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spk05: Good afternoon, everyone, and welcome to AXD's first quarter 2024 earnings call. Leading the call today is Dr. Maurice Young, Chief Executive Officer, and Garrett Fisher, Chief Financial Officer. My name is John, and I will be your coordinator for today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, Please press star 1 again. Thank you. I would now like to turn the call over to Ms. Leslie Green, Head of Investor Relations for AXP.
spk01: Thank you, John, and good afternoon, everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements. regarding, among other things, the future financial performance of the company, market conditions and trends, including expected growth in the markets we serve, emerging applications using chips or devices fabricated on our substrates, our product mix, our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, to utilize our manufacturing capacity, the growing environmental health and safety and chemical industry regulations in China, as well as global economic and political conditions, including trade tariffs and restrictions. 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 results or events to differ materially. These uncertainties and risks include but are not limited to overall conditions in the markets in which the company competes, global financial conditions and uncertainties, COVID-19 and other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations in China, the financial performance of our partially owned supply chain companies, and the impact of delays by our customers on the timing of sales and their products. In addition to these factors that may be discussed on this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at AXT.com through May 2, 2025. Also, before we begin, I want to note that shortly following the close of market today, we issued a press release reporting financial results for the first quarter of 2024. This information is available on the investor relations portion of our website at AXT.com. I would now like to turn the call over to Gary Fisher for a review of our first quarter 2024 results. Gary?
spk04: Thank you, Leslie, and good afternoon to everyone. Revenue for the first quarter of 2024 was $22.7 million. That's up from $20.4 million in the fourth quarter of 2023 and up from $19.4 million in the first quarter of 2023. To break down our Q1 2024 revenue for you by product category, indium phosphide increased sequentially to $8.1 million. That's reflecting strong growth from data center applications, including AI, and continued improvement in passive optical networks. Gallium arsenide also grew to 7.5 million, with broad-based improvement across a number of applications. Germanium substrates were 1.4 million, up from the prior quarter, with renewed strength in demand for satellite solar cells. Finally, as expected, revenue from our consolidated raw material joint venture companies in Q1 was 5.8 million, down from Q4 as we consumed a greater portion of their output for our growing substrate demand. In the first quarter of 2024, Revenue from Asia Pacific was 79%, Europe was 16%, and North America was 5%. The top five customers generated approximately 33% of total revenue, and one customer was over the 10% level. Non-GAAP gross margin in the first quarter was 27.3%, compared with 23.2% in Q4, and 26.9% in Q1 of 2023. For those who prefer to track results on a GAAP basis, Gross margin in the first quarter was 26.9%, compared with 22.6% in Q4 and 26.3% in Q1. Beyond the near term, we remain confident that we can get back to the mid 30% range as the environment strengthens through higher overall volume, favorable product mix, and the benefits of our recycling programs, along with continued efficiency improvements throughout our business. Moving to operating expense, total non-GAAP operating expense in Q1 was 8.7 million, compared with $7.5 million in Q4 of 2023 and $8.7 million in Q1 of 2023. On a GAAP basis, total operating expense in Q1 was $9.4 million compared with $8.2 million in Q4 and down from $9.5 million in Q1 of 2023. As you've seen from our quarterly run rate in 2023, we had put in a number of constraints in place for OPEX to align with market conditions. As things are beginning to trend up, we're loosening up some of these constraints, which has brought OpEx up from the previous run rates. We do expect to hold it at approximately this level throughout the rest of this year. Our non-GAAP operating loss for the first quarter of 2024 was 2.5 million, compared with a non-GAAP operating loss in Q4 2023 of 2.7 million, and a non-GAAP operating loss of 3.5 million in Q1 of 2023. For reference, our GAAP operating line for the first quarter of 2024 was a loss of $3.3 million compared with an operating loss of $3.6 million in Q4 and an operating loss of $4.4 million in Q1. Non-operating other income and expense and other items below the operating line for the first quarter in 2024 was a net gain of $1.3 million. The details can be seen in the P&L included in our press release today. For Q1 2024, we had a non-GAAP net loss of $1.3 million, or $0.03 per share, compared with non-GAAP net loss of $2.8 million, or $0.07 per share in the fourth quarter, and non-GAAP net loss in Q1 of 2022 was $2.4 million, or $0.06 per share. On a GAAP basis, net loss in Q1 was $2.1 million, or $0.05 per share. By comparison, net loss was $3.6 million, or $0.09 per share in the fourth quarter. and gap net loss in Q1 of 2023 was 3.3 million or 8 cents per share. The weighted average basic shares outstanding in Q1 of 2024 was 43.0 million shares. Cash and cash equivalents and investments were 41.3 million as of March 31st. By comparison, at December 31, it was 52.3. Cash is down for two main reasons. First, our revenue billings tended to be back-end loaded in the first quarter, as most of China shuts down for Chinese New Year's. As a result, in Q1, accounts receivable increased by $6.1 million. This is simply a timing issue, as most of that cash can be collected in Q2. The second reason for the decline in cash in Q1 was