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

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 these 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 July 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 second quarter of 2022. This information is available on the Investor Relations portion of our website at axt.com. I would now like to turn the call over to Gary Fischer for a review of our second quarter results. Gary?

Thank you, Leslie and good afternoon to everyone. We're very pleased and excited with the financial results in Q2. Let's walk through them and get Morris on stage. By the way, Morris just returned from four months in Beijing. So it's nice to have him back. So okay, revenue for the second quarter of 2022 was $39.5 million, approximately comparable to $39.7 million in the first quarter of 2022 and up 17% from $33.7 million in the second quarter of 2021. For the first half of 2022, revenue was up 22% over the first half of last year. To break down our Q2 2022 revenue for you by product category, indium phosphide came in at $15.7 million, slightly over Q1 and again, a new record. Gallium arsenide was $12.2 million and this is another positive number in the quarter, $12.2 million is the highest quarterly revenue for gallium arsenide since the third quarter of 2012. Germanium substrates were $3.9 million, and revenue from our two consolidated raw material joint venture companies was $7.8 million. In the second quarter of 2022, revenue from Asia Pacific was 74%. Europe was 13%, North America was 13%. The Top 5 customers generated approximately 35% of total revenue and one customer was over the 10% level. We continue to believe that revenue diversity demonstrates our growth is not overly dependent on any particular customer or application. This is another factor contributing to our confidence that we have reached a point of sustainability and can outpace market growth in 2022. Non-GAAP gross margin in the second quarter was 39.4% compared with 33.8% in Q1 of 2022 and 36.4% in Q2 of 2021. For those who would prefer to track results on a GAAP basis, gross margin in the second quarter was 39.1%, which compared with 33.6% in Q1 and 36.3% in Q2 of last year. As you can see, we made huge progress on gross margin in Q2. While there were many factors that contributed, improved yields, particularly in crystal growth, was one of the most significant ones. Morris conducted regular meetings on yields during his four months in Beijing, and part of our margin improvement has come as a result of this focus. Another contributing factor is that both BoYu and JinMei, our two consolidated raw material companies, improved their gross margins. A third factor is that we developed a process technology that enables us to recycle remnants of indium phosphide processing material. In addition to the gross margin benefit, this program is another step forward for us in our ESG commitment. A fourth factor is product mix; by comparison to the first quarter, the mix looks pretty similar. However, within each substrate product, the diameter mix can impact gross margin. So product mix was more favorable in Q2. Moving on, total non-GAAP operating expense in Q2 was $9.1 million. This compares with $8.6 million in Q1 and was 7.4% in Q2 of last year. On a GAAP basis, total operating expense in Q2 was $10.1 million compared with $9.6 million in Q1. For comparison, total GAAP operating expense was $8.3 million in Q2 of 2021. The totals for the current Q2 included a charge for bad debt of about 200K. We don't experience this very often but we did this quarter. Non-GAAP operating profit for the second quarter of 2022 was $6.4 million compared with non-GAAP in Q1 of $4.8 million and $4.9 million in Q2 of last year. For reference, GAAP operating profit for the second quarter was $5.3 million, up from an operating profit of $3.7 million in Q1 and an operating profit of $3.9 million in Q2 of last year. Non-operating other income and expense for the second