Good afternoon, everyone, and welcome to AXT's Fourth Quarter and Fiscal 2020 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Buena, and I will be your coordinator today.

[Operator Instructions] I would now like to turn the call over to Leslie Green, Investor Relations for AXT. Thank you. Please go ahead, ma'am..

Thank you, Buena, and good afternoon, everyone.

Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the company, market conditions and trends, including expected growth in the markets we serve emerging applications using chips or devices fabricated on our substrates our product mix, our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, to utilize our manufacturing capacity, the schedule and timeliness regarding our relocation, the growing environmental, health and safety and chemical industry regulations in China, as well as global economic and political conditions, including trade tariffs and restrictions.

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

These uncertainties and risks include, but are not limited to, overall conditions in the market in which the company competes, global financial conditions and uncertainties, COVID-19 and other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations in China, market acceptance and demand for the company's products, the financial performance of our partially-owned supply chain companies, and the impact of delays by our customers on the timing of sales of their products.

In addition to the factors that may be discussed in this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our current expectations.

This conference call will be available on our website at AXT.com through February 18, 2022. Also, before we begin, I want to note that shortly following the close of market today, we issued a press release reporting financial results for the fourth quarter and fiscal '20 -- fiscal year 2020.

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, with a review of our fourth quarter and fiscal year results.

Gary?.

Thank you, Leslie, and good afternoon, everyone. Total revenue for the fourth quarter of 2020 was $27 million, up 6% from $25.5 million in the third quarter of 2020, and up more than 46% from $18.4 million in the fourth quarter of 2019.

Of our total revenue, substrate sales were $21.5 million in Q4, compared with $20.3 million in the third quarter, and $14.5 million in Q4 of 2019. Revenue from our raw material joint ventures was $5.5 million in Q4, up from $5.2 million in Q3, and up from $3.9 million in Q4.

In the fourth quarter of 2020, revenue from Asia Pacific was 71%, Europe was 16% and Taiwan was 13%, and North America was 13%. So, actually, Taiwan [indiscernible]. In the fourth quarter, 2 customers reached 10% of revenue, and the top 5 customers generated approximately 37% of total revenue.

Gross margin in the fourth quarter was 33.9%, down slightly from 34.6% in the prior quarter. Given that, in Q4 of 2019, the gross margin was 21%, the year-on-year comparison is very encouraging. This spread is a quick illustration of the leverage we get from higher revenue, and I think it is noteworthy in terms of evaluating our business model.

Both Q3 of 2020 and the recent Q4 are much stronger. I think we can still achieve higher than the recent 2 quarters in terms of gross margin, and Morris and I will be watching for some specific items. One, of course, is product mix, another is overall revenue volume.

A third is that we think there are still some gains to be made in yields in manufacturing efficiencies, as the manufacturing teams settle into the new locations. Total operating expenses in Q4 were $7.2 million, up from $6.6 million in the prior quarter, and $6.7 million in Q4 of 2019.

R&D is up $125,000 over Q3, as we are making good progress on some R&D programs. SG&A is up $460,000, and that increase is driven by several factors. The largest contributor is year-end bonuses totaling about $350,000. About half of this was in the 2 consolidated raw material companies.

We had a good year with a strong finish, and in Q4, it was nice to be able to reward our team. Second, we had a charge for bad debt of $50,000, something that does not happen too often in our business model.

We also had charges related to the private equity round and preparing for the IPO in China, and travel was up as a number of us, including Morrison and me, went to China. Total stock compensation expense for the fourth quarter was $692,000.

Operating profit for the fourth quarter was $1.9 million, compared with an operating profit of $2.2 million in the previous quarter, and an operating loss of $2.8 million in Q4 of 2019. Other income net for the fourth quarter 2020 was a gain of almost $600,000. This includes grants of almost $540,000.

Especially noteworthy is a net profit of $354,000 from the partially owned companies in the AXT supply chain, accounted for under the equity method, so that's good news. It's nice to see that group be positive again. The market for raw materials has tightened up, and this is a good sign. We think this will hold in 2021.

These gains were offset by a foreign exchange loss of $300,000 and a net charge of $40,000 for interest income and expense. Income tax for the fourth quarter of 2020 was a charge of $108,000 compared with a charge of 673,000 in Q3.

Our Q4 results included approximately $400,000 in tariffs as a result of the 25% tariff charged on importing wafers into the United States from China. For Q4 2020, we have a net profit of $2.1 million, or profit of $0.05 per diluted share.

