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spk09: Good afternoon, everyone, and welcome to the second quarter 2022 financial conference call. Leading the call today is Dr. Morris Young, Chief Investor Officer, and Gary Fisher, Chief Financial Officer. My name is Kevin, and I'll be your operator today. At this time, all participants are on a list only. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone. I would now like to turn the call over to Leslie Green, Investor Related, for XT. You may begin.
spk01: Thank you, Kevin, and good afternoon, everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the company, market conditions and trends, including expected growth in the markets we serve, emerging applications using chips or devices fabricated on our substrates, our product mix, our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, to utilize our manufacturing capacity, the growing environmental health and safety and chemical industry regulations in China, as well as global economic and political conditions, including trade tariffs and restrictions. 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 or other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations 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 in their products. In addition to these factors that may be discussed on this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our expectations. This conference call will be available on our website at AXT.com through July 2023. 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 second quarter of 2022. 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 second quarter results. Gary?
spk03: Thank you, Leslie, and good afternoon to everyone. We're very pleased and excited with the financial results in Q2. Let's walk through them and get Morris on stage. By the way, Morris just returned from four months in Beijing, so it's nice to have him back. So, okay, revenue for the second quarter of 2022 was $39.5 million, approximately comparable to $39.7 million in the first quarter of 2022, and up 17% from $33.7 million in the second quarter of 2021. For the first half of 2022, revenue was up 22% over the first half of last year. To break down our Q2 2022 revenue for you by product category, Indian Phosphide came in at 15.7 million, slightly over Q1, and again a new record. Gallium Arsenide was 12.2 million, and this is another positive number in the quarter. $12.2 million is the highest quarterly revenue for gallium arsenide since the third quarter of 2012. Germanium substrates were $3.9 million, and revenue from our two consolidated raw material joint venture companies was $7.8 million. In the second quarter of 2022, revenue from Asia Pacific was 74%, Europe was 13%, North America was 13%. The top five customers generated approximately 35% of total revenue. and one customer was over the 10% level. We continue to believe that revenue diversity demonstrates our growth is not overly dependent on any particular customer or application. This is another factor contributing to our confidence that we have reached a point of sustainability and can outpace market growth in 2022. Non-GAAP gross margin in the second quarter was 39.4% compared with 33.8% in Q1 of 2022 and 36.4% in Q2 of 2021. For those who prefer to track results on a GAAP basis, gross margin in the second quarter was 39.1% compared with 33.6% in Q1 and 36.3% in Q2 of last year. As you can see, we made huge progress on gross margin in Q2. While there were many factors that contributed, improved yields, particularly in crystal growth, was one of the most significant ones. Morris conducted regular meetings on yields during his four months in Beijing, and part of our margin improvement has come as a result of this focus. Another contributing factor is that both Boyu and Jinmei, our two consolidated raw material companies, improved their gross margins. A third factor is that we developed a process technology that enables us to recycle remnants of Indian phosphide processing material. In addition to the gross margin benefit, this program is another step forward for us in our ESG commitment. A fourth factor is product mix. By comparison to the first quarter, the mix looks pretty similar. However, within each substrate product, the diameter mix can impact gross margin. So, product mix was more favorable in Q2. Moving on, total non-GAAP operating expense in Q2 was $9.1 million. This compares with 8.6 in Q1 and with 7.4 in Q2 of last year. On a GAAP basis, total operating expense in Q2 was $10.1 million compared with $9.6 million in Q1. For comparison, total GAAP