AXT (NASDAQ:AXTI) Q2 2020 Earnings Call

0:00 Good afternoon, everyone, and welcome to AXT's second quarter 2020 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fischer, Chief Financial Officer. My name is Liz, and I will be your coordinator today. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star, then 1 on your telephone keypads. Thank you, Liz, and good afternoon, everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the company and the future of the company.

0:54 Thank you. Thank you. Thank you. 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.

1:44 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 or 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 July 22, 2021.

2:43 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 second quarter of 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 for a review of our second quarter results. Gary? Thank you, Leslie, and good afternoon to everybody. Okay, total revenue for the second quarter of 2020 was 22.1 million. By comparison, revenue in the first quarter was 20.7, and revenue in the second quarter of 2019 was 24.8 million. Of our total revenue, substrate sales were 16.9 million in Q2, compared with 16.9 million in the first quarter, and 20.6 million in Q2 of 2019.

3:37 Revenue from our raw material joint ventures was 5.3 million in Q2, up from 3.8 million in Q1, and 4.2 million in Q2 of 2019. In the second quarter of 2020, revenue from all of Asia Pacific was 70%, Europe was 19% and North America was 11%. In the second quarter, one customer reached 10% of revenue and the top five customers generated approximately 30% of revenue. Gross margin in the second quarter was 30.6% up from 26.6% in the prior quarter. The improvement in gross margin was due to a combination of higher revenue, some improvements in manufacturing, as well as strong performance from one of the two consolidated raw material companies. By comparison, gross margin was 34% in Q2 of 2019.

4:28 Total operating expenses in Q2 were 6.3 million, up slightly from 6.2 million in the prior quarter. Total stock compensation expense for the second quarter of 2020 was $640,000. Operating profit for the second quarter of 2020 was $478,000 compared with an operating loss of $634,000 in the previous quarter. That is a swing of $1.1 million, which is a good shift. Operating profit in Q2 of 2019 was $2.3 million. Other income net for the second quarter of 2020 is a gain of $1.4 million. This includes a net loss of $168K from the partially owned companies in AXC's supply chain, accounted for under the equity method, a foreign exchange gain of $52K, a net loss of $39K in net interest income and expense, and a gain of $1.6 million from a provincial government agency grant as an award for relocating to their province.

5:29 This is, of course, in China. Income tax for the second quarter of 2020 was a charge of $920,000. compared with the charge of $336,000 in Q1. This is above our usual tax rate because of a one-time tax related to a rebate we received from our purchase of land use rights when we began the relocation in China. In addition, our Beijing company, as well as the two consolidated raw material companies, had higher profitability resulting in higher income tax. Going forward, we expect the taxes to be between in the 550 to 650K range per quarter. Our Q2 results include approximately 278,000 in tariffs as a result of the 25% tariff charge on importing wafers into the United States from China.

6:21 For Q2 2020, we had a net profit of $361,000 or a profit of one cent per share. By comparison, we had a net loss of $178,000, or a loss of one cent per share, in the first quarter of 2020, and a net income of $1.5 million, or four cents per share, in Q2 of 2019. The share count in Q2 was 40,750,000 shares. Cash equivalents and investments were $32.5 million as of June 30th. By comparison, at March 31st, it was $28.8 million. So cash is up $3.7 million from the March quarter. You may recall from our comments in last quarter's conference call that our accounts receivable was higher than it normally might be running, probably due to Chinese New Year and also the coronavirus.

7:13 We worked on it in Q2 and brought the day sales outstanding number down into a more reasonable range. And as a result, the cash increased. So that's good. We currently forecast that our net cash burn in 2020 will be similar to our cash burn in 2019, which was only about $3 million. Depending on the anticipated growth in the second half, it could initially consume additional cash as we add capacity, driven by growth, of course, and increase raw materials going into WIP. So we feel we have a strong cash position, which is important in light of the uncertainties resulting from the COVID-19. We still have an untapped line of credit with Wells Fargo Bank. and the second bank in China is arranging another line of credit for us as we speak.

