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Operator: Good afternoon, everyone, and welcome to AXT’s Fourth Quarter 2022 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Devin, and I will be your coordinator today. I would now like to turn the call over to Leslie Green of Investor Relations. Please proceed.

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

We wish to caution you that such statements deal with future events, are based on management’s current expectations and are subject to risks and uncertainties that could cause actual results or events to differ materially. These uncertainties and risks include, but are not limited to, overall conditions in the markets in which the company competes, global financial conditions and uncertainties, COVID-19 and other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations in China, 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 via link from our website and contain additional information on the 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 16, 2024. 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 of 2022. This information is available on the Investor Relations portion of our website at axt.com. I would now like to turn the call over to Gary Fischer for a review of our fourth quarter 2022 results. Gary?

Gary Fischer: Thank you, Leslie. Good afternoon to everyone. Revenue for the fourth quarter of 2022 was $26.8 million, that’s down from $35.2 million in the third quarter of 2022 and down from $37.7 million in the fourth quarter of 2021. To break down our Q4 ’22 revenue for you by product category. Indium phosphide came in at $14.0 million, reflecting a market softening, particularly in the data center and telecommunications infrastructure. Gallium arsenide was $5.5 million, reflecting the overall slowdown across a number of applications, particularly in China. Germanium substrates were $1.3 million. Our germanium substrate revenue was up slightly from Q3 as we have resolved the payment issue that we described in the past quarters.

Finally, revenue from our two consolidated raw material joint venture companies in Q4 was $6.0 million. In the fourth quarter of 2022, revenue from Asia Pacific was 70% of sales, Europe was 15% and North America was 15%. The top five customers generated approximately 41% of total revenue and one customer was over the 10% level. Non-GAAP gross margin in the fourth quarter was 32.5% compared with 42.2% in Q3 of 2022 and 32.4% in Q4 of 2021. This was below our expectations and it is a result of significantly lower volume with revenue coming in at the lowest end of our guidance, more of an unfavorable shift in product mix than we had anticipated, and a significant drop in the price of raw gallium in Q4, which resulted in low margin contribution from our consolidated joint venture.

For those who prefer to track results on a GAAP basis, gross margin in the fourth quarter was 32.1% compared with 42.0% in Q3 of 2022 and 32.2% in Q4 of 2021. Total non-GAAP operating expense in Q4 was $9.0 million. This compares with $9.2 million in Q3 of 2022 and with $8.1 million in Q4 of 2021. On a GAAP basis, total operating expense in Q4 of 2022 was $9.6 million, down from $10.2 million in Q3. For comparison, total GAAP operating expense was $9.1 million in Q4 of 2021. Our non-GAAP operating line for the fourth quarter of 2022 was a loss of $252,000 compared with a non-GAAP operating profit in Q3 of 2022 of $5.6 million and $4.1 million in Q4 of 2021. For reference, our GAAP operating line for the fourth quarter of 2022 was a loss of $1.0 million compared with an operating profit of $4.6 million in Q3 and an operating profit of $3.0 million in Q4 of 2021.

Non-operating other income and expense and other items below the operating line for the fourth quarter of ’22 was a net gain of $2.2 million. The full breakdown is in our press release. This included a government grant of $1.2 million, and is a good example of the strength of our favorable reputation and (ph) for our presence in China. For Q4 of 2022, we had a non-GAAP net income of $2.0 million or $0.05 per share, compared with $6.8 million or $0.16 per share in the third quarter of 2022. Non-GAAP net income in Q4 of 2021 was $4.1 million or $0.09 per share. On a GAAP basis, net income in Q4 was $1.2 million or $0.03 per share. By comparison, net income was $5.8 million or $0.13 per share in the third quarter of 2022 and $3.0 million or $0.07 per share in Q4 of 2021.

