Leslie Green – IR Gary Fischer – VP, CFO Morris Young – CEO.

Richard Shannon – Craig-Hallum Investments Edwin Mok – Needham & Co. Avinash Kant – DA Davidson & Co. Greg Roeder – Adirondack Funds Welcome to the AXT, Inc. Third Quarter 2014 Earnings Conference. Please note today's conference is being recorded. I would now like to turn the meeting over to Leslie Green, Investor Relations, AXT. Please go ahead, Ms.

Green..

Thank you, Kelly [ph], 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 and our ability to control costs and improve efficiency, increase orders in succeeding quarters, improve our competitive position as the market improves, as well as other market conditions and trends.

We wish to caution you that such statements deal with future events and are based on management's current expectations and are subject to risks and uncertainties that could cause actual events or results to differ materially.

These uncertainties and risks include but are not limited to overall conditions in the markets in which the company competes, global financial conditions and uncertainties, market acceptance and demand for the company's products, and the impact of delays by our customers on the timing of sales of products.

In addition to factors that may be discussed in this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission and available online by link from our website for 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, 2015. Also before we begin, I want to note that shortly following the close of market today, we issued a press release reporting the financial results for the third quarter 2014.

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 the third quarter results.

Gary?.

Thank you, Leslie. As many of you may have noted, this quarter we made a change to the way we're reporting revenue. Rather than reporting revenue by product line, as we have done in the past, we'll now provide only our total revenue results.

As I'm sure our investors understand, we're in a highly competitive space and we're the only pure play company in the space, in terms of being a public company that has to report numbers. The level of detail we have provided in the past has been eagerly absorbed by our competitors and this has been disadvantageous to our position.

We do understand that investors are interested in the dynamics in each product line area and we will continue to speak qualitatively about product line revenue as appropriate. Now let's turn to the quarter results. Revenue for the third quarter 2014 was $23.1 million, compared with $21.4 million for the second quarter of 2014.

This is approximately 8% sequential growth over Q2. In the third quarter 2014, revenue from North America was 11%, Asia Pacific was 66%, and Europe was 23% of total revenue. No customer generated more than 10% of revenue during the third quarter, and the top five customers generated approximately 35% of total revenue.

Gross margin in the third quarter was 23.0%, compared with 19.4% of revenue for the second quarter in 2014. This is a result of certain manufacturing efficiencies and a favorable product mix. Total operating expenses in the third quarter were $4.7 million, which is unchanged from the prior quarter.

Of this, SG&A expenses were $3.5 million for the third quarter, compared with $3.7 million in the second quarter, and R&D costs were $1.2 million for the third quarter, compared with $1.0 million for the second quarter.

Total stock compensation expense was $272,000 for the third quarter of 2014, of which $4,000 is included in cost of revenues, $227,000 is in SG&A, and $41,000 is in R&D. Operating profit for the third quarter of 2014 was $653,000, compared with a loss from operations of $515,000 in the second quarter of 2014.

This is a swing of almost $1.2 million quarter to quarter and obviously a swing that we are pleased with. Net interest and other income for the third quarter was $260,000, compared with a $1.2 million gain last quarter. This swing is driven by foreign exchange gain and loss.

In Q2 we had a gain of $158,000, but in the recent quarter we had a foreign exchange loss of $556,000. So that's a total swing of $714,000. As a result, our net interest and other income in the third quarter is still a net gain of $250,000, but is a smaller gain than what we had in Q2. This net number consists of four categories.

Number one, an exchange loss of $556,000. Number two, equity earnings of our unconsolidated joint ventures, a gain of $390,000. Number three, sale of our IntelliEpi stock, a gain of $320,000. And number four, interest earnings on our $48 million in the bank of $106,000. Net income in the third quarter of 2014 was $644,000 or $0.02 per diluted share.

This compares with the net income of $319,000 or $0.01 per diluted share in the second quarter of 2014.

