AXT Inc (AXTI) 2007 Q4 法說會逐字稿

Good afternoon, and welcome to the AXT Inc. fourth quarter and fiscal 2007 earnings conference call. I would now like to turn the meeting over to Philip Yin, Chairman and CEO. Please go ahead, Mr. Yin.

Thank you. Good afternoon, everyone, and welcome to AXT's fourth quarter and fiscal year 2007 conference call.

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

Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the Company and our ability to maintain profitability, control costs and improve efficiency; the impact of customer qualification of our products; growth in our customer base and expansion of our addressable market; increasing market share; industry trends that are driving increasing demand for our products; the growth in the handset market; increasing prevalence of LEDs in a wide variety of lighting applications; the worldwide adoption of solar energy; our expansion into complementary technologies, which allows us to increase our product portfolio; as well as market conditions and trends. We wish to caution you that such statements deal future events, are based upon management's current expectations, and are subject to risks and uncertainties that could cause actual events or results to differ materially.

In addition to the factors that may be discussed in this call, we refer you to the Company's periodic reports filed with the Securities and Exchange Commission, and available online by link from our website, for additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at www.axt.com through February 26, 2009.

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

Now turning to our financial results. Revenue for the fourth quarter of 2007 was $17.6 million, a 21% increase from $14.5 million in the third quarter of 2007. Gallium arsenide substrate revenue was $12.2 million for the fourth quarter of 2007, compared with $9.9 million in the third quarter of 2007. Specifically, 6-inch diameter wafer sales were $4.3 million for the fourth quarter, compared with $2.2 million in the third quarter of 2007. Indium substrate revenue was $330,000 for the fourth quarter of 2007, up compared with $408,000 in the third quarter. Germanium substrate revenue was $747,000 compared with $536,000 in the third quarter. Finally, sales of raw materials, primarily 99.9% pure gallium, were $4.3 million in the fourth quarter of 2007, compared with $3.6 million in the third quarter, as a result of additional sales to Asian customers. However, we're seeing raw materials prices stabilizing in 2008 and expect sales to return to the 3.5 to $4 million range in the first quarter of 2008.

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

With regard to gross margins, it is important to note that since the beginning of 2007 we have made a conscious effort to capture additional market share. Our business has generated gross margins since that time in the low to mid 30% range, including some special items such as sales of fully reserved wafers, which caused our margins to come in higher. We outlined those items so that investors can understand the composition of our margin performance. We believe that this strategy to gain market share has resulted in considerable additional revenues, and allowed us to record high gross profits, and, accordingly, better operating margins and EPS. This fourth quarter, for example, our operating margin improved from Q3's 7.4% to 8.9%. Going forward, our gross margin expectation continues to be in that range, and we believe that the additional revenues generated will create value for the Company and for our shareholders. Excluding stock compensation expenses, selling, general and administrative expenses were $3.1 million for the fourth quarter of 2007, compared with $2.9 million in the third quarter.

Research and development costs were $481,000 for the fourth quarter of 2007, compared with $361,000 for the third quarter. With the recent appointments of our new CTO, Chia-Li Wei, and R&D consultant Dr. Grant Elliot, we expect R&D expenses for the first quarter to remain at this level. Total stock compensation expense was $157,000 for the fourth quarter of 2001, of which 15,000 was in cost of revenues, $115,000 in SG&A and $27,000 in R&D. Income from operations for the fourth quarter of 2007 was $1.6 million, compared with $1.1 million for the third quarter. Net interest and other income for the fourth quarter of 2007 was $608,000, compared with net interest and other expense of $54,000 for the third quarter. Net interest and other income of $608,000 included a gain on sale of investment of $1.1 million. Net income in the fourth quarter of 2007 was $1.9 million or $0.06 per diluted share. By comparison, in the third quarter of 2007 we reported net income of $858,000 or $0.03 per diluted share.