7:58 We do not anticipate tapping all of this, but it is prudent today in today's environment. Depreciation and amortization in the second quarter was $976,000 and capital investments were $4.3 million. Net inventory at June 30th increased modestly to $49.6 million compared to $48.3 million in the March 31st quarter. In your inventory, this is of approximately 44% in raw materials, 51% work in progress, and only 5% in finished goods. These portions stay fairly constant in our business model. In conclusion, the P&L swung in the right direction and we continue to have a strong balance sheet. This concludes the financial review.

8:43 I'll now turn the call over to Dr. Morris Young for a review of our business. Morris? Thank you, Gary, and good afternoon, everybody. Amidst a backdrop of unprecedented global change, AXC substrate material continues to have increasing relevance in the technologies and applications that are likely to define the next decade. We're encouraged to see growth in strategic applications like 5G, which not only drives our growth, but also functions as a catalyst for a number of related technologies. We saw this most clearly in our indium phosphide cells in Q2.

9:29 We had expected to take a step back following strong quarter in Q1. Instead, demand for indium phosphide was again strong in Q2, allowing us to deliver the high end of our revenue range and outperform earnings. We believe that indium phosphide is being used in 10G and emerging 25G laser interconnects for 5G base stations. Growth in the 5G network construction present a net new opportunity for AXT. We don't yet know how big it will be, but we know that it is beginning to drive both front-haul and back-haul applications.

10:17 And it is also likely to continue to fuel a healthy pond market. as the two technologies are very closely linked. Further, AXC is well positioned to supply into all of the major supply chain for 5G and these related applications. We believe that our growth to date demonstrates the compelling value proposition that our deep Indian phosphide expertise represent for our customers. Growth in 5G is also driving greater bandwidth requirements in the data center. In Q2, we also saw healthy demand for indium phosphide for data center applications.

11:05 Silicon photonics technology provides a number of advantages such as lower power consumption and increasing bandwidth and data transfer capabilities. This coupled with certain consumer demand for high-speed broadband services is driving hyperscale cloud and large enterprise data centers to deploy optical modules that can support network speeds of 100G and 400G and beyond. Though growth in the revenue for data center applications stalled earlier this year, we're now seeing it return and expected to be a meaningful contributor in Q4 and beyond.

11:53 In addition to these three major applications, we believe there are significant new applications for indium phosphide-based sensors now visible on the horizon in healthcare monitoring, LIDARs for automotive and more. As always, we believe that growth in our indium phosphide business will fluctuate in strength as a result of the emerging nature of many of the applications we serve. But the development work we have been engaged in over the last two years is now beginning to yield tangible business opportunities.

12:38 Collectively, we believe we are building a powerful portfolio tied to some of the most significant and transformative technology trends of the next decades. We look forward to continuing to demonstrate progress. Now turning to Galianosnet. As expected, LED applications, particularly automotive, were weaker in Q2 than the prior quarter. This was offset by the strength in wireless applications, which had good growth for the quarter. We believe the demand is driven by a variety of IoT applications, including Wi-Fi devices, a rebound in Q2 after work stoppages in Q1, and possibly cell phone devices in China.

13:34 At this point in time, it's difficult to predict the enduring strains of the increased demand, but we do believe that gallium arsenide is going through a resurgence of development activities with a wide variety of new applications being brought to the market every year. For example, micro LEDs. They're currently garnering a lot of attention in the display industry and could have an impact on the photonic industry as well. Micro LED displays are set to deliver a wide color gamut, high luminescence, low power consumption, excellent stability, and long life.

14:20 It is a richly innovative field that could add significantly new value to the LED market in 2022 and beyond. With large tier one players driving its development. With so many game changing applications in Indium Phosphide and gallium arsenide now emerging, tier one interest and focus down to the substrate level is increasing. AXC is now engaged in multiple significant qualification efforts. The first in the area of Indian phosphorus for data center applications is expected to begin contributing to our revenue results in Q4.

15:09 In addition, we're working through several other qualifications that can meaningfully impact our business opportunities in 2021. Through these efforts, we're making a concerted investment of time and resources to elevate our business and manufacturing processes to meet the rigorous standards of some of the most prestigious companies in the world. Central to our work in the continued rent of our casual and dingxing facilities, we are proud to be making great progress Since we announced the qualification of Dingxin by a major customer in March, a number of additional qualification customers have completed their certification and have given us approval to RAM production.

