Good afternoon, everyone, and welcome to AXT's First Quarter 2022 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Kevin, and I'll be your coordinator today.

[Operator Instructions] I would now like to turn the call over to Leslie Green, Investor Relations for AXT..

Thank you, Kevin, 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 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 markets 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 April 2023. Also, before we begin, I want to note that shortly following the close of the market today, we issued a press release reporting financial results for the first quarter of 2022. This information is available on the Investor Relations portion of our website at axt.com.

I would now like to turn the call over to Gary Fischer for a review of our first quarter 2022 results.

Gary?.

Okay. Thank you, Leslie, and good afternoon to everyone. I'm hearing a little bit of background noise. So Morris and Leslie, it might be good during the -- this portion of the meeting that we go on mute that we're not speaking, so. By the way, to our group, we're in different locations today. Morris is -- it's the middle of the night in China.

So he's in China, and I'm in the Fremont office for AXT. So, unless he's here also in the Bay Area, so. Okay. Today, we are pleased to report that total revenue for the first quarter of 2022 was $39.7 million. That's up 5% from $37.7 million in the fourth quarter of 2021 and up 26% from $31.4 million in the first quarter of 2020.

Q1 marks our 9th consecutive quarter of growth and highlights the market expansion and increasing demand for indium phosphide and gallium arsenide substrates.

To break down our Q1 '22 revenue for you by product category, indium phosphide was $15.5 million, gallium arsenide was $12.0 million, germanium substrates were $4.2 million and revenue from our 2 consolidated raw material joint venture companies was $7.9 million.

In the first quarter of 2022, revenue from Asia Pacific was 73%, Europe was 16%, North America was 11%. The top 5 customers generated approximately 29% of total revenue, one of which just inched over the 10% level. Our continued revenue diversity demonstrates that our growth is not overly dependent on one large customer or application.

This is another factor contributing to our confidence that we have reached a point of sustainability and can outpace market growth in 2022. Non-GAAP gross margin in the first quarter was 33.8% compared with 32.4% in Q4 of 2021 and 36.9% in Q1 of 2021.

For those who prefer to track results on a GAAP basis, gross margin in the first quarter was 33.6% compared with 32.2% in Q4 of 2021 and 36.8% in Q1 of 2021. Improvement in gross margin came through growing volume, a favorable product mix and a strong focus on yield improvements and manufacturing efficiencies.

We continue to believe that we can get back to the 35% range later this year. Total non-GAAP operating expense in Q1 was $8.6 million. This compares with $8.1 million in Q4 of 2021 and was $7.2 million in Q1 of 2021. On a GAAP basis, total operating expense in Q1 2022 was $9.6 million compared with $9.1 million in Q4.

For comparison, total GAAP operating expense was $8.0 million in Q1 of 2021, so. Non-GAAP operating profit for the first quarter of 2022 was $4.8 million. Non-GAAP operating profit in Q4 of 2021 of $4.1 million and $4.4 million in Q1 of 2021.

For reference, GAAP operating profit for the first quarter of 2022 was $3.7 million, up from an operating profit of $3.0 million in Q4 of 2021 and an operating profit of $3.6 million in Q1 2021. Non-operating other income and expense for the first quarter of 2022 was a net gain of $0.3 million.

This includes a gain of $1.1 million from the unconsolidated raw material companies. The full breakdown is in our press release. For Q1 2022, we had a non-GAAP net income of $4.3 million or $0.10 per share compared with $4.1 million or $0.09 per share in the fourth quarter of 2021. Non-GAAP net income in Q1 of 2021 was $4.2 million or $0.10 per share.

On a GAAP basis, net income in Q1 was $3.2 million or $0.07 per share. By comparison, net income was $3.0 million or $0.07 per share in the fourth quarter of 2021 and $3.4 million or $0.08 per share in Q1 of 2021. The weighted average diluted shares outstanding in Q1 was 42.7 million.

Cash, cash equivalents and investments were $44.3 million as of March 31. By comparison at December 31, that was $51.8 million. Depreciation and amortization in the first quarter was $2.0 million and capital investments were $6.3 million. Total stock comp was $1.1 million. Net inventory at March 31 was $68.8 million. Okay.

