AXT Inc

Good afternoon, everyone, and welcome to AXT's second quarter 2024 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fisher, Chief Financial Officer. My name is Christina, and I'll be your coordinator 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. And if you would like to withdraw your question, you can press star 1 again. Thank you. I would now like to turn the call over to Leslie Greene, Investor Relations for AXT.

Thank you, Christina, and good afternoon, everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements. regarding, among other things, the future financial performance of the company, market conditions and trends, emerging applications using chips or devices fabricated on our substrates, our product mix, global economic and political conditions, including trade tariffs and import and export restrictions, our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, or to utilize our manufacturing capacity. We wish to caution you that such statements deal with future events, are based on management's current expectations, and are subject to risks and uncertainties that could cause actual events or results to differ materially. In addition to the matters just listed, these uncertainties and risks include but are not limited to the financial performance of our partially owned supply chain companies, increased environmental regulation in China, and COVID-19 and other outbreaks of a contagious disease. In addition to the factors just mentioned or that may be discussed in this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are 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 call will be available on our website at AXT.com through August 1, 2025. I also want to note that shortly following the close of market today, we issued a press release reporting financial results for the second quarter of 2024. This information is also available on the investor relations portion of our website at axc.com. I would now like to turn the call over to Gary Fisher for a review of our second quarter of 2024 results.

