AXT Inc (AXTI) 2013 Q2 法說會逐字稿

Good afternoon everyone and welcome to AXT's Second Quarter 2013 Financial Conference Call. Today's call is being recorded. Leading the call today is Dr. Morris Young, Chief Executive Officer and Raymond Low, Chief Financial Officer. My name is Kevin. And I will be your coordinator today. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session, instructions will be given at that time. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Kevin 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, 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 and 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 delay on our customers -- by our customers on the timing of sales of product. In addition to the factors that may be discussed in this call, we refer you to the Company's periodic results filed with the Securities and Exchange Commission and available online by a 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 July 31, 2014. Also before we begin, I want to note that shortly following the close of the market today, we issued a press release reporting financial results for the second quarter of 2013. This press release can be accessed from the Investor Relations section of AXT's website. I would now like to turn the call over to Raymond Low for a review of the second quarter 2013 results. Raymond?

Thank you Leslie. Revenue for the second quarter of 2013 was $23.8 million compared with $22.4 million in the first quarter of 2013. Total gallium arsenide substrate revenue was $10.7 million for the second quarter of 2013, compared with $11.7 million in the first quarter of 2013. Indium phosphide substrate revenue was $2 million for the second quarter of 2013, compared with $1.8 million in the first quarter of 2013. Germanium substrate revenue was $5.3 million for the second quarter of 2013, compared with $2.6 million in the first quarter of 2013. Raw material sales were $5.8 million for the second quarter of 2013, compared with $6.3 million in the first quarter of 2013.

In the second quarter of 2013, revenue from North America was 8.6%, Asia-Pacific was 67.9% and Europe was 23.6% of total revenue. No customer generated more than 10% of our revenue during the second quarter. The top five customers generated 32% of our second quarter revenue.

Gross margin in the second quarter was 12.9% compared with 15.6% of revenue for the first quarter of 2013. The decline in the quarter was primarily the result of sales mix.

Selling, general and administrative expenses were $4.2 million for the second quarter of 2013, compared with $3.9 million in the first quarter of 2013. Research and development costs were $1 million for the second quarter of 2013, compared with $822,000 for the first quarter of 2013. The increase was for product testing costs. Total compensation expense was $338,000 for the second quarter of 2013, of which $5,000 was included in cost of revenues, $291,000 in SG&A and $42,000 in R&D.

Loss from operations for the second quarter of 2013 was $2.2 million compared with loss from operations of $1.3 million in the first quarter of 2013. Net interest and other income for the second quarter of 2013 was $901,000 compared to net interest and other expense of $512,000 in the first quarter of 2013. This positive swing of approximately $1.4 million was mainly attributable to an $811,000 gain on a minority investment in a privately-held company, $289,000 less foreign exchange loss this quarter, $189,000 more equity earnings from unconsolidated joint ventures and $89,000 less withholding tax in China on dividends declared by our consolidated joint ventures.

Net loss in the second quarter of 2013 was $1.7 million or a loss of $0.05 per diluted share. This compares with net loss of $2.4 million or a loss of $0.08 per diluted share in the first quarter of 2013. Cash and cash equivalents with maturities of less than three months, short-term investments, and other investments in high-grade securities with maturity of less than two years decreased by $3.9 million to $45.4 million at June 30, 2013. $2.4 million of this decrease was for dividend paid by our joint ventures to our minorities.

Account receivables, net of reserves, were $20.1 million at June 30, 2013, compared with $17 million at March 31, 2013. Days sales outstanding were at 77 days in the second quarter, compared with 68 days for the first quarter of 2013. Net inventory was $36 million at June 30, 2013, compared with $38.8 million at March 31, 2013. Of this, approximately 53% is raw materials, 37% is work-in-progress and 10% is finished goods.

Depreciation and amortization in the second quarter was $1.4 million and capital expenditures were $732,000. As of June 30th, 2013, the Company, including our consolidated joint ventures had 1,268 total employees, of whom 1,051 worked in production. This concludes our review of the results. I'll now turn the call over to Morris. Morris?

