Q2 2023 AXT Inc Earnings Call
[music].
Good afternoon, everyone and welcome to U X gene second quarter, 2023 financial conference call.
Leading the call today is Dr. Morris Young Chief Executive Officer, and Gary Fischer, Chief Financial Officer. My name is Jessica and I will be your operator today all.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if he would like to withdraw your question press.
Star one again.
I would now like to turn the call over to Leslie Green Investor Relations for E. S. P.
Yeah.
Thank you Jessica 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 the expected growth in the markets we saw.
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 manufacturing yields and efficiencies to utilize our manufacturing capacity.
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.
Events or results to differ materially.
The 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.
[noise] 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 by link from our website and contain additional information.
On 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 August three 2024 also before we begin I want to note that shortly following the close of market today, we issued a press release reporting financial results for the <unk>.
Quarter of 2023. 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 second quarter 2023 results Gary.
Thank you Leslie and good afternoon to everyone.
Revenue for the second quarter of 2023 was $18 6 million down from $19 4 million in the first quarter of 2023 and down from $39 5 million in the second quarter of 2022 to.
To breakdown our revenue in Q2.
By product category Indium phosphide came in at $4 6 million, reflecting the expected market softening, particularly in data center consumer and telecommunications infrastructure Gal.
Gallium arsenide was $5 4 million, reflecting a modest improvement across a number of applications, particularly in China.
Germanium substrates were 1.0 million.
Finally revenue from our two consolidated raw material joint venture companies in Q2 was $7 6 million, which is up from the prior quarter.
In the second quarter of 2023 revenue from Asia Pacific was 75% Europe was 16% in North America was 9% the.
The top five customers generated approximately 24% of total revenue and no customer was over the 10% level.
non-GAAP gross margin in the second quarter was nine 8% compared with 26, 9% in Q1 and 39, 4% in Q2 of 2022 for.
For those who prefer to track results on a GAAP basis gross margin in the second quarter was nine 2% compared with 26, 3% in Q1 of 2023 and 39, 1% in Q2 of 2022.
There are three key drivers affecting the gross margin.
One is total volume last year's Q2 revenue was $39 5 million.
The second key drivers mix last year's Q2, indium phosphide was $15 $7 million. This recent quarter. It was $4 6 million, which we believe is the bottom of the decline by the way.
The third key driver was that our raw material business had lower gross margins due to the fact that they were working through higher priced inventory in Q2.
This was especially impactful because raw materials sales made up more than 40% of our total revenue.
As we look ahead to the coming quarters, we believe we will see improvement in our gross margin as a result of several factors in the near term, we expect to see improvement in the gross margin contribution from our raw material joint ventures as they have worked through much of their higher priced inventory.
We're also pleased to report that we expect June may to begin production in Q3 on our new gallium arsenide recycling program, which like our indium phosphide recycling program should have a positive impact on gross margin.
Further we believe that indium phosphide revenues have bottomed out and should begin to recover over the coming quarters.
Beyond the near term, we remain confident that we can get back to the mid 30% range as the environment strengthens through higher overall volume a recovery in indium phosphide mix and the benefits of our recycling programs along with continued efficiency improvements throughout the business.
Moving to operating expense with the reduction in overall revenue, we are continuing to take steps to reduce our operating expenses to align with the current environment.
Total non-GAAP operating expense in Q2 was only $7 8 million. This compares with $8 7 million in Q1 of 2023 and with $9. One in Q2 of 2022 on a GAAP basis total operating expense in Q2 was $8 6 million down from $9 5 million in Q1.
For comparison total GAAP operating expense was $10 1 million in Q2 of 2022.
Our non-GAAP operating income for the second quarter of 2023 was a loss of $5 9 million compared with a non-GAAP operating loss in Q1 of $3 5 million.
And our non-GAAP operating profit of $6 4 million in Q2 of 2022.
For reference our GAAP operating loss for the second quarter of 2023 was a loss of $6 8 million compared with an operating loss of $4 4 million in Q1 of 2023, and an operating profit of $5 3 million in Q2 of 2022.
Non operating other income and expense and other items below the operating line for the second quarter of 2023 was a net gain of $1 8 million. The details can be seen in the P&L included in our press release today.
For Q2, 2023, with a non-GAAP net loss of $4 2 million or <unk> 10 per share compared with a non-GAAP net loss of $2 4 million or <unk> <unk> per share in the first quarter of 2023.
non-GAAP net income in Q2 of 2022 was $6 7 million profit or <unk> 16 per share.
