Q4 2022 AXT Inc Earnings Call
Good afternoon, everyone and welcome to Axt's fourth quarter 2022 financial conference call, leading the call today is Dr. Morris Young Chief Executive Officer, and Gary Fischer, Chief Financial Officer. My name is Devon, and I will be your coordinator today.
I would now like to turn the call over to Leslie Green Investor.
Investor Relations.
Please proceed thank you Devin and good afternoon, everyone before we begin I would like to remind you that during the course of this conference call, including comments made in response to your questions. We will provide projections or make other forward looking statements regarding among other things the future financial performance of the company market conditions and trends, including <unk>.
<unk> growth in the markets, we serve emerging applications using chips or devices fabricated on our substrate our product mix, our ability to increase orders in succeeding quarters to control costs and expenses to improve manufacturing yields and efficiencies to utilize our manufacturing capacity the growing environmental.
Health and safety and chemical industry regulations in China, as well as global economic and political conditions, including trade tariffs and restrictions we wish to caution you that such statements deal with future events are based on management's current expectations and are subject to risks and uncertainties that could cause actual result.
Or events to differ materially these uncertainties and risks include but are not limited to overall conditions in the markets in which the company competes global financial conditions, and uncertainties, COVID-19, and other outbreaks of contagious disease potential tariffs and trade restrictions increased environmental regulations in China.
The financial performance of our partially owned supply chain companies and the impact of delays by our customers on the timing of sales of their products. In addition to the factors that may be discussed in this call. We refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online.
<unk> from our website and contain additional information on the risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at <unk> Dot com through February 16th 2024 also before we begin I want to note that shortly following the close of market today, we issue.
A press release reporting financial results for the fourth quarter of 'twenty 'twenty. Two this information is available on the Investor Relations portion of our website at <unk> Dot Com I would now like to turn the call over to Gary Fischer for a review of our fourth quarter 2022 results Gary. Thank you Leslie and good afternoon to everyone.
Revenue for the fourth quarter of 2022 was $26 8 million.
That's down from $35 2 million in the third quarter of 2022 and down from $37 7 million in the fourth quarter of 2021.
To breakdown, our Q4 'twenty two revenue for you by product category Indians.
Indium phosphide came in at 14.0 million, reflecting a market softening, particularly in the datacenter and telecommunications infrastructure gallium.
Gallium arsenide was $5 5 million, reflecting the overall slowdown across a number of applications, particularly in China.
Substrates for $1 3 million, our germanium substrate revenue was up slightly from Q3 as we have resolved the payment issue that we described in the past quarters.
Finally revenue from our two consolidated raw material joint venture companies in Q4 was 6.0 million.
In the fourth quarter of 2022 revenue from Asia Pacific was 70% of sales Europe was 15% and North America was 15% the top five customers generated approximately 41% of total revenue and one customer was over the 10% level.
non-GAAP gross margin in the fourth quarter was 32, 5% compared with 42, 2% in Q3 of 2022 and 32, 4% in Q4 2021.
This was below our expectations and as a result of significantly lower volume with revenue coming in at the lowest end of our guidance.
More of an unfavorable shift in product mix than we had anticipated and a significant drop in the price of raw gallium in Q4.
Which resulted in low margin contribution from our consolidated joint venture.
For those who prefer to track results on a GAAP basis gross margin in the fourth quarter was 32, 1% compared with 42.0% in Q3 of 2022 and 32, 2% in Q4 2021.
non-GAAP operating expense in Q4 was 9.0 million.
This compares with $9 2 million in Q3 of 2022.
And with $8 one in Q4 of 2021.
On a GAAP basis total operating expense in Q4 of 2022 was $9 6 million down.
From $10 2 million in Q3 and.
For comparison total GAAP operating expense was $9 1 million in Q4 of 2021.
Our non-GAAP operating line for the fourth quarter of 2022 was a loss of $252000 compared with a non-GAAP operating profit in Q3 of 2022, a $5 6 million.
And $4 1 million in Q4 of 2021.
For reference our GAAP operating line for the fourth quarter of 2022 was a loss of 1.0 million compared with an operating profit of $4 6 million in Q3, and an operating profit of 3.0 million in Q4 2021.