Our results for the second quarter came in within our guidance range. With revenue improving modestly from the prior quarter, we continue to see evolution of our business as our revenue further diversified across the substrate product portfolio. While the wireless market remained soft, germanium substrates showed strong growth in the second quarter. Germanium substrate was gaining momentum with increasing demand from CPV terrestrial solar cell applications. As we continue to work through challenges in the gallium arsenide substrate side of our business, it is encouraging to see growth in other areas in which we have invested over the past two years. We continue to manage our expense carefully and plan our business conservatively in order to weather the near-term environment and position ourselves with success as the market improves.

Beginning with semi-insulating gallium arsenide substrates. We continue to experience weakness in our revenues. We believe that this is the result of several factors; general weakness in the wireless, the ongoing technology transition in our industry, particularly affecting the switch side of our business, and customer-specific circumstances with one of our larger accounts. I will speak briefly to each.

The quarterly financial announcement in the wireless space has reinforced our general sense that demand in the second quarter was softer than typical. Forward-looking guidance has been mixed, but the general consensus is that the market will remain softer than normal in the short-term. What continued to impact us more significantly, however, is the ongoing technology transition on the switch side of our business to SOI. As you know, a large part of our business has been in pHEMT devices manufactured using MBE technology. Much of this market has been affected by the adoption of SOI. We have qualified our wafer for MOCVD technology, which is commonly used for HPT devices; but this will take some time to ramp in this area as it has historically not been AXT's primary focus.

Finally, our gallium arsenide sales has been impacted by a technical issue that has arisen with semiconducting substrates sold into a laser application at one of our larger customers. While the sales volume for this application is modest, we are eager to resolve this issue to clear away any business impediment that could affect our longstanding positive relationship with our customer, as well as business opportunities on the semi solution side of our business.

Turning to semiconducting substrates. As we have seen in the past couple of quarters, the market continues to be soft. Our revenues in Q2 were approximately flat from the prior quarter, and we don't expect much of a change in Q3. Similar to first quarter, we're seeing a greater level of activities from Taiwan and Europe, while China continues to be weak. The market in China is particularly competitive and there are a number of players, especially at the low-end of the market. These players are willing to take very slim margins and this dynamic has prohibited from us participating in certain opportunities that we may have in the past. Similarly, we are seeing the Japanese competitors becoming more aggressive on pricing as a result of the weakening yen.

Turning to germanium substrate, we saw a 110% increase in revenue from Q1, the largest single quarter increase in our company's history. We're expecting germanium substrate revenue to be somewhat lumpy. We expect to see strong growth in 2013 over last year, and believe that demand should continue throughout next year as well. During the second quarter, our traditional germanium substrate applications, including satellite solar cells continues to perform well across the geographies that we serve. In addition, we are seeing increased demand from CPV terrestrial solar cells. For some time, we have noted the increasing conversion efficiency of these solar cells, which is a critical factor in the industry as commercial adoption of this technology. As the efficiency increases, the cost per CPV installation become more attractive. AXT has been preparing for growth in this area of our business for some time. While the CPV industry is still nascent, we're carefully monitoring these commercial adoptions as we believe it has potential for significant growth. The technology is proving itself to be a reliable and effective way to generate power cost effectively. We'll remain the smaller of the two competitors in the solar market, but we are in a good competitive position and believe that we have plenty of opportunity for growth as the market matures.

Our biggest challenge, which we share with our competitor is that the cost of germanium raw material continues to increase. Today, it is approximately $1,850 a kilogram. We do have a minority ownership position in a germanium raw material joint venture that helps a bit to offset the higher cost, but the rising cost will continue to impact our margins for this product. Nevertheless, we have several Tier 1 germanium substrate customers. We are excited by the future opportunity that this business presents. In addition to germanium based CPV solar cells, there is a sizable effort underway to develop semi-conducting gallium arsenide-based CPV solar cells. This technology is proving to be as effective and also certain cost advantage, particularly when the cost of germanium raw material is so high and gallium is at historical lows. AXT is equally well positioned to accommodate a market should gallium arsenide become more widely utilized for these applications. Another interesting part about business currently is indium phosphide substrates for fiber optic applications.