On a GAAP basis net loss in Q2 was $5, one or <unk> 12 per share by comparison net loss was $3 3 million or <unk> <unk> per share in the first quarter and GAAP net income in Q2 of last year was $5 5 million or <unk> 13 per share.
The weighted average basic shares outstanding in Q2 of 2023 was $42 6 million.
Now, let's look at the balance sheet, which favorite.
And the trends were favorable in several areas cash and cash equivalents and investments were $49 6 million as of June 30 by comparison at March It was $53 6 million.
The reduction in cash was primarily due to our repayment of a bank loan totaling $7 2 million. This was offset by a favorable reduction in our inventory at $4 6 million as such several.
Key working capital items trended favorable in Q2.
Depreciation and amortization in the second quarter was $1 8 million and Capex was 750, K, our stock comp was $909 million.
As I mentioned net inventory came down by $4 6 million to $87 1 million at June 30th.
44% of the inventory is raw materials.
<unk> was 52%.
Finished goods makes up approximately only 4% of inventory we continued to do well on recycling of indium phosphide and believe that this will be an important cost advantage for us as the market recovers.
Okay. This concludes the discussion of our quarterly financial results, Let me turn to our plan to list our subsidiary tongue may in China on the star market in Shanghai, We are making progress on the approval process with the China Securities Regulatory Commission known as the <unk>.
Shortly after Chinese new year, we were asked to address two primary issues and we believe are close to a resolution with them. We remain optimistic that we will get <unk> approval in the coming months. We're excited to move into the next phase of the IPO process and believe that <unk> is an excellent candidate for this listening.
With that I'll now turn the call over to Dr. Morris Young for a review of our business and markets Morris.
Thank you Gary.
Before I go through a review of our business I wanted to give you an update on China's recent export control regulations.
Okay.
<unk>.
Regulations per day.
That are exported out of China.
They do not impact the export of indium phosphide products.
Our sales of any products to our customers in China.
Since the announcement of the regulations.
<unk> our subsidiary in China has moved quickly to prepare permit applications on behalf of customers who may be impacted.
The permit process open coop producers on August one.
We have not been given a timeframe for that.
Frankly, the length of the permitting process, but we are hopeful that we can resolve it quickly.
We remain in close contact with our customers through this time and are working with them to minimize any disruption.
Now turning to our business.
As expected our indium phosphide business reached what we believe is the bottom.
Consumer and data center applications.
This decline.
And consumer will be selling into two applications, one of which will continue to ship into the second and mobile device applications is expected.
To be designed into their next generation platform.
However, we believe that these applications validated our indium phosphide as a material of strategic importance in consumer products and validated <unk> as a world class supplier to a tier one companies.
We also believe that there is a significant development work underway for a number of consumer related devices across multiple customers for use in case of retina tracking housewarming entering lidar and more.
With our track record of being the dominant commercial supplier or customer product applications, we are well positioned for current and emerging applications.
Turning to data center applications.
In first half 2023, we saw considerable inventory digestion and believe that it is still ongoing.
However, we look for if we look beyond the immediate environment, we believe that indium phosphide will play an important role in increasing data throughput and enabling.
The widespread adoption of AI.
Optical interconnects and technologies, such as co packaged optics powered our indium phosphide.
We present, a game changing approach to meet evolving demand for artificial intelligence.
Intelligence workloads.
For integrating optical interconnects directly into the processes are switch packages.
Packaged optics minimize latency increased bandwidth and reduce power consumption.
The overall performance of the data Center network.
As a result, we believe that AI will drive strong industry wide growth for indium phosphide likely ramping in 'twenty four and beyond.
Further with our proven performance in optical device devices for the data center. We believe we're in excellent position to benefit from this growth.
In telecommunications applications, including passive optical networks or PON demand appears to have stabilized around the current level.
We're encouraged to see some improvement in China, and the China boost forward with a national stimulus program.
As has been discussed it will likely provide a catalyst for upgrade cycle in the country's telecommunication infrastructure in 2024 and beyond.
In gallium arsenide.
We saw continued modest improvement in Q2 as key applications, such as high power lasers, and Iot devices continue their recovery, particularly in China.
As you May recall gallium arsenide was the first of all material to experience the micro downturn beginning in Q3 of last year.
We're also pleased to report we're making good.
Progress with our eight inch gallium arsenide development program, which micro Leds will likely to be the first application.