By comparison, we had a net profit of $1 million, or profit $0.02 per diluted share in the third quarter of 2020, and a net loss of $2 million, or a loss of $0.05 per share in Q4 of 2019. The share count for Q4 was 42.042 million shares. Cash, cash equivalents and investments were $78.6 million as of December 31.

By comparison, at September 30, it was $29.8 million. This increase is a result of the $48.8 million -- pardon me. This increase of $48.8 million is directly related to the IPO [percepts] of partnering with private equity firms in China. Without that, cash would have been flat. I'll give a brief update on the Star Market IPO project in a moment.

Depreciation and amortization in the fourth quarter was $1.37 million, and investments were $5.3 million. Net inventory at December 31 increased by $3.2 million in the quarter and ended at $51.5 million. Ending inventory consisted of approximately 48% in raw materials, 47% for work in progress, and only 5% in finished goods.

The largest increase was in raw materials, and this was deliberate on our part. Okay. This concludes the discussion of our quarterly financials. Let me just briefly highlight the fiscal year. For the fiscal year 2020, revenue was $95.4 million, up almost 15% from $83.3 million in fiscal year 2019.

This represented growth in every revenue category across our portfolio and underscores the momentum we are seeing in major technology trends that drive demand for our compound semiconductor substrates. Gross margin for fiscal year 2020 was 31.7% of revenues, up from 29.8% of revenue for fiscal year 2019.

Net income for the fiscal year 2020 was $3.2 million or $0.07 per diluted share, compared with a net loss of $2.6 million, or $0.07 per share, for fiscal year 2019.

I'd now like to give you a brief update and comments about our plan to list our company in China on the STAR Market in Shanghai, and these comments also include some forward-looking statements.

On November 16, we announced a strategic plan to access China's capital markets and progress to an initial public offering and -- by our company, the formal name of Beijing Tongmei [Xtal] Technology Company, our wafer manufacturing company there in China, although the short name is Tongmei.

The first major step in this process is engaging reputable private equity firms in China to invest funds in Tongmei. This went smoothly, was met with enthusiasm, and closed faster than we expected. In January, the final installment of $1.5 million in private equity funding came in.

In total, we have banked approximately $49 million, and in aggregate, sold approximately 7.28% of Tongmei.

Simultaneously, we have been working on some reorganization plans, which will make Tongmei have broader product lines, more consolidated revenue, more customers and, in general, strengthen this company and support the high valuations awarded by that investment community.

One example is that we are moving our 2 [indiscernible] raw material companies, BoYu and Jin Mei, into the Tongmei family. We did receive some very positive feedback from a number of shareholders when we announced this. Several of you described this as unlocking a hidden asset, and that resonates with Morris, Leslie, and me.

Morris founded totally in 1998, and the management team has nurtured and steered that company now for over 22 years. Morris and I both spent over 2 months there in the fall of 2020, including the mandatory 2-week quarantine. Especially with the relocation having gone so well, we agree that we are now unlocking a hidden asset in China.

One of you also responded with an e-mail that just said, "Wow,' and that resonates for us, too. We hope to file the application with the China Securities Regulatory Commission by the end of June. There's a lot to accomplish to achieve that goal, and it will be a busy 4 months for us. Okay. This concludes the financial review.

I'll now turn the call over to Dr. Dr. Morris Young for a review of our business.

Morris?.

Thank you, Gary, and good afternoon, everybody. 2020 was a year of solid achievement for AXT, capped off by the growth in Q4, which is typically a seasonally down quarter.

We completed the relocation of our gallium arsenide manufacturing, elevated our business and manufacturing processes to meet Tier 1 standards, and expanded capacity in response to increasing demand.

Now, with the gathering momentum of 5G and its related technologies, new applications emerging in health care and consumer devices and the technology progression and data center connectivity, we believe AXT is in a strong, competitive position to lead our industry and enable many of the defining trends of the coming decades. And we are ready.

In fact, we don't often make fiscal year projections, but I will give you a few today. First, in 2021, we expect to bring 8-inch gallium arsenide and 6-inch indium phosphide to market. We expect to exceed that elusive $30 million revenue quarter-per-quarter mark. We expect to ramp up production with multiple Tier 1 companies.

And finally, we're excited to successfully move AXT towards a 2022 listing on the STAR Market in China. We believe this year will be a transformative for AXT, and in turn, for our employees, our customers, and our shareholders. While we said it before, I am truly excited to report to you on our progress. So let's now get started with indium phosphide.