operating expense was $8.3 million in Q2 of 2021. The totals for the current Q2 include a charge for bad debt of about $200K. We don't experience this very often, but we did this quarter. Non-GAAP operating profit for the second quarter of 2022 was $6.4 million compared with non-GAAP in Q1 of $4.8 million and $4.9 million in Q2 of last year. For reference, GAAP operating profit for the second quarter was $5.3 million up from an operating profit of $3.7 million in Q1 and an operating profit of $3.9 million in Q2 of last year. Non-operating other income and expense for the second quarter was a net gain of 2.3 million. This includes a gain of 2.2 million from the unconsolidated raw material companies. The full breakdown is in our press release. The contribution from the equity method raw material companies is higher than usual and reflects higher ASPs for the raw materials and more units sold. For Q2, we had a non-GAAP net income of 6.7 million, or 16 cents per share. compared with $4.3 million or $0.10 per share in the first quarter of 2022. Non-GAAP net income in Q2 of 2021 was $5.4 million or $0.12 per share. On a GAAP basis, net income in Q2 was $5.5 million or $0.13 per share. By comparison, net income was $3.2 million or $0.07 per share in Q1 and $4.4 million or $0.10 per share in Q2 of last year. The weighted average diluted shares outstanding in Q2 of 2022 was 42.5 million shares. Cash, cash equivalents and investments were 57.2 million as of June 30th. By comparison, at March 31st, it was 44.3 million. This is an increase of $12.9 million. We did get a bank loan in China for approximately $13.8 million during the quarter. If you eliminate that loan, then cash is basically unchanged for the quarter. Depreciation and amortization in the second quarter was 2 million, and capital investments were 16.8 million, of which about 14.8 million was construction. Most of this is facilities related and Indian Phosphate equipment related. Total stock comp was 1.1 million. Net inventory at June 30 was 77.3 million in light of the current supply constraint environment and to be locked and loaded when demand accelerates. We did buy ahead in Q2, but 50% of the inventory is raw materials and WIP is 46%. Finished goods actually declined in the quarter and makes up only 4% of inventory. This concludes the discussion of the quarterly financial results. Turning to our plan to list our subsidiary, Tang Mei and China on the star market in Shanghai, We did have a very big development recently, which is that the Shanghai Stock Exchange approved Tang Mei's application for the initial public offering. The application was approved on July 12th and will now be submitted to the China Securities Regulatory Commission for the next step in the review process. We consider this to be a major, major milestone in our effort to complete the Star Market IPO, as we are told that the Shanghai Stock Exchange review is the most detailed thorough and lengthy of the reviews. We still have more work to do, and we do not want to be overconfident, but the achievement of this milestone will hopefully mean that Tang Mei can complete the listing in this calendar year, most likely in Q4. We're very proud of the team for our progress and believe that our success further underscores our achievements in demonstrating AXT's world-class capabilities. Overall, the IPO is getting a lot of very positive visibility in China, and is affording Tang Mei a new level of respect and prestige. Before I turn the call over to Morris, I want to take a moment to address the COVID restrictions in China. To date, we have not had any shutdowns of our operations in Beijing, Dingjing, or Kaozhou. As we noted last quarter, we have experienced some supply chain disruption as a result of shipment delays and supplier shutdowns relating to products that we use in our manufacturing process. However, so far we've been able to mitigate the impact with inventory on hand. We've also seen some pockets of softness where customers are on lockdown, but the demand for our products coupled with the diversity of customers and applications that need them have allowed us to shift our allocations to other customers or applications that remain in high demand. Like most companies, we're monitoring the situation closely and are managing through these issues with high level attention. We remain in close contact with our customers to understand any changes in their demand expectations should those changes occur. Okay, well, with that, I'll now turn the call over to Dr. Morris Young for a review of our business and markets. Morris? Thank you, Gary.
