AXT Inc (AXTI) 2003 Q2 法說會逐字稿

Good afternoon and welcome to the AXT quarterly earnings call. I will now turn the call over to your moderator, Dr. Morris Young. Go ahead, please.

Hello, and welcome to AXT's second quarter 2003 conference call. I'd like to thank you for taking the time to be with us this afternoon. I am Morris Young, President and CEO of AXT. With me today is Donald Tatszin, our Chief Financial Officer. Donald will give you a detailed financial review of the second quarter, and following that I will comment on the quarter and current market conditions. Donald will close our prepared comments with financial guidance, and we will open up the call for questions and answers. Donald?

Thank you, Morris. Before we begin, I would like to remind you that during the course of this conference call, including comments in response to your questions, we will make projections or other forward-looking statements regarding, among other things, market conditions and trends, the future financial performance of the company, new products, and the company's ability to bring them to market. We wish to caution you that such statements deal with future events and so are subject to risks and uncertainties and that actual events or results may differ materially.

In addition to the factors that may discussed in this call, we refer you to the company's 8-K, 10-K, and 10-Q filings made with the Securities and Exchange Commission and available online by a link from our website for additional information on risk factors that could cause actual results to differ materially from our current expectations. The conference call will be available on our website, which is AXT.com.

Now, on to the results for the quarter. At the end of June, we decided to discontinue the opto-electronics business that manufactured high-brightness, light-emitting diodes and laser diodes, and we determined that the best course of discontinuation was through liquidation. We are in the process of liquidating the opto-electronics assets and expect to complete the effort in approximately six months.

Therefore, results for the opto-electronics business are characterized as discontinued operations effective June 30, 2003. And revenues and costs associated with the opto-electronics business are reported as results from discontinued operations. Reported revenues and costs that comprise income from operations are those associated with our continuing businesses, the manufacture and sales of compound semiconductor substrates and certain raw materials. Historical results have been adjusted to reflect only results from the comparable operations.

Revenue during the second quarter of 2003 was $8.5m, flat with the $8.5m reported in the first quarter of 2003. Total gallium arsenide substrate revenue was $7m for the second and first quarters of 2003. Indium phosphide substrate revenues, $503,000 for the second quarter of 2003 compared with $564,000 in the first quarter of 2003, and the phosphide substrate revenue remains totally dependent on the fiber optics business. Raw materials sales were $1m in the second and first quarters of 2003.

In the second quarter of 2003, North America revenues, 24.6%; Asia Pacific was 55.1%; and Europe was 20.3% of total revenue. One customer for our substrates comprised 10.6% of our total revenue during the second quarter of 2003 and 11.8% for the first half of 2003.

Gross margin was 7.9% of revenue for the second quarter of 2003 compared with 3.2% for the first quarter of 2003. Compared with the first quarter, volume and production rose slightly, and cost declined. Selling, general, and administrative expenses were $2.8m for the second quarter of 2003, compared with $2.5m for the first quarter of 2003. Research and development costs were $368,000 for the second quarter of 2003 compared with $379,000 for the first quarter of 2003, and the percent of revenue R&D was 4.3% in the second quarter compared with 4.4% in the first quarter of 2003.

Interest expense for the second quarter of 2003 was $108,000 compared with $115,000 in the first quarter of 2003. Other expense was $1.3m in the second quarter of 2003 compared with other income of $200,000 in the first quarter of 2003. During the second quarter, we incurred noncash charges of $1.3m to write down the current market value of the minority investments we made in two U.S.-based private companies.

Loss from continuing operations for the second quarter of 2003 was $3.9m compared with a loss of $2.5m for the first quarter of 2003.

Turning to the discontinued opto-electronics business, loss from operations was $2.7m for the second quarter of 2003 compared with a loss of $1.8m during the first quarter of 2003. We also recorded a loss on disposal of $11.1m, inclusive of a loss of $10.4m to reflect the carrying value of net assets in excess anticipated proceeds, and an accrual for wage and severance costs of $750,000.

