AXT Inc (AXTI) 2022 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to AXT's Fourth Quarter 2022 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Devin, and I will be your coordinator today.

I would now like to hand the conference over to Leslie Green, Investor Relations for AXT. Please proceed.

Thank you, Devin, 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; market conditions and trends including expected growth in the markets we serve; emerging applications using chips or devices fabricated on our substrates; our product mix; our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, to utilize our manufacturing capacity, the growing environmental, health and safety and chemical industry regulations in China as well as global economic and political conditions, including trade tariffs and restrictions.

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 events to differ materially. These uncertainties and risks include, but are not limited to, overall conditions in the markets in which the company competes, global financial conditions and uncertainties, COVID-19 and other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations in China, the financial performance of our partially owned supply chain companies, and the impact of delays by our customers on the timing of sales and their 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. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our current expectations.

This conference call will be available on our website at axt.com through February 16, 2024.

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 third quarter of 2022. 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 our third quarter results. Gary?

Thank you, Leslie, good afternoon to everyone. Revenue for the fourth quarter of 2022 was $26.8 million. That's down from $35.2 million in the third quarter of 2022, and down from $37.7 million in the fourth quarter of 2021. To break down our Q4 '22 revenue for you by product category, indium phosphide came in at $14.0 million, reflecting market softening particularly in the data center and telecommunications infrastructure.

Gallium arsenide was $5.5 million, reflecting the overall slowdown across the number of applications, particularly in China. Germanium substrates were $1.3 million. Our germanium substrate revenue was up slightly from Q3 as we have resolved the payment issue that we described in the past quarters. Finally, revenue from our 2 consolidated raw material joint venture companies in Q4 was $6.0 million. In the fourth quarter of 2022, revenue from Asia Pacific was 70% of sales, Europe was 15% and North America was 15%. The top 5 customers generated approximately 41% of total revenue and 1 customer was over the 10% level.

Non-GAAP gross margin in the fourth quarter was 32.5% compared with 42.2% in Q3 of 2022 and 32.4% in Q4 of 2021. This was below our expectations and it is a result of significantly lower volume, with revenue coming in at the lowest end of our guidance, more of an unfavorable shift in product mix than we had anticipated and a significant drop in the price of raw gallium in Q4, which resulted in low margin contribution from our consolidated joint venture. For those who prefer to track results on a GAAP basis, gross margin in the fourth quarter was 32.1% compared with 42.0% in Q3 of 2022 and 32.2% in Q4 of 2021. Total non-GAAP operating expense in Q4 was $9.0 million. This compares with $9.2 million in Q3 of 2022 and with $8.1 million in Q4 of 2021.

On a GAAP basis, total operating expense in Q4 of 2022 was $9.6 million, down from $10.2 million in Q3. For comparison, total GAAP operating expense was $9.1 million in Q4 of 2021. Our non-GAAP operating line for the fourth quarter of 2022 was a loss of $252,000 compared with a non-GAAP operating profit in Q3 of 2022 of $5.6 million and $4.1 million in Q4 of 2021. For reference, our GAAP operating line for the fourth quarter of 2022 was a loss of $1.0 million compared with an operating profit of $4.6 million in Q3 and an operating profit of $3.0 million in Q4 2021.

Non-operating other income and expense and other items below the operating line for the fourth quarter of '22, was a net gain of $2.2 million. The full breakdown is in our press release. This included a government grant of $1.2 million and is a good example of the strength of our favorable reputation and positive regard for our presence in China. For Q4 of 2022, we had a non-GAAP net income of $2.0 million or $0.05 per share compared with $6.8 million or $0.16 per share in the third quarter of 2022. Non-GAAP net income in Q4 of 2021 was $4.1 million or $0.09 per share. On a GAAP basis, net income in Q4 was $1.2 million or $0.03 per share. By comparison, net income was $5.8 million or $0.13 per share in the third quarter of 2022 and $3.0 million or $0.07 per share in Q4 of 2021. The weighted average diluted outstanding shares in Q4 was $42.7 million.