spk10: This is a very exciting time in our business. Our strong execution on a number of fronts has set the stage for great opportunities in the coming quarters. We continue to achieve strong growth in highly strategic applications and are currently ramping several tier one customers. Further, our product quality and technical capability have created a standard of excellence that is increasingly difficult for our competitor to match. as is evidenced by our market share gains in indium phosphide. And despite supply constraints in our industry, we're working hard to meet customer requirements across a growing number of applications. We're also achieving notable success in the development of large diameter substrates that will enable the next generation of technology innovation across a number of end markets. This strong execution has driven first-half revenue growth of 22% over the previous year and continues to enable us to outperform our market with emerging opportunities that will layer on over the coming quarters. As Gary mentioned, we set a new record for IndyFast 5 revenue in Q2. Demand for our product for 5G, telecommunications, data center, and LIDAR applications continues to grow, overcoming a down stick in the pounds market in Q2. We also saw healthy growth in our new customer applications with its continued rapid Q2. In addition, we're pleased to report that we are now qualifying into a second consumer applications for which we deliver pre-production quantities of indium phosphide wafers in May and June. I cannot stress enough the significance of this achievement. AST answered the call on a very tough product specification, surpassing the best effort of our competition and has proven itself up to the challenge of meeting the stringent requirements of a world-class organization. As such, we're now in a position to build meaningful revenue in a brand new market for AXT. And we are also engaging with other tier one customers for opportunities that were previously not available to us. We're now becoming the company to be in the phosphide wafers. This year, we doubled our capacity in the phosphide, demonstrating our unique ability to scale quickly and cost effectively to meet customer demand. Even with the additional capacity, we expect that there will continue to be supply constraints into next year. We'll continue to work closely with our customers to meet their requirements. On the innovation front, we have achieved the important milestone in the development of six-engine E-phosphide. We're now producing and beginning to sell prime device quality wafers of six-engine E-phosphide. This is the culmination of major R&D initiative for AXC. The material quality of our large diameter substrate demonstrate our commitment to excellence and the differentiation of our VGF crystal growth process. We're pleased to be able to offer our customers meaningful advantages in scalability, low stress, and low defect rates as new high-volume application comes to market. Turning now to Gallium Osmite. Total revenue was up in Q2. Our traditional high-end LED market demand remains strong in applications such as automotive display and high-end signage and lighting. We also continue to see strength in high-power industrial laser applications where we have gained significant market share. These lasers are commonly used in welding equipment, testing equipment, tools for cutting metals, robot applications, and others. Wi-Fi applications for IoT also helped to drive a modest increase in revenue over the prior quarter. In RF devices, demand is expected to come down a bit in Q3, but we continue to focus on strengthening our position for future opportunities. We made good use of the tighter environment to renew our relationship with key customers and believe we have laid important groundwork for future market share growth. The sophistication and capability, capacity of our new manufacturing facility, coupled with our achievement of several tier one customers have demonstrated our ability to support customers in this space with high-volume, high-quality substrates. Before I leave the topic of gallium oxide substrate, I want to give an update on our 8-inch gallium oxide development program. I'm pleased to report that we now have two major customers for this product, and we are working with them on design specifications. The level of engagement from our customers is exciting and gives us increasing confidence that there is a real market developing for large-diameter gallium arsenide. We believe that 8-inch substrate will be an important enabler for new high-volume applications over the next several years. Now turning to germanium substrate. Two of our highest revenue quarters in Q4 and Q1, sales were down some in Q2. The satellite solar cell market, which is the primary driver for Germanium, tends to be lumpy. Though industry forecasts for new satellite launches show continued strength, I do want to note that we do expect Germanium's revenue to be done meaningfully in Q3 as a result of a customer-specific payment issue that we expect to resolve before the end of the year. Revenue from our two consolidated joint venture was about flat in Q2 and looks to remain solid in Q3. In particular, Jingmei has been contributing well. it has continued to diversify its product offering beyond high purity gallium. Since relocating to our casual location, Jing Mei has more capacity and state-of-the-art facilities. Today, it also offers purified Indian and Indian Phosphate Poly for sale. In addition, Jing Mei successfully developed the gallium recycling program which is helping us drive efficiency in our cost structure. Both Xinlei and Boyu have strong R&D culture that is contributing to innovation to new offerings that enhance their value. In conclusion, our strong execution has paved the way for a remarkable transformation of our business. We're more diversified than ever before with success across a wide variety of customers and applications. We've proven that we can raise the bar on our business processes in order to meet the very high standards of some of the most sophisticated customers in the world. And in return, we can earn their business and their respect, which is opening doors to growth opportunities across our portfolio. As we look ahead to the next generation of technology that will reshape everything from connectivity to consumer device to LIDAR, healthcare monitoring, and more, AFC is bringing to market innovations in large diameter substrate that will help make them possible. And all of this is being validated by our continued progress in a very diligent IPO process for Tongmei's star market listing in China. I couldn't be prouder of our team or more excited about our future ahead. I will now turn the call back to Gary for our third quarter guidance.
spk04: Gary? Gary? I had myself on mute, so can you hear me now? Yes.