quarter was a net gain of $2.3 million. This includes a gain of $2.2 million from the unconsolidated raw material companies. The full breakdown is in our press release. The contribution from the equity method raw material companies is higher than usual and reflects higher ASPs for the raw materials and more units sold. For Q2, we had a non-GAAP net income of $6.7 million or $0.16 per share compared with $4.3 million or $0.10 per share in the first quarter of 2022. Non-GAAP net income in Q2 of 2021 was $5.4 million or $0.12 per share. On a GAAP basis, net income in Q2 was $5.5 million or $0.13 per share. By comparison, net income was $3.2 million or $0.07 per share in Q1 and $4.4 million or $0.10 per share in Q2 of last year. The weighted average diluted shares outstanding in Q2 of 2022 was 42.5 million shares. Cash, cash equivalents and investments were $57.2 million as of June 30. By comparison, at March 31, it was $44.3 million. This is an increase of $12.9 million. We did get a bank loan in China for approximately $13.8 million during the quarter. If you eliminate that loan, the cash is basically unchanged for the quarter. Depreciation and amortization in the second quarter was $2 million and capital investments were $16.8 million, of which about $14.8 million was construction. Most of this is facilities-related in indium phosphide equipment related. Total stock compensation was $1.1 million. Net inventory at June 30 was $77.3 million, given the current supply constraint environment and should be locked and loaded when demand accelerates. We did buy ahead in Q2. But 50% of the inventory is raw materials and WIP is 46%. Finished goods actually declined in the quarter and makes up only 4% of inventory. This concludes the discussion of the quarterly financial results. Turning to our plan to list our subsidiary, Tongmei, in China on the Star Market in Shanghai, we did have a very big development recently, which is that the Shanghai Stock Exchange approved Tongmei’s application for the initial public offering. The application was approved on July 12 and will now be submitted to the China Securities Regulatory Commission for the next step in the review process. We consider this to be a major milestone in our effort to complete the Star Market IPO, as we are told that the Shanghai Stock Exchange review is the most detailed, thorough and lengthy of the reviews. We still have more work to do and we do not want to be overconfident, but the achievement of this milestone will hopefully mean that Tongmei can complete the listing in this calendar year, most likely in Q4. We're very proud of the team for our progress and believe that our success further underscores our achievements in demonstrating AXT's world-class capabilities. Overall, the IPO is getting a lot of positive visibility in China and is affording Tongmei a new level of respect and prestige. Before I turn the call over to Morris, I want to take a moment to address the COVID restrictions in China. To date, we have not had any shutdowns of our operations in Beijing, Dingxing or Kazuo. As we noted last quarter, we have experienced some supply chain disruption as a result of shipment delays and supplier shutdowns relating to products that we use in our manufacturing process. However, so far, we've been able to mitigate the impact with inventory on hand. We've also seen some pockets of softness where customers are on lockdown but the demand for our products, coupled with the diversity of customers and applications that need them, have allowed us to shift our allocations to other customers or applications that remain in high demand. Like most companies, we are monitoring the situation closely and are managing through these issues with high-level attention. We remain in close contact with our customers to understand any changes in their demand expectations should those changes occur. Okay. Well with that, I'll now turn the call over to Dr. Morris Young for a review of our business and markets. Morris?

