Q1 2025 AXT Inc Earnings Call
Operator: Good afternoon, everyone, and welcome to AXT's first quarter 2025 financial conference call.
Good afternoon, everyone and welcome to Axt's first quarter 2000 certified financial conference call, leading the call today is Doctor Morris Young Chief Executive Officer, and Gary Fischer Chief Financial Officer. In addition to that also.
Operator: Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fischer, Chief Financial Officer.
Operator: In addition, Tim Bettles, VP of Business Development, will be participating in the Q&A portion of the call.
John: VP of business development will be participating in the Q&A portion of the call. My name is John and I will be your coordinator today.
Operator: My name is John, and I will be your coordinator today. At this time, all participants are in a listen-only mode.
John: At this time all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session.
Operator: After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press star followed by the number 1 on your telephone keypad. Thank you.
Speaker Change: Like to ask a question during the pilot Super breasts are followed by the number one on your telephone keypad. Thank you I would now like to turn the call over to Leslie Green Investor Relations for E X D. Please go ahead.
Leslie Green: I would now like to turn the call over to Leslie Green, Investment Relations for AXT. Please go ahead.
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, emerging applications using chips or devices fabricated on our substrates, our product mix, global, economic, and political conditions, including trade tariffs and export and import restrictions, our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, or to utilize our manufacturing capacity.
Speaker Change: 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 emerging applications using chips.
Speaker Change: Our devices fabricated on our substrate, our product mix global economic and political conditions, including trade tariffs and export and import restrictions our ability to increase orders in succeeding quarters to control costs and expenses to improve manufacturing yields and efficiencies or to utilize our many.
Leslie Green: We wish to caution you that such statements deal with future events, are based on management current expectations, and are subject to risks and uncertainties that could cause actual events or results to differ materially. In addition to the matters just listed, these uncertainties and risks include, but are not limited to, the financial performance of our partially owned supply chain companies, increased environmental regulations in China, and COVID-19 and other outbreaks of contagious disease.
Speaker Change: In fact shrink capacity, 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. In addition to the matters just lifted these uncertainties and risks include but are not limited to the financial performer.
Speaker Change: Of our partially owned supply chain companies increased environmental regulations in China, and COVID-19, and other outbreaks of contagious disease. In addition to the factors just mentioned or that maybe 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 <unk>.
Leslie Green: In addition to the factors just mentioned or 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 online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our expectations.
Speaker Change: Site and contain additional information on risk factors that could cause actual results to differ materially from our expectations. This conference call will be on our website through may 1st 2026, I also want to note that shortly following the close of market today, we issued a press release reporting financial results for the first quarter and.
Leslie Green: This conference call will be on our website through May 1, 2026.
Leslie Green: I also want to note that shortly following the close of market today, we issued a press release reporting financial results for the first quarter and fiscal year 2025. This information is also available on the investor relations portion of our website.
Speaker Change: So year 2025. This information is also available on the Investor Relations portion of our website I would now like to turn the call over to Gary Fischer for a review of our first quarter 2025 results Gary.
Gary Fischer: I would now like to turn the call over to Gary Fisher for a review of our first quarter 2025 results. Gary?
Gary Fischer: Thank you, Leslie, and good afternoon to everyone. Revenue for the first quarter of 2025 was slightly above the midpoint of our guidance at $19.4 million, compared with $25.1 million in the fourth quarter of 2024, $22.7 million in the first quarter of last year, 2024. To break down our Q1 2025 revenue for you by product category, Indium Phosphide was $3.8 million, primarily from PON and data center applications. Gallium Arsenide was $6.7 million. Germanium substrates were $0.6 million. Finally, revenue from our consolidated raw material joint venture companies in Q1 was $8.3 million, based on continued healthy demand.
Gary Fischer: Thank you Leslie and good afternoon to everyone revenue for the first quarter of 2025 was slightly above the midpoint of our guidance at $19 4 million.
Gary Fischer: Paired with $25 1 million in the fourth quarter of 2024, $22 7 million in the first quarter of last year 2024.
Gary Fischer: Breakdown of Q1 2025 revenue for you by product category Indium Phosphide was $3 8 million, primarily from PON and datacenter applications.
Mark: Hey, Mark cited was $6 7 million germanium.
Gary Fischer: Premium substrates, where zero point $6 million.
Gary Fischer: Finally revenue from our consolidated raw material joint venture companies in Q1 was $8 3 million based on continued healthy demand.
Gary Fischer: In the first quarter of 2025, revenue from the Asia-Pacific region was 83 percent, Europe was 11 percent, and North America was 6 percent. The top five customers generated approximately 35.9 percent of total revenue, and no customer was over the 10 percent level. Non-GAP gross margin in the first quarter was a negative 6.1 percent compared with 17.9 percent in Q4 2024 and 27.3 percent in Q1 of 2024. For those who prefer to track results on a GAP basis, gross margin in the first quarter was negative 6.4 percent compared with 17.6 percent in Q4 and 26.9 percent in Q1 of 2024.
Gary Fischer: In the first quarter of 2025 revenue from the Asia Pacific Region was 83% Europe was 11% and North America was 6% the top five customers generated approximately 35, 9% of total revenue and no customer was over the 10% level.
Gary Fischer: non-GAAP gross margin in the first quarter was a negative six 1% compared with 17, 9% in Q4 of 2024 and.
Gary Fischer: 27, 3% in Q1 of 2024.
Gary Fischer: For those who prefer to track results on a GAAP basis gross margin in the first quarter was negative six 4% compared with 17, 6% in Q4 and 26, 9% in Q1 of 2024.
Gary Fischer: The magnitude of the decline in gross margin was a disappointment in the quarter, and primarily the result of three factors. First, we had significant yield issues in our semi-insulating gallium arsenide wafers as we worked quickly to scale our output for sizable wireless opportunity. I think the lesson for us is that while the opportunity is compelling, the sophistication of the product specs require us to move in a more measured way to ensure that we can execute cost efficiently. Revenue myth also played a role in our gross margin deficit. Due to the current trade restrictions, substrate sales were down meaningfully in the quarter, and our joint venture sales were higher than normal as a percentage of our revenue.
Gary Fischer: The magnitude of the decline in gross margin was a disappointment in the quarter.
Gary Fischer: And primarily the result of three factors.
Gary Fischer: First we had significant yield issues.
Gary Fischer: Insulating gallium arsenide wafers as we worked quickly to scale our output for sizable wireless opportunity.
Gary Fischer: I think the lesson for us is that while the opportunity is compelling.
Gary Fischer: The sophistication of the product specs require us to be to move in a more measured way to ensure that we can execute cost efficiently.
Gary Fischer: Revenue mix also played a role in our gross margin deficit due to the current trade restrictions.
Gary Fischer: Substrate sales were down meaningfully in the quarter and our joint venture sales were higher than normal as a percentage of our revenue.
Gary Fischer: As a manufacturing company, this resulted in underabsorbed factory overhead that was greater than expected. And finally, we were expecting to see a little bit higher gross margins across the board from our joint ventures, from gallium arsenide, and from germanium sales.
As a manufacturing company. This resulted in under absorbed factory overhead that was greater than expected.
Gary Fischer: And finally, we were expecting to see a little bit higher gross margins across the board from our joint ventures from gallium arsenide and from germanium sales.
Gary Fischer: Morris will talk more about gross margins and our plans for improvement shortly. Moving to operating expenses, we did better than expected in holding OPEX down in Q1. Total non-GAAP operating expense in Q1 was $8.5 million, compared with $10.5 million in Q4 of 2024, and $8.7 million in Q1 of 2024. On a GAAP basis, total operating expense in Q1 was $9.0 million, compared with $10.6 million in Q4 of 2024, and $9.4 million in Q1 of 2024. Our non-GAAP operating loss for the first quarter of 2025 was $9.6 million, compared with a non-GAAP operating loss in Q4 of 2024 of $5.4 million, and a non-GAAP operating loss of $2.5 million in Q1 of 2024.
Gary Fischer: We'll talk more about gross margins and our plans for improvement shortly.
Gary Fischer: Moving to operating expenses, we did better than expected and holding opex down in Q1 total non-GAAP operating expense in Q1 was $8 5 million.
Gary Fischer: Paired with $10 5 million in Q4 of 2024.
Gary Fischer: And $8 7 million in Q1 of 2024.
Gary Fischer: On a GAAP basis total operating expense in Q1 was 9.0 million compared with $10 6 million in Q4 of 2024 and $9 4 million in Q1 of 2024.
