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Edited Transcript of AXTI earnings conference call or presentation 30-Oct-19 8:30pm GMT

Q3 2019 AXT Inc Earnings Call

Fremont Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of AXT Inc earnings conference call or presentation Wednesday, October 30, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary L. Fischer

AXT, Inc. - CFO, VP & Corporate Secretary

* Morris S. Young

AXT, Inc. - Co-Founder, CEO & Director

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Conference Call Participants

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* Hamed Khorsand

BWS Financial Inc. - Principal & Research Analyst

* Jonathan Burke;Game Plan Financial Advisors, LLC

* Joseph Newton Flynn

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

* Leslie Green;Green Communications Consulting, LLC;Principal

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to AXT's Third Quarter 2019 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Anne, I'll be your coordinator today.

(Operator Instructions)

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

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Leslie Green;Green Communications Consulting, LLC;Principal, [2]

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Thank you, Anne, 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 substrate; 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 markets in which the company competes, global financial conditions and uncertainties, 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 October 30, 2020.

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 third quarter. This information is available on the Investor Relations portion of our website at axt.com. I would now like to turn the call over to Gary Fischer for a review of our third quarter results. Gary?

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [3]

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Thank you, Leslie, and good afternoon, everyone. Total revenue for the third quarter of 2019 was $19.8 million. By comparison, revenue in the second quarter of 2019 was $24.8 million and revenue in the third quarter of 2018 was $28.6 million. Of our total revenue, substrate sales were $16.0 million compared with $20.6 million in the prior quarter. Revenue from our raw material joint ventures was $3.9 million in Q3 compared with $4.2 million in Q2 and $5.8 million in Q3 of 2018.

Morris can give you some color on overall revenue. But just as a reminder, last year, we were consolidating the results of 3 -- of the raw material joint ventures. As of this year, we are consolidating only 2 companies into our quarterly results. In the third quarter of 2019, revenue from North America was 9%, Asia Pacific was 66% and Europe was 25%. In the third quarter, one customer reached 10% of revenue, and the top 5 customers generated approximately 40% of total revenue. Gross margin in the third quarter was 29.0%, down from 34.3% in the prior quarter.

This decline was primarily the result of lower volume and product mix. Total operating expenses in Q3 were $6.2 million, approximately flat from the prior quarter. Total stock compensation expense for the third quarter of 2019 was $584,000. Operating loss for the third quarter of 2019 was $478,000 compared with an operating profit of $2.3 million in the previous quarter and $4.3 million for Q3 of 2018. Interest income net for the third quarter of 2019 included interest income of $41,000, a net loss of $0.2 million from the partially owned companies in AXT's supply chain accounted for under the equity method and a foreign exchange gain and other income totaling $0.2 million.

Income tax for the third quarter of 2019 was a charge of $29,000 compared with a charge of $597,000 in Q2. Our Q3 results included approximately $234,000 in tariffs as a result of the 25% tariff charge on importing wafers into the United States from China. For Q3 2019, we have a loss -- a net loss of $898,000 or a loss of $0.02 per share.

By comparison, we had a net income of $1.5 million or a profit of $0.04 per diluted share in the second quarter of 2019 and a net income of $3.9 million or a profit of $0.10 per diluted share in Q3 2018. The basic share count for Q3 2019 was 39.466 million shares. Cash, cash equivalents and investments increased to $38.5 million as of September 30. By comparison, at June 30, it was $37.5 million. We also have a $10 million line of credit at Wells Fargo Bank, which was not utilized. And this quarter, we established a bank loan of approximately $5.8 million in China. We expect to spend approximately $5 million on our relocation in Q4, in line with our expectation for the year of approximately $21 million.

Depreciation and amortization in the third quarter was $1.3 million, and capital expenditures were $4.6 million. Accounts receivables net of reserves were $17.4 million at September 30, 2019, compared with $18.2 million at June 30, 2019. Net inventory at September 30 decreased by $1.2 million to $49.1 million compared with $50.3 million in inventory at June 30.

Ending inventory consisted of approximately 47% in raw materials, 46% in work in progress and only 7% in finished goods. As we noted previously, the reduction in inventory has been a focus for us in 2019. This concludes our financial review. I'll now turn the call over to Dr. Morris Young for a review of our business. Morris?

