Q1 2024 AXT Inc Earnings Call

John: Good afternoon, everyone, and welcome to AXT's first quarter 2024 earnings call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fischer, Chief Financial Officer. My name is John, and I will be your coordinator for today. All lines have been placed on mute to prevent any background noise.

Good afternoon, everyone and welcome to Axt's first quarter 2000, and it's better for earnings skull eating to cultivate used Doctor Morris Young Chief Executive Officer, and Gary Fischer Chief Financial Officer. My name is John and I'll be a coordinator for today all lines have been placed on mute to prevent any background noise. After the.

John: After the speaker's 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 you would like to withdraw your question, please press star one again. Thank you. I would now like to turn the call over to Miss Leslie Green, head of investor relations for AXT.

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 you would like to urge all your question Dispread Star. One again. Thank you I would now like to turn the call over to MS. Leslie Green head of Investor Relations for a XP.

Leslie Green: Thank you John 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 expected.

Leslie Green: Thank you, John, 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 expected growth in the markets we serve, emerging applications using chips or devices fabricated on our substrates, 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.

Leslie Green: We wish to caution you that such statements deal with future events and are based on management's current expectations and are subject to risks and uncertainties that could cause actual results 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 diseases, 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 and their products.

Leslie Green: And the markets, we serve emerging applications using chips or devices fabricated on our substrates, our product mix, our ability to increase quarters orders in succeeding quarters to control costs and expenses to improve manufacturing yields and efficiencies to utilize our manufacturing capacity there.

Leslie Green: 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.

Leslie Green: Cause actual results 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, another outbreaks of contagious disease potential tariffs and trade restrictions increased environmental regulations in China, the financial performance of our.

Our partially owned supply chain companies and the impact of delays by our customers on the timing of sales and that products. In addition to these factors that may be discussed on 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.

Leslie Green: In addition to these factors that may be discussed on 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.

Leslie Green: 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 May 2nd 2025 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 first.

Leslie Green: This conference call will be available on our website at axt.com through May 2nd, 2025. 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 first quarter of 2024. This information is available on the investor relations portion of our website at axt.com. I would now like to turn the call over to Gary Fisher for a review of our first quarter 2024 results. Gary? Thank you, Leslie.

Leslie Green: Quarter of 'twenty 'twenty four 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 first quarter 'twenty 'twenty 'twenty four results Gary. Thank you Leslie and good afternoon to everyone revenue for the first quarter of 2024.

Gary L. Fischer: Thank you, Leslie, and good afternoon to everyone. Revenue for the first quarter of 2024 was $22.7 million. That's up from $20.4 million in the fourth quarter of 2023 and up from $19.4 million in the first quarter of 2023. To break down our Q1 2024 revenue for you by product category, Indian phosphide increased sequentially to 8.1 million. That's reflecting strong growth from data center applications, including AI, and continued improvement in passive optical networks. Gallium arsenide also grew to 7.5 million with broad-based improvement across a number of applications. Germania substrates were 1.4 million, up from the prior quarter with renewed strength and demand for satellite solar cells.

Gary L. Fischer: $22 7 million, that's up from $24 million in the fourth quarter of 2023 and up from $19 4 million in the first quarter of 2023.

Gary L. Fischer: To break down our Q1 'twenty four revenue for you by product category Indium phosphide to increase sequentially to $8 1 million, that's reflecting strong growth from data center applications, including AI and continued improvement and passive optical networks.

Gary L. Fischer: Gallium arsenide also grew to $7 5 million with broad based improvement across a number of applications germanium.

Germanium substrates were $1 4 million up from the prior quarter with renewed strength in demand for satellite solar cells.

Gary L. Fischer: Finally, as expected, revenue from our consolidated raw material joint venture companies in Q1 was $5.8 million, down from Q4 as we consumed a greater portion of their output for our growing substrate demand. In the first quarter of 2024, revenue from Asia-Pacific was 79%, Europe was 16%, and North America was 5%. The top five customers generated approximately 33% of total revenue, and one customer was over the 10% level.

Leslie Green: Finally, as expected revenue from our consolidated raw material joint venture companies in Q1 was $5 8 million down from Q4, as we consumed a greater portion of their output for our growing substrate demand.

Leslie Green: In the first quarter 'twenty 'twenty four revenue from Asia Pacific was 79% Europe was 16% in North America was 5%.

Leslie Green: The top five customers generated approximately 33% of total revenue and one customer was over the 10% level.

Gary L. Fischer: Non-GAAP gross margin in the first quarter was 27.3%, compared with 23.2% in Q4 and 26.9% in Q1 of 2023. For those who prefer to track results on a gap basis, gross margin in the first quarter was 26.9%, compared with 22.6% in Q4, and 26.3% in Q1. 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, favorable product mix, and the benefits of our recycling programs, along with continued efficiency improvements throughout our business.

Leslie Green: non-GAAP gross margin in the first quarter was 27, 3% compared with 23, 2% in Q4 and 26, 9% in Q1 of 2023.

For those who prefer to tracking results on a GAAP basis gross margin in the first quarter was 26, 9% compared with 22, 6% in Q4 and 26, 3% in Q1.

Leslie Green: 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 favorable product mix and the benefits of our recycling programs along with continued efficiency improvements throughout our business.

Gary L. Fischer: Moving to operating expense, total non-GAAP operating expense in Q1 was $8.7 million, compared with $7.5 million in Q4 of 2023 and $8.7 million in Q1 of 2023. On a GAAP basis, total operating expense in Q1 was $9.4 million, compared with $8.2 million in Q4, and down from $9.5 million in Q1 of 2023. As you've seen from our quarterly run rate in 2023, we put in a number of constraints in place for OPEX to align with market conditions.

Moving to operating expenses total non-GAAP operating expense in Q1 was $8 7 million compared with $7 5 million in Q4 of 2023 and $8 7 million in Q1 of 2023.

On a GAAP basis total operating expense in Q1 was $9 4 million compared with $8 2 million in Q4 and down from $9 5 million in Q1 of 2023.

Leslie Green: As you've seen from our quarterly run rate in 2023, we had put in a number of constraints in place for opex to align with market conditions.

Gary L. Fischer: As things are beginning to trend upward, we're loosening some of these constraints, which has brought OPEX up from the previous run rate. We do expect to hold it at approximately this level throughout the rest of this year.

Leslie Green: As things are beginning to trend up we are loosening up some of these constraints, which has brought opex up from the previous run rates, we do expect to hold it at approximately this level throughout the rest of this year.

Gary L. Fischer: Our non-GAAP operating loss for the first quarter of 2024 was $2.5 million, compared with a non-GAAP operating loss in Q4 2023 of $2.7 million, and a non-GAAP operating loss of $3.5 million in Q1 2023. For reference, our GAAP operating line for the first quarter of 2024 was a loss of $3.3 million, compared with an operating loss of $3.6 million in Q4, and an operating loss Non-operating other income and expense and other items below the operating line for the first quarter of 2024 was a net gain of $1.3 million. The details can be seen in the P&L included in our press release today.

Leslie Green: Our non-GAAP operating loss for the first quarter of 2024 was $2 5 million compared with a non-GAAP operating loss in Q4 2023.

Leslie Green: $2 7 million and a non-GAAP operating loss of $3 5 million in Q1 of 2023 for reference our GAAP operating line for the first quarter of 2024 was a loss of $3 3 million compared with an operating loss of $3 6 million in Q4, and an operating loss of $4 4 million in Q1.

Leslie Green: Non operating other income and expense and other items below the operating line for the first quarter. In 2024 was a net gain of $1 3 million. The details can be seen in the P&L included in our press release today.

Gary L. Fischer: For Q1 2024, we had a non-gap net loss of $1.3 million, or $0.03 per share, compared with a non-gap net loss of $2.8 million, or $0.07 per share, in the fourth quarter, and a non-gap net loss of $2.4 million, or $0.06 per share. On a GAAP basis, our net loss in Q1 was $2.1 million, or $0.05 per share By comparison, its net loss was $3.6 million, or $0.09 per share, in the fourth quarter.

Leslie Green: For Q1, 2024, we had a non-GAAP net loss of $1 3 million or <unk> <unk> per share compared with non-GAAP net loss of $2 8 million or seven cents per share in the fourth quarter and non-GAAP net loss in Q1 of 2022 was $2 4 million or <unk> <unk> per share.

Leslie Green: On a GAAP basis net loss in Q1 was $2 1 million or <unk> <unk> per share by comparison net loss was $3 6 million or <unk> <unk> per share in the fourth quarter and GAAP net loss in Q1 of 2023 was $3 3 million or eight cents per share.

Gary L. Fischer: And the GAAP net loss in Q1 of 2023 was $3.3 million, or $0.08 per share. The weighted average basic shares outstanding in Q1 of 2024 were 43.0 million shares. Cash and cash equivalents, and investments were $41.3 million as of March 31st. By comparison, at December 31, it was $52.3 million.