CapEx spending of $5.7 million. This is not new commitments to facilities. This was work done in 2023 for which payment was due in Q1. As we look to the balance of the year, we expect CapEx to be in the $2 to $3 million range per quarter, most of which goes towards facilities work, which was done in 2023. One more note on cash. From time to time, we have had outside parties approach us with an interest to invest in our supply chain companies. Currently, interest in China is growing, perhaps related to the change in the economic circumstances in China. We believe that there is real value in these assets to be unlocked and may consider monetizing a portion of them this year. As a reminder, we now have over 10 companies in our supply chain where we have partial ownership shared with industry partners. Depreciation and amortization in the first quarter was $2.2 million. Total stock comp was $800K. Net inventory was down $600,000 in the first quarter. This includes inventory added through our recycling program. 33% of the inventory is raw materials and WIP was 63%. Finished goods makes up approximately 4%. The increase in WIP is primarily the result of increased crystal growth in anticipation of higher demand in Q2. With improving demand, we hope to bring our total inventory down by approximately $10 million over the year. Okay, this concludes our discussion of our quarterly financial results. Turning to our plan to list our subsidiary, Tongmei in China on the star market in Shanghai, we now believe that we have had some significant developments on the issue that the CSRC previously raised, and we believe the likely next step is that the CSRC can resume consideration of our application. As we've said, this is a lengthy process, but we continue to believe that Tong Mei is an excellent candidate for listing. With that, I'll now turn the call over to Dr. Morris-Young for a review of our business and markets.
spk00: Thank you, Gary.
spk06: We believe our business is on a firm path to recovery, as evidenced by the continued growth in our business and solid execution, which allowed us to exceed our Q1 revenue and profitability. In the first quarter, we achieved 11% sequential growth in our revenues and 29% sequential improvement in our non-GAAP net income. While certain parts of the demand environment remain somewhat soft, all three of our substrate product lines show the improvement, including a 48% growth in the phosphide revenue from Q4. Looking individually at these product lines, any phosphide once again became our biggest selling material in Q1. Sales was driven a continued recovery in the palm market, and a meaningful increase in demand related to AI. We review AI as an exciting catalyst for emitting phosphide in the years to come, as AI requires high-speed lasers and detectors for rapid data transfer with increased bandwidth, low attenuation, and low distortion. AI applications are primarily using gallium oxide pixels, which will require a relatively small amount of substrate material. But as the industry moves to 800 gig and then 1.6 terabyte speed, we expect that there will be a necessary transition to indium phosphide. We're already seeing development work happening today with next generation silicon photonics devices. electro-absorption modulated lasers, or EMLs, for high-speed data center transceivers. Revenue from these applications contributed to our strong indium phosphate growth in Q1 and will help drive our expected growth in 2024. Our gallium arsenide revenue grew 24% sequentially in Q1. reflecting increased demand across a broad base of applications, including power amplifiers, HPT applications for wireless or switches, high-power lasers, and LEDs. We believe much of the excess inventory in the supply chain has been depleted, and we are benefiting from a desire among our customers to diversify their supply base as the market recovers. For example, Today, our share of the HPT market is relatively small, but we believe we have a great opportunity to increase our market share over time and are pleased with early customer attraction. In addition, our 8-inch gallium oxide development efforts have led to groundbreaking advancements in both of our defect densities and yields. We believe this innovation can be applied to our six-inch Galion State products, allowing us to further enhance our competitiveness across all of our market research. In germanium substrate, demand for satellite solar cells were down substantially throughout 2023. It's now beginning to recover. Sales increased 25% in Q1 over the prior quarter, with renewed strength in Europe and Asia. And finally, coming off three quarters of strong sales in our raw material business, as well as contribution from our recycling efforts, sales from our raw material business declined as we expected in Q1. This decline was primarily the result of our consuming a greater portion of the output from our consolidated joint venture as our substrate business has strengthened. In total, our portfolio of joint venture companies continues to be a strategic value to our business, providing money of the critical material we use to make our products and allowing us to benefit from the cost and efficiency advantages. Now, in closing, we're optimistic about the coming year. and the growth and expansion of our business. We are seeing tangible signs of recovery across all of our product lines with new catalysts such as AI providing strong incremental opportunity. We've worked hard over the last two years to pave the way for exciting future by providing world-class products for a highly dynamic technology landscape. elevating our own business practices to meet the requirements of Tier 1 customers, delivering breakthrough innovations in the development of large-diameter gallium arsenide and immunophosphate substrate, and executing our recycling program that both advances our ESG commitments and improves our cost structure. We remain steadfast, focused on business efficiency accelerating our return to profitability. With that, I will turn the call back to Gary for our second quarter guidance. Gary?