The weighted average diluted outstanding shares in Q4 was 42.7 million. Cash, cash equivalents and investments were $52.8 million as of December 31 reduce it by approximately $10 million to $15 million this year. This concludes the discussion of our quarterly financial results. Turning to our plan to list our subsidiary Tongmei in China on the STAR Market in Shanghai, let me give you a brief update. Since the Chinese New Year, we have had active dialogue again with the China Securities Regulatory Commission, also called the CSRC. Their process is detailed and thorough, and they have asked us to respond to a couple of additional items. We are in the process of doing so now and remain optimistic that we will get CSRC approval in the coming months.

We have posted a brief summary of the plan and the process on our website. With that, I’ll now turn the call over to Dr. Morris Young for a review of our business and market. Morris?

Morris Young: Thank you, Gary. During Q4, the softening of the macro environment continued as expected. We saw a step back in revenue across our portfolio as customers continue to digest inventory in the channel and evaluate their needs for the coming quarters. Overall, we believe they are approaching the 2023 demand environment with conservatism and will further reduce their estimated need in Q1. With that said, we’re continuing to see active development for new applications and technology investments using material. What this tells us is that while the near-term environment is working through a significant inventory correction, the mid-term and longer-term prospect for our markets are vibrant. In addition to the core applications that are driving our revenue today, new uses in automotive sensing consumer product, health sensing display and more are taking shape in a very real way.

For the last two years, we are focused on raising our readiness and business efficiency and have created a world-class operation, capable of supporting the current and future need of Tier 1 customers. To that end, I’m very proud of the work that we have done of the accomplishment of the entire AXT team. We have successfully completed the relocation of our gallium arsenide and germanium substrate manufacturing, continued to build out our capability to support a dramatic increase in demand for our indium phosphide wafers, made good progress on two major R&D projects to produce larger diameter wafers, and implemented a recycling program that benefit our cost structure and drive positive results in our ESG efforts. Collectively, our work today has positioned us more favorably than ever before, both with customers as well as competitive landscape.

This includes gains in our market share, particularly indium phosphide, as well as enhancement of our reputation for quality and innovation, and our ability to scale and our ability to deliver the specification that enable technology progress. For these reasons, we are optimistic about our return to growth when the market recovers. As we head into Q1, we’re seeing a business slowdown continue as customers across our portfolio are evaluating and reducing inventory. We believe that the effect in Q1 is exacerbated by the typical business interruption of Chinese New Year as well as the lingering effect of COVID shutdown in China. As such, we are planning for a major reset in Q1, but we do not — but we do expect that we could see improvement beginning in Q2 as China reopens more fully.

Indium phosphide was down in Q4, primarily as a result of continued cooling in the data center market as well as ongoing softness in 5G telecom infrastructure, particularly in China. The (ph) market was coming down off its peak, but was — has been fairly resilient. In addition, we continue to perform well in our consumer applications, but because of inventory digestions, we expect it to take a meaningful pause in the first half of 2023. We have two programs that are currently shipping and we are excited for the ability to build long-term relationship in this important development market. Our gallium arsenide revenue is down significantly off its mid-’22 highs, with customers in China having slowed significantly. We’re seeing a strong impact on applications using wireless devices for IoT and headset markets, as well as industrial lasers, LED lighting and display.

After such a strong decline, the gallium arsenide market appears to be stabilizing and we could see incremental improvement beginning in Q2. We are making good progress in our 8-inch gallium arsenide wafer development. This product will be a cornerstone for microLED adoption in a variety of consumer devices. While a meaningful revenue ramp isn’t expected to begin until sometime next year, product qualification at the substrate level are scheduled to begin this year. AXT is well positioned to be a prime player in this market. We view microLED as a breakthrough display technology for consumers as it is expected to deliver significant improvement in power efficiency as well as greater brightness and more brilliant colors. Tier 1 companies are advancing its development and we believe it has the potential to reshape the gallium arsenide substrate industry.

We’re pleased to report that we have resolved the payment issue with our germanium customers and we saw a small improvement in revenue in Q4. While the germanium substrate market has also been affected by the macro softness, we will be working towards sequential growth in the coming quarters. And finally, turning to our raw material supply chain companies. Consolidated revenue was down due to pricing pressure in Q4 and softer demand environment. We do continue to see a good contribution from our supply chain companies (ph) equity accounting below the operating line. While our increasing price of certain raw material can be negative for a company like Tongmei, which is offset by improved contribution below the line. Our supply chain strategy is unique as compared to our competitors and is attractive to our customers.