Thank you, Gary. This is a very exciting time in our business. Our strong execution on a number of fronts has set the stage for great opportunities in the coming quarters. We continue to achieve strong growth in highly strategic applications and are currently ramping several Tier 1 customers. Further, our product quality and technical capability has created a standard of excellence that is increasingly difficult for our competitors to match. As is evidenced by our market share gains in indium phosphide. And despite supply constraints in our industry, we're working hard to meet customer requirements across a growing number of applications. We are also achieving notable success in the development of large diameter substrates that will enable the next generation of technology innovation across a number of end markets. This strong execution has driven first half revenue growth of 22% over the previous year and continues to enable us to outperform our market with emerging opportunities that will materialize in the coming quarters. As Gary mentioned, we set a new record for indium phosphide revenue in Q2. Demand for our product for 5G telecommunications, data centers, and LiDAR applications continues to grow, overcoming a downtrend in the market in Q2. We also saw healthy growth in our new customer applications with continued ramp in Q2. In addition, we're pleased to report that we are now qualifying in a second consumer application for which we delivered pre-production quantities of indium phosphide wafers in May and June. I cannot stress enough the significance of this achievement. AXT answered the call on a very tough product specification, surpassing the best efforts of our competition and has proven itself up to the challenge of meeting the stringent requirements of a world-class organization. As such, we are now in a position to build meaningful revenue in a brand-new market for AXT and we are also engaging with other Tier 1 customers for opportunities that were previously not available to us. We're now becoming the company to beat in indium phosphide wafers. This year, we doubled our capacity for indium phosphide, demonstrating our unique ability to scale quickly and cost-effectively to meet customer demand. Even with the additional capacity, we expect that supply will continue to be constrained into next year. We continue to work closely with our customers to meet their requirements. On the innovation front, we have achieved an important milestone in the development of 6-inch indium phosphide. We are now producing and beginning to sell prime device-quality wafers of 6-inch indium phosphide. This is the culmination of major R&D initiatives for AXT. The material quality of our large diameter substrates demonstrates our commitment to excellence and the differentiation of our VGF crystal growth process. We're pleased to be able to offer our customers meaningful advantages in scalability, low stress, and low defect rates as new high-volume applications come to market. Turning now to gallium arsenide. Total revenue was up in Q2. Our traditional high-end LED market demand remains strong in applications such as automotive display and high-end signage and lighting. We also continue to see strength in high-power industrial laser applications where we have gained significant market share. These lasers are commonly used for improvement, testing equipment, choosing for cutting metals, robotic applications, and others. Wi-Fi applications for IoT also helped to drive a modest increase in revenue over the prior quarter. In RF devices, demand is expected to come down a bit in Q3 but we continue to focus on strengthening our position for future opportunities. We made good use of the tighter environment to renew our relationship with key customers and believe we have laid important groundwork for future market share growth. The sophistication and capability of our new manufacturing facility, coupled with our achievement of several Tier 1 customers, have demonstrated our ability to support customers in this space with high-volume, high-quality substrates. Before I leave the topic of the gallium arsenide substrates, I want to give an update on our 8-inch gallium arsenide development program. I'm pleased to report that we now have two major customers for this product and we are working with them on design specifications. The level of engagement from our customers is exciting and gives us increasing confidence that there is a real market developing for large diameter gallium arsenide. We believe that 8-inch substrate will be an important enabler for new high-volume applications over the next several years. Now turning to germanium substrates. Coming off of two of our highest revenue quarters in Q4 and Q1, sales were down somewhat in Q2. The satellite solar cell market, which is the primary driver for germanium, tends to be lumpy, though industry forecasts for new satellite launches show continued strength. I do want to note that we do expect germanium’s revenue to be down meaningfully in Q3 as a result of a customer-specific payment issue that we expect to resolve before the end of the year. Revenue from our two consolidated joint ventures was about flat in Q2 and looks to remain solid in Q3. In particular, JinMei has been contributing well. It has continued to diversify its product offering beyond high-purity gallium. Since relocating to our Kazuo location, JinMei has more capacity and state-of-the-art facilities. Today, it also offers purified indium and indium phosphide poly for sale. In addition, JinMei successfully developed a gallium recycling program which is helping us drive efficiency in our cost structure. Both indium and BoYu have a strong R&D culture that is contributing to innovation in new offerings that enhance their value. In conclusion, our strong execution has paved the way for a remarkable transformation of our business. Today, we are more diversified than ever before with success across a wide variety of customers and applications. We've proven that we can raise the bar on our business processes to meet the very high standards of some of the most sophisticated customers in the world. And in return, we can earn their business and respect, which is opening doors to growth opportunities across our portfolio. As we look ahead to the next generation of technology that will reshape everything from connectivity to consumer devices to LiDAR, health care monitoring, and more, AXT is bringing to market innovations in large diameter substrates that will help make them possible. And all of this is being validated by our continued progress in a very diligent IPO process for Tongmei's STAR market listing in China. I couldn't be prouder of our team or more excited about our future ahead. I will now turn the call back to Gary for our third quarter guidance.

