Good afternoon, everyone, and welcome to AXT's Third 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, Vice President of Business Development will be participating in the Q&A portion of the call. My name is Kelvin, 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, Kelvin, 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, ability to obtain China export permits, the timing of receipt of export permits, ability to increase orders in succeeding quarters to control costs and expenses, to improve manufacturing yields and efficiencies or to utilize our manufacturing capacity. We wish to caution you that such statements deal with future events are based on management's current expectations and are subject to risks and uncertainties that could cause actual events or results to differ materially. In addition to the matters just listed, these uncertainties and risks include, but are not limited to, the financial performance of our partially owned supply chain companies and increased environmental regulations in China. In addition to the factors just mentioned or that may be mentioned 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 October 30, 2026. I also want to note that shortly following the close of market today, we issued a press release reporting financial results for the third 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 third quarter 2025 results.

Thank you, Leslie, and good afternoon to everyone. Revenue for the third quarter of 2025 was $28.0 million compared with $18.0 million in the second quarter of 2025 and $23.6 million in the third quarter of 2024. To break down our Q3 '25 revenue for you by product category, indium phosphide was $13.1 million, primarily from data center and PON applications. Gallium arsenide was $7.5 million, germanium substrates were $640,000 and revenue from our consolidated raw material joint venture companies in Q3 was $6.7 million. In the third quarter of 2025, revenue from Asia Pacific was 87%, Europe was 12% and North America was 1%. The top 5 customers generated approximately 45.2% of total revenue and 2 customers were over the 10% level. Non-GAAP gross margin in the third quarter improved substantially to 22.4%, reflecting improved product mix and higher volume to absorb overhead. For comparison, we reported 8.2% gross margin in Q2 of 2025 and a 24.3% gross margin in Q3 of 2024 last year. For those who prefer to track results on a GAAP basis, gross margin in the third quarter was 22.3% compared with 8.0% in Q2 of 2025 and 24.0% in Q3 of last year. We continue to be highly focused on driving continued improvement, including further recovery in Q4. Moving to operating expenses. Given the difficult climate, we've been working hard to hold down OpEx. In addition, we had some favorable adjustments in R&D in Q3 that brought our OpEx down to a lower-than-normal level. These will not carry over into Q4. Therefore, our total non-GAAP operating expense in Q3 was $6.7 million compared with $7.6 million in Q2 and $8.3 million in Q3 of 2024. On a GAAP basis, total OpEx in Q3 was $7.3 million compared with $8.2 million in Q2 and $9.1 million in Q3 of 2024. Our non-GAAP operating loss for the third quarter of 2025 improved substantially to $384,000 compared with the non-GAAP operating loss in Q2 of 2025 of $6.1 million, and a non-GAAP operating loss of $2.6 million in Q3 of 2024. For reference, our GAAP operating line for the third quarter of 2025 was a loss of $1.1 million compared with an operating loss of $6.7 million in Q2 and an operating loss of $3.4 million last year in Q3. Nonoperating other income and expense and other items below the operating line for the third quarter of 2025 was a net loss of $46,000. The details can be seen in the P&L included in our press release today. For Q3 2025, we had a non-GAAP net loss of $1.2 million or $0.03 per share compared with a non-GAAP net loss of $6.4 million or $0.15 per share in the second quarter of 2025. Non-GAAP net loss in Q3 of 2024 was $2.1 million or $0.05 per share. On a GAAP basis, net loss in Q3 was $1.9 million or $0.04 per share. By comparison, net loss was $7.0 million or $0.16 per share in the second quarter of 2025. GAAP net loss in Q3 of 2024 was $2.9 million or $0.07 per share. The weighted average basic shares outstanding for Q3 2025 was 43.8 million shares. Cash and cash equivalents and investments decreased by $3.9 million to $31.2 million as of September 30. By comparison, at June 30, it was $35.1 million. Accounts receivable increased by $11 million, so the delta in cash is explained in working capital. Depreciation and amortization in the third quarter was $2.3 million. Total stock comp was $0.7 million. Net inventory was down by approximately $2.4 million in the third quarter to $77.7 million. This continues to be a focus, and we expect to bring it down further in quarters to come. This concludes the discussion of our quarterly financial results. Turning to our plan to list our subsidiary, Tongmei, in China on the STAR Market in Shanghai. We've continued to keep our IPO application current. Tongmei remains in process as a part of a much more selective and smaller group of prospective listings than a few years ago. Although the current geopolitical environment is dynamic, 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 it over to Dr. Morris Young for a review of our business and markets.