While we have not talked a lot about it in the last couple of years, this area has been quietly gaining momentum and surpassed the $2 million level in the second quarter. For those of you who have followed us over the years, you may recall that indium phosphate substrates were a very significant portion of our revenue in the early 2000s. While fiber optics were out of favor for many years, we maintained the product line as our technology is well suited for this application and our customer reviews of our product has been positive. Further we have continued to invest in this area in order to provide the technical specifications that our customer base requires. In addition, we have begun to see increasing interest in indium phosphide as a result of the emerging silicon photonics technology, in which data is transferred among computer chips by optical arrays. This concept involves combining laser and silicon technology on the same chip for greater available bandwidth and higher processing speed. While the technology is still in the early adoption stage, companies such as Intel and Cisco have announced investments in this area. We continue to watch silicon photonics with interest as it could potentially drive increased demand in the years to come.

Now turning to raw material, while revenue in this area of our business can fluctuate quarter-to-quarter, we're seeing some positive trends. First, our run-rate has increased over the years as our joint ventures mature. Our revenue is now typically over $5 million a quarter. Even during the current cycle when the cost per kilo of gallium raw material is at historical lows. This is an indication that our joint venture has become strong, independent of AXT demand and they are establishing themselves as a reliable provider within their own respective market. Looking specifically at gallium, we noted last quarter, sales volume has healthy increased in the recent quarters and we are seeing product prices stabilizing in the recent environment. While it remains too early to determine, if gallium prices will increase meaningfully in the coming quarters, the positive trend is a welcome sign that applications into which gallium is sold are gaining strength.

In closing, we continue to work through the current challenges in gallium arsenide substrates. Semi-insulating substrate may remain in flux through the duration of the year as we as well as our competitors make adjustments in our business to reflect the current market technology trends. The market for semi-conducting substrates, while soft, has not changed in terms of competitive landscape, application of technologies. The recovery in this area of our business will simply be driven by strengthening demand in end markets that we serve. While it is difficult to predict when this will happen, the market can turn very quickly and we are prepared to handle increasing sales, when the environment improves. Outside of the current challenges in gallium arsenide, we are seeing healthy growth and positive indicators in other areas of our business. We are pleased by our strong performance in germanium and indium phosphide substrates and expect both substrate product lines will see substantial growth in 2013 over the prior year. While we work through this turbulent time in our business, we're highly focused on improving our efficiency and cost structure in order to help mitigate the financial effect of these challenges on our business. This is and will continue to be a major objective across our organization and we are committed to driving improved results for our shareholders.

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

Thank you, Morris. In the third quarter, we are expecting to see total revenues of between $20 million to $22 million. We're expecting net loss in the third quarter of between $0.07 and $0.09 per share based on approximately 32.5 million common shares outstanding. This concludes our prepared comments and are happy to answer your questions.

(Operator Instructions). We'll take our first question from Edwin Mok with Needham & Company.

Hi, thanks for taking my question. First question Morris, just to get some more detail on this customer-specific issue you mentioned. And you mentioned -- I think, in your prepared remarks, you mentioned that you guys are working on it. Is it something that you expect to lastly resolve in the back half of this year, and is that something that is -- that could potentially reoccur in other situation? Can you give us some color on that?

Sure. I think we are working on this issue with our customers. I believe we are fairly close to the end of resolving the issue. I do expect it to be resolved within the quarter.

Oh, I guess it wasn't this quarter. That's great, thanks.

To answer your other part of the question. This is a very specific customer on a very specific product. Although the revenue opportunity is modest, it doesn't affect other customers or other product at all.

Okay, great. And then I think on the semiconducting part, at least on that side, you talked about Japanese customer becoming more competitive because of kind of falling yen and helping them on the cost side. Is that only limit to semiconducting and are you seeing that as a risk for your semi-insulating side at all?

Well so far as we see, it's mostly on the semiconducting side, because in the semi-insulating side, there is not a whole lot of suppliers on that side and we're not seeing particularly aggressive pricing behavior.

I see.

The yen, obviously, is presenting some challenges, when they depreciated 20%.

Of course right, it helped though on the cost side, great. And then on the germanium side, so it looks like CPV finally kick off driving that very, very strong growth this quarter. And I think you mentioned on the call that you expect this year to be a strong year for that business. I'm just wondering is that a big lumpy order that you got in the June quarter and as a result you expect that (inaudible) at least moderate into September quarter and maybe we see more bigger orders somewhere down the road or is that -- is this $500 million level sustainable going into the back half.

