Axt Inc Q1 FY2022 Earnings Call

Good afternoon, everyone, and welcome to AXT's First Quarter 2022 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Kevin, and I'll be your coordinator today. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

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 and 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 of their products. In addition to the factors that may be discussed in this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at axt.com through April 2023. Also, before we begin, I want to note that shortly following the close of the market today, we issued a press release reporting financial results for the first 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 Fischer for a review of our first quarter 2022 results.

Okay. Thank you, Leslie, and good afternoon to everyone. I'm hearing a little bit of background noise, so Morris and Leslie, it might be good during this portion of the meeting that we go on mute when we're not speaking. By the way, to our group, we're in different locations today. Morris is in the middle of the night in China, and I'm in the Fremont office for AXT. Today, we are pleased to report that total revenue for the first quarter of 2022 was $39.7 million. That's up 5% from $37.7 million in the fourth quarter of 2021 and up 26% from $31.4 million in the first quarter of 2021. Q1 marks our 9th consecutive quarter of growth and highlights the market expansion and increasing demand for indium phosphide and gallium arsenide substrates. To break down our Q1 '22 revenue for you by product category, indium phosphide was $15.5 million, gallium arsenide was $12.0 million, germanium substrates were $4.2 million, and revenue from our 2 consolidated raw material joint venture companies was $7.9 million. In the first quarter of 2022, revenue from Asia Pacific was 73%, Europe was 16%, North America was 11%. The top 5 customers generated approximately 29% of total revenue, one of which just surpassed the 10% level. Our continued revenue diversity demonstrates that our growth is not overly dependent on one large 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 first quarter was 33.8% compared with 32.4% in Q4 of 2021 and 36.9% in Q1 of 2021. For those who prefer to track results on a GAAP basis, gross margin in the first quarter was 33.6% compared with 32.2% in Q4 of 2021 and 36.8% in Q1 of 2021. Improvement in gross margin came through growing volume, a favorable product mix and a strong focus on yield improvements and manufacturing efficiencies. We continue to believe that we can get back to the 35% range later this year. Total non-GAAP operating expense in Q1 was $8.6 million. This compares with $8.1 million in Q4 of 2021 and was $7.2 million in Q1 of 2021. On a GAAP basis, total operating expense in Q1 2022 was $9.6 million compared with $9.1 million in Q4. For comparison, total GAAP operating expense was $8.0 million in Q1 of 2021. Non-GAAP operating profit for the first quarter of 2022 was $4.8 million, compared to $4.1 million in Q4 of 2021 and $4.4 million in Q1 of 2021. For reference, GAAP operating profit for the first quarter of 2022 was $3.7 million, up from an operating profit of $3.0 million in Q4 of 2021 and an operating profit of $3.6 million in Q1 of 2021. Non-operating other income and expense for the first quarter of 2022 was a net gain of $0.3 million. This includes a gain of $1.1 million from the unconsolidated raw material companies. The full breakdown is in our press release. For Q1 2022, we had a non-GAAP net income of $4.3 million or $0.10 per share compared with $4.1 million or $0.09 per share in the fourth quarter of 2021. Non-GAAP net income in Q1 of 2021 was $4.2 million or $0.10 per share. On a GAAP basis, net income in Q1 was $3.2 million or $0.07 per share. By comparison, net income was $3.0 million or $0.07 per share in the fourth quarter of 2021 and $3.4 million or $0.08 per share in Q1 of 2021. The weighted average diluted shares outstanding in Q1 was 42.7 million. Cash, cash equivalents and investments were $44.3 million as of March 31. By comparison at December 31, that was $51.8 million. Depreciation and amortization in the first quarter was $2.0 million and capital investments were $6.3 million. Total stock compensation was $1.1 million. Net inventory at March 31 was $68.8 million. This concludes the review of our quarterly financial results. Turning to our plan to list our subsidiary, Tongmei, in China on the STAR Market in Shanghai, let me give you a quick update. The review of our application is now underway and is proceeding according to our expectations. Tongmei received a list of questions from the Shanghai Stock Exchange Review Board. This is similar to what we call a comment letter from the U.S. SEC. Our China advisers think the list was fair and reasonable, and we have provided a lengthy and detailed response. Our advisers tell us to expect another set of questions, as it is normal to have more than one round of comments. Indeed, we received the second set of questions earlier this week, so that's positive. It was a very fast turnaround, and we're pleased with that. As we have discussed, the process of going public on the STAR Market includes several periods of review and therefore, is a lengthy process. Tongmei does not expect to complete the IPO until the second half of this year. Before I turn the call over to Morris, I want to take a moment to address the COVID restrictions in China, which have been in the news, of course. To date, we have not had any shutdowns of our operations in Beijing, Dingxing or Kazuo. We have experienced some supply chain disruption as a result of shipment delays and supplier shutdowns relating to products 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 in 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 are monitoring the situation closely. And with Morris in China, we 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 arise. Okay. With that, I'm going to turn the call over now to Dr. Morris Young for a review of our business and markets.

