AXT Inc (AXTI) 2015 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to AXT's first-quarter 2016 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Jessica and I will be your coordinator today. Today's call is being recorded.

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

Thank you, Jessica, 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 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 results -- or actual events or results could 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 these factors that may be discussed on 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 events or results to differ materially from our expectations.

This conference call will be available on our website at AXT.com through May 2, 2017.

Also, before we begin, I want to note that shortly following the close of market today, we issued a press release reporting financial results for the first quarter of 2016. This information is available on the investor relations portion of our website at AXT.com.

I would now like to turn the call over to Gary Fischer for a review of the first-quarter results. Gary?

Thank you, Leslie. Good afternoon. Revenue for the first quarter of 2016 was $18.7 million compared with $18.1 million in the fourth quarter of 2015. This is slightly above our expectation of $17.5 million to $18.5 million. In the first quarter of 2016, revenue from North America was 13%, Asia-Pacific was 64%, and Europe was 23% of total revenue.

In the first quarter, we had one customer that generated more than 10% of revenue, and the top five customers generated approximately 41% of total revenue, reflecting again our diversification in both products and customers.

Gross margin in the first quarter was 28.1%. This strong improvement from the prior quarter is a result of a continuing shift in product mix favoring indium phosphide, and also good progress in manufacturing yield improvements. In addition, in the prior quarter, we took a lower of cost or market inventory write-down charge from one of our gallium raw material subsidiaries, and that reduced our consolidated gross margins last quarter by approximately 3 percentage points.

If you look at our gross margin over the four quarters before Q4 2015, gallium's write-down -- it's been averaging close to 24%, and then in Q4 it dropped. Q1 is a good rebound driven, by more indium phosphide sales and more efficient manufacturing.

Total operating expenses in the first quarter were $4.8 million, almost exactly the same amount as the $4.8 million in Q4 2015. Total stock compensation was $253,000 for the first quarter of 2016, of which $5,000 was included in cost of revenues, $200,000 in SG&A, and $48,000 in R&D.

Operating profit for the first quarter of 2016 was a positive $498,000 compared with an operating loss of $1.7 million in the previous quarter. Other income for the first quarter was a hit of $168,000. This number consists of four categories: net interest earnings on our [$43 million] in the bank of $98,000; a foreign exchange gain of $75,000; equity accounting on our unconsolidated joint ventures, which is a loss of $456,000; and other items adding up in the plus column for $115,000.

Below that, we reverse the minority ownership share of the three consolidated raw material companies, which is $109,000; and then accrued income taxes totaling $397,000.

For Q1 of 2016, we have a net profit of $42,000 which is $0.00 per share. This was approximately $0.04 better than our guidance range, which was a loss of $0.03 to $0.05 per share attributable to more indium phosphide in our product mix, more revenue, and improved gross margin. By comparison, we had a net loss of $1.2 million or $0.04 per share in the fourth quarter of 2015.

Accounts receivable, net of reserves, were $19.7 million at March 31, 2016, compared with $18.5 million at December 31, 2015. Net inventory increased in the quarter, and ended at $38.8 million compared with $38.0 million at December 31, 2015.

Ending inventory consisted of approximately 50% in raw materials, 43% in work in progress, and 7% in finished goods. This is very close to the spread in Q4.

Depreciation and amortization in the first quarter was $1.2 million, and capital expenditures were $795,000.

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 $43.3 million at March 31, 2016, compared with $44.0 million at December 31, 2015.

Finally, as many of you know, the Beijing city government has announced that it will expand its offices into the area where our manufacturing facility is located. They want to upgrade this area, and they are applying pressure on manufacturing companies to relocate. We are cooperating with them and have reached a verbal understanding to reduce our usage of arsenic at the current site by March 31, 2017. And we have agreed to stop production of gallium arsenide wafers at this site by December 31, 2017.

There is no similar agreement addressing indium phosphide or germanium. But internally, we believe that they will insist that we also stop manufacturing indium phosphide and germanium at this location sometime in 2018. We are in the process of looking at alternative sites, and will form a plan for an orderly phased relocation. Eventually, if we do totally vacate our current site, we would probably put it up for sale. This concludes our financial review.

