AXT Inc (AXTI) 2007 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the AXT, Inc. quarter three 2007 earnings conference call.

Your host for today will be Dr. Phil Yin, Chairman and CEO of AXT, Inc. Please go ahead, Dr. Yin.

Thank you. Good afternoon, everyone and welcome to AXT third quarter 2007 conference call.

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

Wilson?

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 outlook of the Company and our ability to maintain profitability, control costs and improve efficiency, the impact of customer qualification of our products, industry trends that are driving increasing demand for our products, the rapid replacement cycles of cellular handsets, the emergence of a new market for low cost handsets, the proliferation of applications for LED lighting, the increasing focus on solar energy, our expansion into complementary technologies which allows us to increase our product portfolio, the completion of the industry BiFET transition as well as other market conditions and trends.

We wish to caution that you such statements deal with future events, are based upon management's current expectations and are subject to risks and uncertainties that could cause actual events or results to differ materially. In addition to the factors that may be discussed in this call, we refer you to the Company's periodic reports filed with the Securities and Exchange Commission and available online by link from our website for additional information on risk factors that could cause actual results to differ materially from our current expectations. his conference call will be available on our website at AXT.com through October 25, 2008.

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

Now turning to our financial results. Revenue for the third quarter of 2007 was $14.5 million compared with $13.6 million in the second quarter of 2007. Total gallium arsenite substrate revenue was $9.9 million for the third quarter of 2007 compared with $9.3 million in the second quarter of 2007. Specifically, 6-inch diameter wafer sales were $2.2 million for the third quarter compared with $2.8 million in the second quarter of 2007. The decrease in 6-inch revenue was the result of two unexpected events with two 6-inch customers which were resolved during the third quarter. Phil will discuss both events shortly.

Indium phosphate revenue returned to a more normal level of $408,000 for the third quarter of 2007 compared with $660,000 in the second quarter. Indium phosphate revenue in Q2 was unusually high due to a one time sale of approximately $250,000 in scrap indium phosphate materials. Germanium substrate revenue was $536,000 compared with $402,000 in the second quarter. Finally, sales of raw materials primarily 99.99% pure gallium was $3.6 million in the third quarter of 2007, compared with $3.3 million in the second quarter, primarily the result of favorable pricing of raw materials, particularly pure gallium and additional demand from a U.S. customer.

In the third quarter of 2007 revenue from North America was 19%, Asia Pacific was 64% and Europe was 17% of total revenue. No customers generated more than 10% of our revenue during the third quarter while the top five customers generated 31% of our third quarter revenue. Gross margin was 31.3% of revenue for the third quarter of 2007. This included a benefit from the sale of approximately $556,000 in fully reserved wafers which positively affected the quarterly gross margin by 3.8 percentage points.

By comparison gross margin in the second quarter of 2007 was 36.9%. This included a benefit from the sales of approximately $387,000 in fully reserved wafers which positively affected second quarter gross margin by 2.8 percentage points. Our overall gross margin was primarily impacted by a much higher proportion of smaller diameter semi-conducting substrate sales with lower margins for LED products in the Asia Pacific region.

Excluding stock compensation expenses, selling, general, and administrative expenses were $3 million for the third quarter of 2007 compared with $3.7 million in the second quarter, which included a bad debt expense of $574,000. Research and development cost also excluding stock compensation expenses were $360,000 for the third quarter of 2007, compared with $330,000 for the second quarter. Included in cost of revenue and operating expenses was stock compensation expense of $130,000 for the third quarter of 2007. Income from operations for the third quarter of 2007 was $1.1 million, compared with $1.4 million for the second quarter.

Net interest and other expense for the third quarter of 2007 was $54,000 compared with net interest and other expense of $47,000 for the second quarter. Net income in the third quarter of 2007 was $858,000, or $0.03 per diluted share. By comparison in the second quarter of 2007, we reported net income of $1.2 million, or $0.04 per diluted share.

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 were $41.9 million at September 30, 2007, compared with $40.5 million at June 30, 2007. Our cash generated in operations for the third quarter was approximately $1.2 million.