Leslie Green: The weighted average basic shares outstanding in Q1 of 2024 was 43.0 million shares.

Leslie Green: Cash and cash equivalents and investments were 41, $441 3 million as of March 31st by comparison at December 31. It was 52.3 cashes down for two main reasons first our revenue billings tended to be backend loaded in the first quarter as most of China shutdown for Chinese new year's.

Gary L. Fischer: Cash is down for two main reasons. First, our revenue billings tended to be back-end loaded in the first quarter, as most of China shuts down for Chinese New Year. As a result, in Q1, accounts receivable increased by $6.1 million. This is simply a timing issue, as most of that cash can be collected in Q2. The second reason for the decline in cash in Q1 was CapEx spending of $5.7 million. This is not new commitments to facilities.

Leslie Green: As a result Q1 in Q1 accounts receivable increased by $6 $1 million. This is simply a timing issue as most of that cash can be collected in Q2 the.

Leslie Green: The second reason for the decline in cash in Q1 was capex spending of $5 7 million. This is not new commitments to facilities. This was work done in 2023 for which payment was due in Q1 as we look to the balance of the year, we expect capex to be in the $2 million to $3 million of range quarter per quarter, most of which.

Gary L. Fischer: This was work done in 2023 for which payment was due in Q1. As we look to the balance of the year, we expect CapEx to be in the $2-$3 million range per quarter, most of which goes towards facilities work which was done in 2023. One more note on cash; from time to time, we have had outside parties approach us with an interest to invest in our supply chain companies. Currently, interest in China is growing, perhaps related to the change in the economic circumstances in China.

Leslie Green: Goes towards facilities work, which was done in 2023.

Leslie Green: One more note on cash from time to time, we have had outside parties approach us with an interest to invest in our supply chain companies.

Leslie Green: Currently interest in China is growing perhaps related to the change in the economic circumstances in China.

Gary L. Fischer: We believe that there is real value in these assets to be unlocked and may consider monetizing a portion of them this year. As a reminder, we now have over 10 companies in our supply chain where we have partial ownership shared with industry partners. Depreciation and amortization in the first quarter was $2.2 million, and total stock comp was $800K. Net inventory was down $600,000 in the first quarter, but this includes inventory added through our recycling program.

Leslie Green: We believe that there's real value in these assets to be unlocked and may consider monetizing a portion of them. This year. As a reminder, we now have over 10 companies in our supply chain, where we have partial ownership shared with industry partners.

Leslie Green: Depreciation and amortization in the first quarter was $2 2 million total stock comp was 800 K.

Leslie Green: Net inventory was down $600000 in the first quarter. This includes inventory added through our recycling program, 33% of the inventories of raw materials and with a 63% finished goods makes up approximately 4%.

Gary L. Fischer: 33% of the inventory is raw materials, and WIP was 63%. Finished goods make up approximately 4%. The increase in WIP is primarily the result of increased crystal growth in anticipation of higher demand in Q2. With improving demand, we hope to bring our total inventory down by approximately $10 million over the year.

Leslie Green: The increase in.

Leslie Green: Whip is primarily the result of increased crystal growth in anticipation of higher demand in Q2.

Leslie Green: With improving demand, we hope to bring our total inventory down by approximately $10 million over the year.

Gary L. Fischer: Okay, this concludes our discussion of our quarterly financial results. Turning to our plan to list our subsidiary, Tongmei in China, on the star market in Shanghai, we now believe that we have had some significant developments on the issue that the CSRC previously raised, and we believe the likely next step is that the CSRC can resume consideration of our application. As we've said, this is a lengthy process, but we continue to believe that Tong Mei is an excellent candidate for a listing. With that, I'll now turn the call over to Dr. Morris Young for a review of our business and markets.

Speaker Change: Okay. This concludes our discussion of our quarterly financial results turning to our plan to list our subsidiary tongue may in China on the star market in Shanghai. We now believe that we have had some significant developments on the issue that the CSR see previously raised and we believe the likely next step is that the csrs he can resume.

Speaker Change: <unk> of our application as we've said this is a lengthy process, but we continue to believe that tongue may as an excellent candidate for listing.

Speaker Change: With that I'll now turn the call over to Dr. Morris Young for a review of our business and markets.

Morris S. Young: Thank you Gary.

Morris S. Young: We believe our business is on a firm path to recovery, as evidenced by the continued growth in our business and solid execution which allowed us to exceed our Q1 revenue and profitability targets. In the first quarter, we achieved 11% sequential growth in our revenues and 29% sequential improvement. You know, an NGAP net income.

Speaker Change: We believe our business is on my firm path to recovery.

Speaker Change: As evidenced by the continued growth in our business and solid execution, which allowed us to exceed our Q1 revenue.

Morris S. Young: In the first quarter, we achieved 11% sequential growth in our revenues and 29% sequential improvement.

Morris S. Young: non-GAAP net income.

Morris S. Young: While certain parts of the demand environment remain somewhat soft, all three of our substrate product lines show improvement, including a 48% growth in phosphate revenue. Thank you, looking individually at this product line.

Morris S. Young: While certain parts of the demand environment remains somewhat soft.

Morris S. Young: All three of our substrate, probably lie showed improvement, including a 48% growth in indium phosphide revenue from Q4.

Morris S. Young: Lucky individually.

Morris S. Young: As part of their lives.

Morris S. Young: Indium phosphide.

Morris S. Young: [inaudible] once again became our biggest selling material in Q1. Sales were driven by continued recovery in the pound market and a meaningful increase in demand related to AI. We view AI as an exciting catalyst for emitting phosphorite in the years to come, as AI requires high-speed lasers and detectors for rapid data transfer with increased bandwidth, low attenuation, and low distortion. Today.

Morris S. Young: Once again became our biggest selling material in Q1.

Morris S. Young: Sales were driven by continued recovery in the power market.

Morris S. Young: And a meaningful increase in demand related to AI.

Morris S. Young: We review AI, I'd say exciting catalyst for indium phosphide in the years to come.

Morris S. Young: S. AI requires high speed lasers, and detectors for rapid data transfer with increased bandwidth low attenuation and low distortion.

Morris S. Young: Today.

Morris S. Young: AI applications are primarily using gallium oxide pixels, which require a relatively small amount of substrate material. But as the industry moves to 800 gigabit and then 1.6 terabytes of speed, we expect that there will be a necessary transition to Indian phosphorus. We're already seeing development work happening today with next-gen silicon photonics devices, such as Electroabsorption Modulated Lasers, or EMLs, for high-speed

Morris S. Young: Applications are primarily using gallium arsenide, VIX holes, which will require a relatively small amount of substrate material.

Morris S. Young: As the industry moves to 800 gig and then 1.6 terabyte speed, we expect that there will be a necessary transition to indium phosphide.

Morris S. Young: We're already seeing development work happening today with next generation Silicon Photonics devices.

Morris S. Young: Electro absorption modulated lasers or E mails for high speed data center.

Morris S. Young: <unk>.

Morris S. Young: Revenue from these applications contributed to our strong indium phosphide growth in Q1 and will help drive our expected growth in 2024. Our Gallium Oxide revenue grew 24% sequentially in Q1, reflecting increased demand across a broad base of applications, including power amplifiers, HPT applications, for wireless, I'll switch, high power lasers, and LEDs.

Morris S. Young: Revenue from these applications contributed to our strong indium phosphide growth in Q1.

Morris S. Young: And will help drive our expected growth in 2024.

Morris S. Young: Our gallium arsenide revenue grew 24% sequentially in Q1.

Morris S. Young: Reflecting increased demand across a broad base of applications, including power amplifiers HPT applications for wireless or switches high power lasers and Leds.

Morris S. Young: We believe much of the excess inventory in the supply chain has been depleted, and we are benefiting from a desire among our customers to diversify their supply base as the market recovers. For example, today, our share of the HPT market is relatively small. But we believe we have a great opportunity to increase our market share over time and are pleased with early customer attraction. In addition, our 8-inch gallium oxide development efforts have led to groundbreaking advancements in both of our defect densities and yield.

Morris S. Young: We believe much of the excess inventory in their supply chain has been depleted and we are benefiting from a desire among our customer to diversify their supply base as the market recovers for.

Morris S. Young: For example, today our share of the edge <unk> market is relatively small.

Morris S. Young: But we believe we have a great opportunity to increase our market share overtime and I'm pleased with early customer traction.

Morris S. Young: In addition, our Ange gallium arsenide development efforts have led to a groundbreaking advancements in both out of our defect densities and yields.

Morris S. Young: We believe this innovation can be applied to our six-inch new Gallium Oxide product, allowing us to further enhance our competitiveness across all of our market research. However, intervening substrate demand for satellite solar cells was down substantially throughout 2023.