spk03: Okay. Thanks, Morse. Demand across our portfolio continues to be strong, and we are working hard to keep up with customer orders. In particular, we're expecting Indian Phosphide to have healthy growth in Q3 with multiple Tier 1 customers and a breadth of applications driving this, including data center, telecom, consumer, driverless cars, and others. Gallium arsenide for lasers and LEDs is also growing well. On the top line, growth in these areas will likely be somewhat obscured by a decline in germanium substrates caused by the customer specific issue that Morris mentioned. Once it is resolved, geranium substrate revenues are expected to rebound. The important read through for our business is that we are growing and seeing strong demand across our business with new growth drivers that are just gaining momentum. We expect to ramp these opportunities through the end of this year and well into next year. That said, Q3 revenue will be between $39 million and $41 million. We also expect gross margin to continue to be strong. As such, we expect our non-GAAP net profit will be in the range of 15 cents to 17 cents, and GAAP net profit will be in the range of 12 cents to 14 cents. The share count will be approximately 42.661 million shares. Okay, well, this concludes our prepared comments. Morris and I will be glad to answer your questions now. Kevin, do you want to take over as operator?
spk09: Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your touchtone telephone. We'll pause for a moment while I compile our Q&A roster. Our first question comes from Charles Shi with Needham. Your line is open.
spk02: Hey, Maurice and Gary. Good afternoon and congrats on the very nice results and especially improvement in the profitability level. I want to start with the new opportunity of Indian phosphide. Again, congrats on winning this new application. I believe this is second. I think either yesterday or the day before, your number one customer did announce that they are winning some Indian phosphide applications in smartphones and following the first win in the TWS earbuds. Well, I don't know if you want to comment on this, but are you talking about the same application or not? Or maybe give us a little bit quantitative insights here You do have a little bit of an incremental revenue, of course offset by some weakness in Germanium, but in the third quarter. But should we expect this new opportunity to bring you more incremental revenue than the first application that you want earlier this year or end of last year? Thank you.
spk10: Sure. Let me take that first, Gary. So this second opportunity, yes, Charles, I think we believe it's bigger than the first one. We are ramping with them, you know, pilot production now. And we believe probably towards Q3, Q4, it should be twice the number of wafers going to this application. As to what application it is, I tell you, it really puzzles us. As you know, often we only provide substrate and we provide it to epi growers. And even if I know, I'm not allowed to talk about it anyway. But we think it's somewhat related to a any phosphide laser, coupled with a detector application. And we think it's consumer product related. And we believe that, you know, in the beginning, they offer a certain product lines in the beginning. And if it becomes popular, then the volume could grow as it spreads to other models.
spk02: Got it, got it. It sounds like this will be implemented in a subset of this particular consumer product, and it could be proliferated. It kind of means you expect a certain runway ahead, even for the same application. Is that right?
spk04: Yes.
spk02: Got it, got it. Maybe the next question, I really... Can you give us some update on the micro-LED opportunity? I know, understandably, you are working on larger gallium arsenide wafer size and micro-LED. If that really becomes a reality, it sounds like it's going to consume a lot of gallium arsenide wafers. I'm not sure if you have enough capacity today, but can you give us some update on where you are in terms of that micro-LED qualification, and is it one year away, two year away, three years away? Thank you.
spk10: Sure, Charles. I believe the best estimate, I mean, we now have two customers. We are working with them and designing the product specification right now. We're sending sample quantities, hundreds of wafers to them. one of them for several months now and the other one just beginning. And we believe they're going to start to go through their production line and they will start to see where it needs to be to have improvement, where they think, you know, it's good. And they have given us some preliminary volume, but we're not holding them to it because I think We obviously need to work with them because if we were to take their commitment, then we have to sign up for the commitment to deliver. So at this point, it's still a little bit too early, but I would say it probably will start to ramp up in production mode in 2024, and the volume, could be in the – I would say the total addressable market in the first year at least, in my estimation, could be somewhere around $30 million.
spk02: Thanks. Maybe a question for Gary. The growth margin strength you have in this quarter, I think you did mention several factors, but it sounds like improved yields of crystal growth is the primary one. And I would assume this is something that will provide you a... I assume this is something that will provide you a sustainable margin benefits. And what's your thought about gross margin going forward? Are you sort of expecting maybe the high 30s is going to be the baseline now or you still want to hold on to your original guidance? Maybe it's like low to mid 30s.