Now I will turn the call over to Dr. Morris Young for a review of our business. Morris?

Thank you, Gary, and good afternoon, everybody. Q1 was a strong quarter for AXT in which we exceeded our revenue and profitability guidance and posted a strong increase in both our gross margin and operating margins from the prior quarter. In addition, our indium phosphide revenue is the highest it has been in recent years, continuing the strong growth trend we have been seeing.

For Q1, our indium phosphide was north of 30% of our total revenue for the quarter; and, again, was the single largest contributing product being higher than semi-insulating gallium arsenide, semiconducting gallium arsenide and germanium products. In addition, it was a significant contributor to our gross margin.

While indium phosphide is still an emerging material, the drivers for its demand are significant and are becoming clearer as activity steadily increases. For example, our indium phosphide sales continue to be driven by lasers and detectors for fiber-optic communications and passive optical network applications such as EPONs and GPONs. These short-haul networks are used for Internet access, voice-over-Internet protocol, digital TV delivery in metropolitan areas, and backhaul connections for 4G cellular base stations.

In addition, silicon photonics continue to grow rapidly as a driver for indium phosphide. Silicon photonics is an evolving technology in which data is being transferred by optical rays that can carry far more data in less time than electrical conductors. A number of leading companies, including Cisco, HP, IBM and Intel, are developing the technology for next-generation data centers to improve the connectivity both within and between racks. Here again, indium phosphide is a material of choice for the transmitter and receiver at each end of the data stream.

And finally, we are seeing increasing evidence that high-performance substrates will be a key enabler for 5G wireless technology. In order to support ultra-high-definition and 3D video, radio frequency front-ends are moving towards multimode, multiband power amplifiers that can operate at significant higher frequencies. These will be challenging for silicon or even gallium arsenide.

As a result, RF suppliers are actively evaluating indium phosphide for its performance capabilities in meeting the more stringent requirement for 5G wireless. In fact, we're now receiving requests from multiple customers for sample qualities of 6-inch indium phosphide substrates.

Indium phosphide based [derivatives] for all of these applications have tight specification requirements limiting the field of competitors that can address them. As we have noted, optoelectronic devices require very low etch pit density material, or EPD, a specification in which AXT's VGF technology strongly excels.

In addition, performance is a much larger factor than price. These contribute to a much stable margin profile and pricing stability that we see total today in gallium arsenide. AXT's superior performance has allowed us to take a market-leading position and enjoy healthy growth as customer demand continues to increase.

Semi-insulating gallium arsenide revenue was down in this quarter, but we did achieve some yield improvement in manufacturing in Q1. Overall, this area of our business has reached a relatively stable level, having weathered a major technology transition in previous years.

For semiconducting gallium arsenide, we continue to deploy modestly because of the fierce competitive landscape and corresponding pricing environment in the general market. However, we continue to pursue higher-end applications such as backlighting, signage, and automotive, where tighter specification allows us to command a better margin.

In addition, we are seeing increasing interest from customers for sample wafers using a vertical cavity surface emitting lasers, or VCSELs in short. Applications, such as gesture recognition and 3D sensing, are driving the recent interest. VCSELs bring together the advantage of low cost and optical efficiency within a small footprint. Like other optoelectronic devices, VCSELs have high stringent EPD requirements. We believe that the VCSEL market could become a significant driver for semiconducting gallium arsenide sometime next year.

Turning to raw materials, the overall market remains challenging for raw materials. Revenue trended down from Q4 to Q1, largely due to pricing pressure. In particular, the market for gallium raw materials has experienced the greatest decline in both sales volume and pricing in recent quarters as a result of oversupply. However, we believe that several suppliers are now considering cutting their production in an effort to balance demand. We are hopeful that this will result in greater pricing stability in the coming quarters.