Non operating other income and expense and other items below the operating line for the fourth quarter of 22 was a net gain of $2 2 million. The full breakdown is in our press release. This included a government grant of $1 2 million and is a good example of the strength of our favorable reputation and positive regard for our presence in China.
For Q4 of 2022, we had a non-GAAP net income of 2.0 million or <unk> <unk> per share compared with $6 8 million or 16% per share in the third quarter 2022, non-GAAP net income in Q4 of 2021 was $4 1 million or <unk> <unk> per share.
On a GAAP basis net income in Q4 was $1 2 million or <unk> <unk> per share by comparison net income was $5 8 million or <unk> 13 per share in the third quarter of 2022, and 3.0 million or <unk> <unk> per share in Q4 of 2021.
The weighted average diluted outstanding shares in Q4.
Was $42 7 million.
Cash cash equivalents and investments were $52 8 million as of December 31st by comparison at September 30th It was $48 2 million.
Depreciation and amortization in the fourth quarter was $2 1 million and Capex investments were $7 4 million.
Most of the Capex was CIT was for facilities and any buschmann indium phosphide equipment related matters.
Total stock comp was 700 K.
Net inventory at December 31 was $89 6 million.
52% of the inventory is raw materials and with this 44%.
Finished goods makes up approximately 4% of inventory.
Inventory will be a key focus area for us in 2023, and our goal is to reduce it by approximately $10 million to $15 million this year.
This concludes the discussion of our quarterly financial results turning to our plan to list. Our subsidiary told me in China on the Star market in Shanghai, Let me give you a brief update.
Since the Chinese new year, we've had active dialogue again with as China Securities Regulatory Commission also called the CSR see their process is detailed and thorough and they have asked us to respond to a couple of additional items. We are in the process of doing so now and remain optimistic that we will get CSR see approval in the coming months with <unk>.
A brief summary of the plan and the process on our website.
With that I'll now turn the call over to Dr. Morris Young for a review of our business and market.
Morris.
Thank you Gary.
During Q4, the softening of the macro environment continued as expected.
We saw a step back in revenue across our portfolio as customers continue to digest inventory in the channel and reevaluate their needs for the coming quarters.
Overall, we believe they are approaching the 2023 demand environment with conservatism.
And we will further reduce their estimate and need in Q1.
With that said, we're continuing to see active development for new obligations in technology advancements using three five material.
What this tells US is that while the near term environment is working through a significant inventory correction.
Mid term and long longer term prospects for our markets are vibrant.
In addition to the core obligations that are driving our revenue today new uses in automotive sensing.
Similar product.
Sensing display and more are taking shape.
A very real way.
For the last two years, we will focus our raising our readiness and business efficiency and have created a world class operation.
Craig was supporting current and future need of tier one customers.
To that end I'm very proud of the work that we've done.
Accomplishment of the entire H D T.
We have successfully completed that well.
Location of our gallium arsenide and germanium substrate manufacturing continue.
Continue to build out our capability to support a dramatic increase in demand for our indium phosphide wafers.
Good good progress on two major R&D projects to produce larger diameter wafers.
And implemented a recycling program that benefit our cost structure and drive positive results.
ESG efforts.
Collectively.
Work today has positioned us more favorably than ever before.
Those with customers as well as competitive landscape.
This includes gains or our market share, particularly in phosphate as well as he has been of our reputation for quality and innovation.
Our ability to scale.
And our ability to deliver the specification that enabled technology progress.
Yes.
For these reasons, we are optimistic about our return to growth when the market recovers.
As we're heading into Q1.
We're seeing a business slowdown continue as customers across our portfolio.
<unk> and reducing inventory.
We believe that the effect in Q1 is a suburb exaggerated by the typical business interruption of Chinese new year.
Well as the lingering effect of Covid shutdown in China.
As such we are planning for a major reset in Q1, but we do that but we do expect that we could see improvement beginning in Q2 as China reopens more hauling.
Indium phosphide will start in Q4, primarily as a result of continued cooling in the datacenter market as well as ongoing softness in <unk> telecom infrastructure, particularly in China.
The Polish market was coming down off its peak, but <unk> has been fairly resilient.
In addition, we continued to perform well in our consumer applications, but.
<unk> are being into a digestion, we expect it to take a meaningful pause in the first half of 'twenty three.
We have two programs that are currently shipping.