Thank you, Gary. This has been a very eventful quarter for AXT as we are seeing a strong uptick in indium phosphide demand from data center applications globally and as our industry and our customers adapt to a new normal within a rapidly changing environment. In Q3, our revenue grew 56% sequentially and 18% year-over-year. Within this, our indium phosphide revenue grew to our highest level since 2022 as we were successful in obtaining export permits for a number of significant indium phosphide orders throughout the quarter. I'm very proud of the diligence our team and grateful for the partnership of our customers in working through the export control permitting process. Our current experience is that our indium phosphide permits are taking approximately 60 business days, or approximately 3 months, to be processed by China's Ministry of Commerce. This is a bit longer than our initial expectations, but customers are adapting to the requirements and are adjusting their ordering patterns to give us more visibility and longer lead times. I should also note that the Golden Week holiday at the beginning of October in China will likely increase the average permit processing time by a week or so in Q4. The tremendous growth in demand for indium phosphide-based lasers and detectors for high-speed optical connectivity, coupled with our successful obtaining export permits on behalf of our customers are driving a strong increase in our indium phosphide order backlog, which as of today is more than $49 million and growing. Our established customers are planning for longer lead times by placing longer-term orders and giving us more visibility into their expected demand. We are also seeing active engagement with several new Tier 1 customers to qualify our material into their supply chains for the first time in many years. This includes leading optical transceiver module makers, both in China and around the globe. As many of you know, the supply chain for optical transceiver is quite complex and highly globalized. We believe this geographic interdependence is providing both opportunities and incentives for the ecosystem to work together in new ways to solve global supply chain shortages. For a geographic demand perspective, the massive AI infrastructure build-out and the planned CapEx spending by cloud services and AI platform providers in the United States is the primary driver for EML and silicon photonics-based optical transceivers. We believe that today, our materials are being used in multiple U.S. hyperscalers, and we expect that end customers' use will continue to broaden. In China, the data center build-out is early in its ramp, but there is a strong desire for domestic suppliers at every level of the supply chain, and we believe over the next 12 to 18 months, we will see healthy growth in the China data center market. Data center expansion in China is quickly overtaking PON as the leading application in China for our indium phosphide substrates. Given the strong demand environment, it is important to note that AXT is well positioned to handle increased demand. We have ample manufacturing capacity in place today, and we can also significantly increase our output by current level, and we can also add capacity quickly as needed. We also have a demonstrated ability to supply very low EPD wafers in volume that meet the rigorous requirements of next-generation EML and silicon photonics-based devices. Now turning to gallium arsenide. Our revenue grew more than 20% from the prior quarter. The biggest driver was semi-insulating wafers for wireless RF devices, which remains a focused application for us. Industrial laser applications were about flat from Q2, and we saw an uptick in semiconductor wafers for data center laser applications. However, VCSEL lasers don't typically require a lot of gallium arsenide material, so they don't move the needle much as a growth driver. But they do require high-quality material, which we are well positioned to supply. In germanium substrates, our sales declined by about $1 million in Q3. The germanium substrate market was very poor gross margin potential today. And while our material performed well in the solar cell applications as we supply, gross margin constraint disincentivizes us to pursue many opportunities. In addition, certain customers prefer to source substrates outside of China. As such, we do not expect growth in germanium substrates in Q4. Finally, our raw material business in Q3 was consistent with the prior quarter and it was solidly profitable within a stable pricing market. We expect the same for Q4. Globally, there continues to be a greater awareness of the importance of earth materials, and we are ahead of the curve in developing this unique integrated supply chain. In closing, this is a highly active time for our business. The receipt of indium phosphide and gallium arsenide export permits remains the single most significant gating factor for our growth. As such, we are highly focused on ensuring that we are proactive, organized and disciplined about managing the process on behalf of our customers. We also know that we must be laser-focused on running our business with the greatest efficiency. This includes our continued effort to drive gross margin improvement, OpEx discipline, and inventory reduction. With strong ongoing market trends fueling the data center upgrade cycles, we believe we have tremendous opportunity in 2026 to drive meaningful growth in our business and a return to profitability. We look forward to reporting to you on our growth, on our progress. With that, I will turn the call back to Gary for our fourth quarter guidance.

