AXT Inc

Hello, everyone, and welcome to the AXT's first quarter 2021 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fisher, Chief Financial Officer. My name is Lori, and I will be your coordinator today. At this time, all participants are in a listen-only mode. After the speaker's presentation, There will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. And please be advised that today's conference is being recorded. And I would now like to turn the call over to Leslie Green, Investor Relations for AXP.

Thank you, Lori, 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 schedule and timeliness regarding our relocation, the growing environmental health and safety and chemical industry regulations in China, as well as global economic and political conditions, including trade tariffs and restrictions. We wish to caution you that such statements deal with future events, are based on management's current expectations, and are subject to risks and uncertainties that could cause actual events or results 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 a contagious disease, potential tariffs and trade restrictions, increased environmental restrictions in China, market acceptance and demand for the company's products, the financial performance of our partially owned supply chain companies, and the impact of delays by our customers on the timing of sales of their products. In addition to the factors that may be discussed in this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at AXT.com through April 28, 2022. 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 2021. 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 results. Gary?

Thank you, Leslie, and good afternoon, everyone. We are pleased to report that total revenue for the first quarter of 2021 was $31.4 million, up 16% from $27.0 million in the fourth quarter of 2020, and up 51% from the $20.7 million in the first quarter of 2020. As many of you know, we expected that the convergence of expanding markets such as 5G, moving past the relocation program, and overall growth in indium phosphide would push us past the $30 million mark, but we could not predict the exact quarter for this event. It is an exciting milestone, and Morris is already pushing the team towards new goals. Of our total revenue, substrate sales were $23.4 million, compared with $21.5 million in the fourth quarter of 2020 and $16.9 million in Q1 of 2020. Revenue from our two consolidated raw material joint venture companies was $8.0 million in Q1, up from $5.5 million in Q4 of 2020, and from $3.8 million in Q1 of 2020. In the first quarter of 2021, revenue from Asia Pacific was 73%, Europe was 17%, and North America was 10%. Also in the first quarter, no customers reached 10% of revenue, and the top five customers generated approximately 26% of total revenue. As you know, we normally read these statistics quickly and move on, but today I want to highlight them because they're important. Usually, we do have at least one 10% customer, and usually the top five customers contribute approximately 35 to 40% of total revenue. This quarter, when we achieved over $31 million in revenue, it was not because of one big order from one big customer. Further on this point, the top five customers made up a smaller percentage of our total revenue than normal. Together, these factors vividly portray an increasingly broad-based, diversified set of customers and applications. From a business perspective, it is significant in demonstrating the growing adoption of the materials we manufacture, as well as the repeatability of this quarter's success. Okay, moving on, gross margin in the first quarter was 36.8%, up 33.9% from Q4 of 2020. and up from Q1 of 2020, which was 26.6%. The increase was primarily driven by product mix and increasing revenue volume, and there was some tailwind for us from one of the consolidated raw material companies. Total operating expenses in Q1 were $8.0 million, up from $7.2 million in the prior quarter, and $6.2 million in Q1 of 2020. In comparing Q1 of 2020 to the recent Q1, The majority of the increase, 55%, in fact, is in R&D. Included in this are the development costs for 8-inch gallium arsenide wafers. Today, after the market closed, we released an announcement describing our success in developing and shipping 8-inch gallium arsenide wafers. Morris will give you some color on this in a moment, but it is a big step, and we believe our investment in this program could lead to sizable new opportunities. We are currently in development of six-inch Indian phosphide wafers. This is another R&D project that is expected to position us to participate in some exciting new applications for Indian phosphide. To put Q1 operating expense in perspective, total OPEX as a percent to revenue was 25.4% for the quarter. This is a bit lower than the 2020 quarterly average of 27.6%. We