Morris S. Young: We believe this innovation can be applied to our six inch gallium arsenide products.

Morris S. Young: Allowing us to further enhance our competitiveness across all of our market research.

Morris S. Young: In germanium substrate demand for satellite solar cells were down substantially.

Morris S. Young: Substantially throughout 2023 is now beginning to recover.

Morris S. Young: It's now beginning to recover. Sales increased 25% in Q1 over the prior quarter, with renewed strength in Europe and Asia. And finally... Coming off three quarters of strong sales in our raw material business, as well as contribution from our recycling efforts, sales from our raw material business declined as we expected in Q1. This decline was primarily the result of us consuming a greater portion of the output from our consolidated joint venture as our substrate business strengthened. In total,

Morris S. Young: Sales increased 25% in Q1 over the prior quarter with renewed strength in Europe and Asia and.

Morris S. Young: And finally.

Morris S. Young: Coming off three quarters of strong sales in our raw material business as well as contribution from our recycling efforts.

Morris S. Young: Sales from our raw material business declined as we expected in Q1.

Morris S. Young: This decline was primarily the result of our consuming a greater portion of the output from our consolidated joint venture is our substrate business has strengthened.

Morris S. Young: In total <unk>.

Morris S. Young: Our portfolio, joint venture..., continues to be a strategic value to our business, providing money for the critical material we use to make our products and allowing us to benefit from the cost and efficiency advantage. Now, in closing. We're optimistic about the coming years and the growth and expansion of our business. We are seeing tangible signs of recovery across all of our product lines, with new catalysts, such as AI, providing strong incremental opportunities.

Morris S. Young: Portfolio joint venture companies continues to be a strategic value to our business.

Morris S. Young: Providing money of the critical material, we use to make our products, allowing us to benefit on the cost and efficiency advantages.

Speaker Change: Now in closing.

Morris S. Young: We're optimistic about the coming year.

Morris S. Young: And the growth and expansion of our business.

Morris S. Young: We are seeing tangible signs of recovery across all of our product lines with new catalyst such as AI, providing strong incremental opportunity.

Morris S. Young: We've worked hard over the last two years to pave the way for an exciting future by providing world-class products for a highly dynamic technology list, enhancing our own business practices to meet the requirements of Tier 1 customers, delivering breakthrough innovations in the development of large-diameter gallium arsenide and indium phosphide substrates, and executing our recycling program that both advances our ESG commitment and improves our cost performance. We remain steadfast, focused on business efficiency, and accelerating our return to profitability. With that, I will turn the call back to Gary for our second quarter guidance. Gary? Thank you, Morris.

Morris S. Young: We've worked hard over the last two years to pave the way for an exciting future.

Morris S. Young: By providing world class products for a highly dynamic technology landscape.

Morris S. Young: <unk>, our own business practices to meet the requirements of tier one customers delivering breakthrough innovations in the development of large diameter gallium arsenide.

Morris S. Young: And indium phosphide substrates.

Morris S. Young: Executing our recycling program that Bose advances, our ESG complements and improves our cost structure.

Morris S. Young: We remain steadfast focused on business efficiency accelerating our return to profitability.

Gary L. Fischer: In keeping with our comments today, we expect Q2 revenue to be between $25.5 million and $27.5 million. We expect our non-GAAP net loss will be in the range of 3 cents to 5 cents, and our GAAP net loss will be in the range of 5 cents to 7 cents. The share count will be approximately 43.0 million shares.

Morris S. Young: That I will turn the call back to Gary for our second quarter guidance Gary.

Gary L. Fischer: In keeping with our comments today, we expect Q2 revenue to be between $25 5 million and $27 5 million.

Gary L. Fischer: We expect our non-GAAP net loss will be in the range of three <unk> to <unk> <unk>.

Gary L. Fischer: And GAAP net loss will be in the range of five to seven.

Gary L. Fischer: Share count will be approximately 43.0 million shares.

Gary L. Fischer: Okay, well, this concludes our prepared comments. Morris and I will be glad to answer your questions now. John, can you take it back? Thank you.

Speaker Change: Okay, well. This concludes our prepared comments Morris and I will be glad to answer your questions now John.

Speaker Change: Can you take it back.

John: Thank you. At this time, if you would like to ask a question, please press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. We'll pause for just a moment to compile the Q&A roster. The first question comes from the line of Charles Shee from Needham, please go ahead.

Speaker Change: Thank you at this time, if you'd like to ask a question press star followed by the number one on your telephone keypad. If you would like to withdraw your question simply press Star one again.

John: Pause for just a moment to compile the Q&A roster.

John: The first question comes from the line of Charles <unk> from Needham East go ahead.

John: Okay.

Charles Shee: Hi Morris and Gary. Congrats on the good Q1 results and the very upbeat Q2 guidance. I want to start with the AI-related question, indium phosphide. I think last time when we spoke about this, you were talking about semi-insulating indium phosphide wafers potentially being used for some of the high-speed detector applications. But in your prepared remarks, it sounds like you are getting a little bit more upbeat about the high-speed laser type of applications for 800 gigabit, 1.6 terahertz, those kind of applications for the next generation, EML, et cetera. So can you provide us with a little bit of an update on your engagement with these AI applications so far? When do you think the laser application will start to contribute some meaningful revenues for the Ethereum Pulsify business?

John: Hi.

Charles: Gary Congrats on the good.

Charles: Q1 results and very upbeat Q2 guidance.

Charles: Wanted to start with.

Speaker Change: The AI.

Speaker Change: Related question, the indium phosphide I think.

Speaker Change: Last time, we saw.

Speaker Change: Speak.

Speaker Change: When we spoke about this you were talking about a semi insulating indium phosphide wafers potentially being used for some of the high speed the detectors application, but in your prepared remarks. It sounds like you are getting a little bit more upbeat about the high speed laser type of.

Speaker Change: <unk>.

Speaker Change: For 800 gig at one point.

Speaker Change: Tara.

Speaker Change: Hertz those kind of applications for their next generation.

Speaker Change: <unk> et cetera, So can you provide us a little bit update.

Speaker Change: We'll engagement on these AI application so far.

Speaker Change: Do you when do you see the laser applications.

Speaker Change: <unk> start to come to you Bill.

Speaker Change: Meaningful revenues for the indium phosphide business.

Speaker Change:

Speaker Change: Charles.

Morris S. Young: Charles. First of all, the order we received, one customer specifically told us it was for AI. And that was from semi-isolated amine phosphate. And the fact that we're guessing it was for detectors, it was just a guess. Okay, because usually, Indian thoughts fly pretty good.

Speaker Change: First of all.

Charles: The order we received one customer specifically.

Speaker Change: Specifically told US is for us for AI and that was from.

Speaker Change: Some are easily indium phosphide.

Speaker Change: And the fact that we are guessing at Westwood detectors. It was it gas okay, because usually indium phosphide are good.

Morris S. Young: Semi-isolating substrates are either for electronic applications or for high-speed detectors. However, recently in the industry, we also heard that some of the EMLs require semi-insulating substrates. So whether it's for lasers or for detectors, we all know from what we are making, the customer demand for our product is sort of a slight change from silicon-doped, I mean, sulfur-doped semiconducting substrates, usually good for lasers, and now it's for semi-insulating iron-doped indium phosphide. But whether it's for detectors or lasers, it's a guesstimate. We don't really know. I'm sorry. But we did hear from our customer, and it's for a. Pretty large. AI customer.

Speaker Change: Uh huh.

Speaker Change: Some of these are leading our EBIT for electronic applications or for high speed detectors. However, recently in the industry. We also heard some of the e-mails.

Speaker Change: Required semi insulating substrates. So you know this weather is for lasers, all four detectors.

Speaker Change: We all know.

Speaker Change: While we are making the customer demand for our product is sold a slight change from silicon node sulfur dove to semi conducting substrates, usually good for lasers and now as for semi insulating iron dome indium phosphide.

Speaker Change: Whether it will detectors or lasers, it's a gasoline guesstimate, we don't really know.

Speaker Change: Sorry.

Speaker Change: But we do hear from our customer is.

Speaker Change: A.

Speaker Change: Pretty large.

Speaker Change: AI customer.

Speaker Change: Okay.

Gary L. Fischer: Got it, thanks. Well, Morris, thanks for the color you provided. I guess, yeah, it's something we will continue to chat about. And obviously, we don't want to dig more if there's something about your customer you don't want to share. So maybe a second question, maybe for Gary. I think you prepared remarks. You talked a little bit more about the start list. It sounds like you are making some progress on that front

Speaker Change: Got it thanks.

Speaker Change: Mario Thanks for the color you can provide I guess, yes.

Speaker Change: It's something we'll continue to chat and obviously, we don't want to take more of it but there's something about your customer you don't want to share. So maybe a second question maybe for.