Let's now look at our cash and 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 and maturities of less than two years, including restricted deposits, were $45.9 million at December 31st, 2007, compared with $41.9 million at September 30th, 2007. Also in Q4 we are pleased to report that we became cash flow positive and generated cash provided in operations of approximately $3.8 million. Accounts receivables net of reserves were $12.1 million at December 31st, 2007, compared with $11.9 million at September 30th, 2007. Day sales outstanding was at 64 days for the fourth quarter, compared with 76 days in the prior quarter. The improvement in DSO was largely the result of better collections and improved aging. Net inventory decreased slightly to $24.8 million at December 31st, 2007, from $25.1 million at September 30th, 2007. Depreciation in the fourth quarter was $394,000 and capital expenditures were $1.3 million. As of December 31st, 2007 the Company, including our consolidated joint ventures, had 1,057 total employees, of whom 857 worked in production.

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

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

Thank you, Wilson.

Our strong fourth quarter results concluded that was another solid year for AXT. In addition to posting very meaningful gains in revenue, gross profit, operation operating income, net income and positive cash flow from operations, we have continued to grow our customer base, significantly increase our market share and make strategic investments into the technologies and products that will expand our addressable market. We're excited by the long-term trends in all of the markets that we serve, including the growth of the handset market, the increasing prevalence of LEDs in a wide variety of lighting applications, and the worldwide adoption of solar energy. We believe that our unique business model is allowing us to convert these exciting opportunities into tangible results.

During the fourth quarter, we had great success in growing our gallium arsenide revenue, particularly in 6-inch semi-insolating. In fact, our 6-inch business is growing to such an extent that I have authorized another expansion of our VGF crystal operation by another 27% to be completed sometime in Q3 2008. With the uncertainty in the U.S. and global economies, IDC recently noted that they expected single-digit growth in the worldwide handset market in 2008. While we continue to see healthy demand from our customers, we're planning our business in a conservative manner against this backdrop. However, all current indications are that we will see continued growth in our semi-insolating revenues.

In addition to growth that we will experience as a result of a growing handset market, we're also making tremendous progress in market share gains. In fact, Strategy Analytics estimate that AXT completed with 20% market share in semi-insolating gallium arsenide, up 3% in 2005. In 2007 alone we added ten new semi-insolating customers. Further, Strategy Analytics predicts that our market share will increase to 29% in 2008, making AXT again the number one supplier in the world. This growth is likely to come from new customers who will begin contributing to revenue in 2008, as well as expanded opportunities with current customers. One of our most exciting announcements in the fourth quarter was our agreement with IQE to provide primarily 6-inch semi-insolating substrates for their 2008 worldwide substrate requirements. This agreement is valued at approximately $15.1 million, with an option of IQE to purchase an additional $3.5 million of substrates. All the substrates ordered under this contract will begin shipping in the first quarter, and the full contracted amount will be shipped by the end of 2008. We believe that this agreement underscores the progress that we have made in terms of market share perception of AXT and our commitment to quality, and quality systems, and we are enormously proud of that achievement.

Another area of our business where we have considerable growth is semi-conducting gallium arsenide. Year-over-year our revenues increased 37%, largely driven by growing demand for LEDs in a wide variety of applications, such as consumer products, signage, back lighting of cell phones and LCD TVs, flat panel displays and automotive applications. Further, the industry continues to move closer to the adoption of LEDs for general illumination for selected commercial and residential applications, which will represent a significant growth catalyst for semiconducting gallium arsenide. Like our semi-insolating business, we made tremendous gains of market share of high quality revenue opportunities in semi-conducting gallium arsenide. We remain selective in the business that we accept in order to preserve our gross margins, but we are experiencing many exciting opportunities to supply Tier 1 customers. For example, during 2007 we made significant progress in our qualification of a major North American supplier who has not been a customer for AXT for many years. We're very pleased to report that initial qualification indicated positive device results. With additional testing of our material, we expect to obtain official vendor approval, and expect production releases sometime in late Q2 or early Q3.

