AXT Inc (AXTI) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to the AXT fourth quarter conference call.

[OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Dr. Phil Yin. Sir, you may begin your conference.

Good afternoon, everyone and welcome to AXT's fourth quarter 2005 conference call.

I am Phil Yin, 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 the fourth quarter results and I will give you my perspective on our market and our future opportunity. Following the conclusion of my comments, Wilson will provide forward-looking guidance, and then we will open up the call to your questions.

Wilson?

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 control costs and improve efficiency, improvements in our facilities expenses and manufacturing costs, improvements in our competitive position, including our technology development, the impact of customer qualification of our products, new opportunities for our China joint ventures, improvements in our production processes, product quality and yields, costs and supply of raw materials, the impact of technology developments providing new markets for Gallium arsenide substrates 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 on-line 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.

Now, turning to our financial results. I'm very pleased to report that we had a strong fourth quarter with revenue results exceeding our expectations. Revenue for the fourth quarter of 2005 was $7.7 million, up 25% from $6.2 million in the third quarter. Total Gallium arsenide substrate revenue was $5.8 million for the fourth quarter of 2005, compared with $5.4 million in the third quarter.

Indium phosphide substrate revenue was $255,000 for the fourth quarter of 2005, compared with $234,000 in the third quarter. Sales of raw materials primarily 99.99% pure gallium were $1.7 million in the fourth quarter of 2005, compared with $578,000 in the third quarter of 2005. The increase in raw materials revenue was the result of shipments delayed in the prior quarter, as well as new customer sales.

In the fourth quarter of 2005, revenue from North America was 20.2%, Asia Pacific was 63.3%, and Europe was 16.5% of total revenue. Two customers together generated 28.2% of our revenue during the fourth quarter.

Gross margin was 8.4% of revenue for the fourth quarter of 2005, compared with 18.6% for the third quarter. The 8.4% gross margin included year-end inventory evaluation adjustments which negatively affected the quarterly gross margin by 7.4%.

Selling, General and Administrative Expenses were $3.1 million for the fourth quarter of 2005, compared with $2.9 million for the third quarter. Research and Development costs were $466,000 for the fourth quarter of 2005, compared with $472,000 for the third quarter.

During the fourth quarter of 2005, we incurred a $460,000 (inaudible) restructuring charge which included a reduction in force at our Fremont, California facility and our liquidation of the remaining assets of our Japan office.

Loss from operations for the fourth quarter of 2005 was $3.4 million, compared with a loss of $2.2 million for the third quarter. Loss from operations included our inventory evaluation adjustment and restructuring charges. Net interest and other expense for the fourth quarter of 2005 was $286,000 compared with $57,000 for the third quarter.

The Company recorded a $1 million tax benefit during the fourth quarter of 2005, and accordingly reduced our income tax payable by the same amount on the balance sheet. Net loss in the fourth quarter of 2005 was $2.7 million, or $0.12 per diluted share, compared with a net loss of $2.1 million, or $0.09 per diluted share in the fourth quarter. Again, our net loss included inventory evaluation adjustments and restructuring charges.

Let's now look at our cash on 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, including restricted deposits was $30.5 million at December 31, 2005, compared with $31.8 million at September 30, 2005, resulting in cash burn of $1.3 million.

Accounts receivable, nets of reserves, was $5.2 million at December 31, 2005, compared with $4.9 million at September 30, 2005. Day sales outstanding was at 62 days for the fourth quarter, compared with 73 days in the prior quarter.

Net inventory increased to 16.2 million at December 31, 2005, from 15.6 million at September 30, 2005. Capital expenditures in the fourth quarter were 600,000, and depreciation was 850,000. During the quarter, AXT repaid $150,000 in long-term debt principal.

Turning to our stock repurchasing program, we had no repurchases of our common stock in the fourth quarter of 2005. Since July of 2004, we have repurchased approximately 201,500 shares of our common stock.