Cash, cash equivalents and investments were $52.8 million as of December 31. By comparison, at September 30, it was $48.2 million. Depreciation and amortization in the fourth quarter was $2.1 million and CapEx investments were $7.4 million. Most of the CapEx was for facilities and indium phosphide equipment-related matters. Total stock comp was $700,000. Net inventory at December 31 was $89.6 million. 52% of the inventory is raw materials and WIP is 44%, finished goods makes up approximately 4% of inventory. Inventory will be a key focus area for us in 2023, and our goal is to reduce it by approximately $10 million to $15 million this year. This concludes the discussion of our quarterly financial results.

Turning to our plan to list our subsidiary, Tongmei, in China on the STAR Market in Shanghai. Let me give you a brief update. Since the Chinese New Year, we have had active dialogue again with this China Securities Regulatory Commission, also called the CSRC. Their process is detailed and thorough, and they have asked us to respond to a couple of additional items. We are in the process of doing so now and remain optimistic that we will get CSRC approval in the coming months. We have posted a brief summary of the plan and the process on our website.

With that, I'll now turn the call over to Dr. Morris Young for a review of our business and market. Morris?

Thank you, Gary. During Q4, the softening of the macro environment continued as expected. We saw a step back in revenue across our portfolio as customers continue to digest inventory in the channel and evaluate their needs for the coming quarters. Overall, we believe they are approaching the 2023 demand environment with conservatism and will further reduce their estimated need in Q1. With that said, we continue to see active development for new applications and technology advancements using 35-material. What this tells us is that while the near-term environment is working through a significant inventory correction the midterm and longer-term prospects for our markets are vibrant.

In addition to the core applications that are driving our revenue today, new users in automotive sensing consumer products, health sensing, display and more are taking shape in a very real way. For the last 2 years, we are focused on raising our readiness and business efficiency and have created a world-class operation capable of supporting the current and future need of Tier 1 customers. To that end, I'm very proud of the work that we've done of the accomplishment of the entire AXT team. We have successfully completed the relocation of our gallium arsenide and germanium substrate manufacturing continue to build out our capability to support a dramatic increase in demand for our indium phosphide wafers. Made good progress on 2 major R&D projects to produce larger diameter wafers and implemented a recycling program that benefit our cost structure and drive positive results in our ESG efforts.

Collectively, our work today has positioned us more favorably than ever before, both with customers as well as competitive landscape. This includes gains in our market share, particularly in phosphide as well as enhancement of our reputation for quality and innovation and our ability to scale and our ability to deliver the specification that enable technology progress. For these reasons, we are optimistic about our return to growth when the market recovers. As we head into Q1, we're seeing a business slowdown continue as customers across our portfolio are evaluating and reducing inventory. We believe that the effect in Q1 is exaggerated by the typical business interruption of Chinese New Year as well as the lingering effect of COVID shutdown in China.

As such, we are planning for a major reset in Q1, but we do not -- but we do expect that we could see improvement beginning in Q2 as China reopens more fully. Indium phosphide was down in Q4, primarily as a result of continued cooling in the data center market as well as ongoing softness in 5G telecom infrastructure, particularly in China. The PONs market was coming down off its peak, but has been clearly resilient. In addition, we continue to perform well in our consumer applications, but because of inventory digestion, we expect it to take a meaningful pause in the first half of 2023.

We have 2 programs that are currently shipping, and we are excited for the ability to build long-term relationships in this important development market. Our gallium asset revenue is down significantly off its mid-2022 highs with customers in China having slowed significantly. We've seen a strong impact on our applications in wireless devices for the IoT and handset markets as well as industrial lasers and LED lighting and display. After such a strong decline, the gallium arsenide market appears to stabilizing, and we could see incremental improvement beginning in Q2. We are making good progress in our 8-inch gallium arsenide wafer developer. This product will be a cornerstone for micro LED adoption in a variety of consumer devices. While a meaningful revenue ramp isn't expected to begin until sometime next year, product qualification at the substrate level are scheduled to begin this year.