We are excited for the ability to give a long term relationship in this important development market.
Our gallium arsenide revenue is down significantly.
2022 the highest with customers in China, having slowed significantly.
We're seeing a strong impact applications and wireless devices for the Iot and handset markets.
As well as the industrial lasers L led lighting and display.
After such a strong decline the gallium arsenide market appears to have stabilized.
We could see incremental improvement beginning in Q2.
We're making good progress you know a inch gallium arsenide wafer development.
This product will be a cornerstone for micro OLED adoption in a variety of consumer devices.
While a meaningful revenue ramp isn't expected to begin until sometime next year.
Product qualification at the subsidiary level are schedule to begin this year.
<unk> is well positioned to be a prime player in this market.
We view micro OLED is a breakthrough display technology for consumers.
It is expected to deliver significant improvement in power efficiency as well as greater brightness and more drive with bright brilliant colors.
Tier one cost companies advancing its development and we believe it has the potential to reshape the gallium arsenide substrate industry.
We're pleased we're pleased to report that we have resolved the payment issue with our germanium customers and we saw a small improvement in revenue in Q4.
While the germanium substrate market is also being affected by the macro softness we will be working towards sequential growth in the coming quarters.
And finally, turning to our raw material.
Supply chain company.
Consolidated revenues were down due to pricing pressure in Q4 and softer demand environment.
We do continue to see a good contribution from our supply chain companies trading of equity accounting below the operating line.
While our increasing price of certain raw material can be negative for a company like Jin Mei.
Which has offset the.
Which is offset by improved contribution below the line.
Our supply chain strategy is unique as compared to our competitors and is attractive to our customers.
This is a strong focus for us in 2023.
In closing.
Though a softening of micro environment has reset our growth trajectory trajectory.
That has been driven our revenue customer and application expenses remain very much intact.
Today, we are the world leader in indium phosphide, and we are the company that tier one customers come to when they are beginning the new innovation to market.
We continue to raise the bar.
Technical capability, creating clear differentiation with our competitors.
Further.
We have worked hard to improve our efficiency and we'll continue to focus on delivering profitability.
As such the fundamentals of our business are solid and we're looking ahead to our future with optimism.
I will now turn the call back to Gary for our first quarter guidance Gary.
Thank you Morris.
Given the continuing inventory correction as well as the impact in Q1 from Chinese new year, and Covid shutdowns in China.
We expect Q1 revenue to be between 19 million and $21 million.
This lower revenue is expected to have a significant impact on our manufacturing overhead being spread over fewer units, which will have a negative impact on gross margin.
Product mix is also less favorable and as a result of lower expected revenue for indium phosphide.
As such we expect our non-GAAP net loss will be in the range of 10 to 12.
And GAAP net loss will be in the range of 12% to 14.
The share count will be approximately $42 7 million shares.
Okay. This concludes our prepared comments Morris and I will be glad to answer your questions now Devin.
Yeah.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our first question comes from Charles <unk> with Needham and company.
Hi.
Good afternoon.
Gary and Morris. Thank you for taking my question, maybe first I wanted to start obviously Q1 is a reset.
But I did hear you had some relatively more positive commentary.
For example, gallium arsenide.
We're seeing possibly some indications of improvement beginning in Q2.
But but what about the indium phosphide side I did yes, they're there in Q1, there may be some slowdown related as customers pause a little bit you know first half 'twenty three but if I tie all your comments together.
For me to not to think maybe Q1 or even if I wanted to be more cautious and maybe Q2 seems to be the bottom of this down cycle for you can you share with us some up some color what your thoughts are at this point yeah. Thank you George House ICU.
<unk>.
Let me put it this way I think although it's a small company, but our business covers a whole range of different products. As you know germanium is in the solar cell a gallium arsenide.
Not only covers the handsets.
Wireless infrastructure.
As well as high brightness Leds and.
In high power lasers, and I believe every segment of the business school seeing too.
Prime yields dimmed.
Demand in different stages voices wireless headsets took a hit.
I think inventory correction early in Q3.
Infrastructure came a little later.
And you know.
We hear that the HPT market device inventory is still quite strong there but.
On the other hand, you can say that China is reopening up with Covid.
No problem.
Problem out of the way where will the consumer demand come back up and that was the major driver.
<unk>.
Gallium <unk>.