Overall, raw material pricing remains reflective of the continued general weakness worldwide in commodities. However, these joint ventures have been a positive contributor to our business for the last 15 years, and we believe they continue to represent an important part of our value proposition and competitive differentiation.

In closing, we are excited about the strong growth trend in indium phosphide substrates and our continued ability to capture a disproportionate amount of the market increase. AXT has been investing in both our technology advancement and in-house expertise for the last several years, and these investments are beginning to contribute meaningfully to our results.

The indium phosphide market values performance and our substrates have a competitive lead in strategic specifications that are critical to our overall device requirements. As a result, we are well positioned to continue to drive a healthy annual growth from our indium phosphide, and to leverage our success for the benefit of our business model in the quarters to come.

This concludes my prepared comments, and I will now turn the call back to Gary for our second-quarter guidance. Gary?

Thanks, Morris. As we look ahead to Q2, we expect to see continued growth in our business, in keeping with the near-term result trends that Morris just discussed. As such, we believe that revenues will be in the range of $19.5 million to $20.5 million. We are expecting the bottom line to be in the range of breakeven to a profit of $0.02 per share, based on 32 million diluted common shares outstanding.

I'd also like to mention that AXT will be presenting at the B. Riley conference in Los Angeles on Wednesday, May 25.

This concludes our prepared comments. Morris and I will be glad to answer your questions now. Operator?

(Operator Instructions). Richard Shannon, Craig-Hallum.

Congratulations on a very nice quarter and thanks for taking my questions. I guess my first question is -- I couldn't run the math fast enough. But just wanted to ask Gary: what's the implied gross margins for your second-quarter guidance? Is that flat to up? Can you help me out there? And help us understand the puts and takes for the guidance there.

You mean for Q2 coming up?

For second quarter, yes.

There's kind of an echo there, isn't there? Operator, is there an echo on the --?

There was a bit of one, yes. (multiple speakers) I don't hear it anymore.

Can you hear me okay, Richard?

I can hear you guys perfectly. Apparently, you can't hear me well.

We are okay now; there was something going on. As I said, except for Q4 2015, we've been running in the low- to mid-20s. And now, of course, we shot across the line and are at 28%. We'd like to observe another quarter or two before we would use 28% in our model, but something a bit north of 25% is reasonable until we learn more.

(multiple speakers) If I may chime in here, I think it does depend upon the product mix. We love to see indium phosphide coming strong again. Raw material is other variable. It doesn't -- we are seeing it stabilizing now, although at a very low level, so we are assuming nothing changes over there.

Okay, fair enough. If I could backtrack very quickly to the first-quarter results, you mentioned indium phosphide somewhere over 30%. I think the previous quarter, you said it was close to 30%. Can you give us a sense of the growth rate there, either on a sequential or year-on-year basis, in the first quarter?

Well, we haven't calculated, but it's a strong quarter. It's all-time high again increase in years. That's all I can say. Indium phosphide, because it's an emerging material; so sometimes the increases can be up to 20%, but then the next quarter it can backtrack a little bit. So we want to say it can be a little bit lumpy. But year-over-year, in the last two years, was over 50%, as we said. This coming year we are shooting for good growth again.

You kind of preempted my following questions there, Morris. But what is implied within your second-quarter guidance for indium phosphide revenue? Is that for growth, at least as much as the overall corporate growth, or --?

Up, yes. It will be up.

Should be another strong quarter.

Okay. Well, congratulations on that. Morris, maybe if you could talk a little bit about your efforts to gain more customers for indium phosphide. I think you mentioned you think you are either number one or number two in sales there. And then you also mentioned supporting both lasers and photodetectors within the optical communication space.

Are you used differently for either of those main products? And also, do you have a sense of whether the application is driving your more long-haul versus more of the access or PON networks, as you referenced?

Well, your first part of the question is: are we using different material? No. It's the same. But mostly I think sometimes we see some customers have very, very tight specifications; or we were guessing they are probably using higher power laser, so they will require a much lower EPD. And some of them have optical arrays of detectors where they need a very uniformly lower EPD material. Again that's a special niche pocket for us, so again we can satisfy those specifications. I think it's a challenging spec but it's a very good spec for our product.