spk04: Thank you, Morris. In keeping with our comments today, we expect Q2 revenue to be between $25.5 million and $27.5 million. We expect our non-GAAP net loss will be in the range of $0.03 to $0.05, and GAAP net loss will be in the range of $0.05 to $0.07. Share count will be approximately 43.0 million shares. Okay, well, this concludes our prepared comments. Morris and I would be glad to answer your questions now. John, can you take it back?
spk05: Thank you. At this time, if you would like to ask a question, 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. We'll pause for just a moment to compile the Q&A roster. The first question comes from the line of Charles Shi from Needham. Please go ahead.
spk08: Hi, Maurice, Gary. Congrats on the good Q1 results and the very upbeat Q2 guidance. I want to start with the AI-related question. The indium phosphide, I think last time when we speak, When we spoke about this, you were talking about semi-insulating Indian phosphide wafers potentially being used for some of the high-speed detectors application. But in your prepared remarks, it sounds like you are getting a little bit more upbeat about the high-speed laser type of applications for 800 gig, 1.6 terapers, those kind of applications. for the next generation, EMR, et cetera. So can you provide us a little bit update, your engagement on these AI applications so far? When do you see the laser application will start to contribute some meaningful revenues for the EDM Fossify business? Thanks.
spk06: Charles, first of all, The order we received, one customer specifically told us is for AI, and that was from semi-isolating in the phosphide. And the fact that we're guessing if it was for detectors, it was a guess. Because usually, in the phosphide, a good semi-isolating are either for electronic applications or for high-speed detectors. However, recently in the industry, we also heard some of the EMLs require some insulating substrates. So whether it's for lasers or for detectors, we all know you know, from what we are making, the customer demand for our product is sort of a slight change from silicon-doped, I mean, sulfur-doped semiconducting substrates, usually good for lasers, and now it's for semi-insulating iron-doped indium phosphide. But whether it's for detectors or lasers, it's a guesstimate. We don't really know. I'm sorry. But we do hear from our customer, it's for a pretty large AI customer.
spk08: Got it. Thanks. Well, Maurice, thanks for the color you provide. I guess, yeah, it's something we will continue to chat. And obviously, we don't want to take more, but there's something about your customer you don't want to share. So maybe a second question, maybe for Gary. I think in your prepared remarks, you talked a little bit more about the star listing. It sounds like you are making some progress on that front. Can you kind of provide a little bit more color in terms of what kind of a progress exactly, and give us a little bit better sense about why you think it's moving forward a little bit more this time.
spk06: Thanks. So, you know, the process of communication with the Shanghai Stock Exchange, CSRC, is such that once we send in our applications, They will continue to ask questions. They want us to clarify a few things. And there are things which that they express they have concerns with, and we provide them with answers. And we think we made some good progress on the questions they have. And so now we think we are ready to go through the next step. which is go through the review process again. And they will then look at our whole application and either continue to ask questions or approve.
spk08: All right. Thanks for the update. OK. That's all from me for now. Thanks so much. And congrats again on the results and guide.
spk05: The next question comes from the line of Richard Shannon from Craig Helden. Please go ahead.
spk10: Well, hi, guys. Thanks for taking my question as well. Congratulations on a really nice guide here. Great to see. To that point here on the guidance here, I'm wondering if you could elaborate on a couple items here. First of all, just trying to understand the Relative growth dynamics of each of your four revenue buckets here, I would assume you need classifieds. Probably your best growth driver, but wondering if you can kind of rank those and whether you expect them all to be growing sequentially. And then second of all, trying to get a sense of what's implied here for gross margins, given that you said that OPEX could generally be the same in the second quarter as a first. I'm kind of getting a number that's slightly higher than the first quarter, maybe as high as 30 percent. But just wondering if I'm doing the right math on that one.