We believe the performance of our material is very competitive in the market and that we would do well in the formal qualification process that is expected to begin in the second half of this year.
We continue to innovate in our crystal growth process to deliver higher and more consistent yield and we are excited to apply these learnings to our six inch diameter products.
Turning to our raw material business sales.
Sales increased in the quarter with both increased demand and rising prices.
Since relocating to our casual campus, both supply chain companies and being able to increase capacity to meet demand.
Regarding the impact of our export licenses.
GMA exported outside of China represented only a small portion of their sales in Q2, let's.
As I said, 2%.
So we do not expect a meaningful direct impact to our revenue from the new regulations.
As we move forward.
We will have a better understanding of what the direct impact may be if any.
As Gary mentioned.
We're pleased to report that our gallium arsenide recycling program, we're moving to production in Q3. This will allow us to drive gross margin improvements and support our ongoing ESG efforts.
And cozy, though the micro environment will continue to impact growth near term.
The trend that we are being have been driven our revenue and customer expansion remain very much impact.
We continue to excel in our technical capabilities, and we are ready our business to support new applications in AI and consumer products that are likely to drive future growth.
Further we continue to work hard on improving our efficiency.
We are focusing.
Accelerating our return to profitability.
I will call turn the call back to Gary for our third quarter guidance.
Thank you Morris, we expect Q3 revenue to be between $16 5 million and $19 5 million.
Product mix is likely to include growth in gallium arsenide substrates.
But continued weakness in indium phosphide.
We expect our non-GAAP net loss will be in the range of 11% to 13.
And our GAAP net loss will be in the range of 12% to 15.
Share count will be approximately.
$42 7 million shares.
This concludes our prepared comments Morris and I would be glad to answer your questions now Jessica operator.
Great. Thank you just as a reminder, if you'd like to ask a question. Please press Star then the number one on your telephone keypad and we will pause for just a moment to compile the Q&A roster.
Okay.
And just as a reminder, if you'd like to ask a question. It is star.
One on your telephone keypad.
Our first question comes from the line of Richard Shannon with Craig Hallum.
Richard Your line is open.
Great. Thanks.
Morris and Gary for taking my questions.
I guess first.
Picture obvious question here is is trying to understand your guidance in the context of the export licenses I think you said, you're starting to acquire that haven't been awarded yet and so I'm wondering if you're baking in or do you expect any.
Or I guess explicitly taking out any upside or further.
Sales from the rest of the quarter into this guidance or just kind of give us some guidance here on how youre thinking about constructing that please.
Sure I think the first reaction with Gazprom.
Toggled apply.
Actually on August 1st which is two days.
Our goal because China is when they are ahead of us.
And we got a fairly quick response, but we still got more questions to be answered.
But we don't know how long the actual.
So the lower number range.
Assumes that we cannot do any export shipping for the months of August and September .
And the higher number.
<unk>.
We can do some.
Shipping in September the last month of this quarter.
That's why the range is over large for this quarter.
Okay, Okay that certainly makes sense.
Maybe just looking at other elements of the guidance here I think you said gallium arsenide is.
It looks to be improving in indium phosphide weak I'm not sure if that means it's going to be flat or slightly down and just wanted to also in indium phosphide I think you've declared it could be the bottom I'm assuming that would be in the third quarter. Then you can delineate that than probably a couple of follow ups after that.
Yes, I think youre right and because I think we as we said we noticed gallium arsenide was the first product to go into a downturn indium phosphide actually still had a pretty good shipment even in the first quarter of this year.
And then it starts to decline about six months ago. So we expect that to continue a little bit more.
But gallium arsenide, we actually already seen two quarters of improvement, although very very slight.
We hope it will start to accelerate.
Okay.
Both Paul.
Okay.
Okay.
Okay, and I guess, maybe just on the topic of indium phosphide bottoming out I.
I guess wanted to get your sense of where that confidence comes from and are you expecting sort of meaningful bounce off the bottom or you just think it's not going to go any lower.
Okay.
Well, because we still have one more quarter to go so I don't know whether its going to have a strong balance or not but if you listen to the customers.
They are now coming back with very large order requests at this point yet but.
But we think it is.
Some of these especially datacenter customers.
There.
Collyn shipment is almost like only 25% of what we did last year. So we expect that took bounce back towards the fourth quarter and that should be a meaningful bounce.
Oh of course, I think the pons market in China, I think there is any stimulus package working too given the China economy is.