currently have a lot of exciting growth initiatives underway, which leads us to believe that we will be in this range over the next several quarters. Nevertheless, we will be drilling down more deeply to ensure controls and oversight are appropriate. Total stock comp expense for the first quarter was $816K. This is also part of the OpEx increase as it is up $125K over Q4 and a bit more than Q1 of 2020. Operating profit for the first quarter of 2021 is $3.6 million compared with an operating profit of $1.9 million in Q4 and an operating loss of $634K in Q1 of 2020. Other income and below the line items including tax provision for the first quarter of 2021 was a net gain of $204K. Especially noteworthy in Q1 is a net profit of $1.1 million from the partially owned companies in AXT supply chain accounted for under the equity method. The market for raw materials has tightened up and raw material pricing has increased. These gains were offset by a foreign exchange loss of 173K and a tax position of 746K. Our Q1 results included approximately 275K in tariffs as a result of the 25% tariff charged on importing wafers into the United States from China. For Q1 2021, we had a net profit of $3.4 million or a profit of $0.08 per diluted share. By comparison, we had a net profit of $2.1 million or a profit of $0.05 per diluted share in the fourth quarter of 2020 and a net loss of $178,000 or a loss of $0.01 per share in Q1 of 2020. The share count for this recent Q1 was 42.726 million shares. Cash, cash equivalents, and investments were 66.9 million as of March 31st. By comparison, at December 31st, it was 78.6 million. The decrease is primarily attributable to an increase in working capital accounts for accounts receivable, for inventory, and prepaids of 9.8 million, which was modestly offset by an increase in AP of 730,000 plus capex payments. To put this in context, revenue is up 4.3 million from the previous quarter, and accounts receivable is up 3.9 million. These two numbers are correlated, and this is especially true for Q1 because the early months of Q1 had the Chinese New Year, a week-long break, and as a result, our shipments were back in load for the quarter. Collections from these shipments will move into Q2, benefiting cash this quarter. We also use cash for inventory, which is up because of two reasons. First, the order rate is strong, which means we are needing more inventory. Secondly, raw material prices are moving up, and we're buying a little bit ahead of the market to keep our COGS lower. Finally, we use cash for prepaids, which are up as a result of the annual year payments that will be amortized over 12 months. An example of this is insurance premiums. This gives you a bit of color on cash utilization. Depreciation and amortization in the fourth quarter is $1.6 million, and capital investments were $5.6 million. Net inventory at March 31st increased by $3.2 million in the quarter and ended at $54.7. Ending inventory consisted of approximately 46% in raw materials, 48% in work in progress, and 6% in finished goods. All right, this concludes the discussion of our quarterly financials. Before Morris speaks, let me give you... a brief update and comments about our plan to list our company in China on the star market in Shanghai. As early as the fall of 2019, we were looking into this possibility and spent considerable time and effort in assessing the opportunity during all of 2020. We finally publicly announced it to all of you in November 2020, while Morris and I were still together in China. One of the things that became clear as we drilled down is that the process is more complicated than an IPO in the US and that it takes longer to accomplish. An interesting example is that prospective IPO company in China is required to have mandatory training in what it actually means to be a public company. What are the requirements and expectations placed upon a public company? Morris took AXT public in 1998, but even he is going to be required to take the training in China. We completed the private equity activity in January, and the rest of Q1 efforts included aligning our hidden assets in China beneath our main company in Beijing named Tang Mei. Tang Mei is also undergoing an audit conducted by Ernst & Young China, and here again it is more detailed and more complicated. Fortunately, we have a great team, and they are both patient and persistent. These sorts of steps will continue in Q2. We're hoping to submit our SEC application around June 30th. or in Q3. Overall, the process is going fine. We continue to think that our overall timing is good in terms of market opportunities on the horizon and accessing favorable capital markets in China. In conclusion, it has been a busy but good quarter, and this concludes our financial comments. I'll now turn the call over to Dr. Morris Young for the review of our business. Morris?

