AXT Inc (AXTI) 2011 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the AXT's third quarter 2011 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Raymond Low, Chief Financial Officer. My name is Rika and I will be your coordinator today. Today's call will be recorded.

I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Rika, and good afternoon, everyone. Before we begin I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the company and our ability to control costs and improve efficiency, increase orders in succeeding quarters, improve our competitive position as the market improves, as well as other market trends and conditions.

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 sales and products. 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 AXT.com through October 25th, 2012. Also, before we begin I want to note that shortly following the close of market today, we issued a press release recording financial results for the third quarter of 2011. This press release can be accessed from the investor relations section of AXT's website at AXT.com.

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

Thank you, Leslie. Revenue for the third quarter of 2011 was $28.3 million compared with $30 million in the second quarter of 2011. Total gallium arsenide substrate revenue was $18.7 million for the third quarter of 2011 compared with $18 million in the second quarter of 2011.

Indium phosphide substrate revenue was $1.5 million for the third quarter of 2011 compared with $1.6 million in the second quarter of 2011. Germanium substrate revenue was $3 million for the third quarter of 2011 compared with $2.7 million in the second quarter of 2011.

Raw material sales were $5.1 million for the third quarter of 2011 compared with $7.7 million in the second quarter of 2011. In the third quarter of 2011, revenue from North America was 21.4%, Asia-Pacific was 58% and Europe was 20.6% of total revenue. One customer generated more than 10% of our revenue during the third quarter, while the top five customers generated 39.4% of our third quarter revenue.

Gross margin continues to outperform our target model at 43.2% of revenue for the third quarter of 2011. By comparison, gross margin in the second quarter of 2011 was 46.7% of revenue. Tilling, general and administrative expenses were $3.6 million for the third quarter of 2011 compared with $3.7 million in the second quarter of 2011.

Research and development costs were $612,000 for the third quarter of 2011 compared with $699,000 for the second quarter of 2011. Total stock compensation expense was $216,000 for the third quarter of 2011, of which $20,000 was including cost of revenues, $184,000 in SG&A and $12,000 in R&D.

Income from operations for the third quarter of 2011 was $7.9 million compared with income from operations of $9.6 million in the second quarter of 2011. Net interest and other income for the third quarter of 2011 was $459,000. Net income in the third quarter of 2011 was $6.5 million or $0.19 per diluted share. This compares with net income of $7.1 million or $0.21 per diluted share in the second quarter of 2011.

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 were $39.2 million at September 30, 2011, compared with $36.3 million at June 30, 2011.

Accounts receivable net on reserves were $22 million at September 30, 2011 compared with $23 million at June 30, 2011. Day sales outstanding were at 71 days for the third quarter compared with 70 days for the second quarter of 2011. Net inventory was $44.3 million at September 30, 2011 compared with $39.7 million at June 30, 2011. We expect that our inventory levels have now peaked and will decline over the coming quarters.

Depreciation and amortization in the third quarter was $849,000 and capital expenditures were $3.5 million. As of September 30, 2011, the Company, including our consolidated joint ventures, had 1,316 total employees, of whom 1,032 worked in production.

This concludes our review of the results. I will now turn the call over to Morris. Morris?

Thank you, Raymond. The current environment is presenting both great challenges and great opportunities for AXT. In terms of challenges, changing competitive dynamics within the universe of our customers we serve is negatively affecting our revenue base.

While the effect to our third quarter results was moderate, we're expecting that the decline will be significant in the fourth quarter, and we're planning our business accordingly. However, this challenging dynamic aside, as a Company we're continuing to execute strongly across our business, strengthening our competitive positioning, improving our manufacturing and operating efficiencies and providing a solid financial foundation with which to weather near-term weakness.

In particular, our customer qualification activity is very strong. We believe that this is the result of our growing reputation as a solid supplier of high-quality, cost-effective substrates. In each of our core product areas of semi-insulating gallium arsenide, semiconducting gallium arsenide and germanium substrates, we are in active qualification with major players for whom we either do not currently supply or we do not have a significant share of their business.