Gary Fischer: Our non-GAAP operating loss for the first quarter of 2025 was $9 6 million compared with a non-GAAP operating loss in Q4 of 2024 of $5 4 million.
Gary Fischer: non-GAAP operating loss of $2 5 million in Q1 of 2024.
Gary Fischer: For reference, our GAAP operating line for the first quarter of 2025 was a loss of $10.3 million, compared with an operating loss of $6.2 million in Q4 of 2024, and an operating loss of $3.3 million in Q1 of 2024. Non-operating other income and expense and other items below the operating line for the first quarter was a net gain of $0.4 million. The details can be seen in the P&L included in our press release today. For Q1 of 2025, we had a non-GAAP net loss of $8.2 million, or $0.19 per share, compared to the non-GAAP net loss of $4.3 million, or $0.10 per share, in the fourth quarter of 2024.
Gary Fischer: For reference our GAAP operating line for the first quarter of 2025 was a loss of $10 3 million compared with an operating loss of $6 2 million in Q4 of 2024, and an operating loss of $3 3 million in Q1 of 2024.
Gary Fischer: Non operating other income and expense and other items below the operating line for the first quarter was a net gain of zero point $4 million. The details can be seen in the P&L is included in our press release today.
Gary Fischer: For Q1 of 2025.
Gary Fischer: On a non-GAAP net loss of $8 2 million or <unk> 19 per share compared to non-GAAP net loss of $4 3 million or 10 cents per share in the fourth quarter of 2024.
Gary Fischer: Non-GAAP net loss in Q1 of 2024 was $1.3 million or 3 cents per share. On a gap basis, net loss in Q1 was $8.8 million, or $0.20 per share. By comparison, net loss was $5.1 million, or $0.12 per share in the fourth quarter. And gap net loss in Q1 of 2024 was $2.1 million, or $0.05 per share. The weighted average basic shares outstanding in Q1 of 2025 was $43.6 million. Cash and cash equivalents and investments increased by $4.4 million to $38.2 million as of March 31st. By comparison, at December 31st, it was $33.8 million. Depreciation and amortization in the first quarter was $2.2 million.
Gary Fischer: non-GAAP net loss in Q1 of 2024 was $1 3 million or <unk> <unk> per share.
Gary Fischer: On a GAAP basis net loss in Q1 was $8 8 million.
Gary Fischer: Or <unk> <unk> per share by comparison net loss was $5 1 million or <unk> 12 per share in the fourth quarter and GAAP net loss in Q1 of 2024 was $2 1 million or <unk> <unk> per share.
Gary Fischer: The weighted average basic shares outstanding in Q1 of 2025 was $43 6 million.
Gary Fischer: Cash and cash equivalents and investments increased by $4 4 million.
Gary Fischer: $38 2 million as of March 31 by.
Gary Fischer: By comparison at December 31.
Gary Fischer: Was $33 8 million.
Gary Fischer: Depreciation and amortization in the first quarter was $2 2 million.
Gary Fischer: Total stock comp was $0.6 million. Net inventory was down by approximately $4.7 million in the first quarter to $80.4 million. This continues to be a focus for us and we expect to bring it down further in quarters to come.
Gary Fischer: Total stock comp was zero point $6 million.
Gary Fischer: Net inventory was down by approximately $4 7 million in the first quarter to $84 million. This continues to be a focus for us and we expect to bring it down further in quarters to come.
Gary Fischer: Okay, this concludes the brief discussion of quarterly financial results.
Speaker Change: Okay. This concludes the brief discussion of quarterly financial results turning to our plan to list the subsidiary in China, Tom May on the Star market.
Gary Fischer: Turning to our plan to list the subsidiary in China, Tongmei, on the star market. We continue to keep our IPO application current. Tong remains an in-process category as part of a much more selective and smaller group of prospective listings than a few years ago.
Gary Fischer: We continue to keep our IPO application correct Tom.
Gary Fischer: <unk> remains in process category as part of a much more selective in smaller group prospective listings than a few years ago.
Gary Fischer: Well, we're not insensitive to the current geopolitical environment. Tongmei is considered a Chinese company and continues to be regarded in China as a good IPO candidate. We will keep you informed of any updates.
Gary Fischer: Well, we're not insensitive to the current political Gilles Kurt geopolitical environment.
Gary Fischer: <unk> is considered a Chinese company and continues to be regarded in China as a good IPO candidates.
Gary Fischer: We'll keep you informed of any updates.
Morris Young: Okay, with that, I'll now turn the call over to Dr. Morris Young for a review of our business and markets. Thank you, Gary.
Speaker Change: Okay with that I'll now turn the call over to Dr. Morris Young for a review of our business and markets Lewis.
Gary Fischer: Hi.
Gary Fischer: Thank you Gary.
Morris Young: I want to begin with an update on the export restriction because I know that is top of mind for many of you. Then I will discuss current market opportunities and our plan for growth by. As many of you know, on February the 4th... The China government imposed trade restrictions on the export of Union Phosphide material. similar to 2023 restriction on gallium arsenide. These regulations explicitly seek to restrict the export of material used for military applications. Therefore, we are now undertaking an export permit process for emu-phosphate, similar to what we have done for gallium arsenate over the last two years.
I wanted to begin with an update on the export restriction because I know that is top of mind.
Gary Fischer: For many of you.
Dan: Dan I will discuss current market opportunities and our plan for gross margin improvement.
Gary Fischer: As many of you know on February 4th.
Gary Fischer: China government imposed trade restrictions on the export of indium phosphide material.
Speaker Change: Similar to 2023, restricting our gallium arsenide substrates.
Speaker Change: These regulations explicitly seek to restrict export of material used for military applications.
Speaker Change: Therefore, we are now and then.
Speaker Change: Jim export permit process for indium phosphide similar to what we have done.
Speaker Change: Sure.
Speaker Change: Oil and gas.
Speaker Change: Over the last two years.
Morris Young: We were disappointed that the portal to accept export applications did not open until April. That said, we were well-prepared when it is over. And we have submitted comprehensive applications on behalf of all major Indian-Pacified customers outside of China. In our experience, we typically hear back initial applications within 45 business days. and repeat applications are often processed faster. As such, we do not expect to be able to ship any phosphide to customers outside of China before mid-June. Echoed. As we have mentioned previously, we do not believe that any of our phosphide cells go to military applications.
Speaker Change: We were disappointed that the portal to access export applications being done open until April.
Speaker Change: We were well prepared.
Speaker Change: In April.
Speaker Change: And we have submitted comprehensive obligations on behalf of all major indium phosphide customers outside of China.
Speaker Change: In our experience, we typically hear back initial obligations would be at 45 business days.
Speaker Change: Pete applications often process faster.
Speaker Change: We do not expect to be able to ship indium phosphide to customers outside of China before mid June.
Speaker Change: Thanks.
Speaker Change: As we have mentioned previously we do not believe that any of our indium phosphide sales go to military applications.
Morris Young: So we feel that we are in a good position to realize a backlog of cells once we can navigate the permanent process.
Speaker Change: We feel that we are good.
Speaker Change: A good position to realize backlog backlog bombshells.
Speaker Change: Once we can navigate the permit process.
Morris Young: While the current geopolitical environment presents a near-term headwind for our business We are also discovering some unique opportunities. The cloud and data center of connectivity market in China is accelerating. And in an effort to promote innovation and reduce dependency of foreign suppliers, we're seeing a significant effort to develop domestic source of EML and silicon photonic space laser. We estimated that the Chinese data center optical interconnect market is currently around one-third of the global market. However, most of the optical devices for these interconnects are sourced from outside of China. and applications for Union Phosphide within China remain focused on Pong today.
Speaker Change: While the current geopolitical environment present, a near term headwind for our business. We are also discovery some unique opportunities.
Speaker Change: Cloud and data center connectivity market in China is accelerating.
Speaker Change: And in the effort to promote innovation and reduce dependency on foreign suppliers were seeing a significant effort.
Speaker Change: Develop domestic source of email silicon photonics space lasers.
Speaker Change: We estimated that the Chinese data center optical interconnect market.
Speaker Change: Currently around one third of the global market.
However, most of the optical devices for these interconnects are sourced from outside of China.
Speaker Change: And applications, while you can.
Speaker Change: Phosphate within China, we remain focused on Paul.
Speaker Change: Yeah.