Thank you, Morris. To reiterate a couple of key points from Morris's commentary, we are seeing a strong increase in our indium phosphide wafer demand related to AI and the ongoing data center upgrade cycle. Given the geopolitical complexities surrounding this market trend, customer behaviors in our space are changing to allow for longer substrate lead times. Our customers are placing longer-term orders and providing greater visibility into their needs. As such, our indium phosphide backlog has grown to $49 million and is the largest we've ever had in our history. Further, we are actively engaging with new customers today that we have not had business with in some time. With all of these positive market and AXT-specific growth drivers, the most significant gating factor in our growth in Q4 and beyond is the success and timing of getting export permits. Therefore, guiding for the future is somewhat tricky for us right now as we cannot predict future timing of permits or our success in obtaining them for any customer or individual order. But drawing on what we know and what we've experienced thus far in the export permitting process, we can offer the following insight into our expectations for Q4. As of today, we have approximately $20 million in revenue that can be realized in Q4 across our substrate product lines and raw materials for which we either already have a permit to ship or for which an export permit is not required because it ships within China. We have a high degree of confidence in recognizing this revenue in Q4. In addition, we believe there's an incremental $7 million to $10 million in indium phosphide and gallium arsenide backlog, which is currently in our manufacturing process for which we believe we may be able to ship in Q4 if we are awarded permits. Of course, timing of permits is not within our control, but we believe we are in a similar or slightly better position in terms of customer order backlog and permit submissions than we were at the same point in the prior quarter. As such, with that as a background, we believe we have the capability to achieve revenue in the range of $27 million to $30 million in Q4, subject to the caveats I just mentioned. This takes into consideration approximately flat sequential revenue contribution from germanium substrates and raw materials with incremental growth in Q4 likely coming from indium phosphide and gallium arsenide substrates. As Morris mentioned, we continue to focus strongly on gross margin. We made significant gains in Q3 and continue to work on our manufacturing efficiency. Further improvement in Q4 depends on a number of factors, including total revenue as it relates to the absorption of fixed costs, revenue mix by product and our ability to continue to drive better manufacturing efficiency. With regards to OpEx, we expect that it will increase to approximately $9 million as a result of some incremental end-of-the-year adjustments and a return to a more normalized level. With these factors in mind, we believe our non-GAAP net loss will be in the range of $0.01 to $0.03, and our GAAP net loss will be in the range of $0.03 to $0.05. This represents substantial year-over-year progress towards our return to profitability. We estimate the share count for Q4 will be approximately 43.8 million shares. And okay, this concludes our prepared comments. We'll be glad to answer your questions now. Operator, Kelvin?

Your first question comes from the line of Charles Shi of Needham & Co.

Maurice and Gary, congratulations on obtaining the licenses and permits, which contributed an additional $8 million in revenue this quarter, and also on achieving a $49 million backlog. That was an exciting figure to hear. I want to revisit the point on customer behavior changes, specifically whether they are placing longer-term orders. It seems that some customers may not have the necessary permits yet still decided to place substantial orders with you. Can you explain what is driving this behavior? Also, regarding the export permits you currently possess, do they have time or volume limits? What is your best prediction for how customer behavior might continue to evolve?