Speaker Change: Gary.

Speaker Change: Thank you in your prepared remarks, you talked a little bit more about the song lifes pain.

Gary L. Fischer: It sounds like you are making some progress on that front.

Gary L. Fischer: Can you kind of provide a little bit more color in terms of what kind of progress we're making exactly and give us a little bit better sense about why you think it's moving forward a little bit more this time? Thanks.

Gary L. Fischer: Can you kind of provide a little bit more color.

Gary L. Fischer: In terms of what kind of a progress exactly.

Speaker Change: Give us a little bit better sense about why you think gets moving forward a little bit more.

Speaker Change: Hi, Thanks.

Gary L. Fischer: So the process of communication with the Shanghai Stock Exchange, the CSRC, is such that once we send in our applications, they will continue to ask questions. They want us to clarify a few things. And there are things that they express that they have concerns about, and we provide them with answers. [inaudible] We think we've made some good progress with the questions they have. So now we think we are ready to go through the next step, which is going through their review process again. And they will then look at our whole application and either continue to ask questions or on, approved.

Speaker Change: So so.

Speaker Change: The process of.

Speaker Change: <unk>.

Speaker Change: Communication with Shanghai stock exchange as CSR C is such that once we say NDA applications. They will continue to ask questions. They wanted us to clarify a few things.

Speaker Change: And there are things, which they are.

Speaker Change: Express they have concerns with.

Speaker Change: We provide them with answers.

Speaker Change: And.

Speaker Change: We think we made some good progress.

Speaker Change: The questions they have and so now we think we are ready to go through the next step.

Speaker Change: Which is go through their review process again, and they will then look at our whole application.

Speaker Change: In either.

Speaker Change: Continue to ask questions or.

Speaker Change: <unk>.

Speaker Change: Proof of roof.

Charles Shee: All right, thanks for the update. Okay, that's all from me for now. Thanks so much and congratulations again on the results and guide.

Speaker Change: Alright, guys. Thanks for the update on okay.

Speaker Change: That's all from me for now thanks, so much and congrats on the Charlotte and the.

Speaker Change: On the results and guide.

Richard Cutts Shannon: The next question comes from the line of Richard Shannon from Craig Helen. Please go ahead.

Speaker Change: The next question comes from the line of Richard Shannon from Craig Hallum. Please go ahead.

Richard Cutts Shannon: Hi guys, thanks for taking my question as well. Congratulations on a really nice guide here. It's great to see.

Richard Cutts Shannon: Hi, guys. Thanks for taking my question as well and graduations on a really nice guide here great to see.

Gary L. Fischer: To that point, on the guidance here, I wonder if you could elaborate on a couple of things. First of all, I'm just trying to understand the relative growth dynamics of each of your four revenue buckets here. I would assume you need to classify as probably your best growth driver, but I wonder if you can kind of rank those and whether you expect them all to be growing sequentially. And then, second of all, trying to get a sense of what's implied here for gross margins, given that you said that OPEX could generally be the same in the second quarters of first. I'm kind of getting a number that's slightly higher than the first quarter, maybe as high as 30 percent, but I just wondering if I'm doing the right math on that.

Richard Cutts Shannon: To that point here on the guidance here.

Richard Cutts Shannon: Wondering if you could elaborate on a couple of items here first of all just trying to understand the relative growth dynamics of each of your four revenue buckets here I would assume indium phosphide, probably your best growth driver, but wondering if you can kind of rank those and whether you expect them all to be growing sequentially and then second of all I'm trying to get a sense of whats implied here for gross margins given that you said.

Richard Cutts Shannon: That opex could.

Richard Cutts Shannon: Generally be the same in the second quarters of first I'm kind of getting a number that's slightly higher than the first quarter, maybe as high as 30 or 30%, but just wondering if I'm doing the right math on that one.

Gary L. Fischer: Yeah, so let me first try on the business conditions. Actually, the strongest growth, we think, next quarter is going to come from Jianing Asnay and also germanium. Germanium seems to be very strong.

Speaker Change: Yes, So let me first try on the business conditions.

Speaker Change: Actually the strongest growth, we think next quarter is going to come from gallium arsenide.

Speaker Change: And also Dumanian Germania seems to be very strong.

Morris S. Young: And the raw material is very strong as well. Indian phosphide is actually at this point of the timing that we are projecting flat. And one other thing which is interesting about this business environment right now is that wherever the customer wants something, it's, the lead time is extremely short. I mean, we usually ask the customer to give us at least four weeks of lead time because we need to process the wafers, and sometimes we even have to grow the crystal.

Speaker Change: Raw material is very strong as well.

Speaker Change: Indium phosphide actually at this point.

Speaker Change: All good timing.

Speaker Change: We are projecting flat.

Speaker Change: And one other thing which is interesting about this business environment right now is that.

Speaker Change: Wherever the customer wants something it's to shore.

Speaker Change: Lead time is extremely short.

Speaker Change: I mean, we usually ask the customer to give us at least four weeks.

Speaker Change: Lead time, because we need to process the wafers and sometimes we will have to grow the crystal. So the lead time you Shouldnt lease is long, we don't have a standard product for offering, but nowadays and customer just one two weeks lead time.

Morris S. Young: So the lead time is usually long. We don't have a standard product for offering. But nowadays, I mean, customers just want two weeks of lead time, which is great. However, it sort of prevents us from having better visibility. But we can see that Gallien-Alstein is extremely busy. And Indian phosphorite right now, as we can see now, is a flat quarter. But things can change, because we still have almost two months to go, you know, giving two weeks' lead time. We have six weeks to take orders and deliver.

Speaker Change: He has great. However, its solar prevented us from having.

Speaker Change: Better visibility, but we can see that gallium arsenide is extremely busy.

Speaker Change: And indium phosphide right now as we see now is a flat quarter.

Speaker Change: But things can change because we still got almost two months to go.

Speaker Change: Yes, I'm, giving a two weeks lead time, we have six weeks to take orders and deliver them.

Speaker Change: Okay.

Gary L. Fischer: And on the margin, Gary.

Speaker Change: And on the margin.

Speaker Change: Gary.

Speaker Change: Okay.

Speaker Change: <unk>.

Gary L. Fischer: Maybe we can do this on a follow-up call, Richard, because it gets kind of complicated, and I didn't understand exactly what your model is telling you, but we can work on it with you.

Speaker Change: Maybe we can do this.

Speaker Change: On a follow up call rich because it gets kind of complicated.

Speaker Change: I didn't I didn't understand exactly what your model is telling you, but we can work on it with yourself.

Richard Cutts Shannon: Okay, fair enough. Morris, I did want to follow up on your comment regarding Galley-Marseille being your highest growth driver here. To what degree is this maybe some inventory fill on some product areas that were driven down so hard in the last year and a half? And then I think you also mentioned some pickup in the wireless slash HPT market. So I'm wondering to what degree that's contributing this quarter.

Speaker Change: Okay fair enough.

Speaker Change: Morris I did want to follow up on your comment regarding gallium Marseille being your highest growth driver here.

Speaker Change: To what degree is this maybe some inventory fill in some product areas that were driven down so hard in the last year and a half and then I think you also mentioned some pickup in the wireless slash HPT market. So I'm wondering.

Speaker Change: To what degree that's contributing.

Speaker Change: In this quarter.

Morris S. Young: Well, first of all, I would say, you know, Gallien-Aztec was the first product coming down in terms of revenue, right? I mean, I remember it was the second quarter of 2022 when Gallien-Aztec started to come down. So, you know, it takes usually six weeks before all the inventory gets depleted. So now it's coming back.

Speaker Change: Well first of all I would say.

Speaker Change: Gallium arsenide was the first product coming down in terms of revenue right. I mean, I remember it was the second quarter of 2020 to gallium arsenide start to come down. So it takes usually six weeks.

Speaker Change: Before all the inventory got depleted. So now is coming back so because indium phosphide. It takes I think three longer weeks before you start to come down.

Morris S. Young: Because indium phosphide takes, I think, three longer weeks before it starts to come down. Three quarters. Yeah, three quarters, too.

Speaker Change: Yes, two quarters too so I expect indium phosphide, perhaps.

Morris S. Young: So I expect indium phosphide, perhaps, not to recover as quickly as gallium arsenide. Although the pickup of indium phosphide last quarter, I attribute that to the new business of AI. And because I see Pong's business is doing OK, but not really robust. The telecom business is not great. And data centers, from what I see, they are still in inventory out there. So, I think, you know, the AI part of the data center, I think, is pulling the demand for us and increasing our revenue by, what, 40-some-odd percent? 48. Yeah, 48 percent from Q4 to Q1. [inaudible]

Speaker Change: Now to recover as quickly.

Speaker Change: Gallium arsenide, although you know the pickup of indium phosphide last quarter I attribute that to the new business AI.