Morris Young: Further, laser manufacturers in China are developing an appreciation for the critical benefit of very low EPD material in high-speed interconnected devices. both in the traditional pound market and in the new data center market. As a result, our sales of unit phosphide within China are increasing. The time for data center market remains small at this moment, but we do expect to see significant growth over the next few years. As the power laser providers expand their portfolio of market to include EML and silicon photonics solution. That said, in Q2, we expect healthy WBA growth for our revenue from data center applications in China of a Q1 level.
Speaker Change: Laser manufacturers in China are developing a appreciation for the critical benefit or very low <unk> material.
Speaker Change: And could that interconnected devices.
Speaker Change: <unk> in the traditional power market.
Speaker Change: And the new data center market.
Speaker Change: As a result.
Speaker Change: Our sales are being your phosphate within China are increasing.
Speaker Change: The Teng or data center market remains small.
Speaker Change: Gentlemen.
Speaker Change: We do expect to see significant growth over the next few years.
Speaker Change: Laser providers expand their portfolio.
Speaker Change: Market to include email.
Speaker Change: Photonics solutions.
Speaker Change: That said in Q2, we expect healthy double digit growth for <unk>.
Speaker Change: Revenue from data center applications in China.
A Q1 levels.
Morris Young: We also have significant Indian phosphide backlog from customers outside of China that is ready to ship. We are working diligently to support the needs of our customers globally, and we are hopeful that Tomei can begin to secure permits for initial geography soon.
Speaker Change: We also have significant indium phosphide backlog from customers outside of China that is ready to ship.
Speaker Change: We are working diligently to support the needs of our customers globally.
Speaker Change: We are hopeful that they can begin to secure permits initial geography.
Morris Young: Turnage of Gallegos. We continue to see recovery, particularly in China and Taiwan, across a number of applications like high-power industrialization. wireless routers, and Wi-Fi. We believe there is a sizable opportunity for our gallium arsenide substrate in HPT devices for the wireless model. These represent exciting opportunities and potential for which we believe our technology and products are well suited for. With the cost of performance breakthroughs, we achieved our age product, as well as strong relationship building with one of our largest Asian-based EPI providers. We're in a great position for growth. But this is a competitive and sophisticated market.
Speaker Change: Turning to gallium arsenide.
Speaker Change: We continue to see recovery, particularly in China and Taiwan.
Speaker Change: A number of applications like high power industrial lasers wireless soldiers.
Speaker Change: One five.
Speaker Change: We believe.
Speaker Change: There is a sizable opportunity for our gallium arsenide substrate HPT devices for the wireless market.
Speaker Change: This represents exciting potential for which we believe our technology and product.
Speaker Change: Well suited for.
Speaker Change: With the cost performance breakthroughs, we achieved our eight inch products as well as strong relationship building with one of our largest Asian based provider we're in a.
Speaker Change: In a great position for growth.
Speaker Change: But this is a competitive and sophisticated market.
Morris Young: We were excited in Q1 to have the opportunity to compete for a large share, but we stumbled. in trying to scale too quickly. We continue to view this as an exciting space. but are taking a more measured approach to this market share expansion. to ensure that we can execute effectively as we increase our production levels.
Speaker Change: We were excited in Q1 do you have the opportunity to come.
Speaker Change: Last year, but with some mode.
Speaker Change: And trying to scale too quickly.
Speaker Change: We continue to view this.
Speaker Change: Very exciting space.
Speaker Change: But taking a more measured approach to market.
Speaker Change: <unk> market share exploration.
Speaker Change: To ensure that we execute effectively as we increase our production levels.
Morris Young: We're also seeing a notable increase in design activities and qualifications for Yarlong Aslan-based LiDAR for the autonomous vehicle market in China. With the growing adoption of autonomous vehicles and high-precision sensing technologies, gallium arsenide has become a critical material due to its superior electronic properties and ability to operate effectively in high-frequency applications. Chinese manufacturers are increasingly investing in the development of LiDAR systems for the EV market that leverage GALIOS. recognizing their potential to enhance resolution, accuracy, object detection, and navigation over the competing camera-based solutions.
Speaker Change: We're also seeing a notable increase in design activities and qualification of our gallium arsenide based lidar for the autonomous vehicle market in China.
Speaker Change: The growing adoption of autonomous vehicles and high precision sensing technologies.
Speaker Change: Awesome.
Speaker Change: Critical material due to its superior electronic properties.
Speaker Change: And ability to operate effectively in high frequency applications.
Speaker Change: Chinese manufacturers are increasingly investing in the development of Lidar system for the EV market.
Speaker Change: Average gallium arsenide.
Speaker Change: Recognizing the potential dilution actually seeing objects.
Speaker Change: Jack detection and ambition over the competing camera based solutions.
Morris Young: Similar to what we are seeing in the data center market, there seems to be a push in China towards reducing dependency on foreign suppliers and fostering domestic innovation. As a result, we believe that the demand for LiDAR is poised to grow. And that, this is a market in which our low-EPG gallium austenite substrates are showing tremendous value in device performance. over the last 12 months.
Speaker Change: Similar to what we have seen in the data center market there seem to be a push in China towards reducing dependency on foreign suppliers and fostering domestic innovation.
Speaker Change: It reads out.
Speaker Change: We believe that the demand for lidar is poised to grow.
Speaker Change: In that.
Speaker Change: This is a market in which our low <unk> gallium arsenide substrate.
Speaker Change: So a tremendous value and device performance.
Speaker Change: Over the last 12 months.
Morris Young: We have aggressively advanced the technology, technical capability of our material to help our global customer base solving complex next-generation challenges. The materials we supply are being used in highly sophisticated applications, such as the ones that we have mentioned today, where our breakthroughs in delivering extremely low EPP give us a distinct competitive advantage in both ene-phosphide and gallium arsenide.
Speaker Change: We have aggressively.
Speaker Change: <unk> technical capability of our materials to help our global customer base salary complex next generation challenges.
Speaker Change: The materially supply.
Speaker Change: Being used a highly sophisticated applications such as the ones that we have mentioned today, where our breakthroughs in delivering extremely low.
Speaker Change: It gives us a distinct competitive advantage in both indium phosphide and gallium arsenide.
Morris Young: I'm extremely proud of our team for the rapid progress we have made. For that reason, I cannot allow growth margin setbacks in our substrate business to cloud achievement that we're making in our technology. We strongly believe, over the coming quarters, we can drive meaningful improvement in our growth cycle. In the near term, we're taking a more measured approach in the HPD market to ensure that our gallium oxide production and yield can ride themselves. This is now our highest priority here in China and the top priority for our manufacturing leaders. We expect to see improvement beginning this quarter.
Speaker Change: I am extremely proud of our team.
Speaker Change: The rapid progress we have made.
Speaker Change: For that reason I cannot allow.
Speaker Change: Gross margin setbacks in our substrate business to cloud achievement.
Speaker Change: Our technology.
Speaker Change: We strongly believe over the coming quarters, we can drive meaningful improvement gross margin in.
Speaker Change: In the near term, we are taking a more measured approach in that in the <unk>.
Speaker Change: <unk> market to ensure that our gallium arsenide production at yield okay right themselves.
Speaker Change: This is allow amongst the highest priority tier in China, and the top priority for our manufacturing leadership.
Speaker Change: We expect to see improvement beginning this quarter.
Morris Young: and continue throughout the balance of 2025. This is an issue that is very much in our control, and we are laser focused on fixing it. It is also worth noting that the decrease in substrate cells as a result of trade restriction has also impacted our growth margin performance, as Gary noted. We feel good about our ability to begin secure immediate foster care permits, which should help our overall sales volume in the back half of the year. and contribute to a healthy revenue and product mix. Both of these will help us in a gross budget lift for our business.
Speaker Change: Continued throughout the balance of 2025.
Speaker Change: This is the issue that is very much in our control.
Speaker Change: Their focus on <unk>.
Speaker Change: <unk>.
Speaker Change: It is also worth noting that the decreasing substrate sales.
Speaker Change: As a result of trade restriction.
Speaker Change: Our gross margin performance as Gary noted.
Speaker Change: We feel good about our ability to begin secure indium phosphide permits which should help.
Speaker Change: Overall sales volume in the back half of the year.
Speaker Change: Okay.
Speaker Change: LTE revenue and product mix both of these will help us.
Speaker Change: Gross margin lift for our business.
Morris Young: Before I conclude, I want to say a few words about our raw material, geometry. Housing Q1 was strong. And we have been trending up over the past year. We continue to invest in expanding our capability and have built an impressive portfolio, which today includes gallium, arsenic, PBN crucibles, quartz. Indian, and Germanian. The strategic value of these materials is not only that we can more cost-effectively supply all of our critical materials needed to manufacture our products. But we also benefit from the additional revenue stream generated by our joint ventures to sales of these products on the open market.