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [4]

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Thank you, Gary, and good afternoon, everybody. Despite a promising beginning, Q3 turned out to be a particularly challenging quarter for us. Visibility was proven to be quite poor, and the demand environment weakened considerably between July and September. Revenue from every one of our product categories came in lower than expected, indicating broad-based market decline. We saw a negative shift in customer sentiment regarding an expected second half improvement in applications across our portfolio, such as data center connectivity, PON, LED lighting, lasers and satellite solar cells.

Geographically, the U.S. market for compound semiconductor substrates was particularly hard hit, a possible impact of trade tensions. Amidst this backdrop, we continue our strong focus on the execution of our relocation in China and made important progress. After a lengthy process, I'm very pleased to report that we have reached a significant milestone in completing the necessary permitting requirements for both our Dingxing and Ka Zuo locations.

In addition, we now have sufficient capacity online in both facilities to be able to handle large volume production. What is particularly exciting for us is that these are state-of-the-art facilities, and they are the newest in our competitive landscape. They're built to China's exacting environmental standards and optimized for best practice manufacturing processes for crystal growth and wafer processing. There's ample room in both facilities for capacity expansion, which positions us to be able to quickly and efficiently accommodate the strong growth predicted in the application we serve.

Further, in the time [we] have taken to make a careful and methodical transition to the new facilities, we have also placed significant focus on the recruitment and training of relocation of our employees. We're encouraged by the quality of talent we've been able to attract and retain and believe we now have all the essential components in place to meaningfully ramp up production in both locations over the coming quarters.

As such, that we are prepared for renewed growth when the demand environment improves as expected in 2020. Now turning to our end markets. 2019 has proven to be a challenging year, given the turbulent geographical, geopolitical and global economic conditions. In indium phosphide, you may recall that the demand environment in Q2 for data center connectivity and power application was weak by comparison to the prior year as a result of persistent macroeconomic challenges. However, our revenue results in Q2 were strengthened by the completion of a large order from the telecommunication customers in Asia that we did not expect to repeat in second half.

Coming into Q3, our customers in data center and power markets were predicting an improvement in the demand environment, which would have result in renewed growth in demand for our substrates. However, this improvement in demand environment did not materialize. Data center was particularly soft compared to expectations, which may be a result of, again, U.S.-China trade tensions. Ultimately, our indium phosphide substrate revenue for data center and PON remained fairly steady sequentially in Q3, but we were not able to make up for the absence of the telecommunication order that we had in Q2.

Despite these near-term challenges in the environment, we remain optimistic about the underlying large-scale technology trend that fuel the demand for our products. The data center upgrade cycle is well underway to accommodate massive growth in bandwidth requirements at hyperscale and large enterprise data centers. We believe that the silicon photonics market will continue to grow, driven by the technology transition to 100G and beyond to that of 400G.

Related to the data center upgrade is the nascent 5G infrastructure rollout and the continued build-out and upgrade of massive optical network worldwide. The increase in video streaming, new services enabled by 5G, and strong growth in data-intensive cloud-based services will continue to drive increasing demand for optical components that will require indium phosphide substrates. Now in gallium arsenide, LEDs and lasers have been slow to recover from the downtrend of recent quarters. Automotive applications have been particularly hard hit, and continue to be weak in Q3.

Wireless applications are holding steady at their reduced rate. As we look ahead, however, the gallium arsenide market holds significant opportunities. We believe that our traditional applications will recover in 2020. Further, we see great promise in applications such as power lasers for industrial welding and cutting, [big cells] for a variety of customers, industrial and automotive applications, and micro LEDs, which use gallium arsenide for the red portion of the red/green/blue light spectrum.

Gallium arsenide is not going away, and indeed it has a diverse and broad number of applications. Turning to germanium substrates. Our sales took a step back in Q3 in the softer demand environment. It is expected to remain soft in Q4 as excess inventory at certain customers is digested. Overall, the satellite solar cell market is expected to grow in the coming year with a number of satellite launches increasing worldwide. Raw material were also sequentially down in Q3 by about 8% compared to Q2's revenue.

The sluggishness in the substrate market appeared to have a negative ripple effect on the raw material companies that we consolidate. Now in closing, this is a difficult quarter in a difficult market environment. But despite the near-term market softness, we are confident that the underlying technology trends fueling the applications that drive our success are intact. In the meantime, we are taking the opportunity to effectively execute our relocation, and we are pleased to have met significant milestones with permitting and volume production readiness.

These will allow us to support an expected customer volume ramp over the next couple of quarters, as well as new business opportunities when the demand environment strengthens. This concludes my prepared comments. I will now turn the call back to Gary for our fourth quarter guidance. Gary?