Well Edwin, the germanium market actually is exciting because we're not only seeing -- it's not coming from one customer, it's coming from several customers. I think the specific applications are probably the -- end-market is one is probably Middle East and the other strong demand is from China. We are cautiously optimistic and we're sending our marketing people out there. And we certainly hear customers saying that they are increasing demand, they have a next big project, but we've not put that into bank. I mean, we want to be cautious seeing they're really having the next big project to work on. I think the next big project I heard was something like 300 megawatts, which is a huge project they're working on. But again, we need to confirm that.

I see. Okay, that's fair. I'm sorry, two more questions, I'll go away. On the raw material side historically, you guys have or at least over the last two years, your raw material revenue has come down on the back half of the year largely because you start changing some of those material into the substrate side of the business. Will the struggle or the challenge in this Gas substrate business? Should we think that your raw material revenue can be more a stable over the next two quarters?

Well, I think in our prepared comments, we've seen over the years our raw material side of the business has increased. As you typically remember two years ago, it was between $1 million to $2 million a quarter; now it's up to $5 million. I don't really see, Raymond, do you ever see seasonal trend on the raw material business, we don't right?

No, not really.

But they do come -- they're not as steady as they are. And you know also there is -- other factor is that when we use the material itself, we don't count it as revenue and as our gallium arsenide business sort of declined a little bit so maybe that's the other factor, they're selling more to the outside rather than to sell ourselves. So it helps one side, but that means also we're losing on the other side.

I see, okay, great. You kind of confirm what I was thinking . Last question on the gross margin side. 12.9% looks pretty low this last quarter, any one-time effect that affected gross margin this last quarter and based on your guidance, it implies a similar gross margin level, how do you kind of think about gross margin over beyond just the September quarter?

Let me just answer specifically about this quarter and also the immediate quarter coming up. As you can see our germanium revenue increased quite a bit, but obviously the cost of germanium, that's been going up. So margin squeeze came from -- as we said from our prepared comments was largely from the sales mix. Immediately the price of germanium is still high and that's why going into the immediate Q3, we could probably just expect flat gross margin or slightly modestly up. But with the germanium being such a large component of the germanium substrate itself and that cost is very high right now.

So, let me take you to the longer-range future. I think, Raymond hit nail on the head on the germanium cost. I mean, we've been trying to talk to all customers and say "Hey you know look, germanium raw material is increasing in price and we're suffering." But some of these customers, they are long-range customers, they sign contract with us over a year-ago, they say "Well you can't increase our price." They have certain commitments, but we would definitely try to negotiate a better term for next year's contract and I think everybody realize that germanium price significantly increases our cost. We're just in a competitive market and we only have one competitor, so we're looking forward to see if we can improve someone.

I think the other side of the coin is also, as you can see, gallium arsenide is at historical lows. Had we had some gallium arsenide business to shoulder some of these fixed overhead and depreciation costs and whatnot, it definitely would help a lot. I do believe that we are going through a very difficult time and I do expect -- I don't expect it to improve dramatically next quarter, but I hope by next year, we should be able to improve on that side. So that's the second point.

And looking forward also I do see that we are seeing plenty of opportunity for us to again cut our cost and improve our efficiency across all factories. As you know that the AXT has gone through several of these [tychos] before and not very long ago, we were looking at mid-to-high 30s as our target gross margin. I'm not going to be that aggressive now, but I would say I think you are right, 15% is really low. I'm looking for better margin days ahead.

Great, that was really helpful thank you.

(Operator Instructions). Next, Avinash Kant with D.A. Davidson & Company.

Hi Morris, and Raymond.

Hi, Avinash.

So, I think historically, you have given us some average pricing of gallium over the quarter. Could you give us what did you see the average pricing was in gallium (multiple speakers)?

Yes, it's around $280 to $320.

$280 to $320?

Right.

And, it's stabilizing, it has been stable for almost a quarter, quarter and a half.

Okay, and on the gallium arsenide side, especially on the wireless front, you're talking about competition from SOI. Again, could you kind of quantify a little bit -- I think I tried to ask this question in the past also -- what percentage of our business is competing with SOI? What percentage of the gallium arsenide wireless business is competing with SOI?