At December 31, 2005, the Company had 842 employees in total, up from 680 working production compared with 854 employees in total of whom 713 worked in production at September 30, 2005. At December 31, 2005, 55 employees worked in the U.S. and 787 are abroad.

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

Thank you, Wilson.

This is a very exciting time for AXT. 2005 was a year of significant positive changes, and as we enter 2006, we do so with a renewed sense of pride and excitement about our Company, our market, and our potential. In March, I will celebrate my one year anniversary with AXT, and I am extremely proud of the accomplishments of the Company at that time.

Among them, we restructured and reorganized our team from the top down. In particular, we (inaudible) our organization in the areas of manufacturing, quality, and sales, with experienced leadership, and we better leverage our R&D efforts and joint venture operations with the extraordinary talent of the existing executive team.

For example, in July, we created a new Chief Operating Officer position, and appointed the very talented M.S. Lin to that post. Under his direction, AXT has surmounted one of the most challenging issues in our Company's history by resolving the surface morphology issue that we have experienced over the past two years. With a better understanding of what caused this issue, we are now able to standardize a process for cleaning that eliminates it.

We are steadily building back the confidence of our customer as we ship larger and larger quantities of substrates to them without any issues. With improvements in our quality, as well as excellent service, and fast response to our customer needs, our volumes have increased accordingly.

In the fourth quarter of 2005, our substrate shipments increased 18% from the third quarter. With six inch substrates comprising a major portion of it.

We are very pleased to report that our Beijing facility is expected to be certified as having met the international standards, of ISO 14001, an environmental management standard. We were recently notified that our facility has passed its certification audit, and we expect to receive the final documentation in the first quarter.

ISO 14001 is the internationally recognized standard for environmental management systems. It provides guidance on how to manage the environmental aspects of an organization's activities, products, and services more effectively, while taking into consideration environmental protection, pollution prevention, and socioeconomic needs.

It is especially meaningful to me, because it demonstrates our commitment to environmental protection and positive corporate citizenship. This certification along with our ISO 9001 and 9002 quality certification underscores our dedication to serving our customers and our community with the highest level of excellence.

Now turning to our sales organization. We greatly improved the effectiveness of our sales efforts in 2005 with the appointment of John Cerilli, Vice President of Global Sales and Marketing and Bob Ochrym, Senior Sales Director, North America and Europe, who also heads up sales for our joint venture operations.

Through their strong industry relationships and those of our entire team we have been able to open discussions with a number of new and former customers. Our germanium substrate qualifications expected to be completed during the first quarter are a direct result of their efforts.

We are continuing our strong tradition of innovation with Dr. Morris Young now heading up our R&D efforts. As many of you may know, AXT was the first to commercialize vertical gradient freeze technology. Technology that has now become the industry gold standard.

We're also the first to offer six inch diameter gallium arsenide substrate for use in VGF technology, and are still the only company in the industry able to offer VGF grown germanium substrate.

In addition to innovations and new products for the marketplace, we are also advancing our ability to be the market's lowest cost producer. We are currently developing new crystal growth furnaces to shorten crystal growth time and to increase crystal length.

We are also adding state of the art equipment for process control and material characterization. In 2005, we also increased our focus on our raw materials business. In the same tradition of innovation, we are the first company in our industry to establish raw material joint ventures in China.

Today we have five joint ventures, through which we offer raw materials, such as gallium, 4N, 6N, and 7N pure, arsenic 4N and 6N pure , germanium and paralytic boron nitride components, crucibles, and other related MBE parts.

These joint ventures are a key strategic benefit for AXT because they give us a strong competitive advantage of allowing our customers to work with one supplier for all of their substrate and raw material requirements. Further, they allow us to have more control over our own material costs and supply.

As demand increases, these joint ventures will provide critical materials of predetermined costs and ample supply. With all of these achievements, we have been able to reverse a year and a half of declining revenues and market share.

As we move into 2006, we are energized by the goal of regaining our stature in the industry and becoming the number one compound semiconductor substrate supplier in the world.