Accounts receivables net of reserves were $11.9 million at September 30, 2007, compared with $9.9 million at June 30, 2007. Day sales outstanding was at 76 days for the third quarter, compared with 66 days in the prior quarter. Net inventory increased slightly to $25.1 million at September 30, 2007, from $24.9 million at June 30, 2007. Depreciation in the third quarter was $362,000, and capital expenditures were $642,000.

As of September 30, 2007, the Company, including our consolidated joint ventures had 1,013 total employees, of whom 814 worked in production. Turning to the Fremont property, we have signed a sales and purchase agreement with a new buyer with a sales price of $5.65 million and accordingly have filed a Form 8K with the SEC earlier today. We expect the transaction to close sometime during the fourth quarter.

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

Thank you, Wilson.

This is an exciting time for the Company. As we have discussed throughout the year, there are several important industry trends that are driving the increasing demand for our products such as the rapid replacement cycle of the cellular handset, the emergence of brand new markets for low cost handsets and proliferation of applications for LED lighting and the increasing focus on solar energy. Further, our own internal competencies are expanding into complementary technologies, such as standard Czochralski, and liquid encapsulation Czochralski crystal growth, allowing us to offer a very comprehensive product portfolio spanning a wide variety of applications.

As a result we believe 2008 will be another solid year of growth in our business as the convergence of these increasing market opportunities coupled with the completion of the industry BiFET transition and leverages within our business model create numerous opportunities for growth in the coming years. Beginning with our semi-insulating gallium arsenide market, we now believe that the qualification process for BiFET technology that has slowed sales of 6-inch substrates industry-wide through 2007 is largely complete. We are very pleased to report that our substrate performed well in all of the qualifications and we expect to be a major supplier to this new market in the coming years.

The advent of BiFET technology and the completion of the qualification process is a very positive step for compound semi-conductor suppliers because it makes possible the introduction of a lower cost handset, opening up a huge new market for cellular phones in developing countries. In fact, according to strategy analytics, emerging markets are expected to account for 43% of global volumes in 2007 or approximately 481 million handsets. Short term growth in this area will be concentrated in Asia Pacific markets like China, India, Pakistan, Indonesia, the Philippines and Thailand.

BiFET technology may also increase battery life and reduce the RF loss between the integrated components as well as increase functionality and simplify designs. Therefore we expect to see BiFET device architecture in many high-end handsets as well in the coming years.

As Wilson indicated, sales of our 6-inch substrates were overall down sequentially. This was a result of two events this quarter with two of our 6-inch customers. First, one of our customers was transitioning to a new device in the third quarter and encountered an issue with our substrates as the specifications of the new device were different than the prior one. As a result our shipments were put on hold as we conformed to their new requirements. I am happy to say that samples of the new substrates submitted to them met with positive initial results. We have submitted a large sample size for consistency evaluation and assuming the results continue to be positive we are told that releases will commence this quarter.

The second event was an inventory adjustment at another of our large 6-inch customers due to BiFET qualification. This caused the amount of the releases to be lower than normal. We expect to ramp shipments in the fourth quarter and in fact in the last several weeks we have seen an influx of orders for our 6-inch substrates from four of our largest customers.

Now turning to semi-conducting gallium arsenide. This continues to be a very strong area of our business and one in which we see tremendous growth potential. Semi-conducting substrate sales in the third quarter increased to $6.3 million from $4.6 million in the second quarter and we continue to see increasing demand for LEDs as both the applications for and the acceptance of this technology continues to grow. The strong demands is putting a tremendous amount of pressure on LED manufacturers who are feeling the impact of the gallium shortage. As a result, several of our customers are placing large orders with us because they cannot get enough substrate material through other sources.

Furthermore, we are also attracting new customers who are looking for alternative sources for their material. For example, we are progressing very well in our qualifications of a major North American supplier who has not been a customer of AXT for many years, and we should see product releases some time in Q4. This qualification is a significant accomplishment for AXT and we look forward to building a new relationship with them over the coming years.