And what's your second part of the question?

Whether you are exposed to more to the long-haul part of the market, or more access -- or, as you referenced, the PON market.

That is hard for me to answer because we are selling to two layers of customers. Let's say, mostly our important customers are the epi growers. In the epi growers, they probably -- they tell us that is for lasers or detectors or for two-dimensional arrays, but they don't tell us if it's for long-haul or short metropolitan areas.

Okay. I kind of doubted that; but just wanted to get a sense of that. Morris, I guess my last question, and I'll jump out of line here: you talked about some customers interested in sampling 6-inch indium phosphide wafers. Do you have any sort of -- anywhere near volume capability on that? Or when do you think you'd plan to have something up and running at the 6-inch, in volume perspective?

Honestly, we don't have the product yet. We are developing it. We know the interest is coming up very strongly. We know -- we actually have multiple customers requesting sample quantities. So we are developing it. Our goal is to have products ready by the third quarter of this year. And then, we shall see, from that point, how fast the demand comes up and how fast we can ramp up our production.

AXT has always been very good at executing production increase, such as we demonstrated in gallium arsenide. Hopefully -- we again did it for indium phosphide as well. We can handle over 50% growth year-over-year, and that's an excellent performance in executing production increases.

Interesting. That's great detail. Morris, I think that's all the questions from me. I'll jump in line. But, again, congratulations on a great quarter.

Thank you, Richard.

(Operator Instructions). Edwin Mok, Needham and Company.

Congrats for the great quarter. Thanks for taking my questions. First one: just go back to your gross margin, Gary. Is it fair to say that the mix of indium phosphide was the biggest contributor for a strong gross margin, and it's fair to say that indium phosphide gross margin is greater than corporate average?

Yes, both of those comments are true. And also keep in mind that last quarter, in the December quarter, we had an inventory write-down for lower of cost or market on gallium raw material. So that's why last quarter spiked down to the low point that it did.

So if I look at that and you guys expect indium phosphide to grow and the (inaudible) potentially outgrow your company overall, wouldn't that benefit you on gross margin? Do you guide margin to be down sequentially? I'm trying to reconcile these things. Is it just conservatism actually ramped, and some prudential costs?

We are being a little conservative. I believe we're both -- Morris and I are both somewhat conservative in terms of just our personalities. In Q1, everything lined up really nicely, and we are encouraged by that. But we'd like to see one or two more quarters like that. So, I think it's -- my view, it's better to be a little bit more conservative than 28%.

I'd like to chime in on that as well. Indium phosphide used to be only 10% of our revenue. So although margin is better, but the contribution is actually very small. And as it becomes more and more of our product mix, I think it should contribute more. But, still, it's a gradual event. So you are right. If indium phosphide continues to grow after a year, four quarters, I think the contribution margin from indium phosphide to overall gross margin for the Company should be significant.

Yes; it should have an ever-increasing upward lift for some quarters. But as I say, yes, we are being a little bit conservative when we say something north of 25% instead of using 28%.

Okay. Actually, that's extremely helpful. And going on to your comment on indium phosphide for the 5G wireless application you mentioned, is that something that the front-end handset chip supplier are looking at? Or are we talking about more for base station call -- base station application for 5G? I'm just trying to understand that.

And what do you think the timing of those 5G -- since you get supply materials it's possible that you actually (technical difficulty) for the actual mass adoption. So can you help us out with that?

Sure. I believe indium phosphide will be used as HBT devices for the cell phone power amplifiers. I think that's a must area. Other than that, maybe on the Wi-Fi end where it requires a very high frequency. But of course initially, I believe indium phosphide probably will be more expensive than gallium arsenide. So, if gallium arsenide can answer the requirement for the 5G devices, gallium arsenide will have a significant play in that. But I think as performance increases, and some high end probably will migrate into indium phosphide.