Thank you, Gary. Q1 was another strong quarter for AXT. As our growth demonstrates, we have reached an inflection point in our business where our investments in our technology, business operations, and customer relations are bearing fruit. Market share gains and expansion into new applications and Tier 1 opportunities enable us to post a 26% revenue increase in Q1 from the prior year. This growth is coming from a diverse set of applications and customers across telecom infrastructure, data centers, industrial, consumer, healthcare, automotive and more. This gives us strong confidence in the sustainability of our business success throughout 2022 and beyond. In indium phosphide, we achieved record revenue in Q1 of $15.5 million. This represents an increase of more than 45% from Q1 of 2021 and puts us well on track to achieve indium phosphide revenue growth of 30% or more this year. We believe our key markets have entered a new cycle of innovation and application development that is driving opportunity expansions and diversifying our revenue base. This is supported by the strong order pattern we're currently experiencing. Demand from several of our Tier 1 customers is robust, and we're working hard to scale our production accordingly. In particular, our new customer application is ramping well. As we mentioned to you in February, we designed into a short wave infrared sensor for consumer applications. Our success as a supplier for this initial application has allowed us to begin ramping a second application for mobile devices that we believe will incrementally be larger in volume. We're excited about this design win, and we believe it will present a gateway to additional high-value designs and applications in portable consumer devices. Importantly, we're pleased to know that our customer product roadmap is lining up well with our capabilities to meet the new innovations they are developing. Data center applications were also strong in Q1, increasing from a solid and steady level that we've seen over the past year or so. We believe we are gaining tiers in this market. Our customer discussions indicate that we should see growing demand throughout 2022. The silicon photonics market is expanding rapidly and is creating exciting opportunities in telecom, datacom, lidar, healthcare, high-performance computing, AI, and optical computing applications. Several major players are making significant investments in the advancement and adoption of silicon photonics technology. Telecom infrastructure as a category performed well in this quarter as well, including 5G-related applications. We believe that the infrastructure upgrade cycle driven by 5G in the United States, Europe and other parts of the world is creating a beneficial demand environment for indium phosphide, and that should continue for several years to come. Turning to gallium arsenide, the LED market remained strong across all of our traditional end markets, such as automotive display and high-end lighting. In fact, we achieved our highest revenue quarter since Q3 of 2012. Contributing to our growth in Q1, with continued strength in high-power industrial laser applications with our very low EPD wafers, we have gained significant market share, particularly in China. This has allowed us to drive strong revenue growth in these applications over the last 6 years. High-power industrial lasers are commonly used today in tools used to cut metal sheets, welding equipment, various testing equipment, robot applications, medical devices and others. Revenue from our 2 consolidated raw material companies was down this quarter after a very strong growth throughout 2021. With prices remaining volatile, these consolidated raw material companies are being selective in the business they support in order to drive improved gross margin performance in our business. We were pleased to see the increase in contribution to profit from the unconsolidated raw material companies, which represent additional positive leverage in our model. This is a strong benefit of our vertical integration strategy. While high raw material prices had a negative impact on our cost of goods sold for AXT and its competitors, AXT is able to offset some of the impact of the higher prices through the revenue generated by our joint ventures. We also have the benefit of supply guarantees and insight into the pricing trend. We believe these have proven highly valuable to our business over the last 2 decades. In conclusion, we have reached a true turning point in our business. Across our portfolio, we are working with Tier 1 customers for new innovations, helping to redefine what is possible with technology and advancing specialty materials into areas that the market may not have conceived of just a few years ago. Today, we're seeing significant growth from major trends in 5G telecommunications, data center expansions, consumer devices, and industrial applications. Visible on the horizon are emerging applications in microLEDs, advanced health monitoring, and the metaverse that we believe will represent another transformative wave for our business. Through the scaling of our operations, investing in our product roadmaps and strengthening our capital structure, we are executing on a strategy that positions us well for healthy growth and profitability throughout 2022 and beyond. I'm now turning the call back to Gary for our second quarter guidance.