I had myself on mute. So can you hear me now?

Yes.

Okay. Thanks, Morris. Demand across our portfolio continues to be strong and we are working hard to keep up with customer orders. In particular, we're expecting indium phosphide to have healthy growth in Q3 with multiple Tier 1 customers and the breadth of applications driving this, including data centers, telecom, consumer, driverless cars, and others. Gallium arsenide for lasers and LEDs is also growing well. On the top line, growth in these areas will likely be somewhat obscured by a decline in germanium substrates caused by the customer-specific issue that Morris mentioned. Once it is resolved, germanium substrate revenues are expected to rebound. The important read-through for our business is that we are growing and seeing strong demand across our business with new growth drivers that are just gaining momentum. We expect to ramp these opportunities through the end of this year and well into next year. That said, Q3 revenue will be between $39 million and $41 million. We also expect gross margin to continue to be strong. As such, we expect our non-GAAP net profit will be in the range of $0.15 to $0.17 and GAAP net profit will be in the range of $0.12 to $0.14. The share count will be approximately 42.661 million shares. Okay. Well, this concludes our prepared comments. Morris and I will be glad to answer your questions. Kevin?

Our first question comes from Charles Shi with Needham.

Congratulations on the impressive results and the notable improvement in profitability. I want to begin by discussing the new opportunity with indium phosphide. Once again, congratulations on securing this new application, which I believe is your second. I think it was either yesterday or the day before when your top customer announced they were achieving some indium phosphide applications in smartphones, following the initial success in another area. I'm curious if you can comment on whether this is the same application or provide us with some quantitative insights. You've seen a bit of incremental revenue, though that was somewhat balanced by weakness in germanium in the third quarter. Should we anticipate this new opportunity to generate more incremental revenue than the first application you secured earlier this year or at the end of last year?

Sure. Let me take that first, Gary. So the second opportunity, yes, Charles, I think we believe it's bigger than the first one. We are ramping with them on pilot production now. And we believe probably towards Q3 and Q4, it should be twice the number of wafers going into this application. As to what application it is, I tell you, it really puzzles us. As you know, often we only provide substrate and we provide it to epi-growers. And even if I know, I'm not allowed to talk about it anyway. But we think it's somewhat related to an indium phosphide laser coupled with a detector application. And we think it's consumer product related. And we believe that in the beginning, they offer a certain product line in the beginning and if it becomes popular, then the volume could grow as it spreads to other models.

It seems that a specific consumer product will be implemented, which you expect will have a certain growth potential for the same application. Is that correct?

Yes.

Can you provide an update on the microLED opportunity? I understand you are focusing on larger gallium arsenide wafer sizes, and if microLED becomes a reality, it seems it will require a significant amount of gallium arsenide wafers. Do you have sufficient capacity at this time? Can you share where you currently stand with the microLED qualification? Is it expected to be ready in one year, two years, or three years?

Sure, Charles. We currently have two customers, and we're collaborating with them to design product specifications. We're sending hundreds of wafer samples to one customer who has been with us for several months and another who is just starting. We anticipate they will start their production process and provide feedback on improvements needed. They've shared some preliminary volume expectations, but we're not making any commitments yet since we need to ensure we can meet their demands. At this point, it's a bit early to gauge, but I believe we will begin ramping up production in 2024. In my estimation, the total addressable market in the first year could be around $30 million.

I'm ready to change my conservative stance. I believe the higher 30s is a reasonable estimate for the remainder of this year. I want to emphasize that both Morris and I are committed to not just talking but also taking action. Our top priority is to manage the business effectively. We've made significant advancements in Q2, and while we’ve been working hard, that progress wasn’t fully visible until now. Therefore, I recognize it may not be feasible for those running the model to stay at 35%. Additionally, while it's true that yield improvement has played a crucial role, other important factors are also relevant. A significant contributor has been the utilization of our new process technology, which allows us to recycle indium phosphide remnants. This made a substantial impact in Q2, building on some contributions in Q1 and even a smaller amount in Q4 of last year. We’re also considering product mix, which is why we are enthusiastic about the growth potential of indium phosphide, as this will help enhance our gross margin.

Congrats on a great quarter and congrats particularly on the gross margin line. Just on the germanium side of things, can you quantify at all what you're thinking about in terms of headwinds in calendar Q3?

Yes.

Go ahead, Morris.

Go ahead. I mean you're on the numbers. Well, we came in at Q2 about 3.9, right?

And I think we'll be around maybe $2 million or $1.9 million in Q3. The thing I want you all to understand is that we're going to try and get this thing resolved now. We're not going to wait until December 31. And the demand is still there. It's been improving in the last couple of quarters. It's all tied to satellites and we all know satellites are going to continue to go up. But in case we don't get it resolved fast enough, then we've taken our forecast down and we're giving you the conservative forecast. But we're working this problem and it's not laying on the back burner.