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [5]

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Thank you, Morris. As Morris discussed, the demand environment remains challenging and is not expected to improve in Q4. As such, we expect to see revenue in Q4 of between $19.5 million to $20.5 million. We believe our loss per share in Q4 will be in the range of $0.06 to $0.08 based on 39.467 million shares outstanding. This concludes our prepared comments. Morris and I will be glad to answer your questions now. Anne, operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from the line of Joe Flynn from Craig Hallum.

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Joseph Newton Flynn, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [2]

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I was wondering if you could just walk us through the puts and takes of the different businesses within the guide there? And maybe comment on -- it looks like the lower gross margin that you're seeing on flat to slightly up revenue? Anything you could offer would be great.

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [3]

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Yes, I think that lower gross margin, it's probably coming from the lower volume that we have as well as some of the product mix change that we had. I mean remember we had a very strong quarter in Q2 of indium phosphide business, and the volume then was bigger than what we have this quarter. So both are compounded, giving us lower gross margin this quarter.

And what was your other part of the question? The other business environment?

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Joseph Newton Flynn, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [4]

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Yes. Like if you have any visibility at all? Like do you see any key market or like product group, in particular, being able to recover faster than the others, or is this kind of uncertain right now?

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [5]

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Well, we guided for next quarter, our revenue is probably going to be flat. So in business, we probably would expect LED gallium arsenide to be a little bit stronger in Q4 than Q3. Wireless is probably going to be flat. Germanium is going to be stronger in Q4 than Q3. And indium phosphide is going to take another step down in Q4 than Q3.

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [6]

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And Joe, we don't really have a lot of visibility out into 2020, so...

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [7]

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Yes. However, I think we do expect indium phosphide to bounce back.

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [8]

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Yes, yes.

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [9]

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We do see there is some inventory issue in the pipeline.

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [10]

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Currently.

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [11]

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Currently. And we do see that one other customer was telling us they are having a product transition. So they want to bleed out the present inventory to build new products. So when the new products start to ramp, we expect them to increase the demand on that. So I think...

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Joseph Newton Flynn, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [12]

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Just a quick follow-up on that comment. So I'd like to -- these were orders like almost largely like about to be placed until the customers reverse course. Do you think the eventual reversal will be pretty significant on a couple of big just high-volume orders that would get us back to kind of the nice growth we were seeing before?

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [13]

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Well, obviously, we don't have that kind of visibility, as I said, I think we go through 1 quarter at a time. But obviously, we're in constant contact with our customers. As I said, I think we're disappointed about the performance of this quarter and the visibility we see next quarter, it doesn't look that great from what we can see now. But on the other hand, if you look at the reason why we are down in terms of revenue. It's mostly, I think it's because of reasons other than -- for instance, the market is intact. Data center is still going to grow. I mean there's a lot of fiber optics. New business is going to be -- going to ramp. But at this particular moment, there is a softness.

But on the other hand, we're talking to, for instance, customers, and they're telling us, hey, we expect next year to be volume of such. But as you know, that kind of prediction, we would never want to count it until it started to materialize. One [facting] example was data center. I think everybody was expecting second half to be much stronger in demand, again, the first half, I don't -- but also we see from our customers as well as from analysts' view, but it just didn't materialize.

And you cannot say, "Hey, you know, you give us the projection, but then you didn't do that."

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Joseph Newton Flynn, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [14]

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Okay. That's helpful. And then we were wondering if you could expand on the -- the milestone of the permit that you mentioned on the call. Maybe just talk about the significance of this? And any other details that you could provide, that would be helpful.

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [15]

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Yes. Yes, we are very pleased to report that we have finished all the milestone on getting all the necessary permits for volume production. I want to emphasize that. When we finish a construction of a project, usually in China, they allow you to do pilot production, and that's how we start to send samples to customers and see if they -- we need to do any improvement. But when you do start to do volume production, then they want to make all the checks of whether your water's clean, your air's clean, I mean, if you're making all the construction according to code,

and those are more significant checks that the government requires. And I also want to emphasize, China is now government is placing a lot of emphasis on environmental protection. So as we're starting to get our new factory built, especially that we're dealing with gallium arsenide, which is classified as toxic material, poisonous. So we have to really very carefully cross the T and dotted the I, and we are very pleased that both facility has now getting the permit to do, I want to emphasize, volume production. I think it's -- that's a very, very important remark.

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Joseph Newton Flynn, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [16]

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And how's just any conversation or feedback going with your customers? Are they maybe more open to it now, definitely as opposed to, I don't know, back a few months ago, when there was discussions about getting half their inventory -- or half their wafers in 2 spots?