This year our revenues will be driven by two primary drivers. First, we expect to benefit from market share gains as we attract new customers and as our current customers increase their order volumes in response to our quality improvements. Second, we expect to benefit from a market that is rapidly evolving in our favor.

We are seeing that the industry trends toward compound semiconductor substrates is intensifying as device manufacturers are looking for ways to increase performance and lower power consumption, while incorporating more features and functionality into their products. For these reasons, industry analysts such as Strategy Analytics believe that the market for compound semiconductor substrate estimated at approximately 255 million in 2004 will grow to reach 293 million in 2009.

This compound semiconductor market is divided into two segments, semi-insulating and semi-conducting applications. AXT's product supports both.

In the semi-insulating applications, one of the biggest drivers is power amplifiers and switches used for the mobile handset market. This market is estimated to grow from 720 million units in 2005 to 910 million units by 2010. And the content of gallium arsenide in each handset is also increasing.

The reason for this is a typical handset, let's say operates at approximately 450 megahertz, and consumes approximately 3.5 volts of power, but consumers continue to demand handsets that can offer more functionality, such as internet access, music downloads, and enhanced digital camera capabilities. All of these applications require devices that can operate at faster switching frequencies, but maintain the same power level of 3.5 volts.

The only way to accomplish this goal is through compound semiconductor materials. This is the same is true for other typical electronic devices such as laser diode market for optical storage and printers, which is estimated to grow from 9.2 million in 2003 to approximately 270 million by 2008. Validating this market trend toward compound semiconductor substrates is a strong invisible momentum among industry leaders to address the growing need for greater functionality and speed.

A great example of this is Free Scale Semiconductor which is a spin off of Motorola and a customer of ours just announced a viable gallium arsenide MOSFET that could be potentially a significant driver for gallium arsenide substrates in the semi-insulating applications area. Traditionally MOSFET devices, primarily used in wireless and optical electronic applications, have been made exclusively of silicon.

Using traditional Semos processing, Free Scale has been able to fabricate a gallium arsenide MOSFET with theater articles transistor speed approaching almost 20 times that of silicon MOSFET devices. Free Scale has called this break through potentially disruptive, and we believe that this announcement could materially impact our industry in a very positive way.

In the semiconducting market, one of our primary drivers is high brightness LEDs for back lighting LCD TVs and cell phones, flash for cell phones, signage, automotive applications, and general and solid state lighting. We have been successful in penetrating all of these markets, and they are certainly growing rapidly.

Based on recent data from Strategy Analytics, the total LED market was 4.1 billion in 2005, and expected to grow at the 6.5 billion by 2009. With 64% being high brightness LEDs.

Of the many LED applications, our primary focus is on red LEDs, for general or solid state lighting purposes, which comprises 51% gallium arsenide base of the total LED market. Solid state lighting for high brightness is very exciting application within the LED market.

A combination of red, green, and blue, RGB, are also used to produce white light that may eventually replace traditional incandescent and fluorescent lightbulbs. LEDs save energy, have longer life, they are compact in size, and environmentally friendly. They also offer programmable color control, dissipate much less heat than traditional bulbs, and produce a much brighter light.

The significant reason that the migration of LEDs has not yet occurred in a wide spread manner is the higher cost of LEDs compared to traditional incandescent and fluorescent lightbulbs. However, the big five companies such as Lumileds, Cree, Osram, Nichia, Toyota Gosei, and others are currently producing these white light devices for use in automotive headlights, back lighting for LCD TVs, traffic lights, camera flash, and a host of other applications, and we believe that this is an area that we can be meaningful to our business in the coming years.

In addition to the semi-insulating and semi-conducting markets for gallium arsenide, we believe that the germanium market holds significant potential for AXT. With a shortage of polysilicon and it's inherent inefficiency, germanium is becoming the material of choice for portable take applications. For example, EMCOR, one of our customers, recently announced that it was awarded a multi-million dollar contract with the U.S. military for space solar cell applications.

