Axt Inc (AXTI) Q3 2025 Earnings Call Transcript

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 Fisher, Chief Financial Officer. In addition, Tim Vettel, 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. 26. 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 Fisher for a review of our third quarter 2025 results. Gary?

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 Q325 revenue for you by product category, indium phosphide was $13.1 million, primarily from data center and pond applications. Gallium arsenide was $7.5 million. Germanium substrates were $640K. 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 percent, Europe was 12 percent, and North America was 1 percent. The top five customers generated approximately 45.2 percent of total revenue, and two customers were over the 10% level. Non-gap 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 gap 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 in Q3 of 2024. On a GAAP basis, total OPEX in Q3 was 7.3, 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 a 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. Non-operating 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 to the non-GAAP net loss of 6.4 million or 15 cents per share in the second quarter of 2025. Non-GAAP net loss in Q3 of 2024 was 2.1 million or 5 cents per share. On a GAAP basis, net loss in Q3 was 1.9 million or 4 cents per share. By comparison, net loss was 7.0 million or 16 cents per share in the second quarter of 2025. GAAP net loss in Q3 of 2024 was 2.9 million or 7 cents 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 30th. By comparison, at June 30th, 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 turn into our plan to list our subsidiary Tong Mei 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. Morse Young for a review of our business and markets. Morse?

Thank you, Gary. This has been a very eventful quarter for AXE, as we are seeing a strong uptick in the phosphide demand from data center applications globally. And as our industry and our customers adapt a new normal, rapidly changing environment, In Q3, our revenue grew 56% sequentially and 18% year-over-year. Within this, our Indian phosphide revenue grew to our highest level since 2022, as we were successful in obtaining export permits for a number of significant Indian phosphide orders throughout the quarter. I am 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 Indian phosphide permits are taking approximately 60 business days or approximately three 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 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 Indian 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 Indian 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're also seeing active engagement with several Tier 1 new Tier 1 customers to qualify our material into to their supply chains for the first time in many years. These include 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 photonic based optical transceivers we believe that today our material 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 ram in its ram 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 pong as the leading application in china for our indian phosphide substrates given the strong demand environment It is important to know that AXC 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 vigorous requirements of next-generation EML and silicophotonics-based devices. Now turning to gallium arsenide, our revenue grew more than 20% from the prior quarter. the biggest driver for more was semi-insulin wafers for wireless rf devices which remains a focused application for us industrial laser applications were about flat from q2 and we saw an empty in semiconducting wafers for data center laser applications however vixel lasers don't typically require a lot of gallium oxide material so they don't move the needle much as a growth driver but they do require high quality material which were well positioned to supply in Germany substrates our sales declined by about a million dollars in Q3 the Germany substrate market was very poor gross margin potential today and while our material perform well in the solar cell applications as we supply, growth margin constraint disincentivizes us to pursue money opportunities. In addition, certain our 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 solid 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 Indian phosphide and gallium arsenide export permits remains the single most significant gating factor for our growth. As such, we're 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 growth margin improvement, up-ax 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 our growth our progress with that i will turn the call back to gary for our fourth quarter guidance gary thank you thank you morris to really to reiterate a couple of key points from morris's commentary we are seeing a strong increase in our Indian 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 Indian of 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've not had business with and opportunity for some time. With all of these positive market and AST-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 have what we've experienced this 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 dollars 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 to $10 million in Indian 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 this same point in the prior quarter. As such, with that as background, we believe we have the capability to achieve revenue in the range of $27 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 morse 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 mixed by product and our ability to continue to drive better manufacturing efficiency with regards to opex we expect that the it will increase to approximately nine 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-gap net loss will be in the range of one to three cents and our gap net loss will be in the range of three to five cents 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. Thank you.

Ladies and gentlemen, we will now begin the question and answer session. I would like to remind everyone to ask a question. Please press the star button followed by the number one on your telephone keypad.

If you would like to withdraw your question please press star one again one moment please for your first question your first question comes from the line of charge charles shi of needham and co please go ahead hi uh maurice uh gary congrats on the um on receiving the licenses of the department uh shipping 8 million additional revenue in a quarter and a congrats again on the 49 million uh backlog that that was an exciting number to hear. Really want to get back to this point, the customer behavior change, like are they placing longer term orders? But I think if I hear you correctly, some of those customers may not necessarily have the permits at this point, and still proceeded to place the orders with you a pretty significant amount of orders with you. Can you kind of talk through what exactly is driving that behavior and what do you think that the export permits, the current ones you already have, are there time limits to that, are there like the volume limits to that, and what could be your best prediction going forward from here that customer behavior can continue to evolve? Thank you.