AXT is well positioned to be a prime player in this market. We view micro LED as a breakthrough display technology for consumers as it is expected to deliver significant improvement in power efficiency as well as greater brightness and more brilliant colors. Tier 1 companies are advancing its development, and we believe it has the potential to reship the gallium arsenide substrate industry. We're pleased to report that we have resolved the payment issue with our germanium customers, and we saw a small improvement in revenue in Q4. While the germanium substrate market has also been affected by the macro softness, we will be working towards sequential growth in the coming quarters.

And finally, turning to our raw material supply chain company. Consolidated revenue were down due to pricing pressure in Q4 and softer demand environment. We do continue to see a good contribution from our supply chain companies treated in equity accounting below the operating line. While our increasing price of certain raw material can be negative for a company like JinMei, which is offset by improved contribution below the line. Our supply chain strategy is unique as compared to our competitors and is attractive to our customers. This is a strong focus for us in 2023.

In closing, though a softening of microenvironment has reset our growth trajectory, the trend that has been driven out revenue, customer and application expansions remain very much intact. Today, we are the world leader in indium phosphide and we are the company that Tier 1 customers come to when they are beginning their new innovation to market. We continue to raise the bar on our technical capability, creating clear differentiation with our competitors. Further, we have worked hard to improve our efficiency, and we'll continue to focus on delivering profitability. As such, the fundamentals in our business are solid, and we're looking ahead to our future with optimism.

I will now turn the call back to Gary for our first quarter guidance. Gary?

Thank you, Morris. Given the continuing inventory correction as well as the impact in Q1 from Chinese New Year and COVID shutdowns in China, we expect Q1 revenue to be between $19 million and $21 million. This lower revenue is expected to have a significant impact on our manufacturing overhead being spread over your units, which will have a negative impact on gross margin. Product mix is also less favorable and as a result of lower expected revenue for indium phosphide. As such, we expect our non-GAAP net loss will be in the range of $0.10 to $0.12 and GAAP net loss will be in the range of $0.12 to $0.14. This share count will be approximately 42.7 million shares.

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

(Operator Instructions) Our first question comes from Charles Shi [ph] with Needham & Company.

Gary, Morris. Maybe first, I want to start. Obviously, Q1 is a reset. But I did hear you had some relatively more positive commentary, for example, gallium arsenide, you're seeing possibly some indication of improvement beginning in Q2. But what about indium phosphide side, I did hear you yes that in Q1, there may be some slowdown related as customer pause a little bit in the first half '23. But if I tie all your comments together, hard for me to not to think maybe Q1 or even if I want to be more cautious, maybe Q2 seems to be the bottom of this down cycle for you. Can you share with us some color? What were your thoughts are at this point? Yes.

Sure, Charles. I think -- well, let me put it this way. I think although AXT is a small company, but our business covers a whole range of different product. As you know, germanium is in the solar cell, gallium arsenide not only covers the handsets and the wireless infrastructure as well as hybridness LEDs and high-power lasers. And I believe every segment of the business goes into the prime demand in different stages. For instance, wireless handsets to get hit, I think inventory correction early in Q3, and infrastructure came a little bit later. And we hear that the HPT market device inventory is still quite strong there.

But on the other hand, you can say that China is reopening up with COVID problem out of the way. When will the consumer demand come back up, and that was the major driver for gallium arsenide (inaudible) 0:19:52. As far as indium phosphide is concerned, we didn't see the softness in indium phosphide for consumer product until late in Q -- let's say, mid Q1. So we do expect that inventory correction probably will last through this quarter and maybe drag into second quarter. And hopefully, it will start to recover. But indium phosphide also covers other areas of applications such as PONs market as well as the data center. So in a data center, it has been having an inventory correction and the demand is now very strong. So we do expect indium phosphide probably will soften definitely through Q1. Actually, we're expecting phosphide to be almost 50% of what we have been doing Q4. So it's a significant downshift in phosphide demand in Q1.