We are in the process of qualifying our germanium substrate at EMCOR, and we anticipate that the qualification will be completed in the first quarter. In addition, the Tenjing institute number 18 in China has just qualified AXT for full production of germanium for space, satellite, solar cell applications. In fact, we began shipping germanium production in this quarter.

These developments are important to us because we believe that we have a strong competitive advantages in germanium. We are one of two suppliers in the world, and we are the only supplier of germanium produced using VGF technology.

Furthermore, we are the only supplier with germanium joint venture that guarantees us the raw materials at predetermined cost.

In closing, this is a great time for AXT. We have completed a year of tremendous change and accomplishment. We successfully tackled our quality issues, we put in place a strong team, and we are leveraging their talent and experience to execute an aggressive growth plan.

Over the next several quarters, we will continue our strong focus on market penetration and improvements in our manufacturing costs and efficiencies. We are entering the new year with momentum in our sales, significant competitive advantages, and an industry that is rapidly evolving in our favor.

We believe that the strength of our team, the performance of our products, and the innovation that has characterized AXT since its inception will position us for renewed growth and excellence in 2006.

I will now turn the call over to Wilson to discuss our forward-looking guidance. Wilson?

Thank you, Phil.

We project that our revenue for the first quarter will follow normal seasonality and be between $7.1 million and $7.7 million. Also, we project our net loss per diluted share to be between $0.11 and $0.13 which takes into account stock compensation expense of 225,000. This concludes our prepared comments we are now happy to answer your questions.

[OPERATOR INSTRUCTIONS]

Our first question is coming from Pierre Maccagno.

Hi Phil and Wilson.

Hi Pierre. How are you? Happy New Year.

Happy New Year, and congratulations for increasing revenues.

Oh, thank you very much. It was a team effort.

Could you take talk a little bit about the break down of the revenues? One of the breakdowns is how much is six inch versus four inch in the gallium arsenide?

Sure. In the gallium arsenide revenue for Q4, our two inches, it's about $1.2 million, three inch about $1.1 million, four-inch about $1.4 million, and our six inch is about $2.2 million.

2.2, okay, so and versus last quarter so six inch increased quite a bit, I guess, huh?

Six inch in Q3 was only about 1.2. So if you look at the trend of our six inch business, actually in Q4 alone it comprises 28% of our revenue.

Which actually has better margins than our smaller diameter wafers, and for the year you're looking at 16.3% for 2005, compared with 2004 where the percentage on revenue was only about 9% in the entire '04.

For the gallium arsenides?

Correct.

For the six inch, correct?

Those are for the six inches.

Okay, and then what about the breakdown of customers--for the gallium arsenide LED versus wireless?

Yeah, we really normally don't disclose that information, but although we-- we are seeing an improvement in our overall gross margins from Q3 to Q4.

Well, first of all, Pierre,there is no six inch in semi-conducting, right, for LEDs.

Correct.

You can figure that out yourself, most of it was all semi-insulating material.

I see. So these two customers that are greater than 10%, are they from the wireless, or from the LED?

Wireless.

Okay. So you're gaining some share there. So what is the--what are the issues that you're facing, maybe you could describe-- I would imagine it's kind of difficult to enter this market, having two very strong competitors.

Well, as I mentioned before, we solved the surface morphology issue, the post epi-haze issue. I think the key right now is consistency, consistency, consistency. We are gaining our credibility back, that's reflected in our revenues. Okay? A lot of our customers are increasing their volumes to us, the share. So I believe that as we go forward, we have to show consistency in our quality.

Okay. And finally, in this 293,000 would be charged to SG&A, or to R&D, or where would you charge that to?

What 293,000?

The bad debt expense.

Oh, yes, that was part of my--that was part of my SG&A in Q4.

SG&A? Okay. I'm just trying to get pro forma numbers.

I see.

Okay. Thank you very much.

You're welcome.

Thank you Pierre.

Thank you. Our next question is coming from Chang Qiu,

Yeah, good afternoon.

Good afternoon.

Hi, Chang.

Hi, Phil and Wilson. Can you give us some idea about your pricing trend and also growth, profit, gross margin trend?