This concludes the review of our quarterly financial results. Turning to our plan to list our subsidiary, Tongmei, in China on the STAR Market in Shanghai, let me give you a quick update. So the review of our application is now underway, is proceeding according to our expectations.

Tongmei received a list of questions from the Shanghai Stock Exchange Review Board. This is similar to what we call a comment letter from the U.S. SEC. Our China advisers think the list was fair and reasonable, and we have provided a lengthy and detailed response.

Our advisers tell us to expect another set of questions as it is normal to have more than one round of comments. And indeed, we did earlier this week, get the second set of questions, so that's positive. It was very fast turnaround, and we're pleased with that.

So, as we have discussed, the process of going public on the STAR Market includes several periods of review and therefore, is a lengthy process. Tongmei does not expect to complete the IPO until the second half of this year.

Before I turn the call over to Morris, I want to take a moment to address the COVID restrictions in China, which have been in the news, of course. To date, we have not had any shutdowns of our operations in Beijing, Dingxing or Kazuo.

We have experienced some supply chain disruption as a result of shipment delays and supplier shutdowns relating to products we use in our manufacturing process. However, so far, we've been able to mitigate the impact with inventory on hand.

We've also seen some pockets of softness where customers are on lockdown, but the demand for our products, coupled with the diversity of customers and applications that need them, have allowed us to shift our allocations to other customers or applications that remain in high demand. Like most companies, we are monitoring the situation closely.

And with Morris in China, are managing through these issues with high-level attention. We remain in close contact with our customers to understand any changes in their demand expectations should those changes arise. Okay. With that, I'm going to turn the call over now to Dr. Morris Young for a review of our business and markets.

Morris?.

Thank you, Gary. Q1 was another strong quarter for AXT. As our growth demonstrates, we have reached an inflection point in our business where our investments in our technology, business operations, and customer relations are bearing fruit.

Market share gains and expansion into new applications and Tier 1 opportunities enables us to post a 26% revenue increase in Q1 from the prior year. This growth is coming from a diverse set of applications and customers across telecom infrastructure, data center, industrial, consumer, healthcare, automotive and more.

This gives us strong confidence in the sustainability of our business success throughout 2022 and beyond. In indium phosphide, we achieved record revenue in Q1 of $15.5 million. This represents an increase of more than 45% from Q1 of 2021 and puts us well on track to achieve indium phosphide revenue growth of 30% or more this year.

We believe our key markets have entered a new cycle of innovation and application development that is driving opportunity expansions and diversify our revenue base. This is supported by the strong order pattern we're currently experiencing.

Demand from several of our Tier 1 customers is robust, and we're working hard to scale our production accordingly. In particular, our new customer application is ramping well. As we mentioned to you in February, we designed into a short wave [flash] infrared sensor for consumer applications.

Our success as a supplier for this initial application has allowed us to begin ramping a second application for mobile devices that we believe will incrementally be larger in volume. We're excited about this design win, and we believe we will present a gateway to additional high-value designs and applications in portable consumer devices.

Importantly, we're pleased to know that our customer product road map is lining up well with our capabilities to meet the new innovations they are developing. Data center applications were also strong in Q1, increasing from a solid and steady level that we've seen over the past year or so, we believe we are gaining tiers in this market.

And our customer discussions indicate that we should see growing demand throughout 2022. The silicon photonics market is expanding rapidly and is creating exciting opportunities in telecom, datacom, lidar, healthcare, high-performance computing, AI and optical computing applications.

Several major players are making significant investments in the advancement and adoption of silicon photonics technology. Telecom infrastructure as a category performed well in this quarter as well, including 5G-related applications.

We believe that infrastructure upgrade cycle driven by 5G in the United States, Europe and other parts of the world is creating a beneficial demand environment for indium phosphide. And that should continue to do so for several years to come. Turning to gallium arsenide.

The LED market remained strong across all of our traditional end markets, such as automotive display and high-end lighting. In fact, we achieved our highest revenue quarter since Q3 of 2012.