As we have talked about in prior quarters, while the margins in semi-conducting gallium arsenide are lower the volumes are very high, therefore a key focus area for AXT is to develop our own liquid encapsulation Czochralski growth process for small diameter semi-conducting product in order to further reduce our cost. In May, we recruited LEC talent inhouse and we are looking for opportunities to accelerate this process through partnerships or mergers and acquisitions. We believe that this technology will be an important part of our ability to grow our market share in semi-conducting gallium arsenide and we can also leverage it as a way to cost reduce our germanium substrate as well by utilizing the standard Czochralski growth for this product.

Turning to germanium, we continue to see positive indicators that the market for germanium for solar cell applications is materializing. During the third quarter Emcore announced that it has been awarded a follow on production order from Green and Gold Energy for 3 million solar cells for use in their GG&E's sun cube terrestrial concentrated system. This 105-megawatt purchase order represents the largest procurement of concentrated solar cells in the industry today and is a follow on order to an initial 5-megawatt order placed earlier this year. As published the contract is valued at approximately $25 million and all hardware order is to be shipped by the end of 2008.

In addition, the cost curve for known solar PV sell-at technologies continues to drop and expected to reach grid parity within five to eight years. This may even be conservative forecast given the fact that new technologies and improvements in existing ones are constantly being developed and enhanced. All of this bodes well for AXT since we are one of the fewest select suppliers of germanium substrates for the CPV market.

We now have three customers in volume production, two of which are in very early stages of their ramp indicating that our revenues in this area of our business should develop nicely beginning the first half of 2008. Furthermore, we are in qualifications with four additional European companies for space and terrestrial applications. Our competitive positioning in the germanium market remains very strong. Our intent is to evaluate Czochralski Crystal growth technology in addition to our current VGF. This will provide us with a tremendous amount of flexibility in terms of price and performance. Further our unique joint venture gives us volume and price guarantees ensuring that we will be able to cost-effectively meet the demands of this market as it matures.

Now turning to indium phosphide, while we do not foresee any near term changes in the market for indium phosphide we continue to record steady revenues in this area of our business of 400,000 to 500,000 per quarter. We recently qualified a new customers for indium phosphide and we expect revenues continue to begin to grow in 2008. In addition, the Micro-Systems Technology office of DARPA has numerous programs using indium phosphide for transmit receive modules and for mixed-signal circuits. Their goal is to fabricate and eventually commercialize transistors operating in the one plus terahertz range. Again, any advancement in application for indium phosphide are very positive for AXT because indium phosphide is among one of our most profitable products.

Finally, with regards to our joint venture operations we recorded a record $3.6 million in revenue this quarter, up from $3.3 million in Q2 as a result of rising raw materials pricing and new orders from a U.S. customer. This continues to be a significant competitive differentiator for us. For example, in January, the cost of four 9's gallium metal was approximately $350 to $400 per kilo. Currently it is selling for $650 to $700 per kilo. The six 9's and seven 9's pure material which is used for crystal growth is currently selling for $750 to $900 plus per kilo. In addition, the five 9's pure germanium metal price has also increased substantially from $630 per kilo range a year ago to the current price of $1,200 to $1,300 plus per kilo.

Looking forward, we do expect the pricing for gallium arsenide will level off as pricing has reached what we believe to be a peak level, therefore we expect raw materials revenue to return to a normal run rate of approximately $3.2 million in the fourth quarter of 2007, however, the pricing increase and material shortages of the last year underscore the value and competitive advantages of our joint venture operations. We continue to investigate new joint venture opportunities for raw materials that would allow us to expand our suite of offerings and further strengthen our international presence and competitive position.

In conclusion, this is a very exciting time for AXT. Our core gallium arsenide business is emerging from the lull we experienced early in the year as a result of the industry-wide BiFET transition and is gaining momentum. We believe over the next several years the handset market will benefit from both the drive for more features and functionality in the phone and the need for a simple low cost solution for emerging countries. While these are seemingly opposing trends, both drive the use of more gallium arsenide substrates in the market.

Our core market will also benefit from the increasing usage and acceptance of LEDs in the rapidly expanding array of applications, driving towards the ultimate goal of solid state lighting. Further, there is a growing momentum in the solar markets towards concentrated photable take applications in both space and terrestrial applications. These drivers, coupled with a strong competitive positioning provided by our low cost manufacturing and our joint venture operations are strong indicators of our growth opportunity over the next several years.

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

Thank you, Phil.