Q4 of 2020 was a strong -- second strongest revenue quarter for our indium phosphide portfolio in the history of AXT. Our results were exceeded only by Q2 2019, when we received a very large order from a single customer, who we believe is building an inventory for expected future demand.

In Q4 of 2020, however, our revenue achievement was spread across many customers and money applications. We believe the current revenue diversity demonstrates the broad and sustainable nature of our growth opportunities in indium phosphide. It was in April of 2019 that we first mentioned 5G revenue on our earnings report.

Let's say, a year later, 5G and its closely related power applications are driving significant growth in our indium phosphide revenue. Demand had been particularly strong in China and Taiwan, and we don't see any slowing in 2021, as 5G continues to roll out worldwide. We believe capacity in our industry remains very tight.

We have and will continue to run capacity at our Beijing facility to keep pace with customer demand. Scaling quickly and cost it effectively is something AXT is uniquely able to do, and we expect to gain market share because we have the shortest lead time among our primary competitors.

In data center connectivity, the ever-expanding number of users, devices, and applications is driving the transition to technology that transfers faster, more scalable infrastructures. High-capacity connectivity will continue to be essential. In fact, many believe that the evolution from 100G to 400G will happen faster than the move to 100G.

We are seeing this growth in silicon photonics reflected in our steady, strong demand in data center-related revenue.

Moreover, we are pleased with the highly productive customer relationships we are developing in this area of our business, and we are applying the Tier 1 processes we have developed to benefit customer experiences across our portfolio.

In 2021, we expect to see the meaningful emergence of additional new applications for indium phosphide in such areas as health care monitoring and consumer devices. Money are being innovatively driven by Tier 1 players and showcase the unique properties of indium phosphide.

These applications have the potential to represent an entirely new growth area, for which we are well positioned and engaged. Now turning to gallium arsenide. LED revenue continued to rebound, driven by high-end applications, including automotive.

Wireless gallium arsenide revenue was down seasonally in Q4, but IoT applications seem to be providing a lift in ongoing demand for semi-insulating gallium arsenide substrates. New applications, both emerging today and on the horizon, include world-facing cameras, augmented and virtual reality, automotive sensors and biosensors, and more.

As we talked about previously, micro-LED may follow as the next major volume driver of gallium arsenide chips. Micro LEDs are expected to consume less power, provide sharper contrast, and produce brilliant lighting and colors.

Their applications are set to scale from wearable devices and handheld devices to very large screen, like high-end televisions of the future.

While current market expectations very greatly, and they are subject to change over time, we're seeing reports that the micro-LED market for small consumer devices like wearables and phones may eventually reach an annual demand of 2 million 6-inch gallium arsenide substrates for the ready LED portion alone.

If that comes to pass, it will be larger than the entire current market for semiconductor gallium arsenide substrate. Regardless of the specific numbers, this is an exciting space that could add significant new values to the LED market in 2024 and beyond.

Tier 1 players are already driving the development, and we believe that our wafers are being used for early-stage activities. In recent quarters, with so much happening in other parts of our product portfolio, we haven't focused much of our business commentary on germanium substrate.

But for the context, this area of our business grew more than 20% in 2020, after a significant slowdown in 2019. The primary driver is the satellite solar cell market, which appear to have entered a period of recovery. We expect to see further improvement in 2021.

Now turning to raw materials, this is an interesting, exciting time for our raw materials business. In 2020, both BoYu and Jin Mei relocated their factory to our campus in Kazuo. This has enabled both joint ventures to expand capacity in response to strong market demand.

BoYu, which manufactures high-temperature pBN crucibles and pBN-based tools for OLED, continued to see healthy growth. Jin Mei, our other joint venture for AXT, is a diversified industry -- industrial high-purity material supplier, which is also posting solid results as gallium prices continue to increase.

In addition to high-purity gallium, Jin Mei also supplies indium phosphide poly and other materials. Their relocation and expansion have allowed both joint ventures to participate in new business opportunities, which is fueling their continued growth.

Their close proximity to our own manufacturing lines allow AXT to expand recycling efforts, in order to produce [indiscernible] products, while improving manufacturing economics.

In addition to BoYu and Jin Mei, we're pleased that the joint ventures for which we account for using the equity method, also in aggregate contributed positively to our profitability in Q4. Many are benefiting from the increase in commodity pricing being driven by a healthy demand environment.