Contributing to our growth in Q1, with continued strength in high-power industrial laser applications with our very low EPD wafers, we have gained significant market share, particularly in China. This has allowed us to drive strong revenue growth in these applications over the last 6 years.

High-power industrial lasers are commonly used today in tools used to cut metal sheets, welding equipment, various testing equipment, robot applications, medical devices and others.

Revenue from our 2 consolidated raw material companies was down this quarter after a very strong growth throughout 2021, with prices remaining volatile, these consolidated raw material companies are being selective in the business they support in order to drive improved gross margin performance in our business.

We were pleased to see the increase in contribution to profit from the unconsolidated raw material companies, which represent additional positive leverage in our model. This is a strong benefit of our vertical integration strategy.

While high raw material prices had a negative impact on our cost of goods sold for AXT and its competitors, AXT is able to offset some of the impact of the higher prices through the revenue generated by our joint ventures. We also have the benefit of supply guarantees and insight into the pricing trend.

We believe these have proven highly valuable to our business over the last 2 decades. In conclusion, we have reached a true turning point in our business.

Across our portfolio, we are working with Tier 1 customers for new innovations, helping to redefine what is possible with technology and advancing specialty materials into areas that the market may not have conceived of just a few years ago.

Today, we're seeing significant growth from our major -- from major trend in 5G telecommunications, in data center expansions, in consumer devices and in industrial applications.

Visible on the horizon are emerging applications in microLEDs, advanced high-health monitoring and the metaphase that we believe will represent another transformative wave for our business.

Through the scaling of our operations, investing in our product road maps and strengthening of our capital structure, we are executing on a strategy that positions us well for the healthy growth and profitability throughout 2022 and beyond. I'm now turning the call back to Gary for our second quarter guidance.

Gary?.

Thank you, Morris. As Morris discussed, there are a number of company-specific growth drivers contributing to our performance. We're currently expecting Q2 revenue to be between $38 million and $41 million. We believe that our non-GAAP net profit will be in the range of $0.08 to $0.10, and GAAP net profit will be in the range of $0.06 to $0.08.

Share count will be approximately 42.6 million shares. So this concludes our prepared comments. Morris and I would be glad to answer your questions.

Kevin, operator?.

[Operator Instructions] Our first question comes from Richard Shannon with Craig-Hallum..

Let's start looking backwards into the first quarter here and on gross margins. Coming off, I guess, probably a disappointing end of last year, you're directionally upwards. And I think at least based on your qualitative commentary, a bit better than I think you would have expected. In your comments, you mentioned volume mix and some yields.

Can you maybe describe the mix? And then maybe if you want to discuss, Morris, looking forward here, how much -- how close are you to more of your ideal level of yield across your whole substrate portfolio?.

Gary, do you want to take that first?.

Okay. Sure. The reason we point out indium phosphide, as we said, it was a new record for the quarter, $15.5 million. And that kind of mix is beneficial for us in the aggregate gross margin percent. So that's why we underline or underscore, for example.

One of the reasons that we think we can continue to trend in the right direction, meaning upward and to the right is, we think indium phosphide is going to continue to expand. And so, we'll get the benefit of that tailwind.

We are -- we have been going through, I think, a settling in process at the new sites, and we've also done modifications at the Beijing site to increase capacity and things and upgrade it. And so, I think there's still some progress to be made in that arena. We're not at our all-time ever best yet. So I think we can get back to that.

And we are also doing some development program in the R&D category on recycling certain materials that, because the price of materials has increased so much, we've crossed a tipping point where it's economically preferable for us to do more recycling. It's also better for the environment and things like that and efficiencies.

So those are the things that I think are helping us and we -- it's -- I guess it gives the background as to why we think that we can continue to trend in the right direction for gross margin.

Morris, do you want to add anything else?.

Yes, absolutely. I do want to emphasize, I think, Richard, I think you're seeing us growing so fast, especially on some of the categories. When you grow, you can hit that yield point precisely, that's, I think, remarkable. I think we have done a good job. And -- but nevertheless, I think when you settle in, you should have the incremental gain.