On the balance sheet side, cash and cash equivalents with maturities of less than three months, short-term investments and other investments and high-grade debt securities with maturities of less than two years was $48.5 million as of September 30th, 2014. Accounts receivable, which is net of reserves, were $21.1 million as of September 30th, 2014.

This compares to $19.3 million at June 30th, 2014. Net inventory was $36.6 million, compared with $35.3 million on June 30th. Of this, approximately 53% is raw materials, 39% is work in progress, and 8% is finished goods. Depreciation and amortization in the third quarter was $1.4 million, and capital expenditures were $800,000.

This concludes our financial review for the third quarter. I'll now turn the call over to Dr. Morris Young for a review of our business..

Thank you, Gary. I would like to begin by saying how pleased I am to welcome Gary to AXT. Gary brings a wealth of public company experience in finance, strategic planning and global operations, and I am very excited to leverage his expertise as we navigate through a dynamic period in our industry and in AXT's growth and development.

The third quarter was a positive quarter for AXT. We achieved revenue ahead of our expectations as well as another quarter of profitability through improved gross margins and tight expense control.

Further, we're diversifying our customer base throughout our product portfolio and we are pleased to be gaining traction in several areas that have been a strong focus of our product development and sales effort. This has been a time of significant change in our industry.

We believe, however, that the impact from technology transitions and customer consolidations is beginning to settle down. And we have positioned ourselves well for further growth within the current landscape. Now turning to semi-insulating gallium arsenide.

After two years of dramatic changes, we're beginning to gain some clarity under the band [ph] environment and our business opportunity. Our semi-insulating sales in Q3 were down moderately from the prior quarter. But we believe that it is likely to remain at approximately the current level for the next couple of quarters.

Sales into the P-Hem [ph] switch application for mobile devices have largely leveled off following its deep decline in the past two years. Sales of P-Hem [ph] devices to other applications such as radar, defense and WiFi are stable.

Going forward, growth is likely to come from HPT applications as discussions with customers indicate that HPT devices were likely to continue gallium arsenide substrates.

Historically we have not had a meaningful presence in HPT applications, but over the last 18 months we have invested a considerable effort to optimize our products for the particular HPT requirement.

As customers in this space are solidifying their business strategies going forward, we are seeing renewed interest in qualifying AXT for HPT applications. In terms of semiconducting gallium arsenide business, we're pleased to see revenues in the third quarter increase moderately from the prior quarter.

The red LED market in which we participate continues to be highly fragmented and competitive. AXT has historically focused on high end of the market such as lighting, display, printers, lasers, CPV and automotive applications, where our technical capability are well-suited. However, we're now taking a more blended approach to our sales effort.

As long as we retain higher-end sales, we're also able to participate in the growing low-end market as our cost structure and business model can support the margin profile of these opportunities. Our germanium substrate revenue also trended up moderately in the third quarter.

Revenue from satellite solar cell applications continues to be fairly consistent with ongoing programs in the geographies such as Europe and Asia. CPV is also driving our germanium substrate revenue.

CPV appears to be gaining momentum as solar conversion efficiency becomes more efficient and venture capital investment in this industry continues to increase.

In fact, it is likely that in 2014 CPV will cross the 100-megawatt per year capacity threshold, driven by large installations such as the Soitec facility in Touwsrivier, South Africa and the Simco [ph] facility in China.

A few days ago we noted that a new 150-megawatt sales contract was signed between Soitec and the leading provider of solar energy services to supply solar power to San Diego Gas & Electric.

In total the flurry of news surrounding CPV research investment and development underscores the growing momentum of CPV technology across a number of key geography regions worldwide. Now turning to indium phosphide. We continue to see good demand from fiber optics applications such as lasers and detectors.

However, as we have discussed, other applications in solar and datacenter connectivity may also provide opportunities for growth in the future. We have invested in our technical support capabilities in order to help customers with the challenging requirement of these applications and we have capacity in place to meet the increasing demand.

Finally, with regard to our raw material business, our revenue increased modestly in the third quarter as a result of increasing sales volume, while raw material pricing still remain to be stable.