As far as indium phosphide is concerned.
We didn't see the softness in indium phosphide for consumer products.
Until late in Q, let's say mid Q1.
So we do expect that inventory correction probably was lost.
Through this quarter and may be dragging to second quarter and hopefully it will start to recover but indium phosphide also covers other area of applications, such as pons market as well as the datacenter and so youll.
Datacenter.
It has been.
Having a inventory correction and the demand is now very strong. So we do expect yeah, indium phosphide, probably will soften definitely through two one actually we expect indium phosphide to be almost 50% of what we have been doing it in Q4 so.
A significant downshift.
Indium phosphide demand into one, but we'll recover and how much and then it does depends upon the balance of different market segments, such as consumer when would they start to sort out the inventory they have and the datacenter will they recover solely enough to give us.
Significant business contribution so.
It is right now it's hard to say I used to say last year throughout the last I think five six quarters, we'd be saying that axes.
Is having improved.
You know.
Clarity of what is coming in the business pipeline, but because of the business interruptions, our inventory corrections I think we'll lose that visibility. We just don't have a whole lot of visibility of seeing what we.
Can recover I think is probably going to be flat in Q2.
But definitely we'll hold with consumers coming back in China.
I think the market will start to bounce back in Q3 and Q4 of this year.
Thank you.
I think it's.
It's a good responsible in the short summary is yes, we think Q1 is going to be the bottom.
And we'll all find out in another month or two so.
Yes.
So maybe a little bit.
Longer term.
You said that indium phosphide tool programs are shaping.
Production.
<unk> sought to your tool.
And customers.
Do you have much visibility, but there may be a third program, where you can get to the stage that you can ship.
Should production wafers to our customers this year or maybe this year is more about a continuation of the existing two programs may be expand.
Got that.
The volume of bed, while we get really get to the second half of the year when those end products start to ramp again.
That's my second question.
Yeah.
I would say.
We don't see any new consumer product.
Applications for indium phosphide this year and if there's any increasing demand after they counted all their inventories and they if they digested the inventory is probably.
If the demand goes from the top line.
Phone sets to the lower set and then that May drive some increasing demand I cannot tell because the customers are giving us visibility.
As far as future development this concern.
Charles You hit me right here in a very sort of.
Among the inventory corrections.
So you know things are fairly pessimistic, but I.
You asked me, what indium phosphide I used for and what our marketing our gathering information what's the possibility.
Really think there is a lot of growth potentials, especially in sensors in lasers, where you need.
Safety as well as.
Autonomous vehicle I mean, we had customer interest.
In us delivering sizable product two to that market, but that.
Inquiry.
It was late.
Late some time last year, but it never materialized, where will it come back I don't know I think the other.
Other potential product is healthcare product.
The customer was picking our product for a beta site pilot production.
I think unfortunately.
That is not materializing and becoming a major production product.
<unk> now when will they come back.
I think the interest is there, but we just don't have visibility it will come.
To become a major production demand yet.
Yeah. Thank you Morris definitely understand that this is a supply chain that well.
Our customer problems and customer probably only going to tell you how almost the last minute whether its go no go totally understand.
So I think in my last question really around the larger.
Diameter gallium arsenide for micro OLED application.
I thank God.
One of your top customer recently said.
They're going to see meaningful revenue in 2025.
Which kind of implies that.
That's the time they start to ship in volume right.
I don't know how much of your revenue will lead to their revenue.
In terms of <unk>.
<unk>.
Meaningful revenue from this micro Iot application can you kind of give us.
Some idea how the ramp up in revenue could look like.
You said that you're going to start shipping some volume this year, but that but this year next year and appointed quantify how does the revenue ramp look like thank you.
Sure.
We are shipping hundreds of wafers to customers I think they are doing their pilot runs as well as.
Looking at the wafer in all different ways, including growing at B and C are flat they need to wafer to be in.
Running through the pilot production lives and.
I think we agree with you I think.
Although the earlier projection was that is going to start to run have a production ramp up in 2024, but I think it's.
We think it's going to be late 2024, rather than early 2024, so that matches with your 2025.
Peak production ramp, but I think I'm very glad to see that this project is really taking shape and looks like it's going to be a major project, but I think the big unknown is how successful this project will be and where lease spreads to other applications because.
Our customer has told us that.