16:05 These customers are also reporting an improvement in quality and consistency in benefit of our new state of the art lines. We're confident that by Q4, we will have approximately 75% of our galleon asset revenue coming out of the new facilities. This represents a significant increase in production volume throughout 2020. We believe that the relocation of our galleon manufacturing facility has evolved from being a risk factor in our business to becoming a significant competitive differentiator for 2020 and beyond.

16:51 I want to specifically acknowledge the work of our team in China who have executed the relocation process with real great success and dedication against a very difficult backdrop of rising environmental standards, volatile geopolitical conditions, and the global pandemic. They have worked to meet the needs of our customers throughout the process while navigating these external factors and the rigorous relocation plan. I'm proud to say that we have a strong first team senior executives and managers and also strong younger managers and contributors, all of whom shared in doing the heavy weightlifting.

17:47 It is worth noting that the challenges presented by COVID are not behind us. I'm grateful to report that AXC employees and their families have remained healthy so far. At all of our three China locations, we're all taking strict protective measures in accordance with best practice and local laws. The safety of our employees remains our number one concern. We're doing the same thing here in Fremont. Our team have adopted and we are collectively moving the company forward. The biggest challenge to productivity remains the limited travel between our cities in China as well as travel restrictions to and from China.

18:39 To extend, this has impeded our ability to address certain manufacturing inefficiencies in the new facilities as aggressively as we otherwise would like to. On a positive note, we are not experiencing any noticeable disruption in our supply chain of raw materials required to manufacture our substrates. We're able to obtain everything we need. And finally, speaking of raw material, we have two companies that will consolidate our raw material revenue in Q2 was up meaningfully from the prior quarter. In particular, our joint venture Boyu, which is manufacturing high temperature PBN crucibles and other products continue to see healthy growth.

19:35 In closing, we view 2020 as a turning point in our business. There are clear signs in marketplace that strategic applications like 5G, data center, and PONs are strengthening. In addition, we believe new applications across our portfolio are creating exciting incremental opportunities beginning later this year. And we are ready. With the relocation of galleon oxide manufacturing largely behind us and production is ramping, we're now focusing on elevating our manufacturing and business processes to serve the need of increasingly sophisticated applications and customers' requirements.

20:26 In total, we believe we are positioning ourselves for revenue expansion and improving profitability. This concludes my prepared comments. I will now turn the call back to Gary for our third quarter guidance. Gary? Thank you, Morris. As Morris discussed, the demand environment for our products seems to be improving with a number of growth drivers intact. As such, we expect to see revenue in Q3 of between $23.5 million to $24.5 million. We believe that our net profit will be about break-even. We won't have the help in Q3 of a grant in China, but that is offset by increased revenue. Growth is good, so we can deal with that.

21:13 Share count will be approximately 40,000,000.750 shares. Okay, this concludes our prepared comments. Morris and I will be glad to take your questions now. Operator, Liz? Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. Again, that is star, then one, if you'd like to ask a question at this time. Please stand by while we compile the Q&A roster. Our first question comes from the line of Richard Shannon with Craig Hallam. Your line is now open. Well, hi, Morris and Gary. Thank you for taking my questions, and congrats on a nice quarter and guide here. I guess my first question from a financial point of view, Gary, had an awfully good gross margin, certainly well above what I had modeled here.

22:03 You're talking about some mix shift and I think some manufacturing efficiencies here. How should we think about the third quarter number here and what's implied here in terms of many mixed shifts and continued manufacturing improvements? Okay. In the third quarter, we are pretty confident that it's going to continue to increase, go upward and to the right. It's not going to be like a super high jump, but it's going to continue to trend upwards. We're still saying that midterm, We hope we can get back into the mid-30s. We think that's reasonable and expect that we can do that, just not quite sure how long it will take. As Morris did mention about some significant opportunities for indium phosphide, that's beneficial for us in terms of the mix, and that will be part of what drives the number in the right direction.

23:02 So it'll be up a little bit again next quarter. Part of the reason that probably we were ahead of what your model said, Richard, is because the revenue was a little bit stronger than we thought at the beginning of Q2. So more revenue is a big help in gross margin, because there's a fair amount of fixed costs in our cost structure. OK, go ahead, Richard. Any more questions? Yeah, thanks for that. So I think if I heard your language correctly, both of you talked about data center picking up more in the fourth quarter. It seems like you're suggesting it was helpful in the second and maybe in the third. Did you specifically call out growth in the fourth? And if that's the case, is this from your consistent long-time large customer? Do you have new customers in here?