We estimate our revenue for the fourth quarter will increase to between $15.3 million and $15.8 million. Also we estimate that our net income per diluted share will be between $0.03 and $0.05 which takes into account our diluted weighted -average share count of approximately 31.5 million shares.

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

Operator?

Thank you. Yes, did the line drop?

We don't know, we are ready for questions.

Perfect, we will take questions at this time from the telephone lines. (OPERATOR INSTRUCTIONS)

First question will be from Avinash Kant of Broad Point Capital. Please go ahead.

Good afternoon, Phil and Wilson.

Hello, Avinash.

A few questions. I may have missed the number what is the 6-inch wafer number this quarter?

6-inch is $2.2 million versus $2.8 million.

Okay. Now in the guidance that you are giving for the fourth quarter, what kind of assumption do have for 6-inch and basically that will dictate what kind of margins are you assuming.

Absolutely, I think that's a great question. We do expect the--if you take the mid-point of my revenue numbers for Q4, let's say around $15.6 million, that's about $1.1 million in incremental revenues, I would say a big portion of that would really come from the 6-inch. We are also expecting semiconducting, meaning the smaller diameter wafers to continue to gain momentum. The only thing that we see in terms of revenue coming down slightly might be in raw materials.

Okay, and so should we assume that the margin, the overall margin will of course start to improve from here?

Absolutely. We absolutely believe that we should--if the proportion of the semi-insulating 6-inch diameter wafers improves then you should expect to see a little improvement, but let me just point out that our goal is really to target an operating gross margin in the mid 30% range.

And now share count seems to have gone up some this quarter. What was the reason?

Well, we've got--we really are looking at the using the treasury share method meaning we have to include a number of options that are exercisable and in the money, and apparently there are more of those options that are--has to be included in the denominator for the calculating the EPS.

So going into Q4 do you think there will be a significant rise from here on?

I think part of the formula is based on the price because when the price goes up, then you have a lot more options than are in the money.

Right. Okay. Now also talking about the germanium opportunity here, I believe you were--you had some initial order from one larger U.S.-based customers. Where are you in terms of delivering those orders and what kind of opportunity?

Yes, Avinash, it's Phil, we did receive production orders, they are ramping slowly obviously, so, again, we don't expect to see any kind of major, major revenue contributions until towards the end of the first half or something like that next year.

Basically the second half of next year?

Yes, ends of first, beginning of second half.

All right. Okay. And now that the BiFET transition is over pretty much, most of the people have converted. How do you see demand going forward into the next year I'm talking?

Well, I think we should see some sequential increases in our 6-inch semi-insulating.

And indium phosphide you said will be--which I thought indium phosphide margins were pretty high, right?

They are high but as you can see top line is basically staying the same, $400,000 to $500,000 a quarter. That's sort of been our history.

Okay, and you think it will stay at those levels?

Yes, yes, unless--unless--we've qualified with an indium phosphide manufacturer and haven't gotten any major releases. So I think once that customer starts going into full production it might affect our--obviously affect our margins.

Okay, and what would you think your overall share in the gallium arsenide business is at this point?

In fact, yes, Strategy Analytics basically had a recent report. Our semi-insulating market share is around 18%. Our semi-conducting is around 9%--9%, 10%.

Perfect, thanks so much, Phil.

Thank you. The next question will be from Richard Shannon of Northland Securities. Please go ahead.

Hi, guys, can you hear me?

Yes, hi, Richard.

I'm sorry, the line cut off there, sorry about that.

The first question regarding 6-inch gallium arsenide, we've seen the numbers come down the last couple of quarters as the reasons you've explained. I'm kind of curious as to general timeframe for when you expect to set a new company record for revenues in that category?

New company record?

Yes.

It's going to be set up every quarter.

No, well as I mentioned it in my talk we've already seen some releases in the last several weeks, and we will see sequential increases in 6-inch. Again, specifically we had two of those customers and I explained what happened and obviously they are not going to put you at the same run rate where you were before right away. So they're releasing, but they're releasing obviously cautiously. So we expect definitely next year to be getting back into the--some regular run rates or more.

Okay, and specific to one of the specific customer situations, I think the first one you mentioned was a mis-match in specifications. I just want to confirm there wasn't any quality issues.