This is just the start of the program and eventually it is could lead to something like five to 10 times.
The volume is the initial demand is and it does depends upon how well they can run this project and how well they can reduce the cost and how the how the overall macro will be performed but I think as you know there are many many different competing technology.
Each <unk> for these micro led applications such as.
Variables such as.
No.
Goggles. So so I think this is a big win for gallium arsenide and I think we're very well positioned because we not only are in subsidiary, making but we are also in supplying some other raw materials, which will benefit us.
Because of this.
The demand for gallium arsenide escalate increased significantly I think that's the way I view it.
Micro OLED is going to be but as I said I think that the timeframe of when will they be.
Commercially ramping up in volume production I think it's probably late 2024 to 2025.
Got it got it sounds like you may lead.
Customers revenue ramp by about a little bit or that kind of makes sense right because wafer for sets you ship. The wafer you recognize revenue they processed wafer they recognize payroll revenue, but thank you very much Morris.
And Gary I hope to catch up more with you soon.
Thanks Charles.
Our next question comes from Matt <unk> with Wedbush.
Hey, Thanks for taking my questions first one is when you look at the three factors you mentioned is impacting gross margins Gary can you maybe provide some weight.
Or.
Some idea of the weight of each of those factors on the quarter.
Well.
I would say the.
The lower revenue is.
You know.
The key part of the story and.
The product mix.
It wasn't as good as we expected so those are probably the two main things.
Little bit of.
Below expectation from the from the raw material companies, but.
It's really more around the substrate business.
On the other hand, the guidance for Q1.
Again, the major impact of.
The gross margin coming down.
I will probably think is shifting more towards the product mix, because we expect indium phosphide to take a major hit on the inventory correction. So.
Significantly that will impact our gross margin overall as correct Sir.
Understood, but then so when we're thinking about normal.
Gross margins.
We're able to return revenues to the level that they had.
And Youre still looking at.
The gross margins you were enjoying a quarter or two ago.
Oh, absolutely I think Matt I think we you know.
Although they are price pressure from customers, where when businesses not looking good but there is not as significant I mean, it's not a drop of overall margin. Our business is fairly stable and we are also increasing our efficiency, we have new joint ventures.
Taking care of the raw material supply. So we're covered and then.
As business returns I think we should be looking forward to mid thirty's and even yes.
Yes.
So I just wanted to make sure it wasn't more of a pricing wasn't more of a factor right.
The pricing is.
<unk> is not really.
A key factor.
There is price pressure from time to time, but really the big reasons were what I just said, so and we're confident that.
When things rebound all of the stuff that we've done for the last two years to improve gross margin is going to blossom again, it's just taking a pause because of the disruption in the marketplace right now.
Understood.
And then I guess my one other question is.
You talked to some programs being good.
Does that put on hold or your customers given the more difficult environment, which makes sense.
But on the Silicon Photonics front or are you still seeing progress there.
More.
Talk about the.
How you see that market developing for extra.
Silicon Photonics I think is doing fine, although the datacenter market from what we read in the marketplaces that is not doing well.
There is a pause.
No that I mean, even I read.
Microsoft.
Their datacenter businesses are doing well so they are taking a correction.
And so is Amazon.
So all these big datacenter.
If they're not buying they're in silicon photonics is doing well, but on the other hand I would.
<unk>.
As far as Internet and cloud computing is concerned is going to be more and more data transferring Banco pause and you need more data.
Bigger datacenter, a unique fiber optics to two solved.
And with and speed problem. So I think that's all going good for indium phosphide material. So I think longer trend. There is no question about it.
<unk>.
Okay.
But it's short term youre going to have inventory correction, even Microsoft.
Their business is sort of being softer right now everybody is looking at a possible.
Slowdown in the overall economy, yes, I would add that.
One of the strengths of our business model is that the.
The lifecycle for some of these key applications is is really quite different than the general semiconductor industry.
We all know every 18 months or 24 months, you've got to come out with the new chip but.
The datacenter is a good example that is going to be here for and be a driver for silicon Photonics and Ford Therefore for indium phosphide.
For probably 5% to 15 years in lasers Theres really.
It's hard to believe it would ever slowdown so and if you look at our history in gallium arsenide.
Our lifecycle for for some of those products was 15 years or 12 to 15 years. So it is quite different.