But will it recover and how much? And then it does depends upon the balance of different market segments, such as consumer, when would they start to sort out the inventory we have and the data center, will it recover soon enough to give us some significant business contribution. So it is right now, it's hard to say. I used to say last year throughout the last I think, 5, 6 quarters, we've been saying that HT is having improved clarity of what is coming in the business pipeline. But because of the business interruptions or inventory corrections, I think we'll lose that visibility. We just don't have a whole lot of visibility of seeing what we can recover. I think it's probably going to be flat in Q2, but definitely, we hope with consumers coming back in China, I think the market will start to bounce back in Q3 and Q4 of this year.

I think it's a good response. The short summary is, yes, we think Q1 is going to be the bottom. And we'll all find out in another month or 2, so. Yes.

So maybe a little bit longer term. You said indium phosphide 2 programs shipping, I mean, production products to your end customers. Do you have much visibility if there may be a third program where you can get to the stage that you can ship production wafers to your customers this year? Or maybe this year is more about the continuation of the existing 2 programs, maybe expand the volume a bit when we really get to the second half of the year when those end products start to ramp again? That's my second question.

Yes. I would say we don't see any new consumer product applications for indium phosphide this year. And if there's any increasing demand after they count all their inventories and if they digested the inventory, it's probably -- if the demand goes from the top line phone sets to the lower set, and then that may drive some increasing demand. I cannot tell because the customers are giving us visibilities. As far as future development is concerned, Charles, you hit me right here in a very sort of among the inventory corrections. So things are fairly pessimistic. But if you would ask me what indium phosphide are used for, what's our marketing gathering information, what's the possibility? I definitely think there is a lot of growth potential, especially in sensors, in lasers, where you need eye-safety as well as autonomous vehicle. I mean we had customer interest in us delivering sizable product to that market. But that inquiry was late sometime last year, but it never materialized. When will it come back? I don't know.

I think our other potential product is health care product. Again, the customer was taking our product for a beta site pilot production. I think, unfortunately, it's not materializing and becoming a major production product demand now. When will it come back? I think the interest is there, but we just don't have visibility. It will come to become a major production demand yet.

Thank you, Maurice. I definitely understand that this is a supply chain that the customer -- I mean end customer probably only going to tell you almost the last minute, whether it's go no-go totally understand. So I think my last question really around the larger diameter gallium arsenide for micro LED application. I think that one of your top customers recently said they're going to see meaningful revenue in 2025, which kind of implies that that's the time they start to ship in volume, right? But I don't know how much of your revenue will lead to their revenue in terms of generating meaningful revenue from this micro LED application.

Can you kind of give us some idea how the ramp of revenue could look like? I think you said that you're going to start shipping some volume this year, but this year, next year and 2025, how does the revenue ramp look like?

Sure. We are shipping hundreds of wafers to customers. I think they are doing their (inaudible) 0:26:59 as well as looking at the wafer in more different ways, including (inaudible) 0:27:05 they need wafer to be and running through the pilot production lines. And I think we agree with you. I think -- although the earlier projection was that it's going to start to run -- have a production ramp up in 2024, but I think it's -- we think it's going to be late 2024 rather than early 2024. So that matches with your 2025 big production ramp.

But I think I'm very glad to see that this project is really taking shape and looks like it's going to be a major project. But I think the bigger known is how successful this project will be and will it spread to other applications because our customer has told us that this is just a start of the program. And eventually, it could lead to something like 5x to 10x the volume as the initial demand is. I mean, it does depends upon how well they can run this project and how well they can reduce the cost and how the overall macro would be performed.

But I think as you know, there are many, many different competing technology (inaudible) 0:28:33 for this micro LED applications, such as (inaudible) 0:28:38, such as condos. So I think this is a big win for gallium arsenide. And I think we are very well positioned because we not only are in substrate making, but we are also in supplying some of the raw material, which will benefit because this -- the demand for gallium arsenide is going to increase significantly. I think that's the way I view it, what the micro LED is going to be. But as I said, I think the time frame of when will it be commercially ramping up in volume production, I think it's probably late 2024 to 2025.