This could prove to be very positive for our business as even a small portion of this opportunity could move the needle for us in a meaningful way. As many of our long-term shareholders are aware, the customer acquisition and qualification process is lengthy, so we do not expect significant near-term contributions from new accounts. However, we're very encouraged by the progress we are making and believe that we will be able to both broaden and deepen our footprint in these markets in 2012.

Now turning to our key product families. I will begin my discussion with semi-insulating gallium arsenide. The third quarter was an interesting quarter for our sales in this area. We grew our revenue by 14% over the prior quarter, with increased sales across both our four- and six-inch products. However, due to changing competitive dynamics in the RF device market that I mentioned earlier, as we move into the fourth quarter we're seeing a significant decline in our bookings.

It is difficult to predict how long the weakness could persist, but we have confidence that our customers will rebound in the coming quarters. Further, we believe that as we move into 2012, new customer qualifications are likely to offset some of the negative effects of these near-term events.

Turning to semiconducting gallium arsenide, market softness in Taiwan, Japan and China contributed to a 5% decline in our revenue in the third quarter and our expectation is that we will see this softness persist in Q4. We believe that these market conditions are posing more challenges to our competitors as a result of our diversity scale unique business model. Further, while these geographic markets may be soft, we're utilizing our opportunity to focus on the product specification and the customer requirements in these geographic areas in order to position ourselves for additional opportunities when the market rebounds. In fact, our engineering and manufacturing teams have done a great job in surmounting difficult technical and cost issues that we were required in order to position us more competitively and allows us to address the needs of certain customers and applications in this space.

In germanium, our substrate sales grew in the third quarter with the primary activity coming from investment in geopositioning and communication satellite systems throughout Europe and Asia. This is another area of our business where new customer qualification activity is strong and we hope to qualify into the US satellite market next year.

We are excited to continue to expand our market share across all major geographies in 2012 and believe that we will be able to leverage our success in the satellite solar cell market, to increase our penetration in the nascent CPV market as it begins to emerge later next year.

Now turning to raw material. The combination of our joint venture having less material to available to sell on the [open] market coupled with moderate decline in gallium raw material pricing resulted in lower raw material revenue in the third quarter. It is important to note, though, that while gallium spot pricing reached a high of approximately $1,000 a kilogram, and has since come down by approximately 25% in the last quarter, the negotiated purchases, which made up nearly all of our joint venture sales, never reached the high of the spot pricing market and have never seen nearly as deep a rate of decline, either.

Also, as many of our investors understand, AXT is often the largest customer of raw materials for our joint ventures. Over the past year we have built an inventory of those materials to protect us from strong pricing fluctuations. However, even with gallium pricing declining, our inventory of raw gallium is still far below market price and continues to provide us with healthy margin protection. In terms of germanium raw material, pricing remains quite high, at approximately $1,600 a kilo. We were able to purchase some germanium raw material in the third quarter at a discount to this, giving us price protection against our current germanium substrate contracts.

In general, as Raymond mentioned, our corporate inventory levels have now peaked and we expect to reduce our inventory over the coming quarters as we continue to consume the low-cost material that we have acquired over the last several quarters.

Finally, before I close I'd like to say a few words about both our plans for capacity expansion and our shelf filing. Given the current market conditions and the recent dropping of stock price, we are putting a hold on the new building of our [Tomei] campus. We will revisit our requirements in the first quarter to determine the appropriate timing for that expansion. In terms of the shelf, as we have said before, the intention of the shelf was to help us to prepare for our future growth needs. However, AXT's both profitable and cash-generating, and we do not need to raise capital for our current operating requirements. As such, we will also hold off on a capital raise until such time as market conditions and customer requirements merit further action.