Thank you, Leslie, and good afternoon to everyone. Revenue for the second quarter of 2024 was $27.9 million. up 23% from 22.7 in the first quarter of 2024, and up 50% from 18.6 million in the second quarter of 2023. To break down our Q2 2024 revenue for you by product category, indium phosphide was 7.7 million, reflecting continued demand from data center applications, including AI, as well as passive optical networks. Gallium arsenide also grew to 9.1 million, with broad-based improvement across a number of applications. Germanium substrates were $2.9 million, up from the prior quarter, with renewed strength in demand for satellite solar cells. Finally, revenue from our consolidated raw material joint venture companies in Q2 was $8.2 million, up substantially from Q1 on growing demand. In the second quarter of 2024, revenue from Asia Pacific was 78%, Europe was 17%, and North America was 5%. The top five customers generated approximately 31.8% of total revenue and no customer was over the 10% level. Non-GAAP gross margin in the first quarter was 27.6% compared with 27.3% in Q1 and 9.8% in Q2 of 2023. For those who preferred to track results on a GAAP basis, gross margin in the second quarter was 27.4% compared with 26.9% in Q1 and 9.2% in Q2 of 2023. Moving to OPEX, total non-GAAP operating expense in Q2 was $8.9 million compared with $8.7 million in Q1 of 2024 and $7.8 million in Q2 of last year. On a GAAP basis, total OPEX in Q2 2024 was $9.5 million compared with $9.4 million in Q1 of 2024 and $8.6 million in Q2 of 2023. We expect OPEX to hold at approximately this level throughout the balance of 2024. Our non-GAAP operating loss for the second quarter of 2024 is $1.2 million compared with the non-GAAP operating loss in Q1 of 2024 of $2.5 million and a non-GAAP operating loss of $5.9 million in Q2 of 2023. For reference, our GAAP operating line for the second quarter of 2024 was a loss of $1.9 million compared with an operating loss of $3.3 million in Q1 and an operating loss of $6.8 million in Q2 of last year. Non-operating other income and expense and other items below the operating line for the second quarter of 2024 was a net gain of $369,000. The details can be seen in the P&L included in our press release today. For Q2 of 2024, we had a non-GAAP net loss of 800K, or two cents per share, compared with a non-GAAP net loss of 1.3 million, or three cents per share, in the first quarter of 2024. Non-GAAP net loss in Q2 of 2023 was $4.2 million, or $0.10 per share. On a GAAP basis, net loss in Q2 was $1.5 million, or $0.04 per share. By comparison, net loss was $2.1 million, or $0.05 per share in the first quarter of 2024, and the GAAP net loss in Q2 of last year was $5.1 million, or $0.12 per share. The weighted average basic shares outstanding in Q2 was $43.1 million, Cash, cash equivalents and investments increased by $2 million to $43.3 million as of June 30th. By comparison, at March 31st, it was $41.3. Depreciation and amortization in the second quarter was $2.2 million. Total stock comp was $700K. Net inventory was down slightly in the second quarter to $85.8 million. This includes inventory added through our recycling program. 34% of the inventory is raw materials. and WIP is 64%. Finished goods makes up only about 2%. With improving demand, we hope to continue to bring our total inventory down in 2024. Okay, this concludes the discussion of our quarterly financial results. Turning to our plan to list our subsidiary, Tongmei and China, on the star market in Shanghai, we continue to make positive progress and have been in active discussions with the Shanghai Stock Exchange. Recent developments have been encouraging. We've kept our application current while many other Shanghai Stock Exchange applicants in the queue have been dismissed for business, financial, or other shortcomings. We expect to continue to work through this process during the summer and hope to have more news in the fall. As we've consistently said, this is a lengthy process, but we continue to believe that Tong Mei is an excellent candidate for the listing. Okay, 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. Q2 was another solid quarter of growth, with our revenue up 23%. In addition, our non-GAAP net loss was smaller than our earlier guidance. We saw good performance in eating phosphorous substrates and healthy growth in gallium arsenide and germanium substrates. Our raw material business was also up substantially over Q1. Overall, we're encouraged by the science of addition adoption in new applications, such as AI, as well as ongoing broader-based market recovery. The magnitude of the revenue improvement is good news. We are encouraged. We're expecting the recovery to be somewhat lumpy quarter to quarter. as the various segments work their way back to more normalized seasonalities. As we come into the second half of this year, we're feeling very good about our progress as a company and our ability to support exciting new growth, new high-value applications. Looking individually at our product lines, Indian Phosphate grew 67% in Q2 over the same quarter a year ago. That growth has been a function of continued recovery in the palm market and a meaningful increase in demand related to high-speed optical connectivity and AI. Today, AI applications are primarily using gallium arsenide for shorter-range transmissions, which require a relatively small amount of substrate material. But as the industry moves to 800 gig for median to long-distance transmission beginning in 2025 and then to 1.6 terabit speed, we expect that indium phosphide will be a necessary material. We're already seeing development work happening today with next-generation silicon photonics devices and electro-absorption modulated lasers, or EMLs. for high-speed data center transceivers. Both technologies use significantly more material than a galleon-sized pixel. We have strong contribution in Q1 and Q2 from these applications. And while we always caution investors that the timing of pre-production orders can vary, market trends and customer data points give us confidence in the growth potential of these emerging applications over the coming years. Our gallium arsenide revenue grew 22 percent in Q2 and are up 50 percent from our revenue level in Q4 of 2023. This increase reflects demand across a broad base of applications, including HPT power amplifiers, applications for wireless switches, high-power industrial lasers and LEDs. Coming off two quarters of strong growth and some fluctuations in the industrial market, we're expecting a moderation of our gallium oxide sales in Q3. But we don't believe there is much excess inventory in the supply chain. We expect to continue to benefit from strengthening global demand as it occurs. In addition, Our galleon arsenide recycling effort have been highly successful. We're now fully licensed and processing material that we collected over time but did not have the capability to recycle. This is visible to the investment community in both our revenue and gross margin at GMA, one of our raw material joint venture companies. These efforts also advance our ESG commitments and drive meaningful efficiencies in our manufacturing. Turning to germanium substrates. Demand for satellite solar cells, which was down substantially throughout 2023, is now showing recovery. Our cells more than doubled in Q2 over the prior quarter. With renewed strains in Europe and Asia, A portion of these strains was due to the timing of orders, which fell into Q2 rather than Q3. As such, we don't expect to see quite as strong results in Q3 of this year, but still a significant improvement from this time last year. And finally, our raw material business. It grew more than 40% in Q2, both on growing demand and the success of our recycling effort. Our portfolio of joint venture raw material companies continues to be a strategic value to our business, and they are contributing positively to our results. In closing, we are optimistic about the growth and the expansion of our business over the coming quarters. Across our portfolio products, the recovery are tangible, and though we expect some lumpiness quarter-to-quarter, we have positioned ourselves well for success in this highly dynamic technology landscape. Looking ahead, new catalysts such as AI are providing strong incremental opportunity that is likely to accelerate as we move into 2025. This can significantly benefit our unit phosphorus business. Further, we remain highly focused accelerating our return to profitability, and looking forward to reporting to you our progress. With that, I will turn the call back to Gary for third quarter guidance. Gary?