This is a strong focus for us in 2023. In closing, though a softening of macro environment has reset our growth trajectory, a trend that has been driven our revenue, customer and application expansions remain very much intact. Today, we are the world leader in indium phosphide and we are the company that Tier 1 customers come to when they are beginning their new innovation to market. We continue to raise the bar of technical capability, creating clear differentiation with our competitors. Further, we have worked hard to improve our efficiency and we’ll continue to focus on delivering profitability. As such, the fundamentals in our business are solid and we’re looking ahead to our future with optimism.

Gary Fischer: Thank you, Morris. Given the continuing inventory correction as well as the impact in Q1 from Chinese New Year and COVID shutdowns in China, we expect Q1 revenue to be between $19 million and $21 million. This lower revenue is expected to have a significant impact on our manufacturing overhead being spread over fewer units, which will have a negative impact on gross margin. Product mix is also less favorable and as a result of lower expected revenue for indium phosphide. As such, we expect our non-GAAP net loss will be in the range of $0.10 to $0.12, and GAAP net loss will be in the range of $0.12 to $0.14. The share count will be approximately 42.7 million. Okay, this concludes our prepared comments. Morris and I will be glad to answer your questions now. Devin?

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Operator: Our first question comes from Charles Shi with Needham & Company.

Charles Shi: Hi. Good afternoon, Gary and Morris. Thank you for taking my question. Maybe first, I want to start, obviously, Q1 is a reset. But I did hear you had some relatively more positive commentary. For example, gallium arsenide, you’re seeing possibly some indication of improvement beginning in Q2. But what about the indium phosphide side? I did hear you, yes, that in Q1, there may be some slowdown related — as customer pause a little bit in the first half ’23. But if I tie all your comments together, hard for me to not to think, maybe Q1 or even, if I want to be more cautious, maybe Q2 seems to be the bottom of this down cycle for you. Can you share with us some color? What were your thoughts at this point? Yes, thank you.

Morris Young: Sure, Charles. I think — let me put this way. I think, although AXT is a small company, but our business covers a whole range of different products. As you know, germanium is in the solar cell, and gallium arsenide, not only covers the handsets, the wireless infrastructure, as well as high-brightness LEDs, and high-power lasers. And I believe every segment of the business goes into the prime demand in different stages. For instance, wireless handsets took a hit, I think inventory correction early in Q3. Infrastructure came a little bit later, and we hear that the HPT market device inventory is still quite strong there. But on the other hand, you can say that China is reopening up, with COVID problem out of the way, when will the consumer demand come back up, and that was the major driver for gallium arsenide HPTs. As far as indium phosphide is concerned, we didn’t see the softness in indium phosphide for consumer product until late in Q — let’s say, mid Q1.

So, significant downshift in indium phosphide demand in Q1, but will it recover and how much, and then it does depends upon the balance of different market segments, such as consumer, when will they start to sort out inventory they have, and the data center, will it recover soon enough to give us some significant business contribution. So, it is — right now, it’s hard to say. I used to say last year, throughout the last I think five, six quarters, we’ve been saying that AXT is having improved clarity of what is coming in the business pipeline. But because of the business interruptions or inventory corrections, I think we’ll lose that visibility. We just don’t have a whole lot of visibility of seeing what we can recover. I think it’s probably going to be flat in Q2, but definitely we hope, with consumer coming back in China, I think the market will start to bounce back in Q3 and Q4 of this year.

Gary…

Charles Shi: Thank you.

Gary Fischer: I think, it’s a good response. The short summary is, yes, we think Q1 is going to be the bottom, and we’ll all find out in another month or two. So, yes.