Base station, I definitely think could be an indium phosphide business. Or some people are saying it could be a silicon carbide or gallium nitride type of business, where you have both high frequency as well as high power. But I think definitely wireless cell phones, where its operating voltage use is much smaller, definitely requires indium phosphide material.

(multiple speakers) I believe people are saying it could be 2020. But although I think the recent news says Verizon is having a [deposition] of 5G networks early next year.

Okay, that's helpful. Morris, you didn't talk too much about germanium on the call. But if I did my math correctly, I think germanium actually grew a little bit this quarter. Did I screw up my math and --? Any kind of color -- what drove the sequential growth for germanium? Or was it just kind of stabilizing, as well?

I think germanium did grow? Right, Gary? But germanium -- we didn't talk much about it because I think it's a -- how should I say? It's a business for serving the satellite business. And the satellite is -- it's one quarter up, and another quarter down. And the margin on that business is not really that great. And the other thing is the other market for germanium is CPV. Their market practically is dead. But there is one Google proposed OneWeb, using 100 some-odd satellite (multiple speakers). If that were to come to the market, people are saying, proposing that by 2017 or 2018, there could be a big, big business for germanium substrate again. But, you know --.

In the meantime, it's not (multiple speakers) we like the product, but it doesn't have the same thrill as indium phosphide.

Yes, indium phosphide is probably more predictable. And its growth quarter over quarter, we are more excited about it.

I see, okay. That's very, very helpful. Lastly, and I'll let the other guys ask. Gary, you mentioned on the last part of your commentary that your site in Beijing is being pushed out by the government; and, therefore, you guys need to look for a new site, right? Do you expect that to cause any kind of disruption in the production as we go to the later part of the year or into 2017? I'm just trying to gauge that.

And do you have another facility that you might be able to start moving capacity there to provide a more smooth transition? I'm just trying to understand what potentially (multiple speakers) would happen.

I can take first crack on it. We don't expect disruption in production. Some of our customers would be upset if there is disruption, so you have to do a phased and orderly relocation. You don't do it overnight, in one step. It would be -- the normal kind of plan that companies have to have when they move like this. So we would move part of our equipment and get it set up and running, and leave the rest back in Beijing. And so we'll operate -- produce from two sites until we know that the new site is stable. And in some cases, the more mature customers would want to compare the old wafers to the new wafers. But it's going to be using the same equipment, the same raw materials and the same processes, so we wouldn't expect there to be any differences.

So, no, there shouldn't be a disruption. There is a risk of that, of course, but I think we feel positive about it. We've got a lot of good options. We are looking at stuff. We've done this kind of thing before in our career. So it's a headache; but we've always tried to cooperate with the officials of China, and that's why we have their respect and their appreciation.

So just two quick one on that. One, should we expect some kind of incremental CapEx that will come through later on in the year, potentially get some color where should we expect CapEx become as you go through that transition? And second thing is is it true that when you move from one site to the next, some of your customer might have to be qualified on substrate? I'm just trying to understand how sensitive the customer are in terms of location production.

Yes. I think to answer your second part of the question, it definitely needs requalification. The customer are location-sensitive. So we do need to --. But we do requalification with our customers all the time, such as we have a new source of gallium or a new source of arsenic; and so, we are very familiar with those requalification process.

What we do is we qualify ourselves, looking at its critical parameters first. And then we send samples, quantity, to our customers; once they qualify, then we can start to ramp from the new facility.

And as far as CapEx is concerned -- Gary, do you want to answer that part of the question?

Sure. We don't have any hard numbers yet. Whatever CapEx we do invest would be -- it's going to be depreciated over approximately 27.5 years. So it's not likely to move the needle from what we have today. We don't have any concern about financing. We have existing cash. We also have our facility that we are currently in; which, as I said, if we totally vacate it, we can sell that eventually. And it's worth millions and millions of dollars. So, there will be some CapEx, but it shouldn't move the needle from what you see today.

(multiple speakers) Thank you.