Yeah, thank you, Charles. So we have, as you say, a $49 million backlog. That includes customers that have previously received permits and customers that are still in their 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 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 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.

Yeah. So maybe I can add another point. I hear Charles is asking, why is there any relationship with customer giving us a lot more order, a lot 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 you know ship this product to them in time is is that a part of a question, Charles?

Yes. I think maybe a better way to help us understand what the permit does to the size of the orders, how much long-term the orders is going to be. Maybe you can share some light. Let's say the order currently on average cover is like a one-year demand, two-year demand, three year demand, what do you see there? Like how long does the order you have in the backlog of covers for customers demand, yeah.

Right, okay, I 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 six months. So everything has to be shipped within six months of receiving the permit.

Yeah. And the other point is this. Our customers are telling us, we'll give you this order. If you get the permit and if you can manufacture it, you can ship it tomorrow.

So when Tim mentions 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. It is. It is. So maybe I ask another question on profitability. So when you were at this revenue level in the high 20s, going back a few years, you probably have a gross margin somewhere in the high 20s or even low 30s percent. and you would have a non-GAAP EPS in a positive territory. But I think, Gary, if I hear you right, I think you're still expecting some non-GAAP loss in the coming quarter. And I wonder if there's anything, you know, cost structure that's a little bit different now versus back then. And how do we get back to, like, the similar profitability level at the similar revenue run rate back in the, let's say, go back, only go back two or three years?

Yeah, I expected to be asked that question to us. So, and it's something that we talk about internally. So, as I like to say to ourselves and to, you know, analysts and investors, in our business model, it's never one single dial. It's not like one thing we can focus on, and we have to focus on two to four things to sort of move the needle in the right direction. In this regard, one of the things we need to get improvement on is gross margin. And that's primarily a result of mix, which is going in our favor right now, and also efficiencies on the line. So we have – I'm actually encouraged to be able to say this because it's pretty much in our control. And we've done better than we're doing right now. But this is – it is common in manufacturing businesses to have some cycles. And so I think we can work on that and focus on it and get improvement. That's probably the biggest one.

I think we could get a bit more help from our joint venture companies. expect that to improve in the coming in the coming quarters as well but those are the two things that come to mind so Charles maybe I can answer all the other question I think that did the deadliest thing in manufacturer I think analyst should ask is is your ASP dropping okay I think we can say except with the low end on the two inch Indian phosphide most of our ASP are holding very firm in fact some of the ASP for our high end low EPD Indian phosphide substrate the ASP is increasing okay so I think we can we can we can surely stop that work I mean we have some other efficiency issues such as loading factors you know germanian is perhaps not making a whole lot of money for us because the pricing pressure is very strong but you know the main focus on any phosphide the pricing is firm and the demand is high thanks um i think maybe maybe one last question before I jump back into the queue would be the Indian falsified demand you're seeing today

how much of that is from the overseas customers that would need a permit versus domestic Chinese these customers. And if I recall correctly, I remember that the Indian phosphide was primarily shifted 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 Indian phosphide?

If you can kind of you know uh paint a little bit of picture to us of how things have been evolving uh that would be great thank you well you know actually indian phosphide business is very globally connected a lot of our substrate are shipped to let's say taiwan to put the epi on and ship back to united states put to make a device and ship back to china to make a transceiver and then ship back to U.S. data centers. So I think, you know, but our direct customer in China is roughly, I would say, 40 percent. But the great AI opportunity definitely is, you know, the big increase is the AI data center in 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. Thank you.

Next question, please.

Your next question comes from the line of Richard Shannon of Craig Hallam. Please go ahead.

Well, hi, Morris, Gary, and Tim. Thanks for taking my questions, and I'll offer congrats on a wonderful quarter. Great to see some grads to the entire team for making that happen here. Let's start with the first question here on the Union Classified 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 are customers ordering here? I would imagine, given one of the prior answers here, talking about a permit allows you to ship for six months, that they're probably going out six months here, but just want to get a sense of what this looks like and how it's changed.

Yeah, so as Morris has previously said, those permits do last six months, but most of our customers are asking to ship as soon as we can. So that backlog, once we have a permit, we can ship that backlog as quickly as we can manufacture, to be perfectly honest. So in terms of our backlog last quarter, we've got more than double the backlog as we speak today than we had last quarter. So that continues to grow. And as was said in the conference call, we're seeing more and more new opportunities coming. So that backlog is growing daily as we speak.