I think the design win of the indium phosphide, I believe when we start to ramp into volume that should give us yet other opportunity to, not only increase yield, but also be favorable in product category, as well as volume, okay? I think that should give us an increase in volume.

And on top of it, I think our new factory, I mean, it's not new anymore, but still crystal growth is, they call it [indiscernible] size of crystal growth. So, I think we have more to gain in terms of yield and success rate and so reduce our cost in crystal growth as well..

Okay. And a follow-up on that topic, Gary, built into your guidance for the quarter, been much time to try to run this through.

But given similar volumes, do you expect a similar gross margins within a certain range in the second quarter as well?.

Yes, our group here that drills down, they have been ticking up a little bit, but it's -- so I would expect that's going to be the case..

Okay..

Yes..

Just want to make sure we're reading that right. So that's helpful. Next topic here. On the last call, you talked about the expectation of hitting top line sales of 15%, 20%, your first quarter is up 26%. And the guide here looks like it's implying a number of probably in the -- probably around 18% or so.

I think also on the last call, Morris, you alluded to the potential of maybe even hitting a $50 million quarter this year. So wondering if you could talk about trends in the rest of the year supporting that 15% to 20%.

Or is there a still -- do you see a possibility of that $50 million number popping up this year, which case you can clearly blow that away, especially since I think you talked about some positive dynamics in health sensing, which maybe contribute to that.

Can you talk to those points, Morris, please?.

Sure, Richard. Of course, that's $50 million, I'm not trying to take it back, but you need a lot of good things last quarter to happen. In last quarter, we were talking about indium phosphide continues to grow in the first design win we have. We also talk about the possible ramping up of the second and third product.

And we're starting to see the second product start to ramp. So we're very pleased. And hopefully, we're going to see the start of the third product ramp. And data center, obviously, is very strong.

And in fact, I think our indium phosphide is sort of capacity constrained at this point, although we are growing very fast, but still the customer demand is really strong. So, hopefully, by later this quarter, we should be able to catch up to the capacity for our customer demand.

In gallium arsenide, one particular area was the power amplifier, HBT market. And we are still in talk with our customers on several issues, such as commercial terms and what's the sustainability of this strong market going forward because we need to do investment to address that market. And that market is more difficult than indium phosphide.

Indium phosphide is a newly developed market. That market, HBT market is more mature. But I think we do see the demand being high, but that's not resolved. So if that were to come to fruition, that obviously is going to be a very big volume. So, if you [count] all these come into fruition, then sure, it's possible to reach $50 million.

However, everybody hates however, when the CEO talks. We have to come -- we didn't know the Ukrainian war, it's happening. I think a possible recession everybody is looking at. And the technology stock is slowing down and COVID is affecting China specifically very strongly.

So, I think our business specifics are not being affected, I don't believe some of this new product introduction, I don't think it will be affected by recession or COVID. But our supply may be affected. And eventually, our customer may be affected. So I think we're looking at a lot of changing things.

And so hopefully, that AXT stock price at $6 a share are taking everything into account..

Okay. I'm sorry, Gary, what was that? Okay. I thought I heard something. Just one more question for me. I'll jump back into the queue here. Gary, you mentioned there was a 10% customer just above.

Can you tell us whether that was a customer who's been one in the past? And then of the top 5 customers you have, how many of these are these kind of these new Tier 1s that you've been talking about investing in or investing in behalf of for the last couple of years?.

Yes. This is a customer that is a recurring winner in the 10% category. And it’s a heavy user of indium phosphide. So it kind of lines up that way for them. The answer to your other question is that, the top 5 are not – none of the brand-new applications in the consumer market is yet in the top 5.

It’s getting close, it’s going to flip over, but it hasn’t yet. So the ones that are the top 5 are customers that we’ve mentioned before over time. So….

[Operator Instructions] Our next question comes from Hamed Khorsand with BWS Financial..

So first question I had was just given the market backdrop, are you getting this feedback from the end users? Or is the customers placing more orders, giving you this clarity as to how indium phosphide is being used and gallium arsenide?.

I think -- I'll give some color. But I think the answer is both. We're getting it from the people -- the companies that we sell to in the food chain, but we're also being supervised and communicating with the end customers. So go ahead, Morris..