In conclusion, we're heading into a new chapter of our growth and development. Major technology trends that we have discussed over past quarters are now gathering momentum, with new ones visible on the horizon.

Our Tongmei facility in Beijing, Dingxing, and Kazuo are ready to meet this moment and enable the innovations of some of the most discerning customers in the world. 2021 is shaping up to be a transformative year for our industry and for AXT specifically.

And part of our journey will include preparation for our STAR Market listing, which we believe will further strengthen our financial position and unlock additional value for our key stakeholders. We are very pleased to have you with us on this journey, and we appreciate your ongoing enthusiasm and support. This concludes my prepared comments.

I will now turn the call back to Gary for our first quarter guidance.

Gary?.

Thank you, Morris. As Morris discussed, the demand environment remains healthy, with a number of growth drivers leading the way. We expect to see revenue in Q1 of between $28.5 to $29.5 million. We believe that our net profit will be in the range of $0.05 to $0.07, with a share count of approximately 42.1 million shares.

This concludes our prepared comments. Morris and I will be glad to answer your questions now.

Buena?.

Yes, sir. [Operator Instructions] Your first question is from Richard Shannon of Craig-Hallum..

Congratulations on some really nice numbers here. A number of questions here. Let me start just very quickly with the guidance here, Gary, Morris, $29 million at the midpoint here versus the $27 million number. Typically, you're seasonally down a little bit in the first quarter.

Kind of help us, A, describe the kind of the individual segments here, and then kind of describe qualitatively what's driving all of this.

What's helping you to a much better than seasonal first quarter of the year?.

Gary, do you want to take a first crack?.

Yes. First of all, without pulling out a bunch of numbers, the seasonality actually is out of cycle right now because we normally have a down quarter in Q4, but this recent Q4 was up, and that's the first time in a number of years. And then typically, I wouldn't say Q1 is down from Q4. It may be flat or a tiny bit up.

So -- but having said that, we are projecting growth. We see lots of momentum. The raw material companies are doing well, and Morris can comment on that, but we're seeing raw material prices increase, and that's going to ripple through the numbers, both on the equity companies down below that we use the equity method for, as well as BoYu and Jin Mei.

And then, we're continuing to see strong market demand, maybe not so strong for the gallium arsenide wireless, but every other substrate category is looking good.

Morris, do you want to add to that?.

Sure. Sure. Yes, so let me dive a little bit deeper. I mean, indium phosphide is absolutely strong. In fact, our lead time has increased than before, but compared to our competitors, we're told we're still having the shortest lead time. We are increasing our capacity, and the demand seems to be just very robust.

I think for germanium, the business is good. As Gary said, perhaps the wireless is the weakest link, but it's going to still hold flat.

So also, let me remind you, Q1 not only has one of the months which is only 28 days for February, but also the factory, because of Chinese New Year, has to shut down for about a week, so the number of working days for us is actually shorter. And for us to be able to ramp -- guide the revenue up, so you can see the demand is very, very strong..

Okay. That's helpful, those comments. I want to follow up on kind of gross margins here. Always like to try to figure out what you're thinking here. You're talking about indium phosphide being strong, and also raw materials I think is helpful.

Directionally, Gary, you could help us think about, relative to the fourth quarter, where you're looking for gross margins?.

Well, the -- we know the things that drive it, and we try and mention them frequently to your community as well. But mix is one thing, and that's continuing to be favorable. Total revenue is helpful as it grows, because it absorbs more of the fixed cost over more units. And we see the volume generally going up.

As a side note, it is possible, as some of these larger accounts kick in, that they -- the volume could go up, but it could hold the gross margin even because you might lose the benefit of some of the pricing with high-volume with Tier 1 customers.

But gross profit can go up -- gross profit dollars can go up no matter what, and we hope gross margin will -- initially, we're trying to just get it back to 35%. We're confident that that's going to happen. We can't say when, for sure, but hopefully soon. And -- but that's not where we'll settle for our goal.

We'd like to go higher than that, and I think that there's more runway for us to do that. So we're feeling at ease about it, I guess, is what I would say.

Morris, do you want to add anything?.

Yes. I think what I will comment, usually, gross margin is CFO's territory, but I would say this. I mean, we just finished the move for our gallium arsenide factory, which is not a small matter. I think we have done an excellent job not losing any customers, and we are ramping up fairly nicely.

And then we said once they settle the factory, we still got more efficiency gain or yield improvement to do. As I said, indium phosphide business is very strong and depends about how much more we can do on indium phosphide. I think that should help us on gross margin. I think the other thing is, obviously, the overall revenue.