Net loss in the second quarter of 2003 was $17.7m, or 78 cents per diluted share, compared with a loss of $4.3m, or 19 cents per diluted share in the first quarter of 2003. Net cash loss from operating activities of both the substrate and opto-electronics operations was $1.1m for the quarter ended June 30, 2003 compared with net cash generated from operating activities of $737,000 in the quarter ended March 31, 2003.

The total reduction in cash and equivalents was $3.4m for the quarter ended June 30, 2003, compared with an increase of $3.7m for the quarter ended March 31. Total cash flow for the first quarter includes receipts of $5.2m from the sale of real estate assets.

Let us now turn to the balance sheet. Cash and cash equivalents with maturities of less than three months, short-term investments, and other investments in high-grade debt securities with maturities of less than two years were $36m at June 30, 2003, compared with $39.4m at March 31, 2003. Of this amount, $9.6m is held as restricted cash and deposits at June 30, 2003.

Accounts receivable, net of reserves, was $5.6m at June 30, 2003, compared with $7.9m in the prior quarter. We saw day sales outstanding decrease to 53 at June 30, 2003, compared with 54 at March 31.

Net inventory decreased $4.2m from $34.5m at March 31, 2003, to $30.3m at June 30, 2003. The change in inventory is due largely to the effects of a combination of revaluing the opto-electronics inventory to its expected value in a liquidation situation. Inventory in our continuing substrate operations decreased by $2.1m during the three months ended June 30, 2003, and $4.7m during the six months ended June 30. We expect further declines during the upcoming quarters as we sell inventory products to customers.

Capital expenditures for PP&E during the quarter were $787,000, and depreciation was $1.7m. Most of our capital expenditure is related to the completion of our substrate manufacturing facilities in China. At June 30, 2003, we had 968 employees working in our continuing operations of whom 805 worked in production compared with 995 employees, in total, of whom 823 working in production at March 31, 2003. At June 30, 2003, 120 employees in our continuing operations worked in the U.S., and 848 worked abroad.

This concludes our review of our recent financial performance. Let me now turn the call back to Morris.

Thank you, Don. The major event of the second quarter was our decision to discontinue our opto-electronics business, which we launched approximately four years ago. It was a very difficult decision, but it was the right one. Now we can focus all our efforts on growing and improving the performance of our core substrate business. I will focus today's discussion on our plans for the substrate business after I summarize the factors that led to our decision to discontinue opto-electronics.

Since launching our opto-electronics business in mid-1999, we had accomplished much. We produced some of the brightest and most reliable high-brightness blue, green, and cyan light-emitting diodes available commercially. And by midyear 2002, we had increased our sales of these devices to over $5.5m for the quarter. We also developed a broad range of edge-emitting lasers -- VCSELs -- focused on the telecommunications and other markets.

We made steady progress in reducing our costs and increased the breadth of our customer base and strengthening our team.

But in recent quarters, these positives were offset by other developments. A large LED customer sharply curtailed orders about a year ago, and although we worked through our issues and requalified with them later last year, their orders, since that time, have not come back to the volume that we had historically shipped to them. New customers, whom we value highly, have not produced the volume necessary to offset earlier declines. Our lasers (inaudible) product were affected by the slowdown in demand for telecommunications infrastructures, and while we have built a steady business manufacturing fiber (inaudibldinaudible) lasers, we do not expect these end markets to grow substantially in the near term.

We have always expected that the prices would decline in the LED business. But the approximately 30% decline that we experienced in late February and early March was more than we anticipated. In addition, since many of our customers are in Asia, particularly in China, we were affected by the outbreak of SARS.

Finally, we believe that the patent infringement lawsuit filed against us by Cree Lighting and Boston University, which we believe is frivolous and without merit, damaged both our existing business and our ability to enter into joint ventures with others. It played a role in our decision to discontinue the opto-electronic business. Since the lawsuit was filed, some customers either reduced or failed to make new orders, and our discussion with them indicated that the presence of the lawsuit was a factor in their decision.