Now turning to germanium. We continue to hear positive announcements that say that the market for concentrative photovoltaics is developing. For example, Amcor Corporation recently reported that it has received additional orders to supply solar CPV components and systems to the Spanish market through several agreements. According to Amcor, it is scheduled to install a CPV system in Castilla La Mancha, Spain, by December 2008; to construct an 850-kilowatt solar power park in Extramadura, Spain, to be completed before July 2008. It also said it will supply CPV systems to the Canadian and Korean markets, and expects to achieve an efficiency rate for its CPV systems of greater than 45% by 2010. Strategy Analytics is predicting that the CPV market, now about 1% of the total solar market, will grow at a compounded average annual growth rate of about 350% per year through 2012. While our revenues from germanium substrates are still relatively small, they were $2.2 million in 2007, a 145% increase from the $909,000 in 2006. Further, 2007 revenues were primarily from one customer. We currently now have three customers in volume production, two of which are in the 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.

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

Our raw materials business as a whole yielded tremendous benefits in 2007. Throughout the course of the year, we were able to double the output of all of our five joint ventures, three of which we have major ownership. This expansion has allowed us to supply our own raw materials needs, while providing considerable cost benefits. Throughout 2007, our industry experienced shortages in supply of gallium and germanium. Our joint ventures allowed us to maximize our revenue opportunities by supplying substrates to customers who could not get materials from competitive suppliers, and thus increase our market share. Further, this business generated high-quality revenue throughout the year through the sale of excess raw materials on the open market. We believe that our raw materials business is among our most significant competitive advantages.

As we enter 2008, we continue to focus on technology development. We're very pleased to recently announce that we have retained the services of renowned scientist Dr. Grant Elliot to augment our R&D efforts under Chia-Li Wei, our Chief Technology Officer. Dr. Elliot's efforts will primarily be focused on the area of VGF technology enhancements and Czochralski and Liquid Encapsulated Czochralski crystal growth. The applications of this work will be in both semi-insolating gallium arsenide areas of the business, while the LEC crystal growth process for producing dynamic substrates will open up new markets for our products, and allow us to further improve our cost structure. It will be an important part of our germanium revenue growth strategy, as CD crystal growth will provide us with flexibility in terms of price and performance. This technology will allow us to explore the viability of new compound semiconductor substrates such as gallium phosphide.

In closing, I would like to express my sincere gratitude to all of the employees of AXT, whose tremendous execution in 2007 resulted in a highly successful year. As we enter 2008, although we are certainly mindful of the current volatile economic backdrop, we are encouraged as we look to Q1 and the balance of the year. We believe that, as was the case last year, much of our growth will come from market share gains and from new customer agreements put in place in 2007 that will begin to contribute to our revenue in 2008. Further, we believe that our customers are starting the year with relatively low levels of inventory. We will continue to view and plan our business conservatively, but we believe that the long-term trends in the market that we serve will present significant opportunities for growth in the coming years. We're excited to watch these trends unfold, and we look forward to sharing with you continued success in 2008. I will now turn the call back to Wilson.

Thank you, Phil. We estimate our revenue for the first quarter will increase to between $17.6 million and $18 million. Also we estimate our net income per diluted share will be between $0.03 and $0.05, which is in the range that is consistent with our top line growth when you take into consideration our Q4 results, including the gain on the sale of investments that accounted for $0.03 per diluted share. Our first quarter EPS takes into account our diluted weighted average share count of approximately 31.6 million shares.

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

Thank you. (OPERATOR INSTRUCTIONS) The first question is from Pierre Maccagno from Needham.

Hello, Philip and Wilson.

Hello.

Could you comment on the ASPs for both the gallium arsenide semiconductor as well as the germanium, any changes that you see there in the markets?

Yes. I think on the semiconducting side, Pierre, we still see ASPs eroding. It's mostly in the Asia-Pacific, specifically Taiwan market. As you know that is going to keep going down because the goal to compete against fluorescent and incandescent light. So there is a lot of pressure to decrease the material costs, obviously, because it's a big portion of it. On the semi-insolating side, it's stabilizing, I guess maybe that's the term to use. On the germanium side, it's sort of holding its own, I guess.

I see. So even there though there is so much demand, I guess it still continues dropping, prices?

Yes, specifically on semiconducting for LED applications, yes.

And this new customer you're talking about, anything -- I mean is this a very large handset customer?

You mean the North American guy that I was talking about?

Yes.

No, that's an LED customer.

Oh, an LED customer. Okay. That's about it. I might ask a question later.