No, that was--they actually used our substrates for another device and we had some parametric issues. So we worked with the customer. We made some changes in our process for that particular substrate, and initial results were very positive. We sent them some more samples just to see how consistent the material would work in their fab and got good results, and we've already gotten some releases.

For either of you, if obviously there's a bit of a hole from the 6-inch revenue number in the third quarter, would it be possible for you to speculate what your gross margins would have been had you received the expected amount of 6-inch wafers in the quarter?

No, we haven't done that calculation.

Okay. Question on capacity. You mentioned last quarter that you were in the process or close to completing your 40% increase in capacity. I'm wondering if that has been completed yet?

Yes, Richard it has been completed. Actually it was completed at the end of August.

It was, okay, and what does that imply for depreciation going forward in the fourth quarter and also--and beyond?

We are expecting depreciation for Q4 to be between 375 to 400. We are still in the process of finalizing the 2008 budget. So without getting the final CapEx number we won't be able to give out a depreciation figure going forward for Q1.

Okay, and what's your capacity utilization? I think you mentioned that around 80% last quarter with the new capacity in place what will that utilization be now?

With that in place it's a little bit down, it's probably in the low 70's now.

Okay, last question and I will jump out of line.

Wilson, imbedded within the fourth quarter guidance, can you give us an idea of what you're thinking about in terms of operating expenses please?

Absolutely. Because we are going towards the year end we tend to be a little more conservative given the fact that this is the first year that we actually have to go through an integrated SOX audit. The audit fees probably would double where we were last year, so we are putting a little more accruals on Q4. So you should see that the OpEx number, it's probably going to be at about 3.7, 3.8 million for Q4.

For OpEx, R&D--?

For OpEx, yes.

Okay, great, I will jump out of line. Thank you.

Thank you. The next question will be from Pierre Maccagno of Needham. Please go ahead.

Hey, good afternoon, Phil and Wilson.

Hi Pierre.

I have a couple of questions. Could you talk about in the semi-conducting business, I believe there's a trend there to going to larger diameter wafers, I guess 4-inch, and how are you tracking there and would that have a positive impact on your margins?

You're absolutely right, Pierre. There is some customers that are thinking about going to 4-inch as you know right now, there is Lumalet and Cree and others are thinking about transitioning. In fact, some of them have small ramps already, they are sort of doing some test runs. From a margin standpoint, it's hard to say right now, we really haven't done that calculation. Because the materials that we shipped were like mechanical wafers.

I would add to what Phil has said about the margins for 4-inch historically, it's not one of our more profitable segment of our business. You probably would be looking at 20% if we get a good order, sometimes they are even in the teens.

Keep in mind, Pierre, that most of the LED customers are all in Taiwan, all there, and the pricing pressure over there is horrendous.

But I would imagine 3-inch is even less margins, correct?

No, 3 inches are actually about the same or maybe slightly higher than four.

I see. So really no major change?

No, we don't see any major change, not in semi-conducting.

I see. Then the other question is, if you could explain a little more this Czochralski method, that's going to be mostly then for the semi-conducting if I understand, and why is it that it's--?

Well, I talked about two CZ methods. One was the liquid encapsulation LEC for specifically for small diameter. When I say small meaning most likely from a 3-inch down, three and 2-inch semi-conducting LEC, and the other one is straight regular Czochralski for germanium which is just like silicon because it's an element. So let's go back to the LEC first, okay?

Currently when you are growing, using VGF process, one of the inherent issues with VGF as you know well is the cycle time being very long, right, and the ingots are relatively short, compared to LEC. So with the pricing pressure that we are getting on the LED product, with LEC method because it's a Czochralski method you can grow or "pull" much faster, however, keep in minds that the LED requirements from EPD standpoint is much less than for, let's say, for wireless for PHMPs or HPT. So you can get away using LEC method to grow with a higher EPD content. So that's, that's the first part.

Obviously the second part using straight CZ for germanium that's sort of a no-brainer. Now it's an element, there's no segregation coefficient. So you can grow or pull the material much faster than growing it via VGF.

Did I answer your question?

Yes, good, thanks very much.

Okay.

