AXT Inc (AXTI) 2010 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to AXT's fourth quarter 2010 financial results conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Raymond Low, Chief Financial Officer.

My name is Sara, and I'll be your coordinator today. All lines will be muted throughout today's presentation, followed with a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions. Just a reminder, today's call is being recorded.

And now, I'd like to turn the conference over to Leslie Green, Investor Relations for AXT.

Thank you, Sara, and good afternoon, everyone.

Before we begin, I would like 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, increase orders in succeeding quarters, improve our competitive position as the market improves, as well as other market conditions and trends.

We wish to caution you that such statements deal with future events, are based on management's current expectations, and are subject to risks and uncertainties that could cause actual events or results to differ materially. These uncertainties and risks include, but are not limited to, overall conditions in the market in which the Company competes, global financial conditions and uncertainties, market acceptance and demand for the Company's products and the impact of delays by our customers on the timing of sales of products.

In addition to the factors that may be discussed on this call, we refer to you the Company's periodic reports filed with the SEC 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 through February 23, 2012.

I would now like to turn the call over to Raymond Low for a review of the fourth quarter results. Raymond?

Thank you, Leslie.

Revenue for the fourth quarter of 2010 was $26.9 million, compared with $26.8 million in the third quarter of 2010. Total gallium arsenide substrate revenue was $18.7 million for the fourth quarter of 2010, compared with $19.2 million in the third quarter of 2010. Indium phosphide substrate revenue was $1.13 million for the fourth quarter of 2010, compared with $955,000 in the third quarter of 2010. Germanium substrate revenue was $3.4 million for the fourth quarter of 2010, compared with $2.3 million in the third quarter of 2010. Raw materials sales were $3.5 million for the fourth quarter of 2010, compared with $4.4 million in the third quarter of 2010.

In the fourth quarter of 2010, revenue from North America was 23%, Asia-Pacific was 58%, and Europe was 19% of total revenue. Only one customer generated more than 10% of our revenue during the fourth quarter, while the top five customers generated 42.9% of our fourth quarter revenue. Gross margin was 39.8% of revenue for the fourth quarter of 2010. By comparison, gross margin in the third quarter of 2010 was 39.3% of revenue.

Selling, general, and administrative expenses were $4.2 million for the fourth quarter of 2010, compared with $3.3 million in the third quarter of 2010. This increase was primarily the result of one-time charges associated with severance costs and legal fees pertaining to our settlement with Sumitomo Electric Industries.

Looking ahead to Q1, we would expect SG&A to return to a more normal level of between $3.6 million and $3.7 million per quarter. Research and development costs were $911,000 for the fourth quarter of 2010, compared with $462,000 for the third quarter of 2010. One of our joint ventures, in Barton two research and development project, and spent an additional $344,000, which may qualify this joint venture for China government incentive program of reduced future tax rates. We expect future quarterly R&D costs to be approximately $550,000 to maintain our level of research and development.

Total stock compensation expense was $235,000 for the fourth quarter of 2010, of which $9,000 was included in cost of revenues, $203,000 in SG&A, and $23,000 in R&D. Income from operations in the fourth quarter of 2010 was $5.7 million, compared with income from operations of $6.7 million in the third quarter of 2010.

Net interest and other income for the fourth quarter of 2010 was $422,000. Net income in the fourth quarter of 2010 was $4.9 million or $0.15 per diluted share. This compares with net income of $5.6 million or $0.17 per diluted share in the third quarter of 2010.

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 with maturities of less than two years was $41 million at December 31, 2010, compared with $41 million at September 30, 2010. Accounts receivable net of reserves were $23.1 million at December 31, 2010, compared with $19 million at September 30, 2010. Days sales outstanding were at 79 days for the fourth quarter, compared with 65 days for third quarter of 2010, as a result of typically slower year-end payments.

Net inventory was $36 million at December 31, 2010, compared with $33.2 million at September 30, 2010. The increase in inventory was primarily the result of raw material purchases. Depreciation and amortization in the fourth quarter were $794,000, and capital expenditures were $2.3 million. As of December 31, 2010, the Company, including our consolidated joint ventures, had 1,302 total employees, of whom 1,034 worked in production.