Yes. However, I would comment on is that, obviously, we cannot disclose our customers because we are at a very heavy NDA.

But some of the -- because of the nature of our business, we usually send our substrates to epi house who use our substrate and put an epilator on, and they subsequently send it to device fabrication house and then finally assemble them into a particular device.

So, although we do have visibility who that end customer is, but we very often miss or we don't know what's their specific applications are. We can guess. We know it is a -- mostly is it laser, is it LED or a detector. So I think the most often words we hear about today for indium phosphide applications is detectors and lasers.

So they're using the indium phosphide as a laser, as a sensor and detect a pair to switch off something, to detect something or to help the electronic device to perform better.

For instance, the most frequently hurdle applications is lidar, which has applications for autonomous vehicle applications, which is still not in the mainstream, but you do hear lidar being talked in the industry for smartphone applications..

Okay.

And then could you just comment on the customer application that you're ramping with the second one in mobile devices? Is it all with the same customer? Or is it just different consumer applications with different customers?.

It's a different application, but I think the customer is similar..

Okay.

And then my final question was, given the risk of shutdown in China with your operations, what kind of procedures do you have in place to minimize any impact if it does happen?.

Well, let me answer it this way. I think we have a lot of procedures to protect ourselves, okay? And China uses big data to monitor people very carefully. So we have clear instruction to our employees, especially our delivery drivers. So they have to take COVID tests very often. They have to be very much aware where they have been.

If they have crossed a certain points, which has a strong COVID infection rate then we ask them – we set up a room for them to rest and not mingle with the rest of the employees. So we also have given our employees free testing kits. So if they feel uncomfortable, we ask them to take a COVID test those quick tests before they come to work.

If they don’t feel comfortable and if they feel sick, just stay home, okay? So we have a lot of protocols to help ourselves. I mean, our factory also – we’re manufacturing of high-purity materials. So just about everybody wears a mask in the production floor and our density of employees are not very highly populated.

So we have taken a lot of precautions and we have gone through a lot of prior pandemic, such as even SARS. Knock-on wood, we are safe. But it’s not to say that we can continue that tradition. I mean, we’re just being diligent.

As far as if it will happen, what do we do? That we have not thought about because I think mostly then will be government will be interfering. I think what we worry the most, I think, is the government. So far, Beijing has – yesterday, I think, 46 cases compared to the rest of world is peanuts. It’s very low attraction rate.

But in China, it’s very serious. So I hope they can stamp it down and Beijing is fairly [attractive]. And so, we should watch this development very closely if they start to reach a peak start to trend down, then we’re probably okay..

Our next question comes from Richard Shannon with Craig-Hallum..

All right. I think I have a follow-up on the topic of microLEDs.

Morris, can you give us an update on the engagement here with customer or customers? What kind of state of either material development or negotiation understanding of market development we ask? And can you tell us about the kind of status of the 8-inch gallium arsenide wafers that are to support that?.

Sure. Yes. We have been saying that we are spending a lot of money on research and development these days on both 8-inch gallium arsenide, as well as 6-inch indium phosphide. On both fronts, I think we have incremental success. I mean, we have not made a big announcement.

We did say that we are -- the 8-inch, we are sending sample wafer -- quantities of wafer to our customers already in the roughly 200, 300 wafer per month. And the feedback so far are okay. So we're still working with our customers to retune our process or retune their process and see what specifically they need.

Yes, we are in sort of a more advanced negotiation with our customers in terms of what kind of specification they need in terms of what kind of pricing we can commit and what's the volume that we need to commit ourselves to support their manufacturing. But so far, it's still in serious and heavy negotiation. We have not reached any conclusion yet.

And we do have 2 customers, by the way, engagement. So I think from the looks of it, both customers are extremely committed -- confident it to go. In fact, one of the customers have announced that they have invested -- investing $1 billion to build a microLED factory. So that's all good news for microLEDs.

Richard?.

Sorry, I put it on mute. Not sure why I did that. Gary, a quick follow-up on CapEx here. I was wondering if you could give us a thought process on how you -- what your expectations are for this year.