Thank you, Gary, and good afternoon, everybody. Q1 was a very important milestone quarter for AXT. We met and exceeded the $30 million revenue threshold, which has been a goal of ours and a challenge that I gave to our team. Our performance surpassed our expectations with growth in nearly all of our strategic products. We also drove improvements in our gross margin and achieved strong growth in profitability. What we're seeing today is the convergence of a number of trends across our portfolio that are beginning to have a meaningful impact on the demand for our products. These include applications in 5G telecommunications and its related technologies, data center connectivities, LED-based sensing and display, healthcare monitoring, also referred to as biometrics, consumer devices, and others. Our investments over the past several years in our new and expanded facility elevated our businesses and manufacturing processes. In-house expertise and product development efforts are all now allowing us to support the requirements of new and exciting growth opportunities. We have the second largest revenue quarter in our history. This number was surpassed only by eight sales in Q2 of 2019, in which quarter we received a very large order from a single customer who was buying for future demand. By contrast, this past quarter of 2021, our sales were driven by a number of customers across a diversified set of applications, indicating that demand is broad-based and building momentum. In some ways, Indian phosphide wafers sketches a classic Silicon Valley story. Ten years ago, Indian phosphide revenue was barely $1 million and was the lowest revenue generator out of our all-product lines. lower even than germanium on raw material. It was classically a product waiting for the market to arrive. Today, we have demand from a number of different applications, and we are seeing additional applications on the horizon. In particular, we saw continuous trends from 5G and its related technologies. At the subsurface level, it can be difficult to distinguish between optical connections specifically for 5G equipment or those for related technologies like passive optical networks that support 4G and 5G functionality. But from our perspective, any modernization of telecom infrastructure that utilizes Indy Phosphine is positive for our business. Demand continues to be strong in the second quarter, and we can scale quickly and cost-effectively to meet our customers' requirements. In data center connectivity, demand remains steady and at a positive level. During Q1, we're pleased to become fully qualified at our Tier 1 customer. This was a multi-quarter process that touched nearly every aspect of our business and elevated our operations for our benefit of all our customers. We were pleased to work closely with our customer on this qualification process and we're proud to have been awarded this designation. As I mentioned in 2021, We expect to see a meaningful emergence of additional and new applications for Indian phosphide material in such areas as healthcare monitoring and consumer devices. Money are being driven by tier one players. We're currently engaged in these applications, which represent a new growth area for our business this year. Now, turning to gallium arsenide. Revenue in Q1 grew both in wireless and LED applications. It was our highest revenue quarter in gallium arsenide since Q1 of 2018. Demand in Q1 was driven by high-end applications, including automotive, lighting and display, and IoT. As we look into Q2, we expect LED demand to remain strong, but we do expect revenue from wireless applications to decline from Q1 level. We were very pleased to announce today our successful development of 8-inch gallium arsenide wafers for LED applications. We have diversified, we have delivered sample quantities of interested, to our interested customer and we are working with them to meet the requirements of their emerging projects. Increasing the diameter in crystal rolls is complicated for our focused materials. Every step up in diameter sizes comes with a major increase in technical challenges of producing it. But AXT has always been a pioneer in this area. with the entrepreneurial spirit to drive innovation in order to unlock the potential for our new applications. We have been able to overcome a number of hurdles. This is no longer a test tube laboratory program because we are now shipping wafers according to our customer specifications. This is a tremendous step for AXT and we are very proud of our team. Among the many benefits, we believe this innovation will help to enable the scale and efficiency required for a number of very high-volume applications, including Vixels for 3D sensors, LIDARs, as well as micro LEDs for displays. We believe that micro LEDs are likely to benefit likely to become the next major volume driver of gallium arsenide chips. We're seeing reports that the potential micro-LED market for smaller consumer devices like wearables and phones may be larger than the entire current market for gallium arsenide substrates. Regardless of specific numbers, This is an exciting space that could add significant new value to the LED markets in 2024 and beyond. These devices are expected to consume less power, provide sharper contrast, and produce brilliant lighting and colors. Their application could extend from wearables devices and handheld devices to very large screens like high-end televisions of the future. Tier 1 players are already driving the development of the technology, and we believe that our wafers are used for early-stage activities. Turning to germanium substrates, coming off a very strong quarter in Q4 of last year, revenue for germanium substrates decreased modestly in Q1. However, the satellite solar sale market looks to be strong in Q2021, we expect to see growth this year. Finally, I want to touch upon our raw materials, which grew 45% since 2021. As you may recall, we currently consolidate two joint ventures, Boyu, which manufactures high-temperature PBM crucibles and PBM-based tools for OLED and Another joint venture, Jing Mei, who is a diversified industrial high purity material supplier. In 2020, both companies relocated to our campus in Kajol, unable then to expand capacity in response to strong market demand. This, coupled with a recovery in pricing of raw materials, such as raw galleon, has allowed both companies to grow meaningfully in recent quarters. As we look ahead to Q2, we expect the performance to remain at around this strong level, although perhaps coming down modestly from Q1. The improvement of commodity pricing also enabled joint ventures that account for using the early equity method to perform very well in Q1. In fact, we saw a 214% increase in their contribution during this quarter. We believe the demand environment should remain healthy this year and that their performance will continue to be strong to our results. In closing, we're off to a strong start in 2021 with a broad-based customers and applications showing healthy demand. We're excited to see so many of our opportunities for which we have been preparing over the last two years now are yielding results and with more to come. In addition, our successful development of 8-inch gallium arsenide aligns our product and technology capabilities with Tier 1 customer requirements. We believe this will open up significant new applications for us over the next several years and enhance our reputation as the go-to supplier. With our new factories ramping up well and ample room for capacity expansion, we're ready and excited for the year ahead. This concludes my prepared comment. I will now turn the call back to Gary our second quarter guidance. Gary?