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [17]

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Yes. Let me try to explain the -- we obviously have a very diverse customer base. Some customers, we usually say they don't probably care, especially they have small customers. And some customers will look at your qualification wafers, they don't see any reason why they -- they would not start to accept wafers from that new location, that's fine. However, there are certain customers who are -- especially large volume customers, they are more particular, I mean, so for instance, they want to make sure, they want to qualify, they don't want to have a mixed product run.

In other words, if you grow crystal from new location, then they want the wafer to be finished, processed in new location as well, okay. So but then our ability to do, let's say, crystal growth in old facility and new wafer process at a new facility, that mixed bag will be accepted by a lot of customers, but major customers or some customers, especially if their volume is large, they don't like to do that.

Now both facilities have all the permits, and we're ready for volume production. So that gives us all the incentives or we can set a milestone and goals and negotiating with our major customers. As we speak now, we have 2 major customers that we're working with and saying, look, all the worries, and we were ready for you to ramp up the volume at new locations. So we hope to do that volume shift to new locations in the next quarter or 2.

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Operator [18]

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Your next question comes from the line of Hamed Khorsand of BWS Financial.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [19]

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So just on that -- the move on the new locations, I mean in the prior calls you've been talking about some activity at those facilities. Is that still ongoing? Or was this permitting preventing you from ramping? So could you just provide a little bit more insight into that?

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [20]

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Hamed, I think as I explained, I think -- so every customer's need actually is slightly different. Some customers are very particular. They won't -- they don't want to qualify twice. So they say, well, I can look at your product, I can sort of qualify it. But when you ramp up in volume, I want to make sure you have the volume to support me, and so when you talk about volume, definitely, the permit is a prerequisite.

So I think I want to differentiate is that when you're sending qualification samples, the requirement, and it's a little bit different from the fully permitted facilities.

I think what's the difference is now, we have all the permits, and we now have utilized the time to build up the volume capability of both facilities, so we're ready to ramp. And as I said, we're working with 2 particular large customers to shift their demand from the new locations in the coming quarters. Although the process will still take time because they don't want to shift everything right away, they will still want to go in stages.

But I think we're now much more confident that we can push -- set our goals and the time line to be able to shift the production to the new facilities.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [21]

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Okay. And then just given the current environment that you're reporting and the no visibility, how certain are you that you haven't lost any customers or any orders?

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [22]

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That's a very good question. I think we could probably look at different product categories. We are very confident that we're not losing anything in indium phosphide. In fact, when we were talking to our salespeople, they even are saying to me that we're gaining market share. But indium phosphide, in particular, is that several customers are -- one, well, the excuse was that they are having a product transition into new products. They want to deplete the old product code and then ramp up in the future for the new products, so they are using inventory. And one other was that they said they have inventory in their pipeline, they want to deplete it. And some of them are telling us there are trade-tension related issues. And I can also comment, the other thing is about PONs market in China.

Usually, the PONs market can go very crazy. I mean when the volume comes, it's like a big swamp. But China market, the economy is sort of coming down. So that's -- I don't know how much is affected by the Huawei and ZTE, because fiber optic devices are -- great portion of it is made in China.

So when the end markets start to [crimp], then the demand could be delayed. But I think the good thing that we view that is that no matter what, if you're going to make a PON, if you're going to make a data center fiberoptics, you need indium phosphide. There are only 3 of us in world making indium phosphide. We have the best product, we have the best quality, and we check with all customers, they are not telling us that, "We're not giving this order to you, we're going to somebody else," okay?

So that's indium phosphide. I think germanium, I don't think we are losing market share either there. I mean again, the China economy getting soft is not helping us. We have yet other European customers who just called us yesterday and actually told us, well, we have too much inventory. We don't want you to ship in November, December. But they're not telling us they're buying from somebody else, okay. That's for sure.

LED is particularly impacted by the slowdown in China, okay. And -- but I think we are seeing it coming back. We think that the LED market is coming back. Actually, it's going to be stronger in Q4 than Q3, okay. Wireless, I think the market is -- has been down, but I don't think we are losing market share, but we're not a major, major supplier in the wireless market. We're probably having 15% to 20% market share, but I don't think we're losing market share. But I think the whole demand environment is just -- visibility is poor. Okay. I do want to make one other comment is that I think we are impacted somewhat by the relocation. Because there are some customers who is taking extra long time, and they want to make sure our product is qualified. So some of the customers are buying less from us because we have a relocation issue, and for instance, we also had -- we've been telling everybody, well, we're missing the opportunity of qualifying to VCSEL business because our customers are telling us, "You're going to move in the next year,

we don't want to qualify you in the old location, we want to qualify in the new location." Now we are ready. So I think we can remove that hindrance ahead of us, too. So I think if you say, are we losing any market share of the business, I think the relocation, definitely in the past, has making an negative impact on us. Hopefully by finishing up the relocation, we can remove that obstacle too.