I think in past calls, you've heard about when is that point where we get to kind of more closer to maintenance levels, obviously, spending in a pretty hefty rate here for a couple of years.

So how should we think about that for the rest of the year?.

Well, it's a constant topic for Morris and myself and the other team members. We're committed to investing for the future because there's some just beautiful opportunities. For me and Morris, let's just say, we've been around the block a few times. And only every once in a while in my career, has so many bright lights been on the horizon.

So, we are doing some broader development work, which I alluded to earlier today for recycling. There are several programs like that, and we're trying to balance the need to be prudent on investments versus falling asleep and not taking advantage of the opportunity as it's there.

So, we're definitely going to be in double-digit dollars for CapEx again this year. It's a bit fluid still so far, but we'll be investing -- we need to do a little facility work as well, and we are doing more automation work with equipment.

And we haven't really announced any details, but we did disclose in our documents within our filings that we formed another joint venture for raw materials. So it's -- we're not going to get to the maintenance level this year. I think maybe 6 months ago, I thought we might.

But then when we started seeing what's happening in the marketplace and talking to our senior executives and compiling lists and choices and things, then I can see that we're not going to be in the, let's just say, $6 million to $10 million. So -- but we're comfortable with where we're at with cash.

And we're still optimistic about succeeding in the IPO process in China. So anyway, that kind of give you a perspective. We watch it carefully, and it's a trade-off between being prudent versus taking advantage of key opportunities..

Okay. That's -- sorry, go ahead, Morris..

Yes. I do want to emphasize looking at the opportunities. I think the demand, we just have to invest so that we don't have this situation of indium phosphide, our customer wants wafers, and we are out of capacity. And so, you know we are good at increasing capacity, but we need to, not only build the capacity, but also be more automated.

And so, I think all these investments should bear fruit later for AXT shareholders in the next year or so. Yes, in the future..

Okay. That's helpful. One last question from me, I'll jump on the line again. On your -- again, just talking on the topic of your 15% to 20% sales growth number for the year.

At the midpoint of your second quarter, if you were flat the rest of the year, I think you'd still be -- a little bit above the low-end of that number, which would certainly be well below your seasonally normal, but I'm not sure it's seasonally normal can be proud of in this environment.

Can you -- is there any thought process about what you would be only at the low-end of that number versus what I hear about similarly good programs indium phosphide and others that could drive some sequential growth through the rest of the year and easily get to the midpoint or well above?.

Absolutely. I think our internal goal, obviously, is higher than that, but we don't want to give other updated growth target for the year. And given the potential design win we have, just to name a few. And on top of it, it could be the HBT when that goes, and that should kick us into a second year. And then it's the microLED.

MicroLED is probably a little bit further away. I mean, it all depends upon how fast the customers are pushing. I mean, although it's nice to know that they're building a $1 billion investment in microLED, but on the other hand, they just announced it. So, you would expect that it will not need wafer until at least a year from now.

So in the meantime, the power laser market in China is very strong. So we are seeing strong across the board. I tend to think the opportunity for indium phosphide, we're really excited is because in the past, we only talk about PONs market and then later on data center a little bit. Now we're talking about multiple fronts.

We're talking about the PONs still there. Fiber-to-home is still there. Data centers keep on growing. On top of it is 5G. And then on top of it is this electronic device. I think we're starting to see it start to emerge. As you asked the question, is there any of those customers in our top 5? They're not.

That indicates when they start to ramp, there's going to be a few of them, potentially it's going to be in that top 5. So that you can see is significant. So, I am very excited about it. And we're investing. We're showing up in our SG&A and R&D. Our SG&A, R&D are 2 years ago was $5 million, it's now almost $9.5 million.

And I said, how nice it is, if we can drop that all down to profits. I mean, shareholders are all going to celebrate instead of -- my sense is this year, we're going to be delivering $0.20 a share.

But we choose to spend to build a better company in terms of infrastructure for bigger operation and IPO in China, as well as spending money in R&D and think about it if we have 2 new growth funds in terms of microLED, which is going to be maybe a year, 1.5 years from now, and that's a huge market, I believe, and the 6-inch indium phosphide.