Thank you, Morris. In keeping with our comments today, we expect Q3 revenue to be between 25.0 million and 27.0 million. We expect our non-GAAP net loss will be in the range of six to eight cents. and gap net loss will be in the range of seven to nine cents. We expect share count will be approximately 43.1 million shares. Okay, this concludes our prepared comments. Morris and I would be glad to answer your questions now. Christina, operator, you can take over now.

Great, thank you. At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. Again, that's star one to ask a question. And we'll pause for just a moment to compile the Q&A roster. Thank you. Your first question comes from Charles Shi of Needham. Your line is open.

Hey, good afternoon. Maybe the first question, I want to get a little bit more color on the Q3 guidance. It looks like 26 million at the midpoint, slightly down from the Q2 level. I think in the prepared remarks, you already mentioned maybe some degree of moderation in gallium arsenide. Maybe even you talk about some of that in germanium as well. But I wonder, is indium phosphide, the raw material, are the other two product categories holding up? Or what's the general sense right now?

Sure, Charles. I think raw material is probably going to hold up. I think it's probably going to be the same level as Q2. In phosphide, my feeling is, you know, the order we got from AI for Q1 and Q2, we're not counting on it to continue as of yet. But because it's a sort of a startup business, so, you know, order can come in any time. If that were to come in, then we can probably sort of maintain our same level as Q2. But at this point, we're not, we're discounting that. So with that as a negative, you know, India Phosphor is not going to provide the growth. And as you know, telecom and datacom, regular datacom business, there are still some, inventory to be digested in Q3. So that's not going to provide growth. So, you know, as I said, I think we had a very good, strong growth provided by AI applications in Q1 and Q2. And Q3, we are not counting on that at this point.

Yeah, what I would add, too, is that the orders are a bit, you know, jumping around some. you know, some of the stuff that we thought was going to come in Q3 came in in Q2. But I think the key thing for us is we are getting the orders. We're not losing market share and, you know, we're in very close communication with our customers and there's lots of transparency on both sides. So I think we're in a good spot.

Yeah, thanks. Maurice, I think there are some new languages around your AI opportunity this quarter. I thought we went through this exercise for a few quarters and I think you and I were thinking maybe the Indian phosphide opportunity you were seeing in the prior quarters were more for like photo detectors, some really advanced photo detectors. But this quarter sounds like you're gaining some confidence that Indian phosphide substrates are actually going into the optical transceivers. Wonder if there's any new data points that lead to this slight change in how you think about the end application of the indium phosphide?

Well, I'm not so sure. I mean, we have the confidence it's going into AI. But I'm not sure what specific application it is. It is a, I think it is a transceiver. But I think what we are, we're not seeing a continued order from our customer as of now yet. We're seeing maybe there are some market adoptions for the time being. And it will come hopefully later this quarter and definitely, you know, to the second part of this year.

And I'm not sure we're intelligent in terms of knowledge level to know precisely where the indium phosphide is going into AI. There may be more than one application within AI, so...

Yeah, as we discussed with you, I think we know that our end customer definitely told us it's for AI. Our second level, in other words, epi customers are telling us it's for AI. And they're also telling us who they are selling to. And end customer application, I don't want to name them now at this conference, but I think it's well known. But it's what specific application is used for

um we we don't know yet it's not absolute knowledge yeah when you find out charles let us know though okay okay uh so maybe the last question i still want to ask about this indian classified uh i i think uh uh over the past three months uh we did hear from some of the uh optical transceiver companies based in North America talked about the potential Indian phosphide shortage over the next five years as, well, things like you mentioned, the 800 gig plus transceivers ramped up in higher volume. We know you're an important player but you do have a competition. So I want to get your thoughts on whether you see a shortage. It could be an issue or not, and whether that particular end customer talking about shortage, are they talking about any specific supplier in mind, or they're giving a broad market comment, which could mean something quite positive for AXT going into the next few years as AI wraps up.