Speaker Change: And because I see PON business is doing okay, but not really robust the telecom business is now grade and data center from what I see they are still <unk>.

Speaker Change: Inventory out there.

Speaker Change: So I think the.

Speaker Change: Part of the data center I think is pulling the demand for us and increase our revenue by 40, some odd percent.

Speaker Change: 48% from Q4 to Q1.

Speaker Change: So.

Speaker Change: Yes.

Richard Cutts Shannon: I didn't mean to interrupt, Morris. Please continue.

Speaker Change: I didn't mean to interrupt Marisa please continue.

Morris S. Young: Oh, no, actually, I forgot what my train was. So what was the other part of the question? Yeah, yeah.

Marisa: Oh, no actually I forgot.

Speaker Change: So.

Speaker Change: What was the other part of it.

Speaker Change: Yeah Yeah.

Richard Cutts Shannon: Yeah, I think so. But there is an interesting follow-up to those comments here, which is, like, how much of your India phosphide business is data or is AI today? It seems like, given these kind of growth rates, it's got to be a pretty substantial part now. Can you quantify that in any way?

Marisa: Yes, I think so but there is an interesting follow up to those comments here, which is.

Marisa: How much of your indium phosphide business. This data errors AI today it seems like.

Marisa: Given these kind of growth rates, it's got to be a pretty substantial part now can you quantify that in any way.

Marisa: Well.

Morris S. Young: I think last quarter was significant, and I would say it could be as much as 20%.

Speaker Change: I think last quarter was significant.

Speaker Change: I would say.

Speaker Change: B as much as 20%, although Illinois, its a little difficult for us to really nail it because some customer will tell us.

Morris S. Young: Although, you know, it's a little bit difficult for us to really nail it because some customers would tell us, and some customers wouldn't, okay? But as I said, the Indian phosphide business is very interesting. I want to encourage analysts to help us to do the analysis.

Speaker Change: And some customer Don Okay, but as I said.

Speaker Change: Indium phosphide business is very.

Speaker Change: Interesting I want to encourage analysts to help us to do that analysis. There are two kinds of indium phosphide semi insulating and semi conducting the semi insulating is usually made for detectors electronic applications.

Morris S. Young: There are two parts to Indian phosphide. One is semi-isolating, and the other is semi-conducting. The semi-insulating material is usually made for detectors and electronic applications, and the software of the semiconducting materials is usually low EBD and good for lasers, and they have been the dominant demand for indium phosphide for many, many years. It's almost like 8 to 1 in favor of semiconducting wafers, okay? But the last two or three quarters...

Speaker Change: And the sofa Adobe semiconducting.

Speaker Change: Unusually low abd and good for lasers and they are the dominant demand for indium phosphide for many many years is almost like 8% to one in favor of semi conducting wafers, okay, but the last two or three quarters.

Morris S. Young: The trend is reversed. There's so much more demand for semi-insulating iron doped wafers. So it's as if the laser just didn't grow, or maybe they still got too much inventory. And this new demand for iron doped, making either some kind of laser or, more likely, a high speed detector is growing very strong. So what I'm hoping for is that, you know... The sulfur-doped material will recover as inventory gets consumed and will come back again. But this iron doped actually is a new application that will continue its own trajectory of growth.

Speaker Change: The trend is reversed.

Richard Cutts Shannon: Okay, very interesting dynamics there. I'm going to ponder that while I ask a couple other questions here. I guess just a quick one here, you had a 10% customer in the quarter. Can you identify that or at least the sector and whether they've been a 10% customer in the past?

Speaker Change: There is so much more demand on semi semi insulating iron dome.

Speaker Change: Wafers, so if the laser.

Speaker Change: Didn't grow or maybe they're still got too much inventory and this new demand of iron.

Speaker Change: Making either some kind of laser or more likely a high speed detector.

Speaker Change: Is growing very strong so what I'm, hoping for is that you know.

Speaker Change: The sofa dome material will recover.

Speaker Change: Mentally.

Speaker Change: Get consumed it will come back again, but this actually is a new application will continues on a trajectory of growth.

Speaker Change: Okay, very interesting dynamic, Sir I'm going to ponder that while I ask a couple of other questions here.

Speaker Change: I guess just a quick one here you had a 10% customer in the quarter king identify that or at least sector and whether that there had been a 10% customer in the past.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: It was.

Gary L. Fischer: It was the It was an EpiHouse, Richard.

Speaker Change: It was in every house Richard.

Gary L. Fischer: And it's actually related to the EAG customer, right? So yeah.

Speaker Change: And it's actually related to the EAA customer right. So yeah yeah.

Speaker Change: Okay.

Speaker Change: Yes.

Gary L. Fischer: It's a historically long-term customer for us that does EPI, but we don't know for sure where that is going.

Speaker Change: It's.

Speaker Change: And historically long term customer for us that does abbvie and okay.

Speaker Change: We don't know for sure where that was going.

Gary L. Fischer: but, well, actually, we do know, but we can't say so I'm not going to lie to you.

Speaker Change: But.

Speaker Change: We do know, but we cant say so.

Speaker Change: <unk>.

Richard Cutts Shannon: All right, fine. Fair enough, Gary.

Speaker Change: Okay.

Speaker Change: Alright.

Speaker Change: Gary maybe just a couple of last questions here and I'll ask both of you put on your.

Richard Cutts Shannon: Maybe just a couple last questions here, and I'll ask both of you to put on your long-term lenses here, or I guess we'll call it medium-term lenses here. But just kind of one, one of you conjectures on the opportunity for getting back to break even by the end of this year or early next year. And maybe just as a reminder of what that model looks like in terms of revenues and gross market.

Speaker Change: Your long term lenses here or I guess, we'll call it medium term lens here, but just kind of one <unk>.

Speaker Change: <unk> on the.

Speaker Change: Opportunity for getting back to breakeven level.

Speaker Change: By the end of this year or early next year and maybe just as a reminder, what that model looks like in terms of revenues and gross margins.

Gary L. Fischer: Well, we certainly think that it's a reasonable target and goal to do that, maybe this year. So we're not giving up. We're not giving up on it.

Speaker Change: Well, we certainly think that it's a reasonable target and goal to do that.

Speaker Change: May be this year, so we're not giving up we're not giving up on it I would say is this year, yes. So.

Morris S. Young: I would say it's this year. Yeah.

Richard Cutts Shannon: Thank you.

Speaker Change: Yes.

Speaker Change: Uh huh.

Gary L. Fischer: It's probably somewhere between $28 and $30 million a quarter. And we would need to get the gross margins to go up and maybe close to 28% and keep the OPEX somewhere around. You know, 9.3, 9.5.

Speaker Change: It's probably somewhere between $28 million to $30 million a quarter.

Speaker Change: And we would need to get the gross margins to go up and maybe close to 28%.

Speaker Change: Keep the opex somewhere around.

Speaker Change: Nine 394.

Gary L. Fischer: Yeah, and that's GapNopex, by the way. So, yeah, and I think we do need some help from Indian phosphide. I mean, right now, Indian phosphide is...

Speaker Change: S GAAP opex by the way so yes.

Speaker Change: We do need some help on indium phosphide.

Speaker Change: J plasma is only.

Gary L. Fischer: 50% of what we used to do at the peak. Yeah.

Speaker Change: 50% of what we used to do at the peak yes.

Gary L. Fischer: Yeah, I mean, that's probably the wild card. And it's, I would say that the Indian phosphide surge, especially since it's centered in the artificial intelligence area, is happening sooner than we expected. We thought it would, we believed early on it was going to happen, but it's happening sooner. So the question is, what's going to happen in the next two or three quarters? But it's a tremendous opportunity. And there are billions and billions of dollars that are being invested in the hardware side of AI and the software side. And, of course, we play on the hardware side. So it's a. It's pretty amazing what's on the horizon. One last question and I'll jump out of line here, guys.

Speaker Change: Yes.

Speaker Change: That's probably the wildcard and.

Speaker Change: It's.

Speaker Change: I would say that the the indium phosphide, Serge, especially since it centered in the artificial intelligence area.

Speaker Change: It's happening sooner than we expected we would.

Speaker Change: We thought it would we.

Speaker Change: We believe early on it was going to happen, but it is happening sooner.

Speaker Change: So the question is.

Speaker Change: What's going to happen in the next two or three quarters, but its a tremendous opportunity.

Speaker Change: Theres billions and billions of dollars that are being invested in the hardware side of the AI and the software side so and.

Speaker Change: Of course, we play on the hardware side so.

Speaker Change: Alright.

Speaker Change: It's pretty amazing, what's what's on the horizon. So.

Speaker Change: Yeah.