Yes. Thank you, Charles. So we have, as you say, $49 million backlog. That includes customers that have previously received permits and customers that are still in the permit phase for the first permit as we go through. Everybody that has previously received a permit has typically received subsequent permits from there. So there's a lot of confidence in getting further permits as we move forward through this. So people are placing orders into that backlog with the understanding that the confidence levels of receiving permits are high, especially for indium phosphide. So as we look forward and as we look at that backlog, all of the orders that we've received and put into backlog have permit applications in place so far. And we manage that backlog and those permit applications, and we manage the manufacturing process so that we can combine the expected permit approval time with the finishing of the product. So our lead time to ship the product after receiving the permit is very low.

Yes. So maybe I can add another point. I hear Charles is asking why? Is there any relationship with customers giving us a lot more order, a longer order lead time? Is it because we have a permit process? I think that is true. People realizing instead of just in time, they want to give us a long lead time to submit the permit application so that we can ship this product to them in time. Is that a part of the question, Charles?

Yes. I think maybe a better way to help us understand what the permit to the size of the orders, how much long term the orders is going to be? Maybe you can shed some light on, let's say, the order currently on average cover is it like 1-year demand, 2-year demand, 3-year demand? What do you see there? Like how long does the order you have in the backlog covers what customers demand?

Right. Okay. Understood. Thanks, Charles. So the permit, we apply for a permit and it can be for multiple shipments, number of shipments up to 12. This is the important part. The permit only lasts 6 months. So everything has to be shipped within 6 months of receiving the permit.

Yes. And the other point is this, our customers are telling us, we give you this order, if you get the permit and if you can manufacture it, you can ship it tomorrow.

So when Tim mentioned up to 12, that means 12 line items. Every PO needs a separate permit. So if you put each line item on a separate PO, then we need 12 permits. It's complicated as they say in the show business.

So, I have another question about profitability. A few years ago, when you were at a revenue level in the high 20s, your gross margin was likely in the high 20s or low 30s percent, and your non-GAAP EPS was positive. However, Gary, if I understood you correctly, you're still anticipating some non-GAAP loss in the upcoming quarter. Is there anything in your cost structure that has changed now compared to then? How can we return to similar profitability levels at the same revenue run rate from a couple of years ago?

Yes, we anticipate that question will come up. This is something we discuss internally. I often remind ourselves and analysts and investors that in our business model, we can’t just focus on one aspect. We need to concentrate on two to four factors to effectively drive progress. One area that needs improvement is gross margin, which is currently benefiting from a favorable mix and increased efficiencies on our production line. I'm pleased to share this because it is largely within our control, and we have historically performed better than our present situation. It is typical for manufacturing businesses to experience cycles, but I believe we can concentrate on this issue and achieve improvements. This is likely the most significant area for us. Additionally, I expect our joint venture companies will also provide more support, leading to improvements in the upcoming quarters. Those are the main points I wanted to highlight.

So Charles, maybe I can answer part of the other question. I think the deadliest thing in manufacture, I think analysts should ask is, is your ASP dropping, okay? I think we can say except with the low end on the 2-inch indium phosphide, most of our ASPs are holding very firm. In fact, some of the ASP for our high-end low EPD indium phosphide substrate, the ASP is increasing. Okay? So I think we can surely stop that worry. I mean we have some other efficiency issues such as loading factors; germanium is perhaps not making a whole lot of money for us because the pricing pressure is very strong. But the main focus on indium phosphide, the pricing is firm and the demand is high.

I think maybe one last question before I jump back into the queue would be the indium phosphide demand you are seeing today, how much of that is from the overseas customers that would need a permit versus domestic Chinese customers? And if I recall correctly, I remember that the indium phosphide was primarily shipped to outside of China previously. How much of the domestic development today maybe has led to a little bit more of a domestic shipment of the indium phosphide. If you can kind of paint a little bit of picture to us of how things have been evolving, that would be great.