With all our substrate product categories poised for further growth in 2015, we believe that our vertical integration capability will continue to be a major competitive differentiator. In closing, this is an interesting time for AXT.

The disruptive changes in the gallium arsenide landscape over the past two years have undoubtedly had a major impact on our business. However, with all these changes finally beginning to settle and new applications for our product emerging across our substrate portfolio, we are cautiously optimistic for our continued growth in 2015.

I believe that where market change, AXT needs to adapt to these changes and make intelligent moves that benefit our company. In light of this philosophy, we have returned the company to profitability through a combination of effective cost control and investment in product areas that are driving our revenue growth.

I'm very pleased to have a strong team in place with expertise to maximize our potential as we evolve our business to meet new opportunities. I'm also pleased that our Board of Directors have just approved a $5 million stock repurchasing program that underscores AXT commitment to returning value to our shareholders.

This concludes my comments on the business and will now turn the call back to Gary for our fourth quarter guidance.

Gary?.

Thank you, Morris. Looking to the fourth quarter, we are expecting Q4 to be seasonally down as it has been for the last few years. Therefore, we're expecting total revenues of between $20.5 million and $21.5 million.

This takes into account a moderate decline in semi-insulating and semiconducting gallium arsenide substrates and approximately comparable sequential revenue in germanium substrates, indium phosphide substrates and raw materials.

Therefore we think we'll be approximately breakeven for the quarter based on 32.7 million diluted common shares outstanding. This concludes our prepared comments, and we would now -- Morris and I would be glad to take your questions if you have some.

Operator?.

Thank you. [Operator Instructions] We'll go first to Richard Shannon with Craig-Hallum Investments..

-- and Gary, how are you guys doing?.

Good..

Good. And Gary, welcome to AXT. Good to work with you again..

Thank you..

Let's see. I guess just a few questions from me. You guys have done quite well in gross margins the last few quarters. You talked about some diversification of customers here. Would love to understand, from the gross margin perspective, how much of this improvement is coming from lower costs versus mix within products and/or customers..

Gary, you want to take that?.

Well, I can start and Morris probably can give more color since he has a longer sense of the history of the company. But it is a combination of both.

We've made some progress in product mix, which has a little bit higher ASPs, but we've also made some good progress on business development, and we've been nurturing some prospective accounts and customers that had begun to bear fruit.

We hired a very talented additional professional guy to the team last October who has been doing business development, marketing and sales in Greater Asia, and he's been very effective and has some good success so far..

Yeah. If I may add, obviously the increased revenue definitely helps the capacity utilization. This helps us on the gross margin as well..

Okay. Fair enough..

Yeah. And also of course, in Q1 we started a cost cutting program and increased our efficiency. I think it's all of the above which is helping us..

It's a blended solution, yeah..

Okay. All right, fair enough. Appreciate the perspective.

And then looking forward on your gross margin, I didn't have enough time to throw those numbers into my model, but I'm guessing you're expecting gross margins to modulate downwards somewhat, probably at a level greater than what you had in the second quarter though?.

I'm not sure how it will compare to the second quarter, but we are modeling it to go down a bit. And what drives that, besides ASP and product mix is the factory overhead pool which, you know, the larger our revenue number goes, we benefit proportionally on gross margin, because the overhead pool is spread out over more units.

So, since we're thinking the unit sales will be down a bit, then we burden ourselves on a per-unit basis with more of the overhead -- manufacturing overhead pool..

Okay, fair enough. Probably just two more questions from me, I'll jump out of line. You referenced both in your press release and your prepared comments about, you know, driving your varied technologies into new applications. Would love to hear kind of the top two or three new ones that you're applying yourself towards.

And Morris, if you could expand on your comments specifically about indium phosphide in the datacenter applications. Would love to hear what you're referring to there please..

Sure, Richard. I think datacenter definitely is one of them -- we are very focusing our effort on. As you know that datacenter connectivity is a hot button [ph] these days and indium phosphide is used for making the laser chip which enables some of this silicon photonics can communicate between each other, you know. So that's one focus area.