Richard Cutts Shannon: One last question, I'll jump out of line here, guys. The short report that came out on your stock early last month, I think we've established pretty well that it was a bunch of malarkey for the most part, but it does bring up an interesting topic that I think would be very interesting for you to address. And I think it's a risk that a lot of investors bring up with me, and that is related to the star listing and the investment by private equity investors.

Speaker Change: Okay.

Speaker Change: One last question I'll jump out of line here guys.

Speaker Change: The.

Speaker Change: The short report that came out on your stock early last month.

Speaker Change: I think we've established pretty well as a bunch of malarkey for the most part but it does bring up an interesting topic. There I think it would be very interesting for you to address risks that a lot of investors bring up with me and that is related to the star listing and the investment by private equity investors and if there's any.

Richard Cutts Shannon: And if there's any, you know, rejection of the application, for whatever reason here, what's the risk? And how do you get around the risk of having to repay that money and then find other ways to finance the company?

Speaker Change: Peter rejection of the application for whatever reason here, what's the what's the risk and how do you get around the risk of having to repay that money and then find other ways to finance the company.

Speaker Change: Well.

Speaker Change: Yeah.

Speaker Change: Yes.

Gary L. Fischer: As long as we're in the process, they have no right to redemption.

Speaker Change: As long as we're in the process.

Speaker Change: They have no right.

Speaker Change: For redemption.

Gary L. Fischer: And equally important, they don't want to be redeemed. The last thing they want is their money back. And so they're, they're very willing to be patient and work with us. And it's, You know, everyone's disappointed that it's taken longer than we all expected. But so let me try to help out a little bit here, Gary. Look, I think.

Speaker Change: And equally important they don't want to be redeemed.

Speaker Change: I mean.

Speaker Change: The last thing they want is their money back.

Speaker Change: <unk>.

Speaker Change: So they are very willing to be patient and work with us in.

Speaker Change: Okay.

Speaker Change: If were ever was disappointed that it's taken longer than we all expected.

Speaker Change: But.

Speaker Change: So let me let me, let me try to help out a little bit here Gary look.

Speaker Change: I think.

Morris S. Young: Uh, I mean...hard assets in doing manufacturing semiconductor or materials jobs are hot in demand in China. And that is showing up in the fact that we have, you know, other investors interested in acquiring a minority share of our other joint ventures. So although the IPO takes longer than we thought it would, but I think, you know, our assets in China are highly valuable. You know, I think the psychology or the thinking from a Chinese investor point of view, their money, you know, can no longer go into real estate to invest.

Speaker Change: I mean.

Speaker Change: Hard assets and doing manufacturing semiconductor all materials job industry is hot in demand in China and.

Speaker Change: And that is showing up in the fact that we have no other.

Speaker Change: Other investors interested in.

Speaker Change: <unk> M minority share of our other joint ventures.

Speaker Change: So.

Speaker Change: So although you know the IPO takes longer than we thought it is but I think our assets in China are highly valuable.

Speaker Change: You know I think the psychology or the or the thinking.

Speaker Change: From our former Chinese Investor point of view.

Speaker Change: Their money.

Speaker Change: No longer can go into real estate to invest.

Morris S. Young: And doing materials, and doing manufacturing, and the real fundamental business of manufacturing, it's highly desirable. So if we don't, for whatever reason, we don't go public, I would say one possibility is, you know, inviting other investors to invest in our joint ventures, and we have several of them, which are highly valuable. I mean, of course, the most valuable is Tomei Manufacturing Substrates, and we have world-ranking leadership in those fields, although they are small, but nevertheless, it's highly desirable.

Speaker Change: And doing materials and doing manufacturing.

Speaker Change: And the real.

Speaker Change: Fundamental business manufacturing is highly desirable so if we for whatever reason we don't go.

Speaker Change: IPO I would say one possibility is.

Speaker Change: Invest.

Speaker Change: The other customer.

Speaker Change: Lessors investing into our joint ventures, and we have several of them.

Speaker Change: Which are highly valuable.

Speaker Change: I mean of course, the most valuable has told me manufacturing substrates and we have the world ranking.

Speaker Change: Leadership in those field, although they are small, but nevertheless is highly desirable, but because we are going public in China. So we cannot separate them and then by investor into the main body of the investment until May but for our joint ventures, we can certainly.

Morris S. Young: But because we're going public in China, we cannot separate them and then invite investors into the main body of the investment, Tomei, but for our joint ventures, we can certainly, Yeah, let me give you. I mean, we have talked about this internally. So, you know, we're not worried about it. But as I said, the PE companies want us to go public; they don't want us to pull out.

Speaker Change: Get other investors investing in those joint ventures.

Speaker Change: Let me give you when we have talked about this internally so.

Speaker Change: Okay.

Speaker Change: We're not worried about it but as I said.

Speaker Change: The p/e companies want to want us to go public they don't want they don't want to pull out so.

Speaker Change: The.

Speaker Change: <unk>.

Morris S. Young: So the, you know, these private equity investors are all large and premier institutions, each with an investment of just under $5 million, which represents a relatively small part of their respected portfolios. And so far, since they have to be patient no matter what, they're being patient.

Speaker Change: These equity private equity investors.

Speaker Change: Are all large and premier institutions.

Speaker Change: Each with an investment of just under $5 million, which represents a relatively small part of their respective portfolios.

Speaker Change: So far since they have to be patient no matter, what they're being patient so.

Speaker Change: And.

Speaker Change: Yes.

Morris S. Young: I know that it's probably interesting to

Gary L. Fischer: Another thing that's probably interesting to note is that they don't have any recourse, or their investment is not collateralized, so that's why they need us to succeed. And we made some significant progress and some developments that, you know, we really can't give any details about, but some very good steps were taken in the recent quarter, which continues to sustain our hope regarding the IPO.

Speaker Change: Another thing Thats, probably interesting to note is that they don't they don't have any recourse or.

Speaker Change: Their investment is not collateralized so.

Speaker Change: That's why they need to succeed so.

Speaker Change: And we made some significant.

Speaker Change: Progress since and developments that we.

Speaker Change: Really cant give any details.

Speaker Change: But.

Speaker Change: Some.

Speaker Change: Some very good steps were taken in the recent quarter, which.

Speaker Change: Continues to sustain our hope regarding the IPO.

Speaker Change: Okay.

Richard Cutts Shannon: Well, great, I appreciate all that detail. I think a lot of investors wanted to hear that. And I think that's a great, great response. So appreciate the time, guys. That's all.

Speaker Change: Well great I appreciate all that detail I think a lot of investors wanted to hear that and I think that's a great. Great response. So I appreciate the time guys Thats all from me.

Timothy Paul Savageaux: The next question comes from the line of Team Savageaux from Northland Securities. Please go ahead.

Speaker Change: The next question comes from the line of Tim <unk> from Northland Securities. Please go ahead.

Timothy Paul Savageaux: Hi, good afternoon, and congratulations on both the results and the outlook, and especially the growth in the phosphide. I think there was a mention of, you know, kind of peak levels that you had achieved in indium phosphide, getting up toward 20 million a quarter, maybe 18. But you know, at that point, you also had some additional consumer business, and I guess, my question is, as you look at it now, the market opportunity you're seeing, do you think this AI-based optical data center opportunity can move you back toward peak? in the emphasized levels by itself? I have a follow-up question.

Tim: Hi, good afternoon, and congrats on both the results and the outlook.

Tim: Through the end of the growth in indium phosphide and.

Tim: I think there was a mention of.

Tim: Kind of peak levels that you had achieved in indium phosphide and pets.

Tim: Getting up towards $20 million a quarter, maybe 18.

Tim: But at that point you also had some additional consumer business I guess.

Tim: My question is as you look at it now the market opportunity Youre seeing do you think this AI kind of optical data center opportunity.

Tim: <unk> move you back toward peak.

Tim: Indium phosphide levels by itself.

Speaker Change: I have a follow up.

Morris S. Young: That's a good question. I, I, you know, the customer who we use our product for consumer products. At the time, I mean, they still have one product using it for consumer products, by the way, they didn't go completely, and we are, a big, dominant supplier for that product. And we are also in negotiation and in qualification for yet another product. Although I don't know what the launch time is and whatnot.

Speaker Change: That's a good question.

Speaker Change: The customers, who use our product for consumer products.

Speaker Change: At the time.

Speaker Change: They still have wound product using it for consumer product by the way. They didn't go all completely and we are I believe.

Speaker Change: A big dominant supplier for that product and we are also in negotiation and in qualification.

Speaker Change: Yet other product.

Speaker Change: Although I don't know whats the launch time and whatnot and the other thing is that talking to their engineers.

Morris S. Young: And the other thing is that talking to their engineers. At one time, they told us they had 11 projects, centered around using any phosphide in their consumer product device. So.

Speaker Change: At one time, they told us they have 11 projects.

Speaker Change: Centered around using indium phosphide.

Speaker Change: In their consumer devices.

Speaker Change: So.