In closing, while we are heading into a challenging quarter, we're looking ahead to improve market conditions in 2012 and believe that we are establishing a great foundation to build upon next year. Fundamentally we see no change in the secular trend that we're playing into, including long-term growth in the wireless device market, proliferation of LED devices and the adoption of photovoltaic technologies. In all of these key markets, we are in a great competitive position and our sales and marketing team is actively engaged with new potential customers that can help us to expand our presence in the market we serve.

Our engineering and manufacturing operations teams continue to execute well against our corporate goals to provide a broad portfolio of high-quality products and strong customer support. These achievements, coupled with our solid business model and unique joint venture portfolio, will provide this tremendous opportunity for us as the demand environment improves.

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

Thank you, Morris. As a result of weakened market conditions in the fourth quarter, we expect total revenues of between $20 million and $23 million. We are expecting net income in the fourth quarter of between $0.08 and $0.12 per share based on approximately 33.2 million common shares outstanding.

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

Thank you, sir. (Operator instructions). We'll take our first question from Avinash Kant with D.A. Davidson & Company.

Good afternoon, Morris and Raymond.

Afternoon.

Hi.

A few questions. The first one, of course, you did see a meaningful decline in your materials revenues in the quarter sequentially. Could you give us some idea about how much of the decline came from volume and how much of that was from pricing?

It's mostly volume, very little pricing. Pricing is still firm.

Okay. Maybe Raymond, in the Q4 guidance that you're talking about, what kind of gross margins are we talking and how should we think of operating expenses there?

Avinash, we don't normally give out guidance on gross margins, but I'll just say again that our target model is the high 30%s to low 40%s.

High 30%s to low 40%s. Okay. One housekeeping thing -- when I was punching up the numbers and I put up the share count, the EPS that I get is $0.20. You are talking $0.19. Is there some adjustment there?

No. It's $0.19. That's $0.19.

Okay. Okay, perfect. I'll get back in line later on. Thank you.

Thank you. Next we'll hear from Richard Shannon with Craig-Hallum.

Hi, guys. I guess maybe a couple of questions on the fourth quarter guidance. Wondering if you can give us a sense of the relative direction of the major revenue buckets here, specifically both parts of the gallium arsenide and the raw materials. I think the midpoint of your guidance is down something around 20%. How do each of those buckets compare to that overall average?

Yes, the declines, Richard, mainly are coming from gallium arsenide. Most of the other markets are relatively stable, and we count it, it's probably the majority is coming in from the RF space and some from LED space as well. Of course, they come from a different reason.

Sure. Morris, you didn't mention anything in your prepared comments, but I just want to make sure that we're not seeing any sort of a share loss happening in the RF side. You haven't seen any examples of that happening, have you?

No, not really. Obviously, if the whole RF space is concerned, we're suffering because our customers are having a hiccup.

Is this coming -- Okay. You're talking about your end market customer. Is the EPI in between client there, which is your 10% customer, do you expect them to be a 10% customer in the fourth quarter?

Raymond?

Richard, we don't normally comment on the specific customers, but obviously we only have to disclose any customer who's greater than 10%.

Okay, fair enough. Any sort of -- and I know you didn't mention anything about beyond this quarter, but any feel from a forecasting or other commentary, or talking with your customers about when we might see specifically some of the RF business come back?

Well, our visibility is not great these days, let me put it this way, Richard, and you can see that our guided range for our revenue in the fourth quarter is even bigger than usual. That is really -- there is a chilly fact. Our customers are feeling the chill, and so they are giving a shorter leash to us. So that's mainly affecting the LED space. I think the fundamental market strength in the wireless device market is still strong, I believe, but we have a particular problem with our end customer.

Okay. Maybe just a last question for me on the pricing, given the air pocket that we're seeing here. Is there any further pricing inflections downward than what you might normally see? I know we've had a capacity constrained environment for most of 2011, but obviously there's some excess out there right now. Has this hurt pricing in any way?

We don't believe so. Obviously, each individual market or customer, important customer, we deal with them independently, and as we feel they are very important that can be adjusted upwards or downwards, mostly downwards, of course.