Thank you, Morris. As Morris discussed, there are a number of company-specific growth drivers contributing to our performance. We're currently expecting Q2 revenue to be between $38 million and $41 million. We believe that our non-GAAP net profit will be in the range of $0.08 to $0.10, and GAAP net profit will be in the range of $0.06 to $0.08. Share count will be approximately 42.6 million shares. So this concludes our prepared comments. Morris and I would be glad to answer your questions. Kevin, operator?

Our first question comes from Richard Shannon with Craig-Hallum.

Let's review the first quarter, particularly focusing on gross margins. After what was likely a disappointing end to last year, we're seeing an upward trend. Based on your qualitative insights, your performance appears to be better than expected. You mentioned aspects like volume mix and yields in your comments. Can you elaborate on the mix? Additionally, Morris, looking ahead, how close are you to achieving your ideal yield levels across your entire substrate portfolio?

Gary, do you want to take that first?

Okay. Sure. The reason we point out indium phosphide, as we said, it was a new record for the quarter, $15.5 million. And that kind of mix is beneficial for us in the aggregate gross margin percent. So that's why we underline or underscore, for example. One of the reasons that we think we can continue to trend in the right direction, meaning upward and to the right is, we think indium phosphide is going to continue to expand. And so, we'll get the benefit of that tailwind. We have been going through, I think, a settling in process at the new sites, and we've also done modifications at the Beijing site to increase capacity and things like that. I think there's still some progress to be made in that arena. We're not at our all-time best yet. So I think we can get back to that. And we are also doing some development programs in the R&D category on recycling certain materials that, because the price of materials has increased so much, we've crossed a tipping point where it's economically preferable for us to do more recycling. It's also better for the environment and things like that and efficiencies. So those are the things that I think are helping us, and it's the background as to why we think that we can continue to trend in the right direction for gross margin. Morris, do you want to add anything else?

Yes, absolutely. I want to highlight how quickly we are growing, particularly in certain categories. When growth occurs, we can accurately reach that yield point, which is impressive. I believe we've done well in this regard. However, as we stabilize, we should experience incremental gains. The design win of indium phosphide should provide us with an additional opportunity to boost both yield and performance across product categories and volume. I anticipate this will lead to an increase in volume as well. Additionally, although our new factory isn't new anymore, it still demonstrates significant potential in crystal growth. I believe we have more opportunities to enhance yield, improve success rates, and lower our crystal growth costs.

Okay. And a follow-up on that topic, Gary, built into your guidance for the quarter, been much time to try to run this through. But given similar volumes, do you expect a similar gross margins within a certain range in the second quarter as well?

Yes, our drilling team has seen a slight increase, and I anticipate that will continue.

Okay. Next topic. In the last call, you mentioned the expectation of achieving top line sales of 15% to 20%. Your first quarter is up 26%, and the guidance suggests a number around 18%. Additionally, you mentioned the possibility of hitting a $50 million quarter this year. Could you discuss the trends for the rest of the year that support the 15% to 20% growth? Is there still a chance for that $50 million figure this year, especially given the positive dynamics in health sensing that might contribute to that? Please address these points, Morris.