Speaker Change: Before I conclude I want to say a few words about our raw material joint ventures sales.
Speaker Change: Sales in Q1 was strong.
Speaker Change: And we have been trending up over the past year.
Speaker Change: We're continuing to invest.
Speaker Change: Capability.
Speaker Change: Bill.
Speaker Change: <unk> portfolio, which today includes gallium.
Speaker Change: <unk> TV.
Speaker Change: PVA crucibles.
Speaker Change: Sure.
India.
Speaker Change: And Germania.
Speaker Change: The strategic value of this material is not only that we can more cost effectively supply all of our critical materials needed to manufacture our products.
Speaker Change: We also benefit.
Speaker Change: Revenue streams generated by our joint ventures.
Speaker Change: Sales of these products on the open market.
Morris Young: The asset value of this portfolio has grown substantially over the last 20 years, and we will continue to expand our opportunity in 2025 through the development of new markets. There is a new and greater awareness of the importance of Earth's material. And we are ahead of the curve in developing this unique integrated supply chain.
Speaker Change: Yes, I said value of this portfolio and it will all substantially over the last 20 years.
Speaker Change: We'll continue to expand our opportunity in 2025 through the development of new markets.
Speaker Change: Maybe it's a new and greater awareness of the importance of material.
Speaker Change: We are ahead of the curve in developing this unique integrated supply chain.
Morris Young: In summary, while the geopolitical environment is creating undeniable challenges, we are focusing our energies where we can drive positive return today. We're uniquely positioned to optimize growth opportunities in China, such as high-speed data center connectivity and sensors for autonomous driving. And we're pursuing these and then other opportunities with success across key markets for Indian phosphide.
Speaker Change: In summary.
Speaker Change: While the geopolitical environment is creating.
Speaker Change: Evaluable challenges, we are focusing our energies, where we can drive positive return today.
Speaker Change: Uniquely position.
Speaker Change: To optimize growth opportunities in China, which.
Speaker Change: Such as high speed data center connectivity and sensors for autonomous driving.
Speaker Change: We're pursuing these and.
Speaker Change: Then other opportunities with success across key markets for indium phosphide.
Morris Young: Danny Austen and Jermaine... We're also working tirelessly on behalf of our global customer base to ensure that we can continue to support their need across all our products. We recognize this is a challenging time for our customers, our investors, and our employees. And we are deeply committed to working diligently on your behalf.
Speaker Change: Gallium arsenide and germanium substrates.
Speaker Change: We're also working tirelessly.
Speaker Change: Tirelessly.
Speaker Change: Behalf of our global customer base to ensure that we can continue to support the need across all our products.
Speaker Change: We recognize this is a challenging time for our customers our investors and our employees.
Speaker Change: Deeply committed to working diligently on your behalf.
Gary Fischer: With that, I will turn the call back to Gary for our second quarter guidance. Thank you, Morris. In keeping with our comments today, we believe Q2 revenue will be in the range of $20.0 million to $22.0 million. This guidance range excludes any contribution from Indian Phosphide for our customers outside of China in Q2. Once we do receive permits, we have several million dollars of indium phosphide backlog that we would be able to ship, most likely in Q3. We do feel encouraged that even without these shipments, we are in a good position to grow our business sequentially.
Gary Fischer: With that I will turn the call back to Gary for our second quarter guidance Gary.
Gary Fischer: Thank you Morris in keeping with our comments today, we believe Q2 revenue will be in the range of 20.0 to 22.0 million.
Gary Fischer: This guidance range excludes any contribution from indium phosphide for our customers outside of China in Q2.
Gary Fischer: Once we do receive permits we have several millions of dollars of indium phosphide backlog that we would be able to ship most likely in Q3, we do feel encouraged that even without these shipments were in a good position to grow our business sequentially.
Gary Fischer: As Morris mentioned, this is due to our success in optimizing emerging opportunities to grow our business in China across all of our product categories. While we don't normally give gross margin guidance, we do believe that we can see a recovery on a gross margin to around 10% in Q2 based on manufacturing improvements. We also believe that production volume growth in the second half, coupled with continued yield improvements this year, will allow us to drive continued gross margin recovery for the rest of the year.
As Morris mentioned this is due to our success in optimizing emerging opportunities to grow our business in China across all of our product categories.
Speaker Change: While we don't normally give gross margin guidance, we do believe that we can see a recovery in our gross margin to around 10% in Q2 based on manufacturing improvements. We also believe that production volume growth in the second half coupled with continued yield improvements. This year will allow us to drive continued gross margin recovery.
Gary Fischer: For the rest of the year.
Gary Fischer: Based on our revenue range, we believe our non-GAAP net loss will be in the range of $0.12 to $0.14 in Q3, and GAAP net loss will be in the range in Q2, and GAAP will be a loss in the range of $0.14 to $0.16. Share count will be approximately 43.7 million shares.
Gary Fischer: Based on our revenue range, we believe our non-GAAP net loss will be in the range of 12% to 14.
Gary Fischer: In Q.
Gary Fischer: Three and GAAP net loss in the range in Q2 in GAAP will be a loss in the range of 14 to 16.
Gary Fischer: Share count will be approximately $43 7 million shares.
Operator: Okay, this concludes our prepared comments, and we'd be glad to answer your questions now.
Gary Fischer: Okay. This concludes our prepared comments and we'd be glad to answer your questions now John operator.
Operator: John, operator? Thank you.
Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session. If you have dialed in and we would like to ask a question. As a reminder, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question simply press Star one again.
Operator: Ladies and gentlemen, we will now begin the question and answer session. If you have dialed in and would like to ask a question, as a reminder, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again.
Operator: If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Thank you.
Speaker Change: I called upon to ask your question in or listening via loud speaker ongoing device. Please speak up your handset and ensure that your phone is not on mute when asking your question. Thank you.
Operator: We'll pause for a moment to compile the Q&A.
Speaker Change: To compile the Q&A roster.
Speaker Change: Okay.
Richard Shannon: Your first question comes from the line of Roscoe with Needham & Company. Please go ahead.
Speaker Change: Your first question comes from the line and for our school with Needham and company. Please go ahead.
Morris Young: Hi, and thank you for taking my question on behalf of Charles. I was wondering if you could maybe dive a little deeper into the yield issues you're seeing for the semi-insulating gallium arsenide and maybe, you know, when do you expect to see these yield issues resolved and is there any change to your market opportunity as a result of this? Thank you.
Speaker Change: Hi, and thank you for taking my question on behalf of Charles <unk>.
Speaker Change: I was wondering if you could maybe dive a little deeper into the yield issues youre seeing for the semi insulating gallium arsenide and maybe when do you expect to see these yield issues resolved and is there any change to your market opportunity as a result of this thank you.
Morris Young: Sure. As we said, I think we were excited about the opportunity for HPT market for wireless because it's an existing market. you know, we have a good relationship with good customers in Asia, we can, we thought we can penetrate their market. We see any frostbite permit restriction on our revenue. So, we were taking on that market a bit too aggressively. So, we encountered a yield problem, but we think that is solvable. And we have been in manufacturing business for years, and we have a yield glitch, and we already find the source of the problem, as we, as Gary mentioned, that although, you know, this quarter's margin was negative 6%, but we do expect a very quick recovery to about 10% next year.
Speaker Change: Sure.
Speaker Change: As we said.
Speaker Change: I think we were excited about the opportunity for HPT market for wireless <unk>.
Speaker Change: We see markets.
Speaker Change: And.
Speaker Change: We have good relationship with good customers in Asia, We can't we thought we can penetrate that market, let me say indium phosphide permit restrictions.
Speaker Change: Revenue. So we were taking on that market a bit too aggressively.
Speaker Change: So we encountered a yield problem, but we think that is solvable.
Speaker Change: Solvable.
Speaker Change: In manufacturing business for years, and we have a glitch.
Speaker Change: Already fine.
Speaker Change: To solve the problem as we as Gary mentioned that although this quarter's margin was negative 6%, but we do expect a very quick recovery.
Speaker Change: 10% next quarter.
Morris Young: So, that is a good sign. And I think, you know, we are, we get into this market a little bit more too aggressive. So, that hurts our ability to achieve a good margin, but we think we have the solution on hand, but we will take a more measured approach to this market. But this market is there. So, we'll just approach it more carefully. But we think the opportunity is there for us to get into, you know, once we get our yielding order and our manufacturing line more effectively producing this product. Great, thank you. That was very helpful.