For the fiscal year 2010, revenue was $95.5 million, a 72.5% increase from $55 million in fiscal year 2009. Gross margin for fiscal year 2010 was 38.2% of revenue, compared with 25.1% of revenue for fiscal year 2009. Net income for fiscal year 2010 was $18.7 million or $0.57 per diluted share, compared with a net loss of $1.9 million or loss of $0.07 per diluted share for fiscal 2009. This concludes our review of the results.

I will now turn the call over to Morris. Morris?

Thank you, Raymond.

2010 was a year of tremendous execution for AXT. Revenue for the year increased by more than 72% from 2009. Our gross margin's performance improved by more than 1,300 basis points, and our net income grew by a solid $20.5 million.

These results reflect healthy growth in our markets, as well as continued share gains, outstanding quality product, and tremendous operational execution across our entire organization. While we are experiencing near-term softness in the Taiwanese LED market and expect seasonality in our first quarter of semi-insulating gallium arsenide revenues, we believe that we will see sequential growth in our business beginning again in the second quarter, driven by positive secular trends in the demand for wireless devices, LEDs, and photovoltaics, as well as gains in our positioning within various customers in all markets.

Beginning with semi-insulating gallium arsenide, 2011 looks to be another strong year for our gallium arsenide products, driven by the proliferation of wireless enabled devices and the increasing roll out of 3G and 4G smart phones that support substantially faster download speeds. At the recent CES Show, which has not historically been a showcase for mobile phone introductions, 4G was a dominant theme. All of our major carriers were featuring smart phones from a number of device manufacturers that are set to roll out over the course of 2011.

Equally prevalent at CES were the announcement of 3G-enabled tablet devices, building on the popularity of Apple iPads. In nearly every major geographic areas of the world, we're seeing continued momentum in the roll out of 3G and 4G LTE networks. Consumers are eager to take advantage of the higher speed and increasing features and functionalities of the devices that can run on these networks.

This is a great news for us, as it drives increases both in the number of devices sold as well as the content of gallium arsenide per device. In fact, several of our Tier One customers have reported to us that they were increasing capacity this year in anticipation of growing demand. Also, last week UNC, one of the world's largest silicone foundries, announced that it was (selling) a gallium arsenide foundry in anticipation of brisk demand for power amplifiers and switches using mobile devices.

In the first quarter, our semi-insulating substrate revenue grew by more than 10%, reflecting a 51% year over year increase, where exp -- we are expecting that our semi-insulating revenue will be seasonally down in Q1, but we will resume the growth in second quarter and throughout the year. In semi-conducting gallium arsenide, following a 21% increase of sales in Q2 and a 30% increase in sales in Q3, our sales in Q4 declined, primarily as a result of softness in the Taiwanese LED market. We expect this -- that this weakness will extend through the first quarter, but we should see renewed growth beginning in Q2. The growth drivers in LED market remain very exciting, and they are continued to be tremendous investment worldwide in the proliferation of this technology.

In fact, on my recent trip to China, I was amazed by the tremendous role in LED signage in indoor and outdoor full color display. This market in China for this and other applications looks to be very dynamic over the next several years. China clearly wants to be the leader in world, in the LED production.

As it is inspired the government subsidies for MOCVD purchases. Shipment of MOCVD reactors continues to grow at a healthy pace, and though a smaller percentage of the reactors may be dedicated to red LEDs, the impact of the market for semi-conducting substrates is likely to be meaningful over the coming years.

One of our major sales initiatives of 2011 is to increase our penetration in the China LED market, as we believe that this will be a strategically important as the worldwide market develops. While automotive applications, signage, and display continue to be our primary target applications, emerging applications such as luminations are also looking encouraging. For example, the LED enterprise lighting market is expected to grow by 30% and generate more than $1 billion in annual revenue by 2014, according to a recent industry report. Tremendous advancements continue to be announced by a number of suppliers, both in terms of improving the brightness of LED bulbs and also in softening the light for indoor consumer use.

These advancements, coupled with a reduction in costs, will like -- will make LED light bulbs increasingly attractive for wider scale consumer use. In fact, earlier this month, the European Union announced that it will invest in several large scale pilot projects to demonstrate the benefit of (solid) lighting. We're also seeing a major push in other geographic areas such as China, who leads the world in clean tech investing.