In addition, professional joint venture partners were unwilling to enter into agreement with us while the lawsuit was in place, and we cannot control the amount of time required to settle the lawsuit.

On the basis of our analysis, we do not believe that we infringed the patent. Today we filed a response to Cree Lighting's lawsuit, in which we stated our disposition. And we filed a countersuit against Cree Lighting and the trustees of Boston University, in which we allege that the plaintiffs' action was intentionally designed to interfere with AXT's prospective business relationships and attempted to gain an unfair business advantage.

While we believe we will ultimately be successful in defending ourselves against Cree's and Boston University's allegations, and in winning our lawsuit against them, litigation is uncertain, costly and time consuming.

As I mentioned at the outset of my remarks, our decision to discontinue the opto-electronic business allows us to focus all our attention on improving the performance of our core substrate business and material business. Let's now look at the current substrate environment and our plans for it in the coming quarters.

First, we have done a lot since the substrate business declined and weakened in the third quarter of 2001. For example, our cost of goods sold continues to decline as we move more of our operation to China and reduce our activities in the United States. Our substrate and corporate-related operating expenses declined by more than 45% since its mid-2001 peak, and by more than 20% in the past year.

Recently, our product rejection rate has declined, typically meeting or exceeding customers' requirements. Finally, while we recorded net losses in our substrate business during the past several quarters, cash generated from operations during the past 24 months was $8.6m, as we curtailed purchasing, re-negotiating agreements to lower our costs, used more inventory, and collected account receivables.

Second, we believe that market conditions are favorable for improvement. While there is some uncertainty regarding the outlook for cell phones during the third quarter, due to a build-up in inventory that corresponded with the advent of SARS during the second quarter, the outlook is positive thereafter. China, the market most affected by SARS, appears to be recovering rapidly. Second, we expect red and yellow LED production to grow and require additional gallium arsenide substrate. We believe demand for this product will be steady, providing with a predictable revenue base. Currently, approximately 55% of our gallium arsenide substrate business is for optical application.

While they are not immediate, other applications are looming for gallium arsenide, including its use in collision-avoidance radars for automobiles, and selected wi-fi devices. This quarter, raw material sales comprised 12% of our revenue. We believe that raw material prices are increasing. The price for large-quantity orders of (inaudible) gallium increased by approximately 40% from late 2002. During that period, our production costs did not change substantially. We believe we are among the lowest-cost producers of gallium worldwide.

We are also seeing increased demand for germanium, and prices of this product also rose during the quarter. Finally, while indium phosphide and germanium substrate sales are not at this low level today, we will expect them to make meaningful contribution to our revenue and results within the next year.

Three leading telecommunications companies have adopted a common standard for fiber-to-home. As this network is deployed, indium phosphide-based lasers and other devices will be required to power it. Finally, our backlog today stands at a higher level than we have seen at this point in a quarter for the last six months. In addition, the pace of orders has increased recently.

While we have achieved a great deal, and conditions are favorable, we do recognize there is still much to do. Our first challenge is to improve product quality. We continue to receive customer feedback that confirms that our crystals are superior to those offered by our competitors.

We recognize, however, the need to improve our substrate surface quality. During the past several months, we have developed new production processes capable of producing high-quality wafers consistently at our Fremont and China facilities. We are shipping wafers processed using these new techniques and are receiving feedback that wafers performance is good, and our rejection rate dipped below industry standard.

As our quality improves, we believe we will be able to increase our sales to our customers with whom we have lost market share during the recent quarters. Most of these customers are in the wireless segment and have indicated they are prepared to increase orders substantially as we improve quality. We believe that this will enable us to gain market share over the next year.

Simultaneously, we expect our costs to decline further. We have already qualified many customers for China crystal growth and expect to qualify all significant customers by the end of this year. That will enable us to further shift production to China, as well as reduce our costs in the United States.

We are also reducing overhead expenses by pursuing reduction in insurance premiums, professional service costs, and facility costs. As more of our production moves to China, we will also be able to further reduce other SG&A costs.