Speaker Change: So that is a good side and.
Speaker Change: I think you know.
Speaker Change: We'll get into this market a little bit more aggressive so that hurts our.
Speaker Change: Ability to achieve a good margin, but we think we have the solution in hand, but we will take a more measured approach to this market, but this market is there.
Speaker Change: So.
Speaker Change: We will just approach it more carefully.
Speaker Change: I think the opportunity is there for us.
Speaker Change: To get into.
Speaker Change: Once we get our yielding order.
Our manufacturing.
Speaker Change: While more effectively producing this product.
Speaker Change: Great. Thank you that was very helpful.
Richard Shannon: Next question comes from the line of Richard Shannon with Craig Callum. Please go ahead.
Richard Shannon: Next question comes from the line of Richard Shannon with Craig Hallum. Please go ahead.
Speaker Change: Okay.
Richard Shannon: Well, hi guys. Thanks for letting me ask a question here as well. Since we just talked about yields, why don't I ask another question on this topic here?
Speaker Change: Hi, guys. Thanks for letting me ask a question here as well.
Speaker Change: Since we just talked about yields why don't I ask another question on this topic here and I guess Morris.
Morris Young: And I guess, Morris, I guess I'm curious why it's going to take, you know, more than a quarter or two to fix the yields here. I mean, is this an entirely new product? I guess I thought this was kind of a, you know, an existing product that you just go back to the way you were doing it before, maybe just at a slower pace, so you get back there fairly quickly or I'm misunderstanding the situation. Richard, you're correct. I mean, it is a product that we have worked on for many years, but as you know, when you are dealing with a commercial volume of tens of thousands, I mean, thousands of wafer per month, and the customer specification from time to time will change.
Speaker Change: I guess I'm curious why it's going to take more than a quarter or two to <unk> 60 yields here I mean is this an entirely new product.
Speaker Change: I guess I thought this was kind of a.
Speaker Change: An existing product that you can just go back to the way you were doing it before maybe just at a slower pace. So you can get back there fairly quickly or am I misunderstanding the situation.
Speaker Change: Yeah.
Richard Shannon: Richard you are correct.
Speaker Change: It is a product we have worked.
Speaker Change: For many years, but as you know when you are dealing with a commercial volume.
Speaker Change: Tens of thousands.
Speaker Change: Thousands of wafers per months.
Speaker Change: <unk>.
Speaker Change: The customer specification.
Speaker Change: From time to time will change, but if youre not laser focused into supplying.
Morris Young: But if you're not laser focused into, you know, supplying them consistently, any little change. can require a recalibration of our production line without our customers' need. So I think that is perhaps one of the reasons which hit our yield, and it's that we thought we're delivering this product to them for many years before we can re-enter this market so we can go quickly, you know, change our manufacturing slightly. But, you know, manufacturing is something which you don't change quickly. So I think we want to make sure that we are approaching this problem more measurably so that we can protect our gross margin and our profitability.
Speaker Change: Supplying them consistently any little change.
Speaker Change: We require.
Speaker Change: A.
Speaker Change: Calibration of our production in line with our customers.
Speaker Change: So I think that is perhaps one of the reasons, which hit our yield.
Speaker Change: And it's that we thought we are delivering this product to them.
Speaker Change: And then the years before.
Speaker Change: We entered this market so it will take them quickly.
Speaker Change: Change our manufacturing slightly but you know manufacturing is something which.
Speaker Change: You don't change.
Speaker Change: Quickly. So I think we want we want to make sure that we are approaching this problem.
Speaker Change: A more measured way so that we can protect our gross margin and our profitability and.
Morris Young: And so we can get back to the 10% gross margin from negative 6% in the next quarter in Q2.
Speaker Change: And so we can get back to the 10%.
Speaker Change: Gross margin from negative six.
Speaker Change: In the next quarter in Q2, and also as Gary mentioned that.
Gary Fischer: And also, you know, as Gary mentioned, the gross margin hit not only coming from this manufacturing Gary Fischer, Danny Cheng, Yu Shi, Tim Bettles, AXT Inc. product of, you know, for instance, immunophosphate for the first quarter, we have one month of immunophosphate revenue of January, you know, the restriction comma was coming on February the 4th, and that we cannot deliver any after that. And the Q2 guidance taking into account that we don't have any outside of China immunophosphate permit, and that will hit our margins as well compared to Q1. But if we can Secure any permit on any classified, then that can improve our gross margin.
Speaker Change: Right.
Speaker Change: Our gross margin.
Speaker Change: Coming from the manufacturing.
Speaker Change: Yes.
Gary Fischer: Yield lower but also is coming from the product mix as well as third point Gary.
Speaker Change: I mean, what was the third one so it's a mix.
Gary Fischer: Okay.
Gary Fischer:
Gary Fischer: Product.
Gary Fischer: For instance, indium phosphide for the first quarter, we had one months, albeit phosphide revenue of January the restriction Kumba was coming on February the source and that we cannot deliver any after that and the Q2 guidance taking into.
Gary Fischer: That we don't have any.
Gary Fischer: Outside of China, Indium phosphide permit.
Gary Fischer: And that will hit our margins as well compared with Q1.
Gary Fischer: But if we can.
Gary Fischer: Secure any.
Gary Fischer: Currently the indium phosphide.
Gary Fischer: Improve our gross margin, but we're taking a more conservative view.
Morris Young: But we're taking more conservative view of making that estimate of what our product mix will be in Q2. Okay.
Gary Fischer: Making that estimate.
Gary Fischer: Our product mix will be in Q2.
Gary Fischer: Okay Fair.
Richard Shannon: Fair enough for that, Morris.
Gary Fischer: Fair enough for that Morris.
Richard Shannon: Maybe let's touch on indium phosphide here. And I guess, as you said last quarter with this permitting process, since you've already done it with gallium arsenide and it's been, you know, other than the delay factor you had initially, seemed like it was mostly seamless here. Have you been given any assurances that you're expecting a similar process here? Do you have any worries that we're going to have a delay beyond what you said as a mid-June timeframe to hopefully start shipping to the backlogs you have? Home Well, you know, to getting a permit, it's dealing with bureaucrats and, you know, bureaucracy is always very difficult to predict.
Gary Fischer: Maybe let's touch on on indium phosphide here.
Gary Fischer: Yes.
Speaker Change: As you said last quarter with this permitting process since you've already done it with gallium arsenide and it's been other than the delay factor you had initially it seemed like it was mostly seamless here have you been given any assurances that you're expecting a similar process here do you have any worries that.
Speaker Change: We're going to have a delay beyond what I think you said as of mid June timeframe to hopefully start shipping to the backlog you have there.
Speaker Change: Yeah.
Speaker Change: Hum.
Speaker Change: Well you know.
Speaker Change: Getting a permit.
Speaker Change: Dealing with scale.
Speaker Change: Bureaucrats.
Speaker Change: You'll also see is always very difficult to predict.
Morris Young: But given that, you know, China announced that they want to make sure these are not for military applications, and none of our customers, we believe, are using the FOSTECH for military applications. So, we think that a permit should be We should have no restriction for our customers to get permits. But on the other hand, there are geopolitical struggles between countries. So it's hard to say, but I think in our prediction, we think we could get our permits soon. I mean, the normal 45 days, once we have submitted the application into the Commerce Department of China.
Speaker Change: But given that you know.
Speaker Change: China announced that they want to make sure. These are not for military applications and none of our customers. We believe are.
Speaker Change: Using the phosphate for major applications. So we think that permit it should be.
Speaker Change: We should have no restriction.
Speaker Change: Our customers to get permits but on the other hand, there are geopolitical struggles with gene countries. So.
Speaker Change: It's hard to say, but I think in our prediction, we think we can get our permits.
Speaker Change: I mean, the normal 45 days.
Speaker Change: Okay.
Speaker Change: Once we submit the application in June.
Speaker Change: The Commerce Department of China.
Morris Young: OK. So playing this forward here, I think you said, assuming you get the permits here by the middle of June, you can ship out, I think your words were several million dollars. I guess if we... I guess maybe give us a little bit better quantification of what exactly that means. Is there any timing dynamics here would prevent all that, you know, quote unquote several million dollars being able to be shipped and recognized in the second quarter? Yes, we are actually making you know, especially large customer orders, that we're making them in our production line just ready for shipment, or some of them we make it into stages that we can finish up by the final clean or the final polish so that we don't lose the freshness of these wafers to our customers.
Speaker Change: Okay.