spk06: Yeah, so let me first try on the business conditions. Actually, the strongest growth we think next quarter is going to come from gallium arsenide and also germanium. Germanium seems to be very strong, and raw material is very strong as well. Indium phosphide actually at this point of the timing that we are projecting flat. And one other thing which is interesting about this business environment right now is that wherever the customer wants something, the lead time is extremely short. I mean, we usually ask the customer to give us at least four weeks lead time because we need to process the wafers And sometimes we even have to grow the crystal. So the lead time usually is long. We don't have a standard product for offering. But nowadays, I mean, customers just want two weeks lead time, which is great. However, it sort of prevents us from having, you know, better visibility. But we can see that Gallien Einstein is extremely busy. In the first five right now, as we see now, it's a flat quarter. But things can change because we still got almost two months to go. You know, giving two weeks lead time, we have six weeks to take orders and deliver. And down the margin, Gary?
spk04: Maybe we can do this on a follow-up call, Richard, because it gets kind of complicated and I didn't understand exactly what your model is telling you, but we can work on it with you.
spk10: Okay. Fair enough. Morris, I did want to follow up on your comment regarding Gallia Marseille being your highest growth driver here. To what degree is this maybe some inventory fill in some product areas that were driven down so hard in the last year and a half? And then I think you also mentioned some pickup in the the wireless slash HPT market. So I'm wondering, you know, to what degree that's contributing in this quarter?
spk06: Well, first of all, I would say, you know, Jialing Acai was the first product coming down in terms of revenue, right? I mean, I remember it was the second quarter of 2022, Jialing Acai started to come down. So, you know, it takes usually six weeks before all the inventory got depleted, so now it's coming back. Because Indian Phosphorite takes, I think, three longer weeks before it starts to come down. Three quarters. Yeah, three quarters. So I expect Indian Phosphorite perhaps not to recover as quickly as gallium oxide. Although the pickup of Indian Phosphorite last quarter, I attribute that to the new business on AI. And because I see Pong business is doing OK, but not really robust. The telecom business is not great. And data center, from what I see, they are still inventory out there. So I think the AI part of the data center, I think, is pulling the demand for us and increase our revenue by, what, 40-some-odd percent. Forty-eight, yeah. Forty-eight percent from Q4 to Q1.
spk09: So, yes.
spk10: I didn't mean to interrupt, Morris. Please continue.
spk06: Oh, no. Actually, I forgot what my trend. So, what was your other part of the question? Sorry about that.
spk10: Yeah, yeah. Yeah, I think so. But there is an interesting follow-up to those comments here. which is like how much of your India phosphide business is AI today? It seems like given these kinds of growth rates, it's gotta be a pretty substantial part now. Can you quantify that in any way?
spk06: Well, I think last quarter was significant. I would say could be as much as 20%. Although, you know, it's a little bit difficult for us to really nail it because some customers will tell us and some customers don't, okay? But as I said, you know, Indian phosphide business is very interesting. I want to encourage analysts to help us to do that analysis. There are two parts of Indian phosphide. One is semi-isolating and the other is semi-conducting. The semi-insulating is usually made for detectors and electronic applications, and the sulfur-doped semiconducting are usually low EBD and good for lasers, and they are the dominant demand for indium phosphide for many, many years. It's almost like 8 to 1 in favor of semiconducting wafers, okay? But the last two or three quarters, the trend is reversed. There's so much more demand on semi-insulating iron-doped wafers. So it's as if the laser just didn't grow, or maybe they still got too much inventory. And this new demand of iron-doped making either some kind of laser or more likely high-speed detector is growing very strong. So what I'm hoping for is that, you know, the sulfur dough material will recover as inventory get consumed and will come back again. But this iron dough actually is a new application will continue its own trajectory of growth.
spk10: Okay, very interesting dynamics there. I'm going to ponder that while I ask a couple other questions here. I guess just a quick one here. You had a 10% customer in the quarter. Can you identify that, or at least the sector, and whether they've been a 10% customer in the past?
spk04: It was an Epi House, Richard.
spk09: It's actually related to the AI customer, right?