Thank you, Morris. As Morris discussed, the demand environment remains healthy in Q2. Indium phosphide coming off a very strong quarter. We believe we will see continued growth. We also expect growth in gallium arsenide revenues for LED and a modest increase in germanium. As Morris mentioned, we expect a pullback in gallium arsenide for wireless and a flat to slightly down for raw materials. As such, We expect to see revenue in Q2 of between 30.5 million to 31.5 million. We believe that our net profit will be in the range of 6 to 8 cents a share, and that's based on a share count of approximately 42.8 million shares. All right, this concludes our prepared comments. Morris and I will be glad to answer any questions. Operator, Lori?

And, yes, as a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, in order to ask a question, please press star 1. And we have a question from Dave Kang of B. Riley. Your line is open.

Hi, this is Danny Chang on for Dave. I was wondering if you guys could comment on the effect of ship charges. And broadly, we're seeing ship prices increased. And we were wondering, are you guys also increasing prices as this phenomenon occurs? And the second question is, how long can you expect this raw materials pricing environment to stick around?

So let me take a crack at that first. Generally, substrate business is difficult to increase price at a substrate level. However, on the raw material side, Yeah, they do fluctuate with demand and supply. And the raw material, for instance, galleon price has increased from, let me quote you this number, about $150 a kilogram last year. And as late as last quarter was $400 a kilogram. So it's more than double. But recently the price has come down a bit. But that not significantly, down to about 350 for $400 a kilogram per gallon. But I do believe that the demand is still very tight. And so, however, there are more new suppliers coming into the production line because the price has gone up. In the substrate level, I believe it's more difficult to increase prices. However, the way I would describe it is this, in terms of eating phosphide, many times that we may increase price if the customer wants to tighten their specification. For instance, if you want material, let's say, with defect density in the neighborhood of 500, and that sort of set a price of X, and if all of a sudden, the requirement is such that you want defect density to be half of that, 200 versus 500, then the price may rise by a factor of 20, 25%. So that's yet another way of increasing price. In other words, drive your productivity up and increase the price. Did I answer your question?

Yeah, thank you. That's helpful. And I guess just a quick follow-up. Are you broadly seeing customers you know, trying to tighten specifications more, like maybe the supply chain constraints are forcing them to be more deliberate with their specifications or anything?

Yeah, that's an interesting question. Actually, I think in Indy Phosphide specifically, I mean, gallium oxide is a lot more mature. So I think we see less of a change. But in Indy Phosphide, we do see customers coming in with tighter specifications. because they are mainly dealing with high-end products such as lasers and, you know, very demanding performance levels so that they want to tighten up the spec as they develop their next generation product. Also, what we're also seeing was that, you know, we start to see, you know, we deliver this better quality product to one customer and all of a sudden other guys are seeing the same thing. So the end customer starts to tighten their specification to the intermediate, let's say, AP growers. So, yes, we do see that tightening of the spec, yeah, coming on in a fast way.

Got it. That's helpful. Thank you.