Yeah, I would definitely think in our end, as far as substrate is concerned, Charles, we're confident we have the best technology in terms of EPD, in terms of commercial availability, and ability to expand our expansion because we have a very good supply chain, you know, supplier through our joint ventures. And as you know that our unique phosphide revenue at this point is only half of what the peak level was. So definitely we can grow to that level. And as you also recall, On that up cycle, we grew our indium phosphide revenue 50% year-over-year for two years in a row. So we definitely don't feel any difficulties of expanding our capability to provide more substrate. As far as technology is concerned, we are developing six-inch indium phosphide capability, and our four-inch is going very good on technology front we also applied you know two very good technology development over the last six months or so so that enables us to have much better yield and so we can have better quality material and controlling our cost so you know if you know anybody who feel there's a potential shortage of indian phosphide go talk to them and we can sign long-term deals we guarantee supplies

I'm not sure that's my business, but thanks for the answers. Thanks, Maurice. Thanks, Gary. That's all from me.

Good questions, Charles.

Your next question comes from the line of Richard Shannon from Craig Colum Capital Group. Your line is open.

Hi, Maurice and Gary. Thanks for taking my questions as well. I guess I'm going to take a point of view past this third quarter you just guided to where your body language sounds fairly positive across most of your business here and maybe kind of push you to give us some sense of what you're seeing, not only for the fourth quarter qualitatively. Are you seeing any improvement or possibility of improvement across any of these segments? And then maybe more broadly and higher level, what your conversations with customers give you about confidence going into 2025?

Sure, Richard. I think, you know, from my perspective, I think, you know, obviously, we cover a lot of market segment. Okay, so if I were to pick one of my favorites, which is in the front line, I think the excitement of using it in AI, it definitely excites me. We are in talk with customers about potentially running in commercial applications, although I don't know the exact timing of it, but I think your customers are you know, increasing their trial order from 100 wafer to 200 wafer per month, and whether they start coming the fourth quarter or first quarter of next year is questionable. And as far as POMS market and telecom market is concerned, I mean, we hear there are data center businesses still sort of lagging. and telecom market is not doing very well. But I think, you know, things will start to digest its inventory, and hopefully that we can have some recovery for the policy market as well as the regular data center market, right? So as far as Gowling Asset is concerned, we are seeing good growth in terms of HVTs because our customers are sort of worried about diversifying their supply chain for wireless HVTs. So we hope that HVT will continue to grow. As far as industrial applications, we're seeing some softness in the LEDs where customers are telling us that they are seeing the third quarter slowing down a bit. But I don't know whether it's going to continue in Q4 or not. That I don't know. As far as industrial laser for Galileo Assange is concerned, again, it's softer for Q3 than Q2, but I don't have much visibility into Q4 yet. As far as satellite communication is concerned, I think Q2 was a very strong quarter, and Q3 slowed down a bit. But if you hear that the low orbit satellite, which is going to fill in the gap for 5G plus telecom network, then I think Elon Musk was talking about launching another 40,000 satellite and China has a plan to launch another 15,000. So that market can grow rapidly. Although I think I worry about that market a bit is because Germanium material is a fairly sensitive part of our cost of goods sold. So although the market potential to grow is very, very big, but we will need to see what the cost of goods sold of raw material is going to be. And our raw material is shaping up to be a very very good supply chain supply line. You can see that we have almost 40% growth last quarter, and I think Q3 is going to hold up on the same supply, and we have more supply chain joint ventures to join us in the coming quarter. So I think our supply chain joint venture is giving us good growth opportunity as well.