In total, the secular trend driving our semi-insulating, and semi-conducting gallium arsenide substrate business are very exciting. In 2010, our gallium arsenide sales grew 64% over the previous year. Despite some seasonal softness in Q1, we expect that the demand for wireless devices and proliferation of LED technology will continue to drive growth in our business throughout 2011 and beyond.

Further, I'm very proud of our manufacturing and operation teams, who have made great strides in 2010 to improve our cost structure, allowing us to deliver strong gross margins while maintaining our cost competitiveness. This allows us to participate in high volume markets, as well as increase our shares at key customers in our space.

In anticipation of continued strong gallium arsenide demand, we have been adding capacity, recently, increasing our crystal growth capacity by semi-insulating and semi-conducting gallium arsenide by another 20%. We're currently in the process of facilitizing another 30,000 square feet at our Beijing plant in both -- for both crystal growth and wafer processing, that we can bring on line as demand increases.

During 2011, we begin construction of a new 80,000-square foot facility at our property in Tongmei. This will allow us to meet our growth plans throughout at least 2013. We're fortunate to be able to do this with relatively modest capital CapEx expenditures, a major benefit of our China-based manufacturing.

Now, turning to germanium. We experienced strong growth and record revenues in the fourth quarter as a result of increased shipment into European markets, as well growth in our customers in Asia. We're currently shipping into several high profile satellite projects and are well positioned in key geographies for continued growth in 2011.

Also, we continue to ramp our volume of six-inch germanium substrates. The development of this product was a major R&D effort in 2010, and I'm extremely proud of our engineering team in surmounting the technical hurdles required to bring it to the market. While we do not view the terrestrial market as major growth driver this year, we believe that 2012 will be a pivotal year for terrestrial solar technology, and our strong execution in 2010, will position us very well for the growth when the market begins to mature next year.

Turning to raw material. During the fourth quarter, AXT continued to be a strong buyer of four and six (nine) gallium from our joint ventures, which decreased the amount of material available for our joint ventures to sell on the open market. This, in turn, cost our consolidated raw material sales to decline in the quarter. As we look ahead to the year, nearly all of our joint ventures are adding capacity to meet the strong market demand, expect to have increase on line in the second half of the year, giving them more material to sell on the open market.

Looking at raw material pricing, as we have been discussing for several quarters, raw material pricing, particularly for gallium continue to rise. These fluctuation price tends to go in two-year cycles, but the main increase is causing tighter supply and then more capacity is brought to the market, easing the material availability. Price increases affect all substrate supplies, but AXT has the unique ability to mitigate some of the impact.

Our raw material joint ventures gives us two important advantages. First, with better visibility into pricing trends, allowing us to buy material in advance of pricing increases. Over several quarters, we have leveraged disadvantage to purchase large amount of gallium and germanium for inventory on order to give our customers pricing protection and provide us with gross margin stability. Second, we have material supply guarantees, ensuring that we'll have enough material to meet our substrate demand, and this is a critical when supply is tight.

We believe that this vertical integrated raw material strategy, which is absolutely unique in our industry, has been a critical part of our success over the past several years. As such, we continue to look for additional opportunities to expand our supply of the raw material that we currently source, as well as other material used in our manufacturing of our products. Again, as a Company with significant China-based manufacturing and long-standing positive relationships in China, we are at a great advantage in securing additional opportunities that will allow us to maintain a high competitive business model.

This strategy, coupled with outstanding operational execution, has allowed us to drive tremendous value in our business. For example, some of you may be surprised to know that gallium raw material pricing has increased in the past 12 months by nearly 150%, while approximately $300 a kilogram to currently [$720] per kilogram.

But during this same time period, AXT has been able to maintain our pricing for our customers while improving our gross margin by 1,300 basis points. That demonstrates the power of our model and underscores our success in driving significant operational improvements in our business. In fact, a significant portion of our ongoing R&D budget is dedicated to its innovative manufacturing techniques that can help us continue to deliver positive results.

We continue to believe that a gross margin in the mid to high 30% range is approx -- is appropriate for our business. While at times we may out perform that target, as we have done recently, we believe that this range allows us to deliver great value to both our customers and our shareholders. This period of partnership with our customers has allowed us to expand our market share and maintain strong positive customer relationships.