And then shifting over to kind of capacity and inventory, Gary, can you just remind us what a more typical inventory mix might look like or more typically what you'd be carrying in terms of finished goods?

It's relatively small. Over time, it could be around 5% or 6%. I may not remember exactly, but I don't recall it ever being around 10%. We generally get that shipped out. Normally, it remains steady. This quarter, it decreased, but from a business perspective, if we're going to see an increase in inventory, I prefer that it be in raw materials and work-in-progress rather than just an accumulation of finished goods.

And then I guess my last question is simply, so it sounds like if you had more material and particularly more indium phosphide, you could ship more material. I guess, when we're thinking and clearly, you're spending money on CapEx. Can you talk a bit about how that spend equates to increased capacity, both heading out of this year and then into next?

Morris, do you want to take that or do you want me to go first?

Sure. It's an ongoing process. I want to elaborate on this question a bit. As mentioned in our script, we are doubling our capacity this year. However, as the second consumer product starts ramping up, we anticipate that supply may still be somewhat constrained. Additionally, we have another product that will be qualifying in the latter half of the year, and we believe it could begin ramping up in the second quarter of next year. We also have inquiries from other customers regarding products for the driverless car market, specifically a laser LiDAR specification for indium phosphide. There are many factors at play. When we consider everything, we believe that this year's doubling of capacity may not be sufficient, and we will need to continue our growth. Of course, we also acknowledge the possibility of an economic downturn. The key question is how much these new product developments will be impacted by a potential recession. For us, the situation is somewhat simpler because the primary costs associated with expanding our production capacity are related to facilities. This includes building claims for DI water and similar infrastructure. Adding processing equipment and crystal growth equipment, which we design and manufacture in-house, can be done relatively easily. Recently, we have been solidly expanding our indium phosphide production facility in Beijing. This is beneficial because, as you may remember, our Beijing facility previously handled indium phosphide, gallium arsenide, and germanium wafer processing together. Three years ago, we decided to stop gallium arsenide wafer processing, which created a significant gap in our Beijing facility. The high demand for indium phosphide aligns perfectly with that gap. We only need to make some minor modifications for cleanroom purposes and infrastructure, saving us considerable expenses compared to constructing a new cleanroom. Overall, I believe AXT is in a fortunate position. I hope I addressed your questions, but to reiterate, while we are doubling our indium phosphide capacity this year, we anticipate needing to explore further expansions next year as well.

So again, congrats on the great quarter.

Our next question comes from Sam Peter with Craig Hallum.

Sam on for Richard here. First one, it looks like your Top 5 customers grew in dollar terms, a good bit quarter-over-quarter. I'm curious, are those top line customers the same five customers as you had in the first quarter or are they different?

Gary, do you know...

No, I'm not sure. I can look into it, but I haven't done a comparison from quarter to quarter.

On the usual...

Yes, there is one customer that has been gradually increasing but hasn't reached the Top 5 recently. Generally, our customer base remains stable. We didn't have any customers contributing 10% last year, but in previous years, companies like Osram and LandMark would often reach that threshold in different quarters, and they typically rank among our top customers. However, as Morris mentioned, there is a noteworthy trend happening with indium phosphide, and we are well-positioned to take advantage of it. Among the three substrates we produce, we excel in producing indium phosphide wafers. This is a challenging technology as it requires growth under pressure, and we outperform our competitors in this area. This trend is significant, and I want to emphasize that there is indeed a remarkable opportunity for indium phosphide, and we are ideally positioned to capitalize on it. The developments Morris highlighted are likely to attract new customers who are currently outside our Top 5, and within a year, some of them might break into that group.

That answers my question well. I understand that dynamic with indium phosphide and that's kind of what I was asking after with if any of those new customers you kind of made it yet. So that's helpful. Sticking with indium phosphide in that topic. I'm just running out the numbers here. And I think last quarter or maybe the past few quarters, you talked about indium phosphide growing 30% year-on-year for fiscal '22 as a whole. And just looking at where the numbers shake out, it seems like that number might end up being closer to 40% year-on-year growth in 2022. Is that how you guys are thinking about it or is that a little too aggressive?