I mean obviously we're also focusing very much on the rest of the indium phosphide landscape which I think is growing fairly nicely, although some analysts was telling us that, you know, maybe we're taking some of the market share away from our competition as well. We're also very focused on the effort we're seeing -- the activity in CPV.

We think that should potentially be a big benefit for us because we not only participate in germanium but also we participate in gallium arsenide and finally indium phosphide. As many of you know that CPV is a very different approach to the PV industry, and we are really in the beginning of this industry development.

So, hopefully that we can catch the tremendous growth potential for this industry..

Okay. Appreciate the details there. Last question from me for you, Morris. You talked about the gallium arsenide semi-insulating market kind of, I forgot the word you used, but it sounds like you're not certain to get some -- perhaps more in-depth conversation and closer engagement on HPT.

Can you give us a sense of perhaps where -- which type of customers you're engaging with, when those might be done and when that could possibly generate some additional revenues for you?.

Well, first of all, we've been saying that, for P-Hem [ph], I just want to let you know that it's not down and out. I mean it's stabilizing, hopefully, that we're still seeing, at least our customers are telling us, the business from WiFi and radar and defense, and even in some of the wireless devices, they're still hanging on.

And I think the other thing we didn't say was that, as wireless migrate to higher frequency, from 2.5 gigahertz to 5 gigahertz, again gallium arsenide will play a major role, but of course that could be a year, year and a half, or even two years from now. But I believe eventually it will come. And so we're committed to the wireless industry.

As far as HPT is concerned, I think that's a short-term potential gainer for us. We are looking at quite a few opportunities, but I think if we were to penetrate those market, I would say maybe second half of next we will start to see some of the revenue coming in from those customers..

Okay. I appreciate the perspectives, Morris. Thank you very much. I'll jump out of line..

Thanks..

We'll hear next from Edwin Mok with Needham & Co..

Hi. Thanks for taking my question. And welcome to the team, Gary. Nice to work with you again.

So, first question I have actually is in [indiscernible] in terms of the current cost structure and margin structure, I understand obviously there's a lot of leverage as your revenue goes up, but Gary, now that you've been at AXT for a little bit, any -- do you see any room for further improvement on either the OpEx or the gross margin front? And then also just to kind of extrapolate that question, how do you think about OpEx as we go forward in the fourth quarter and into 2015?.

Well, I haven't looked much at OpEx yet, so I -- but if you look carefully from Q2 to Q3, it's an amazingly small change. You know, Q-to-Q, based around $4.7 million, the swing was only $10,000, and it dropped in Q3 by $10,000.

So I focus more on the manufacturing side because I think there's bigger numbers there, for one thing, and I think there's some places that we can maybe identify ways to improve, both efficiencies, both -- including yield, and just kind of how we load up the manufacturing overhead pool, what goes in there, how does it cost.

And we're going to -- just put it more into the spotlight. So for OpEx, I think it's safe to assume it's going to be close to what it has been the last couple of quarters. And then going forward on the manufacturing overhead pool, the biggest early dial that we can turn and beneficially turn is going to be volume.

So if we can get the volume up, even a small amount, it begins to make a difference. And then in the meantime, Morris and I are both going over to Beijing next week for a couple of weeks and we're going to be meeting with our manufacturing professionals and talking about some of these topics.

So I think there is some improvement, but I would picture that as a very large ship going in a certain direction so you can't turn it 90 degrees in a few meetings. It's going to take some more analysis and study to really understand the business.

But, you know, I've been over there once already and it's -- I'm very impressed with our team there and with our facilities there. And it really is exciting for me as a business professional to, you know, be in a company that really has hands-on manufacturing, we build things you can see and we're vertically integrated through our subsidiaries.

So it's a very interesting business model and I think it does give us several places in the food chain that we can maybe make some changes as we understand it better..

Great. Actually that's very useful color.

So actually the 23% gross margin you did in the September quarter, it sounds like that's not some additional equity you guys have done recently, right, that's based on whatever you guys have talked about previously in terms of improvement, am I correct on that?.