In closing, 2010 was a great year for AXT. We drove significant growth in our revenue margin and net income performance, brought to market a new and technically challenging product, maintaining outstanding quality records and continue to drive significant cost and efficiency improvement in every aspect of our business.

As we look ahead to 2011, we're excited by the growth drivers in our business and believe that we have a great team in place to maximize our opportunity. We would like to extend my sincere gratitude to all AXT employees who have shown such dedication to the success of our Company. I'd also like to thank our valued customers, partners, and investors for their support of AXT.

I will now like to turn the call back to Raymond to discuss our forward-looking guidance. Raymond?

Thank you, Morris.

As Morris mentioned, as a result of current softness in the LED market, coupled with some seasonality in the market for semi-insulating gallium arsenide, we are expecting a decline in our substrate revenues in the first quarter and also planning for a decline in our third-party sales of raw materials in Q1. Therefore, we expect total revenues of between $24 million and $25 million. We are expecting net income in the first quarter of between $0.11 and $0.13 per share, based on approximately 32.6 million common shares outstanding.

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

Thank you. (Operator Instructions) We'll pause for just a moment. We'll go first to Edwin Mok with Needham & Company.

Thanks for taking my questions. So, actually a good job on the gross margin line.

So I guess the first question I have for the gross margin baked into your guidance, it seems to imply that margins is just down a little bit, maybe based on lower volume, and not much impact from the raw materials. Is that how I should think about that? And kind of baked into that question is, I might have missed it, did you mention what was your R&D expense expected to be in the first quarter?

Yes, it's about $560,000.

On the gross margin line, is that correct that it mostly come from low volumes?

We don't break out gross margin line separately.

Okay. All right.

Morris, can I ask you a question related to that? You mentioned that obviously you gave really good pricing for your customer, despite the rising raw material cost, right? But if you look longer term than just one quarter, if I look out a year plus, right, raw material price going up like this, do you anticipate at some point either you or your competitor will have to raise price? And given your vertical integrated structure, wouldn't that enable you to maybe gain some benefit from them and, in fact, generate even better margin than your target?

I think your analysis is correct, but however, I think, we have always been saying that AXT wants to be a overall winner in the marketplace. That is, we -- our strategy is that we have some protection, our raw material because of our joint ventures to protect our costs.

But on the other hand, we understand as the customer ramp up in their volume, everybody wants a smart phone. People wants to buy at affordable costs, so we want to make gallium arsenide to help our customer to be as competitive as we can. So I think -- in the long-term, I think if you were to compare with our competitors, we'd certainly have those advantages. But, the short-term, if you look at the raw material increases, definitely it will impact us negatively. But on the other hand, we have other lever to pull, which is operational efficiency in buying the material in advance of the cost increase.

And as we said in our conference call script, that just look at the past record. In the last year, the raw material price increased by -- from $300 to $720, and yet we have been able to maintain our increase in margin. But, again, we keep on repeating, we want to maintain the mid- to high-30 percentage range. That's our corporate goal.

Great. That's very helpful commentary.

Can I ask you a question about some insulation market? Obviously, there's some seasonality, just looking at the end market. For this year, I think, Morris, you have previously said that you expect, you know a double digit, maybe even as high as 20% to 30% growth this year for that line of your business. Do you still anticipate that, even with this (inaudible) in first quarter?

Oh, certainly, yes. I think 30% growth is still our goal. But the first quarter we do see some seasonality, but as we go through the first quarter, we certainly see a lot of bullish signs from our customers. They are buying equipment. They buy MOCVDs, so that's a good sign that they plan to have -- what big volume capacity increase down the line.

And so is solar, and so is LED, so we don't see any change in the fundamental business prospect of our business but we think just Q1 is a seasonality change. And in LEDs, perhaps we have much of a -- accelerated growth in Q2 and Q3 of last year and taking a slight pause, but you cannot have 50% growth every six months, and that would be too fast a growth.

Yes, that's correct. I have two more questions.

One is on the capacity expansion that you mentioned on the call. Was that already comp baked into your previous guidance? And any we can kind of quantify how much capacity you've added in 2011 -- I'm sorry, in 2010 -- and any way you can kind of give us an idea how much capacity you plan to add in '11?