You know, maybe I can chime in a bit. You know, I think the CEO, I take care of a lot of this China development, engineering, and electric manufacturing. And also, well, my duty is to push the IPO process in China. but recently I got putting more and more to talk to invest customers because they cannot get enough material they call my sales guys and the sales guy says well you got to come and visit the customers to calm them down how are you opening up the opportunity to supply any phosphate customers so I got a lot of this very good warm receptions from our customers and sometimes on the customers customer and also the end user so in other words that big rollers the device makers as well as the CPU GPU makers in fact I got message from our customers especially globally not especially they all told us that we are very important supplier of indian phosphate secondly they all told me there's a great great opportunity to increase the demand in the near future obviously they are all anxious to know what are we going to do to ease the pain of getting the permits to export material and lastly quite a few customers told us they start to appreciate the better ebd or the better quality of indian fossil material we supply in fact when customer told me that now every diet comes and using our substrates they can make better diet yields on their lasers or detectors so i think that's a very warming you know information for me and also telling us that in the phosphide the paradigm there's a paradigm shift because of the global increased demand for AI connectivity in optical transceivers, and what's the other word, CPOs?

CPOs.

I start to learn that word.

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 and worried about the door shutting here at any point, you know, very well could be, you know, ordering well above what their normal rates of consumption would be in 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, you know, full utilization?

You're dynamic question. I think the fact of the matter is that people are building inventory levels so that they have inventory on hand. But I don't think this is a one-time build-out because they're concerned. This is a multi-year cycle. So the demand today that we're seeing is real, and you You can see evidence of that all up and down the supply chain for optical transceivers. I want to really just look at some of the CapEx spending messaging that was given from U.S. hyperscalers on their earnings calls yesterday. So everybody is talking about CapEx moving faster and, quote, growth in dollars getting noticeably larger as we go through financial year 26. So there's definitely growth going on here at the hyperscale level, and we're seeing that come into here. We're also seeing longer term discussions on indium phosphide for CPO, both on scale up and scale across now. So the demand is there, the demand is real. And of course, people are building backlog. Also, people are building inventory levels, but those inventory levels will continue to grow. So we don't see this as a one and done shot.

Yeah. So let me add on to another point. You know, yesterday, Tim and I were in the valley visiting a few actually customers customers they're asking me what can they help in terms of financially in terms of customer relationship to ensure that indian phosphide will be supplied in other words they are they are telling me there's a tsunami coming okay i just don't know how big the tsunami is because you know the normal rate let's say if it is a one foot wave then the tsunami is only 10 feet it's not that big but if the normal wave is already five 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 Indian 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. So I was struck to hear that word as a description of what's on the future.

Okay. Thanks for that. Now, let me ask another question. You're looking on the other side of this dynamic here, which is you mentioned a number of engagements with customers you've not worked with ever or for a very long time here. I think, Maurice, you've been talking about the very, very good EPD specs on urethane phosphide for a few years at least. And we haven't heard you talk about new customers really much, if at all. And I know I've asked on this conference call a few times in the last few years on this Why is it they're all of a sudden coming to you now? It seems like it's a unique or, I guess, a coincidental timing to see a number of customers coming to you at this particular time? What's going on here and what's driving that?

Gee, you're so smart. I mean, you called 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 an EPD is higher. In fact, yesterday, I was told by one of the customers, how come you guys can make the EBD so low? Right, Tim?

Right, right. And I think that 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 prices.

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 Indian Phosphide revenues per quarter here? And how long would it take you to get a new capacity and what kind of CapEx commitment to grow it by, I don't know, say 25 percent? How does that look like?

Well, you know, we could double our capacity on any phosphide in about nine months' time. It would take us about, my estimation is, because this is our greenfield, we got the clean room already, we got, you know, land already, and all we need to do is add a few crystal ball is. So my estimation is about $10 to $15 million. But we need a signal. I'm getting it.

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, inventory on hand and all that kind of stuff. But we estimate that current capacity is around about $20 million a quarter for indian phosphide with our current run rate and current capacity that we've got. You ask how quickly can we increase by 25 percent? Probably within about three months, we can increase by 25 percent. We do not need to build anything other than bring some more furnaces online.

And to add, for us to double that, that we need the nine months. I caught that.

That's perfect perspective. I've asked a lot of questions. I will jump in line and re-queue here, guys. Thank you. Thank you very much.

Your next question comes from the line of Tinsavajo, Northland Capital Markets. Please go ahead.

Hey, good afternoon. And 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 double with all this battery growth margin. I'm joking. I think it's a lot more than that. I think but one step at a time. I think if we can double that, and I think we have all the ability to increase our capacity, well, the easiest way is in China. But I think beyond that, we may want to consider building something.