spk03: No, I'm, I'm willing to, uh, to surrender the conservative position. I think, uh, higher thirties is, is a good general range for, um, you know, the rest of this year. So, um, you know, I do want to stress that Morris and I really take seriously that, um, you know, we want to, not just top to top, we want to walk the walk. So the most important thing for us is to run the business well. We've certainly made tremendous progress in Q2. We know we've been working on it all along, but it wasn't quite getting to the surface to be seen. So, yeah, I'm okay. I think it's... it's not going to be realistic for me to trust and have the people that run models stay right at 35%. But I want to add something else. It's correct, the yield improvement is very helpful and significant, but there are other things going on with that that are important. Another big contributor was the the utilization of the new process technology that we've developed where we can recycle the remnants of indium phosphide. So that made a big contribution. It contributed a little bit in Q1 and even a smaller amount in Q4 of last year, but they really made great progress in Q2 and it's really a big step. And then, you know, always Always, always, we look to product mix. And that's why we're so excited about any phosphides. There's a phenomenon going where that helps drive the gross margin. OK, next question.
spk04: One moment. Our next question comes from Matt Bryson with Wedbush. Your line is open.
spk07: Thank you. Congrats on a great quarter, and congrats particularly on that gross margin line. Just on the Germanian side of things, can you quantify at all what you're thinking about in terms of headwinds in calendar Q3?
spk03: Yeah. Go ahead, Morris.
spk10: Go ahead. I mean, you run the numbers.
spk03: Well, we came in at Q2 about, what, 3.9, right? And I think we'll be around maybe 2 million or 1.9 million in Q3. The thing I want you all to understand is that we're going to try and get this thing resolved now. We're not going to wait until December 31st. And the demand is still there. it's, it's been improving in the last couple of quarters, you know, it's all tied to satellites and we all know satellites are, are, you know, going, you know, continue to go up. So, um, so, but in case we don't get it resolved, uh, fast enough, then we've, we've taken our forecast down and we're giving you the conservative forecast. Um, but we're working this problem and, um, it's not, it's not laying on the back burner.
spk07: That makes sense. Shifting over to kind of capacity and inventory, Gary, can you just remind us what a more typical inventory mix might look like or more typically what you'd be carrying in terms of finished goods?
spk03: Well, it's pretty small. Over time, it could be, you know, 5 or 6%. In my memory, and maybe more so you can correct me, but I don't ever remember it being like 10%. So, you know, we tend to get that stuff shipped out. I'm just looking at my notes here. So, it usually stays flat. This quarter it went down and, you know, but it, To me, from a business standpoint, if we're going to have inventory increase, I want it to be in raw materials and WIP and not just be building FG or finished goods.
spk07: Got it. And then I guess my last question is simply so. It sounds like if you had more material and particularly more Indian phosphide, you could ship more material. I guess when we're thinking, and clearly you're spending money on CapEx. Can you talk a bit about how that spend equates to increased capacity both heading out of this year and then into next?
spk03: Morris, you want to take that or you want me to go first?
spk10: Yeah, sure. It's a continuous process that actually I, Yeah, I want to expand on this question a little bit. First of all, data in our script, we are doubling our capacity this year. But as we see, you know, on the second consumer product ramping up, we think potentially it's just going to be supply a little bit tight now. And we do have two other products in the qualification. for other consumer wearable product, which is in qualification. No, not in qualification, but will be in qualification second half of the year. And we believe that it could start to ramp up in the second quarter of next year. And yet we have other customer inquiry about product which a driverless car market you know a laser lidar kind of a specification for indian phosphide so so so it's that's a lot of moving parts if we put it all together we think uh this doubling of this year probably is not going to be good enough and we're going to continue But of course, we also are recognizing the fact that, you know, economy may be on sort of a downturn. But on the other hand, these are new product development. Are they going to be affected greatly by the recession, coming recession or not? I think that's the question. But for us, I think it's a little bit easier because you see in our production, the thing which have the most cost building to our production capacity expansion is facilities. In other words, to build our clean rooms, to build DIY waters, et cetera. And for us to just to add processing equipment, crystal growth equipment, which we may design and make most of them ourselves, the move is relatively easy, okay? So, and recently that we are expanding our inline phosphide production facility in a very solid way in Beijing, which is a very good thing, because as you recall, our Beijing facility used to be able to do inline phosphide, gallium oxide, and germanium wafer processing all together. And three years ago, we decided to move out gallium oxide with a processing. So that left out a big hole in the Beijing facility. And this big demand for indium phosphide just fits right into that hole. All we need to do is a little bit modification because, you know, clean room is clean room and water is water. So we can save ourselves quite a bit of money as well as you know, the pain to build a new cleaning room and spend the money. So I think AXC is very fortunate. But I don't know if I answered all the questions for you. So although, as I said, I think we're doubling our unit phosphate capacity this year, but we think we still need to do some planning for more expansion next year as well.
