Good afternoon, everyone, and welcome to AXT Inc.'s Second Quarter 2025 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. In addition, Tim Bettles, VP of Business Development, will be participating in the Q&A portion of the call. My name is Audra, and I will be your coordinator today. I would now like to turn the call over to Leslie Green, Investor Relations for AXT. Please go ahead.

Thank you, Audra, 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 results or events 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 regulations in China and COVID-19 or other outbreaks of 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 conference call will be available on our website at axt.com through July 31, 2026. 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 2025. 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 2025 results. Gary?

Thank you, Leslie, and good afternoon to everyone. Revenue for the second quarter of 2025 was $18.0 million, compared with $19.4 million in the first quarter of 2025 and $27.9 million in the second quarter of 2024. To break down our Q2 2025 revenue for you by product category, indium phosphide was $3.6 million, primarily from PON and data center applications in China. Gallium arsenide was $6.2 million, germanium substrates were $1.5 million. Finally, revenue from our consolidated raw material joint venture companies in Q2 was $6.7 million. In the second quarter of 2025, revenue from Asia Pacific was 90%, Europe was 9% and North America was 1%. The top 5 customers generated approximately 30.9% of total revenue and 1 customer was over the 10% level. Non-GAAP gross margin in the second quarter was 8.2%, reflecting a solid improvement from the prior quarter. For comparison, we reported a negative 6.1% gross margin in Q1 and a 27.6% gross margin last year in Q2 of 2024. For those who prefer to track results on a GAAP basis, gross margin in the second quarter was 8.0% compared with negative 6.4% in Q1 and 27.4% last year. We continue to be highly focused on driving continued improvement, including further recovery in Q3. Moving to operating expenses. Given the difficult climate, we have been working hard to hold operating expenses down. Total non-GAAP operating expense in Q2 was $7.6 million compared with $8.5 million in Q1 and $8.9 million in Q2 of 2024. On a GAAP basis, total operating expense in Q2 was $8.2 million compared with $9.0 million in Q1 and $9.5 million in Q2 of 2024. Our non-GAAP operating loss for the second quarter of 2025 was $6.1 million, compared with a non-GAAP operating loss in Q1 of 2025 of $9.6 million and a non-GAAP operating loss of $1.2 million in Q2 of 2024. For reference, our GAAP operating line for the second quarter of 2025 was a loss of $6.7 million, compared with an operating loss of $10.3 million in Q1 and an operating loss of $1.9 million in Q2 of 2024. Nonoperating other income and expense and other items below the operating line for the second quarter of 2025 was a net loss of $0.4 million. The details can be seen in the P&L included in our press release today. For Q2 of 2025, we had a non-GAAP net loss of $6.4 million or $0.15 per share compared with a non-GAAP net loss of $8.2 million or $0.19 per share in the first quarter of 2025. Non-GAAP net loss in Q2 of 2024 was $0.8 million or $0.02 per share. On a GAAP basis, net loss in Q2 was $7.0 million or $0.16 per share. By comparison, net loss was $8.8 million or $0.20 per share in the first quarter of 2025. GAAP net loss in Q2 of 2024 was $1.5 million or $0.04 per share. The weighted average basic shares outstanding in Q2 of 2025 was $43.7 million. Cash and cash equivalents and investments decreased by $3.1 million to $35.1 million as of June 30. By comparison, at March 31, it was $38.2 million. Depreciation and amortization in the second quarter was $2.5 million. Total stock compensation was $0.6 million. Net inventory was down by approximately $300,000 in the second quarter to $80.1 million. This continues to be a focus for us, and we expect to bring it down further in quarters to come. Okay. This concludes the presentation of our quarterly financial results. Turning to our plan to list our subsidiary, Tongmei, in China on the STAR Market in Shanghai. We have continued to keep our IPO application current. Tongmei remains in process as part of a much more selective and smaller group of prospective listings than a few years ago. While we are not insensitive to the current geopolitical environment, Tongmei is considered a Chinese company and continues to be regarded in China as a good IPO candidate. We will keep you informed of any updates. 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, and thank you to our customers and investors for your ongoing support as we navigate this unique macroeconomic environment. As Gary mentioned, our substrate revenue increased in Q2 from the prior quarter, but the increase was less than we had expected as a result of longer processing times for gallium arsenide export permits, coupled with some sluggishness in the demand environment in China. That said, we made good progress in driving recovery in our gross margins with a strong focus on our manufacturing process and efficiency. We also saw healthy growth in AI-related demand for indium phosphide substrate in China. And as a result of obtaining our first export license in June, we were able to ship initial orders of indium phosphide substrates to our customers outside of China. Since export restrictions are top of our mind for our investors, I'd like to begin there with an update, and then we will discuss our key markets. As many of you know, the Chinese government imposed trade restrictions on the export of gallium arsenide in August of 2023 and on our indium phosphide in February of 2025. These regulations explicitly seek to restrict the export of materials used for military applications and require that we file an export permit for every customer order. In our experience, we typically hear back on