I mean, people are pounding on doors, demanding 6-inch indium phosphide. We're working hard on it, and hopefully, that we can deliver that. And that is not obviously in the forecast. So I think AXT has a lot of great futures and our visibilities are better.

But let's -- in terms of forecasting, we want to be conservative and deliver what we really can deliver. And, "Hey, 15% to 20% growth is not bad after a 44% growth last year, right?".

No doubt about that, Morris. That’s certainly excellent growth, and I appreciate the perspective..

Our next question comes from Geoff Scott with Scott Asset Management..

I'd like to follow up on the CapEx question. I think you said your CapEx for the first quarter was $6.4 million.

Is that -- has that been directed toward the indium phosphide or the gallium business?.

It includes both. Especially for indium phosphide, we're adding furnaces. As Morris alluded to, we reached a point where we can't quite meet the demand from one of our good customers. So they're a bit nervous about us right now. And we're -- we have a solution. We're going to add more furnaces. It's going to be okay.

But yes, so there's some equipment for indium phosphide. There's also some wafer processing equipment in the gallium arsenide line and in the germanium line. So it's mixed..

Okay. Yes.

If maybe a little more information on the increase in market share, is that driven by new customers or higher share of wallet from existing customers?.

Let me try that. I think customers are usually -- they don't tell us. I mean, usually, they will try to not say, if you do give us a lower price, I'm going to give it to the competitor. So we are only guessing what kind of market share we get, okay? But on the other hand, you can tell some of the [indiscernible] size.

For instance, we cannot deliver substantially on some of the customer demand. And we said, "Well, we're sorry, you're telling us this increased demand too late. And why don't you get it from your second supplier." And the answer back is silence.

So I think either 2 things, we are the majority shareholder or a supplier or alternatively, we think it's more true is our competitor, the lead time is even longer. We're putting somewhere around 8 weeks volume time on some of the indium phosphide product.

And our competitor, we hear our customers told us -- some of the customer told us are, as far out as 6 months the lead time. So on some of the --. Go ahead..

You're increasing your capacity for the indium phosphide.

Are the other 2 major global suppliers also increasing their capacity?.

That's a good question. The 2 as is, I don't think I know, but I can give you some historical perspectives. In 2014 and 2015, we were growing 60% year-over-year, 2 years in a row. Those 2 years, the market didn't grow. We see some market research. We were growing top at maybe 20%. So we think we're taking market share.

And also if you look at AXT's revenue on indium phosphide, I believe we zoomed up very quickly. We believe we are firmly in #1 place now. Okay? So I think we are not only good in terms of the quality we deliver, but we are also very good in terms of answering our customers' commercial demand very responsibly. So we're gaining market share, I believe..

Okay. Last question. On the last call, you talked about efforts to recycle scrap raw material. How far along are you in getting success in that? And if it is successful, it seems like that should make a material difference in gross profit margin.

Is that correct?.

Yes. We're getting on very well on that. We're probably launching that this quarter and increasing in volume next quarter. So the good thing is the significant part of the it, volume of it left because we have saved all these recyclable material that we have a way to go.

As far as saving in terms of helping us in gross margin is concerned, I think it's significant, but I don't know how to qualify it significant. As far as indium phosphide is concerned, indium phosphide raw material is a good portion of our costs are good sold, let me put it that way. And if we can recycle it, yes, it will help us in gross margins..

I mean, I'm thinking that if it is successful, it would be at least a couple of percentage points of gross margin improvement. It wouldn't be tens of a percent, it would be multiple percent..

That could be, but that is limited to indium phosphide only. So indium phosphide is only about 30% or 40% of our revenue base, yes. So [indiscernible] not going to be….

I'm not showing any further questions at this time. I would like to turn the call back over to Morris Young for any closing remarks..

Okay. Thank you, everybody, for participating in our conference call. And this quarter, we will be presenting at the 19th Annual Craig-Hallum International – Institutional Investor Conference. We do look forward to seeing many of you there.

As always, please feel free to contact me, Gary Fischer or Leslie Green directly if we would like to set up a call with AXT. I look forward to speaking with you in the near future..

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day..