spk04: So, yeah. Yeah. Okay. Yeah. It's... a historically long-term customer for us that does Epi. And, um, we, we don't know for sure where that was going, but, well, actually we, we do know, but we can't say, so I'm not going to lie to you.
spk00: Okay.
spk10: All right. Fine. Fair enough, Gary. Um, maybe just a couple of last questions here. Um, and I'll ask both of you to put on your, uh, your long-term lenses here, or I guess we'll call it medium-term lens here, but just kind of, why don't you conjecture on the opportunity for getting back to break-even level by the end of this year or early next year, and maybe just as a reminder what that model looks like in terms of revenues and gross margins.
spk04: Well, we certainly think that it's a reasonable target and goal to do that, you know, maybe this year. So we're not giving up. We're not giving up on it.
spk06: I would say it's this year.
spk04: Yeah. So, uh, yeah. Uh, it's probably somewhere between 28 and $30 million a quarter. And we would need to get the gross margins to go up and maybe close to 28% and keep the OPEX somewhere around, you know, 9.3, 9.4. Yeah. That's gap knob X, by the way, so. Yeah.
spk06: And I think we do need some help from indium phosphide. I mean, right now, indium phosphide is only 50% of what we used to do at the peak.
spk04: Yeah. Yeah, I mean, that's probably the wild card. And it's, I would say that the indium phosphide surge, especially since it's centered in the artificial intelligence area, It's happening sooner than we expected. We believed early on it was going to happen, but it's happening sooner. So the question is, what's going to happen in the next two or three quarters? But it's a tremendous opportunity, and there's billions and billions of dollars that are being invested in the hardware side of AI and the software side. And of course, we play in the hardware side. Right. So it's pretty amazing what's on the horizon. Okay.
spk10: One last question. I'll jump out of line here, guys. The short report that came out on your stock early last month, I think we've established pretty well, it was a bunch of malarkey for the most part, but it does bring up an interesting topic that I think it would be very interesting for you to address and I guess to risk that a lot of investors bring up with me, and that is related to the star listing and the investment by private equity investors. And if there's any, you know, rejection of the application for whatever reason here, what's the risk and how do you get around the risk of having to repay that money and then find other ways to finance the company?
spk09: Well,
spk04: as long as we're in the process, they have no right for redemption. And equally important, they don't want to be redeemed. I mean, the last thing they want is their money back. And so they're very willing to be patient and work with us. Everyone's disappointed that it's taken longer than we all expected.
spk06: So let me try to help out a little bit here, Gary. Look, I think, I mean, hard assets and doing manufacturing semiconductor or materials job industry is hot in demand in China. And that is showing up in the fact that we have you know, other investors interested in acquiring a minority share of our other joint ventures. So although, you know, the IPO takes longer than we thought it is, but I think, you know, our assets in China are highly valuable. You know, I think the psychology or the thinking from a Chinese investor point of view, you know, their money no longer can go into real estate to invest. And doing materials and doing manufacturing and the real fundamental business manufacturing is highly desirable. So if we don't, for whatever reason, we don't go IPO, I would say one possibility is inviting other investors investing into our joint ventures. And we have several of them which are highly valuable. I mean, of course, the most valuable is Tomei Manufacturing Substrates, where we have the world-ranking leadership in those fields, although they are small, but nevertheless, it's highly desirable. But because we're going public in China, so we cannot separate them and then invite investors into the main body of the investment, Tongmei. But for our joint ventures, we can certainly, you know, get other investors investing in those joint ventures.
spk04: Yeah, let me give you, I mean, we have talked about this internally. So, you know, we're not worried about it. But as I said, the PE company's want us to go public. They don't want to pull out. So these private equity investors are all large and premier institutions, each with an investment of just under $5 million, which represents a relatively small part of their respective portfolios. And so far, since they have to be patient no matter what, they're being patient. And another thing that's probably interesting to note is that they don't have any recourse. Their investment is not collateralized. So that's why they need us to succeed. And we made some significant progress in some developments that we really can't give any details. Some very good steps were taken in the recent quarter, which continues to sustain our hope regarding the IPO.
spk10: Well, great. I appreciate all that detail. I think a lot of investors wanted to hear that, and I think that's a great response. So I appreciate the time, guys. That's all for me.
spk05: The next question comes from the line of Tim Savage from Northland Securities. Please go ahead.
spk02: Hi.