Well, from a pricing standpoint, I think that everybody knows that there's a tremendous amount of pressure to reduce prices, the ASPs have been falling throughout the year. Frankly speaking, I really don't know when it's going to stop. I've been in the semiconductor business for many, many years, and I see this -- this industry emulating the same type of trend with silicon, what happened.

So yes, the pricing pressures are tremendous, but I feel that with a lot of our cost cutting programs that we have in place that will definitely increase our margins, and obviously volume is going to help our margins, and with us gaining credibility back, and with our customers giving us more of their share of the market, it's going to definitely help us on margin. Wilson, can you comment?

Yes, let me just ad to that is that in our Q4 gross margin of the 8.4%, we were negatively impacted by the inventory valuation adjustments, which has negatively impacted my quarterly gross margin by 7.4%, so we really haven't seen double digit gross margins in 2004, and we were hoping that going forward we'll start seeing double digit gross margins.

Okay. Phil, on the side, it looks like you see strong demand from the (inaudible-heavy accent) business, also from the sales or the wireless business. There are right now some speculation for gallium arsenide, also used for solar cell applications you didn't mention germanium used for solar cell applications. Can you comment on that?

Sure the only one I know for solar cell applications is the Boeing contract to develop a triple junction solar cell from a gallium arsenide standpoint. What we're seeing is a trend for germanium, for solar cell applications, such as EMCORs, a contract from the military, Spectra Lab again, and this Tenjing Institute Number 18, which already has received a contract from the Chinese government to put solar cells up in space, and it's basically a two-year program there, and as I mentioned, we already are qualified. We're shipping production volumes to them.

And again, I think one of the other drivers there is that there's a shortage of polysilicon. Solar cells, a lot of solar cells are made out of polysilicon. Right now, even the IC guys can't get enough silicon, and as you know, polysilicon sort of went up from $45, $55 a kilo, so $135 a kilo and you still can't even buy it at that price.

So I think some of the drivers in this industry is number one a shortage of polysilicon , and the new contracts awarding for solar cell applications both for space and terrestrial, as you remember the California government, Schwarzenegger just signed a rebate program for $3 billion to use solar cell energy. So I think it's coming around the corner now.

Again, back, germanium, and I think only time will tell, but I think AXT is sitting in a very good position from a competitive advantage standpoint, because we have our own raw materials, we're only one of two in the whole world, and we grow our material using VGF technology versus CZ.

In terms of benefit, what's the benefit of using germanium?

From what standpoint? From a materials standpoint?

From a materials standpoint. You grow gallium arsenide on germanium, or use germanium itself for solar cell?

No, germanium itself is used for solar cell applications.

But so much smaller, how's the efficiency with germanium.

They grow an empty layer on top of that. Proprietary, obviously we don't know what that is.

I see, and in terms of a cost, compared to poly how much more expensive is germanium substrate?

Well, germanium is a little more expensive and obviously there's only two and four inch, we've been asked can we sell six inch. Obviously we have to do some development work, but it's easily scalable with our VGF technology, but mostly it's two and four inch. It is a little bit more expensive, but, again, the--from an efficiency standpoint, and from an availability standpoint currently, I think those are the drivers.

I see, in terms of efficiency, for solar cells made on germanium what's the highest efficiency achieved right now?

Well, let's see. EMCOR and Spectra Lab are still in the process of developing "their process for the military", the numbers have not been released to us. We don't know, but from literature standpoint, as you know, there have been efficiencies in the area of over 37% accomplished.

Uh-huh. Okay. That's great. In terms of a quality, you did mention consistency, consistency. Should we as investors, should we really think that the quality issue recognized really over?

Well, we haven't--since we've identified all the parameters that caused that post epi-haze, we haven't had any issues at all.

I see. Okay.

So we're keeping our fingers crossed, and hopefully we will be consistent as we go forward.