But we don't see any peculiar price drop and I think maybe I can say that even in LED, although the market is relatively soft, but there's no such thing as excess capacity available, so there's no pricing drop like the sapphire substrate are experiencing.

Okay. Great. I will jump in the line, guys, thank you.

Thank you.

Next we'll hear from Edwin Mok from Needham & Company.

Hi, Morris, Raymond, thanks for taking my call. So first question I have is regarding your customer inventory. Are you seeing any of your customers working down inventory aggressively? I think TriQuint said that on the press release just now, so I was wondering if you can comment on that.

Yes, we do hear that. That was one of the perhaps problems we have in Q4.

I see. Then on the gallium arsenide substrate business, you mentioned that most of the down side comes from the semi-insulation side. I was wondering on the semiconducting side, are you guys also seeing a decline in revenue in the coming quarter, and then also I just want to clarify a little bit in terms of your guidance, in terms of raw material revenue, do you expect a lower raw material revenue in the coming quarter?

Well, we are sort of guiding conservatively in our raw material revenue, but we do see that the raw material pricing, as of now, is still stable. But you never know, there's still two months to go, and our JVs also are telling us they are fully booked. But again, things can change. But we are guiding conservatively. We take that into account if substrate suppliers are having excess inventory and then it may go down to the raw materials, so we have put some conservatively in there.

I see, so just to be really clear, on the third quarter you didn't see much price decline, but it was lower volume because you used more of the raw material yourself, but in the fourth quarter you are baking some price degradation into your guidance based on what you see in the end markets, basically. Is that fair to say that?

No, mostly volume. We're conservative on volume.

I see, okay. That's fair. Then in terms of your operating expense, it's been running about $4 million per quarter, right? Assuming that we have -- let's make the assumption that we have a persistent weakness in terms of the end market. Do you see any room for you to reduce your operating expense in the coming year?

I think we will just make adjustments as we see how the market plays out.

Yes. Well, Edwin, let me jump in to say I think our operating expense is pretty lean already, and I think for us to add on to our ability to say let's say sales and marketing as well as technology, it would actually help us to penetrate these markets.

Although it's difficult to predict how long this thing is going to last, I think we have a very, very good wealth of product portfolio by improving or contacting the customer, and getting to the customer's face will help us to overcome some of the near-term (inaudible) difficulties.

Great. I have one last question and I'll let you guys go. Just quickly on the germanium, how much of your business is going to a CPV-type application versus satellite? CPV I meant terrestrial--.

Right now it's about 20%.

Around 20%?

Right now, but --

Right now?

-- we hear -- in fact, I think you wrote a report saying that the CPV market is really starting to pick up, but we're not counting on it. But we also hear the same thing. Some of our customers are telling us for the third time that the CPV market is taking off.

Yes, I've heard your main customer is actually doing pretty well in that market. Okay. That's all I have. Thank you.

Next we'll hear from Robert Spandau with ThinkEquity.

Hi, good afternoon. Thanks for taking my question. You were talking about consuming inventory. Can you talk a little bit about how much of that inventory you expect to consume, how long you think it'll take and what effect will this have on your JV sales?

Raymond?

You know, Robert, as we mentioned now the inventory's at its peak and we will be working its way down over the next coming quarters. It's really difficult to say exactly how much they will come down to and give you an absolute number. Also, the JVs, always an ongoing part of our JV model is that we do consume some inventory from them intercompany-wise, and then the remainder goes out for sale to third parties.

Well, let me jump in by saying our JV, for instance, in the second quarter our gallium JV didn't take any order from us at all, so they are not necessarily dependent upon us as a customer to sell their products.

Okay, great, thanks. Then as you were talking about delaying the new building, what does it do to your overall CapEx plans for both this year and next year? How do you see CapEx trending from here on?

That building was slated more for the later half of 2011 going into 2012. We have not given out any numbers yet or guidance or budgetary numbers for 2012 yet. For the remainder of 2011, we probably still plan to spend about $2 million.