spk07: Excellent. I think you answered my question fully, Morris. Again, congrats on a great quarter. Thanks, man.
spk04: One moment for our next question. Our next question comes from Sam Peterman with Craig Hallam. Your line is open.
spk06: Hi, guys. Sam on for Richard here. Thanks for taking my questions. First one, it looks like you're your top five customers grew in dollar terms a good bit quarter over quarter. I'm curious, are those top five customers the same five customers as you had in the first quarter, or are they different?
spk10: Gary, do you know?
spk03: No, I don't know. I mean, I can find out, but I didn't study. I didn't do a quarter-to-quarter comparison.
spk10: Yeah, they are the usual suspects. Yeah, they don't change a whole lot.
spk03: Yeah. There is one that's been inching up that hasn't made the top five the last time I looked. But generally, it's pretty constant. You know, the ones that we name as 10% from time to time. We didn't have any 10% customers in all of last year. But prior to last year, frequently Osram and Landmark, the different quarters would be 10%. And they're always in the top echelon. But with this phenomenon that Morris described, and I call it phenomenon because there really is something going on out there for indium phosphide. And we're just at the right place at the right time. And of the three substrates that we produce, we're probably the best in producing indium phosphide wafers. It's very difficult process technology because it's grown under pressure. So we're better than our competitors for sure. So there really is a phenomenon, and I want to underline that word because there's something going on for indium phosphide, and we're in the right spot. So the reason I say that is some of the things that Morris described are going to generate business with new customers who are not in the top five, And, uh, a year from now that some of them will be.
spk06: Okay. Yeah, that's, that's great. Gary that, uh, that answers my question. Well, I understand that dynamic with Indian phosphide and that's kind of what I was asking after with, if any of those new customers that kind of made it yet. So, um, that's helpful. Um, sticking with Indian phosphide and that topic, I'm just running out the numbers here. Um, and I think last quarter. or maybe the past few quarters you talked about Indian phosphide growing 30% year-on-year for fiscal 22 as a whole. And just looking at where the numbers shake out, it seems like that number might end up being closer to 40% year-on-year growth in 2022. Is that how you guys are thinking about it, or is that a little too aggressive?
spk10: Well, next quarter is definitely a strong quarter. We're counting on it. But I don't know what the first quarter is going to be like. I think it's going to be a strong growth this year. Last year, I think our Indian phosphorus grew something like 44%, right, Gary?
spk03: I'm looking here. 41%? Oh, sorry. I tried to cheat 3%.
spk10: You're forgiven, sir.
spk03: Hang on a second, I can, I'm just going to quickly add something up. Yeah, you're correct. 30% is likely to be too conservative. I'm just doing a quick handheld calculator thing here. So it'll definitely be more than 35%, I think. And it could begin with a four again. Okay. I don't have the Q4 number on my worksheet right now. But I've got two actuals plus what we think is going to happen for Q3. Q3, indi-phosphate is going to grow double-digit over Q2.
spk06: Okay, that's great perspective. Thanks, Gary. And I think my last question, just on the large diameter substrates, that you seem like you had some success both with 6-inch indi-phosphate and 8-inch gallium arsenide. Curious if you could describe that just a little bit more and maybe talk about where you think you sit on both of those large-diameter substrates relative to your competitors.
spk10: Go ahead, Marshall. So let me understand. You want me to compare ourselves with our competitors on these two products?
spk06: Yeah, I'm just curious. It sounds like you had some advances in your large-diameter substrates in the quarter. Just curious to hear how you think that kind of changed your position relative to your competitors or where you think you sit with those products right now.