It is very depressed so.
And a stimulus package towards infrastructure improvement that should go into.
Some of the optical network improvement in China.
Okay Fair.
Fair enough, let me ask some more question I'll jump out of line and that really goes to the spending here specifically the opex side Gerry had mentioned.
And it's clear to see a fairly good cut from the first quarter, which is great to see wondering if to what degree these are sustainable and structural versus onetime in nature and then how do we think about going forward and specifically in the third quarter.
Well I think.
It might tick up a little bit in the next quarter or 200 K.
But in general I think it's going to be in this neighborhood.
Through December 31.
We haven't done a grounds up.
Going forward after that yet, but so I think I think.
Flat or up a little bit but.
I'm very encouraged.
I think the team has really pulled together.
Yes.
This is a it's a good illustration of how leadership effects company culture.
<unk>.
Morris is back from China, now, but he has been in China for a number of months and.
It's easy to make.
The team there and the team here is responsive to leadership so.
We've put the word out that we're tightening up and it's helping associates is a great. It's a great illustration.
Of company culture stuff so yes.
Let me add one more point.
I think.
You know.
We are trying to make ourselves ready for the <unk>.
Although.
With your ramp in production probably comes in the fourth quarter of 2020.
Four.
But.
In preparation for the official ramp we've got to make some <unk>.
So a few equipment purchased to make it ready for because once we got qualified that prices will be frozen and will be ready ourselves for the ramp so we need to spend a little more money for the micro OLED program.
Okay, I guess I lied here and I said.
When I said I was going to be done here since you brought the topic of like early be here.
Didn't want to hit on this one here so it sounds like there is going through a call process.
Sorry Maurice.
Going through the court process here in the second half any you gave a very specific timeframe of ramping in the fourth quarter of next year. So I guess.
Wanted to get a sense of where that specificity comes from in any sense of scale of the.
When this concern when it does start to ramp up.
Yes.
I think I'm happy to see that finally micro OLED is confirmed because I think we.
Including myself.
And a number of analyst.
Really believes there's a lot of obstacles ahead of micro OLED, but I think the customers are showing confidence and they are moving ahead and then we have a scheduled qualification going.
And we expect it to be finished before the end of the year and we believe that.
Our position is pretty good on it.
As far as the ramp into production. This concern we do have some number from customers.
I would say.
Okay.
It's about.
$4 million to $5 million next year and could double that by.
2025 20.
Yes.
Although secondary thank you Matt.
What.
Okay.
I didn't mean to interrupt Morris please continue.
Yes, that's assuming that if we can get 50% of the market.
Yes.
Okay.
Excellent that's great detail I will jump on the line. Thank you.
Thanks Richard.
Okay.
Your next question comes from the line of Charles <unk> with Needham.
You May go ahead.
Hi.
Chris.
Gary.
Just a first question when after I mean.
Over the past two three years, we'll have in the U S government export restrictions on China.
Scott got impacted actual result.
Saw a pop in the near term with our revenue numbers.
Currently we're not seeing.
We're going to have a pop.
Was kind of curious why <unk> plus I would have thought.
August 1st on bottom line.
Some of the overseas customers Asaf chime on the partner wanted to extraordinary assumptions, especially given that you have relatively high inventory turn things.
Around very quickly why why are we not seeing that path.
Next question.
Well we did.
We have.
<unk>.
Increased shipment in July .
But.
There are two restriction on that one is that.
The order came in really late.
<unk> got the notice in July the third and even we start cranking out a lot of production.
It's still we're limited on how much we can actually producing the months of July and the second thing is that although the office show restricting come in July .
Not until August 1st, but China custom actually put.
Sort of the delay tactics on most of the shipment in July already okay.
Sure.
We do have I would say a good.
<unk> on the shipment and in July and that sort of.
Alleviated, some or all of the missing shipment.
Revenue, we can recognize in let's say August and part of the September that's why as a flat quarter.
If were missing our two quarter two months of the quarter. Then you would expect the revenue to be down substantially but it is not so far.
Fact of.
We over shipped some in July another factor Charles is that several customers.
Outside of China.
Do operate under a consigned inventory program, where we just to explain to people that may not be familiar with the concept that we shipped to them.
But we continue to own the inventory.
Our books until they pull it.
And so.
In a couple of cases, they've got enough to to stay in.
In full production with their schedule for August and September .