The indium phosphide business has significant global connections. Many of our substrates are sent to Taiwan for EPON production and then returned to the United States to create devices, which are then shipped to China for transceiver manufacturing, and finally sent back to U.S. data centers. Our direct customer base in China accounts for about 40%. However, the substantial opportunity in AI is driving a major increase in AI data centers in the United States.

And I think I can add to that as well. If you look at our financials from Q2 versus Q3, you can see that the indium phosphide in Q2 was about $3.5 million, and that's increased to about $13 million in Q3. So that kind of gives you an idea of what the incremental is, and all of that incremental has come from outside of China.

I'll offer congrats on a wonderful quarter. Great to see. So congrats to the entire team for making that happen here. Let's start with the first question here on the indium phosphide backlog. I just want to understand the dynamics here. Maybe if you can help us understand a few things here. What was the backlog a quarter ago? And then how far out are customers ordering here? I would imagine, given one of the prior answers you're talking about a permit allows you to ship for 6 months that they're probably going out 6 months here, but just want to get a sense of what this looks like and how it's changed.

Yes. As Morris mentioned earlier, the permits are valid for six months, but most customers are eager to ship as soon as possible. Once we receive a permit, we can ship the backlog as quickly as we can produce it. Currently, our backlog is more than double what it was last quarter, and it's continuing to grow. As we mentioned in the conference call, we are experiencing an increase in new opportunities, so our backlog is increasing daily.

As CEO, I focus significantly on developing, engineering, and manufacturing in China, alongside advancing the IPO process there. Lately, I've been engaging more with indium phosphide customers due to an increasing demand for materials. Our sales team has been directed to visit customers to address their concerns. The feedback from our clients, including the epi growers and device manufacturers, has been overwhelmingly positive. They recognize us as a crucial supplier of indium phosphide and see a substantial opportunity for increasing demand soon. Many are eager to understand how we plan to simplify the export permit process. Additionally, several customers have noted improvements in the quality of our indium phosphide material, with one mentioning enhanced die yield for their lasers and detectors. This is encouraging and indicates that there is a significant shift in demand due to the global rise in AI connectivity for optical transceivers.

And what's the other words, CPOs?

I'll start to learn that one.

Okay. That is helpful. I'm going to explore a couple of different angles on the dynamic here. So I think one of the things that investors will be worried about or cognizant of here is customers understanding the geopolitical dynamics, as you referenced in your prepared remarks, are worried about the door shutting here at any point, very well could be ordering well above what their normal rates of consumption would be and building some level of inventory. To what degree do you see that behavior anywhere here in the backlog build? And what are the limits to your shipping faster? Are you near full utilization in your indium phosphide today?

Let me begin by addressing the dynamic question. The reality is that companies are increasing their inventory levels to ensure they have stock available. However, this isn’t just a one-time adjustment due to concerns; it's indicative of a multi-year cycle. The current demand we are witnessing is genuine, and there is clear evidence of this throughout the supply chain for optical transceivers. Additionally, I want to highlight some remarks regarding capital expenditure from U.S. hyperscalers during their earnings calls yesterday. All indications suggest that capital expenditures are accelerating, with significant growth in dollar amounts expected as we progress through financial year '26. This points to real growth at the hyperscale level, which is reflected in our operations. Moreover, we are engaged in longer-term discussions about indium phosphide for co-packaged optics, focusing on scaling both in terms of volume and applicability. The demand is substantial and genuine, and while companies are building inventory levels, those levels will keep rising. We do not perceive this as a one-time event.

Yes. So let me add on to another point. Yesterday, Tim and I were in the valley visiting a few actually customers' customers. They are asking me what can they help in terms of financially, in terms of customer relationship to ensure that indium phosphide will be supplied. In other words, they are telling me there's a tsunami coming, okay? I just don't know how big the tsunami is because the normal rate, let's say, if it is one foot wave, then tsunami is only 10 feet. It's not that big. But if the normal wave is already 5 feet, then that's going to be very significant. So we're going to get that information soon. But I think the demand from what I hear is enormous. And don't forget, Richard, we are 40% of the indium phosphide supply chain, and we have the best quality material.