spk10: Well, these two products are in the development stage, so they are not selling like generating a lot of revenue yet, okay? So... So far as we know in the world, there is one, well, actually two competitors know how to make a 8-inch gallium arsenide substrate, but we don't know each other's capability and ability or quality of their wafers, and for that matter, cost. As far as indium phosphide is concerned, We know of one other competitor knows how to do it, and that's why six-inch wafer. The reason I'm proud to announce it and showing off is that we have done a lot of work just achieving it. But I think, you know, if I were to compare product in the marketplace, this is not the time to compare because, There's very few demand. We're only making the first product offering, and it will take quite some time to make this product more mature and fix the specification, et cetera. So, you know, I'll be very happy to talk about, let's say, three-inch and four-inch coaches. You know, if you want 10,000 wafers, we can talk about what specification you want and how do we differentiate our product specification or capability compared to my competitors. I think that's the way I would describe it. So on these newly developed products, it's difficult to say how do we compare to our competitors, mainly because, you know, it's, It's difficult to know what they are. I mean, we know where we are.
spk03: Yeah. I agree with you, Morris. I want to add one thing, though. I think that where we do stand out in terms of differentiation is that we're the only competitor who has new facilities, new equipment, upgraded facilities, upgraded equipment, add capacity quickly. So when we get into a competitive, you know, bake off, um, we think we'll do well on specs and technology, but I think we have an edge over our competitors because, uh, some of these applications are very high volume and the, the customer that's buying for this stuff, uh, is nervous about capability. And that's where I think we shine. So.
spk06: Got it. Appreciate the perspective. That's it for me.
spk04: One moment for our next question.
spk09: Our next question comes from Ethan. That would be Riley.
spk05: Hi there. Thanks for taking my question. Could you provide some additional color on your backlog and how you see that playing out directionally over the next few quarters, especially with the big capacity buildup?
spk03: Go ahead, Morris.
spk10: Well, we don't ever run the backlog number, do we? No. Because I don't know how to build that backlog number. I mean, maybe I can answer it this way. I think in the past few years, we always say it's difficult for us to come up with a solid forecast because our customer can always cancel their orders. and they don't give us a long-term forecast of how much they want. But in the last five, six quarters, we have been able to tell our investors our visibilities are much better. We are forecasting, let's say, on some product is a lot more clear. For instance, Indian Phosphine, you know, we've got customers lined up and they're telling us how much they want. In some cases, we don't have enough to fulfill their current short-term need. And so we have to push out the lead time to six to eight weeks. And, but as we increase our capacity, we should be able to shorten that lead time. But, you know, for instance, Germanians, I know the need is there. But obviously, we're not going to forecast that they're going to be my next month forecast because we haven't resolved the price and payment issue. I mean, germanium is a weird thing to talk about. But, you know, germanium carries a very large portion of germanium raw material as cost of our goods sold. And germanium raw material price has increased quite substantially, almost doubled. in the last year or so so as you can see if it if it constitutes 50 percent of my cost was sold and that that cost doubled that squeezes my margin tremendously so obviously we want to talk to our customers and see if they can help uh if they can then you know we need to to find some you know another way to make ourselves uh not a terrible organization. Uh, so I don't know if I have answered that question, but we've never done the bill, uh, big to bill ratio, uh, in our organization ever. Yeah.
spk03: Ethan, let me, let me, uh, let me, let me give it a little more color, but the nature of our business model is that, um, we go purchase order to purchase order. Um, the, the key is that the, the customers, um, We work off of forecasts and we build to forecast. And the reason we can do that instead of build to orders is that the orders are cyclical. Once you're in, it's very difficult for a customer to qualify a way for substrate supplier. Once they qualify you, they want to, they don't want to go get somebody else or get a third source. So we don't really monitor backlog in that way, but we monitor forecasts. So we have a forecast all the way through Q4 already. And they're usually pretty reliable because of the nature of the business model, where they need us and we need them, and it's hard to switch. OK, go ahead.
spk05: Yes, certainly. Thank you. That's very helpful. So do you think that you see like double ordering as an issue?
spk10: That is always a fear. Yes, absolutely. But we try to talk to each other. We try to talk to them and say, hey, you know, are you aware your customer is ordering the same thing? I mean, are you double ordering? We do make sure. We don't want to stuff the channel for sure. But so far, we don't see it.