Yeah. It's benefited because we had higher sales over Q2 and it benefited because we had some products that improved in revenue total that had a little bit better margin..

I see. Okay. That's helpful. On the indium phosphide side, I missed it, you guys -- clarify.

Did revenue actually come down a little this quarter after a very strong quarter last quarter? And how much of your cells is related to the datacenter opportunity that you guys are talking about now, or is this still a greenfield opportunity that you guys are going after?.

Well, I'll let Morris comment about the product applications and things like that. But I think what we said about the product line is that we continue to see good demand from places like fiber optics of course, and that generally the product -- the indium phosphide trended up a little bit in revenue.

You want to take applications a bit?.

Right. Obviously we're very focused on the silica photonics data tender activities, but I think that's more of a future growth opportunity for us at this point..

I see. Okay, great. That's helpful.

So actually -- and then go back to gallium arsenide but more the semiconducting side of the business, right? I think Morris you said that the business has improved a little bit, partially because of the strategy to broaden your target market beyond just the high end, right? Am I understanding correctly that, you know, now that you guys are willing to kind of go after those opportunities, right, there is probably quite a bit of -- quite a big market out there that you guys can go after, right? And we've got a more aggressive price point or more aggressive effort in that area, even probably have good level of growth opportunity beyond just near term, right? Am I thinking it the right way or am I like overly aggressive here?.

I think you're absolutely right. I think that the market size is quite large. Or should I say the opportunity for us to grow is there, but it's not without challenges. For one, that, you know, the price is lower, and yet some of these still need qualification and we need to build that connectivity between us and the customer.

So I think we are a bit more focused in trying to getting to that low-end business opportunity for us..

I see.

Are you still being selective on the overall market or are you, because of, you know, the similar pricing to commoditize, it's -- or are you thinking that there is actually -- you can be pretty aggressive in terms of pricing?.

Let's see. I don't think we're necessarily turning business away, but on the other hand, when the price is really competitive, we may go into the market and say, hey, don't give us 50%, we only want 20%. And we will offer a very attractive competitive price. That's how we play. And the name of the game is that we still have those capacity out there.

So wherever we still have capacity, I know we would like to fill some of those low-end opportunity so that it can start to share some of the overhead pool for our factory..

I see. Okay, great. That's helpful color.

And then on the raw material side, I remember typically when you guys have business picked up, you're using raw material into the substrate part of the business and therefore raw material typically have a lower sales, right? But I think on the call you said that raw material haven't actually increased, right? Is it just you guys have additional capacity that you guys can, you know, monopolize now? And if I look at the minority interest line, it looks like the raw material business is not super-profitable as you say, right? Is any areas that your JV are working on to improve the profitability of that business or is it just a function of the market?.

Yeah. Edwin, I do appreciate you have such a good memory. Yes, it is true. I mean when -- usually when our business is good, we take more product from JV, you know, JV's revenue actually decline. But I think in the last cycle our JV really has built up quite a bit of capacity.

I tell you, you know, for the, let's say, 49 gallium [ph] JV that we have, we almost more than doubled our capacity. So, you know, our take of their product is now getting to be smaller and smaller.

And just about all the business that you look at from our JVs, our share of their product that we take for our own consumption is getting a smaller proportion. So that is to say that our JV has increased capacity and also established themselves as an independent supplier to the rest of the industry.

And also our JV, you know, for instance, raw gallium -- 49 gallium [ph] used to be almost 75% or 80% of our revenue for JVs. But nowadays, it shrank.

Because for one, that raw gallium price has stabilized at a very low value, so although their volume has increased, but the revenue didn't increase a whole lot, while some of the -- of our other JVs where they deal with refining gallium [ph] to 69 or 79, or making PPM wear [ph], and their business still continue to grow.

So that's a good healthy product mix gain that we are seeing on our JVs..

Yeah. And I don't have the historical data with me in the room, and I am new with the company of course, but just to clarify, the three subsidiaries that we consolidate, in aggregate, they're making a positive contribution. Yeah. I mean, they're not -- in aggregate, we're not losing money with those guys..