Okay. That's great. Wilson, one more question for you. If I'm going to back to enough a few years, look much quarter relative to December quarter I don't really see a sequentially sound quarter for March, so I just wonder to ask you regarding your --you said normally-- you mentioned, kind of implied a weaker quarter for March. Could you give us some color on that?

Well, I think--I think back in the previous years, there are a few--there are a few first quarter that we've got revenues, we get carry overs from Q4, and I think that's why we ended with the number that might be comparable to Q2, but normally we don't expect Q1, because of the Chinese New Year, and things that's going on, it's normally Q1 is not a strong quarter for us.

Right after the holidays, people went shopping, they bought all of these electronics, so Q1 is usually, in both the semiconductor and compound market, is usually a down quarter.

Okay.

Or flat.

Okay, and I understand. Maybe one more question for you, Phil. You mentioned that you want to become the number one leader in terms of compound semiconductor substrate. What's your estimate? How far are you away from the top guy?

Well, I think we all know that AXT was the number one compound semiconductor substrate supplier in the world just a few years ago, right? When you say how far away? I think everybody knows from literature our market share currently is less than 10%. It was almost 70% a few years ago. So when you say how long is it going to take? I really can't give you a number.

I can't tell you, hey, it's going to take two years, three years, four years. I think it's just going to depend on our performance, our consistency, how our customers believe in us, and how our product performs, and how our team performs. So all those are part of the equation, I think, of us gaining market share.

But I think what's important is if you look at our competitive advantages, again we've been doing VGF for 20 years, it has become the gold standard. If you want low defect material, you have to use VGF technology number one. Number two, we have our own raw materials supply. Nobody has that.

So we're not affected by any price fluctuations, we're not affected by capacity constraints, which I think is coming down the road right now. In fact, some of our competitors are getting so worried, they're even qualifying some of our raw materials.

Uh-huh. Okay. That's great. Actually last quarter you also mentioned a few of your previous customers are qualifying your gallium arsenide. Are they now all becoming customers now, or are they still qualifying?

Well, when I mentioned that, I basically said that our previous customers that basically went away due to our quality issues in the past are now calling us and say hey, we're hearing that your quality is consistent now, we want you to requalify, your material in our--in our fab again. We want to give you another chance, so that's what I meant.

I see. And now you are in, or are you still in the process?

Well, in some of them, for instance the germanium customer in China, we started to qualify them several years ago, and we ran into this post epi-haze issue, and then we started to send them samples of the new process, and they ran several samples, and as the quantities increased, finally they gave us the green light, said, okay, we're putting you into full production. That's a great example.

Some other customers where our volumes were very low, because they didn't have confidence in our consistency of our material, now the quantities are beginning to go up every month.

Okay. All right. That's great.

Thank you. Our next question is coming from Pierre Maccagno.

Yeah, could you talk about the pricing of the gallium, actually, the raw material? Is that in short supply at this point?

Is it in short supply?

Yes.

I wouldn't say its in short supply on a worldwide basis, no.

So the pricing on the gallium is, I mean, stable?

Yeah, it's stable from where it was, let's say 2005.

Okay. Thanks.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

Our next question is coming from Joy Mukherjee.

Good afternoon. With all the cost reductions that you put into place, has that changed your break even at this juncture?

Well, we have taken into account the--beginning in Q1 of 2006, because of the implementation of FAS 123 R, so we got to expense stock compensation expense. Our break even guidance continues to be at revenue of $14.5 million, and at 22% gross margin.

Okay. Would you say that 22% gross margins is kind of your longer term target, in terms of the gross margins, or can you get it above that?

Definitely we do believe that the 22% gross margin is more in the longer term.

Okay.

Put we actually do have internal plans in place that we're trying to get there and exceed that expectation.

Now, you mentioned Q1 seasonality. Would you describe to me your normal seasonality for the year?

For the entire year?

Yeah.

I think it's the--I think the electronic industry is basically--has been the same every year. Fourth quarter is very strong due to the holidays, people buying all of this electronic type equipment and gadgets, and Q1 is usually slow, and you start to see a ramp-up starting at the end of Q1, perhaps in the beginning of Q2.