Sure and I think traditionally, we have been strong in the MBE type of applications and MBE especially strong in the recent past in making the pHEMT switches and what we understand is that that segment of the market is being impacted big-time by the SOI invasion coming into the market. And so, I think we are seeing a very significant impact. I think on the HPT, which we participate to a lesser extent, is not affected by the SOI or CMOS as best we can tell our industry leader has been calming everybody saying the HPT still has a better efficiency as well as linearity and the cost of making these HPTs are not more expensive than CMOS. So, most people are very confident that the HPT will remain to be a strong point for gallium arsenide, but the challenge for AXT is that we have been historically strong in the pHEMT market in making MBE and that market is significantly impacted by the SOI.

So you would say that pHEMT will be roughly 40% of your overall Gallium Arsenide wireless sales?

No, I would say more than 50% on the pHEMT.

And that is where you are seeing the competition?

Yes. We are not seeing the competition, but we are seeing the customer adopting SOI from what we --

Yes, from SOI. Exactly, okay. And on the LED front, you said its market is kind of -- you're expecting it to be flat?

Yes.

Okay. And that's primarily because of competition in China.

Yes.

And could you talk a little bit about your margins in the materials business?

Material business I think is sort of flat. We can definitely get some help from the increase in gallium price, but I think it's flat right, Raymond? That's the best to describe it. I think we are -- I mean the good news is that our joint venture has very low cost structure so they are -- they're definitely not losing money and so the volume is up. So, they are sort of comfortable there and they don't have a big infrastructure. They don't have to pay lawyers and Sarbanes-Oxley.

And given what you've been saying about the germanium market, it looks like your margins in the germanium business are lower than the corporate average right now?

Right now, because of the high cost of germanium raw materials.

But I would say this though -- I think you know -- I definitely welcome the opportunity in germanium that is, first of all there is not a whole lot of competitors in the space and if we suffer as we said in our comments that our competitor has to suffer as well. So, either we gain a huge amount of market share or we will be able to negotiate a better price. I mean, this is a problem that the whole industry has to face and I think the exciting thing is that if the CPV technology is gaining momentum, then you can -- I'm assuming that would solve the problem of using gallium arsenide as a substrate to make CPV. So, they have to resolve each other whether germanium is a better substrate for CPV or gallium arsenide is a better substrate for CPV. And we can provide both.

And final question. So your key customer in the wireless side has been talking positive things and how come you don't see it yet?

I don't know Avinash, which key customer you are talking about, but you know --

Your largest customer in the gallium arsenide wireless side?

Is it Triquint or is it --

Yeah.

Well, Triquint I think, I mean, I listened to their call. My take is that they are saying gallium arsenide is doing well because HPT is doing great, but they are also seeing a great opportunity in the future business. So, you're right. I think, if Triquint were to recover, we definitely think that we should recover with them, but on the other hand, if they are going to adopt part of their switch from gallium arsenide pHEMT to SOI that would hurt us.

Is that happening?

Well, we think so.

Okay, thank you so much.

Our next question comes from Richard Shannon with Craig-Hallum. Please go ahead.

Hey Morris and Raymond, how you doing?

Hi Richard.

Hi Richard.

I guess just a few questions from me. Morris, well, I think I've done this the last few quarters I'll ask you to look at your crystal ball and let us know what you think the future curve in gallium pricing, I think you mentioned it maybe has bottomed out here or stabilized at these levels. Do you see it improving anytime soon? And do you see that being driven by any capacity reductions or anything like that?

Well, every cycle is different. If I take my optimistic hat, I usually say the gallium will increase price for a two to three years in a row and then it will decline and you would get rid of the high-cost producer it will start to climb. I think, honestly what I fear now is that this particular cycle is impacted by the fact that perhaps the pHEMT business is on decline. I don't know what kind of effect that is. I don't have no idea what proportion it is, but of course gallium business is not supported not only by gallium arsenide, but also supported by other things such as LED, as well as other strong magnet and gallium nitrite as a catalyst for petroleum refining.

So, most of the others are not being affected. So, my crystal ball is telling me that, we more than doubled our capacity in the last cycle and we're selling just about all the capacity we can make. I think we're thankful because of our low cost structure we're still making money and I can definitely tell you I know of even in China there are gallium plants closed in the tune of -- the one I know of is around 30 tons per year capacity, but no matter what I say it's still -- I mean we haven't seen a substantial increase in gallium price. So, I can't predict what it's going to be -- I mean if I do I have to quit my CEO job and just speculate on gallium price.