No..

And then the unconsolidated investments we've made where we still have a very active involvement in helping them grow their markets and things like that, that group of JVs is also net positive on the income statement.

So that's what's intriguing to me as a new guy on the block, is that this is a very -- pretty complicated business model, but it's pretty unique also.

And I'm fascinated by it, and I think there's a lot of value there, and for me and Morris, as business people, I think there's a lot of things that we can do to maximize the structure that Morris has set up, and I'm pretty excited about it, so..

That sounds great. Very helpful.

Last question, just quickly, on the buyback, any kind of timeframe you can provide for us?.

I don’t think there's a timeframe we set up. I mean $5 million..

Yeah. I mean we have to do some mechanical things to set it up and then we can start buying back. But we only got the Board's approval earlier this week. So, frankly, I haven't done anything to get going because I've been working on getting ready for today's call and things like that..

I see. Okay, great. That's all I have. Thank you..

We'll hear next from Avinash Kant with DA Davidson & Co..

Good afternoon, Morris, and welcome, Gary..

Hi..

Hi, Avinash..

So the question, of course, on -- this has been a question that's been around for a long time, could you comment anything on the progress at the key customer that you have been working on qualifications for, especially on the gallium arsenide side?.

Especially on gallium arsenide side. I think I know what you mean. It's probably wireless. There's really nothing new to report, although we are optimistic, but nothing really to report at this point..

On the other hand, have you seen any change in the buying pattern, given that two of your key customers have merged?.

Yeah, that's an interesting question, yeah. I think, as you said, I think Tricum [ph] has traditionally been our customer and RFMD has not been. I think we have been keeping in touch with our customer, and I think as the margin process continues, I think they are making good progress to integrate themselves into one company.

But what's the net effect of that, it still remains to be seen..

Right..

Of course we are cautiously optimistic..

Okay. So you would say the conversations have been going on which will kind of, you know, lead to some sort of discussion post the merged entities, how their business change? Or it's just like, as things -- just as things or no change..

As of now there's no change. I mean in other words we are still keeping a conversation with our existing customer, and their margin activity, as they told us, are progressing, but they're not making the promise to us that they're going to bring us into overall combined operation..

But is there a risk that you may not be there?.

Is there a risk we may not be?.

Yeah, because their margin on supply [ph] --.

There's very little risk because I think the people that we're working with, as you know, on their side, they are reasonably comfortable that they're going to continue their operation. They're just not making the promise for us that we will be a big supplier into the combined operation. I think that's my assessment..

Okay. And on the raw material pricing side, any particular trends that you see, gallium arsenide mostly? For gallium..

Gallium. No. I think it's still stable. But I think it's again, you know, I think I sound like a broken record, I mean it's amazing that, with all this volume coming online, we have not had any substantial inventory. We sold everything we can make.

So I think, you know, if you look at glass from half-full or half-empty point of view, I think it's half-full, because that says, with the devastation of the PM [ph] now using gallium arsenide, the filing-up of these applications to absorb almost, you know, two-and-a-half times the capacity four or five years ago. So I don’t know.

I don’t want to make predictions, but I say one of these days it's going to be a no mas [ph], or something --.

And you don't think that your customers have any inventory of gallium there?.

We don't think so. I mean we just look at ourselves. Our own gallium inventory is very limited [ph]. We go from month to month. Why should I buy inventory gallium when we know the next month's price is going to be the same or maybe I can drive a harder bargain? That's the mentality in the marketplace right now I think..

On the LED side, it seems like the whole food chain is suffering from pricing pressure.

Have you seen some on the material side?.

Well, I would say, we've been saying, in the LED side, it's really two markets. On the lower end market you don't need anybody to tell you, the guy who make Christmas lights or to make kids' shoes, those pricing are just tremendous. Unless -- until there is a shortage. Right now there is no.

Okay? So I think we've been saying that we're putting in both end of the market, we've been doing a high end, the low end, and as long as it can plant [ph] itself and give us reasonable margin and take up some of the capacity utilization, then we're willing to do those business.