Because we are anticipating that our revenue will increase, we are targeting our cost-reduction efforts to achieve a breakeven point at approximately $11m in revenue per quarter at current prices. Should we find that revenue goal is not achieved by early next year, we will make further reduction in our cost structure.

As we complete the turnaround, we expect to pursue additional opportunities. We have had notable success integrating backwards to raw materials. For example, we discussed the success of our gallium extraction joint venture in prior conferences. We also expect success from our gallium purification, germanium mining, and purification activities. As performance of the substrate division improves, we're beginning to look for new opportunities in China that relates to our existing material business and our ability to provide assistance to materials-focused business opportunities in China.

In summary, while we are disappointed in the fate of the electronic business, we are optimistic about the outlook for AXT. We are correct in forecasting that a market for gallium arsenide and indium phosphide substrates will move to VGX technology. Our decision to move production to China enables us to have the lowest cost structure in the industry, and access to exciting joint venture opportunities. In addition, our cash flow will benefit from the use of inventory and from income tax (inaudible) refund of approximately $8m we expect to receive during the fourth quarter.

We expect our recovery will be steady, and we look forward to report to you our progress. I'll turn the call back to Don to give our forward-looking guidance. Don?

Thank you, Morris. We see business conditions improving moderately for our substrate business. Specifically, we anticipate that revenue from continuing operations in the third quarter will be between $8.5m and $8.8m. Gross margin for the September quarter is expect to be 3% to 5%. Sales, general, and administrative expense is expected to be approximately $2.6m, and R&D is projected to be approximately $350,000. We projected that the loss from operations from our discontinued opto-electronics business will be approximately $450,000. Loss from continuing operations is expected to be between $2.5m and $2.7m, or between 11 cents and 12 cents per diluted share.

Net loss, utilizing our effective tax rate of zero, is expected to be between $2.9m and $3.2m, or between 13 cents and 14 cents per diluted share. We project the capital expenditures in Q3 will approximate $1.5m. We have sufficient cash reserves and funding capacity to meet our anticipated capital requirements beyond 2003.

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

At this time you may press star, 1 on your touchtone phone to ask a question. If you would like to withdraw a question at any time, please press the pound key. We're going to take our first question from Earl Lum.

Yes, good afternoon, gentlemen.

Hi, Earl.

A couple of quick questions with regards to the breakeven that you talked about at $11m. Are we assuming that's based upon a certain revenue number coming from both the substrates or the materials or is there a separate breakeven level that we should be looking at for your raw material group relative to the substrates? Or how should we view that?

That was combined, and we essentially just assumed the proportionate increase in both. The current level is about $7.51m

Okay, and, Morris, you mentioned that orders seem to be improving. Certainly, you're making the right strides improving the quality of your product. Can you tell us, at this point, has the visibility improved since the beginning of the quarter as you exited the quarter and entered into Q3?

Well, we still depend heavily on the tourist business. We do have a lot of visibility. But, as said, our order pattern seems to be better at this point of the quarter as compared to the last two quarters. So that is very significant by the perspective, as well as I think the other activities are showing strong patterns.

And are you seeing this across the board from both the semiconducting products for the opto as well as for the semi-insulating wireless products? Or is there a difference -- or are they both seeing a better rate of order patterns?

Well, we think the semiconducting actually is performing slightly better than the semi-insulating. I mean, I think the wireless field is sort of holding on its own but not seeing a great improvement.

Okay, then because of that, are you expecting ASPs to remain pretty moderate on both sides or are we going to see more ASP pressure on the semi-insulating wireless side than we would on the semiconducting?

Well, we do see ASP pressure from both businesses. However, as you can see, our results in the last quarter, we are seeing gross margin improvement. So we have been able to contain the cost reduction on our side, and also we don't believe the price pressure is as severe as it was last year.

Okay. So the competition on the pricing is not as bad as it was a year ago?

Right.

And then, at this point, can you tell us what percentages of the transfer that you've done on the crystal growth over into China relative to what you have in Fremont?