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [23]

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Yes, and this is Gary. I would add something, that in our business model, because of the nature of what we're producing and delivering is technical with specs, there's -- and because the competitive circle's pretty small, we're pretty close to the customers. Our sales guys are very close to the customers. And so there's not a lot that's withheld. There's not a lot of secrets or -- admittedly, their estimates sometimes are not very accurate, as we experienced severely in Q3, but they're not like lying to us or deceiving us.

So if there's an issue, we pretty much are confident we know about it because we're close to the customer. So...

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [24]

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Well, their accuracy of predicting is that they are lacking, but the customer can change their mind. Yes. As we always say, they give us order, but they can always say, "Hey, hold your shipment," and they don't take the product.

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [25]

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Yes, I mean, if they're -- we're not selling to the end application, we're selling through the food chain. So their visibility isn't always as good as we want it to be.

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Operator [26]

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Your next question comes from the line of Drew Burke of Game Plan Financial.

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Jonathan Burke;Game Plan Financial Advisors, LLC, [27]

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Could you, first off, just start off by addressing intermediate to longer-term plans in Beijing. I mean clearly, 3 facilities is a drag on gross margins.

And could you kind of quantify what amount of the gallium arsenide business in Q4 shipped from Beijing versus Dingxing?

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [28]

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Okay. Let me try that. I think as the new facility -- I probably want to separate this into 2 parts. One is crystal growth and this is -- the other is wafer processing. And as you know that we take gallium and arsenic, and synthesize into polycrystal and then we grow crystal. Once it become a single crystal, now we process it according to the customer spec.

And as you know that Ka Zuo was mostly crystal growth facilities, that we're ramping up very rapidly. And as we speak, most of the crystal now can come from Ka Zuo, okay?

Dingxing, I think we are processing about maybe up to 20% of customer demand from Dingxing facilities. And in the next quarter or 2, we're going to start to qualify major customer requirements from Dingxing facility.

So I think by end of Q1 of next year, it's hard for me to give you a real number, but I think I definitely expect the 2 major customers to complete their shift of taking a product from the new Dingxing facility in the next 2 quarters, okay. And those are very significant large customers. I think also, it brings benefit of, a lot of customers, once they see you are very busy, you have really have a lot of activities, and that will also encourage other customers to believe that you're okay, you're very steady, we can trust the quality coming from the new facilities. So as far as cost is concerned, savings is concerned, I think I want probably give it to Gary to comment.

But from my perspective, I think we definitely incurred some extra costs. I know in operation, for instance, we have new operators we hired from the new facilities. When we trained them in the beginning, we were only training in Beijing. So we actually provide them room and board. As you know, those are not cheap. And so they crowd out our Beijing facility to be trained, but that's necessary, right?

So now the new facilities opened up, then they could go home and [CTP] still be our operator. And so right away, you remove the extra cost of room and board, and also we can start to think about reorganization in our Beijing facility will start to ramp down in the Beijing labor force as well as our costs. Gary?

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [29]

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Well, on the operating expense, I think Morris has summarized it, it did get pushed up a bit because of what he just described. And now more recently, it's trending back down. And so we're pleased to see that. On the overall manufacturing process, we haven't taken any of the footage in Beijing out of service yet. And when we do that, then you stop depreciating it. But that's not going to begin to happen until 2020.

And then gradually, over the course of the year, we'll -- and it may be several years, but we will take various portions of the facility out of service.

And we're already in the process of sort of, I would say, beautifying it. When I go over there, I always walk both sides of the street and check out how we're doing. As we've said publicly before, eventually, we want to monetize all or some of the Beijing site. We don't have anything in the works right now -- it's premature because we're not ready -- and then we will ultimately, we may wish to just retain even the vacant side until we can bundle it with the occupied side and have a -- in the theory that one big lot would be more valuable than selling it off in 2 installments.