Got it. Got it. Sounds like you may lead your customers' revenue ramp up by a little bit or that kind of makes sense, right, because wafer first, you ship the wafer, you recognize revenue, they process wafer, they recognize their revenue.

Our next question comes from Matt Bryson with Wedbush.

First one is when you look at the 3 factors you mention is impacting gross margins, Gary. Can you provide some weight as to -- or some idea of the weight of each of those factors on the quarter?

Well, I would say the lower revenue is the key part of the story and the product mix wasn't as good as we expected. So those are probably the 2 main things. A little bit of below expectation from the raw material companies, but it's really more around the substrate business.

But on the other hand, the guidance for Q1, then the major impact of the gross margin coming down, I will probably think it's shifting more towards the product mix because we expect indium phosphide to take a major hit on the inventory correction. So that will drop significantly, that will impact our gross margin overall.

That's correct.

Understood. But then -- so when we're thinking about normal gross margins, if you're able to return revenues to the level they had been at, then you're still looking at the gross margins you were enjoying a quarter or 2 ago. Is that fair?

Absolutely.

See Matt, I think we -- although there are price pressure from customers when business is not looking good, but this is not as significant. I mean, it's not a drop of overall margin. Our business is fairly stable. And we're also increasing our efficiency and we have new joint ventures, taking care of the raw material supply. So we're confident in as business return, I think we should be looking forward to mid-30s and even, yes.

Yes. Understood. I just wanted to make sure it wasn't more of a -- the pricing wasn't more of a factor, right, because that be ---

No. Pricing is not really a key factor. Yes, there's pricing pressure some time to time, but really, the big reasons were what I just said. So -- and we're confident that when things rebound. All the stuff that we've done for the last 2 years to improve gross margin is going to blossom again. It's just taking a pause because of the disruption in the marketplace right now.

Understood. And then I guess my one other question is you talked to some programs being potentially put on hold and your customers given the more difficult environment, which makes sense. But on the silicon photonics front, are you still seeing progress there? Or anything you can talk about as to how you see that market developing for AXT?

Yes. Silicon Photonics, I think, is doing fine, although the data center market from what we read in the marketplace is that it's not doing well. I mean there is a pause, as you know, that I mean, even I read Microsoft, their data center business is not doing well. So they are taking a correction and so is Amazon. So all these big data centers if they're not buying, then now silicon photonics is doing well. But on the other hand, I would still say, as far as Internet and cloud computing is concerned, there's going to be more and more data transferring backup force and you need more data, more bigger data center and you need fiber optics to solve the bandwidth and speed problem.

So I think that's all going good for any phosphide material. So I think longer trend, there's no question about it. I think it's -- but it's short term, you're going to have inventory correction, I mean, even Microsoft, their business is sort of being soft right now. Everybody is looking at a possible slowdown in the overall economy.

Yes. I would add that one of the strengths of our business model is that the life cycle for some of these key applications is really quite different than the general semiconductor industry. As we all know, every 18 months or 24 months, you've got to come out with a new chip. But the data center is a good example. That's going to be here for -- and be a driver for silicon photonics and therefore, for indium phosphide for probably 5 to 15 years. I mean there's really -- it's hard to believe it would ever slow down, so.

And if you look at our history in gallium arsenide, the life cycle for some of those products was 15 years or 12 to 15 years. So it's quite different and -- but it's a positive difference, so.

(Operator Instructions) Our next question comes from Richard Shannon with Craig-Hallum.

For taking my questions. I'm going to hit on the gross margin topic, you're going to ask your direct question, Gary, as I usually do here. Trying to fit the guidance to get to the bottom line and guessing on OpEx here, and I was coming up with gross margins that are around a little bit below 20%. As I look back in the history to the last quarter around $20 million per quarter, I saw a number of around 26%, 27%. Clearly, you've got a negative mix here with indium phosphide, but that difference seems fairly dramatic. So I wonder if you could tell us how close they are in doing our math here?