Well, next quarter is definitely a strong quarter. We're counting on it, but I don't know what the fourth quarter is going to be like. I think it's going to be a strong growth year this year. Last year, I think our indium phosphide grew something like 44%, right, Gary?

I'm looking here 41%.

I tried to achieve 3%.

Hang on a second. I'm just going to quickly add something up and yes, you're correct. It's 30% likely to be too conservative. I think doing a quick calculation here, it will definitely be more than 35%. It could start with a four again. I don't have the Q4 number on my worksheet right now, but I've got two actions plus what we anticipate for Q3. In Q3, costs are going to grow double digits over Q2.

And I think my last question, just on the large diameter substrates that you seem like you had some success, both with 6-inch indium phosphide and 8-inch gallium arsenide. Curious if you could describe that just a little bit more and maybe talk about where you think you sit on both of those large diameter substrates relative to your competitors...

So let me understand. You want me to compare ourselves with our competitors on these two products?

I'm curious about the advancements you made in your large diameter substrates this quarter. How do you believe this has changed your competitive position, and where do you currently see yourself with those products?

These two products are still in development, so they haven't generated significant revenue yet. Currently, I know of one, actually two competitors that can manufacture 8-inch gallium arsenide substrates, but we lack information about their capabilities, the quality of their wafers, and their costs. For indium phosphide, we are aware of one competitor able to produce 6-inch wafers. I'm proud to share our progress because we have put in a great deal of effort to achieve this. However, it's not the right time to compare our products in the market due to minimal demand; we are just launching our first product, and it will take time to mature it and finalize specifications. I would gladly discuss potential production of 3-inch and 4-inch wafers. If you're looking for 10,000 wafers, we can talk about specifications and how we can differentiate our products from our competitors. Overall, it's challenging to gauge our standing compared to competitors because we’re not fully aware of their products, whereas we are clear about our own position.

Yes. I agree with you, Morris. I want to add one thing, though. I think that where we do stand out in terms of differentiation is that we're the only competitor who has new facilities, new equipment, upgraded facilities, upgraded equipment, to add capacity quickly. So when we get into a competitive bake-off, we think we'll do well on specs and technology. But I think we have an edge over our competitors because some of these applications are very high volume. And the customer that's buying for this stuff is nervous about capability. And that's where I think we shine.

Our next question comes from Ethan Ada with B. Riley.

Could you provide some additional color on your backlog and how you see that playing out directionally over the next few quarters, especially with this big capacity buildup?

Go ahead, Morris.

Well, we don't ever run the backlog, do we?

No.

Because I don't know how to drill that backlog number. I mean, maybe I can answer it this way. I think in the past few years, we always say it's difficult for us to come up with a solid forecast because our customers can always cancel their orders and they don't give us a long-term forecast of how much they want. But in the last five, six quarters, we have been able to tell our investors our visibilities are much better. We are forecasting, let's say, on some product is a lot clearer for instance, in indium phosphide. We've got customer lineups and they're telling us how much they want. And in some cases, we don't have enough to fulfill their current short-term needs. And so we have to push out the lead time to six to eight weeks. But as we increase our capacity, we should be able to shorten that lead time. But for instance, germanium, and I know the need is there. But obviously, we're not going to forecast that they're going to be my next month's forecast because we haven't resolved the price and payment issue. I mean, germanium is a weird thing to talk about. But germanium carries a very large portion of germanium raw material as cost of our goods sold and germanium raw material price has increased quite substantially, almost doubled in the last year or so. So as you can see, if they constitute 50% of my costs were sold and that cost doubled that squeezes my margin tremendously. So obviously, we want to talk to our customers and see if they can help. If they can, then we need to find some way to make ourselves not a terrible organization. So I don't know if I have answered that question, but we've never done the big to bill ratio in our organization ever yet.