I think our plan -- I think 2010 was roughly 50%, was it Raymond?

Yes.

I think, for 2011, our budget is to grow another 30%.

And Raymond, can you remind me, what was the CapEx that you spent in 2010 to add that additional capacity?

Total 2010, $6.3 million.

Great. Very helpful.

One last --

Hello, Edwin.

His line disconnected. We'll move onto Northland Capital Markets' Richard Shannon.

All right. Let's see -- a few questions for you.

First question on the fourth quarter, you have done a very good job up to this quarter in guiding conservatively in beating your numbers here. I'm kind of curious when you started to see a little bit of the weakness that resulted in the numbers coming below your guidance in the fourth quarter.

I think that the first quarter, I guess, missed by about $1 million, was primarily driven by the two facts. One is the LED market started to get a bit soft. And we still have a chance to catch up, if we were to sell those raw material in the open market. But we elected not to because it doesn't make much business sense, because raw material is very tight in the open market. As we go through selling to the open market, our own substrate production supply may be in short. So that was -- that contributed a bit more than $1 million, just by the raw material alone.

Okay.

And to the point in your inventories about buying excess raw materials out there, without that buying, what would your inventory turns have been -- turns have been finishing the fourth quarter?

Inventory turns, you know, from our business it's traditionally very slow, because we keep a lot of whip, semi-finished goods in inventory. So it's not quite a very meaningful number, Richard.

But I think the inventory increase was primarily due to two facts. I mean, first of all, raw materials price increase is driving us to maintain a bit higher inventory level, because we don't want to -- because we are a big volume buyer for both gallium as well as germanium. If we don't maintain very healthy and a bit more than needed inventory on both of these material, we would buy in the open market, then that can tick up the price of those materials. So that was the reason.

When the material price start to go down, then we can just place our monthly order and just even park our inventory at our supplier's site. So, you know, that was the main reason.

And the second reason, actually is, surprisingly -- we need so much material to maintain our normal business. As the price of this material increases, let's say double, more than double, then it increase the value of this inventory, as you can see.

Okay. Fair enough. Fair enough.

I had a couple questions on your LED business. Curious how much of your semi-conducting gallium arsenide is exposed to Taiwan, and then also kind of the -- kind of highlighting the difference there going forward. When do you expect to see some more benefit from selling into the LED market into China, specifically? I know you commented briefly in your prepared remarks, but I'd love to hear those thoughts here, Morris, please.

Sure. Raymond is busy looking at the -- what the percentage of Taiwan LED market.

But let me give you the color on the China market. We do see a lot of customers in China gearing up in buying more MOCVDs, but probably, perhaps you want to say it's because of government support. There's a lot of subsidies in helping most LED makers to buy MOCVDs.

But on the business side, as I said in our conference call, we also saw a very strong demand for utilizing LEDs. China is very unique. I mean, in the Western world perhaps, the light pollution or whatnot, LED is not necessarily so fast adopting.

I want to point out to, except for the fact that one is, if you were to see the Olympics in 2008, as well as the 2010, China Shanghai Expo, both of these places are showing tremendous amount of adoption of LEDs. And recently when I was in China, I saw this signage. Every storefront, I mean, the price point, I was told by one of my customers, the price point of those red LED signage where you can put out any information about your store or whatever is on sale or discount, it's getting to such a point that it's selling like hotcakes. The growth rate of those business, according to my customers in China, are saying 60% growth year-over-year. And the next revolution growth is supposed to be for outdoor and indoor full-color display.

So we are very encouraged by the China LED adoption, and I think the growth rate in the area is very, very encouraging. And we have a very focused effort to gaining market share in China's market.

Okay. Fair enough. And I guess one last question from me, Morris.

I'm kind of curious about what you see your share position being in semi-insulated gallium arsenide. I know that you've been -- not selling into a sort of a smaller supplier in the RF space here recently. I'm kind of curious whether you've been able to get back into that customer. And I think also, there's a larger consumer in the RF space that you're hoping to gain some share with. Kind of curious as your thoughts as to the possibilities of that larger customer.