And again, as a reminder, to ask a question, please press star 1 on your telephone keypad. Your next question is from Richard Shannon of Craig Callum. Your line is open.

Well, good afternoon, Morris and Gary and Leslie. Thanks for taking my questions. Let me start with kind of a multi-part question on gross margins. Had some very nice numbers here in the first quarter. I think you called out mixing volume as the drivers here. I didn't hear you talk anything about yields. I think you've alluded in the last call or two that the potential of seeing those improve as you going to get more comfortable with the new facility. And so I'd love to hear what you think about not only for the second quarter and along those lines, but also when you talk about buying some more inventory here at lower cost, but eventually that's going to start to bake in here. When do you see the raw materials prices start to bake in and kind of level off, kind of provide a little bit of headwind from gross margins?

Well, I was just curious. I'd say we've already taken advantage of some of that because we saw this happening early in the quarter, even as recently as last Q4. So I don't see that all of a sudden we're going to have a huge benefit because the raw material price that we paid is going to be moving from inventory into cost of goods sold. It is a factor that we're taking advantage of, but it's difficult for you to be able to measure the impact.

Well, so let me put my two cents on the CFO, Gary. But the way I see it is that raw material price increase, it's difficult for us to pass along to our customers, especially in short term. However, the benefit of AXT is is our raw material supplier, our joint venture who supplies galleon and start to make a lot of profits, okay? So that's the benefit to us. But we don't write up our inventory because we have a lower cost galleon in our inventory, right? Right. We don't write it up. The only time that it will impact us is actually if our newly purchased galleon which we pay the higher price, start to get into our inventory, then we sort of, in average, get our cost of goods sold up. And if that price remain to be high, then our cost of manufacturing that substrate becomes higher. And if we cannot pass along that increase in our cost to our customers, then our gross margin will decrease. we are probably still better off than our competitors because we have joint ventures to offset part of it. In a way, we have some insurance policy.

And I guess part of my question is when would that happen? I assume that's a relic of your cycle time of manufacturing. But I also wanted to bake in here the potential of seeing yield improvement under substrate manufacturing as well and kind of get a multi-quarter view on what you think your gross margins can do. We've talked about in the last few quarters about the potential or kind of long-term goal of getting to 40%. Sounds like you've got a few tailwinds, maybe one or two headwinds here, and wanted to kind of look at that in a multi-quarter trend. Can you kind of help us out in that context?

Yeah, I'd say to be specific about yields, I think there's still some – some improvement that we can gain. And I think we will see the yields improve as things settle in and stabilize at the new sites. Reciprocally, I think we probably see some push on cost goods sold because of raw materials. So they may have some offsetting effect. We still think the prudent comment that we should make for today is that somewhere around 35% is very achievable, obviously. But, you know, Morris and I are not inclined to have everybody move the margins up after one quarter, you know, a one-quarter improvement. We'd like to see a couple more quarters before we think, okay, this is kind of what the pattern is going to be. So certainly we're pleased with the margin from Q1. We think we'll probably be at or above 35% for Q2. But we're hesitant to sort of paint out the rest of the year and and pick a new number.

Richard, maybe you and I are old timers. I think you're probably thinking that with raw material price going up, it should help us on gross margin. And that was exactly what happened back in 2011 and 12 when gallium price was going, went from up to about $1,000 a kilogram. However, the difference is that In 2011, we consolidate that joint venture into our revenue as well as our profits. So when the profit of that joint venture start to help us, our gross margin jumped up as well. However, that joint venture, although we still own substantially, I think last I saw was 39%, but we don't consolidate their revenue anymore. although we do enjoy the profit they make, but it doesn't help us in terms of gross margins. Does that sort of answer your question?

Yeah, that's helpful. And I'll note the fact that you called me old, Morris, so thanks for that.

Oh, I am only speaking for myself.

Oh, okay. You kind of looped me in that one, but we'll leave that one alone. My quick follow-on question is – Maurice, you talked about Indian Phosphine, some new applications here, and you said there's going to be some contributions this year. Any way you can help us scale this contribution? Is it going to be noticeable, very small? How would you characterize that and help us think about that going forward into next year?