Let me provide some additional information. Our business model operates on a purchase order basis. The crucial aspect is that we base our operations on a forecast that we create. We can do this because orders tend to be cyclical. Once a customer qualifies us as a wafer substrate supplier, it's challenging for them to switch to another source. Therefore, while we don't specifically track backlog, we do keep an eye on forecasts, which we already have in place through Q4, and these are generally quite dependable. Given the nature of our business interactions, both sides rely on each other, making it difficult for customers to change suppliers. Please continue.

So do you think that you see double ordering as an issue?

That is always a fear. Yes, absolutely. But we try to talk to each other. We try to talk to them and say, 'Hey, are you aware your customers ordering the same thing? I mean are you double-ordering?' We do make sure we don't want to stuff the channel, for sure. But so far, we don't see it.

Yes. We're not seeing that now. And we're pretty close to the big customers. So again, they have a vested interest to not abuse the relationship because they need the product. So especially right now, it's tight out there right now from the supply side for our competitors and for us. We know that it's running tight. So there's not a lot of gamesmanship in terms of pretend that.

Yes. The other thing is our wafers are actually perishable and they have a guaranteed shelf life. If they order it and they sit on the shelf, then they cannot use it. They have to return the wafer for us to repolish, sometimes we do it for free, but sometimes we have to charge for a restocking fee. So I don't think it makes any sense for somebody to overbuy it and stock it.

Congrats again on the quarter.

Our next question comes from Hamed Khorsand with BWS Financial.

So just a follow-up on that question. There's how much of the clarity and variability is there in the orders that you received from customers, how would you describe the clarity you have within the current quarter and beyond the current quarter?

The current quarter is this current quarter much clearer and better than the order that we receive forecast for the next quarter. I do understand. I mean order is an order...

Well, I'm just trying to understand the last quarter, you guided what was it, 38% to 41%, you end up closer to the lower end. So I'm just trying to understand what the variability is in the ordering trends in your guidance that you provide and how you ended up at 39% instead of 41% and how that spills over into this quarter.

Okay. That's a very good question. COVID did play a role in the last week or two of the last quarter, Q2. By the end of Q2, COVID started to increase a bit in our area. As a result, we missed one or two orders that we could not deliver to our customers. Initially, we expected to deliver almost another 1.5 million, but it didn't happen. It is what it is. As you mentioned, those orders might be pushed to the next quarter. However, I can't recall if we pushed over any orders from last quarter or if we pooled any orders then. We believed that the end of Q2 was a very strong quarter.

Hamed, just to point out, 39.5% isn't at the low end of the range, it's exactly at the midpoint of the range.

Gary, about the bad debt charge, your receivables, how are you managing that? And are you making adjustments in who you're giving credit terms to?

No, we haven't changed our policy, but we're pretty conservative. For existing customers, there are no issues. However, occasionally an existing customer may face difficulties, but I don’t believe we’ve had any significant write-offs in the last couple of years. For new customers, we conduct credit checks, and they need to complete a credit application. We utilize services like credit reference agencies internationally to help with this. Overall, we feel confident in our approach. For smaller accounts like universities, the credit risk is minimal. We have a thorough process in place and haven’t found it necessary to alter it, as it’s effective.

Okay. My last question is regarding the several Tier 1 customers you’re ramping up. Are any of them under the 10% or 5% threshold that could potentially become significant for you as you continue to ramp them? What is the timeline for achieving optimal revenue from these Tier 1 ramps?

Hamed, I haven't done that conclusion, but it really depends upon when they start to ramp and some of these customers, they have a cross-line effect. One customer takes the wafer and they build an app and they give it to the other one. And so I'm not so sure I can predict who is going to be the number three and it's going to ramp up to number two or one now. But so far, I don't see any very dramatic change. But all I know is indium phosphide will grow very nicely next quarter. Thank you for participating in our conference call. This quarter, we will be presenting at the virtual BWS Financial Conference on August 23 and the 3rd Annual Needham's Virtual Semi Cap Conference on August 24 and Jefferies 2022 Semiconductor Conference in Chicago August 30. We 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 us. We 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 presentation.