23:49 Or if you can help us understand the dynamic here by calling out the fourth quarter? I think IndieFosFi will continue to grow in the third quarter, but fourth quarter will definitely be another up quarter for this data center connectivity business. So let me answer it this way. This is a customer that we have known, but we have not sold directly to them previously. We are in the path of qualifying with them and of course, you know, we cannot specifically comment who they are because we are under NDA, but I can let you know that our view is that, you know, there's a huge impact because of coronavirus on cloud computation.

24:44 So this is clearly a strong and ongoing growth for now and growth is going to accelerate and this is a dramatic I think it's going to continue for the foreseeable future. So that means it's going to be good growth for our customer. And the result is that silicon botanics technology is becoming increasingly strategically important in data center connectivity. And this is a multiple year opportunity and we will continue to grow with it. And the qualification point will position us to increase our market share in the marketplace, which is already growing nicely. And all of these cloud players are going to put their foot on the gas pedal, we believe.

25:38 as you know, that we should be able to sell to everybody. But specifically, we do are going through a qualification with a specific customer. So we are hopeful that we can increase the market share with this particular customer, but also we can sell more into money installations. And we believe this rigorous qualification I mentioned previously will get us to other tier one players we expect a similar level of certification and maturity put from their supplier lines. So this is not only good for us, but also with this training into serving the first tier customers will get us to be able to play into other emerging applications such as healthcare and other applications which all have tier one customer demand that will increase the volume of indium phosphide application to a very much unprecedented volume of applications for indium phosphide.

26:51 Very interesting comments, Morris. I may jump out of line after my last question and come back to follow up on that one. It's a very interesting topic here. But I did want to ask a question regarding your commentary about making your manufacturing processes more rigorous. Can you help us understand what this means, what this means in terms of costs and op-ex? Over what time period do you expect this to have an effect? And can you help us understand what's driving this? Because obviously quality is important in general and always has been here. What is the impetus and where do you need to go with this more rigorous manufacturing process? Sure. As you know, when you move up the food chain to tier one customers, they obviously, number one requirement is a very high quality standard.

27:45 Fortunately, we have very good quality in the phosphide inherent properties such as dislocations and the surface polish. We have a very good high quality standard. What we perhaps need to improve is in our manufacturing line, we need to implement a lot of, for instance, SPC control. We need to follow certain protocols to serve the customer, to give them heads up. If we have any improvement in our quality, we need to communicate ahead of time, and we need to also improve our ability to monitor our quality online basis. So you can perhaps imagine this is an increased cost because we probably need to buy some sophisticated testing equipment. But on the other hand, the tier one customers, they're also more consistent.

28:50 And our experience also is they don't make mistake. So we can expect, you know, if we do adhere to the good quality standard, we will have more return of material because there's miscommunication between customer and supplier. And as you know, when you get problems with customers, it's always the supplier for the bill. So we do believe that we will get ourselves more engineers and trainers and managers to monitor the progress and actually more communication with the end customers.

29:35 We have to go through fairly rigorous training as well as fitting to their computer ordering systems. so that there will be less mistake and they are both predictable. But once we got in, we got latched onto the more automated ordering system and quality monitoring system. We have many portals that we need to connect to. So it's more sophisticated, but I'm glad we are almost through all this I do believe once we get in, that will elevate AXT to a higher level, which we believe that most of the tier one customers require this kind of service anyway.

30:28 So it's going to be a good thing for us. Yeah. Let me underline a couple of things there that Morris touched on. I would say from a big picture standpoint, These particular customers we're thinking of, they want more transparency. They want more data. So we have to figure out how to do that properly. A good example, though, is a change in the manufacturing process, which could be a very small change, in which case we wouldn't in the past necessarily have notified some of the customers. But Now if we make even small changes, we have to step up and be transparent about that and let them have test wafers and things like that.

31:19 And we do have statistical process control, SPC. We've been using it for years, but now this particular customer specifically, a couple of customers have said, well, we also want you to do this with your SPC and that with your SPC. And so they've broadened the scope and the depth. So we're very excited about it. We think it's going to make us an even better company, and it's a fun process, and there's a lot of enthusiasm within the ranks of the company. Okay. Excellent. I appreciate all the detail. I will jump on the line. Our next question comes from Gus Richards with Northland. Your line is now open. Yes, thanks for taking the question. In terms of some of the new applications you highlight, like Direct Drive LED and health monitors, et cetera, which ones do you expect to start to see revenue from first?

32:19 We're running parallel lines on that in all of them, but I think we think the first common line for revenue, regular volume production is probably from data center business. Okay. And then just touching on the germanium business, you know, how is that trending? There seems to be a, yeah, just any color there? What business you're talking about? Germanium. Germanium. Germanium is kind of flat and slightly down this quarter.

33:10 We see it's probably going to be sort of meandering around this line and not dropping significantly either, but it all depends upon whether, you know, the satellite launches. And, you know, satellite launches are fairly consistent, but sometimes the customer has one launch or two launches and then they will buy more and other quarters they don't. And this It's not a, let me say, a focused business for AXT as of now, right now anyway. But, you know, if, what's that, the Constellations satellite covering the whole web, if that were to build, then obviously there's going to be a lot more opportunity for Germany. But as of now, it's going to be a $2 to $3 million per quarter business.

34:13 Okay. And you're referring to like Skynet and what SpaceX is doing? Yes. Okay. And then finally on the raw materials business, do you expect that to hold in flat moving forward? That business seems to be pretty strong. and is that still being driven by, you know, OLED? Yeah, I think we're going to see from our joint venture, they can see through Q3. They think Q3 is still going to be a pretty good strong quarter, but they don't have visibility for Q4. Okay, got it. All right, thanks so much. I'll jump out of line.

34:59 Thanks, Gus. Our next question comes from Quinn Bolton with Needham. Your line is now open. Hey, guys. Thanks for taking my question. I wanted to follow up on Richard's question about the data center application. First, is this the beginning of what you think is a sustained ramp with this customer, or do you see it as kind of a shorter term, one or two quarter project that would then tail off after some period of time? Well, in Q2, we have not started. We will start to see some revenue coming in Q3. And our customer telling us it's going to be a big run for Q4 because they got to build some inventory.

35:50 But it's going to be a consistent performer for the rest of 2021. And, you know, obviously, if if 400G becomes adopted more rapidly as we expected, and data center growth will definitely kick up their business demand. So this is, to answer the question, I mean, it's definitely gonna be a uptick in quarter in Q3, but a big quarter in Q4 because of inventory build. And in over 2021, we believe it's gonna be a more consistent revenue driver for us. I think you've given us a couple of hints, but I'm just wondering, it sounds like this is a silicon photonics-based 400 gig optical module product that you'll be shipping lasers into or the indium phosphate substrates for the lasers?

36:49 Yes, but also 100G was also used. We believe it's mainly for 100G and 400G. Oh, so it's both 100 and 400 gig. Yep. Got it. And then you guys had talked about the mini LED opportunity on the call. Just wondering, what do you think the timing of that going to higher volume is? Well, we think that the opportunity probably is going to be more towards 2022. And I think later, we got some samples in the qualification line. but I think our customer probably still got a few things need to be ironed out such as sorting and the placing of these very tiny leather knives and obviously we think this is a great great opportunity but it's still sort of fairly early I mean as you know that we believe we have a strategic are the major LED 6-inch supplier to one of the German LED makers.

37:54 And these LED, micro-LED that customer is proposing to use, they need not only high quality, but also they have very high volume and they also need very competitive price. I think if you want to combine the three on top of it, the customer probably is also thinking about how you're gonna manage the upstream supply lines, such as PBM Crucibles and Galleon and Osteq. Obviously, if you combine all these things We are ahead of the competition.

38:52 But obviously, you know, this is still early. I will not declare a victory. And, you know, we are working very hard trying to be a supplier in that business. Got it. And then just for Gary, Gary, you mentioned that the Beijing JV were more profitable and that led to sort of higher taxes. Do you expect the profitability of the JVs to kind of step back down to more normal levels in Q3 and beyond or? Any further comments you can make about the JV profitability? We think those two guys, those two companies are going to continue to be profitable. We see it jumping around a bit from time to time, and they're not that great at forecasting. It's not their strength, and so we don't press them for too far out.

39:41 So yes, they will continue to be profitable. I'm not sure where the tax thing's going to settle out, but I think 550 to 650 is probably close. You know, we did have an extra charge in Q2 because retroactively we had to pay a tax on a rebate that we got like a year and a half, two years ago. So sometimes that happens in China. It's like, hey, we forgot we want you to pay taxes on this, so... Thank you. Yeah, they're looking good. They're going to be profitable. Great. Next question? Our next question comes from Hamid Khursan with BWS Financial.

40:30 Your line is now open. Hi. So first off, could you just quantify the current environment that you're seeing for indium phosphide with the data center and 5G compared to the last cycle you saw? Do you think that as far as the demand you're seeing, do you think that this is towards the end of the cycle or do you think it's really a starting point? Okay, this is Morris. I definitely think this is the beginning. I think we're starting to see the 5G applications just starting. As you know, I think I saw some reports that say that base stations built in China is 600,000 for this year and next year. It's going to jump up to 1.6 million base stations per year in 2022 and 2023.

41:26 And so I believe this is only the beginning, but this is only China. What about Europe? And what about United States? As you know that we are the substrate supplier. No matter where you're going to build a base station, you're needing a phosphide substrate as long as you need fiber optic connectivity. As far as data center is concerned, I think we're getting into a new trend of growing. I believe data center will definitely keep on growing. However, with improvement, you can increase the switching speed, So perhaps you need less devices.

42:11 But I think the fiber optic part of the silicon photonics is going to enjoy an extra growth opportunity. That is, when you're down to 40G or below, you can still deal with that kind of photonics connection with coaxial cable, even, and maybe gallium oxide with plastic fiber. But as you go up in speed, you need to consume less power, data transmission reliability, and transmission distance you need. So uniphosphite single-mode fiber is absolutely needed. And then we also know that silica photonics, when you get to higher speed because of a Mark Zander kind of switching mechanism, enables it to compete very well at higher, higher frequency rate. So although, you know, so there are two level of growth opportunity we believe that we can enjoy. One is that, you know, with coronavirus, everybody's complaining about bandwidth is not big enough, and then everybody wants instant, you know, connectivity, and you now have a layer on top of it, the 5G, which will increase the data traffic again.

43:34 and then you add on to it the work from home and then the speed is going to be higher and the data center is going to get bigger. So I believe there are many multi layers of benefit which will benefit as well as . So why, if you have so many different endpoints that are doing so well, Why is revenue not anywhere close to what you were doing in the last cycle, whereas you didn't have these many endpoints available to you? I'm not so sure, Hammett. You're right. I mean, I don't recall the revenue level, but I can tell you over the last 10 years, we grew our Indian phosphide revenue by a factor of 20.

44:31 all right so that's a real growth but quarter to quarter you may have up and downs you know for instance last year sometime we had a big Huawei order and we didn't get it you know for many quarters so so quarter to quarter it's difficult to say you know this particular quarter got to be higher than the last quarter but overall the other thing I can tell you is that you know Again, this quarter, indium phosphide is equal to both gallium arsenide, semi-insulating, semi-conducting combined. And we, again, believe next quarter and the quarter after, indium phosphide is going to continue to grow that we have the visibility of. And gallium arsenide, we think it's going to be okay, but we don't see the growth.

45:18 So if I were to predict that indium phosphide would definitely surpass gallium arsenide as the revenue contributor, for our business in Q4 and beyond. But of course, you know, next year, who knows? Maybe a micro LED will start coming, a VIX will start coming, and Gallium Onslaught has nine lives. So don't kick it, right? So, but it's good. You have one product line growing and the other one growing with it. So, you know, let them compete us, number one. Great. Thank you. One thing I would say to add is The opportunity that we are into now, it really wasn't in full production in Q2.

46:10 So as we start to ramp in real production in Q3 and then even more in Q4, I think the dots will get connected. So stay tuned. Got it. Okay, I appreciate it. Thank you. Our next question. Our next question comes from Dave Kang with B Reilly. Your line is now open. Thank you. Good afternoon. Speaking of Huawei, so whatever happened to their follow on? We haven't seen anything yet. So we're waiting patiently. No, we don't have any other from Huawei. at this point.

46:56 What's been the message from them? I mean, is it coming or is it pretty much dead or what's the status? Well, yeah, our sales force has been in contact with them. I think, you know, the feedback is still they like our product. They like our quality. They like our service. But one thing, their management, The message to us is they don't like the fact that we are a U.S. company. So it could be a part of a decoupling process? I hope not. And as long as, you know, under the current law, we can supply them, we would definitely treat them like a customer.

47:46 We would serve them, you know, if we don't violate laws. And we don't. We're not. But the other thing I think I'd like to remind you is that any phosphide substrate supplier, there's not a whole tons of it. And you cannot go to the street corner and order any phosphide from the other supplier. There's only three. It's us, Sumitomo, and JX. and the third supplier are not even using the good quality VGF technology. So I don't know. I think definitely it's a challenge and I hope we can work it out. And as I said, again, there's not a whole lot of supply line and capacity is also a consideration and we are definitely eager and the ready to serve whoever wants to use good quality in the phosphorus substrates.

48:52 Got it. And then regarding our fourth quarter, I know you're not giving official outlook, but since you talked about this new data center customer being qualified and expected to ramp in fourth quarter, Could they be enough to offset seasonality and maybe even fourth quarter be up sequentially or still going to be down? Dave, that's our plan. We think potentially first quarter, I mean, but still early. But we think we're trying to, of course, in fourth quarter. So Dave, I just think of others listening. Yeah, traditionally, we do tend to go down.

49:39 We do go down in Q4. So, you know, you guys all expect that. And, you know, it's no sense trying to, you know, speak between the lines and not, you know, just flat out. We'll just say we think we're going to grow in Q4. It's going to be a change for at least this calendar year, so. Can you remind us why fourth quarter is so soft? Is it mainly because of Han or is there something else? No, Dave, you know, let me give you the analysis. First of all, you know, the fourth quarter have the Chinese national holiday, October 1st, right? And second of all, we lost half a month in December. Nobody works beyond December 15th.

50:27 And so... So the first quarter is traditionally slow quarter. And then on top of it, a lot of this product launch happens in the fall. So we are at the beginning of a full chain. So when Q2 and Q3 is supposed to be everybody ordering stuff and then make it build in Q4 and then sell it to the market. And then Q4, everybody take a breather. But we do have some visibility from our customers. They are expected to rent. They are talking to us about the possible capacity. So we are preparing ahead of time. So hopefully that we can meet that demand.

51:13 But, you know, I think hopefully, according to our calculation, we should be able to continue to grow even the Q4 of this year. Got it. And Gary, just on numbers, I just wanted to clarify if I heard them correctly. I heard depreciation as 976, but then I didn't hear CapEx. What was the CapEx? I think 4.3 million. 4.3 million. Okay. You think it's going to remain kind of elevated because of, you know, expansion, you're in an expansion mode, or how should we think about CapEx going forward? I think it could be in that range for another couple quarters.

52:01 You know, we're buying, the gift is it's a little bit less than, it's not so much facility stuff as some equipment stuff. You know, we're ordering more furnaces. We ordered a tester that Morris alluded to that tests Indian phosphide stuff. But, you know, all in all, the numbers look very, very similar in terms of cash to 2019. And in 2019, the total net burn was $3.2 million. So we feel comfortable with cash. All right, great. Thank you. Thanks, Dave. Thanks, Dave. Our next question comes from Richard Shannon with Craig Hellam. Your line is now open.

52:46 All my questions are asked. You can take me out of the queue. Thank you. I'm showing no further questions in queue at this time. I'd like to turn the call back to Dr. Young for closing remarks. Oh. Thank you, everybody, in participating in our conference call. And We are participating in several conferences. Let me see where is the number of conferences that we're participating in. But if you need time to connect to the management, please contact Gary Fischer or Leslie Green for... Ah, yeah, here we go. We're going to participate in the annual BWS Growth and Value Summer Series virtual event, August 12th.

53:40 the Needham Virtue Semicap and EDA Conference on August 13th, and Jeffrey Virtue Semiconductor IT Hardware and Communication Infrastructure Summit on September 1st and September 2nd. As always, please feel free to contact me, Gary, or Leslie if you need to speak to us. Thank you very much. Bye now. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.