Charles Shi: Yes, thanks. So, maybe a little bit longer-term. You said that indium phosphide, two programs shipping, I mean, production products to your end customers. Do you have much visibility if there maybe a third program where you can get to the stage that you can ship production wafers to your customers this year? Or maybe this year is more about a continuation of the existing two programs, maybe expand the volume a bit when we get — really get to the second half of the year when those end products start to ramp again? That’s my second question.

Morris Young: Yes. I would say, we don’t see any new consumer product applications for indium phosphide this year. If there’s any increasing demand after they count all their inventories and if they digest their inventory is probably if the demand goes from the top line phone sets to the lower sets and then that may drive some increasing demand. I cannot tell, because the customers aren’t giving us visibilities. As far as future development is concerned, Charles, you had me right here in a very sort of among the inventory corrections. So, things are fairly pessimistic. But if you were to ask me what indium phosphide are used for, what’s our marketing, our gathering information, what’s the possibility, I definitely think there is a lot of growth potentials, especially in sensors, in lasers where you need high safety as well as autonomous vehicle.

I mean, we had customer interest in us delivering sizable product to that market. But that inquiry was late sometime last year, but it never materialized. When will it come back? I don’t know. I think other potential product is healthcare product. Again, the customer was picking our product for a beta site pilot production. I think unfortunately that is not materializing and becoming a major production product demand now. When will it come back? I think the interest is there, but we just don’t have visibility, it will come to become a major production demand yet.

Charles Shi: Yes. Thank you, Morris. Definitely understand that this is a supply chain that, well, the customer to — I mean, your end customer probably only going to tell you almost the last minute whether it’s go, no go, totally understand. So, I think my last question really around the larger diameter gallium arsenide for microLED application. I think that one of your top customer recently said it’s that — they’re going to see meaningful revenue in 2025, which kind of implies that, that’s the time they start to ship in volume, right? But I don’t know how much of your revenue will lead to their revenue in terms of generating meaningful revenue from this microLED application. Can you kind of give us some idea how the ramp of revenue could look like? I think you said that you’re going to start shipping some volume this year, but — this year, next year and the 2025. How does the revenue ramp look like? Thank you.

Morris Young: Sure. We are shipping hundreds of wafer to customers. I think they are doing their pilot runs as well as looking at wafer in all different ways, including going epi and seeing how flat they need the wafer to be, and running through their pilot production lines. And I think we agree with you. I think although the earlier projection was that it’s going to start to have a production ramp up in 2024, but I think it’s — we think it’s going to be late 2024 rather than early 2024. So that matches with your 2025 big production ramp. But I think I’m very glad to see that this project is really taking shape and looks like it’s going to be a major project. But I think the bigger known is how successful this project will be and will it spread to other applications.

Because our customer has told us that this is just the start of the program, and eventually, this could lead to something like five to 10 times the volume as the initial demand is. And it does depend upon how well they can run this project and how well they can reduce the cost, and how overall microLED performed. But I think, as you know, there are many, many different competing technologies eyeing for this microLED applications, such as wearables, such as goggles. So, I think this is a big win for gallium arsenide. And I think we are very well positioned because we not only are in substrate making, but we are also in supplying some other raw materials, which will benefit us, because this — the demand for gallium arsenide is going to increase significantly.

I think that’s the way I view it, what the microLED is going to be. But as I said, I think the timeframe of when will they be commercially ramping up in volume production, I think it’s probably late 2024 to 2025.

Charles Shi: Got it. It sounds like you may lead your customers’ revenue ramp up by a little bit, or that kind of makes sense, right, because wafer — first, you ship the wafer, you recognize revenue, they process the wafer, they recognize their revenue. But thank you very much, Morris and Gary. I hope to catch up more with you soon. Thank you.

Gary Fischer: Thanks, Charles.

Operator: Our next question comes from Matt Bryson with Wedbush.

Matt Bryson: Hey, thanks for taking my questions. First one is, when you look at the three factors you mentioned that’s impacting gross margins, Gary, can you provide some weight as to — or some idea of the weight of each of those factors on the quarter?

Gary Fischer: Well, I would say, the lower revenue is the key part of the story and the product mix wasn’t as good as we expected. So, those are probably the two main things. A little bit of below expectation from the raw material companies, but it’s really more around the substrate business.