Thank you.

Thanks.

Thank you. The next question is from after Avinash Kant of Broadpoint Capital. Please go ahead.

Hi, Avinash.

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

Okay. As I mentioned, one of them has completed qualification. He actually has already completed the audit of our facility last week. The audit was very successful. We're going to be supplying some additional samples just for some minor checks, and we should see some production samples most likely before the second half. The other customers, we're still in qualifications. Some of them are in early stages, some of them are in the second phase of qualifications, European customers. Our American customer has released a final batch for their completion for their qualifications. So as I stated, we should see some sort of a ramp starting in the second half of 2008.

So would you have an anticipation - I believe you said your geranium revenues were roughly $2.2 million in calendar year '07?

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

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

Well, you know, it's kind of hard to predict because we haven't had any forecast from these customers yet. I mean, there will definitely be a ramp, you know, how big is that ramp? It's really hard to tell until we get some production releases.

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

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

So we would still be in the positive zone, then?

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

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

Well, definitely we've got a lot of leverage, you know, in the margin side right now. As I mentioned earlier in the call, you know, I think in terms of expectations, we should be seeing the margins in the range, in the low 30% range. But having said that, you know, we've got over 80 cost reduction programs in place right now. Phil mentioned the fact that we've got these joint ventures where we are aggressively negotiating long-term contracts and pricing of them, so that we can stabilize the raw materials prices as much as possible. We also look at the product mix, you know, fairly carefully. We may even think of weeding out some customers that has negative margins. We want to take those out so we can protect the margins going forward.

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

We think we replaced them because we weren't in there that heavily first, so we obviously had to replace someone. As far as that other option, you know, their run rates are pretty linear right now. So we expect that they will -- or we will use that option up.

Okay.

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

Very good. Great quarter, guys. Thank you.

The next question is from Richard Shannon of Northland Securities. Please go ahead.

Hi Phil and Wilson, how are you?

Good. Hi, Richard.

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

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

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

Our CapEx, that we expect to be a little less than $6 million. In terms of depreciation, this particular quarter in Q4 we're at $394,000 for the quarter, so we expect probably roughly $400,000 to 425 per quarter for 2008.

Okay. And Phil, also on the capacity increase, is that related just to gallium arsenide or is it to germanium also?

That's all gallium arsenide.

All gallium arsenide, okay. In relation to germanium then, just based on the capacity that you have planned for right now, what is the maximum potential of germanium revenues that you could do this year?

Maximum potential revenue. That's kind of hard to say right now. Because one, we don't know what the forecast is from our customers; two, some of the customers we haven't negotiated the price per wafer yet. But again, long-term, if we think long-term, we view that our germanium customers will be a big, big contributor to our revenue. I can't really give you a number. The only thing I can tell you, Rich, is that if you look at the capacity utilization for germanium substrates, they're probably in the 30, 40% range right now. So that means if we double our capacity, we do not have to spend a lot of money in terms of adding furnaces and what have you. But that's obviously in the plan on how we're going to expand the germanium substrates, based on the timeline on when we get qualified by the European customers.

Okay. Last quick question, also on cash. Do you have any other commitments, significant commitments to cash as you go through 2008? And I guess I specifically identify the situation with your joint ventures. Do you foresee any potential ability and/or desire to up your investments in that such that --

Obviously, I think that a majority of our cash will be used for working capital purposes. As we work more closely with the Tier 1 customers, I think that chances are that we're going to have consignment inventory arrangements with those guys would be very high, meaning that we would take their forecast and start building up inventory for them. On the other hand, I think some of the cash, you know, we may use, and Phil has mentioned this a couple of quarters now, that we're also looking at any opportunities for increasing our share ownership of our JVs, and maybe even M&A opportunities, if there is anything out there. So that's -- that would be kind of the use of our cash for 2008.

Okay. Great. Thanks a lot, guys. Good quarter.

Thanks.

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

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

Well, as far as our inventory, you mean consignment?

Well, I mean just even inventory at various channel levels like RFM, DM, Sky Works and to their customers, I guess, like [Motorola] -

I can tell you, I hate to say it, we are behind in consignment inventory. They're taking inventory faster than we can put it in. That's all I can tell you, Dave.