I think it's going to be meaningful. Yeah, I think, you know, not only this product, but I think I'm overall excited about this new approach. utilizing the UV spectrum of lighting as well as lasers, which can do a lot of wonderful things, you know, healthcare monitoring and et cetera. So, you know, instead of just good old telecommunication, which is great, I mean, it just cannot escape from utilizing any phosphor for fiber optics. However, when you're dealing with consumer products, Imagination is limited. Everybody likes to take care of your health, and this is a great approach to help you monitor your health. I think it has a great future. We are only starting the beginning of this. I think there are other developments which can follow on this. I think not only it's going to be meaningful, but also I think it's going to be multi-year. We just don't know how big it is going to be, whether it's going to be 500% or 1,000%. Okay, fair enough.

I'll put it back in the queue. Thanks, Morris. Thanks, Richard.

And your next question is from Gus Richard of Northland. Your line is open.

Yes, thanks for taking my question. Just going back to the new applications for Indium Pacified, Do you have a sense of whether it's a health monitor or some sort of other type of consumer product? Do you have any sense of the application at this point?

Gus, we really don't know. And if anything, that we can only guess. But even if I know, I don't think I'm allowed to talk about it anyway. But because this is very new, I would say, you know, you weigh down a quarter or two, you know, eventually it's going to go on the market and somebody is going to take it apart and they're going to see what it is for. Okay. But I don't think we're kidding around. This is real. This is, you know, we've worked with this for almost more than two years. And we are seeing them ramping.

And you expect this application to be, you said it's going to be significant. You know, is it going to be, you know, material part of the Indian phosphide revenue? In other words, for the year, could it add up to, you know, 10% of your Indian phosphide revenue?

Well, that's a hard question. I don't know how fast the rest of them will, but it's a significant, yeah, it could add, you know, a good 5% to 10%, yes. Okay.

Okay. Thanks. And then, Gary, for you, just looking at the OPEX, it was quite a bit above what I was expecting in the quarter. And, you know, clearly you've got a need to invest in R&D and, you know, SG&A was up. Can you give a little bit more color on, you know, what were driving those, particularly SG&A in the quarter? And, you know, how should we think about that going forward?

Yeah. I mean, the biggest driver from 20,000 feet up is we just have a lot of initiatives. There's a tremendous amount of activity, energy, implementation of the vision from Morris and the marketing team. So that drives down in lots of ways and touches lots of general ledger accounts that give expenses booked to them. You know, we are pleased that over half of it's R&D. That's good. But to drill down another layer, there has been growth in headcount, both at our Tong May Company and also Jin May and Boy U. So stock compensation has increased. Wages have increased. The bonuses we paid more recently were larger than normal because we finished 2020 on a good note. So I'd say the biggest single component setting aside R&D versus SG&A is labor. Also compensation for our reps that we pay commission to on sales when sales are up, you know, commissions are up. A fair amount towards what I would call permits still and licenses and, you know, things that have to do with facilities. and continuing to layer in all the kinds of things that are required. Those are things that come to my mind extemporaneously. So it's all, I mean, for me as a numbers watcher, you know, one of my sayings is there's a story behind every number. And the story for these numbers is about lots of exciting initiatives and good things happening. But, you know, the flip side of it, myself and our sort of you know, senior level controllers and stuff, we're watching it closely. I'd also, you know, I take some comfort from me as a business person that as a percent of revenue, it's actually lower in Q1 of this year than the average from all of 2020. So You know, those are the kinds of things I can put around it, and, you know, I hope that's helpful in giving you some color. Maybe, Marcy, you want to add anything?

Yeah, I think, you know, many times I remember when our revenue was lower. People were asking us, well, if your revenue were to grow at a good 30% or 50%, would most of this drop down to your profit? And we would say, absolutely. You know, we're not going to get a higher rate. salary and we're not going to hire other, several senior vice presidents, et cetera. However, you know, now our revenue grew 50% year over year and now, well, you caught us being a liar about it. But then if we, again, we dissect it, I think I'm happy to see that we're spending a lot of activities in terms of, you know, the new hire help us to go start market listing, you know, the six-inch in the development, the age . I mean, all those exciting initiatives which will translate to even higher revenue or higher profits. So what I'm saying, I think, is this. If our revenue were to grow 50% and stay there, we don't have, you know, tremendous growth opportunity. start listing in China, then, yeah, sure, everything will come back because I don't expect to earn much more than what we do, and we don't need to add one more salesman or a person to do more revenue. However, you know, when you're preparing yourself for more growth, more opportunities, you need to spend a little bit more money.