Where does it reach its peak? It's hard for me to guess right now, but if we--if we talk about it from a compound standpoint, again as I mentioned, with the market demanding all of this new functionality and the potential for LED looking for--I call it the holy grail, to replace white light, I think the potential for the market to grow quarter by quarter is going to be there.

Also bear in mind that in the last two years, we have been facing with the quality issues, and that's why we've got consistently declining revenues quarter-over-quarter, so the seasonality factor wasn't really that impact to us, but now that we've fixed the issues, I think the seasonality factor would be a bigger element when you look at 2006.

In terms of the solar cell market, is there--somehow can you categorize what your potential market size could be for that area?

Well with the solar cell market, I think when you--I guess you're referring to germanium correct?

Correct.

If you look at the last couple of years in germanium it's really been dead, and in fact I tried to read up on it, and it was very hard to get any kind of concrete data and so I really can't comment the size of the market, but what I do can comment on is that there are only two suppliers in the entire world that supplies substrates to the market, and that's our competitor, and us. And what differentiates us and them is we use VGF technology versus CZ.

Thank you.

Thanks.

Thank you, our next question is coming from Dar Posellmein (ph.).

Congratulations on the results. Just now that quality issues are behind us, is it possible to understand how much revenue growth can we see from the just regaining the market share, as well as you mentioned seasonality, but just overall if we have to look at it from a macro demand, can we see that you'll still be able to see some revenue growth with the market, kind of 20%, 30% growth, as well as some market share gains?

We're definitely projecting very healthy increases in terms of our revenue projections, but at this point our policy is only to give out guidance for the next quarter, but I think to address your question we--we are working really hard trying to also lower our gross--I mean lower the cost so that we can have healthy gross margins going forward.

And another way of asking probably might be, then, what else can keep the gross margin--like where else can we see gross margin upside as well as are there any other issues which can affect you guys not grow with the market ,plus regaining all of the market share being almost -- well, very few suppliers in the market?

Well, one thing I can answer is that from the infrastructure point of view, in Q4 when we do the restructuring charge by eliminating a lot of our employees in Fremont. You're looking at an annual savings of almost $800,000 per year in salaries and fringe benefits, so you'll see that having an impact in our 2006 cost of revenues.

Got you. And is there any other inventory left for which you guys can take a charge or anything?

Well looking at just Q1alone, if there are any inventory valuation charges, that really should be insignificant.

Oh, okay. Great. So the margin should reflect just a normal 16%, 17% gross margin?

That's what we are anticipating.

Got you. Thank a lot and congrats.

Thank you, our next question is coming from Austin Lewis.

Yeah, you mentioned gross margins around 22% potentially. Is there any way to get them a little bit higher than that?

Always. This is a volume driven business.

I was going to say with your relationships with your suppliers, you could just be a distributer and probably get those kinds of margins from the materials side.

Well, we can't get it for free, unfortunately. No, but all joking aside, I mean, you can always improve margins, right? Volume will definitely drive margins, and as we gain market share, and as our customers become more and more confident in our material, we should get more volumes, and that's going to drive margins. And with all of our cost cutting programs that M.S. Lin plans to implement or have implemented, once they come into fruition that will help the margins obviously also.

Could you give some kind of longer term projection of what you think the margins should be?

Well, I I think at this time, it's very, very difficult.

Okay. Thanks.

Sure. Thank you.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

There appears to be no further questions at this time.

Well, thank you for participating in our conference call. 2006 marks the 20th anniversary, and we are commemorating this event with the launch of a whole new look for AXT. We invite you to visit our new website at AXT.com.

This afternoon we will be presenting at the research--Securities Research Associates winter conference in San Francisco, and next week we will present at the Roth Capital OC conference in Dana Point, California. We look forward to seeing many of you there, and we thank you for your continued interest in AXT.

Thank you very much, and we'll speak with you next quarter. Bye-bye now.

Thank you. This does conclude today's AXT fourth conference call.