Even if we don't ship to them in August and September . So now they could have an issue in October November if we're if we're not shipping by then but by then we think we will be shipping so yes.
But Charles.
You didn't ask this question, but let me try to explain.
Some of the dynamics in this recession.
Asking for.
Sure.
Applications for permit to export as far as we're concerned.
Our substrate maker so.
It's easier I believe for us to identify the specific application and specific customer need and we believe.
It's more transparent.
Whereas our competitor in making gallium arsenide substrate they.
They need the raw material gallium.
Which is a bit more difficult because then they do need to explain to their ultimate customer is and in what portion of that shipment know gallium to those customers are which I believe.
<unk>.
I think the worst case scenario.
Would have been.
Even in terms of compete comparing to our competitors, but if there is any tilt towards caution in terms of China's restriction.
Supplying gallium.
Two the World then I think we may gain some advantage of shipping.
Sure.
Because.
Our permitting process is probably more clear and easier to get than our competition. That's the way I analyze the situation.
Got it got it more it's actually that was my second question about a yard. Thank you very much.
Charles.
Yes.
Your next question comes from the line of Matt Robison with Wedbush, Matt go ahead.
Thanks for taking my questions.
First one is just with indium phosphide.
Kind of normalized more normalized revenue run rate before.
Before you added those consumer applications.
Somewhere between.
Nine and $10 million per quarter I guess.
Now do you have a feel for what normalized revenues might look like.
Inventories get worked out.
You put the number right. There I think it's going to be 910, I think normalized rent number I would expect without the.
The increased demand, which I do believe is going to come.
Once.
First the lie of increased demand is AI, you need more more more calculation and more processing, but eventually that data has to be exciting and taken out and I believe that's the second wave that should increase the indium phosphide demand for data center and telecommunications.
I know you don't have a ton of visibility.
Into.
How much inventory.
Beyond you Budd.
Any idea at all that you can give us in terms of what inning, we're in and seeing that inventories get worked down.
And in terms of those revenues getting back to normalized levels.
Hum.
I see.
I will put it in the first quarter of next year.
Because I think Gil.
You say it normally takes about a year.
To digest, all the inventories and we did check with the customers I mean, they are still saying Q3 is due.
Not good.
But Q4, we really don't have much visibility, yet, but I'm quite sure our customers are happy with us.
Just got inventory in their hand.
No.
They need to work that down and also doing a more recessionary kind of.
Period, everybody wants to control that inventory, including ourselves we want to work down our inventory. So we've got customers and we've got customers customer everybody wants to work on their inventory.
The.
Bottom of the totem pole, so I think the inventory probably start.
We're hit us more than normal, but I think Wednesday come back then.
They should come to us too.
From a bigger picture.
Go ahead, Matt no.
Good afternoon.
I was going to say from a big picture point of view.
One of the unexpected consequences of Covid was that there was a lot of supply chain disruptions in 2021, and so a lot of companies, including us in 2022.
But instead of just in time with what just in case. So the overhang is probably more than a normal cyclical thing that was probably accentuated.
To be larger than the normal because of that.
But it's going to work through and we're seeing it on our own balance sheet and we're in good communication with the customer so.
It's just going to take a bit more time.
Yes.
Understood I guess.
For you Gary.
In terms of getting back to those mid 30% type gross margin levels.
Is there a certain revenue number that we should be thinking about.
Well.
We probably have to be close to or above.
28% to $32 million somewhere in that range.
<unk>.
The volume is.
Youre asking correctly Matt.
You know this but the volume is a critical factor.
But but an equally strong variable is the mix.
So if the mix is heavily weighted in one direction, meaning probably indium phosphide then.
Somewhere maybe 'twenty eight 'twenty I mean, it should be fine.
But if it if it's weak then I got to be $32 million to $33 million. So this somewhere in there.
Again, what I would say is we're going there.
There is no doubt in our mind. There is there is some stuff that Morris has been working on while he's in China when in the supply chain system and.
Some some things that we've done that's going to contribute the whole recycling program is pretty new.
It's strong with indium phosphide, but now we're just on the threshold of going with gallium arsenide.
If that goes the way Morris thinks it's going to go that's going to help so.
So we're very optimistic about some of the stuff.
We haven't been sitting around sleeping during this slowdown we have been working hard so.
Completely understood I guess, that's my last question.
What are you thinking about those mid <unk> levels.
Does that assume that the recycling program and gallium arsenide for comfortable.
The one in indium phosphide.