Speaker Change: Yes.

Morris S. Young: I don't think I'm giving that up, but, you know, Indian phosphide just has so many different characteristics, such as far-infrared. And it can be used as a detector, et cetera, et cetera. So it's unique in its place to be used as a technology device, whereas, you know, an AI application. I think it's an extension of what people use it for in the data center. If you want high bandwidth, high speed data transfer, low attenuation, I mean, that's the perfect choice.

Speaker Change: I don't think I'm, giving that up but indium phosphide just has so many different characteristics such as volume for red.

Speaker Change: And using as a detector etcetera etcetera. So it is unique in its place to be used as a technology.

Speaker Change: Device.

Speaker Change: Whereas AI.

Speaker Change: Location.

Speaker Change: I think it's a extension of what people use it for data center.

Speaker Change: If you want the high bandwidth high speed data transfer.

Speaker Change: Lower attenuation I mean, thats the perfect choice and if you have AI that means you've got to access data much.

Morris S. Young: And if you have AI, that means you've got to access data much more 100 times, 1,000 times, even 10,000 times. And you have so many more data centers you want to exchange information. What's the best way to transfer that information? It's a no-brainer. It has to be some kind of optical device to transfer that data.

Speaker Change: 100 times, a thousand times, even 10000 times and you have so many more datacenter you under exchange information, what's the best way to.

Speaker Change: Transfer that information, it's no brainer it has to be some kind of optical device to transfer that data. So I think.

Morris S. Young: So I think it's difficult for me to say when it's going to be so strong and so big, but whether it's going to rival, you know, that's a consumer product, but I think both of them. Do we need the Indian forest fire? Yeah, well...

Speaker Change: It's difficult for me to say when it's going to be so strong and so how big but.

Speaker Change: Whether it's going to rival too.

Speaker Change: <unk>.

Speaker Change: Consumer product, but I think both of them.

Speaker Change: Do need indium phosphide.

Speaker Change: Yes.

Gary L. Fischer: When Morris says optical, that means it's got to have the Indian phosphide because the wavelengths can be read by Indian phosphide. So, yeah, we believe we will get back to those levels, Tim. As Morris says, we're not sure on the timing. And it could get back to that level sooner than we thought because of AI. You know, six months ago, we didn't have this kind of expectation.

Speaker Change: When more says optical that means it's got to have the indium phosphide.

Speaker Change: The wavelengths can be read by indium phosphide, so, but yes, we believe we will get back to those levels Tim.

Speaker Change: As more says we're not sure on the timing.

Speaker Change: And it.

Speaker Change: It very well could get back to that level sooner than we thought because of AI six months ago. We didn't have this kind of expectation I don't know for the people listening of it I think last week. There was really amazing article in the New York Times about the amount of money invested in AI in Q1 of this year and it was I think 32 billion.

Gary L. Fischer: I don't know, for the people listening to this, but last week there was a really amazing article in the New York Times about the amount of money invested in AI in Q1 of this year, and it was, I think, $32 billion. And that's not just software; that's hardware, too. So it's data center stuff. So, you know, I mean, we've all been around a long time, and so we've seen stuff.

Speaker Change: <unk>.

Speaker Change: And Thats not just software that's hardware too so its datacenter stuff so.

Speaker Change: Yes.

Speaker Change: We've all been around a long time, and so we've seen stuff, but I was I was very amazed by that and I send it to Morris and Leslie I showed it to our board of directors.

Gary L. Fischer: But I was very amazed by that, and I sent it to Morris and Leslie. I sent it to our board of directors because that's going to... You know, we know we're at the bottom of the food chain or the, you know, end of the train, but that's going to benefit Indian phosphide substrates. And so. The dream or the hope is that the consumer will come back. And it competes against AI for who's going to be the biggest, you know, contributor to Indian phosphide revenue. And, you know, we don't need a miracle for that to happen. I think it's a very reasonable goal.

Speaker Change: Because because that is going to.

Speaker Change: We know we are at the bottom of the food chain or at.

Speaker Change: At the end of the train, but that's going to benefit.

Speaker Change: Indium phosphide substrates.

Speaker Change: So.

Speaker Change: The.

Speaker Change: The dream or the hope is that.

Speaker Change: The consumer comes back.

Speaker Change: And it competes against AI for who is going to be the biggest.

Speaker Change: Contributor to indium phosphide revenue and.

Speaker Change: And we don't need a miracle for that to happen I think its very reasonable goal.

Timothy Paul Savageaux: Got it. And I want to ask a little bit more about the improvement or the pretty dramatic growth that you saw in Q1 and Indium Phosphide, and you've already talked to You know, you have a unique perspective kind of in the ecosystem, and maybe I'm going to ask you to guess a little bit more here, but I guess my question is around the breast, and how we can characterize that strength. Obviously, you can sell to a lot of different folks in this arena, whether it's EpiWafer suppliers or vertically integrated laser manufacturers or module manufacturers.

Speaker Change: Got it and.

Speaker Change: I wanted to ask a little bit more about the improvement or the pretty dramatic growth that you saw in Q1 in indium phosphide and you've already talked to them.

Timothy Paul Savageaux: And I think you've done business with all of those types of guys, whether it's looking at the type of customers or looking at wafer sizes. What does that tell you about the breadth of demand that you see? Is there, you know, historically, you've had a couple of major customers on the data center side, or, you know, can you see to what extent new customers are showing up, or are there a couple of customers really moving the needle for you when you see this extraordinary growth in Q1?

Speaker Change: You have a unique perspective.

Speaker Change: And within the ecosystem and maybe I'm going to ask you to guess a little bit more here, but.

Speaker Change: Yes, My question is around the breadth.

Speaker Change: And how would you characterize that strength obviously you.

Speaker Change: And so through a lot of different folks in this arena whether it's.

Speaker Change: The wafer suppliers or vertically integrated.

Speaker Change: Laser manufacturers or module manufactures and I think you've done business with all of those types cigars.

Speaker Change: And so whether it's looking at the type of customers.

Speaker Change: We're looking at wafer sizes.

Speaker Change: Yes.

Speaker Change: What does that tell you about the breadth of demands.

Speaker Change: <unk> historically, you've had a couple of major customers on the datacenter side or can you see that new customers are showing up or are there a couple of customers really moving the needle for you. When you see this extraordinary growth from Q1.

Speaker Change: The Q1 customer actually is new.

Speaker Change: They are a customer or other.

Speaker Change: Product, but for that application.

Morris S. Young: [inaudible] Boy, I was new. They're telling us they're a customer, but I can't repeat it. It's a big, big customer.

Speaker Change: For AI.

Speaker Change: New.

Speaker Change: And.

Speaker Change: They are telling us their customer, but I can't repeat it.

Speaker Change: And it's a big big customer.

Gary L. Fischer: Well, there's a, you know, we know the players, right? There's Meta, there's Google, there's Microsoft. All of those data centers are going to, you know, where India Phosphide is going to have a play are rack-to-rack, rack to the aggregation point within the data center and then the aggregation point to a different data center. All of that needs high speed. If you think of the data that's computed in AI, then you've got to transfer it and move it around in order to get an end result. And so within the rack, we don't think they'll go to AI or Indian Phosphite. But rack to rack and beyond, that's where Indian Phosphite has a definite application.

Speaker Change: Well there is.

Speaker Change: We know we know the players right Theres matter there is Google Microsoft.

Speaker Change: All of those data centers.

Speaker Change: Are going to.

Speaker Change: We're indium phosphide is going to have a play is.

Speaker Change: Rack to rack.

Gary L. Fischer: Of course, Gary. You're not saying anything different. Why is it AI? Data centers are already doing it.

Morris S. Young: But it's just that data centers have to get so busy talking to each other and exchanging information a thousand times or ten thousand times that requires higher speed, higher. That is where Union Phosphate comes in.

Gary L. Fischer: The other thing that one of our marketing guys taught me is that some of the large data centers are now having a shortage of power, electricity, to run the thing. So they're downsizing in the future architecture to more data centers that are smaller but are spread around, and that's going to benefit us.

Timothy Paul Savageaux: Got it. Well, okay, that sounds like there was, you know, sort of a big customer helping to drive that growth and Q1 and sort of the rest of the... color I was looking for. I know there's only so much you can say, but clearly,

Morris S. Young: You're at the substrate level; you've got an epi wafer supplier who, you know, maybe selling into a module manufacturer. I mean, I imagine that you're maybe not all the way up to the cloud provider level, but you have customer touchpoints all along that ecosystem. And I was just looking for, as you see the pieces move around, you know, what you're seeing in terms of opportunity at any of those levels, right?

Morris S. Young: Whether it's going directly to a chip supplier. Obviously, we used to do a lot of business with Intel and their module assets are over at Jable now. Are you seeing sort of different customers, you know, kind of show up at different parts of the food chain, I guess, in driving this AI growth? Well, not yet.