So I don't think the price pressure is particularly severe at this point for the LED business. I mean it has always been bad..

Overall it looks -- if I look at the overall gallium arsenide business, it looks like both, you know, the LED and the electronics side combined, you seem to be feeling at least that some of the secular negative trends that you have seen lately seem to be bottoming out.

Is that the way to think about it?.

Yeah. And I would like to position AXT by saying, look, if you look at AXT's revenue, I'm surprised that you guys are now all focused on what are you going to do with the qualification on the wireless side.

Look, it's now getting to be a smaller portion of our overall revenue stream and hopefully [indiscernible] and we have opportunity to grow from that.

So on the other side you can also say, you know, the other area of business we're doing are picking up, so that although we lost a lot of revenue for wireless, we're not particularly doing to well on LED but we still deliver a $23 million revenue. That's the way I would like to picture it..

Perfect. Thank you so much..

And from Adirondack Funds, we'll go to Greg Roeder..

Hi, good afternoon.

Can you help me out on indium phosphide and germanium, those substrates that you make that seem to be picking up some steam? I'm just curious as to the manufacturing process, is it similar, is it, you know, do you have to basically take down a line? Is there, you know, being that there isn't a huge amount of volume, is there inefficiencies? I'm just curious about the margin profile, the competitor set.

Could you just help us out on those thoughts?.

Sure. Let's begin with, you know, AXT has always prided ourselves by saying that we're VGF. We use this VGF technology to make semi-insulating gallium arsenide, semiconducting gallium arsenide, so it's indium phosphide as well as germanium. So it's all VGF. So the advantage for VGF is such that we can leverage that knowhow.

We have the same set of skills to grow the crystal. All the crystal needs to be sliced, edge-rounded and polished and cleaned. So those equivalent are commonly shared. However, for each material, there is a particular finesse, how to make each one of this product line to feed into the particular application.

So let me give you some color to that, is, for instance, indium phosphide is a very nasty material, a difficult material to make, because at its melting point it has a very, very high pressure. So you're almost like doing something under a pressure cooker.

Germanium is relatively simple because it's a single element, it doesn't have a whole lot of vapor pressure. So let me get back to -- from technology to market. The market obviously is also different. On wireless, it's the Skyworks RFMD, Triquint [ph]. When you go to LED, it's obviously a different set of customers, and so is indium phosphide.

It's completely different. So, one needs to work with them in such a way that you learn the -- you earn their trust and you're getting to that qualification cycle and you grow with them.

So in a way, we're using the commonality of technology, our processing capability, our production line, and yet we have to build our expertise in terms of understanding the material, our sales force, our application engineer are specially fitted for each one of this category of markets.

Have I answered most of your questions?.

Yeah.

Do you compete with Fryburger [ph] and Sumitomo in those areas as well or not?.

Okay. So Fryburger [ph] is my competitor in the wireless arena. Sumitomo is a competitor both in wireless as well as LEDs. In germanium, none of them are in the competition. Our competitor in germanium is a company in Belgium called Umicore. And on indium phosphide, we have two other competitors in Japan. Other than AXT, we have Sumitomo and JX..

Okay. All right. Thanks..

Yeah, this is Gary -- go ahead..

Have a good trip to China, and hopefully I can catch up with you guys when you get back..

Right. Yeah, and this Gary speaking. Just to give you a little bit of color about some of the things that is attractive that -- to team up here, as Morris speaks, you're getting a great blend of a true PhD material science with also somebody who really knows the markets and the products and the application.

So it's a unique combination that is pretty fun to watch..

And Gary is going to make money for it..

Next question?.

Good luck guys..

All right..

And with no further questions at this time, I'll turn the conference back to Morris Young, Chief Executive Officer, for closing remarks..

Thank you for participating in our conference call. As always, feel free to contact me, Gary Fischer or Leslie Green directly if you would like to meet with us. We look forward to speaking with you in the near future..

And that will conclude today's conference. Again, thank you all for joining us..