spk11: Good afternoon, and congrats on both the results and the outlook, and especially the growth in indium phosphide. And I think there was a mention of kind of peak levels that you had achieved in indium phosphide. I think that's getting up toward 20 million a quarter, maybe 18. But at that point, you also had some additional consumer business. And I guess My question is, as you look at it now, the market opportunity you're seeing, do you think this AI kind of optical data center opportunity can move you back toward peak indium phosphide levels by itself?
spk02: And I have a follow-up.
spk09: That's a good question.
spk06: I, you know, the customer who we use our product for consumer product, At the time, I mean, they still have one product using it for consumer product, by the way. They didn't go all completely. And we are, I believe, a big dominant supplier for that product. And we are also in negotiation and in qualification for yet another product, although I don't know what's the launch time and whatnot. And the other thing is that talking to their engineers, At one time, they told us they have 11 projects centered around using indium phosphide in their consumer product devices. So I don't think I'm giving that up. But, you know, indium phosphide just has so many different characteristics, such as far infrared using as a detector, et cetera, et cetera. So it's unique in its place to be used as a technology device. Whereas AI application, I think it's an extension of what people use it for data center. If you want high bandwidth, high speed data transfer, you know, low attenuation, I mean, that's the perfect choice. And if you have AI, that means you got to access data much in a hundred times, a thousand times, even 10,000 times, and you have so many more data center, you want to exchange information. What's the best way to transfer that information? It's no brainer. It has to be some kind of optical device to transfer that data. So I think it's difficult for me to say when it's going to be so strong and so how big, but whether it's going to rival to the consumer product. But I think both of them do need the indium phosphide.
spk04: Yeah, when Moore says optical, that means it's got to have the indium phosphide in it. Because the wavelengths can be read by indium phosphide. But we believe we will get back to those levels, Tim. As Morse says, we're not sure on the timing. And it very well could get back to that level sooner than we thought because of AI. Six months ago, we didn't have this kind of expectation. I don't know for the people listening, but I think last week there was a really amazing article in the New York Times about the amount of money invested in AI in Q1 of this year. And it was, I think, $32 billion. And that's not just software. That's hardware, too. So it's data center stuff. So, you know, I mean, you know, we've all been around a long time. And so we've seen stuff. But I was very amazed by that. And I sent it to Morris and Leslie. I sent it to our board of directors. Um, cause, cause that's gonna, you know, we know we're at the bottom of the food chain or the, you know, the end of the train, but that's going to benefit, uh, any phosphide substrates. And, um, so the, the, the dream or the hope is that, uh, the consumer comes back and it competes against AI for who's going to be the biggest, you know, uh, contributor to indium phosphide revenue. And, you know, we don't need a miracle for that to happen. I think it's a very reasonable goal.
spk02: Got it.
spk11: And I want to ask a little bit more about the improvement or the pretty dramatic growth that you saw in Q1 in indium phosphide. And you've already talked about, you know, you have a unique perspective kind of in the ecosystem. And maybe I'm going to ask you to guess a little bit more here. But I guess my question is around the breadth and how we can characterize that strength. Obviously, you can sell to a lot of different folks in this arena, whether it's epi wafer suppliers or vertically integrated laser manufacturers or module manufacturers. And I think you've done business with all of those types of guys. And so whether it's looking at the type of customers or looking at wafer sizes, You know, what does that tell you about the breadth of demand that you see? Is there, you know, historically you've had a couple of major customers on the data center side, or, you know, can you see if the extent new customers are showing up, or are there a couple of customers really moving the needle for you when you see this extraordinary growth in Q1?
spk06: The Q1 customer actually is new. I mean, they are a customer of other products, but for that application for AI was new. And they're telling us they're a customer, but I can't repeat it. It's a big, big customer.
spk04: Well, there's a, you know, we know the players, right? There's Meta, there's Google, there's Microsoft. All of those data centers... are going to, you know, where Indian phosphide is going to have a play is rack to rack, rack to the aggregation point within the data center, and then the aggregation point to a different data center. All of that needs high speed. You know, if you think of the data that's computed in AI, then you've got to transfer it and move it around in order to get an end result. And so within the rack, we don't think they'll go to AI, to Indian phosphide. But rack-to-rack and beyond, that's where any phosphide has a definite application.
spk06: Of course, Gary, you're not saying anything different. Why is it AI? Data centers are already doing this.
spk00: Yeah, okay.
spk06: But it's just that data center has to get so busy talking to each other and exchanging information 1,000 times or 10,000 times. That requires higher speed, higher weight. That is where you need phosphide coming.