Yeah, I want to add a perspective that I think is useful, and it sort of differentiates us from the traditional sort of chip companies in the semiconductor industry, which is that we have a record where our products and product segments have a very long positive trajectory. So, you know, we all know that if you're making chips, you've really got to rotate one out and a new one in maybe every 18 months. and phosphide with passive optical networks back in 2013 and 14, but it's still a market that exists. And so almost all the markets that we touch, while they may, you know, go up and down some, but the long five to 15 year path is generally upward and to the right. So, you know, we think we're well positioned for growth across a number of markets. And, you know, gives us ability to deliver strong results going into 2025. The strong second quarter that we just had puts our first half run rate just over 50 million. So we're now targeting to be in triple digits once again. So that just gives a little color, I think. Next question.

Thanks for all that. Maybe I'll dig in a little bit on the Indian Phosphate and AI angle here. Maybe you can give us a perspective of of the customer base here and really kind of digging not just into your direct customer, but the end customer, which seem to have visibility in certain cases. To what degree are these transceiver and ultimately end users, which I assume are to a large degree hyperscalers, to what degree are those Chinese or Western world customers?

I think at this point what we understand is definitely Western world customers. So the way I understand, Richard, is this, okay? I mean, if I look at it from 25,000 feet up, you know, what is AI? You need computation. You need data storage. And lastly, you need to transfer this data very rapidly and in massive amounts, okay? I think the first one to go is the short distance, which is VIXL, using sort of the optical cable. And as the short distance communication speeds up, then you're looking at sort of medium range and long range. I think that's where I think Indy Phosphide will start to shine. And so you're talking about whether it's going to be an EML or silica photonics. And as the speed goes up, as the data transfer needs to get more and more, definitely we're confident it's going to grow. And it doesn't need a whole lot of market growth to move our needle, as you know. And I think the other thing is, I think if you look at Indian Phosphate now, it looks like it's sort of waiting for its next growth opportunity, but look at it. I mean, when the consumer product started to grow two years ago, our revenue on Indian Phosphate zoomed almost 50% year over year for two years in a row. And so that shows that we have the capability to make the supply chain satisfied. I mean, customers are very happy with us. I mean, the fact that they didn't adopt the next generation phone is not because of us. And I know there are other customers and other applications potentially going to be using the FastFi such as following eyeball or glucose monitoring or... Consumer applications. Other consumer applications is poised to grow because it's special ability to work in the far infrared range. So it's not because of us. It's the material characteristics. It will just shine in certain applications. I think it will come.

Okay. Fair enough. Kind of a two-part question that's probably mostly for Gary, kind of more on the financial side here, but last quarter you talked about driving inventory down $10 million. This quarter you just said downwards. Is $10 million still possible there? And then also in the last conference call you talked about the potential for hitting break-even in the fourth quarter. Just curious whether you still think that's possible. Thanks.

Break-even I think is still possible. Again, as we've said before, it's going to depend on volume, of course, and mix. So it's definitely something that we would strive to achieve. Bringing inventory down remains a priority for us. What clouds the picture a bit is that we've had great success in our recycling program, so you don't see the full effect of our inventory reductions efforts in the numbers. Our largest target is indium phosphide for inventory reduction, and as our revenue grows, we expect to be in a good position to bring the inventory down. I have to say openly to the community that it's taking longer than I thought, but I We understand why, and we're working it. So we haven't taken our eye off the ball. It's just happened as quickly as I hoped.

Yeah, Richard, I think Gary is definitely right about Indian phosphide inventory. And because they demand all of a sudden drops in 2023, that sort of forces to have, you know, as you know, you need to build inventory to supply into the customers, and all of a sudden they put a stop to it. That's why the buildup was. But I think the good part of it is that those indium phosphide would never be written off or written down because they are as good as gold. I mean, if anything, the value will go up rather than go down.

Okay, fair enough. Thanks, guys. Thanks, Richard.

Your next question comes from the line of Tim Savageau from Northland Capital Markets. Your line is open.