We said before that we are looking for that elusive $30 million mark. And we believe that the overall cost of running the factory and everything else is going to be a lot more efficient as we pick up revenue..

Okay. I do want to follow up quickly on the gross margin topic as you look further out here. Gary, in your prepared remarks, you talked about -- and Morris, I think you just mentioned again about the potential for yield improvement as you've gone through this move, which I think most people would think is a significant move.

How much more do you have left to go here? And I'm asking the question partly quantitatively, but I'm also asking it kind of in a simplistic manner with same mix and obviously, growing volume of what you're thinking about.

But can you get to 40% gross margins as you get yields back up to where they were before you did the move?.

Well, without getting into the details, I definitely think so. I think so. But of course, we also need some -- the product mix, some of the high-end gallium arsenide business, indium phosphide definitely, for sure. And if we load up the factory, definitely, we can gain market -- gross margin.

Of course, I think we have this debate, healthy debate, I would say, with Gary, because after all, Gary has to calculate those gross margins, and I can just promise the gross margin. But I definitely see that we can do it..

Fair enough.

Morris is my boss, so I'm not going to disagree with him..

I think that's a good policy, Gary. All right, last question, I will jump out of line. Indium phosphide, you're talking about some really strong growth here. I want to kind of -- I got a multipart question here, I guess, for you, Morris. I think you mentioned in your prepared remarks about strength in 5G and [PON].

I know it's a little bit hard to tell there. What we've seen from the industry is maybe a little bit of a pause, driven by the trade tensions with Huawei, who's, I think, the biggest driver there.

I want to know, to what degree is that coming back here versus other dynamics, like datacom or even some of these new applications you're referring to?.

Well, so far, I mean, I read the news about the trade tension and et cetera. But I think our 5G application does not limit itself to Huawei or any particular region. Indium phosphide is used for the front haul link on the base stations. And China itself is building 600,000 last year, and they're going to just increase rather than decrease.

So, like it or not, they need indium phosphide to do that linkage. And with the pandemic worldwide, maybe the 5G build-out is sort of slowed down in 2020. And I think as the economy recovers, definitely, somebody is going to catch up, or to try to catch up. And that definitely will use indium phosphide, [PON].

And I think it's just a measure of how much more it's going to increase, rather than it's going to have a slowdown. And that's from read. And as far as the other applications I was talking about, yes, we're working with our customers.

Yes, we are gaining a lot of trust, and we're seeing their ramp, but where are they going to launch the product, we don't know. Honestly, I think we hope soon then later..

Okay. Fair enough. I will jump out of line..

Your next question is from Hamed Khorsand of BWS Financial..

So, first off, I just want to see, what's driving your clarity more as just to your comments about $30 million a quarter this year? I mean, is it your customers committing to more orders? What are you seeing beyond this quarter qualitatively from your customers that's giving you that confidence?.

Yes. I -- so let me answer it this way. I think usually, we don't have good visibility. Normally, we only get -- a customer can turn off the order anytime, as we always say. But looking at our indium phosphide order book, so far, it's very strong, and I don't see any slowing down.

And also, if you look at the supporting application of indium phosphide, what used to be -- the last time it was very strong was back in 2015, and the big application then was PON. And then PON sort of slowed down, and then silicon photonics start to pick up.

Now, if you look at indium phosphide applications, we not only have the 5G, and I believe it's only in the beginning, the first inning. They still got more to go, or if anything, they're going to grow faster. And then silicon photonic is not slowing down at all.

And we just engaged with a first-year customer, they buy instead of through a epi supply, they buy directly, and we just see more opportunity to increase our order with them. And then, we also see the consumer product applications that we mentioned in our call, which I think hasn't started yet. So, given that, I think indium phosphide is good.

And from semiconductor gallium arsenide, we see the automobile industry is definitely strong. One of our customers guided their revenue is going to -- they increased their revenue increase from 4% to 6% up to 8% to 12%. So that's good news, because they are a very large customer of ours.

And we also see other automotive LED customer giving us the same signal. And then we also see -- we haven't started the VCSEL high-power laser market, which I think is also strong.

And wireless is probably the only one which is sort of, well, I think 2020 was still a growth year, but we just don't have a good finger to point at what specifically they're going to grow. But the demand is, again, I think is good.