We do expect to complete the transfer by sometime in the third quarter, which is what we are in now. But we're giving plenty of time to our customers, to qualify our China product and we said before the fully qualified China, we will not shut down Fremont. So a lot of activities have already transferred to China.

Okay, and then one final question, and I'll give up the podium to the next person. If you look at the margins on the raw material business relative to the margins that you are expecting from the substrates, are the equal? Are they better or worse? Or can you give us some qualitative guidance there?

Don?

They are approximately equal. There is not a big difference.

Okay. So as they both grow, then in terms of the corporate, there shouldn't be any issues in terms of the way we're modeling that growth?

Right, right.

Okay, great. Thanks a lot, guys, take care.

Thank you.

As a reminder to all participants, you may press star, 1 to ask a question. If you want to withdraw your line, just press the pound key. We will take our next question from Mr. Dave Kang. Go ahead.

Yes, thank you. The first question is legal expenses -- how shall we model that, going forward? Is that going to mean material? And also regarding your gross margin guidance, why is it going to be sequentially down when revenues are going to be flat to slightly up?

For the legal expenses, obviously, the Cree lawsuit is at its early stages. So I don't expect it to be that great in the next quarter. And we'll give an update if things change. With regards to the gross margins, we had some pick-up by using some reserved inventory in the second quarter. And while we made do that again in the third quarter, we're not counting on it.

Okay, and with substrate business, going forward, can you just provide a market segment breakdown between wireless, telecom, and others? And, lastly, on the balance sheet, can you explain what assets held for sale of $8m? Thank you.

Sure. I'm going to take the last part first. The assets held for sale represent the estimated value of the opto-electronics assets when we sell them. And so, by having made the decision to liquidate, that's the proper classification for them. And so they've been pulled out of PP&E, for example.

The -- I think your first question -- was a breakdown of products. About 55% of the substrate business right now for opto-electronic application, the vast majority of that is for red and yellow LEDs. There are some relatively small amounts for lasers, and the remaining 45% is primarily for wireless handset devices -- power amplifiers, high-speed switches, et cetera. And a small percentage of that is for other high-speed electronics products.

And just lastly, do you still have a little over 1 million shares of Fenezar (ph)?

Yes.

Okay, we will take our next question from Mr. Jason Sam. Go ahead, please.

Hey, guys, just real quick -- at $11m, what type of gross margins are you looking at? Are you assuming that operating expense is going to stay fairly flat?

Well, we're hoping that we can improve our gross margin as revenue picks up. I think we have seen that. In fact, in between months, when we delivered a larger quantity of-- we're about to catch more revenue, our gross margin actually improves.

But also we have other independent measures to improve our gross margin, such as more efficient manufacturing of doing in China, and also the quality affected our gross margin as well. In the last few quarters, our gross margin was dramatically impacted by some of the product rejection rate we experienced. But we are expecting to improve on those quality products that we are going to be able to generate.

Now, the product issues that they -- mainly, the semi-insulating products?

No, actually it's a surface-quality problem, and it was -- at the peak of the problem in the third quarter of last year, it was across the board. But I think we have gotten out of it. But, I think most of our LED customers have already accepted our improved-quality product already, because they are quicker to react, while semi-insulating, although we have selected customers, telling us our quality is now exceeding their expectations. But I believe it will take a little bit of time before a lot of these customers will come back and order more from us.

So have you, in terms of customer attrition, can you give us a little bit of visibility in terms of that? And have you gained any of them back since the product quality has improved?

Yes, we think we are beginning with the LEDs. LED customers, we think we are gaining back some of the customers we lost. As we said, the wireless customers -- we're gaining some, but it will take a little longer time, but we don't name customer names, but we do have major customers we are targeting that we hope to recover in the next few quarters.

Okay, and as far as the headcount of 968, are you expecting to cut some more or is that pretty much what we are looking at, unless things get worse?