Okay, appreciate those thoughts Morris. Second question on germanium. It sounds like a fairly lumpy business and which I guess isn't surprising here. You mentioned you know forthcoming project of 300 megawatts that might be coming up. Are these deals single source? Do they source from both the major suppliers in this market and how many more projects of similar size you see coming down the pipeline in the next say two or four quarters?

Well, we're certainly looking very hard and as you know some of this market it's hard to tell. I mean, I also heard about 200 megawatt last year, but that never materialized, okay. But this particular one seems to be I mean real because we are seeing multiple customers seeing both in China as well as in Europe, increasing their demand for CPV applications. So, I think we are not counting number of projects. We know there's one in Mexico, we know there is a big project in China, in the Middle East, we really don't know, I mean but there we do see a customer of ours in Europe who traditionally are very active in Europe, in Middle East, they're buying a whole lot of substrates. So, I think it's a multi-front increase.

Okay, fair enough. Last question from me, we've had three straight quarters of small losses here and it looks like another one coming up here. Can you give us your thoughts on what does your path look like getting back to breakeven in terms of revenue levels, gross margins, and OpEx and what's your level of urgency or when do you think you can get back there?

Well, we certainly are working very hard to do that. I mean obviously from the business perspective, we definitely need to repair that relationship with our major customer. Hopefully that is helping us and we are working very hard to get back into that HPT, and we are qualified with customers in HPT arena. But just traditionally, we have been strong in MBE field, which is being impacted by SOI. So it would take us some time and probably towards around the beginning of next year. So, that will repair our revenue streams in the semi-insulating side.

On the semi-conducting side, I think we just need to keep in touch with our customers and making sure if they were to increase their demand, the business revenue would come to us.

On germanium and indium phosphide, we have no issues. I think they are -- if we just take care of the business, we should have a good ride. On the raw material end, really there is nothing we can do, I think, but on the side of the business structure-wise in terms of efficiency, improving our yield. China is certainly having its challenge recently because of the higher cost of living and inflation and we have increased our employee salaries substantially in the last 2-3 years. So, but we are a technology company. So if we better organize ourselves, I think we can overcome those salary increases as we have done it in the past. So I'm really hopeful that we can, with a little bit help from the metal price side, we get ourselves act together to regaining our momentum in the semi-insulating side. I think we should be able to break even and shoot for better margins ahead.

Okay, fair enough. That's all from me guys. Thank you very much.

We'll take our next question from Tom Sepenzis with Northland Capital Markets. Please go ahead.

Hi guys. Sorry if I missed this, but you know the germanium business obviously did very well in the June quarter and I just was wondering, are you expecting that to stay flat to higher for the remainder of the year and something else is coming off or will that lump back down in the September quarter?

Well that business is going to be lumpy, but I think it's going be sort of flat in the next quarter, but I think the demand is going to be continued strong. The demand -- we do negotiate contract to contract with our smaller customers, but our large customers they do give us projections and we see those projections are fairly strong, but on the other hand, the smaller customers do constitute a good portion of our expected growth (multiple speakers) business.

So when using the midpoint of your guidance at around $21 million, where would you expect the fall off to come from, is that primarily in the gallium arsenide business, is that going to continue to decline or is it coming from raw materials? Where would the [guide] be?

We usually don't give that granular a prediction because we need a little bit of wiggle room. The fact that we have a diversified portfolio, I mean if we give you -- you know our own projection, I think we're saying gallium arsenide will probably continue to be slightly on the downside protection and germanium is flat, yes.

And then in terms of the raw materials in June, obviously down about $1 million sequentially on the top-line but pricing

hasn't been improving all year and improved in the second quarter over the first quarter. So I'm just curious as to why the business itself was down and what are your thoughts are on that moving --

Tom, I think the pricing in raw gallium actually went down between Q2 and Q1, actually went down.

Okay. Alright, well then I guess I looked at the wrong chart, which has happened before. Alright, that's all I have for you. Thanks very much.

Good Tom.

(Operator Instructions). We'll go next to Matt Reiner with Adirondack Funds. Please go ahead.

I'm all set guys. My questions are answered.

Okay, thank you.

(Operator Instructions). And there are no further questions. This does conclude today's question-and-answer session. At this time, I'd like to turn the conference back over to Dr. Morris Young for any additional or closing comments.

Thank you for participating in our conference call. 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, this does conclude today's conference. We thank you for your participation.