Morris Young: But on the other hand, the guidance for Q1 then the major impact of the gross margin coming down, I will probably think is shifting more towards the product mix, because we expect indium phosphide to take a major hit on the inventory correction. So, that will drop significantly. That will impact our gross margin overall.

Gary Fischer: That’s correct.

Matt Bryson: Understood. But then — so when we’re thinking about normal gross margins, if you’re able to return revenues to the level that they had been up, then you’re still looking at the gross margins you were enjoying a quarter or two ago. Is that fair?

Morris Young: Oh, absolutely. I think we — although there are price pressure from customers when business is not looking good, but there’s not a significant — I mean, it’s not a drop of overall margin. Our business is fairly stable and we also increasing our efficiency. We have new joint ventures taking care of the raw material supply. So, we’re confident. And as business return, I think we should be looking forward to mid-30%s and even — yes, high 30%s.

Matt Bryson: No. Understood. I just wanted to make sure it wasn’t more of a — the pricing wasn’t more of a factor, right, because that’d be…

Gary Fischer: No, pricing is not really a — the key factor. Yes, there’s price pressure from time to time, but really the big reason is what I just said. So — and we’re confident that when things rebound, all the stuff that we’ve done for the last two years to improve gross margin, it’s going to blossom again. It’s just taking a pause because of the disruption in the marketplace right now.

Matt Bryson: Understood. And then, I guess, my one other question is, you talked there’s some programs being potentially put on hold at your customers given the more difficult environment, which makes sense. But on the silicon photonics front, are you still seeing progress there? Or anything you can talk about as to how you see that market developing for AXT?

Morris Young: Yes. Silicon photonics, I think, is doing fine, although the data center market from what we read in the marketplace is that it’s not doing well. I mean, they say pause as you know — I mean even I read Microsoft, their data center business is not doing well. So, they are taking a correction, and so is Amazon. So, all these big data center, if they’re not buying, then our silicon photonics aren’t doing well. But on the other hand, I would still say, as far as Internet and cloud computing is concerned, there is going to be more and more data transferring back and forth and you need more data, more — bigger data center and you need fiber optics to solve the bandwidth and the speed problem. So, I think that’s all going good for indium phosphide material.

So, I think longer trend, there’s no question about it. I think it’s — we’re going to see growth. But short term, we’re going to have inventory correction. I’m even Microsoft, their business is sort of being soft right now. Everybody is looking at possible slowdown in the overall economy.

Gary Fischer: Yes, I would add that one of the strengths of our business model is that the lifecycle for some of these key applications is really quite different than the general semiconductor industry. As we all know, every 18 months or 24 months, you’ve got to come out with a new chip. But the data center is a good example. That’s going to be here for — and be a driver for silicon photonics and therefore for indium phosphide for probably five to 15 years. I mean, there’s really — it’s hard to believe it would ever slow down. So — and if you look at our history in gallium arsenide, the life cycle for some of those products was 15 years — or 12 to 15 years. So, it’s quite different, and it’s — but it’s a positive difference. So…

Matt Bryson: Got it. Thanks so much for the color.

Gary Fischer: Thanks, Matt.

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

Richard Shannon: Well, thanks, guys, for taking my questions. I’m going to hit on the gross margin topic here and ask a very direct question, Gary, as I usually do here. Trying to fit the guidance to get to the bottom-line and guessing on OpEx here and I was coming up with gross margins that are around a little bit below 20%. As I look back in history to the last quarter around $20 million per quarter, I saw a number of around 26%, 27%. Clearly, you’ve got a negative mix here with indium phosphide, but that difference seems fairly dramatic. So, I wonder if you could tell us how close we are in doing our math here.

Gary Fischer: So, Richard, are you describing the Q4 results or the…

Morris Young: No, Q1.

Gary Fischer: Q1.

Richard Shannon: First quarter.

Morris Young: I think Richard wants to know how do we compare with the last cycle? I mean, when we had $20 million quarter, Richard is saying our gross margin was better than what you telecasted or forecasted.