Speaker Change: So playing this less forward here.
Speaker Change: Thank you said, assuming you get the permits here by the Middle of June you can ship out I think your words were several million dollars.
Speaker Change: I guess if we.
Speaker Change: I guess, maybe give us a little bit better quantification of what exactly that means or is there any timing dynamics here would prevent all of that quote unquote several million dollars being able to be shipped and recognized in the second quarter.
Speaker Change: Yes.
Speaker Change: We are actually making.
Speaker Change: Especially large customer orders that we were making them.
Speaker Change: All production line just ready for shipment.
Speaker Change: Or some of them we make it.
Speaker Change: In two stages that we could finish up by.
Speaker Change: The final cleaning all of the final Polish so that we don't.
Speaker Change: Lose the freshness of these wafers to our customers. So we do believe we can get permits we can ship. These.
Morris Young: So we do believe if we can get permits, we can ship these very quickly. And, you know, honestly, our customers waiting patiently for this product to be delivered to them too. They are giving us orders. So I think we're confident we should be able to ship them within let's say a week to 10 days after we get the permits. Okay.
Speaker Change: Very quickly.
Speaker Change: Yes.
Speaker Change: Our customers waiting patiently for these products to be delivered to them too.
Speaker Change: Giving us orders.
Speaker Change: No.
Speaker Change: I think we're confident we should be able to ship them.
Speaker Change: Within let's say a week to 10 days after we get the permits.
Speaker Change: Okay.
Richard Shannon: So, again, relate any phosphide, but stretching out the time frame to calendar 25 here, going back to your last call, and I can't remember if it was you, Morris, that said this, or maybe it was Tim. There's a question asked about what kind of growth do you expect from any phosphide? And the answer given was something in the 20% growth range.
Speaker Change: So.
Speaker Change: Again related any phosphide, but stretching out the time frame to calendar 'twenty five here.
Speaker Change: Going back to your last call and I can't remember if it was you Morris said this or maybe it was Tim.
Speaker Change: Question asked about what kind of growth do you expect from indium phosphide in the answer given was something in the 20% growth range, let's assume that the permitting process isn't onerous enough such that you can't get anything done this year, which hopefully will be the case or we got real real big problems, but is that growth.
Tim Bettles: Let's assume that the permitting process isn't onerous enough such that you can't get anything done this year, which hopefully will be the case. So, we've got real big problems, but is that growth outlook still roughly intact?
Speaker Change: Outlook still roughly intact here.
Tim Bettles: So maybe I can give this question to Tim. Maybe Tim can answer that, 20%.
So maybe I can give this question to team, maybe Tim mentioned that 20%.
Tim Bettles: Tim? Yeah, I think that growth outlook is still there. The market dynamics are still pushing towards what we would... as a growth of 20%. Given that, obviously, we can ship wafers outside of China. I just want to make a quick comment about that, too. As I said, and Morris commented, we feel like we're in a good position to get permits to ship out. Indian Phosphide that is outside of China. But from a timing perspective we see that the first permits come through under Q2 as we've said, but from a guidance perspective we haven't included Indian Phosphide shipment outside of China in our Q2 numbers.
Speaker Change: Yes.
Speaker Change: I think that growth outlook is still there.
Speaker Change: The market dynamics are still pushing towards what we would see.
Speaker Change: <unk> is a growth of 20%.
Speaker Change: Given that obviously you know if we can we can ship.
Speaker Change: Out of China.
Speaker Change: So just want to make a quick comment about that too as I said and lowers commented we feel like we're in a good position to get permits to ship outside of China.
Speaker Change: Indium phosphide that is outside of China.
Speaker Change: But from a timing perspective, we see that the first permits come through.
Speaker Change: And Q2 as we've said.
Speaker Change: But for guidance perspective, we haven't included indium phosphide shipments outside of China.
Speaker Change: In our Q2 numbers.
Tim Bettles: And we believe it's better to be conservative until we have more clarity on this timing. What you'll see is, you'll see, we still see that market trend going, increasing to about 20%. We believe we'll be able to capture that fully in 2020. 2026, I think last conference that was related to 25. So just want to make sure. citing the criteria. Is that what you mean, Tim? So, yes, so we'll be more conservative on 2026, on 2025, sorry, just because of a timing perspective on these permits. So what we're looking at here is, as I say, Q2 numbers.
Speaker Change: And we believe it's better to be conservative until we have more clarity on this timing.
Speaker Change: No.
Speaker Change: What youll see is youll.
Speaker Change: Youll see we still see that market trend going.
Cruising to about 20%, we believe we'll be able to capture that fully in 2026.
Speaker Change: Yeah.
Speaker Change: In 2026, I think last call last conference call.
Speaker Change: The related 25, so just wanted to make sure that we're citing the correct year here or is that what you.
Speaker Change: We intend in 2026.
Speaker Change: So yes, so we'll be more conservative on 2026 or 2025, sorry.
Speaker Change: Just because of a timing perspective on these permits.
Speaker Change: So what we're looking at here is as say Q2 numbers we believe.
Tim Bettles: We believe we've not included any of the permits. We still believe this market is growing at 20% in terms of Indian Phosphide, and we'll be able to capture that beyond Q2 in 2025, beyond Q2, second half, and then into 2026.
Speaker Change: Yes.
Speaker Change: We have not included any of the permits we still believe this market is growing at 20% in terms of indium phosphide.
Speaker Change: And we will be able to capture that beyond Q2.
Speaker Change: 2025 beyond Q2 second half and then into 2026.
Speaker Change: Okay.
Richard Shannon: Perfect. I think that's all the questions I have for now. I will jump out of line, guys. Thank you.
Speaker Change: Perfect.
Speaker Change: That's all the question I have for now I will jump out of line guys. Thank you.
Matthew Bryson: Your next question comes from the line of Matt Bryson with Wedbush Securities. Please go ahead.
Your next question comes from the line of Matt <unk> with Wedbush Securities. Please go ahead.
Matthew Bryson: Hey guys, thanks for taking my questions. I'm going to kind of follow on Richard's line of questioning with Indian Fossified. Is there any risk at all that You're not being able to ship to customers, ends up with customers going with another supplier. or something that's business doesn't come back to you. Um- That's a good question. I think, you know, we are a major Indian phosphide supplier. We believe we have perhaps between 40 to 50 percent worldwide market, and Indian phosphide material is not the easiest material to make. We believe there are only two major competitors worldwide.
Matt: Hey, guys. Thanks for taking my questions.
Speaker Change: Kind of a follow on.
Speaker Change: Just a follow up question.
Speaker Change: Indium phosphide.
Speaker Change: Is there any risk at all.
Speaker Change: Youre, not being able to ship to customers and with customers going with another supplier.
Speaker Change: Some of this business doesn't come back to you.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: That's good.
Speaker Change: Good question I think we I think you know what.
Speaker Change: We are a major indium phosphide supplier we believe.
Speaker Change: We have.
Speaker Change: Perhaps could between 40 to 50 per se worldwide market.
Speaker Change: Indium phosphide material is not the easiest netsuite make.
Speaker Change: We believe there are only two major.
Speaker Change: I mean, two major competitors worldwide.
Morris Young: and, you know, get any phosphide material to be qualified with a customer is. takes a very long time, because they are lasers. They are, you know, the device increasing in terms of current density, as well as the size of the lasers. So all that requires very careful qualification of the good low-EPG material. So we believe that those shoes are not very easily to be filled. But of course, I mean, with this market demand out there, we believe it's, you know, everybody wants to get more E-Link Phosphide.
Speaker Change: And you know get indium phosphide material to requalify with that customer.
Speaker Change: <unk>.
Speaker Change: It takes very long time, because they have lasers.
Speaker Change: They are.
Speaker Change: The device increasing in terms of current density as well as the size of the lasers. So all of that requires very careful qualification, although good low ETP materials. So we believe that those shoes are not very easily to be.
Speaker Change: Field, but.
Speaker Change: Of course I mean.
Speaker Change: Market demand out there.
Speaker Change: We believe it.
Speaker Change: Everybody wants to get more indium phosphide theme, maybe you can help.
Tim Bettles: Tim, maybe you can help. What do we hear from the marketplace? Is any of our lost order being taken by our competitors? Yeah, thanks, Morris. Yeah, I agree. We don't believe that it's the case so far. You know, we're still seeing orders coming in from all of our customers. We're building up a backlog within those orders or from those orders. And if we can begin to see permits late this quarter, early next, we're pretty much ready to ship through Q3, Q4. This market's growing too fast. And as Morris said, we're a major supplier into this.