Well, I think when our business was good, like last year, we spent about $11 million in terms of CapEx. But when business is growing normally, let's say 10%, 20%, in the last couple of years we were doing something like $4 million to $5 million a year. So that's the range that I think going forward is what you may take into your model.

Okay, great. I will step out and come back into the queue.

Thank you, sir. (Operating instructions). Next we will hear with Dave Kang with B. Riley & Company.

Thank you. Good afternoon. The first question is on the LED side. Morris, you talked about China pulling you in so given that Q4 guidance reflects a sequential decline, has that been ended or where are you in terms of China pulling [you in]?

Well, China LED market is cooling off. Yes, we have customers telling us that because of the overall market condition it's not very strong. However, you remember in the beginning of this year we were forming an LED China team to address this unique, special specification requirement for our customers, and we're making great progress.

So I'm still anxiously seeing some of these efforts turn into fruits later on this year, or early next year. So although we are modeling sort of a sequential cool-off period for our LED market in China, but I think we're standing a very good chance to come back and even take in some market share in China.

Okay. Then just looking at your guidance, and you talked about on the RF side it's a market share shift between your customers, but then you also talked about customer inventory correction as well. So how do you see the nexus between market share shift versus market or inventory correction from Q3 to Q4?

Well, from our perspective, our demand for our semi-insulating wafer in the third quarter, in the beginning of the third quarter, was fairly strong, and that was about the same time that the market shift started. So perhaps those materials were made into those channels and they may have to be digested through the inventory adjustment later on in the fourth quarter, or there could be just a trickle effect that we are at the end of the supply chain, so if somebody were to worry about eventual market demand then the first thing they'd do is reduce the inventory level they have.

Okay. Because I'm a little bit perplexed, because I'm looking at your customer up north, they reported their numbers and their guidance for Q4 is going to be flat to up a little bit in Q4, so I'm not sure where you're getting this market share shift among your customers. It doesn't look like they're going to lose market share based on their guidance.

Yes, exactly. I think that's what I was talking about. In the beginning of the third quarter our RF business was very strong.

Okay.

So we made a lot of delivery into our EPI customer and then eventually into the end customer need, and that was about the same time that they said there was a market shift change.

So those deliveries were probably sitting in the inventory and then that's the time they needed to digest those numbers. So you can see that our end customer, the Q3 number was down, and yet our Q3 number was sequentially up 14%. So maybe that's a delayed fact which is hitting us.

I think that the other effect that I was talking about is that I believe the end market is still strong, and I believe there's some shift, and also when people are more conservative in terms of planning their business, so they don't want to -- the first thing they do is reduce their inventory. Because we are at the beginning of this food chain, so we are affected more.

In other words, what I'm saying is that if a normal business environment, if you want to maintain certain inventory, in a more conservative environment, people will want to reduce the inventory they hold and not worry about the potential business they can lose, but rather them protecting their bottom line.

Okay. All right, thank you.

Thank you, sir. Next we will hear from Ben Axler with Spruce Point Capital.

Hi, gentlemen. I was hoping you could elaborate a little bit more on the new customer qualifications you're working on and maybe size up the potential revenue opportunity, assuming that you capture a certain share of those customers. Thank you.

Sure. As we said, we have actually major customers in all three different areas, in both semi-insulating as well as semi-conducting and germanium, and customers in qualification -- actually, those activities are stronger than usual, and I think that's the result of our better reputation and as a turnaround story and a legitimate good-quality supplier in all three fields.

What we hear consistently from our customers are for one that they want a good supplier with good capacity, they want good quality and lastly, it's a reason behind for them to make a switch. So the opportunity for us, I think even -- we have one or two who are just about taking high production quality already, but I think the major one, if we were to take one or two, which would be a very significant revenue boost for us as well as broaden our footprint in the product portfolio that we serve.

Thank you very much.

Next we'll take a follow-up question from Richard Shannon with Craig-Hallum.