And finally, germanium, we grew 20%, as I said, last year, and we believe the order pattern seems to be strong, not counting on the so-called OneWeb and connecting all 5G communications. And so, I think germanium is going to have a good year as well. So, if you look at it, all 4 categories are doing great.

And finally, raw material for our 2 joint ventures, not only they move to their new factory, they've got all the capacity expansion you can ask for, and the market is again, strong, I can just say. Raw material prices is increasing, and demand is strong for our raw materials..

Okay.

And then my other question was that, are you adding customers, or is the revenue lift coming from existing customers?.

I think both. I mean, some of the customers I speak, as I think go through my mind, of course, I cannot tell you the names, but some of them are new customers. They're coming in with large orders, hopefully, that they're going to ramp. Some of the other customers, they used to buy a small amount from us.

With this new qualification going through, they're going to become a major customer of ours. So I think it's both. And lastly, I would say, we have been saying about this we are getting our factory to serve the Tier 1 customer, which includes SBC control.

You have more metrology, and so you have -- you adhere to more rigorous control in terms of -- that will increase our cost in terms of engineering, in terms of serving the customer the right way. But eventually, it's going to pay off, because people then will trust our quality better, and they will be more at ease to give us more businesses..

Yes. I'd like to add to that, Hamed, and just to say that we do have good communication between the AXT and our customers, and that's one of our strengths, and we promote that and our sales and marketing group is very devoted to listening to the customer. And sometimes, what we hear, we don't like.

And we've been through those cycles before, and you've been with us when we've gone through some of them. But right now, it's like turning up the volume on your stereo system. There's just a lot of positive feedback about their expectations. So communications is up and what -- it's good.

A second thing, which Morris touched on, is the relocation is over. So there are customers who are holding back, just as some investors held back, frankly, because they were concerned about the relocation risk. Now that's been converted into an opportunity. We're going to grow the company and take market share.

So I think that's brought some customers back, and then -- or to increase their volume. And then there are new customers that we've been shipping, shall we say, pilot production levels to, and that's going to eventually turn on. So it's basically customer feedback. I mean, that's what's happening..

Okay.

And then my last question was going to be, as far as the tight capacity is concerned, do you know how much capacity you're short as far as the market is concerned? And what's to drive the -- your competition doesn't build up capacity and just there's ample supply out there?.

I think, Hamed, I think that depends upon product, I think. I mean, obviously, we always have utmost respect for our competition. I think -- but indium phosphide is a product material I've been always saying is very difficult.

And also, because of the specific applications of indium phosphide, they are mostly for high-end telecommunication lasers and consumer products. They have very stringent requirements. So not only we have the capacity, but we -- I believe that we have a very high quality standard, so I think we are ahead of our competition, I think.

But as far as capacity, we are trying to build that capacity, and our customers definitely are telling us, I would need this, and they give us projections. But of course, we have to take it with a grain of salt because sometimes they give -- they double order or triple order.

But then, we cannot afford to take them lightly, either, because we don't want to disappoint them. So we are sort of cooking to our customers' guidance, and hopefully, we won't disappoint them.

And I also believe that indium phosphide is not a material that you can go to your corner store and order a dozen to take home -- the qualification time, the stringent specification, the whole 9 yard.

I mean, they have to come over to our factory and turning things around, taking a look at it, and they sometimes even specifically ask for what kind of metrology tool you have to inspect your wafer before you ship to them.

So it's a very elaborate process that we're working with our customers that we -- on this particular application, we work with them almost for 2 years. And so, we have constant feedback, and so -- but of course, we don't take the business for granted.

I mean they can always say, okay, well, we're going to give a portion of the business to your competitor. That we cannot stop them. But then they do give us guidance on how much they want..

Yes, Hamed, let me add a little bit more, that if you look at the characteristics of our competitors and of AXT, even though AXT has been around a long time, there's still quite an entrepreneurial spirit in the company management, which both Morris and I try and project, as well as our other key vice presidents.

If you compare that to one of our other competitors, they're much more conservative. They're more consensus-based in their decision making, and they don't move as fast. So I'm not saying that no customer can add capacity and grow, but the likelihood is much lower than it is with AXT.

In the case of another customer, a competitor, they're privately financed. They don't have access to capital in the markets like we do, and they're not part of a big company. So I think we have some reasons to believe that there's barriers to entry in terms of rapidly adding capacity.

The only company who can prove that they can do it well is AXT, because we just did it..

There's no questions at this time, and I would like to turn it back to Dr. Morris Young, CEO of AXT, for any further comments..

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

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