But it is a positive difference so.
Got it thanks, so much for the color.
Thanks, Matt.
As a reminder press star one to ask a question. Our next question comes from Richard Shannon with Craig Hallum.
Well, thanks, guys for taking my questions I'm.
Im going to hit on the gross gross margin topic, you've been asking for your direct question Gary.
As I, usually do here trying to fit the.
The guidance to get to the bottom line and guessing on Opex here and I was coming up with gross margins.
That are around a little bit below 20.
As I look back in history to the last quarter around $20 million per quarter I saw a number of around 26 27.
Clearly you've got a negative mixture with indium phosphide, but different seems fairly dramatic so wondering if you could.
Tell us how close we are in and doing our math here.
Okay.
So Richard are you, describing the Q4 results or the.
Q1 31.
First quarters.
I think Richard wants to know how do we compare with the last cycle.
I mean, when we had a $20 million.
Sure.
Richard's saying our.
Gross margin was better than what Youll telecast.
Forecast.
Yes.
18% approximately right.
Because it's a lot different than the last time you were at the sales level. So I just want to get a little bit more clarity there.
I'd say, it's too low.
Okay.
I don't know for sure what it's going to be.
Obviously, given the mix.
Auto sales is more than 20.
21% Africa, but thats our model okay.
Okay, well, that's clearly got some other parts of the models that will follow up offline there, but just wanted to get that one out of the way here.
That is helpful.
Just wanted to just wanted to make sure I caught this correctly in the first quarter, we expect indium phosphide to be down more.
More than 50% sequentially.
This was entirely due to consumer and datacenter or were there other elements of it is I just want to make sure I caught all of them.
Yeah, I think datacenter is not helping but most significantly is the consumer.
Consumer bridge product pod didn't take a big inventory correction until recently.
Okay.
Yes, we understand their cycles, so that certainly doesn't.
Isn't necessarily surprising so that's fair enough.
Gary I guess kind of a multipart question here kind of.
Taking topic of inventory of the topic of Capex.
And in thinking about cash flows. This year, you've made has made a prepared remark about trying to burn $10 million to $15 million of inventory.
Inventory this year, which is good to see here given the churns you recently I'm.
Wondering if you comment also on what your Capex expectations are for the year, especially relative to last year and since a lot of the build here in Capex has been in your classified and you've got a fairly significant hole here. However, temporary that may be here. It seems like you don't have as much urgency to to build at least right away. So I wanted to get your sense of of to what degree.
Capex needs to be as high as last year.
Let's just kind of cut it off there.
Okay.
The short answer is it won't be as high as last year.
We are.
In addition to clamping down on inventory were.
Put the brakes on Capex as well so.
I'd say $3 million to $5 million.
Okay.
<unk>.
We we can modify that if things bounce back if we haven't we have investments we'd like to make but Morris is already.
Got his shotgun out and if anyone talks about a lot of capex.
To be in trouble.
Well.
Even if the business were to pick up.
The spend that we did for last year was because the customer demand.
Way outstripping, our ability to deliver and that's why we were building very aggressively and even towards second half of the year. So some of those fields are still hanging out there. So even if the business were to recover I think we do expect it to recover and it will continue to grow.
We can no problem at all and it's only where if we are seeing.
The other two which I hope.
Other consumer product will coming to use indium phosphide, then we're going to stop building again, so I think.
I hope you understand that.
Lag right.
We're forecasting is going to grow so we're going to build the capacity because we don't want to shortchange and not being able to deliver to our customers. But then when there is a cut off and obviously, we put a breakout but theres some remnant.
<unk> hanging out there, but I don't think is at risk because I think indium phosphide for the near future probably will absorb all those extra capacity we plan to build yes.
Fair enough.
Yes, sorry, Morris I didn't mean to cut you off there. Please please finish.
I finished I said as planned, but we build last year.
Okay Fair enough last question for me kind of Dovetailing off of one of those <unk>.
Our remarks, and Theyre Morris regarding general sensing applications I think an earlier question asked about your large customer and I think you I think if I caught you correctly. So you didn't expect any new programs in this list.
This current calendar year, how about kind of more broadly thinking other customers.
Implications regarding sensing and to what degree.
Or are they in early stage versus late stage development, such that they could impact this year or perhaps in following years, maybe just kind of give us the big picture long term there.