Thank you. The next question will be from Dave Kang of Roth Capital. Please go ahead.

Thank you. Good afternoon.

Most of my questions have been answered but just on the first customer that's--that had different specs, since you just shipped samples, we shouldn't expect much revenue contribution from this first customer?

You are talking the one that we had an issue with?

Yes.

No, no, what I meant by that is we made the change in the substrate, already shipped it. That was very positive. We just shipped them a larger sample just to see how consistent it is, and they've already processed that already, and we've already gotten releases already, production releases. But they're not at the level that--where they put us on hold.

Okay, and also on the second customer that was going to through BiFET transition, I don't understand how they were a major customer to begin with if they were going to through BiFET transition because that's been going on for a long time, has it not?

Oh, yes, what I meant and maybe I should have clarified that a little bit but I knew the question would come up, we were the last to qualify on that particular process technology, so our competitors were in there before us. So when they finished the qualification we expected obviously to have major releases, however, because of having another vendor qualify for this particular process they had to make an inventory adjustment. So we didn't expect--well, in other words, we expected larger volumes than we got.

So when Wilson said the delta of $1.1 million from the third to fourth quarter, and most of that will be 6-inch, are you referring to these two customers making the bulk of that $1.1 million delta?

Part of it, yes, and yes, probably most of it, in fact.

Okay, and can you just talk about raw materials, JVs, a capacity situation and what was the reason for them going down this quarter, in the fourth quarter?

Going down in the--what quarter?

Yes, didn't you say raw materials revenues will be down slightly this quarter, from the third quarter?

Well, because one of the things we are saying is the gallium arsenide raw material pricing is basically set--stabilized, and it's because of supply versus demand. So we are anticipating perhaps the price might go down a little bit, maybe. We just wanted to be conservative.

So we are not expecting the quantity to go down. We are expecting the quantity to be consistent with Q3. But what we are saying is that we think it will probably go back to a little lower run rate than what we had in this particular quarter.

Got it, and can you talk about your capacity situation?

Well as I mentioned many times, every JV basically doubled their capacity. One of them is at maximum capacity right now. Both germanium and gallium, the arsenic guy, he's not completely at max but he's pretty close. PDN, JV, he's not--he's got 11 furnaces, I think he's only utilizing four of them. So it all depends what kind of product.

Okay, and lastly on the germanium side, besides Emcore, it sounded like you guys were pretty active with several other players, mostly international. Currently how many are active terrestrial customers?

Right now?

Yes.

Active, let's see, one, two, two of them are very active, yes.

Okay, and going into 2008, I mean, how many do you expect that will be--?

Probably an additional four or five.

Additional?

Yes, additional.

Got it. All right, that was it. Thank you.

Thank you. The next question will be from Jim Kennedy of Marathon Capital Management,. Please go ahead.

Hi, Phil. Hi, Wilson.

Hi, Jim.

Most of mine have been answered, a couple quick questions.

Relative to the JVs and the CapEx and the expansion this year, are there any other obligations for the balance of the year to the JVs in terms of large size dollar commitments?

Well we are always looking at other opportunities for our JV operations as far as raw materials. I guess that's the only comment I can make, I don't think we have anything--

Oh, yes, Jim, I think you're referring to any remaining commitments for the year?

Correct.

I think that the commitments will continue to go through probably, we are in the process of negotiating with them again for the 2008 commitments.

Okay.

So I think that probably sometime by late December or January we should have everything straightened out.

Okay, and then early in your comments, and I think it was you, Phil, and I didn't catch the exact wording, you alluded to some lower margins in the LED product area in the Far East.

Yes.

What is that related to, is that something specific to you all, you are seeing something in the distribution, the manufacturing chain? What were those comments referring to?

Well, I was really referring to two and 3-inch semi-conducting material, specifically for the Asia Pacific customers, traditionally they just beat you up on pricing, I hate to say that but that's how it is over there and that's--it's contributing to our margins because volumes are very, very high.

Right but that's only in the two and 3-inch, right?

Correct, yes.

Okay. Very good. Way to go, guys. Thanks a lot.

Thank you. The next question will be from Richard Shannon of Northland Securities. Please go ahead.