Let me come in from a non-financial point of view. I think the location that we are in are in primary, or will be the prime area for the Beijing metropolitan areas. So the city government is going to move to nearby our address. So I think that real estate should be appreciate quite a bit. So although we may have to spend money to buy another piece of land, and to construct a new facility, but it should be more than compensated by vacating and selling the present location.

Great. As always, thank you.

Tom Sepenzis, Northland Bank.

Congratulations on the quarter, on the guide. I'm just curious; I didn't -- I don't think I understood why -- what is happening? Why are you closing the indium facility?

Well, we are not closing the facility. The present location of the manufacturing location that we have in Beijing, the city government is moving the city government to a location close by us, such that they don't like to see big chimneys and semiconductor industry nearby. So they are pressuring us to move along to a different location, so that's why we have to move.

Yes, and it's not just AXT. Anyone that's in what I would call the hard manufacturing business is being edged out, and they are going to convert this region of the city into boutique offices and restaurants. They are putting in an amusement park. So it's the whole nine yards, and we're not being isolated or singled out. We are one of about 3,000 companies in that area that are being respectfully asked to volunteer to relocate.

Okay. And then what kind of confidence do you have here for -- what kind of visibility do you have going into Q2? Because quarters tend to be lumpy. And I'm just curious as to what gives you confidence that you can raise your range here to $19.5 million to $20.5 million in June on the revenue side.

Tom, AXT has sort of a set procedure to reach our next quarter of guidance. I think that comes from both sales as well as our financial model. But sometimes we miss a little bit, just like last quarter. We guided a little bit lower range, and we achieved a little bit higher. But it's within, I would say, good confidence level is plus, minus 10%.

So if we are over 10%, we will probably pre-announce. If we are down 10%, we will probably pre-announce, as well. That's the general rule. So, we do take -- put a lot of effort into coming to those projected projections that we come to the guidance.

Great. Thank you. That's very helpful. I appreciate it.

Orin Hirschman, AIGH Investment Partners.

Congratulations on the results. One question. In terms of the -- in terms of next quarter, is the growth coming completely from silicon germanium (inaudible) completely from the indium phosphide business. Or was some of that coming also from the base gallium arsenide business?

I think indium phosphide we did make sure that it will show growth in our projection. Gallium arsenide, by the way, should have an increase quarter as well.

And raw materials will have an increase.

Yes, raw material actually will increase as well

So it's not one product. It's several. Indium phosphide definitely going to grow; but we'll get a little help on gallium and also raw materials.

Gallium arsenide.

Yes, gallium arsenide. Yes, yes.

Can you just go back -- did you actually mention what the percentage was on the indium phosphide business this quarter, which piece of the business it was (multiple speakers)?

We are hearing difficulty hearing you. Can you get closer to the phone?

Yes. And did you actually indicate what percent of revenues the indium phosphide business was this quarter?

I think we said it's north of 30%, but we didn't break it out. We said it's more than 30% in the last quarter.

Okay, thanks so much.

Jorge Rivas, Craig-Hallum.

Just a few follow-ups from us. So first of all, what's the time frame for the relocation of the facilities from Beijing? When should you expect to have that all finished up?

The first phase is end of 2017. We should start gallium arsenide substrate manufacturing. We think that we probably will vacate from the facility for indium phosphide and germanium probably by the end of 2018.

Okay, okay, that's good to know. Also I wanted to get more granularity on the gross margins and ask: what was the impact or the benefit from the write-down that happened in the past quarter? We are seeing an increase of about 11%, quarter over quarter. So if you could break that down between the benefit on mix versus the impact on the write-down that took effect this quarter.

Well, the write-down would have a zero impact. If we wrote it down to the market price, which is what we did for lower of cost or market, then we neutralized its negative impact. So, the improvements that we saw did have a swing from being very negative on raw materials in Q4 to being somewhat better in Q1. And that's probably maybe 3 percentage points in terms of gross margin.

We also just had -- we've been working on manufacturing, the concept of continuous improvement in yield. And we got some help there that I think is probably worth another maybe 2% to 3%. And we even had improvements in indium phosphide yields. So, between increased revenue of indium phosphide plus improved yield of indium phosphide, then you get several percentage points on that. So as we break it down, it makes sense.