Speaker Change: What do we hear its on the marketplace.
Speaker Change: Is.
Speaker Change: Any of our loss order being taken by our competitors.
Speaker Change: Yes, Thanks Morris.
I agree.
Speaker Change: We don't believe that is the case, so far we're still seeing orders coming in from all of our customers. We're.
Speaker Change: We're building up a backlog.
Within those orders of those orders and if we can begin to see permits late this quarter early next week.
Speaker Change: With pretty much ready to ship through Q3 Q4.
Speaker Change: This market is growing too fast.
Speaker Change: And.
Speaker Change: As Walter said, we're a major supplier into this market. The other players both cannot keep up with capacity.
Tim Bettles: The other players both cannot keep up with capacity, nor can they meet our quality standards. This was the first time that we're seeing that kind of performance that our customers are starting to demand from us now. So at the moment, we're really not seeing people move away. But we're seeing people kind of hang in there, continue to place orders, and they'll wait for permits to get approved.
Nor can they meet.
Speaker Change: Quality.
Speaker Change: Performance.
Customers are starting demand to demand from US now so at the moment with we're really not seeing people move away, but we're seeing people kind of hanging there continues to place orders.
Speaker Change: Wafer permits to get approved.
Tim Bettles: Got it. So then best guess is that once you get your permits approved, that your customers end up resuming orders, there's there's inventory, refill, and you possibly see a Almost a period of over shipment versus end demand just as customers catch back up. Is that is that fair? That's absolutely fair. Yes, we would see a rebuild of inventory. As those permits come through, so we should see a pretty healthy bump. Got it.
Speaker Change: Got it so then best guesses.
Speaker Change: Once you get your permits.
Speaker Change: <unk>.
Speaker Change: It.
Speaker Change: Your customers and resuming orders there is theres inventory.
Speaker Change: So and you.
Speaker Change: Possibly see.
Almost a period of over shipment versus end demand just as customers catch back up is that is that fair.
Speaker Change: That's absolutely fair, yes, we would we would see a rebuild of inventory.
Speaker Change: As the permits come through so we should we should see a pretty healthy bump yes.
Speaker Change: Got it.
Gary Fischer: Next question, I think, Gary, when you were talking about the factors weighing on gross margin, it was lower in the phosphide shipment. The HVT and then I think the third factor was just lower gross margins on a couple products. When we made our plan... for the, you know, once we learned about the February 4th announcement from China. You know. We knew that was going to hurt both our top line and our gross margin line, but we had expected maybe that the rest of the product lines, including raw materials, would have some, at least, mitigating lifting effect.
Speaker Change: Next question I think.
Speaker Change: Gary when you were talking about.
Speaker Change: <unk>.
Speaker Change: The factors weighing on gross margin.
Speaker Change: It was lower than your phosphide shipments.
Speaker Change: The problems with.
Speaker Change: The HPT.
Speaker Change: And then I think the third factor was just lower gross margins on a couple of products.
Speaker Change: Can you just.
Speaker Change: When we made our plan.
Speaker Change: Once we learned about the.
Speaker Change: February 4th announcement from China.
Speaker Change: No.
Speaker Change: We knew that that was going to hurt both our topline and our gross margin line, but.
Speaker Change: Weak.
Speaker Change: Expected, maybe that the rest of the product lines, including raw materials would have some at least mitigating lifting effect.
Speaker Change: Sure.
Speaker Change: In.
Speaker Change: <unk>.
Gary Fischer: Had a little bit of that, but it probably wasn't quite as robust as I had hoped, but that was the third factor. Got it. So it's more you didn't see a lift as opposed to there was lower pricing or anything else going on. Yeah, no, there's no, not really an ASP issue in this story. The real story is, is, is, you know, India Phosphide dropped in revenue. And at the same time, we're trying to make up for that revenue drop by accelerating some gallium arsenide work. And as Morris said, maybe we're a little bit too aggressive there.
Speaker Change: Had a little bit of that but it wasn't probably wasn't quite as robust as I as I had hoped.
Speaker Change: But that was the third factor.
Speaker Change: Got it so it's more you didn't see a lift as opposed to there was lower pricing or anything else going on.
Speaker Change: No Theres no not really NASP issue in the story.
Speaker Change: The real story is is.
Speaker Change: Given our phosphate.
Speaker Change: Drops in revenue.
Speaker Change: And at the same time, we are trying to make up for that revenue dropped by accelerating some.
Speaker Change: From gallium arsenide.
Speaker Change: <unk> and <unk>.
Speaker Change: As Morris said, maybe we were a little bit too aggressive there.
Gary Fischer: And So that's our understanding, yeah.
Speaker Change: So those are that's our understanding.
Tim Bettles: got it but there's nothing there's nothing going on with pricing across across all the markets or no there's no there's always right And it just was good. Sorry, just with the material shipping to China, if there's more material shipping to China, does that have any impact on pricing at all?
Speaker Change: But there's nothing there's nothing going on with pricing across the across all the markets are no theres always right.
Speaker Change: And then just we would never good.
Speaker Change: Yes.
Speaker Change: Go ahead sorry.
Speaker Change: Okay.
Speaker Change: With the materials shipping into China.
Speaker Change: Theres more material shipping charters that have any impact.
Speaker Change: Impacts on pricing at all.
Tim Bettles: I'll let Tim take that one.
Jim: I'll, let Jim take that one.
Speaker Change: Yeah.
Tim Bettles: So some of the traditional, yes, hello? So, yes, some of the additional... P.O.N. markets are seeing some price pressures as we go into that and we see some... Growth this year into those markets. But generally, as we look at other markets, of course, we're always under some kind of price pressure, but we're not seeing anything out of the ordinary that I would say at this moment. Got it.
Speaker Change: So some of the some of the traditional yes Hello.
Speaker Change: So yes some of the traditional.
Speaker Change: <unk> end markets.
Speaker Change: <unk> seen some price pressures as we go into that and we see some growth.
Speaker Change: Growth this year into those markets.
Speaker Change: But generally as we as we see looking we look at other markets.
Speaker Change: Of course, we're always we're always under some kind of price pressure, but we're not seeing anything out of the origin Greg.
Speaker Change: But I would tell you at this moment in time.
Speaker Change: Got it and then last one for me.
Tim Bettles: And then I lost one for me. Just I don't think you ship a lot of product in North America. But can you just talk to any ramifications from the substantial tariffs that The U.S. is placing on China, is it affecting your business at all?
Speaker Change: Can you ship a lot of products in North America.
Speaker Change: Good.
Speaker Change: Can you just talk to any ramifications from the substantial tariffs.
Speaker Change: The us is placing on China is it affecting your business at all.
Tim Bettles: Go ahead, Tim. Yep, so, so for context, revenues to the US in 2024 were about 8%. They'll probably be less in 2025 as a result of these trade risk accrues and the timing of the permits. But anything that we ship to the U.S. will likely have a tariff on it. The amount of this tariff is still a little unclear, and it still seems to be under discussion between the U.S. and China. Yes, we expect that we're going to have to have to deal with this tariff. Again.
Tim: Please go ahead Tim.
Tim: Yes so.
Speaker Change: Context revenues to the U S. In 2024 were about 8%.
Speaker Change: Probably be less in 2025 as a result of these trade restrictions on the timing of the permitting process.
Speaker Change: But anything that we shipped to the U S will likely have a tariff on it.
Speaker Change: Mounts of this tariff is still a little unclear.
Speaker Change: <unk> seems to be under discussion.
Speaker Change: Between the U S from China So.
Speaker Change: Yes, we expect that we're going to have to have to deal with this tariff.
Tim Bettles: Thank you. Revenues in 2024 were about 8%. So It's not something that gives us real great heartburn at the end of the day. Got it.
Speaker Change: Again.
Speaker Change: Revenues in 2020 for about 8%, so it's not something that.
Speaker Change: Gives us real quite hot at the moment.
Operator: Thank you so much.
Speaker Change: Got it thank you so much.
Dave Kang: Thanks, Matt. This question comes from the line of Dave Kang with B Riley.
Matt: Thanks, Matt.
Speaker Change: Okay.
Speaker Change: Next question comes from the line of Dave Kang with B Riley. Please go ahead.
Dave Kang: Please go ahead. Yes, thank you.
Speaker Change: Hi, yes. Thank you good afternoon my question.