So we will have extra costs because of this. We are looking closely. One of the things that happened because of the relocation is we had to make decisions about which equipment to move and not move. And the result of that is, according to the rules of general accepted accounting principles, periodically, you should review your useful life estimates, and we've always been very conservative on that. So we would depreciate stuff for over 5 years. But indeed, some of it lasts 15 or 20 years.

So we're looking at ways to revise the useful life estimates, which will have a mathematical benefit as well. I think we can be more specific on this going forward. But we're right on the cusp of sort of having hard numbers and drilling down, so...

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Jonathan Burke;Game Plan Financial Advisors, LLC, [30]

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Fair enough. And then secondly, do you have anything -- anything -- you didn't comment during the call at all about VCSEL opportunities. I mean there is still a lot of talk in the marketplace about various VCSEL opportunities out there. Is there anything you can add there? And then my third sort of market-related question is, with regards to this recently announced $10 billion win, the Jetty program going surprisingly to Azure instead of AWS, does that have any impact on you that you can talk about?

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [31]

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Last one was the Microsoft Azure new cloud award from the government.

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [32]

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I see.

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [33]

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And what -- will that give us any opportunities?

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [34]

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So yes, I would tend to think it's very much removed from our immediate customers. I mean I think we are the materials supplier. I mean you've got to look at who's supplying to the device, who is doing the epi. And so we're the material provider. So as long as there's a lot of data center activity build, eventually, they all need indium phosphide, especially when you go from coaxial cable more towards fiber optics, then that's good demand for indium phosphide material.

And we are probably the largest shareholder in market share of indium phosphide substrate. So we should benefit from that. But specifically which customer wins that business, [anyway], I think it's very much removed from us. Now we don't have much visibility. So what was your -- the other question?

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [35]

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Middle question, yes. The second question, Drew.

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Jonathan Burke;Game Plan Financial Advisors, LLC, [36]

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VCSEL. Any developments and...

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [37]

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(inaudible) I guess maybe we're intentionally trying to avoid that question. I mean, VCSEL, honestly, is a disappointment for us; to me, at least. I think we believe that we have the good product, the EPD requirement, we can fulfill very easily. But for one reason or the other -- for one, was that we hear customers are telling us, "We don't want to look at your product because you're in the process of moving to new locations.

This product, you definitely needs qualification, why we want to qualify you twice," okay? But we are -- yes, we are busy engaging customers, and we want to -- now we have our facility build. We definitely will try to be knocking on doors again and say, "Hey, come visit us and qualify our new facility product."

So I think that we'll review our -- I mean, that's -- in fact, next year, that's my -- one of my target goals, that we want to get into the VCSEL market. I think the other thing I want to comment is I think VCSEL actually was sort of slow to start. I mean it didn't grow to the expected volume, and in the beginning, we thought, "Hey, this business, Face ID is going to ramp up, and it's going to go to [world-facing],

so the demand is going to increase dramatically." So when the volume goes up very rapidly, maybe it would be easier for us to get included into the market participation. But that didn't happen. But I think if you read overall, the automotive applications, and we are engaging with a number of different customers.

So I think the answer is in the short term, we don't have anything good to report. We're not getting into a lot of VCSEL business. But I think the good news is now we moved the last obstacle, we now have the new facility, we can start to qualify for the new facilities. Gary?

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [38]

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Yes, just one other comment -- well, 2. As we've said before, even though it's a slow start, we think VCSEL is going to be a game changer for gallium arsenide. And it inevitably will spill over, not only to AXT but also to Freiberger. So right now, Sumitumo are sort of carrying all the weight. Second comment is that -- Leslie passed me a note, but she reminded me that Intel is a supplier to Azure. It's a good customer for them. So while no one has called us up and informed us that there's some upside because of this announcement, if indeed Intel remains a good supplier to Azure, then that's going to be positive for AXT.

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Jonathan Burke;Game Plan Financial Advisors, LLC, [39]

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Is Intel a good supplier to AWS?

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Gary L. Fischer, AXT, Inc. - CFO, VP & Corporate Secretary [40]

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I don't know. I'm not sure. So...

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Operator [41]

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Thank you. I am showing no further questions at this time. I would like to turn it back to Dr. Morris Young for any further comments.

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Morris S. Young, AXT, Inc. - Co-Founder, CEO & Director [42]

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Okay. Thank you for participating in our conference call today. During Q4, we will be participating in the 10th Annual Craig Hallum Alpha Select Conference in New York on November 12, and we look forward to seeing many of you there. As always, please 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.

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Operator [43]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and have a wonderful day. You may all disconnect.