Well, we have a very big customer in the RF space, and the other two big RF device manufacturers, one of them we have already qualified. We think any time now, we should be able to get into it. We're really working with them very closely. We're trying to get into one big account by then. Of course, before the ink is signed, we can't really say that -- how big we can get into. But we are qualified with that large RF device makers.

And this smaller account -- yes, we are working on it too. As we said to you before, that we're working with these customers in two levels. One is to penetrate into the (inaudible). And the other is to be qualified at the device maker's site, too.

So both ways will be able to help us to get into these markets. And also, I believe the demand for this LED devices increases, but of course, the first quarter seems to be everybody saying the market is a bit soft. It's taking seasonality, but I think if you look at overall, a number of major device makers are saying that 2011 is a very solid growth year for them. So we're counting on them to provide the market growth engine for the whole industry.

Okay. Understood. I appreciate the comments, Morris and Raymond. Thanks.

Thank you, Richard.

Next we'll hear from Dave Kang with B. Riley.

Thank you. Good afternoon.

First, Raymond, what was the stock compensation?

Oh, that was just compensation charges every quarter for stock options. It was $203,000 for the quarter.

Okay. All right. And then did you give out the CapEx budget for this year?

2011?

Yes.

It's aimed to be about $11 million.

$11 million. Okay.

And then, I guess we'll talk about LED market first. So you talked about -- Morris, you talked about the Chinese market. So what's going on there? Because I want to -- some of the reports are suggesting that it's really China that's causing the -- China was the culprit for this imbalance in supply and demand and suggesting that it could be a more than a quarter situation in terms of, you know, the demand firming up. So what gives you the confidence that your LED business will come back in Q2?

Well, Dave, I don't know where is your data coming from, but I think we've got to be careful in separating what is the sapphire and what is for gallium arsenide. The sapphire market, although I'm not an expert in that, but obviously there is a tremendous hype in that market. I mean, 1,000 MOCVDs delivered for those market. And what I'm talking about in gallium arsenide, yes, we do see -- for instance, one of my customers in China, in Beijing for instance, last year they had two MOCVD reactors, and they're buying two by the end of first quarter. So it's going to be four, and by the end of the year, they told us they're going to add another eight. So you count it as 12, so they have a 6 times increase in volume. But that is actually the customer are telling us that's what their proposal of MOCVD reactors is, but nothing has happened yet.

So you have to look at -- from gallium arsenide, the base is small to begin with, okay. We're not experience a hype or a tremendous growth opportunity brought on by the alleged LED TVs as well as general illumination or the street light. Illumination, I think AXT's gallium arsenide red LED will participate, but I think the first market opportunity actually belongs to the street light, which red LED does not participate.

So I believe that red LED has a place to go in the whole total scheme of LED, either lighting, signage, or the total market. But it's -- it has not got to the main market yet. So we are -- we are, you know, as I said, that particular customer in China, they're definitely buying all those 12 MOCVDs. They increased their capacity at about 6 times, but we're not actually putting all those into, you know, our projections.

We're modestly -- we're definitely looking at the market and say we want to address those markets very aggressively, but we're also acting certain caution.

Got it, got it.

And then switching gears to the semi-insulating wireless side. So how do we know it's -- as far as March quarter is concerned, how do we know it's just a seasonality or there's an inventory situation. Maybe not at your customers but your customer's customers, meaning maybe the phone vendors. Is there some kind of a channel inventory situation that needs to be burned off over time or --

Well, Dave, I think we can look at it from two aspect of this market information. One is from our immediate customers.

I've got at least two major vendors in the industry who are saying they're increasing their capacity. I'm talking about (inaudible) growers. They're increasing their capacity by at least 40% to 50% in 2011. In fact, the machine delivery schedule is already done. They're very aggressive in terms of adding their capacity.

The second is that from the customer's customer. In other words, the device makers, those are public information as well.

Yes.

As you know, the device maker in Oregon is adding capacity by at least 40% or 50% in Texas, and so on so forth. So and also you see the smart phones, the LPDs, and, everybody's buying tablets. So those are giving us the confidence, but of course, in the short-term as far as inventory check is concerned, we actually did check our customer's inventory. In fact, one of the softness was brought on by one of our customers was saying that because they had been machine maintenance for the first quarter, but they said because of that, their customer's customer's inventory is kind of low. They told us they're going to ramp up production to catch up for -- to fill up, to restock the inventory. That inventory pipeline.