spk03: Yeah, we're not seeing that now. And we're pretty close to the big customers, so again, they have a vested interest to not abuse the relationship because they need the product. Especially right now, it's tight out there right now from the supply side for For our competitors and for us, you know, we know that it's running tight. So there's not a lot of gamesmanship in terms of, you know, pretend stuff.
spk10: Yeah, this other thing that is our wafers are actually perishable. They have a guaranteed shelf life. If they order it and they sit on the shelf, then they cannot use it. They have to return the wafer for us to repolish. Sometimes we do it for free, but sometimes we have to charge for a restocking fee. So I don't think it makes any sense for somebody to overbuy it and stock it.
spk05: Thanks. That's really helpful. Congrats again on the quarter.
spk04: Thanks, Ethan. One moment for our next question. Our next question comes from with BWS Financial.
spk09: Your line is open.
spk08: Hi. Just a follow-up on that question. How much of a clarity and variability is there in the orders that you receive from customers? How would you describe the clarity you have within the current quarter and beyond the current quarter?
spk10: The current quarter, is this current quarter much clearer and better than the order that we see forecast for next quarter? I don't understand. I mean, order is order.
spk08: Well, I'm just trying to understand, you know, the last quarter you guided, you know, what was it 38 to 41 you end up closer to the lower end so I'm just trying to understand what the variability is and the ordering trends and your guidance that you provide and how you ended up at 39 instead of 41 and how that spills over into this quarter okay so that's a very good question actually COVID did play a role in the last
spk10: week or two in our last quarter, Q2. By the end of Q2, as you know, COVID started to ramp up a little bit in our neck of the woods. And so we are missing one or two of these orders that we cannot deliver to our customers. So originally we thought we're going to be almost another million and a half more than what we delivered. But, hey, it is what it is. I mean, as you said, it could be pushed over to next quarter, right? But, yeah, but if you want to look at it that way, I don't remember did we have push over last quarter or did we pull in any order last quarter or not? You know, we thought towards the end of Q2, it was a very strong quarter.
spk04: Okay.
spk03: Just to point out, The 39.5 isn't at the low end of the range. It's exactly at the midpoint of the range.
spk08: I understand. Gary, about the bad debt charge, your receivables, how are you managing that? Are you making adjustments in who you're giving credit terms to?
spk03: No, we haven't changed our policy, but we're pretty tight, you know, For existing customers, there's no issue. But every once in a while, an existing customer gets in trouble. I'm not saying every year, but, you know, I don't think we've had a big write-off like this maybe in a couple years. So we do, if it's a new customer, then we do the credit checks. They have to fill out a credit application and, you know, we use down at Bradstreet or similar services like that internationally. I think we're pretty good at that. For the small accounts like universities and stuff, there's not much credit risk there. We have a pretty diligent process and we haven't needed to change it. It's working.
spk08: My last question was that these two tier one customers that you're ramping or actually several, sorry, the quote is several. Are any of them under the 10% line or the 5% line that could actually become a big deal for you as you start ramping them? What's the timeline to seeing optimal revenue from these Tier 1 ramps?
spk10: Hmm. I haven't done that conclusion, but, you know, it really depends about when do they start ramp. And, you know, some of these customers have a cross-line effect. You know, one customer takes the waiver and they build the API and they give it to the other one. And so I'm not so sure I can predict who is going to be the number three and it's going to ramp up to number two or But so far, I don't see any very dramatic change. But all I know is Indian phosphorus will grow very nicely next quarter.
spk08: Yes.
spk03: Okay. Thank you. Thanks, Ahmed.
spk09: And I'm not showing any further questions. I'd like to turn the call back over to Dr. Morris-Young for any closing remarks.
spk10: Okay. Thank you for participating in our conference call. This quarter we will be presenting at the Virtual BWS Financial Conference on August 23rd, and the third annual Needham Virtual Semicap Conference on August 24th, and the Jefferies 2022 Semiconductor Conference in Chicago on August 30th. We look forward to seeing many of you there, as always. Please feel free to contact me, Gary Fisher, or Leslie Green directly if you would like to set up a call with us. We look forward to speaking with you in the near future.
spk09: Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful presentation.
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