Hi, good afternoon. Pardon me. I wanted to go back to the kind of capacity slash shortage question. You mentioned, Morris, I think, talking about in Indian phosphide, you know, trial orders for customers, you know, going from 100 to 200 wafers. And I'm getting a sense that a lot of what's occurred to date has been that kind of, you know, development sort of activity. But I guess my question, my first question is, are you getting a sense as we kind of move forward in the year here, you know, what production volumes might look like in the future relative to the the trial volumes that you just discussed? And I'll follow up from there.

Yeah, I think, you know, I think, first of all, most of our customers, they gave us four guidance, okay? I mean, one specific data center customer, Silicon Photonics. I mean, they give us forward guidance. So, you know, that is production. But they can change. For instance, that customer, when the market was really slow, they told us they have inventory. They went as slow as, let's say, 400 way for a month. and they told us it's going to grow to 900 months in the fourth quarter uh we cannot hold them to it but usually they do deliver okay that's one example of what customer will give us forecast and on the the the pilot production customer is concerned 100 to 200 trial order i think we're hopeful But they don't tell us when it's going to start in production. They do give us a volume forecast. That's how we negotiate a sort of a poor-looking total price package. But I don't know whether I can hold them to that or not. But they're talking about thousands of wafers. So you can say, If they go to 1 to 200, definitely the minimum level is 1,000 before we're going to give them the big discount. But whether they go to 1,500 or 2,000, I mean, last time when consumer products started to boom, it was in the 5,000s.

Yeah, Tim, what I would say is that we have varied strong convictions about these markets for indium phosphide. We don't have quite as much clarity on quarter to quarter, but we definitely see that these things are coming. And, you know, I've mentioned this, I think, in the past, but I want to remind you that in the last five years, we have significantly upgraded our facility in Beijing where we manufacture the indium phosphide. Customers have toured it and have been very impressed. And we've added capacity. So I don't think, we're not losing sleep about total capacity capabilities. And we will have enough advanced knowledge and awareness when it's time to add more equipment. But that's going to be the issue. It's probably not going to be facilities now, which is good. It'll be equipment. And we're set up to be able to do that relatively quickly. quickly for a manufacturing company. So I think we're really in a great spot. And when it comes, it's going to be a lot of fun.

All right. Looking forward to that.

And along those lines, you mentioned you're, I guess, a little bit below half your previous peak in terms of Indian phosphide revenue. But my question kind of goes to what you were just saying, Gary, which is, you know, you've talked in some examples here of, you know, some of these pilot volumes going up by a factor of 10 or 5 or 10 or something like that. But what is your, could you estimate for us your maximum kind of quarterly revenue capacity to indium phosphide right now without adding any new gear or space?

Well, I'll let, of course. Would it be a fee or is it a fee?

right go ahead i'll let morris give the uh you know the the forward look but let's just look i'm just quickly looking back to confirm my my memory in real life we got as high in terms of any phosphide revenue as 17.7 million okay so and we haven't subtracted capacity so i think You know, it's pretty easy to say for me as just a mere accounting thing, well, we could at least get to $17.7 million. But I know Morris will say we could do more than that.

Yeah, there are two factors. One is that we have substantially upped our yield. Don't tell our customer that. So that would enable us to... increase our capability to deliver more wafers. But on the downside, and also shave off our costs. But on the downside, as you know, every cycle brings the piranhas. The customer, when they have the order in hand, they want lower price. So, you know, we are, you know, sharpening up our pencils and, you know, if a customer give us bigger orders, we are willing to work with them. But I think, you know, what we have on savings in terms of better yields and better supply chain supply, you know, in New Phosphor, we upped our yield. We have increased our recycling capability. So we're going to have other supply chain supplement to help us to reduce the cost. all in favor of reducing our costs to help our customers to deliver better product for the common good of all consumers.

Okay, great. And just one question on gross margins. I mean, you performed pretty strongly there in the quarter, I guess, talking about recycling being one of the contributors. But I think you'd expected gross margins to come down given product mix, which looks like it, you know, a little bit of upside, but it looks like it came in as expected. So I wonder what the kind of moving parts were for the gross margins strength in the quarter. And likewise on the guide, you look to be guiding gross margins back down a bit. I wonder, you know, where the factor is driving that.