Tim Bettles: Good afternoon. My question is regarding that last statement about your sales to the U.S. My understanding is that semis are exempt, so your products, would they be exempt as well? Yeah, they're exempt from the reciprocal tariff, but they're not fully exempt from all tariffs at the moment. But as we say, this tariff situation is still under discussion, there still seems to be some negotiation going on between the U.S. and China, so I think once the permit process opens up and we start shipping again, we'll get a clearer understanding of what our position is.
Speaker Change: My question is regarding that last statement about.
Speaker Change: Your sales to U S.
Speaker Change: My understanding is the SME is our exempt so.
Speaker Change: Your products.
Speaker Change: Will they be exempt as well.
Speaker Change: Yes, they are exempt.
Speaker Change: <unk>.
Speaker Change: We're cyclical tariffs.
Speaker Change: But not fully exempt from all tariffs at the moment, but as we say this tariff situation.
Speaker Change: Is still under discussion.
Speaker Change: Still seems to be some negotiation going on between the U S and China.
Speaker Change: I think once once the permit process opens up and we start shipping again, we've got a clear understanding of what our position is in terms of tariffs.
Gary Fischer: So what happened in first quarter? I mean, can you just tell us the facts, like how much showed, if you can quantify tariffs? And you didn't mention that in your three factors we got in gross margin, but then. tariffs didn't impact your gross margin as well. Oh, you know, again...
Speaker Change: So what happened in the first quarter I mean can you just tell us the facts like how much was how much if you can quantify tariffs and you didn't mention that in your three factors regarding gross margin, but then.
Speaker Change: Tariffs impacted gross margin as well.
Speaker Change: Again.
Morris Young: Oh, Morris, did you want to comment? Yeah, I think perhaps Dave's question is, you know, our gross margin impact from tariffs since in Q1, we have shipped at least one month in January. I think our product shipped in January did pay tariffs. Okay, but that was the old tariffs. What was the percentage, Tim? I think it's around 25%, correct? Yeah, correct. The Section 301 tariff is 25%. And now it has changed.
Speaker Change: Of course, if you want to comment.
Speaker Change: Yes.
Speaker Change: Perhaps Dave's question is.
Speaker Change: Our gross margin impact.
Speaker Change: From tariffs.
Speaker Change: In Q1, we have shipped.
Speaker Change: Uh huh.
Speaker Change: One months in January I think.
Speaker Change: All product shipped in January did pay tariffs.
Speaker Change: But that was the old tariffs.
Speaker Change: What was the percentage I think it was around 25% correct.
Speaker Change: Yes, correct. The section 301 tariff is 26%.
Speaker Change: And now is it has changed so.
Morris Young: So what percentage of tariff is going to be? I think we're watching very intensely how it's going to be resolved. And as you mentioned, it could be exempt. And I also heard China, on the web, actually, China is going to exempt some of the imports from the United States, certain material that China wants to import from the United States, such as semiconductors. So could that play into reciprocal tariff from the United States? Because these Indian phosphide products, none of them can be made in the United States anyway. And our customers in the United States need this material.
Speaker Change: Yes, what percentage of tariff is going to be.
Speaker Change: We are watching very intensely how is going to be resolved.
Speaker Change: As you mentioned it could be again.
Speaker Change: And I also heard.
Speaker Change: China.
Speaker Change: Yeah.
Speaker Change: On the way up actually China is going to exempt some of the.
Speaker Change: Imports from the United States.
Speaker Change: Certain material that China wants to import from the United States, such as semiconductors, so could that play into it.
Speaker Change: Through cyclical tariffs in the United States, because these indium phosphide products.
Speaker Change: None of them can be made in United States anyway.
Speaker Change: Our customers in the United States needs this material.
Morris Young: So we don't know at this point.
Speaker Change: So we don't know at this point, but let's get the permit problems solved first but we believe that.
Morris Young: But let's get the permit problem solved first. But we believe that. The tariff issue can be navigated. We have a plan to resolve this tariff issue, right, Tim? Correct, we do have some plans to navigate around this. It's too early to say anything. You know, some of the component vendors told me that their customers, not all, but some customers are willing to pick up tariffs, at least temporarily. I mean, it sounds like you guys are paying the tariffs, not your customers. Well, we've been faced with this situation before, and there's no easy answer to it, right?
Speaker Change: The tariff issue can be navigated we have it planned to.
Speaker Change: Resolve this tariff issue right.
Speaker Change: Correct, we do have some plans to navigate around this.
Speaker Change: It's too early to say anything about them together.
Speaker Change: It does.
Speaker Change: The component vendors told me that they are.
Speaker Change: Customers not all but some customers are willing to pick up the tariffs at least temporarily I mean, although it sounds like you guys are paying the tariffs that your customers.
Speaker Change: Well, we've been faced with a situation before.
Speaker Change: And there's no easy answer to it but some customers.
Tim Bettles: Some customers will pick up the tariff, some customers will pick up some of... We take, we've dealt with it with gallium arsenide for the past 18 months, and we'll deal with the tariff as we go case by case, or sorry, with indium phosphide for the past We'll deal with this on a case-by-case basis as we move forward, and we have to get a better understanding of what this tariff is.
Speaker Change: We'll pick up the tariff some customers.
Speaker Change: We will pick up some of the tariffs.
Speaker Change: We take with Delta with gallium arsenide for the past 18 months.
Speaker Change: And we will deal with with the tariffs.
Speaker Change: As we go case by case I'm sorry.
Speaker Change: Indium phosphide for the past 18 months.
Speaker Change: Deal with this.
Speaker Change: As a case by case basis, as we move forward and we have to get a better understanding of what this tariff really means.
Dave Kang: Got it.
Speaker Change: Got it and my last question is regarding the wireless <unk>.
Morris Young: And my last question is regarding the wireless HVT, the one with yield issues, just wondering if you got that business, I mean, can you kind of quantify as far as the revenue? And is it because you're stumbled? Is it a lost opportunity? Or are you still in the derby, I guess? And is it just one customer or multiple customers? Well, it's one specific customer. It's a fairly large customer. And I think we have not lost the opportunity. I mean, we're still working on it. And as I said, we will take a little bit more measured approach to trying to gain more market share.
Speaker Change: The one with yield issues.
Speaker Change: Wondering if you got that.
Speaker Change: <unk> I mean can you kind of quantify as far as.
Speaker Change: The revenue and is it because youre stable is that a lost opportunity or are you still in.
Speaker Change: In the Derby I guess.
Speaker Change: And is it just one customer or customers.
Speaker Change: Yeah.
Speaker Change: Well, it's one specific customer or is that fairly large customer and I think we have not lost the opportunity I mean.
Speaker Change: Still working on it and as I said, we will take a little more measured.
Speaker Change: Our approach to trying to gain more market share but.
Morris Young: But I mean, once we got our, you know, actually it's not a yield issue per se, but it's a matching of specification from what we can make and the customer demand. Once we got that sorted out, I think we should be able to get back to it.
Speaker Change: Once we're done.
Speaker Change: Actually it's not a yield issue per se, but it's the matching of specification from what we can make and the customer demand was we got that sorted out I think we should be able to get back to it.
Morris Young: And Morris, can you kind of quantify? All right, let's see, it's probably around $2 million. per quarter. No. A little bit more than $1 million for the quarter. Yeah, for the quarter. Got it.
Richard Shannon: And Morris can you kind of quantify.
Speaker Change: Okay.
Speaker Change: Let's see.
<unk> probably around $2 million.
Speaker Change: Per quarter.
Speaker Change: Sure.
Speaker Change: No.
Speaker Change: A little more than $1 million per quarter, yes for the quarter.
Operator: Thank you.
Speaker Change: Got it thank you.
Operator: And it seems that we have no further questions today.
And it seems that we have no further questions today I would now like to turn the call over back to Dr. Morris Young for closing remarks.
Morris Young: I would now like to turn the call over back to Dr. Morris Young for closing remarks. Thank you for participating in our conference call. Later this month, we will be participating in the Be Riley Security 2025 Annual Investment Conference.
Speaker Change: Thank you for participating in our conference call later, just minus where we'll be participating in the B Riley Securities 2025 annual Investor Compass.
Morris Young: As always, please feel free to contact me, Gary Fischer, or Leslie Green if you would like to set up a call. We do look forward to speaking with you in the near future.
Speaker Change: As always.
Speaker Change: Please feel free to contact me, Gary Fischer or Leslie Green.
Speaker Change: If you would like to set up a call.
Speaker Change: We do look forward to speaking with you in the near future.
Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Speaker Change: Ladies and gentlemen. This concludes today's conference call you may now disconnect.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.