Hi, guys , a couple quick follow-up questions, kind of big picture for you, Phil.

Obviously you've talked a little bit about your hope to drive some additional LED business in 2008. I want to do get your feel for how you expect your mix between semi-conducting and semi-insulating gallium arsenide next

How do we see the mix?

Yes.

From a revenue standpoint or from a quantity standpoint.

Revenue, please.

Revenue standpoint, I definitely--semi-insulating is going to be higher revenue.

Okay, I think you--in the third quarter you just reported it was something like, was it 46% semi-insulating?

If you look at this quarter in particular, 58% is semi-conducting, 42% is semi-insulating. So we were hoping for either 50/50 or even do a flip next year.

Okay, and as I look at the first quarter this year had you about 67% of semi-insulating, do you expect to get a lot closer to that kind of a ratio?

We are targeting, we hope.

Okay. Okay, good, and second question was, Phil, can you talk about in your efforts--your generic efforts to gain share with your handset related customers be it directly with the RFIC companies and their epi-wafer suppliers? What's going on with your efforts, where do you sit, where do you see the biggest opportunities (inaudible)?

Well, I mentioned this many times in my conference call. We have an NDA with most of them. So I really can't discuss, but as you know we've qualified with one already. We are trying to push for the other one, I think it's a well known thing one of them had an issue, right, I think it's been announced in their quarter earnings. In fact you even called me on it, so the opportunities are there and I think as the Company progresses, as we--our credibility has returned already. As we qualify new--new semi-insulating materials with major customers in the wireless applications, namely HBT and PHMPs, we will be getting back in. I think Sky Works just announced they are going to go into 6-inch, right. I think that's--there's an opportunity there. So from my standpoint the door is open for us. It's just for us to get in.

Thanks for those thoughts, Phil.

Okay.

Thank you. (OPERATOR INSTRUCTIONS)

The next question will be from Peter Trapp of Frost Capital. Please go ahead.

Hello, Phil.

Hi, Peter.

Yes, hi.

For the sake of us old timers in this stock, when I hear about a transitioning issue with substrates, it kind of reminds me of a little bit of the old days of under the previous management on quality issues and returns, and I just want to make certain that that's not what this is--has anything to do with, that it's just a technical delay.

You're talking about the one customer putting us on hold and all that?

Yes, the 6-inch wafers.

Yes, it's exactly--this is what happened, right, it's--they put our material on a new device with the same spec and it didn't work, it wasn't consistent. The failure rate wasn't consistent and we made an adjustment and it works.

So this had nothing to do with the quality of the materials that you sent to the Company?

No, if you're referring to the haze issue that we had in the past.

Yes.

No, no, strictly a device parametric issue. I mean it was a DC gain inch, I can tell you, that's what it was.

And is it fair to say that this has been completely cleared up?

Yes, in fact, I think I mentioned we've already gotten releases from that particular customer.

Okay, so does that mean that the fourth quarter would see an accelerated ramp from that customer inasmuch that some of it was delayed in the third quarter?

Yes, I think I mentioned that they will ramp us up hopefully to the standard run rates.

I see. Okay. My second question was, I was wondering if you could just give us a little update on your progress in the rationalization of ownership of the China JVs?

Well we have major ownership in three of them. I know when I first came on board we were in the process of trying to get major ownership in our germanium [Ton Li] joint venture. They had an executive management change--management change at the top. Basically that resulted in us going back to the drawing boards again, square one. We are building the relationship there. Obviously our goal is to have major ownership in all of them. So that's I guess that's the only comment I can make. We are working on it.

There isn't kind of like a timeline or a milestone date to try to get this majority ownership?

No, not really.

Just working away.

Yes.

All right. Well all my other questions have been answered, so hopefully the fourth quarter is going to reaccelerate the growth.

Thanks.

Thanks, a lot, Phil.

Thank you, take care.

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

Well, thank you, everybody for participating in our conference call. During the first quarter we will be presenting at the AEA Classic Conference as well as visiting investors in several cities around the industry, and we hope to see you all there and we will talk to you next quarter. Thanks everybody.

Thank you. The conference has concluded at this time. You may disconnect your telephone lines. We thank you very much for your participation and have a great afternoon.