initial applications within 45 business days, and repeat applications are often processed faster. With that said, we found the permitting process in Q2 for gallium arsenide to be slower than we typically see over the last 2 years. The delays in Q2 resulted in our being able to ship less material outside of China than we had anticipated. About half of our revenue shortfall in Q2 was the result of this factor. On a positive note, the pace of permits in the month of July has improved meaningfully, mostly on smaller orders, but this improvement is good news, and we do expect gallium arsenide revenue to grow sequentially. We're pleased to be granted our first permit for indium phosphide in late June, and we were able to ship nearly $700,000 of material for our non-China backlog in indium phosphide in Q2. Although the process for indium phosphide has been a bit slower than we expected as well, we have received additional permits in July and expect to see more over the coming months. Based on the pace so far, we're taking a conservative view of the timing of larger permits in Q3. As we have mentioned previously, we don't believe that any of our indium phosphide sales go into military applications. So, we feel we are in a good position to realize millions of dollars of sales backlog once we navigate the permit process. While the recent geopolitical environment presents a near-term headwind for our business, we are also taking advantage of some of the unique opportunities. The cloud and data center connectivity market in China is accelerating. And in an effort to promote innovation and reduce dependency on foreign suppliers, we're seeing a significant effort to develop domestic sources of EML and silicon photonics-based lasers. We estimate that the Chinese data center optical interconnect market is currently around one-third of the global market. However, most of the optical devices for these interconnects are sourced from outside of China and applications for indium phosphide substrate within China remain focused on the PON business only. Further, laser manufacturers in China are developing an appreciation for the critical benefit of low EPD material in high-speed interconnect devices. Both in the traditional PONs market and in the new data center market. As a result, our sales of indium phosphide within China are increasing. In Q2, we nearly doubled our revenue for AI-related applications, although the revenue base is small, and we expect to continue to grow in Q3. The total addressable market for the data center market in China remains small at this moment, but we expect to see significant growth over the next few years as the PON laser providers expand their portfolio to include EML and silicon photonic solutions. Broadly speaking, we expect to grow our total indium phosphide revenue by 30% or more in Q3, as a result of growth in applications for PON, data center connectivity, and various indium phosphide-based sensors. Now turning to gallium arsenide. Demand in China was sluggish in Q2, and customers are taking a more cautious approach to ordering and holding inventory. Despite a lackluster environment, we were pleased to be able to grow our wireless business in China during the quarter, with continued growth expected in Q3. As we mentioned, there's a sizable opportunity in the wireless market for which our technology and products are well suited. During Q2, we took a more measured approach to market expansion, and we were able to service a portion of the customer opportunity while executing effectively at modestly higher production levels. The adjustment we made in our approach, along with the strong focus from our manufacturing organization on yield and efficiency, allowed us to drive meaningful improvements in gallium arsenide gross margins, which contributed to our overall progress to our good margin recovery. And this will continue to be a top priority for us in the second half of the year. Turning to our germanium business. We saw growth in our revenue in Q2, driven by satellite solar cell applications in China. This market is highly price sensitive, and we continue to be very selective in the business opportunities we choose to support as the sharp rise in germanium raw material pricing in the last several years has severely constrained gross margins. In addition, germanium substrate permits for sales outside of China have been difficult to obtain. Therefore, in Q3, we expect to see our sales decline again, and we may remain at lower levels throughout the second half of the year. With regard to our raw material joint ventures, our consolidated revenue in Q2 declined by approximately $1.6 million compared to Q1. The economic climate was one factor, and the other factor relates to the mix of revenue from the two service models a customer chose for our germanium purification process. On a positive note, the pricing environment has been relatively stable. Globally, there continues to be a greater awareness of the importance of earth materials, and we're ahead of the curve in developing this unique and integrated supply chain. In summary, though the export permit process has been slower than we would like, we are making progress against a backlog of more than $10 million in customer orders for gallium arsenide and indium phosphide substrates. We're also encouraged to see growth in strategic applications within China, including indium phosphide for AI-related data center connectivity and gallium arsenide for wireless devices. With a strong focus on gross margin improvement across our product portfolio, we delivered meaningful recovery in Q2 and expect to continue our progress in the second half of the year. Our competitive positioning continues to be enhanced by superior product performance in key specifications such as low EPD, and we are working diligently to support the next-generation technology requirements of our global customer base. With that said, I will now turn the call back to Gary for our third-quarter guidance.