Hi, guys. Can you tell me what your substrate capacity utilization was in the third quarter and what you expect in the fourth?

Well, I think probably in the beginning we were full, in the very first month of the third quarter. That was part of the reason we built up the unwanted inventory, because we were having customers knocking on doors and saying they need more delivery. Then as the quarter developed, it started to cool off. I think in the fourth quarter we'll probably be utilizing maybe up to 70%.

Okay. Great, that is all for me. Thanks, guys.

All right.

Next we'll take our next question from Rob Ammann with RK Capital.

Hello?

Mr. Ammann, your line is open.

Yes, sorry about that. Can you hear me now?

Yes.

The gross margin compression you saw in the quarter, can you characterize whether you saw more compression on the raw materials side or on the substrate side?

Mostly from the raw material.

Okay. Then what looks like a similar amount of gross margin compression would be implied in your guidance if operating expenses hold flat. Would you expect greater gross margin compression again on the raw material side, or would you think you're baking in obviously with that sort of revenue decline maybe a little bit more -- less overhead coverage and more margin compression on the substrate side on a relative basis?

Okay, actually -- this is Morris; I'm not the CFO so I can't make this qualification comment. When I was answering the question, the margin compression coming from the raw material, doesn't mean that actually the raw material pricing was actually relatively stable as far as our JV selling price is concerned. Just because they sell less during the quarter than Q2, so their contribution to our margin is less. Okay, that's the corrected description, right, Raymond?

Correct.

So what was the second part of the question, in Q4 -- compression on margins?

Yes, and actually before that just to clarify, last quarter, in basis points, did the gross margin compress more, not talking about dollars contribution, but did you see a greater gross margin compression on the substrate business or the raw material business in Q3?

Well, you see, the raw materials have, because of the higher price, they have higher margins.

I understand that.

Because they sell a little bit less, so that margin contribution to our overall margin is less. That's the best way to explain.

Right, but it's -- maybe I'll follow up afterwards. I think it's a pretty simple question in terms of gross margin. If the gross margin declined, if it fell 350 basis points, did the substrate business see more or less than that sort of gross margin compression on a gross margin percentage?

I see, Rob. We unfortunately do not discuss gross margin in each of the categories.

Okay, so for Q4 can you provide any color on which of the two businesses might see more or less gross margin compression, or just going to kind of leave us guessing?

Yes, once again, it's a complex model that we do have with the joint ventures.

Yes, it's always been complex, but I would hope you could give shareholders a little bit of color about the major dynamics. I don't see that that's all that proprietary, but maybe I'll try to follow up later. Thanks.

(Operator instructions). We'll take a follow-up question from Robert Spandau with ThinkEquity.

Hi, thanks for the follow-up. You discussed on semi-insulating and semiconducting four suppliers for semi-insulating and six suppliers for semiconducting. Can you describe what the big difference is between the manufacturing processes there, and whether you expect there to be increasing competition in semi-insulating or decreasing competition in semiconducting? Thanks.

Well, yes, I think I don't quite get your question. We do have four competitors in the semi-insulating space, Sumitomo, Hitachi Cable, AXT and Freiberger, and in semiconducting I don't remember all of them now. So what was your question? You say there will be more competition or less competition in both of them?

Well, what is the big difference in terms of the manufacture of these substrates?

Oh, okay.

Because if it looks like there's more competition on semiconducting, then are these folks going to look for an additional market by moving into semi-insulating, or is this going to be one of these situations where semi-insulating condensed down to four suppliers, are we going to see a condensation down to four suppliers for semiconducting as well?

Yes, I think the competition dynamics is quite different from the two fields, although they are all called gallium arsenide. The main difference, how you make it, is just by doping one of the products to make it semiconducting.

However, when you deal with customers, the semi-insulating customer is a lot more finicky. In other words, it takes a long, long time of qualification and as you know, that some of the qualifications we have been going on with our main customers takes almost two years. So product requirement, the entry barrier is quite high.