Yeah, you're following the trail pretty accurately. I think for the upside surprise, which we were pleased with, one contributor was a good performance on the gallium arsenide recycling program. And that's gotten more traction during the Q2 time period. We were actually starting that program back in 2023, but I think it's really getting into making a difference. So what that means is that's done through one of our subsidiaries called Jin Mei, and actually through one of their subsidiaries. So we're the grandparent, I guess. But they're doing well. And Ginmei's contribution to gross margin on the consolidated basis was above their normal average in Q2. So that was one thing. And we also did better on manufacturing efficiencies just in general. So, you know, each little, it's never one, in this kind of business, it's rarely ever one big thing. It's usually two or three or four medium-sized things. But efficiencies is one. The recycling program is another. And, you know, we're hopefully being a little bit conservative for the implied guidance on gross margin. But, you know, that's kind of our style, I think, is to be a little bit more, you know, cautious because we're not always sure.

Thanks very much. You're welcome, Tim. Good questions.

Your next question comes from the line of Dave Kang from B Reilly. Your line is open.

Thank you. Good afternoon. First question is on indium phosphide. Just wondering if you have the data on the mix between high-speed optics for AI versus the rest?

Well, actually, at this point, AI is still relatively small. If I were to estimate, it's probably 10% to 12%.

Of indium phosphide?

yeah oh okay got it um and then second question is on on any um well um any market share data so i'm assuming you know most of your uh i mean your competitors have most of the ai market share at this point is that a fair assumption or like like sumitomo

I would tend to think we, I mean, unless we are wrong, but of course we don't have what our competitors are doing. We don't have their financial numbers. But from what I understand from our customer, they are buying everything from us.

The reason for that is that our quality on the number of measurements, including EPD, is hands over our competitors. So keep in mind, the only serious competitor is Sumitomo. And we're just better than... On this particular product, we are viewed as orders of magnitude better. So for companies where yield counts and where reliability counts, they're going to AXT. And we don't think that's going to change. We've got a...

a really long head start, shall we say.

Got it. And just quickly on the Tongmei listing situation, you mentioned zero companies got dropped. I mean, what are the odds that you guys are getting dropped?

Well, you know, I think the environment for going public in China or the requirement for going to be listed on the Shanghai Stock Exchange or Shenzhen Stock Exchange or even Beijing Stock Exchange. There are three of them now. They are in China. But I think the regulations to allow company to be listed has changed very dramatically this year. I mean, two years ago, there are up to about five or 600 company go in public on Star Market. This year, I think there are probably, I think you can count with your fingers, less than 10. And there were 300 companies asked to be not on the queue for application to be listed on Star Market. And we just updated our application. for six months results. So that's a good sign for us. As we also, Gary said, we have worked one of the very important issue that Shanghai Stock Exchange was looking at. So hopefully we can resolve that. And with our six months results, hopefully we have better things to report in the next three to six months.

Yeah, just a little bit more on that, which is that You have to refresh your application. And a number of companies, several hundreds of companies, were asked not to bother. Don't refresh because you're not ready for prime time. They had companies going in early 2020 that had no revenue. So they've raised the bar over the time period, but never to us in terms of saying go away. On the contrary, they have actually told our investment bankers that this is an attractive offering. You guys have a lot of good stuff that we're in favor of. So we can't guarantee that they wouldn't change their mind, but they've had plenty of time to say something negative like this, and they have not. So that's why we remain optimistic, and we're just staying in the game to go for it.

Okay. Thank you. You're welcome.

And with no further questions, I'll turn the floor back over to Dr. Morris-Young.

Thank you for participating in our conference call. This quarter, we will participate in the Needham Virtual Semicap Growth Conference, the Jefferies Technology Summit, and the Evercore ISI Semiconductor IT Hardware and Networking Conference. We hope to see you there. As always, Feel free to contact me, Gary Fisher, or Leslie Green if you would like to set up a call. We look forward to speaking with you in the near future.