Richard Shannon: Yes. Is 18% approximately right, because it’s a lot different than last time you’re at this sales level? So, I just want to get a little bit more clarity there.

Gary Fischer: I’d say it’s too low. I don’t know for sure what it’s going to be yet. Obviously, given the mix in the…

Morris Young: I think, what our model says is more than 20%, I think. Yes, 21%. But that’s our model.

Richard Shannon: Okay. Well, you clearly got some other parts to model, so we’ll follow-up offline there, but just want to get that one out of the way here. That is helpful. And just wanted to make sure I caught this correctly. On the first quarter, do you expect indium phosphide to be down more than 50% sequentially? And this was entirely due to consumer and data center? Were there other elements of it? Just want to make sure I caught all of them.

Morris Young: Yes. I think data center is not helping, but most significantly is the consumer. And the consumer…

Richard Shannon: Okay. All right, great.

Morris Young: …part didn’t take a big inventory correction until recently, and…

Richard Shannon: Yes. We understand their cycle, so that certainly doesn’t necessarily surprising, so that’s fair enough then. Gary, I guess kind of a multipart question here, kind of taking — the topic of inventory, the topic of CapEx and thinking about cash flows this year, you made a prepared remark about trying to burn $10 million to $15 million of inventory this year, which is good to see here given the (ph) here recently. Wonder if you comment also on what your CapEx expectations are for the year especially relative to last year. And since a lot of the build here in CapEx has been indium phosphide, and you’ve got a fairly significant hole here, however temporary it may be here, it seems like you don’t have as much urgency to build at least right away. So, I want to get your sense of — to what degree your CapEx needs to be as high as last year? Let’s just kind of cut it off there.

Gary Fischer: Okay. Well, the short answer is it won’t be as high as last year. In addition to clamping down on inventory, we’re going to put the brakes on CapEx as well. So, I would say, $3 million to $5 million. And we can modify that if things bounce back. We have investments we’d like to make. But Morris has already got his shotgun out and if anyone talks about a lot of CapEx, they’re going to be in trouble. So…

Morris Young: Well, even if business were to pick up, I mean, the spend that we did for last year was because the customer demand is way outstripping our ability to deliver. That’s why we were building very aggressively and even towards second half of the year. So, some of those builds are still hanging out there. So, even if the business were to recover, I think — we do expect it to recover and it will continue to grow, we can handle it. No problem at all.

Gary Fischer: Yes.

Morris Young: And it’s only where — if we are seeing other or two which I hope other consumer product will come in to use indium phosphide, then we’re going to start building again. So, I think the — I hope you understand that it’s a lag, right? I mean, we’re forecasting it’s going to grow. So, we’re going to build the capacity because we don’t want to (ph) or not be able to deliver to our customers. But then, when it’s a cut off, then obviously we put a break on, but there’s some remnant value hanging out there. But I don’t think it’s at risk. Because I think indium phosphide for the near future probably will absorb all those extra capacity we plan to build. Yes.

Richard Shannon: Fair enough. And that’s a…

Morris Young: Yes.

Richard Shannon: Sorry, Morris, didn’t mean to cut you off there. Please, finish.

Morris Young: Oh, no. I finished. I said, it’s not we planned, but we built last year.

Richard Shannon: Okay, fair enough. Last question for me, kind of dovetailing off of one of those remarks in there, Morris, regarding just general sensing applications. I think in an earlier question asked about your large customer and I think if I got you correctly, said you don’t expect any new programs in this current calendar year. How about kind of more broadly thinking other customers and applications regarding sensing, and to what degree are they in early-stage versus late-stage development such as they could impact this year, or perhaps in following years? Maybe just kind of give us the big picture long-term there.

Morris Young: Yes. But Richard, I think — I had my head hanging down now. But if you look at indium phosphide, I think — as I said, I think healthcare is a big application, although I think the development is taking a pause. I mean automotive, we have a customer asking for 3,000 4-inch indium phosphide per month, and they were giving a formal quote, and we were calculating how much will it cost us and we were almost build — ready to build extra capacity for them, but they didn’t come through, okay? But I don’t think they’re playing games with us, okay? So, I think there are many other progress, such as if you’re going to have the Meta goggle, I was told that you need a eye-tracking indium phosphide sensor. And if that market were to take off and — but then of course, there’s a lot of development program taking a pause right now.