By the way, tsunami was used by the customer that Morris and Tim were visiting. We're not making it up in our conference room.

Okay. Let me ask another question regarding the other side of this situation. You mentioned several engagements with customers you haven’t worked with recently or at all. Morris, you’ve been discussing the strong EPD specifications on indium phosphide for several years, yet we haven’t really heard about new customers much. I know I’ve inquired about this several times during past calls. Why are these customers approaching you now? It seems like a unique coincidence to see many customers coming to you at this specific time. What’s happening, and what’s driving this interest?

Jeez, you're so smart. I mean you call me. But I tell you, I have a perfect answer to that. That is, first of all, I think with all these lasers getting bigger and bigger, the EPD is getting that much more because the larger the device, the chances of you hitting a EPD is higher. In fact, yesterday, I was told by one of the customers, how come you guys can make the EPD so low, right, Kim?

Right, right. And I think the market is maturing such as well. And the demands that our customers are being faced with, with increased demands, increased capacity, one of the customers said to us, every device is important. The yield of devices on a wafer has become so much more important today than it ever has been, both because of cost and capacity constraints within the fab. So people are turning to us because they get much higher device yields from our wafers.

Yes. That's what the customer told us straight in the face, they wouldn't tell us because we would have to ask higher price.

Richard, a secondary factor subservient to what Morris and Tim just described is there is a concern among the customer base about capacity and capacity potential. They're sensing that there are shortages, and we are the best positioned currently with capacity and with the ability to respond quickly to add capacity.

Well, Gary, that was a perfect setup for my next question here, which is on a full run rate basis, hand-to-mouth basis here, what is your kind of maximum indium phosphide revenues per quarter here? And how long would it take you to get new capacity? And what kind of CapEx commitment to grow it by, I don't know, say, 25%? How does that look like?

We could potentially double our capacity for indium phosphide in approximately nine months. This wouldn't require starting from scratch since we already have the cleanroom and land; we just need to add a few crystal growth systems. My estimate for this would be around $10 million to $15 million. However, we need a clear indication to proceed.

So let me answer the question on current capacity there, Richard. So it's a complex question because it depends on a number of factors relating to product mix and wafer size and inventory on hand and all that kind of stuff. But we estimate that current capacity is around about $20 million a quarter for indium phosphide with our current run rate and current capacity that we've got. You asked how quickly can we increase by 25%? Probably within about 3 months, we can increase by 25%. We do not need to build anything other than bring some more furnaces online.

To double that, we will need 9 months.

Your next question comes from the line of Tim Savageaux with Northland Capital Markets.

Again, congrats on that backlog number. Believe it or not, I still have a few questions. And I guess the overall question is, guys, is doubling capacity, is that a tsunami? Or is that just good business?

That's a good question, but I think I'll be happily retiring when the capacity is doubled with all the better gross margin. I'm joking. I think it's a lot more than that. One step at a time, if we can double that, I believe we have all the ability to increase our capacity, and the easiest way is in China. However, beyond that, we may want to consider building something.

Yes. U.S.-based capacity would make a lot of sense. And yes, I think just intuitively, a tsunami is like 5 to 10x. And I have heard numbers like that in the industry in terms of where demand is going to be. And it sounds like the tsunami referenced in particular, is that a specific kind of looking forward scale up, scale across comments, which is to say, I assume what you're seeing in terms of current demand is likely module-driven, might be some early CPO, you tell me. But in terms of the real big step function in capacity, is that discussion mostly CPO-based or scale-up type based?

Yes, that's absolutely right. So we are seeing growth right now. That is, we believe, in the pluggable market and probably will continue to be in the pluggable market for the next few years. But we are starting to have those discussions now about growth rates for CPO for scale up. And the tsunami, the 5, 10x that you talk about, that is a lot of that is coming from CPO for scale up.