In semiconducting, it's quite different. Some of the customers are still [as stringent in] semi-insulating, but there is a lot of these smaller sort of toy-making or kids' shoe LED makers in China, for instance, and their entry barrier is substantially lower.

So some of these LED makers in China who claim to be gallium arsenide substrate makers, I would say they would never get a chance to migrate into the semi-insulating market at all, because just they don't have the reputation, they don't have the know-how, and the entry barrier for entry into this market is much, much more difficult.

Great, thanks. Then looking at your latest investor presentation, it looks like you changed out Lumileds for Sanan in the LED section. Should we read much into that --

No.

-- and can you describe what Sanan is doing with gallium arsenide substrate when historically they've been using sapphire?

No, I think those customers are sort of representative of some of these customers are, but never meant to be, they are more important or less important to us. No.

Okay. Is Sanan pursuing gallium arsenide substrates when in the past they've been pursuing sapphire? How big of an addition is the gallium arsenide substrate to their LED portfolio? How big do you expect this to get with Sanan?

Sanan is a -- they not only require sapphire to make the blue and green, but also they have a division which makes the red and yellow LEDs. So they are a major force in China to supply the red and yellow LEDs, so they are a major consumer of gallium arsenide substrates there.

Okay. This is not necessarily a growing portfolio for them, it's just all -- it's not really changing much in the past few quarters, or is this --

Oh, it is a growing portfolio.

-- something that is growing for them in relation to their other LED products?

Okay, I'm not very much aware of what the other divisions are doing, but this is a major growing product offering that Sanan is engaging. But I'm guessing it's much smaller than their sapphire venture, but it's still substantial. I think they have up to, oh, around 15 [MOCDB] growers.

Okay, okay. Then the last one on customers, you mentioned that Changelight is now pursuing I'm presuming germanium substrates for solar. Can you talk a little bit about Changelight and how much you expect to sell to them in relation to other folks, and what is their viewpoint on the solar market and how are you guys going to participate?

Unfortunately, Robert, we don't really comment on specific customers.

Okay. Then when I look at a $59 million market opportunity for 2011 and you mentioned that you have 23% market share for germanium, my math comes up to only 20%, and that's before we make any adjustments for 4Q. So can you help me understand how we get 23% market share for germanium if we think that the market is only going to be $59 million in 2011?

Yes, those presentations I don't think we have calculated to be very, very precise, because it's a projection, and so it's in the ballpark, let me put it this way.

Robert, are you looking at both the satellite and the CPV germanium?

I'm looking at the -- you have a breakdown of by year, each one of your four segments, and for germanium it doesn't break out between satellite and CPV, it just says the germanium opportunity is $59 million.

We'll have to get back to you on that one, Robert.

Okay, no worries. Thanks so much.

We'll take another follow-up question from Avinash Kant with D.A. Davidson & Company.

Hi, Morris and Raymond. One or two more questions, maybe first one for Raymond. How should we think of tax rate? It seems to be fluctuating quite a bit at this time. How should we model it in the current quarter and going forward?

I think probably between, like, 11% and 14% EBIT. That would be probably the best model.

Okay, 11% to 14%?

Yes.

Okay. Also maybe for Morris, clearly, I would like to know a little bit about how much of the visibility you have, especially on the gallium arsenide side, for RF applications, and what have you seen thus far in the quarter compared to what you saw in the September quarter?

Visibility is poor compared to September quarter.

Okay. Customers are actively pushing things out or kind of saying that things are stabilizing over the last month or so, or how would you call it?

I would say it's declining, yes.

Declining? Okay, perfect. Thank you so much.

That is all the questions we have at this time. I would like to turn the conference back over to Mr. Young for any additional or closing remarks.

Thank you for participating in our conference call. This quarter we will be participating in the Tech America conference in San Diego and the Piper Jaffrey conference in New York.

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.

Thank you, and that does conclude today's conference. We thank you for your participation. You may now disconnect.