Well, first of all, Jason, although 900-some employees seems to be large, as you know, we only have 120 employees in United States. The vast majorities are in China. Second of all, a lot of these employees in China are joint-venture employees. So we do have three of them in that category. About 200 of them are joint-venture employees. And, as you know, wages in China are much lower than United States. So they don't create such a burden as some of the U.S. wages produces.

What percent of the wafers are currently done in China now?

We do expect 100% transfer all the production to China by the end of this year. We are doing the last-leg transfer of technology of manufacturing as we speak now, which is the crystal growth. We are qualifying all major customers, and most of the customers are either in the qualification process or they already completed the qualification. So, when every customer qualifies, then we'll move all production to China, which we expect to be completed by the end of the year.

Okay, thank you.

Thank you.

Thank you.

The next question comes from the site of Tom Demoore (ph).

Good afternoon.

Yes, Tom.

Good afternoon.

You mentioned that you're going to be incurring some expenses to litigate with Cree and, I think, Boston University. How expensive do you expect that to be? You mentioned you'll start incurring some costs in the September quarter, and I wondered if you could just lay out or compare how much it will cost in September versus quarters after that. How much of a burden is this litigation going to be?

Well, it really depends upon what course the litigation takes. I mean, as we've announced, we by and large have discontinued the opto-electronics division. So we certainly aren't infringing now, because we're essentially selling that thing. So I think that's going to help hold the cost of litigation down. We are going to seek a rapid conclusion. I would hope that we might be able to end this by the end of the year.

Well, we are also getting a budget from our lawyers and what the best course of action. But we do feel very strongly that Cree's lawsuit was frivolous. We expect to win that lawsuit.

Okay, and what do you expect will be the cash impact as a result of liquidating the assets of the opto-electronics business?

Well, the net effect would be slightly positive in the short term. We do have some lease debt associated with the opto-electronics assets that we would pay off as we sell them. As we said, our estimate value of the assets held for sale is about $8m. The lease debt is somewhat over $6m. So we would expect to gain, once we sell both the equipment and the buildings.

Okay. You mentioned a decline in the valuation of some investments. Could you just put a little more detail behind that? Is that part of the $2.9m in long-term investments? And can you just itemize the decline?

Okay. It's actually in the category called "other assets." The long-term investments are really sort of cash equivalents. And in this case there are two companies that we had historically shipped some product to and taken back shares in the private company. They have done new rounds of financing at different prices, and so we've marked our stock down to their current price. At the same time, we stopped the shipments to one of them for -- well, actually, we now sell to both of them on a cash basis like we do all of our other customers.

Okay. Can you tell us who the two companies are that comprise this investment?

We prefer not to. I think that's an announcement they need to make.

And they are a private company, and they're U.S.-based.

They're not any of the joint ventures we talked about as part of our China operations.

Okay. Another semiconductor maker out there -- I should say, a semiconductor maker out there, Vetas (ph), announced they are going to be closing down a gallium arsenide plant. And I just wondered if you could comment on that as an observation on the overall health of the gallium arsenide market?

Well, first of all, I think Vetas had stopped gallium arsenide production a long time ago. I believe that 6-inch gallium arsenide production plant was used to make OC192 and OC48 optical fast switch devices. I think they stopped -- the revenue declined drastically, and they are either moving to silicon-based device, or when they need higher speed, Vetas is committed to use indium phosphide type of devices.

As far as that segment of the market, which we call high-speed devices concern, that decline has occurred almost for a whole year. It's nothing new. The gallium arsenide main market today is wireless PAs, power amplifiers, as switches. That main market is intact, and we believe the volume potential can go up.

As you see, if the wireless handsets sold year-over-year, if it is going to have an increase, then every handset needs parts of ours. That's the potential market for gallium arsenide.

Right. And is that where most of the growth is likely to come from in order to reach your target of $11m in sales in order to be breakeven?

No. We do expect, as we said, the growth -- the market gain from the wireless -- the LED market, which is very healthy right now. We also think the indium phosphide, although it's only $500,000 revenue this quarter, we think it's making (inaudible), it should go up, as well as germanium substrates.