Thank you, Morris. In keeping with our comments today, we believe Q3 revenue will grow sequentially to be in the range of $19.0 million to $21.0 million. This guidance range includes a modest contribution from indium phosphide and gallium arsenide for our customers outside of China and only includes revenue for which we currently have permits. Within China, we continue to optimize the emerging opportunities to grow our business in strategic applications for both indium phosphide and gallium arsenide. And finally, we expect our germanium revenue to be down and our raw material business to be approximately flat in Q3 from the prior quarter. As Morris mentioned, we continue to focus strongly on gross margin improvement. In Q3, we expect our margins to improve again and to be in the low to mid-teens. Based on this revenue range and gross margin improvement, we believe our non-GAAP net loss will be in the range of $0.11 to $0.13 and GAAP net loss will be in the range of $0.13 to $0.15. Share count will be approximately 43.8 million shares. Okay. This concludes our prepared comments. We'd be glad now to answer any of your questions. Audra?

We'll go first to Ross Cole at Needham & Company.

And it's great to hear that you're starting to get some of the permits, especially for indium phosphide. But I was wondering, given that there's still been a bit of a delay in the permitting, are you concerned about any potential share loss to customers if they're continuing to wait for this licensing process?

Tim, go ahead.

Sorry, Morris. Yes, I can answer that. So, in the near term, obviously, it has taken some extra time to get these permits. And the customers are working in every channel they can to get material in on time. But we do continue to receive permits. And if we continue to receive permits for specifically those larger orders, we have a very healthy backlog that's ready to ship. And we believe that the market is just growing too fast to be adequately serviced by just two players at this moment. So long term, I think the business still holds good.

Yes. If I may add to that point, indium phosphide is at a critical juncture at this point. I think indium phosphide traditionally has been serving the faster data center activities such as transceivers. But now with AI moving from 800G to 1.6T to 3.2T, as the speed goes up higher and higher, the need for indium phosphide is also increasing, and the requirement for lower EPD material becomes that much more important. And so, I believe that with AI’s advancement in data center applications, the demand for indium phosphide will increase tremendously, and also because the device size becomes larger and the power requirement for these higher-speed indium phosphide devices will need better quality material. All that said, should increase our indium phosphide business opportunity for AXT. With all that said, AXT is also a significant player in the supply of indium phosphide substrates overall. We believe we are either number one or number two in the world of indium phosphide substrate supply, which we estimate to be at least 40% of the global indium phosphide supply. So, I think although the permitting and the geopolitical restrictions are hurting our business at this point, the demand is there, and we believe we should recover.

Great. That was really helpful. And then I have another question. It looks like it's great to see your gross margin improving again. And I wanted just to confirm, I remember in the first quarter, there had been a bit of a yield issue associated with gallium arsenide for a wireless HPT customer. It seems like that's been resolved. And have you resumed the business opportunity with that customer at this time?

Yes, we have. But although, we're taking, as we said in the script, a fairly conservative approach. We’re not taking a big portion of it, but we want to not only serve the customer well, but also improve our margin. So I think we should be able to continue to see the improvement throughout the second half of the year on that business. And if we can improve the margin, that implies better yield and efficiency, so we should ask for a higher portion of our business with that customer, which should grow our revenue as well.

Next, we'll move to Tim Savageaux at Northland Capital Markets.

I want to revisit something Tim mentioned regarding the market's rapid growth and the challenges of servicing it with just two players. I’d like to explore that further. There are many signs pointing to this, including the planned expenditures from hyperscale companies and the insights we’re receiving from various members of the technology ecosystem; demand appears to be quite robust. From AXT's viewpoint, can you provide more details on what you’re observing in terms of growth potential and how that may have contributed to an increase in your backlog during the quarter, especially in light of the export challenges? If we weren’t dealing with these export issues in indium phosphide, do you think the growth rate you initially anticipated has sped up? What trends are you noticing?