Yeah.
Yes, Richard I think you know.
<unk>.
I had my head hanging down now.
But if you look at indium phosphide I think.
And as I said I think health care is a big application. Although I think the development is taking a pause I mean automotive we have a customer asking for three four inch indium phosphide per month, and they will given a formal quote and we will calculating how much will it.
Cause us and we will always build ready to build extra capacity for them, but they didn't come through okay, but I don't think they are playing games with US okay. So I think.
There are many other programs such as <unk>.
You're going to have a.
Yeah.
The.
Meta God.
Argo.
I was told that you need a eye tracking indium phosphide sensor.
If that market were to take off and then of course, there's a lull development program, taking a pause right.
Right now, but I think those are money. Many of these users, which will use indium phosphide and one customer told us they are 12 projects.
Being developed using indium phosphide to improve.
Consumers.
<unk>.
To improve their handheld devices so.
But.
If you asked me last year, I think well, maybe there is a few which could come to fruition in 2024, but I think.
I'm, taking more conservative.
Okay.
Yes, okay.
Okay.
Yes, let me add something to that too.
It's Canada.
The big picture comment but.
Indium phosphide is taking on a life of its own and it's it's robust.
It's great to watch it's exciting for us to be a leader in this kind of material.
And there's going to be going into gaming automotive sensors.
<unk> well being so.
It's.
It's definitely.
Taken on a life of its own.
And I think if you.
For looking for short term.
I would say you know.
China is looking to pump up there.
The economy.
I think the government may want to do some infrastructure build.
As far as I think the United States I think U S is thinking about.
The big infrastructure build wants to make internet.
Yes.
Okay.
Hughes.
Basic.
Anything which has anything to do with fiber optic communication. So I think they may help but I think at this point <unk> base station is not billed which is our low point and telecommunication is on a low point, but any of this in government.
Government.
Pumped infrastructure Bill is going to.
It's going to help the <unk>.
And they'll be indium phosphide.
Okay perfect. That's all from me guys. Thank you.
Thanks Richard.
Our final question comes from Amit <unk> with Gws.
Hi, Jim.
Just wanted to really understand if you are talking about a reset in the business in Q1.
Why you're not considering tick resetting your business structure as it is.
What's giving you the confidence that you will bottom out in Q1.
I think we're taking reset comment I think you'd all agree.
We're not buying materials were shutting down most of our construction lower capex lower capex, we're looking at all possible ways to tighten.
Our budget lower inventory lower inventory.
But when.
We're looking at cutting back R&D that probably is area, we're not cutting back yet.
But we're going to take a cautious look because that's the future of the company.
Such as <unk> inch gallium arsenide, we want to keep on developing it. So that we can have a robust crystal's yield as well as the April capacity to deliver to our customers that revenue is going to come. If we can we can take care of the business I mean, it's always indium phosphide, although as we said we're not.
Building more capacity anymore. I mean, if you would ask US last year, we were saying we're going to increase our capacity by 50% anyway. So this is a reset we're not building that capacity anymore. That's a reset.
Okay, and then as far as inventory is concerned.
Any risks.
It becomes obsolete by the time the business turns around.
No no.
The 50% of our inventory is raw material.
And raw material will never go back.
We can even sell the raw material Kelly.
And the other 40% is a work in process, which without cutting polishing to any potash specific product specification and you know gallium arsenide indium phosphide has been here gallium arsenide being here for 25 30 years. So it will never go away.
Okay, I mean, so anything which is already cut to customer specifications, which is only four 5%.
And even then I don't think we have lost customers. The most severe punishment is that the customer take our product and don't pay and they go bankrupt. That's the only time, where we lost so I don't think there is a whole lot of risk pool.
Yes in this in this business model and again, it's it's different from the semiconductor because I come out of that background, but.
The the fact that we're a material science company.
We start with raw materials.
Theres not a lot of management need to be micro managing and watching out for.
Obsolescence and things like that so.
Okay. Thank you.
Thanks, Amit.
There are no further questions at this time I will now turn the call back over to Dr. Morris Young for closing remarks.
Thank you for participating in our conference call as always.
Please feel free to contact me, Gary Fischer or Leslie Green directly if you would like to set up a call. We look forward to speaking with you in the near future.
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