Sure, Richard. Of course, that's $50 million, I'm not trying to take it back, but you need a lot of good things last quarter to happen. In the last quarter, we were talking about indium phosphide continues to grow in the first design win we have. We also talked about the possible ramping up of the second and third product. We're starting to see the second product start to ramp. So we're very pleased. Hopefully, we're going to see the start of the third product ramp. Data center, obviously, is very strong. In fact, I think our indium phosphide is sort of capacity constrained at this point. Although we are growing very fast, still the customer demand is really strong. Hopefully, by later this quarter, we should be able to catch up to the capacity for our customer demand. In gallium arsenide, one particular area was the power amplifier, HBT market. We are still in talks with our customers on several issues, such as commercial terms and what's the sustainability of this strong market going forward because we need to do investment to address that market. That market is more difficult than indium phosphide. Indium phosphide is a newly developed market. That market, HBT market is more mature. I think we do see the demand being high, but that's not resolved. If that were to come to fruition, that obviously is going to be a very big volume. So, if you count all these come into fruition, then sure, it's possible to reach $50 million. However, everybody hates 'however' when the CEO talks. We didn't know the Ukrainian war is happening. I think a possible recession everybody is looking at. Technology stocks are slowing down, and COVID is affecting China specifically very strongly. Our business specifics are not being affected, I don't believe. Some of this new product introduction, I don't think it will be affected by recession or COVID. But our supply may be affected. Eventually, our customers may be affected, so I think we're looking at a lot of changing things. Hopefully, that AXT stock price at $6 a share is taking everything into account.

Okay. I'm sorry, Gary, what was that? Okay. I thought I heard something. Just one more question for me. I'll jump back into the queue here. Gary, you mentioned there was a 10% customer just above. Can you tell us whether that was a customer who's been one in the past? And then of the top 5 customers you have, how many of these are these kind of these new Tier 1s that you've been talking about investing in or investing in behalf of for the last couple of years?

Yes, this is a customer that is a recurring winner in the 10% category. And it’s a heavy user of indium phosphide. It kind of lines up that way for them. The answer to your other question is that, the top 5 are not – none of the brand-new applications in the consumer market is yet in the top 5. It’s getting close, it's going to flip over, but it hasn’t yet. So the ones that are in the top 5 are customers that we’ve mentioned before over time.

Our next question comes from Hamed Khorsand with BWS Financial.

So first question I had was just given the market backdrop, are you getting this feedback from the end users? Or are the customers placing more orders, giving you this clarity as to how indium phosphide is being used and gallium arsenide?

I think I'll provide some insight. The answer is that we are receiving feedback from both the companies we sell to in the supply chain and directly from the end customers. So please continue, Morris.

Yes. However, I would comment on is that, obviously, we cannot disclose our customers because we are in a very heavy NDA. However, the nature of our business, we usually send our substrates to epi houses who use our substrate and put an epitaxial layer on, and they subsequently send it to device fabrication houses and then finally assemble them into a particular device. Although we do have visibility on who that end customer is, we often miss or don’t know what their specific applications are. We can guess. We know it is mostly laser, is it LED or a detector. The most frequently heard words today for indium phosphide applications are detectors and lasers. They're using the indium phosphide as a laser, as a sensor and to detect something to help the electronic device perform better. For instance, the most notable applications are lidar, which has applications for autonomous vehicle applications, which is still not mainstream, but you do hear lidar being talked about in the industry for smartphone applications.

Okay. And then could you just comment on the customer application that you're ramping with the second one in mobile devices? Is it all with the same customer? Or is it just different consumer applications with different customers?

It's a different application, but I think the customer is similar.

Okay. And then my final question was, given the risk of shutdown in China with your operations, what kind of procedures do you have in place to minimize any impact if it does happen?

Well, let me answer it this way. I think we have a lot of procedures to protect ourselves, okay? And China uses big data to monitor people very carefully, so we have clear instructions to our employees, especially our delivery drivers. They have to take COVID tests very often. They have to be very much aware of where they have been. If they have crossed certain points, which have a strong COVID infection rate, then we ask them to – we set up a room for them to rest and not mingle with the rest of the employees. We also have given our employees free testing kits. If they feel uncomfortable, we ask them to take a COVID test before they come to work. If they don’t feel comfortable and feel sick, just stay home, okay? We have a lot of protocols to help ourselves. I mean, our factory also – we’re manufacturing high-purity materials, so just about everybody wears a mask on the production floor, and our density of employees is not very high. We've taken a lot of precautions and have gone through various pandemics prior, even SARS. Knock on wood, we are safe. It's not to say that we can continue that tradition. I mean, we're just being diligent. As far as what we will do if it happens, we have not thought about it because I think mostly it will be the government that will interfere. I think what we worry the most is the government. So far, Beijing has – yesterday, there were 46 cases, which compared to the rest of the world is negligible. It’s a very low attraction rate, but in China, it’s very serious. So I hope they can stamp it down, and Beijing is relatively stable. We should watch this development closely, if they start to reach a peak and trend down, then we’re probably okay.