spk04: The other thing that one of our marketing guys taught me is that some of the large data centers are now having a shortage of power, electricity to run the thing. So they're downsizing in the future architecture to smaller, more data centers that are smaller but are spread around. And that's going to benefit us. Got it.
spk11: Well, okay. It sounds like there was sort of a big customer helping to drive that growth. in Q1 and sort of the rest of the color I was looking for, I know there's only so much you can say, but clearly you're at the substrate level. You've got an EpiWafer supplier who may be selling into a module manufacturer. I imagine that you're maybe not all the way up to the cloud provider level, but you have customer touchpoints all along that ecosystem. And I was just looking for, as you see the pieces move around, you know, what you're seeing in terms of opportunity at any of those levels, right, whether it's going directly to a chip supplier. Obviously, you used to do a lot of business with Intel, and their module assets are over at Jabil now. You know, are you seeing sort of different customers, you know, kind of show up at different parts of the food chain, I guess, in driving this AI growth?
spk06: Not yet. In fact, I think if I, I mean, we have some China customer, which is showing up, taking a lot of wafer as well, but they're not telling us anything. I mean, I think the customer base seems to be shifting somewhat, you know, before this thing all happened. You know, it's a consumer product that sort of went away. And then there was a data center, you know, that you were talking about, which was taking a lot away from it. They are not prime customer at the table right now. There is a new Chinese customer coming in, but we don't know where they're coming from. And this new customer is taking this semi-insulated anti-phosphate. And we know they're telling us it's going into AI. I wish I could see the second one or third one coming. That would be great.
spk04: Okay, thanks. We think we understand the architectural needs well enough that there's little doubt in our mind. There's no doubt, frankly, that we're going to end up benefiting and getting into multiple data centers along the big names that I just ran off. Got it.
spk02: Thanks very much.
spk05: Thanks, Tim. Next question. The next question comes from the line of Dave Kang from B Reilly Securities. Please go ahead.
spk07: Good afternoon. My first question is actually on Gallimard tonight. So you're expecting that to be the main driver from first quarter to second quarter. Just wondering if there are any applications, or customers driving this strong growth?
spk06: LED is strong for automobile. Lasers is strong, but not as high as at the peak. I would say it's about 50% of the peak level. Automobile is probably 70%, 80% of the peak. And HPT is a new, I believe, opportunity for us. And we're trying very hard to get ourselves back into it. And if we are successful, we can expect more revenue growth for HPT as well. And the China market seems to be fairly strong in gallium oxide.
spk07: Got it. And just wondering how sustainable, you know, your expectation is on Galdemars. Are we talking, you know, just a few quarters or kind of a multi-year cycle?
spk06: Oh, I cannot guarantee multi-year. I would say we have probably good visibility at least to Q3. I mean, demand is strong. But you know that I do worry about the world economy. I mean, I think, but then, you know, people are saying there's a recession, but it never comes, right?
spk07: Yeah.
spk04: I mean, I'll just comment, David. Yeah. Most of our cycles are more than one quarter. So, you know, gallium arsenide is, you know, more robust than we expected it to be. But we're not thinking like, oh, then it's going to drop back down in July. Got it.
spk07: And then just on India Fossify for AI applications, is there any data on market share, how big that is, and the market share between you versus two competitors?
spk09: No, we don't know.
spk04: There is some public projections on markets that Coherent shared publicly in one of their presentations. If you haven't seen that, you might want to take a look because there's some stuff in there that might give you some information.
spk07: But just on the market share, I mean, you think, should we expect maybe one-third each for you and your competitors or somebody has a dominant market share? Just for on the AI. Any color on that?
spk06: Yeah, the customer we have, I think they are giving us order order. But I don't know whether our competitor is taking order from a different customer. In other words, the order we got, we know we got 100% of that order from that customer. And they told us it's for AI. But I don't know whether our competitors are serving yet on the channel.
spk02: Got it. All right. Thank you.
spk09: Thanks, Dave.
spk05: The next question comes from the line of Matt Bryson from Redbush Securities. Please go ahead.
spk03: Hey, thanks for taking my questions. On the HPT side of things, If you're successful in getting traction, any idea of what the size of that opportunity might be?
spk09: Say it again?
spk06: I didn't quite hear.
spk04: The expected value? How big is the HPT market?
spk03: What could that look like on a quarterly or annual revenue run rate, assuming you're successful in getting traction in that market?