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

We still have over 8 million.

8 million, okay.

Yes, in fully reserved wafers. And I can tell you that we'll probably build in about 200 to 250 per quarter for 2008. But for sure, that number is going to decrease by the time we reach 2009.

Right. Okay. So I mean, so many, many years left before running out, I guess.

No. I don't think many, many years left.

No?

Because, as you know, most of the good stuff is going to be gone.

Okay, good point.

The rest, you know, we don't know what we're going to do. Melt it down or whatever. Fire sale, we haven't decided yet. We're not at that point yet.

Sure. Sure. And then on the raw materials, can you just talk about the capacity situation. It seems if prices are stabilizing, raw material sales will be going down, so demand the picture really is not changing that much?

Well, you know, right now, you know, the supply has equaled demand. Prior to that it was the other way around. There was a constraint in both gallium and germanium, but for instance our operations, [GIA], they've increased capacity. I think I know MCP increased capacity, so there is no more constraint, let's say, in gallium. There is a constraint in germanium, because as you know the price has gone up, but I think it's around $1,325 or $1,350 a kilo right now.

Yes.

So you know, we've seen the price basically stabilized on the 4.9s, like around 5.25, 5.10, 5.15, somewhere around there. We do not see any indication it's going to do down any further or up any further. So it's sort of stabilized.

Got it. And speaking of germanium. Can you just talk about Solaris as a competitor? It seems at least one of your customers are taking Solaris fairly seriously. Just going from [Unicorp], now you're dealing with Unicorp plus Solaris.

Again, Solaris is a newcomer on board. We've learned that they're a privately-held company. We know that they're in one of our customers. That's about it. We do not see them anywhere else. I mean, that's the only thing I know about them.

Got it. Got it. And then on your guidance, Wilson, can you just talk about some of your assumptions, so you indicated raw materials will be down a little bit. Will germanium and gallium arsenide, obviously growth has to come from those two, I was wondering if you could quantitatively talk about germanium versus gallium arsenide, as far as what we should expect for -

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

And Phil, this will be my last question.

You can ask as many as you want, Dave.

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

I don't think it's tight as it was before, but you know, the -- I mean, it's really interesting because our current customers have really increased their demands, and therefore that's one of the reasons I've approved this expansion plan, because we do get a forecast with some of these guys. But as far as constrained capacity in the industry, we do not see it. Not in 6-inch, anyway, semi-insolating material.

Okay.

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

Got it. Okay. Thank you.

Thank you.

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

Good afternoon.

Hi, Jiwon.

Some of my question have been answered but just a quick question on your visibility for especially the semi-insolating gallium arsenide. How much visibility should we expect beyond first quarter '08?

Well, Jiwon, we do not normally disclose things like book to bill ratio, but I will tell you is we do have good visibility for about maybe about 60 days.

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

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

Okay. And that's sort of the level we should be expecting going forward?

Absolutely.

Okay. And I think the rest of the questions actually were answered, so thank you very much.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

The next question is from Peter Castellanos of Glacier Partners. Please go ahead.

Hi. I want to take another crack at this germanium volume. You mentioned in 2007 you had one customer that did $2.2 million.

Yes.

And then you also mentioned that they've got three customers now in volume production.

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

Okay. So are these potentially, are these $2 million potentially, $2 million, bigger, smaller customers? Can you give us -- it may not be this year, can you give us some idea where they fit in that?

Well, as I mentioned before, we see a ramp probably starting in the second half of the year -

Okay.

- on the germanium customers. This is all based on the qualification phase, where we are now and where we're going to be in the second half of the year. The ramp up in production, things like that.

Yes. Well let me ask you, since the Needham conference, the last time I saw you was at that conference, and I think you had mentioned at that time that you had some customers that were coming in for qualification. So that would have been back in the end of January. Since that time, have you had any of these customers qualify yet or qualify you yet, or where do you stand?

Well, as I mentioned in my talk, we had one customer that's already qualified, they've already come and ordered at our facility last week.

Okay..