Yeah, US-based capacity would make a lot of sense. And And, yeah, I think just intuitively a tsunami is like 5 to 10x. And, you know, I have heard numbers like that in the industry in terms of where demand is going to be. And it sounds like the tsunami reference 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 similarly CPO, you tell me, but in terms of the real big step function and capacity, is that discussion mostly CPO based or scale up type based?

Yeah, 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 510x that you talk about, a lot of that is coming from CPO for scale-up.

Yeah.

Makes sense. Sorry, Morris, were you saying something?

No, I said yes.

Yeah, I like 510. the question I'll add to the, just trying to get a sense of this backlog. So, you know, you increased your backlog, you doubled it and shipped 13 million in material, which I think gives you a book to build that's approaching three. So that's not bad. But where would that kind of normally be, I guess? And so maybe as opposed to go back to last quarter, let's go back to last year or just historically, you know, without export, um, you know, permits required, what, what kind of backlog would you normally have in terms of, you know, quarters of revenue or, or just straight up where, where was that Indian phosphide backlog, you know, Q324?

Well, because we could be responsive to customer orders, um, we had a lot of terms business every quarter. So to be honest, we don't really, in terms of me and Morris and Tim, we don't manage the company by looking at it book to bill. You know, I have in other companies, but it's not very meaningful in this case. So it's hard to say what it was because I don't have a piece of paper in front of me with that list because there's no such list.

Got it. Well, it sounds like it should be some fraction, you know, maybe half or a third of whatever your Indian Fossified Revenue was a year ago, which means your backlog is Tsunami. It's up 10x, right?

Yeah, and again, Tsunami was not... I agree with you, Tsunami is 5 to 10x, and I'll say again, that was not our words. That was the words from, you know, an end customer, so...

Okay. Last one for me. Mentioned two 10% customers in the quarter. And Morris, you talked about kind of industry structure, you know, EPI, tier one, back to the U.S. But any color on, you know, whether you've got a, you know, an integrated device maker in there is just really focused on EPI wafer suppliers or whether you might have a new 10% customer in there?

Tim? Yeah, so the 10% customers that we've got, we've been dealing with for a while. The new customers that we've got are integrators as well. We're dealing more and more with integrators and hardware customers.

Including GPU and CPU makers.

Exactly right. So we're dealing directly with GPU, CPU hardware makers. We're dealing with pluggable makers. So that's where really the visibility is coming from.

Yeah, I would say in the past we haven't had access to those people, but now they're calling us. They want to see us. So that's why we had better visibility.

Got it. Thanks.

Your next question comes from the line of Matt Bryson of Wedbush Securities.

Please go ahead. this is a little bit like a complaint but it's not a complaint um just curious so there's clearly a whole lot of demand out there your Japanese competitor is is announced two capacity increases in the last I think four months three months um just curious if you're 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?

Well, all of our shipments, all of our ability to ship is based on permitting. So we, as we've talked about plenty of times, we've got a large backlog now We've been told by customers we can ship as quickly as we possibly can, but we have to go through the permitting process. Now, that permitting process, you know, it takes 60 business days, which is approximately three months. And there is some opaqueness to that permitting process. So, you know, if we if we had a bunch of permits today, I'm sure we could ship an awful lot more of that backlog today. You know, we've we've guided a twenty seven to thirty million dollars. If we got permits, could we ship more than that? Yes, we could. But we're we're basically running trend analysis on how long it takes to get permits and probability analysis of what permits we're going to get. And that's where the guidance comes in.

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.

Got it. So, I mean, it comes down to the permits of the gating factor. But as hopefully permanent approvals continue to get across the line and lift, there's a path to, you know, achieving the levels of shipments that you were at a few years back during COVID. and then I guess what's in terms of gross margins obviously when you're running back at close to full capacity back then you had substantially higher gross margins I guess what's what's key to getting gross margins back up is it predominantly utilization or were you benefiting back then from higher pricing can you just talk to kind of the dynamics around gross margins where they can go

to from here if you can get indian phosphide back up to full utilization yeah um pricing is not really a big factor i think that the big factor is is volume because it does carry more of the fixed assets um in a proper way and um and then it's i'm confident we can return you know we're be over 30 percent because there's we can control that so we need we you know we need to improve the efficiencies on the line but i already commented on that so um i see it going in that

direction thanks i think the most important factor is we got more we can utilize our indian phosphide line i think that's the greatest opportunity we're facing now got it understood of more. Thanks. Thanks, Matt.

Next question.

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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.