Thank you, Tim. It's a good question. I want to emphasize what Morris mentioned. We are observing a rapid increase in the demand for optical interconnectivity. The transition to higher-speed transceivers is happening quickly, which we anticipated. This trend benefits us since the requirement for higher quality materials and lower EPD materials increases as speed and size grow. Additionally, we are gaining market share due to this demand. Many new devices are larger, especially with the introduction of larger EML devices and silicon photonics, which increases the demand for indium phosphide substrates. We are seeing healthy growth in this area, likely surpassing our earlier predictions. As Morris noted, we hold about 40% market share. The market struggles to sustain itself with just two players, especially since we have a competitive advantage in quality and technology. While the permitting process is slow, we continue to receive daily orders for indium phosphide, indicating ongoing demand for AXT. Once we overcome the permit hurdles, we expect to see further demand growth.

Okay. And then just a follow-up. I think you mentioned the $10 million backlog for both indium phosphide and gallium arsenide. And I guess looking at the shortfall in the quarter, I think you said half of that was gallium arsenide export. So, should we infer from that that the majority, not the vast majority of that backlog is indium phosphide? And without the permits, I mean, could you ship all that this quarter? Or I guess, how quickly do you think you can get back to $10 million or get to $10 million a quarter in indium phosphide substrate revenue?

Right. Again, good question. Thank you, Tim. So yes, more than 50% of the backlog is indium phosphide. And we've got a large amount of capacity there right now. We're typically turning orders around in 4 to 6 weeks. Sometimes, if we need to, we can turn them around faster than that. Of course, before all of this permit procedure came into place, we've got a lot of work in progress and we've built up work in progress waiting to get some of those permits coming in as well. So, it is possible that we can turn all of this backlog around pretty quickly. But of course, it's going to be very dependent on the timing that those permits come in and how they come in throughout Q3. But we do anticipate that if we get more permits, we'll see an upside to our Q3 guidance.

We'll go next to Richard Shannon at Craig-Hallum Capital Group.

This is Tyler Anderson on for Richard Shannon. Could you expand upon why the gallium arsenide export licenses slowed down as the indium phosphide licenses began to be issued? And is this the same agency that's issuing these? And are you expecting any lower cadence of the indium phosphide licenses than what you expected before because of the gallium arsenide slowdown?

I can start to address this and then Morris can provide additional insights. It's challenging for us to speculate on the situation. However, we know that it isn't specific to AXT. The entire industry has been experiencing delays with gallium arsenide permits. What we've observed is that throughout Q3 and especially in the last month, the permit approval process appears to be accelerating again. We've received a significant number of permits in July. It seems they are making progress in addressing some of the backlog we've encountered. Therefore, we hope that things will return to normal soon for gallium arsenide, and we anticipate a similar pattern for indium phosphide as we approach normalization for gallium arsenide.

Yes. I think Tim doesn't want to speculate, but I can sort of tell you, if you see the news that the ongoing restriction of rare earth in China implementing the policy probably has something to do with it. In other words, China will want to use this as a negotiating tool. So, I think they started to restrict the number of permits. But I think we are seeing the latter part of it start to relax more now. I think it's getting into a more regular session that we should be able to get more permits regularly.

And are you seeing any sort of advanced order making where customers are starting to build inventory? And could we see any kind of spikes in your revenue moving forward as you work through the backlog and people start to place larger orders while they can get a permit?

I would tend to think there are customers threatening to give us big inventory orders to anticipate getting the permits. But I don't think we are at that stage because we're not delivering even the first big large orders. We do have a lot of very urgent order needs to be delivered. Customers have indicated that if we could get the first order through, they will give us anticipated orders; they want to build inventory. But I don't think we are at that stage to worry about that yet, because we're not even delivering the first batch. As far as big orders are concerned, we've so far delivered, we said $700,000 worth of indium phosphide orders outside of China. But the backlog is six times, seven times, or even ten times that.

And that concludes our Q&A session. I will now turn the conference back over to Leslie Green for closing remarks.

Thank you all for participating in our conference call. We will be participating in the Annual Needham Virtual Semiconductor & SemiCap Conference in August and hope to see many of you there. And as always, please feel free to contact us if you would like to set up a call. We look forward to speaking with you in the near future. Thanks.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.