Right, and then I guess they're talking about that Oregon customer. So when do we see that happening? Is that March quarter or June quarter that -- once they start to ramp up capacity?

Beginning about end of first quarter.

Okay. Okay.

And then just generally speaking, Morris, what kind of, or how much visibility do you have typically? I mean, do you have like a one month, two months? What kind of visibility do you have?

Well --

And is it getting better or worse?

We keep on saying our visibility is not as -- is relatively short. You know, as evidenced by -- you know, we have been performing perfectly, you know, for the last year, but the first quarter and if customer, if they have a, you know, oversupply, they can stop the delivery any time.

That will affect our ability to deliver the revenue. However, we also look at overall trend. I mean, if customer buying equipment, and so that provided some visibility, so that guidance to the CapEx budget that we have.

Just a couple more. Regarding 4G LTE phones, are there any kind of a spec out there in terms of gas chip content versus 3G? I mean, in terms of bandwidth, there's certainly a big gap between 3G and 4G. Do we have any kind of a gas chip content, 4G versus 3G.

You know, Dave, I'm not really expert on it. But I think that -- from what I know is that the more bandwidth you have and the more functionality you need --

Right.

The more devices, that's as simple as that. And you want faster download rate, you also need more gas.

Right. Because, I guess, phone vendors are all looking at next few months to launch Verizon -- not just Verizon but the LTE phones, right? I'm just wondering whether you're seeing any kind of a , you know, difference from your customer -- you know, customers in terms of order pattern because of

I think --

Probably too early?

Yes, the way it's been announced to us, I think it's typical to see -- all we see is that somebody they're buying the equipment. They're buying more wafers.

Right.

They don't --

Got it.

And then the last question, if you can just -- have you talked about any kind of a terrestrial solar opportunities? I know you talked -- always talk about a few handful European customers. Any update there?

The terrestrial market, we believe, is going to be 2012 event. Although, you know, we were successfully launched a 60-inch germanium product. There were some takers. We made some, I would say, pilot production sales in the last quarter or two. And so -- and also those trial were very successful. So that gives us a lot of the encouragement, but we don't see the terrestrial market really taking off. I mean, one other note to take also is the China terrestrial market. I mean, if you were to talk to the China terrestrial CPD player, they are very, very bullish. But we don't take that into --

Right.

Bake that into all the numbers.

Sure.

That's tremendous.

Any kind of bit as far as the gap between, you know, CPD germanium versus the solar and thin film at this point?

If we --

Is it getting there or are we still a ways --

I think it really depends upon what report you read. I think the terrestrial CPD market -- I think the threshold is very different. I mean, as far as devices is concerned. Phone, the readings I got is relatively cheap, but the more cost goes into the tracking devices, as well as -- Yes.

Yes, okay.

Those are the main expenditures.

All right. Thank you.

And from Needham & Company, we'll move onto Conor Irvine.

So this Edwin Mok. Sorry, I got cut off. So just kind of finishing my last question.

On the germanium market, you had a strong fourth quarter. You mentioned the European project, as well as some Asian customer. It sounds like new customer. I was wondering how you think about in the first quarter and do -- should we anticipate some drop off, at least from the European project as we get into second quarter and beyond?

What do you think, Raymond? In germanium, I think it's probably going to be flat, right? I mean, germanium do present some lumpiness.

If we were to win a major satellite program, then it will start to increase. And then once the satellite project is over, then there will get softer. But on the other hand, our number of customers in germanium is now tracking to be quite high, so, they will tend to average out.

I see. Good to know. Very helpful.

And then Raymond just quickly -- tax went down a little bit this quarter. How should we think about tax rate for 2011?

The quarterly, Edwin, it's always difficult, because Q4 that's when we threw up everything for the whole year. So during the year -- you know, Q1, 2, and 3. It's the tax provisions as best we can to estimate the rest of the year. Q4, that's the final tax for the year.

Right. So you true up the (inaudible) about 10% on the 2010. Is that the way we should think about the tax rate for 2011?

I'm going to say, look at 12% rather, because pending one of the joint ventures, that may get the slight tax rebates or reduced taxes, we're not sure yet. So I would say model around about 12%.