Morris S. Young: Well, not yet. In fact, I think if I...

Morris S. Young: I mean, we have some Chinese customers who are showing up, taking a lot of wafers as well, but they're not telling us anything. I mean, I think the customer base seems to be shifting somewhat. Before this thing all happened, you know, it's a consumer product that And then there was a data center, you know, that you were talking about, which was taking a lot of wafers. They are not the prime customer at the table right now.

Morris S. Young: There is a new Chinese customer coming in, but we don't know where they're coming from. And this new customer is taking this semi-insulated Indian phosphide, and we know they're telling us it's going into AI. But. I wish I could see the second one or third one come in. That would be great. Okay, thanks.

Timothy Paul Savageaux: Okay, thanks. Congratulations. We think we understand the architectural needs well enough that there's little doubt in our minds, there's no doubt, frankly, that we're going to end up benefiting from and getting into multiple data centers along the big names that I just ran off, so.

Dave Kan: The next question comes from the line of Dave Kan from B. Reilly Securities. Please go ahead.

Dave Kan: Good afternoon. My first question is actually on gallium arsenide. So you're expecting that to be the main driver from first quarter to second quarter. Just wondering if there are any applications or customers kind of driving this, you know, strong growth?

Morris S. Young: LED is strong for automobiles; lasers are strong, but not as high as the peak. I would say it's about 50% of the peak level. The automobile is probably... 70, 80% of the peak. And HPT is a new, I believe, opportunity for us. And we're trying very hard to get ourselves back into it. And if we are successful, we can expect more revenue growth for HPT as well. And the Chinese market seems to be fairly strong in Galinausk.

Dave Kan: Got it. And I was just wondering how sustainable your expectation is for Galileo Mars. Are we talking just a few quarters or kind of a multi-year cycle?

Morris S. Young: Oh, I cannot guarantee multi-year. I would say we probably have good visibility at least to Q3. I mean, demand is strong. But, as you know, that I do worry about. The world economy. I think, but then, you know, people are saying there's a recession, but it never happens.

Dave Kan: I mean, I just can't seem to... Yeah, most of our cycles are more than one quarter. So, you know, gallium arsenic is, is, you know, more robust than we expected it to be. But we're not thinking like, oh, then it's going to drop back down in July, so. Got it. And then just on Indian phosphide for AI applications.

Morris S. Young: Is there any data on market share, how big that is, and the market share between you versus two competitors?

Dave Kan: No, we don't know.

Gary L. Fischer: There are some public projections on markets that Coherent shared publicly in one of their presentations. If you haven't seen that, you might want to take a look, because there's some stuff in there that might give you some information.

Dave Kan: But just on market share, I mean, do you think we should expect maybe one third each for you and your competitors, or somebody has a dominant market share? Just on the AI. Any color on that?

Morris S. Young: The customer we have, I think they are giving us an order, but I don't know whether our competitor is taking orders from a different customer. In other words, the order we got, we know we got 100% of that order from that customer. And they told us it's for AI. But I don't know whether our competitor is serving Yadonna Chenoweth.

Dave Kan: Got it. All right. Thank you.

Matthew Stevens Bryson: The next question comes from the line of Matt Bryson from Wedbush Securities. Please go ahead.

Matthew Stevens Bryson: Hey, thanks for taking my questions. On the HPT side of things, if you're successful in getting traction and have any idea of what the size of that opportunity might be,

Matthew Stevens Bryson: Say it again. I didn't hear it quite right here.

Morris S. Young: The expected value. How big is the HBT market? Oh, what could that look like on a quarterly or annual revenue run rate, assuming you're successful in getting traction in that market? Okay.

Morris S. Young: I would say close to $20 million a year.

Matthew Stevens Bryson: Got it. So that's a nice big round number. Similarly, or slightly different question. I think a lot of the focus on a new phosphide has been around the AI opportunity.

Morris S. Young: But Do you have any sense of how close we are to the point where inventory is normalized? We are like, is that two, three quarters out? Is it a year out? And then any idea in terms of how much revenue you think you're losing? Because there's inventory out there right now, or what your revenue might look like if that inventory didn't exist? Any thoughts?

Morris S. Young: Yeah, I think right now it's very difficult for me to understand because I don't even know whether they are in full production or not, although the amount of substrate they're buying doesn't look like it's in pilot.

Morris S. Young: I think they're making something. But we haven't seen it, I mean, the first thing I'd like to see is, I mean, the last order was for three months. If they give us an order out of six months, if they're increasing, then I can estimate. And better yet, if there's a second customer. Solo coming in wants the same thing, and that's even better. At this point. I'm sorry to interrupt, Morris. I'm actually...

Morris S. Young: And sorry to interrupt Morris, I'm actually asking about kind of that traditional Indian phosphide business, like where you know, you have inventory kicking around in the supply chain, if you have any idea. So not so much the AI side, but that traditional business, if you have any idea, what the impact on your revenue is. How much it's holding it off, and then, you know, any thoughts on when that inventory might get worked out. A normal revenue run rate on that older

Matthew Stevens Bryson: I think that's it. Because the business is right now at the... Just beginning, it's hard for me to tell. But, I mean, I think we have the capacity. We can definitely make three or five times what they are ordering now, or even 10 times that if they give us a little bit of time to increase our facility. So... I think the volume is no problem, and I think our product quality really fits well with what they wanted.

Morris S. Young: So at this point, I don't know whether I'm answering your question or not. I think I'm excited about it, and we're trying to get as much information as we can, and we know the customer and the client, which is large. I don't think they're fooling around. So hopefully, they're coming back with increased order, or somebody else is going to come in following their lead. So I think that's the best I can do. Yeah.

Gary L. Fischer: Yeah, I've had some of these conversations with our marketing guys, and I think that they expect that we're going to continue to work through the inventory into the second half of this year.

Gary L. Fischer: But that's not

Gary L. Fischer: No, no, it's not AI, it's just in general. Data center. Data center.

Gary L. Fischer: Yeah. Yeah. Yeah. Yeah. So that's what I was referring to, okay?

Matthew Stevens Bryson: Okay, so there's still some out there. There's still some out there, but yeah. It getting cleared out and then restoring normal levels, that's probably an early 2025 type phenomenon, is your thinking right now? Yeah.

Gary L. Fischer: Yeah, maybe Q4 this year, but definitely, definitely in 2025. So, it's... It's going to happen. So we can't wait. We're so excited about it.

Matthew Stevens Bryson: Yeah, I guess, last one for me, Gary. I completely understand that customers don't want to hold inventory, and so they're putting in rush orders, which makes it hard on your end to clear out your inventory, because you don't want to turn down business. But But I guess, given that environment, how confident are you that you can take down inventory by $10 million? Or what are the dynamics involved in that? Where you're not effectively having a turnout, you can't meet the rush.

Gary L. Fischer: Well, You know, I wanted to take it down by $10 million last year, and, you know, it went down last year, but not as much as our target. However, I have a couple of reasons that I think it's a realistic target.

Gary L. Fischer: One is, if you look back at our historical inventory levels compared to our revenue run rate levels, you know, it was. The inventory was... in the $60 million level range, $65 million level range. So the difference is we have more inventory in the consolidated joint ventures now because they have different added product lines and things like that, and our recycling program, which is good, it helps us with gross margin and it helps us with ESG, but you're converting what I would call scraps of materials or slurry, which has a little or no book value, and then you bring it in at standard cost, so your inventory goes up. It's counter Is it going to be ten million dollars?

Gary L. Fischer: That's my target. And if revenue grows, you know, for us, then it makes it a little easier to take the inventory down. So, yeah. I don't need a miracle to have that happen. I just need some good business decisions.

Speaker Change: I don't need a miracle to have that happen I just need some good.

Matthew Stevens Bryson: And it was easier, frankly, when I could go to China, because I would hold inventory review meetings. And I haven't been there for a while because of the COVID thing, but I'm going to go this year. So we're getting back into that cycle. But it's a good question, so thanks.

Speaker Change: <unk>.

Speaker Change: It was easier frankly, when I could go to China, because I would hold inventory review meetings.

Speaker Change: But it's a good question so.

Speaker Change: Thanks.

Matthew Stevens Bryson: Awesome. Thanks for taking my question.

John: As there are no further questions in the queue this time, this concludes our Q&A session. I would like to turn the call over back to Dr. Morris Young for closing remarks.

Morris S. Young: Thank you for participating in our conference call. This quarter, we will participate in the Northland Security Growth Conference on June 25th. I hope to see you there. As always, please feel free to contact me, Gary Fischer, or Leslie Green if you would like to set up a call with us. We look forward to speaking with you in the near future.

Speaker Change: Thank you for participating in our conference call. This is it.

John: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Speaker Change: Okay.

Speaker Change: [music].