Okay, great. And then just a couple more on indium phosphide. So we are hearing from multiple sources that there are constraints in the optical supply chain that are probably going to last for a couple of quarters. So first of all, I'm wondering if you guys are -- do you need to increase capacity? And that's the first part of the question.

The second part of the question is that the optical industry tends to go through price renegotiations, and price pressure tends to be very idiosyncratic of the industry. I'm wondering if you guys are exposed to that kind of price pressure in your indium phosphide business.

Sure. I think that's a very good question. I think -- to answer the question about how much we are preparing the growth, so let me demonstrate: we have been growing over 50% year-over-year, we've been saying for the last two years. So we have demonstrated that we can grow over 50% year-over-year. So, how much are we preparing to grow? Yes, I can -- I think we are increasing our capacity as we speak. And we are also developing the 6-inch capability. So we can -- if anything that we can very, very efficiently do is increasing our capacity.

As far as pricing pressure is concerned, we are having annual negotiation with our customers on pricing. However, usually comes up with higher volume; and so far, we haven't seen a whole lot of pressure on our material. As we also said at this point, performance is probably more important than price. And guaranteed volume also is very, very important. But it's not -- that's not to say that if you come up with a $2 million order and you say, well, Morris, can you drop the price a bit? We can definitely ask Gary to calculate it. We can benefit from the higher volume; then we definitely can give discounts.

We are definitely not saying the high pressure as we see in some of the mature products. I would characterize it to say, let's say, the latter part of the gallium arsenide volume increase where you see a very mature product, and then the price just drops every year. So for indium phosphide, we don't see that.

Okay. That's all for me, guys. Thanks a lot.

Sheldon Grodsky, Grodsky Associates.

Gentlemen, do you think you can maintain the 50% growth in indium phosphide for another year or two?

Well, as the numbers get bigger as the denominator grows, it's probably harder to keep this above 50% going. It's just the natural phenomenon of numbers when they get bigger. So the mathematically correct answer is no, we don't; we think that it won't be 50% again. But I think in our business model for 2016, we are in the 40% growth range, or north of 40%. Can it reach 50%? Maybe it can. But right now, to be conservative, we'd say it's not going to be over 50%.

Thank you.

Excuse me. I think that's a CFO answer. Do you want to hear the CEO answer? (laughter) I would say it is. I think we can handle the high usual growth. But we are just not modeling our business that way. Are we preparing for that? You bet. We are increasing our capacity. And because we know the technology well, so we don't have to invoke a very high CapEx to do that. And we are keeping check with our customers. Some of these 5G, if you were to increase very rapidly, who knows? As well as silicon photonics, we are just seeing the start of the tip of the iceberg. So, I agree with you. I think if we model our business, 50% or 45% is a very good business model growth.

Let me ask one more question. Do you think that relocating your facilities is going to be very disruptive? Or do you think it will be -- you will be able to do that fairly smoothly?

Well, it's a headache. I don't like to move, but I think we have to move. But I think, given the time that we are aware of this move coming up to us, I think we should be able to execute a smooth relocation.

How far do you think you may have to move?

Well, we like to keep to nearby places because it's more convenient. And for retention of our employees, that's easier too. But we like to keep it as close as possible. But some of the constraints also come in from the fact that we are manufacturing gallium arsenide material, and arsenic is increasingly becoming a sort of a highly dangerous material, even for China. So that will give us some limit as to the choice of places we can move to.

I think the distance is less of an issue than just being really organized, having the right people in charge of the program, and taking advantage of a long-time horizon that we have to plan for it, and get ready and execute it.

Thank you.

And it appears there are no further questions at this time. I'd like to turn the conference back to the speakers for any additional or closing remarks.

Thank you for participating in our conference call. As always, please feel free to contact me, Gary Fischer, or Leslie Green directly if you would like to meet with us. We look forward to speaking with you in the near future.

This concludes today's call. Thank you for your participation. You may now disconnect.