spk09: Okay. I would say close to $20 million a year.
spk03: Got it. So that's a nice big round number. Similarly, a slightly different question. I think a lot of the focus on Indium Phosphide has been around the AI opportunity, but do you have any sense of how close to the point where inventory is normalized we are? Like is that two, three quarters out? Is it a year out? And then any idea in terms of how much revenue you think you're losing because there's inventory out there right now? Or what might your revenue look like if that inventory didn't exist? Any thoughts?
spk06: Yeah, I think right now it's very difficult for me to estimate. Because I don't even know whether they are in full production or not, although the amount of substrate they're buying doesn't look like it's pilot. I think they're making something. But we haven't seen, I mean, the first thing I'd like to see is, I mean, the last order was for three months. If they give us another six months order, if they're increasing, then I can estimate.
spk03: and better yet is if there's a second customer sort of coming in wants the same thing then that's even better at this point and sort of interrupt morse i'm actually i'm asking on kind of that traditional uh indian phosphide business like where you know you have inventory um kicking around in the supply chain if you have any idea so not so much the ai side but um that traditional business if you have any idea like how what the impact on your revenue is is today, how much it's holding it off. And then, you know, any thoughts on when that inventory might get worked out? You might resume normal, normal revenue run rate on that older business.
spk06: I think that's because the business is right now at the just beginning it's hard for me to tell but I mean I think we have the capacity we can definitely you know make three or five times what they are ordering now or even ten times if giving us a little bit time to increase our facility so So I think the volume is no problem, and I think our product quality really fits well with what they wanted. So at this point, I don't know whether I'm answering your question or not. I think I'm excited about it, and we're trying to get as much information as we can, and we know the customer and customer, which is large. I don't think they're fooling around, so hopefully, be coming back with increased order or somebody else is going to come in following their lead. So I think that's the best I can.
spk04: Yeah, I've had some of these conversations with our marketing guys, and I think that they expect that we're going to continue to work through the inventory into the second half of this year. But that's not AI. No, no, it's not AI. It's just in general.
spk06: Data center. Data center, yeah. Yeah.
spk04: Yeah. So that's what I was referring to, so. Yeah.
spk03: Okay.
spk04: So there's still some out there. There's still some out there, but, yeah.
spk03: But it getting cleared out and then restoring normal levels, that's probably an early 2025 type phenomenon, as you're thinking right now.
spk04: Yeah, maybe Q4 this year, but definitely in 2025, so. It's going to happen, so we can't wait. We're so excited about it.
spk03: I guess last one from me, Gary. I completely understand that customers don't want to hold inventory, and so they're putting in rush orders, which makes it hard on your end to clear out your inventory because you don't want to turn down business. But I guess given that environment, um how confident are you you can take down inventory by 10 million dollars or what are the dynamics involved in that um where you're not uh effectively having to turn down business because you you can't meet those rush orders well uh you know i wanted to take it down 10 million last year in in a you know it came down last year but not as much as i as our target uh
spk04: However, I have a couple of reasons that I think it's a realistic target. One is if you look back at our historical inventory levels compared to our revenue run rate levels, the inventory was in the $60 million level range, $65 million level range. So the difference is we have more inventory in the consolidated joint ventures now. because they have different added product lines and things like that. And our recycling program, which is good, it helps us on gross margin and it helps us with ESG, but you're converting what I would call scraps of materials or slurry, which has a little or no book value, and then you bring it in at standard cost. So your inventory goes up. it's counterintuitive. But even so, I'm absolutely convinced we can take money out of the inventory. Is it going to be $10 million? That's my target. And if the revenue grows for us, then it makes it a little easier to take the inventory down. So yeah, I I don't need a miracle to have that happen. I just need some good, you know, business decisions. And it was easier, frankly, when I could go to China because I would hold inventory review meetings. And I haven't been there for a while because of the COVID thing, but I'm going to go this year. So, you know, we're getting back in that cycle. But it's a good question. So thanks.
spk03: Awesome. Thanks. Thanks for taking my question.
spk05: As there are no further questions at the queue this time, this concludes our Q&A session. I would like to turn the call over back to Dr. Maurice Yeung for closing remarks.
spk06: Thank you for participating in our conference call. This is a quarter we will participate in the Northland Security Growth Conference on June 25th. I hope to see you there. As always, please feel free to contact me, Gary Fisher, or Leslie Green if you would like to set up a call with us. We look forward to speaking with you in the near future.
spk05: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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