Our next question comes from Richard Shannon with Craig-Hallum.

All right. I think I have a follow-up on the topic of microLEDs. Morris, can you give us an update on the engagement here with customer or customers? What kind of state of either material development or negotiation understanding of market development we ask? Can you tell us about the kind of status of the 8-inch gallium arsenide wafers that are to support that?

Certainly. We have been investing significantly in research and development recently for both 8-inch gallium arsenide and 6-inch indium phosphide. We are seeing some incremental progress in both areas, although we have not made any major announcements yet. We are currently sending sample wafers to our customers, with quantities ranging from 200 to 300 wafers per month. The initial feedback has been satisfactory, and we are collaborating with our customers to refine our processes and better understand their specific requirements. We are currently engaged in advanced negotiations regarding their specifications, pricing commitments, and the volume we need to support their manufacturing needs. While these discussions are ongoing and remain complex, we have two committed customers. Notably, one of these customers has declared an investment of $1 billion to establish a microLED factory, which is a positive development for the microLED sector.

Sorry, I put it on mute. Not sure why that happened. Gary, I wanted to follow up on CapEx. Can you share your expectations for this year? In previous calls, you've mentioned when we might approach maintenance levels, especially since we've been spending significantly for the past couple of years. How should we consider this for the remainder of the year?

It's a regular discussion for Morris, myself, and the team. We are dedicated to future investments because there are some excellent opportunities ahead. Morris and I have extensive experience, and rarely have I seen so many promising prospects on the horizon. We are involved in broader development work for recycling, among other programs, and we are trying to strike a balance between being prudent with investments and seizing available opportunities. This year, our capital expenditures will definitely be in double-digit millions. It's been somewhat fluid so far, but we're planning to invest in facility improvements and increase automation with our equipment. While we haven't shared specific details, we did announce in our filings that we have established another joint venture for raw materials. This year, we won't reach maintenance spending levels. About six months ago, I thought we might, but after evaluating recent market trends and discussions with senior executives, it’s clear that we won't fall within the $6 million to $10 million range this year. However, we are comfortable with our cash position and remain optimistic about the IPO process in China. Overall, we monitor the situation closely, weighing the need for prudence against the necessity of capitalizing on significant opportunities.

Okay. That’s—sorry, go ahead, Morris.

Yes. I do want to emphasize looking at the opportunities. The demand is such that we have to invest, so we don't find ourselves in a situation where indium phosphide customers want wafers, and we're out of capacity. We are good at increasing capacity, but we need to not only build but also be more automated. All these investments should bear fruit later for AXT shareholders in the next year or so. Yes, in the future.

That's helpful. I have one last question. Regarding your sales growth projection of 15% to 20% for the year, if you remained flat for the remainder of the year at the midpoint of your second quarter, you'd still exceed the low end of that range, although it would be below your typical seasonal performance. However, in today's environment, I'm not sure how much we can rely on that usual seasonality. Could you share your thoughts on why you might only reach the low end of that projection versus some similarly successful programs in indium phosphide and others that could contribute to sequential growth for the rest of the year, potentially allowing you to reach or exceed the midpoint?

Absolutely. I think our internal goal, obviously, is higher than that, but we don't want to give other updated growth targets for the year. Given the potential design wins we have, just to name a few. On top of it, the HBT when that goes, and that should kick us into a second year. Then it's the microLED. MicroLED is probably a little further away. I mean, it all depends upon how fast the customers are pushing. It’s nice to know that they're building a $1 billion investment in microLED, but they just announced it. So you would expect that it will not need wafers until at least a year from now. In the meantime, the power laser market in China is very strong. We are seeing strong demand across the board. I tend to think the opportunity for indium phosphide is really exciting because in the past, we only talked about the PONs market, and then later on data centers a little bit. Now we're talking about multiple fronts. We're talking about the PONs still there. Fiber-to-home is still there. Data centers keep growing. On top of it is 5G. And then on top of it, these electronic devices. We are starting to see it emerge. As you asked the question, are any of those customers in our top 5? They’re not. That indicates that when they start to ramp, a few of them are potentially going to be in that top 5. You can see that it's significant. I am very excited about it. We are investing. We're showing up in our SG&A and R&D. Our SG&A and R&D, two years ago was $5 million, it's now almost $9.5 million. It’s nice to know that if we can drop that all down to profits, then shareholders are going to celebrate. My sense is this year, we're going to be delivering $0.20 a share. But we choose to spend to build a better company in terms of infrastructure for bigger operations and IPO in China, as well as spending money in R&D. Think about it, if we have two new growth fronts in microLED, which is going to be maybe a year, 1.5 years from now, and that's a huge market, I believe. The 6-inch indium phosphide is also in demand. People are pounding on doors, demanding 6-inch indium phosphide. We're working hard on it, and hopefully, we can deliver that. That is not in the forecast. AXT has a lot of great futures, and our visibility is better. But let’s — in terms of forecasting, we want to be conservative and deliver what we can really deliver. And, hey, 15% to 20% growth is not bad after a 44% growth last year, right?