Okay. What do you think needs to happen before you can start generating some more growth in the gallium arsenide substrate for the wireless market?

Well, we think one of the big opportunity for us is, we have corrected basically our quality problem. And we believe the industry think that AXT is a very reliable and good supplier. But, we had a quality blip, and we essentially had to correct it, and we are now qualifying, or coming back, to our old customer.

And once they see the strong evidence that we have corrected our quality problems, they will start to order more from us. We think that's a potentially market shift that we can gain in the near future but, of course, some of these customers may not order from us immediately.

So we think it's going to take the whole course of a year, and the other strong point of the (inaudible) is the fact that we have the lowest cost structure. I think part of the quality problem, we keep on saying for the last three quarters, we have now mostly corrected, was also because of the fact that we moved our operation from United States to China, and any major movement of production is some potential for -- well -- should I say "screw ups."

But now have corrected those, but the advantage we have gained is now we have the lowest cost structure of all our competitors.

Okay, very good and, finally, with regard to the joint ventures, how are those reflected on your financial statements, both in terms of any ownership interest and in terms of any earnings impact?

There are three that we consolidate because we have controlling interest of 51% or greater, and so those are consolidated on the income statement and consolidated on the balance sheet. The others, where we have a minority interest -- well, let's say above 20% -- we have equity accounting. So we show the effects every month or quarter as other income or other expense line but don't break out the detail, and that we carry our investment basis in the balance sheet under other assets. And then we have a few, like the ones we wrote down, that we hold a diminimus (ph) amount of their total shares, and we just mark them to market periodically as their value changes.

So the two investments that you mentioned that you mark to market, those are -- that's part of these joint ventures that you referred to?

No, no, those are not. We have no involvement in the operation of those companies. It was simply an exchange of product for stock at one point in time.

Okay, but they're all included in the other asset line of the balance sheet?

Yes, yes.

Okay, and I'm taking from the $1.2m positive in other -- oh, wait -- it's other expense -- so they are money -- those were a drag, then, on the results for the quarter because it was other expense at 1.269m?

Yeah, and the total for those two items was right about that amount. Essentially -- the total amount -- almost the total amount of other expense was for those two items.

Those two items being the --

-- the two companies.

Okay. Okay, thank you.

All right, thank you.

Our next question comes from the site of Dave Kang.

Yes, can you provide the mix between 4-, 5-, and 6-inch? And is any one size doing better in terms of growth? And can you just talk about the migration to 6-inch platform by your wireless players? Thank you.

While Don is looking for the number, let me -- I think the migration to 6-inch will continue. Of course, when the industry is not in the healthiest state, it limits customers' ability or willingness to spend money to buy new plants and equipment to migrate into 6-inch.

However, everybody knows processing cost is going to be lower in 6-inch, and you're going to get more devices out of a 6-inch at that point. But we have not seen significant customers moving to 6-inch, as we speak now, but nobody is switching back to 4-inch, if that's what you mean.

Our number is for 5- and 6-inch for this quarter -- about $780,000, which is down from what it was in the prior quarter. The bulk of what we sold in this quarter was 2- and 3-inch.

Okay and just, lastly, and since we're talking about the market size, how big or how small is the wireless infrastructure market versus handsets? Thank you.

Well, we believe we mostly address the wireless handset market. I think it's, by far, the largest. However, Dave, it's difficult for us to estimate, because if we were to sell our product, let's say, to Epimakers (ph) or to SkyWorks (ph) or whatnot, they don't really -- or Anadigix (ph) -- they don't really tell you what part of the substrate they're going to shipping to wireless infrastructure versus wireless handset. But I believe that a majority of them goes into wireless handsets.

Thank you.

Thank you.

Again, if there are any further questions, you may press star, 1 on your touchtone phone.

At this time it appears there are no more questions. I am going to turn the call back over to your moderator, Mr. Young.

Thank you. Thank you for taking the time to participate in our conference call. We look forward to speak with you again very soon.