Great. Very helpful. Thank you.

Moving onto Regina La Croce with Neumeier Poma Investment Counsel.

Hi, La Croce. Thank you for taking my call.

I was wondering, can you say how much of your current sales are now to LED makers and what the sales breakdown by country to LED makers?

We actually don't break down the LED by country. We just have the total by country, both it's -- semi-insulated and LED. But basically in gallium arsenide, the LED side is about 40% of the business of gallium arsenide, and the semi-insulating RF wireless side is 60%.

Okay.

And I wanted to ask you if you could clarify, you did kind of touch base when you were explaining that street lights, they don't -- the red LED doesn't participate in that market.

Right.

You were saying, but yet there's still a place for them. And what I was wondering was is the red light what would give the warmth to the LED?

Yes.

Is that -- okay. I just wanted to make sure I was understanding that correctly.

That's right. Because the street light, the color temperature can be very high and people don't care about color temperature as long as it's just, lights up a shadow. But I think in room light illumination, people do care about color temperature, so one way to bring the color temperature down, to bring more warmth to the light, is using the red LEDs.

Okay.

And one last question. I don't know if you break it out, but the gross margins for LED products, are they more or less than your wireless markets?

No.

No, we don't break that down.

Okay. Well, thank you for taking my call.

Thank you.

(Operator Instructions) And from [Spectra], we'll go to [John Margolis].

Hi. Could you talk about prices in gallium and germanium this quarter -- first quarter this year, how they've been doing?

Yes. Gallium, as I said, the recent, most recent poll, the amount of pages is $720 a kilogram, and germanium went up from about $900 a kilogram last -- fourth quarter of last year to recently traded around $1,400 a kilogram.

So do you see yourselves continuing to build up the inventory beyond what you've been doing in the first quarter?

Well, obviously if the price keep on going up, we tend to buy a bit more, but we won't discuss it openly and because it's a strategy. I mean, if we see, start to see the supply demand start to re-calibrate, then we won't buy and we'll just bleed out our inventory because of, our joint venture supply guarantees that then we can enjoy the lower price later, okay.

All right.

That's an advantage for us, both in terms of when it's raising, raising in price or rising in price, as well as declining in price.

Okay. Maybe I misheard this before, but you said that the gallium prices go on two-year cycles. Is that what you're saying, and what year of the cycle would we be in then?

Well, we were saying usually it takes two years, but of course, every cycle is slightly different. This cycle, I believe, it really depends upon how fast -- because if there's a more higher price, they encourages people to add on capacity. But it would take time to build a factory to add on the capacity, and that time usually when people start to realize it, then start to form a capital (inaudible), to form a company, it takes another year so that's about two years. But, if people can do faster, then maybe the cycle is a bit short. And specifically when gallium started to rise in price, it was around the first quarter of 2010.

Okay.

And as far as your guy's capacity billed out goes, when do you guys expect to be done with the 35,000 square feet in Beijing and the 80,000 square feet in [Tomay]?

Well, Beijing and Tomay is same place, by the way. Tomay is in Beijing. The 30,000 square foot we're facilitizing in. In other words, the building was built some six, seven years ago, but we started to facilitizing it, utilizing those production space as the demand increases. The 80,000 square foot building was on the design phase. We're probably going to build it out in 2011. That's sort of the spare facility that we can utilize as the demand increases further, and that should be able to meet the demand into 2012 or '13.

Okay. So is the 30,000 square feet, it's being facilitized now, so is that actually being utilized Q1, or is that being utilized Q4, 2010? When is the actual utilization happening?

It's probably Q1, late Q1, yes.

All right. That's it. Thank you.

All right.

And gentlemen, there are no further questions at this time. I'll turn the conference back over to you for any additional or closing comments.

Thank you for participating in our conference call.

In the next month, we will be presenting at several conferences around the country. Tomorrow we will be presenting at JPMorgan, LED General Illumination Symposium in 2011 in Santa Clara. Next month, we're presenting at the Northland Security Market Cap Growth Conference in New York and Coffman Brother Third Annual Green Technology Conference in Boston.

We look forward to seeing many of you there. As always, feel free to contact me, Raymond, or Leslie Green directly if you would like to meet with us. We look forward to speaking with you in the near future.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.