No doubt about that, Morris. That’s certainly excellent growth, and I appreciate the perspective.

I would like to ask a follow-up regarding the capital expenditure question. You mentioned that your CapEx for the first quarter was $6.4 million. Has that amount been allocated to the indium phosphide or the gallium business?

It includes both. Especially for indium phosphide, we're adding furnaces. As Morris alluded to, we reached a point where we can't quite meet the demand from one of our good customers. So they're a bit nervous about us right now, and we have a solution. We're going to add more furnaces. It's going to be okay. But yes, so there's some equipment for indium phosphide. There's also some wafer processing equipment in the gallium arsenide line and in the germanium line. So it's mixed.

Okay. Yes. If you could give me a little more information on the increase in market share, is that driven by new customers or higher share of wallet from existing customers?

Let me try that. I think customers usually don't tell us. I mean, they usually try not to say, if you give us a lower price, I'm going to give it to a competitor. We only guess what kind of market share we get. But on the other hand, you can tell some of the size. For instance, we cannot deliver substantially on some of the customer demand. We said, 'Well, we’re sorry; you're telling us this increased demand too late. Why don’t you get it from your second supplier?' The answer back is silence. So I think, either we are the majority shareholder or supplier, or alternatively, we think it’s more true that our competitor's lead time is longer. We’re putting somewhere around 8 weeks volume time on some of the indium phosphide products. Our competitor, we hear from our customers, is as far out as 6 months for lead time.

You're increasing your capacity for the indium phosphide. Are the other two major global suppliers also increasing their capacity?

That's a good question. The two, as is, I don't think I know, but I can give you some historical perspectives. In 2014 and 2015, we were growing 60% year-over-year for 2 years in a row. Those two years, the market didn't grow. We see some market research. We were growing at the top of maybe 20%. So we believe we’re taking market share. Also, if you look at AXT's revenue on indium phosphide, I believe we zoomed up very quickly. We believe we are firmly in #1 place now. We are not only good in terms of the quality we deliver but we are also very good in terms of answering our customers' commercial demand very responsibly. We’re gaining market share, I believe.

Okay. Last question. On the last call, you talked about efforts to recycle scrap raw material. How far along are you in getting success in that? If it is successful, it seems like that should make a material difference in gross profit margin. Is that correct?

Yes. We're getting on very well on that. We're probably launching that this quarter and increasing in volume next quarter. The good thing is a significant part of the volume has been saved because we have saved all these recyclable materials that we have a way to go. As far as saving in terms of helping us in gross margin is concerned, I think it's significant, but I don't know how to qualify it. As far as indium phosphide is concerned, indium phosphide raw material is a good portion of our costs of goods sold, let me put it that way. And if we can recycle it, yes, it will help us in gross margins.

I mean, I'm thinking that if it is successful, it would be at least a couple of percentage points of gross margin improvement. It wouldn't be tens of a percent; it would be multiple percent.

That could be, but that is limited to indium phosphide only. Indium phosphide is only about 30% or 40% of our revenue base.

I'm not showing any further questions at this time. I would like to turn the call back over to Morris Young for any closing remarks.

Okay. Thank you, everybody, for participating in our conference call. This quarter, we will be presenting at the 19th Annual Craig-Hallum International – Institutional Investor Conference. We do look forward to seeing many of you there. As always, please feel free to contact me, Gary Fischer, or Leslie Green directly if you would like to set up a call with AXT. I look forward to speaking with you in the near future.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.