Yes.

Sorry Morris, you were saying something. I’m trying to understand the backlog situation. You've doubled your backlog and shipped $13 million in material, which suggests a book-to-bill ratio approaching 3, which is quite positive. However, I would like to know what this typically looks like. Instead of comparing to last quarter, could we look back to last year or historically, without the need for export permits? What kind of backlog would you usually expect in terms of quarters of revenue or specifically, where was the indium phosphide backlog in Q3 '24?

We have been able to respond effectively to customer orders, which has resulted in significant business every quarter. To be honest, neither Morris, Tim, nor I focus on managing the company using a book-to-bill metric. While I have done so in other companies, it doesn't hold much meaning in this context. Therefore, I cannot provide specific figures since I don't have a document with that information.

Got it. Well, it sounds like it should be some fraction, maybe half or 1/3 of whatever your indium phosphide revenue was a year ago. Your backlog is tsunami. It's up 10x, right?

Yes, I agree that tsunami is 5 to 10 times. However, those were not our words; they came from an end customer.

Yes. Okay. Last one for me. You mentioned two 10% customers in the quarter. And Morris, you talked about kind of industry structure, epi Tier 1 back to the U.S. But any color on whether you've got an integrated device maker in there? Is this just really focused on epiwafer suppliers or whether you might have a new 10% customer in there?

Yes. We have been working with the 10% customers for some time. The new customers we've acquired are integrators as well. We're increasingly collaborating with integrators and hardware customers.

Including GPU and CPU makers.

Exactly right. So we're working directly with GPU and CPU hardware manufacturers, as well as pluggable makers. That's where the visibility is coming from.

This is going to sound a little bit like a complaint, but it's not a complaint. Just curious, so there's clearly a whole lot of demand out there. Your Japanese competitor has announced 2 capacity increases in the last, I think, 4 months, 3 months. Just curious, if you have all this backlog and your customers want more product faster, why wouldn't you be building and shipping to capacity next quarter or this quarter?

All of our shipments depend on the permitting process. As we've mentioned several times, we currently have a significant backlog, and we've been informed by our customers that we can ship as quickly as possible. However, we need to go through the permitting process, which takes about 60 business days, or roughly 3 months. There is some uncertainty in that process. If we had a lot of permits right now, we could significantly increase our shipments from the backlog. We have provided guidance of $27 million to $30 million. If we received permits, we could ship more than that. However, we are essentially analyzing trends regarding how long it takes to obtain permits and assessing the likelihood of receiving certain permits, which informs our guidance.

By the way, we're not standing still on those orders that we are applying for permits; we are putting that into WIP. In other words, we are making it, and we're packaging it and waiting for the permits to be issued, and then we can deliver right away.

Understood. It comes down to the permits being a limiting factor, but hopefully as permit approvals start to come through, there’s a possibility to reach the shipment levels we had a few years ago during COVID. Regarding gross margins, when we were close to full capacity back then, we had significantly higher gross margins. What do you think is essential for improving gross margins? Is it mainly about utilization, or were we benefiting from higher pricing at that time? Can you discuss the dynamics surrounding gross margins and their potential outlook if we can achieve full utilization of indium phosphide?

Yes. Pricing is not a significant factor. The main factor is volume, as it better accommodates the fixed assets. I'm confident we can achieve over 30% because we have control over that. We need to enhance efficiencies on the production line, which I've already mentioned. I anticipate this improvement will happen.

I think the most important factor is that we can utilize our indium phosphide line more effectively. I believe this represents the greatest opportunity we are facing right now.

There are no further questions at this time. I will now turn the call back to Leslie Green for closing remarks. Please go ahead.

Thank you, everyone, for participating in our conference call. We will be participating in the Northland Virtual Conference in December and the Needham Growth Conference in January, and we hope to see many of you there. As always, feel free to reach out to any one of us if you would like to set up a call, and we look forward to speaking with you in the near future.

Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect.