AXT Inc. Q4 2007 Earnings Call Transcript

Feb.27.08 | About: AXT Inc (AXTI)

AXT Inc. (NASDAQ:AXTI)

Q4 2007 Earnings Call

February 26, 2008 4:30 pm ET

Executives

Philip Yin - Chairman and CEO

Wilson Cheung - CFO

Analysts

Pierre Maccagno - Needham

Avinash Kant - Broadpoint Capital

Richard Shannon - Northland Securities

Dave Kang - Roth Capital

Jiwon Lee - Sidoti & Company

Peter Castellanos - Glacier Partners

Rusty Cannon - RKC Capital

Operator

Good afternoon ladies and gentlemen, and welcome to the AXT, Inc. fourth quarter and fiscal 2007 Earnings Call. I would now like to turn the meeting over to Phil Yin, Chairman and CEO. Please go ahead, Mr. Yin.

Phil Yin

Good afternoon, everyone and welcome to AXTs fourth quarter and fiscal year 2007 conference call.

I am Phil Yin, Chairman and Chief Executive Officer and I would like to thank you for taking the time to be with us. With me today is Wilson Cheung, our Chief Financial Officer. Wilson will take you through a detailed financial overview of our fourth quarter and our fiscal year results and then I will give you my perspective of our markets and future opportunities. Following the conclusion of my comments Wilson will provide forward-looking guidance and then we will open up the call to your questions. Wilson?

Wilson Cheung

Thank you Phil. Before we begin I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things the future financial performance of the company and our ability to maintain profitability, control costs and improve efficiency, the impact of customer qualification of our products, growth in our customer base and expansion of our addressable market, increasing market share, industry trends that are driving increasing demand for our products, the growth in the handset market, increasing prevalence of LEDs in a wide variety of lighting applications, the worldwide adoption of solar energy, our expansion into complementary technologies which allows us to increase our product portfolio, as well as market conditions and trends.

We wish to caution you that such statements deal with future events, are based upon management's current expectations and are subject to risks and uncertainties that could cause actual events or results to differ materially. 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 and available online by link from our website for additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at axt.com through February 26, 2009.

Also, before we begin I want to note that shortly following the close of market today, we issued a press release reporting financial results for the fourth quarter and fiscal year 2007. This press release can be accessed from the Investor Relations section of AXT's website at AXT.com.

Now, turning to our financial results, revenue for the fourth quarter of 2007 was $17.6 million, a 21% increase from $14.5 million in the third quarter of 2007. Gallium arsenide substrate revenue was $12.3 million for the first quarter of 2007, compared with $9.9 million in the third quarter of 2007, specifically, six-inch diameter wafer sales worth $4.3 million for the fourth quarter, compared with $2.2 million in the third quarter of 2007.

Indium phosphide substrate revenue was $330,000 for the fourth quarter of 2007, compared with $408,000 in the fourth quarter. Germanium substrate revenue was $747,000 compared with $536,000 in the fourth quarter. Finally, sales of raw materials, primarily 99.99% pure gallium, were $4.3 million in the fourth quarter of 2007, compared with $3.6 million in the third quarter, as a result of additional sales to Asian customers. However, we are seeing raw material prices stabilizing in 2008 and expect sales to return the $3.5 to $4 million range in the first quarter of 2008.

In the fourth quarter of 2007, revenue from North America was 17%, Asia-Pacific was 67% and Europe was 16% of total revenue. No customer generated more than 10% of our revenue during the fourth quarter, while the top five customers generated 39% of our fourth quarter revenue. Gross margin was 30.1% of revenue for the fourth quarter of 2007. This included a benefit from a sale of approximately 466,000 in full reserved wafer, which positively affected the quarterly gross margin by 2.7 percentage points. By comparison, gross margin in the third quarter of 2007 was 31.3%. This included a benefit from the sales of approximately 556,000 in fully reserved wafers, which positively affected fourth quarter gross margin by 3.8 percentage points.

With regards to gross margins, it is important to note that since the beginning of 2007, we have made a conscious effort to capture additional market share. Our business has generated gross margin since that time in the low-to-mid 30% range including some special items, such as sales of fully reserved wafers, which caused our margins to come in higher. We outlined those items so that investors can understand the composition of our margin performance.

We believe that this strategy to gain market share has resulted in considerable additional revenues and allowed us to record high gross profits and accordingly better operating margins and EPS. This fourth quarter for example our operating margin improved from Q3 7.4% to 8.9%.

Going forward, our gross margin expectation continues to be in that range and we believe that the additional revenues generated will create value for the company and for our shareholders.

Excluding stock-compensation expenses, selling, general, and administrative expenses were $3.1 million for the fourth quarter of 2007 compared with $2.9 million in the third quarter. Research and development costs were $481,000 for the fourth quarter of 2007 compared with $361,000 for the third quarter. With the recent appointments of our new CTO, Chia-Li Wei and R&D consultant Dr. Grant Elliot, we expect R&D expenses for the first quarter to remain at this level.

Total stock compensation expense was $157,000 for the fourth quarter of 2007 of which $15,000 was in cost of revenues, $115,000 in SG&A and $27,000 in R&D. Income from operations for the fourth quarter of 2007 was $1.6 million compared with $1.1 million for the third quarter. Net interest and other income for the fourth quarter of 2007 was $608,000 compared with net interest in other expenses of $54,000 for the third quarter. Net interest and other income of $608,000 were included again in sale of investment of $1.1 million.

Net income in the fourth quarter of 2007 was $1.9 million or $0.06 per diluted share. By comparison in the third quarter of 2007 we reported net income of $858,000 or $0.03 per diluted share.

Let’s now look at our cash and balance sheet. Cash and cash equivalents with maturities of less than 3 months, short investments, and other investments, and high grade debt securities and maturities of less than 2 years, including restricted deposits were $45.9 million at December 31, 2007, compared with $41.9 million at September 30, 2007.

Also in Q4 we are pleased to report that we became cash flow positive and generated cash provided in operations of approximately $3.8 million. Accounts receivables, net of reserves were $12.1 million at December 31, 2007 compared with $11.9 million at September 30, 2007.

Day Sales Outstanding was up 64 days for the fourth quarter compared with 76 days in the prior quarter. The improvement in DSO was largely the result of better collections and net ageing. Net inventory decreased slightly to $24.8 million at December 31, 2007 from $25.1 million at September 30, 2007.

Depreciation in the fourth quarter was $394,000 and capital expenditures were $1.3 million. As of December 31, 2007 the company including our consolidated joint ventures had 1,057 total employees up from 857 working in production.

And now, turning to the results of fiscal year 2007, it was another year of strong growth for AXT. Revenue for fiscal 2007 was $58.2 million. This was an increase of $13.8 million or 31.1% over $44.4 million for fiscal 2006. Gross margin for fiscal 2007 was 34.8% compared with 28.7% in the prior year. Net income for fiscal 2007 was $5.3 million or $0.16 per diluted share. This compares with net income of $944,000 or $0.03 per diluted share for fiscal 2006, which actually included a $3.3 million gain on the sale of the Finisar stock. This concludes our financial review. Let me turn the call now to Phil.

Philip Yin

Thank you Wilson, our strong fourth quarter results, concluded that was another solid year for AXT. In addition to posting very meaningful gains in revenue, gross profit, operating income, net income and part of the cash flow from operations, we have continued to grow our customer base, significantly increase our market share and make strategic investments into the technologies and products that will expand our addressable market.

We are excited by the long-term trends in all other markets that we serve, including the growth of the handset market. The increasing prevalence of LEDs in a wide variety of lighting applications and a worldwide adoption of solar energy. We believe that our uniqueness of the business model is allowing us to convert these exciting opportunities with the tangible results.

During the fourth quarter, we had great success in growing our gallium arsenide revenue, particularly in the 6-inch semi-insulator, in fact our 6-inch business is growing to such an extent that I've authorized another expansion of VGF crystal growing operation by another 27% to be completed some time in Q3 2008.

With the uncertainty in the US and global economies, IEC recently noted that the expected single-digit growth in the worldwide handset market in 2008, while we continue to see a healthy demand from our customers, we are planning our business in a conservative manner against this backdrop, however all current indications are that we'll see continued growth in our semi-insulating revenues.

In addition to growth that we'll experience as a result of the growing handset market, we are also making tremendous progress in market share gains. In fact Strategy Analytics estimates that AXT finished 2007 with 20% market share in semi-insulating gallium arsenide, up from just 3% in 2005.

In 2007 alone, we had 10 new semi-insulating customers. Further Strategy Analytics predicts that our market share will increase to 29% in 2008, making AXT again the number one supplier in the world.

This growth is likely to come from new customers who will begin contributing to revenue in 2008 as well as expanded opportunities with current customers. One of our most exciting announcements in the fourth quarter was our agreement with IQE to provide primarily 6-inch semi-insulating substrates for the 2008 worldwide substrate requirements. This agreement is valued at approximately $15.1 million with an option for IQE to purchase an additional $3.5 million of substrates. All the substrates ordered under this contract will begin shipping in the first quarter and the full contracted amount will be shipped by the end of 2008.

We believe that this agreement underscores the progress that we have made in terms of market share perception of AXT and our commitment to quality and quality systems and we are enormously proud of that achievement.

Another area of our business where we have considerable growth, the semi conducting gallium arsenide. Year-over-year our revenues increased 37%, largely driven by growing demand for LEDs in a wide variety of applications such as consumer products, signage, back lighting of cell phones, and LCD TVs, flat panel displays and automotive applications.

Further, the industry continues to move closer to the adoption of LEDs for general illumination, the selected commercial and residential application, which will represent a significant growth catalyst for semi conducting gallium arsenide. Like our semi insulating business we made tremendous gains in market share of high quality revenue opportunities in semi conducting gallium arsenide. We remain selective in the business that we accept in order to preserve our gross margins, but we are experiencing many exciting opportunities to supply tier 1 customers.

For example, during 2007 we made significant progress in our qualification of a major North American supplier, who has not been a customer for AXT for many years. We are very pleased to report that the initial qualification indicated positive device results. With additional testing of our material we expect to obtain official vendor approval and expect reduction releases sometime in late Q2 or earlier Q3.

Now turning to germanium, we continued to hear positive announcements that indicate that the market for concentrated affordable takes is developing. For example Emcore cooperation recently reported that it has received additional orders to supply its solar CPV components and systems to the Spanish market through several agreements.

According to Emcore, it is scheduled to install a CPV system in Castillo La Mancha, Spain by December 2008. To construct a 850 KW solar power park and in Extremadura, Spain, to be completed before July 2008, they had also said that they would supply a CPV system for the Canadian-Korean market and expect to achieve an efficiency rate for its CPV system of greater than 45% by 2010.

Strategy Analytics is predicting that the CPV market, now about 1% of the total solar market, will grow at a compounded average annual growth rate of about 350% per year, through 2012.

While our revenues from germanium substrate are still relatively small, they were at $2.2 million in 2007, a 145% increase from the $909,000 in 2006. Further, 2007 revenues were primarily from one customer. We currently now have three customers in volume production, two of which are in stages of the ramp, indicating that our revenues in this area of our business should develop nicely beginning in the first half of 2008.

In addition to these customers, we are in qualifications with four European companies for space and terrestrial applications. In fact one of these has successfully completed the qualification phase and is scheduled to audit facility this month. With several new customer opportunities ramping in 2008, our unique germanium joint venture will become an increasing and important competitive advantage, as it gives us volume and price guarantees of our raw material ensuring that we would be able to cost effectively meet the demand of this market as it matures.

Our raw material's business as a whole yielded tremendous benefits in 2007. Throughout the course of the year, we were able to double the output of all of our five joint ventures, three of which we have major ownership. This expansion has allowed us to supply our own raw material needs while providing considerable cost-benefits.

Throughout 2007, our industry experienced shortages in supply of gallium and germanium. Our joint ventures allowed us to maximize our revenue opportunities by supplying substrates to customer who could not get materials from competitive suppliers and thus increase our market share.

Further, this business generated high quality revenue throughout the year from the sale of excess raw materials on the open market. We believe that our raw materials business is among our most significant competitive advantages.

As we entered 2008, we continue to focus on technology development. We are very pleased to have recently announced that we have retained the services of renounced scientist Dr. Grant Elliot to augment our R&D efforts under Chia-Li Wei, our Chief Technology Officer. Dr. Elliot's efforts will primarily be focused on the area of VGF technology enhancements and Czochralski and liquid encapsulation Czochralski crystal growth. The application of this work will be in both semi-insulating gallium arsenide area of our business, while the LEC crystal growth process for producing small diameter substrates, will open up markets for our product and allow us to further improve our cost structure.

They will also be an important part of our germanium revenue growth strategy, [CD] crystal growth will provide us with flexibility in terms of price and performance.

This technology will also allow us to explore the viability of new component semi-conductor substrate such as gallium phosphide.

In closing, I would like to express my sincere gratitude to all of the employees of AXT whose tremendous execution in 2007 resulted in a highly successful year. As we enter 2008, although we are certainly mindful of the current volatile economic backdrop, we're encouraged and we look to Q1 and the balance of the year. We believe that as was the case last year, much of our growth will come from market share gains and from new customer agreements put in place in 2007 that will begin to contribute to our revenue in 2008.

Further we believe that our customers are starting the year with relatively low levels of inventory. We will continue to view and plan our business conservatively, but we believe that the long-term trends in the market that we serve presents significant opportunities for growth in the coming year. We're excited to watch these trends unfold and we look forward to sharing with you continued success in 2008.

I will now turn the call back to Wilson.

Wilson Cheung

Thank you Phil. We estimate our revenue for the first quarter will increase to between $17.6 million and $18 million, also we estimate our net income per diluted share will be between $0.03 and $0.05, which is in the range that is consistent with our topline growth when you take in to consideration our Q4 results included the gain on sale of investments that accounted for $0.03 per diluted share.

Our first quarter EPS take to accounts our diluted weighted average share count of approximately 31.6 million shares.

This concludes our prepared comments. We are now happy to answer your questions.

Question-and-Answer Session

Operator

Thank you, we will now take questions from the telephone line. (Operator Instructions) The first question is from Pierre Maccagno of Needham. Please go ahead.

Pierre Maccagno - Needham

Hi, Phil and Wilson.

Phil Yin

Hi Pierre, how do you do.

Pierre Maccagno - Needham

Fine, thanks. Could you comment on the ASPs for both gallium arsenide semiconductor and semi insulating, as well as the germanium. Any changes that you see there in the market?

Phil Yin

Yeah, I think on the semiconductor side, Pierre, we still see ASPs eroding. It’s mostly the Asia-Pacific, Taiwan market, as you know, that's going to keep going down, because the goal is to compete against the rest incandescent light, so there's a lot of pressure to decrease the material, obviously because it’s the big portion of it. On the semi-insulating side, that is stabilizing, I guess maybe that's the term to use, and on the germanium side, it’s sort of holding its own, I guess.

Pierre Maccagno - Needham

I see. So, even though there is so much demand, I guess, it still continues to drop on pricing?

Phil Yin

Yeah, specifically on semi conducting for LED application. Yes.

Pierre Maccagno - Needham

The additional customer that you were talking about, is this a very large handset customer or..?

Phil Yin

He is a North America guy that I was talking about?

Pierre Maccagno - Needham

Yes.

Phil Yin

No, that’s an LED customer.

Pierre Maccagno - Needham

An LED customer, okay, that's all I have. I might ask questions later.

Wilson Cheung

Thank you.

Phil Yin

Thanks

Operator

Thank you, the next question is from Avinash Kant of Broadpoint Capital. Please go ahead.

Avinash Kant - Broadpoint Capital

Good afternoon, Phil and Wilson

Phil Yin

Hi, Avinash.

Wilson Cheung

Hi, Avinash.

Avinash Kant - Broadpoint Capital

A few questions, if you could talk a little bit about the germanium side, where you are in terms of - you talked about one particular customer in Europe, but where are you in terms of qualification with the other three in Europe, and what is the situation with the American customers on the germanium side?

Phil Yin

Okay, as I mentioned, one of them has completed qualification. He actually has already completed the audit of our facility last week. Audit was very successful. We are going to be supplying some additional samples, just for some minor checks, and we should see some production samples, most likely before the second half.

The other customers were still in qualifications, some of them are in early stages, and some of them are in second phase of qualification, European customers. Our American customer has released the final batch for their completion of their qualification. So, as I stated, we should see some sort of a ramp starting in the second half of 2008.

Avinash Kant - Broadpoint Capital

So, we would have an anticipation. I believe you said your germanium revenues were roughly $2.2 million in calendar year of '07.

Phil Yin

Right, compared to the $909, 000 of last year.

Avinash Kant - Broadpoint Capital

So, what kind of expectation do you have in '08 from germanium?

Phil Yin

Well, it's kind of hard to predict, because we haven't had any forecast from these customers yet. There will definitely be a ramp. How big that ramp is, which is really hard to tell until we get some production releases.

Avinash Kant - Broadpoint Capital

Right, right. And question for Wilson. Wilson, how should we model other income line item for the current quarter and for the year?

Wilson Cheung

Well, that line item actually comprises several numbers in there. There is obviously the minority interest, because we are majority share owner of three of the majority joint ventures. So the more profit that we have in those three joint ventures, you will see, the larger the other expense. But what's going to offset that, of course, is the interest income, and other income line, as we're generating more cash. And having a higher cash balance, hopefully that would offset some of the minority interest expense number.

Avinash Kant - Broadpoint Capital

So we would still be in the positive going there.

Wilson Cheung

I think it would fluctuate. But I would say, that it would almost be neutral.

Avinash Kant - Broadpoint Capital

And in terms of going forward for the year, and during the quarters, should we expect much margin improvement, or should we model margin at similar levels?

Wilson Cheung

Well, definitely we've got a lot of leverage in the margin side right now. As I've mentioned earlier in the call, I think in terms of expectations, we should be seeing the margins in the range in the low 30% range, but having said that, we've got over 80 cost reduction programs in place right now. Phil mentioned the fact that we've got these joint ventures where we are aggressively negotiating long term contracts and pricing with them, so that we can stabilize the raw materials prices as much as possible.

We also look at the product mix fairly carefully. We may even think of weeding out some customers that have negative margins. We want to pick those out, so that we can protect the margins going forward.

Avinash Kant - Broadpoint Capital

And one final question, if I may? At IQE, they had an option to order additional 3.5 million worth of gallium arsenide substrate. Do you have much clarity on that, and did you replace somebody, one of your competitors at IQ

Phil Yin

We think we replaced them because we wanted him in there that heavily first, so we obviously had to replace someone. As far as another option, their run rates are pretty linear right now, so we expect that they will, or we will, use that option up.

Avinash Kant - Broadpoint Capital

Okay.

Wilson Cheung

One other point, based on what we talked about earlier, we certainly look at the gross margin line, very, very closely, but at the same time, we also look at the overall business objective, which really is to grow the revenues and to improve our bottom line, and the good news is, for 2008, that any incremental revenues would hit the bottom-line, because we have pretty much covered our fixed cost. So, in other words, the quality of our earnings is really improving by the day.

Avinash Kant - Broadpoint Capital

Very good. Great quarter, guys. Thank you.

Phil Yin

Thanks.

Operator

Thank you, the next question is from Richard Shannon of Northland Securities. Please go ahead.

Richard Shannon - Northland Securities

Hi Phil, and Wilson. How are you?

Phil Yin

Good. Hi Richard

Wilson Cheung

Hi, Rich.

Richard Shannon - Northland Securities

I guess, first question for Wilson, looking at your guidance for the first quarter, what are your assumptions in terms of gross margins and operating expenses?

Wilson Cheung

Well, as I've said earlier to Avinash, I think that the margins, we're expecting that to be in the low range, and then, we should be pretty stable in terms of operating expenses, because our infrastructure right now is ready to support [$20] million in revenue.

Richard Shannon - Northland Securities

Okay, second question. Phil, you mentioned a capacity increase. I'd be interested to know what you’re planning to spend for CapEx and also associated depreciation for the year 2008.

Phil Yin

Our CapEx we expect to be less than $6 million. In term of depreciation, this particular quarter in Q4, we are at $394, 000 for the quarter. So we expect probably roughly $400, 000 to $425,000 per quarter for 2008.

Richard Shannon - Northland Securities

Okay, and Phil, also on the capacity increase, is that related just to gallium arsenide, or is that to germanium as well?

Phil Yin

That is all gallium arsenide.

Richard Shannon - Northland Securities

All gallium arsenide, okay, I guess. And related to germanium then, just based on the capacity that you have planned for right now, what is the maximum potential germanium revenue that you could do this year?

Phil Yin

Maximum potential revenue, well that is kind of hard to say right now, because one, we don't know what the forecast is from our customers. Two, some of these customers, we haven't negotiated the price for '08 period. But again, we think long term, we view that our germanium customers will be a big, big contributor to our revenue. I can't really give you a number.

Wilson Cheung

The only thing I can tell you, Rich, is that if you look at the capacity utilization for germanium substrate, they are probably in the 30%-40% range right now.

Phil Yin

Yeah.

Wilson Cheung

So, that means that if we double our capacity, we don't have to spent lots of money in terms of adding furnaces and what have you, but that is obviously in the plan, and how we are going to expand that germanium substrates based on the timeline and when we get qualified by the European customers.

Richard Shannon - Northland Securities

Okay, and last quick question, also on cash. Do you have any significant commitments to cash as you go through 2008, and I guess I specifically identified the situation with your joint ventures? Do you foresee any potential ability and/or desire to top your investments in that, such that you can …?

Wilson Cheung

Obviously, I think that the majority of our cash will be used for working capital purposes. As we work more closely with the tier 1 customers, I think that the chances that we are going to have consignment inventory arrangements with those guys would be very high, meaning that we would pick their forecast and start building up inventory for them.

On the other hand, I think some of the cash we may use, and Phil has mentioned this a couple of quarters now, that we're also looking at any opportunities for increasing our share ownership of our JVs, and maybe even M&A opportunities, if there is anything out there. So that would be kind of the use of our cash for 2008.

Richard Shannon - Northland Securities

Okay, great thanks a lot guys. Good quarter.

Phil Yin

Thanks.

Operator

Thank you. The next question is from Dave Kang of Roth Capital, please go ahead.

Dave Kang - Roth Capital

Thank you good afternoon. I guess the first question is, can you just talk about the inventory at the channel level, because a couple of our RF chip vendors talked about a soft Chinese market, and I guess there was some inventory crashing. Can you talk about what you've seen from your side?

Phil Yin

As far as our inventory, you mean consignment?

Dave Kang - Roth Capital

Well, I mean just inventory at various channel levels like RF and DMs, Skyworks, and to their customers I guess like Motorola and…?.

Phil Yin

Yeah, I could tell you, I hate to say, but we are behind in consignment inventory. They have taken inventory faster than we can put it in. That's all I could tell you, Dave.

Dave Kang - Roth Capital

Okay. All right, and then Wilson, how much of the fully reserved wafers are left?

Wilson Cheung

We still have over 8 million

Dave Kang - Roth Capital

8 million?

Wilson Cheung.

Yeah, in fully reserved wafers, and I can tell you that we probably build in about 200 to 250 per quarter for 2008. But, for sure, that number’s going to decrease.

Dave Kang - Roth Capital

Right.

Wilson Cheung

By the time we reach 2009.

Dave Kang - Roth Capital

Right, okay. So I mean, so guys, many, many years left before running out, I guess?

Phil Yin

I don't think, many, many years left.

Dave Kang - Roth Capital

No?

Phil Yin

Because most of the good stuff is going to be gone.

Dave Kang - Roth Capital

Okay, good point.

Phil Yin

So, the rest, we don’t know what we are going to do, melt it down or whatever, fire sale, we haven't decided yet.

Dave Kang - Roth Capital

Got it.

Phil Yin

We are not at that point yet.

Dave Kang - Roth Capital

Sure, sure. Then on the raw materials, can you talk about the capacity situations? Seems like if prices are stabilizing, raw materials sales will be going down, so demand picture really is not changing there much?

Phil Yin

Well, right now, the supply has equaled demand. Prior to that, it was the other way around, there was constraint in both gallium and germanium. But, for instance, our operation’s keys are, Dave, they've increased capacity, I think. I know MCT increased capacity. So, there is no more constraint, lets say, in gallium. There is a constraint in germanium, because the price has gone up, but I think it’s right around $1,325 to $1,350 a kilo right now.

Dave Kang - Roth Capital

Yeah.

Phil Yin

So, we've seen the price, basically, stabilized on [$4.90s] like around $5 in a quarter, $5.10, $5.16, somewhere around there. We don't see any indication that it is going to go down any further or go up further, so it’s sort of stabilized.

Dave Kang - Roth Capital

Got it. And speaking of Germanium, can you just talk about Solaris as a competitor. Seems like at least one of your customers is taking Solaris fairly seriously, just going from Umicore, and now you're dealing with Umicore plus Solaris?

Phil Yin

Yeah. Well, again, Solaris is a newcomer on board, we have learned that they are a privately held company. We know that they’re in one of our customers. That's about it. We don't see them anywhere else. That's the only thing I know about it.

Dave Kang - Roth Capital

Got it, got it. And then on your guidance, Wilson. Can you just talk about some of your assumptions? So you indicated raw materials will be down little bit, will germanium and gallium arsenide? Obviously, growth has come from those two. I was wondering if you can just qualitatively talk about germanium versus gallium arsenide, as far as what we should expect for?

Wilson Cheung

Dave, I think you have hit the nail in the head. While we believe that the raw material sales may trend down a little bit because of the ASPs, the majority of the incremental revenues, we think, would come from the semi-insulating 6-inch gallium arsenide wafers, than the larger diameter wafers. We think that is going to come in continually to be strong, and we expect we are going to continue to have a solid year for 2008. But like Phil has said earlier, because we also see the same news headlines like you do, and given the volatile economic backdrop, we just want to be conservative in the way that we forecast our business.

Dave Kang - Roth Capital

Got it, and Phil can you just talk about -- this will be my last question?

Phil Yin

You can ask as many as you want, Dave.

Dave Kang - Roth Capital

The gallium arsenide industry capacity, just not so long ago, you felt that that was very tight. Is that still the case, and if it is, I am just kind of scratching my head why you don't have that much leverage in terms of pricing?

Phil Yin

I don't think it is as tight as it was before, but it is really interesting, because our current customers have really increased their demands, and therefore that's one of the reasons I have approved this expansion plan, because we do get a forecast with some of these guys.

But as far as constrained capacity in the industry, we don't see it, not in 6-inch anyway semi insulating material.

Dave Kang - Roth Capital

Okay.

Phil Yin

Maybe, perhaps, in the small diameter semi-conducting, because there was a constraint in raw materials, but I think a lot of these competitors have gotten the raw materials now, whereas last year they couldn't get it. So I see it easing up a little bit.

Dave Kang - Roth Capital

Got it. Okay thank you.

Phil Yin

Okay.

Operator

Thank you. The next question is from Jiwon Lee of Sidoti & Company, please go ahead.

Jiwon Lee - Sidoti & Company

Good afternoon.

Wilson Cheung

Hi, Jiwon.

Phil Yin

Hi, Jiwon.

Jiwon Lee - Sidoti & Company

Some of my questions have been answered, but just a quick question on your visibility, for especially the semi insulating gallium arsenide, how much visibility should we expect for beyond first quarter '08?

Wilson Cheung

Well, Jiwon, we don't normally disclose things like book-to-bill ratio, but what I can tell you is that we do have a good visibility for maybe about 60 days.

Jiwon Lee - Sidoti & Company

Fair enough and one housekeeping item. Was there options expense in the quarter?

Wilson Cheung

The stock compensation expense, I actually said, that we have about $157,000.

Jiwon Lee - Sidoti & Company

Okay, and that's sort of the level that we should be expecting going forward?

Wilson Cheung

Absolutely.

Jiwon Lee - Sidoti & Company

Okay. I think the rest of the questions actually were answered. So thank you very much.

Wilson Cheung

Thanks.

Phil Yin

Thank you.

Operator

Thank you. (Operator Instructions). The next question is from Peter Castellanos of Glacier Partners. Please go ahead.

Peter Castellanos - Glacier Partners

Hi. I just want to take another crack at this germanium volume. You mentioned in 2007, you had one customer that did $2.2 million, and then you also mentioned that you have got three customers now in volume production?

Phil Yin

No, we have three customers that are going into production, correct. They haven’t ramped up yet.

Peter Castellanos - Glacier Partners

So by these, potentially, these $2 million potentially, $2 million bigger, smaller customers, I mean can you get -- it may not be this year, but can you give us some idea where they sit in that?

Phil Yin

Well, you know, as I mentioned before, we see a ramp probably starting in the second half of the year, on the germanium customers. This is all based on the qualification phase, where we are from, where we are now, and where we are going to be in the second half of the year, the ramp up in production and things like that. So…

Peter Castellanos - Glacier Partners

Yeah. Let me ask you, since the Needham conference, the last time I saw you was at that conference, and I think you'd mentioned at that time that you had some customers, that they were coming in for qualification, so that would be at back end, the end of January.. Since that time, have you had any of these customers who had qualified yet, or qualified you yet, or where do you stand?

Phil Yin

Well, as I mentioned in my talk, we had one customer that’s already qualified, they have already come in and audited our facility last week. In fact, I went back for the audit to China and the audit was very successful. We do have to provide them with some more samples, they want to look at some other areas of their devices, and we expect some production quantities realized somewhere and sometime in the early second half.

Peter Castellanos - Glacier Partners

Also, you earlier, not in this call, but in your earlier presentations a few months ago, you mentioned that under the legacy business, your older business, you had lost a lot of customers, and your diligent attempts to try to get some of them back, have you had any success in that area?

Phil Yin

You mean, as far as overall customers.

Peter Castellanos - Glacier Partners

Yeah.

Phil Yin

Of course, I mean, we have gotten lot of them back. In fact, one of my goals when I first came on board, I spent a few weeks on the road visiting every customer, telling them this is our get-well plan, and that we are now going to come back to you until we get our quality resolved and things like that, and then when we come back, when we are ready, all we are doing is, we want to ask you for one more try to qualify us. In fact, when you look at our market share back in 2005 in semi-insulating, it was 3% and most recently, it went up to 20%, and then estimated that we are going to hit 29% this year. So, that's an indication of getting our customers back.

Peter Castellanos - Glacier Partners

Yeah, and yes, but you did mention earlier, not again, that you gave them some price concessions to get back into the game, is that still a case here?

Phil Yin

Well, I mean obviously in some areas we do, but our quality has obviously returned to the level that meets the customer specifications, so we didn't gain market share by lowering price. We gained market shares through a lot of reasons, where we are, customers feel very confident with us, don't forget there was constraint in raw material. We are the only company that is completely vertically integrated. We have our own source of raw materials. So, put yourself in the customer’s shoes, if you’ve got a constraint in raw materials, who are you going to go to. Right?

Peter Castellanos - Glacier Partners

Yeah.

Phil Yin

So, that was very, very important competitive advantage that we had. Secondly, we increased capacity when there was the constraint in 6-inch semi insulating, where some of the competitors couldn't provide the requirements to their customers. Their customers came to us, and we were able to provide their requirements, because we can put capacity online very, very quickly, because we designed our own furnaces and build our furnaces, plus we have the space and our competitors basically have to go greenfield.

Peter Castellanos - Glacier Partners

Also just switching over to the JVs, I think at one point you mentioned that there was an attempt there to actually change the structure of some of the JVs, possibly become a bigger partner in those, is there any progress on that?

Phil Yin

We're still discussing.

Peter Castellanos - Glacier Partners

So its -- is it I mean is it progressing or is it just sort of…

Phil Yin

It is progressing. These things are -- takes some while.

Peter Castellanos - Glacier Partners

Yeah.

Phil Yin

Especially in China.

Peter Castellanos - Glacier Partners

And then the last question I got for you, and I appreciate your patience here, and this is a difficult question to answer, but maybe I just wanted to throw it out. Maybe you can give us some parameters on it. If you look at three or four years between the handset volume, the LED volume and those markets and the solar market, could you give us some idea how they stack up against each other?

Phil Yin

Well, as Wilson has been saying, he is saying our germanium business is a blue bird, what he is really saying is that we think, or we estimate that our germanium business, which is really solar and you know the solar market is so hot these days.

Peter Castellanos - Glacier Partners

Right.

Phil Yin

That if you are looking out three to five year, that might equal or even surpass our gallium arsenide business.

Peter Castellanos - Glacier Partners

Okay. We won't be surprised.

Phil Yin

Yeah, we won't be surprised by it if it does.

Peter Castellanos - Glacier Partners

And so, where would that put it, and then the LED business would be just a minor part of the plan?

Phil Yin

No, I mean, it’s not going to be minor, obviously. I mean, just think when the world adopts or starts transferring all fluorescent and incandescent lighting into LEDs.

Peter Castellanos - Glacier Partners

Yeah.

Phil Yin

I mean, just think, it’s actually hard to phathom.

Peter Castellanos - Glacier Partners

Okay, well thanks very much, good quarter.

Phil Yin

Sure, thank you.

Operator

Thank you, the next question is from Jiwon Lee of Sidoti & Co. Please go ahead.

Jiwon Lee - Sidoti & Company

Hi.

Phil Yin

Hi

Jiwon Lee - Sidoti & Company

You have forgot something, any preliminary thoughts back on your capacity expansion on the incremental revenue contribution that you are looking for when it’s done?

Phil Yin

You mean?

Jiwon Lee - Sidoti & Company

Did you put it in the market share in terms of 29%?

Phil Yin

You’re saying?

Jiwon Lee - Sidoti & Company

Yeah.

So, let me re-phrase the question, are you saying the capacity increase that I mentioned of 27%, how is that going relate to revenue, is that what you are saying?

Jiwon Lee - Sidoti & Company

Yeah, that's right you did mention 27% of that.

Phil Yin

Yeah.

Jiwon Lee - Sidoti & Company

All right, thank you.

Phil Yin

Okay.

Operator

The next question is from Rusty Cannon of RKC Capital. Please go ahead.

Rusty Cannon - RKC Capital

Phil, I had a quick question for you on this LEC stuff that you are working on.

Phil Yin

Yes.

Rusty Cannon - RKC Capital

Is that designed to try to solve the low margin problem of that business?

Phil Yin

You hit right on the head. It’s essentially the [parameter]. As you know, VGF is a slow process, it short ingots LEC .The cycle time is much shorter. You get much longer ingots, and most importantly the EPD level is not as tight for semi-conducting with LED application, versus for the semi-insulating handsets, for HBTs and PMs.

Rusty Cannon - RKC Capital

So, it is too early to start thinking about that.

Phil Yin

Yes, that’s why you get away by growing using LEC for LED applications using VGF.

Rusty Cannon - RKC Capital

I mean, is it too early to forecast when that might…

Phil Yin

Well I think I mentioned it, I think I mentioned, towards the end of this year or early Q1 of 2009, before we really start producing or manufacturing in production.

Rusty Cannon - RKC Capital

So not too far away then?

Phil Yin

No, no. Not at all. I mean from my standpoint, I wish had enough.

Rusty Cannon - RKC Capital

Yeah. All right. That was my only question.

Phil Yin

Okay. Thanks.

Operator

Thank you. There are no further questions registered at this time so I will return the meeting over to Mr. Yin.

Phil Yin

Thank you, everybody for participating in our conference call. During the first quarter we will be visiting investors in several cities and around the country around the industry, and we look forward to seeing many of you there. So we will talk to you next quarter. Thanks again.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time.

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