Or.
For some potential.
Jim get up into the high 30%, 40% range I guess do you need something else there other than just the lift volumes.
<unk> mixed back to normal.
Yes, I think we probably counted that recycling program here, we do have quite a few of these program we assume.
And we've been working on for almost lost a year year and a half so.
I think there is no question in mind, those will work, but I think we did counted.
We cannot have factored in.
But we're excited about it.
Okay understood. Thank you so much for the for the thanks, Matt.
Yes, good luck to you.
Your next question comes from the line of Richard Shannon with Craig Hallum. Richard Go ahead.
Yes.
Great. Thank you.
Few follow up questions here, I think I'll throw one obligatory one out here ill start listing process unsecured prepared remarks sure related to a couple of.
Comments are still responding to wondering if you can tell us the nature of those comments and how fast you think those will be response or kind of completed and then.
Any other steps.
Late last year, you thought it would be <unk>.
<unk> early this year and we're obviously quite a bit past that point. So I am sure you feel a little snake bitten about trying to predict things too closely but wanted to get your sense of.
Ample do you expect to be done this year or not necessarily.
Okay.
Yeah.
Yes.
I don't want to over promise.
I think that's what we're assuming.
Because this is a process, which is now we're now very familiar with it and we really rely heavily our bankers in China.
We were surprised to see that these two little questions took so long to get.
Thus our.
Authorities to be comfortable with our answers leasing will provide the good answers but.
Yes.
As I've been telling my board that.
I expected next week, but don't color.
But what we do we only have one question to be answered I think they're comfortable with it and then we should go.
Have it go through yes.
Okay Fair enough a couple more quick ones for me.
So to answer your question.
It could be as quick as next month.
But yes.
Yes.
I think I think so and if not.
Definitely towards the end of the quarter.
Okay.
That was more specific than I was expecting but good to hear.
Let's see a couple more questions Gary on cash flows.
Obviously absent any sort of that dynamic.
That's what you had in the second quarter here, but what are you expecting for casual you are positive or negative obviously net income will be negative, but I think you would be trying to generate cash from inventory wanted to get your sense of what the second half of the year looks like.
Well, yes, we know we start with.
Loss.
On a non-GAAP basis.
Take out some of the.
When you take out all the stock comp take out the depreciation.
On a cash basis is less.
Which is what happened this quarter by the way so for Q2.
Sure.
So.
I think the.
I think we will still be able to bring inventory down.
And.
Work on some of the other working capital accounts on the balance sheet.
So if it's a negative cash flow it'll be.
Hopefully book similar to what we had this.
This recent quarter that by the way you can take note that if we hadn't paid the debt bank loan off which was $7 2 million cash would've gone up not down so because it only went down by $3 6 million or $3 9 million. So.
So I think we're in what I'll call noise level.
And I think we can manage it okay. So.
And then as Morris pointed out we expect that.
The cash balance is going to change significantly at some point.
Hopefully this quarter.
Is that a reference to the star listing Gary.
A big unveil blessing referenced.
Okay, that's what I figured.
Last quick question for me I'll jump on the line again.
Following up on the immediately prior questions here regarding gross margin.
Getting to that 35% level revenues required for that which I think you said was centered around $30 million a quarter.
What do you think your Opex would be in that case I mean, you obviously had a nice drop down here you talked about tightening expenses or are you going to continue to keep those tightened down even as you approach that revenue level or open up the spigot or how should we think about that.
Well, we're going to have to open it up some.
We shouldn't pretend that we can magically flatbed.
We're looking at.
On a GAAP basis, when it looks like for next year.
We'll probably get into the May.
Maybe 93% to $9 6 million in the quarter by the middle of next year.
I'm, hoping we don't reached 10.
Think that we need to try and keep a lid on things to keep it.
At or below $10 million a quarter by the end of next year. So.
Okay.
Okay perfect that is all from me guys. Thank you.
Thanks Richard.
Thank you for your question at this time I will turn the call back over to Dr. Morris Young CEO for closing remarks.
Thank you for participating in our conference call. This quarter, we will be presenting at Needham virtual semiconductor countless the Jefferies semiconductor communication technology summit, and the Northland capital market Institutional Investor Conference.
As always please feel free to contact me, Gary Fischer or Leslie Green directly if you would like to set up a call.
Over to speaking with you in the near future.
Ladies and gentlemen that concludes today's call. Thank you for joining you may now disconnect.
Okay.