I think that's the way I see it. I still think there's a tremendous leverage on our business model. So we're, you know, we're proud of what we're accomplishing. We don't see it, you know, increasing a lot right now.

Okay. And then just is variable comp paid quarterly or annually?

Both.

Bonuses.

Both. Okay. Got it. Which company we're talking about. So...

Okay. All right. Thanks so much. Thanks, guys.

And again, if you have any questions at this time, please press star then the number one on your telephone keypad. We have a follow-up question from Richard Shannon of Grey Callen. Your line is open.

Hi, guys. Thanks for taking my follow-on question here. Just want to ask about the star market listing process here. And you mentioned the process that's more difficult than what's normally happens here in the U.S. One reading the news might suggest that those have gotten more difficult even for companies who started the process earlier. And so I wonder if you can comment on the degree to which you're seeing those getting more difficult just within China. Seems like there's some

reticence about quality of companies on the Star Exchange that are in China and worry about whether those due diligence Requirements get even worse for US companies like yourself So, let me try that first but but definitely Gary is more qualified he's very much involved I mean every day You know, there are many many activities Gary is covering but so let me give you the high-level comment first I believe the tightening process of the stock market listing, I heard it was because there are too many companies going public on stock market in China. That's why they want to tighten it up. Otherwise, they're going to have hundreds and hundreds of companies all want to go public. So as a result, I think that they are lengthening the process. For instance, let me give you an example. They're looking at You know, senior management, they want to make sure there's no related part of transaction. They want to make sure our revenue are real. There's no, you know, funky business. And they are tidying up. But I think to a certain degree, our investment banker in China are telling us that part may be better for us because we have been public company in United States for the last, what, 20-some odd years. So, you know, we scrub out every one of our quarters. So, you know, we are, you know, really doing the right business. And we also, you know, a real company delivering high-quality products. So I think all those speaks well for us. However, because China regulatory agency are more cautious, so they are tightening the screws so they're slowing down the process. So I think as a result, we may see that there's slight delay or every step of the way, they want to make sure it's doing the right thing, which we have been doing all along anyway. So I think it's a double-edged sword. Gary?

Yeah, I think Morris hit the nail right on the head. We're not surprised at what's causing things to be a little, raise the bar, if you will, to leap over, lengthen the time a bit more, because they are trying to be very, very sure about who gets through that gate. But if you take a step back and look at our Tongmei Company, it was founded in 1998 by Morse. and other leaders of the company at that time. So what that makes it over 23 years old. Collectively now with adding Boyu and Jinmei, it's over 1,000 employees. They're all Chinese citizens. They all pay taxes in China. You drill down further into the supply chain. I doubt there's many other companies applying for Star Market Listing that have partial ownership of 10 other companies. in China. We don't want to be cocky at all, but from a business standpoint, this is a very, very attractive company to take public. We manufacture something. You can see it. We build things. It's not software. We've been audited since 1998, or maybe 1999 in China. It's harder. It's more work, but the rewards are significant. And as we see things growing on the horizon, this is a wonderful opportunity to have a significant amount of capital set aside to take advantage of growth opportunities around the world. So, yeah, it's harder, but we're all in. And our guys, the team is excited, and nobody's discouraged. They're just tired, so.

Okay. Appreciate all the detail. That's all from me, guys. Thanks. Okay.

And there are no questions on cue at this time. I will turn the call over back to Dr. Morris Young for his closing remarks.

Thank you. Thank you, everybody, for participating in our conference call. In June, I will be participating in Crack Holland's Institution Investor Conference. As always, please feel free to contact me Gary Fisher or Leslie Green directly if you would like to set up a call. We look forward to speaking with you in the near future.

And ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may all disconnect.