But I think those are many, many of these users, which will use indium phosphide. And one customer told us there are 12 projects being developed using indium phosphide to improve consumers’ experience to improve their handheld devices. So — but if you asked me last year, I think, well, maybe there’s a few which could come to fruition in 2024, but I think I’m taking more conservative

Richard Shannon: Okay.

Gary Fischer: Let me add something to that, too. It’s kind of a big picture comment. But indium phosphide is taking on a life of its own, and it’s robust. It’s great to watch. It’s exciting for us to be a leader in this kind of material. And there’s going to be stuff that’s going into gaming, automotive sensors, health and well-being. So, it’s definitely taken on the life of itself.

Morris Young: Yes. And I think if you’re looking for short term, I would say China is looking to pump up the economy. I think the government may want to do some infrastructure build. As far as, I think, United States, I think, U.S. is thinking about the big infrastructure build, wants to make Internet connection available throughout materials used for basic — anything which have anything to do with fiber optic communication, so I think they may help. But I think at this point, 5G base station is not built, which is on a low point, and telecommunication is on a low point. But any of this €“ government-pumped infrastructure build is going to help on the demand of indium phosphide.

Richard Shannon: Okay. Perfect. That’s all from me guys. Thank you.

Gary Fischer: Thanks, Richard.

Operator: Our final question comes from Hamed Khorsand with BWS.

Hamed Khorsand: Hi. Just wanted to really understand if you’re talking about a reset in the business in Q1, why you’re not considering resetting your business structure as it is? What’s giving you the confidence that you will bottom out in Q1?

Morris Young: I think we’re taking a reset, Hamed. I think…

Gary Fischer: I agree.

Morris Young: We’re not buying material. We’re shutting down most of our construction…

Gary Fischer: Lower CapEx.

Morris Young: Lower CapEx. We’re looking at all possible ways to tighten the — our budget.

Gary Fischer: Lower inventory.

Morris Young: Lower inventory. But when — are we looking at cutting back on (ph), that probably is area we’re not cutting back yet. But we’re going to take a cautious look because that’s the future of the company, such as 8-inch gallium arsenide, we want to keep on developing it, so that we can have a robust yield as well as the able capacity to deliver to our customers. That revenue is going to come if we can take care of that business. I mean, so is indium phosphide. Hamed, although, as we said, we’re not building more capacity anymore. I mean, if you were to ask us last year, we were saying we’re going to increase our capacity by 50%, didn’t we? So, this is a reset. We’re not building that capacity no more. That’s a reset.

Hamed Khorsand: Okay. And then, as far as the inventory is concerned, any risk that it becomes obsolete by the time the business turns around?

Morris Young: No. 50% of our inventory is raw material, and raw material will never go bad. I mean, we can even sell the raw material, can’t we? And the other 40% is work-in-process, which without cutting or polishing to any product specification. And gallium arsenide, indium phosphide has been here — gallium arsenide has been here for 25, 30 years, so it will never go away, okay? I mean, so anything which is already cut to customer specification, which is only 4% or 5%, and even then, I don’t think we have lost customer. The most severe punishment is that the customer take our product and don’t pay and they go bankrupt, that’s the only time where we lost. So, I don’t think there’s a whole lot of risk for inventory.

Gary Fischer: Yes, in this business model — and again it’s different from the semiconductor, because I come out of that background. But the fact that we are a material science company and we start with raw materials, there’s not a lot of management need to be micro managing and watching out for obsolescence and things like that. So…

Hamed Khorsand: Okay. Thank you.

Gary Fischer: Thanks, Hamed.

Operator: There are no further questions at this time. I now turn the call back over to Dr. Morris Young for closing remarks.

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

Operator: Thank you for attending today’s presentation. You may now disconnect.