In fact I went back for the audit to China and the audit was very successful. We do have to provide them with some more samples. They want to look at some other areas of their devices. And we expect some production quantities released somewhere -- sometime in the early second half.

You know, also, you earlier, not in this call, but in your earlier presentation a few months ago, you mentioned that you had -- the old -- under the legacy business or the older business you had lost a lot of customers, and there was an attempt to try to get some of them back. Have you had any success in that area?

You mean as far as overall customers?

Yes.

Well, of course. We've got an a lot of them back. I mean, in fact one of my goals when I first came on board, I spent three weeks on the road visiting every customer, telling them this is our get-well plan, and that we're not going to come back to you until we get our quality resolved and things like that. And then when we come back, when we're ready, all we're doing is we want to ask you for one more try to qualify us. In fact, when you look at our market share back in 2005 on semi-insolating, it was 3%. And most recently it went up to 20%, and it's estimated we're going to hit 29% this year. So that's an indication of getting our customers back.

Yes. But you did mention earlier, again not that you -- that you had to price -- you had to give them some price concessions to get back into the game. Is that still the case?

Well, you know, I mean obviously in some areas we do, but our quality has obviously returned to the level that needs the customer specifications. So we didn't gain market share by lowering price. We gain market share through a lot of reasons. Where we are. Customers feel very confident with us. Do not forget there was a constraint in raw materials. I mean, we are the only Company that is completely vertically integrated. We have our own source of raw materials. So put yourself in the customer's shoes. If you have a constraint in raw materials, who are you going to go with, right? So that was a very, very important competitive advantage that we had.

Secondly, we increased capacity when there was a constraint in 6-inch semi-insolating, where some of the competitors couldn't provide the requirements, that their customers came to us, and we were able to provide their requirements ,because we can put capacity on line very, very quickly because we design our own furnaces and build our own furnaces. Plus we have the space, and our competitors basically have to go green field.

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

We're still discussing.

Is it progressing or is it just sort of --

It is progressing. These things -- it takes a while, especially in China.

Yes, okay. And then the last question I've got for you, I appreciate your patience here, and this is a difficult question to answer but maybe - I just want to throw it out and maybe you can give us some parameters on it. If you look out three or four years between the handset volume, the LED volume, those markets and the solar market, can you give us some idea what percent -- how they're going to -- how they'll stack up against each other?

Well, you know, as - Wilson has a saying, he says that our germanium business is a bluebird. What he's really saying is that we think or we estimate that there are germanium business, which is really solar, and you know the solar market is so hot these days, if you're looking out three to five years, that might equal or even surpass our gallium arsenide business.

Okay.

We won't be surprised.

Yes, we won't be surprised if it does.

So would that put - the LED business would just be a minor part of the --

No. It's not going to be minor, obviously. Just think, when the world adopts or starts transferring, you know, all fluorescent and incandescent lighting into LEDs, just think, it's actually hard to fathom.

Okay. Well thanks very much. Good quarter.

Sure. Thank you.

Thank you. The next question is from Jiwon Lee of Sidoti & Company.

Hi. Sorry. I knew I forget something. Any preliminary thoughts back on your capacity expansion, the incremental revenue contribution that you're looking for when it's done? Can you put it in a market share in terms of 29%.

So let me rephrase the question. Are you saying the capacity increase that I mentioned of 27%, how is that going to relate to revenue, is that what you're saying?

Oh, that's right. You did mention 27%. All right. Thank you.

Okay.

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

Phil, I have a quick question for you on this LEC stuff that you're working on.

Yes.

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

You hit it right on the head. Small diameter - as you know, VGF is a slow process, it's short ingots. LEC, the cycle time is much shorter. You get much longer ingots and, most importantly, the EPD level is not as tight for semiconducting LED application versus for the semi-insolating, for let's say handsets for HPTs and [PMs].

So is it too early to start thinking about that?

That's why you get away by growing - using LEC for LED applications. You don't need VGF.

Is it too early to forecast when that might develop?

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

So not too far away then?

No. No, not at all. From my standpoint, I wish I had it now.

All right. That was my only question.

Okay. Thanks.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over Mr. Yin.

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

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