So Richard, are you describing the Q4 results or the --

No, Q1.

First quarter.

I think Richard wants to know how do we compare with the last cycle? I mean when we had a $20 million quarter, Richard’s saying our gross margin was better than what you telecasted or forecasted.

Yes. Is 18% approximately right because it's a lot different than last time you were at the sales level. So I just want to get a little bit more clarity there.

I'd say it's too low.

I don't know for sure what it's going to be. Obviously, given the mix in the --

I think a lot of sales is more than 20, I think, 21%. But that's our model.

Okay. Okay. We have clearly got some other parts of the model that we'll follow up offline there, but I just want to get that one out of the way here. That is helpful. And I just wanted to make sure I caught this correctly on the first quarter, you expect any phosphide to be down more than 50% sequentially, and this was entirely due to consumer and data center or were there other elements of it? I just want to make sure I caught all of them.

Yes. I think data center is not helping, but most significantly is the consumer. And the consumer product part didn't take a big inventory correction until recently and.

Yes. We understand their cycles. So that certainly isn't necessarily surprising. So that's fair enough then. Gary, I guess, kind of a multi-part question here kind of taking a topic of inventory, the topic of CapEx and thinking about cash flows this year, you made a prepared remark about trying to burn $10 million to $15 million of inventory this year, which is good to see here given the turns here recently. I wonder if you could comment also on what your CapEx expectations are for the year, especially relative to last year. And since a lot of the build here in CapEx has been in the phosphide and you've got a fairly significant hole here, however temporary it may be here. It seems like you don't have as much urgency to build at least right away. So I want to get your sense of to what degree CapEx needs to be as high as last year. Let's just kind of cut it off there.

Okay. Well, the short answer is it won't be as high as last year. In addition to clamping down on inventory, we're going to put the brakes on CapEx as well. So I would say $3 million to $5 million. And we can modify that. If things bounce back, we have investments we'd like to make, but Morris has already got a shot gone out. And if anyone talks about a lot of CapEx, they're going to be in trouble, so.

Well, even if business were to pick up, I mean the spend that we did for last year was because the customer demand is way outstripping our ability to deliver. That's why we were building very aggressively and even towards second half of the year. So, some of those builds are still hanging out there. So even if the business were to recover, I think we do expect it to recover, and it will continue to grow. We can handle that. No problem at all. And it's only where if we are seeing other or 2 which I hope other consumer products were coming in to use indium phosphide, then we're going to start building again.

So I think -- I hope you understand it's a lag, right? I mean we're forecasting it's going to grow. So we're going to build the capacity because we don't want to short change or not be able to deliver to our customers. But then when it's a cutoff, then obviously, we put a breakout, but there's some ruminant value hanging out there, but I don't think it's at risk because I think indium phosphide for the near future, probably we will absorb all those extra capacity we plan to build.

Sorry, Morris. I didn't mean to cut you off there. Please finish.

No, no. I have finished. I said it's not -- we plan but we built last year. Yes.

Okay. Fair enough. Last question for me, kind of dovetailing off of one of those remarks in there Morris regarding just general sensing applications. I think an earlier question asked about your large customer, and I think you -- I think if I caught you correctly, so you don't expect any new programs in this current calendar year. How about kind of more broadly thinking other customers in applications regarding sensing? And to what degree are they in early stage versus late stage development such that they could impact this year or perhaps some following years? Maybe just kind of give us the big picture long term there.

Yes. But Richard, I think I had my head hanging down now. But if you look at indium phosphide, I think as I said, I think health care is a big application, although I think the development is taking a pause. I mean, automotive, we have a customer asking for 3,000 4-inch indium phosphide per month, and they will -- we were giving a formal quote and we were calculating how much will it cost us, and we will almost be ready to build extra capacity for them, but they didn't come through, okay. But I don't think they are playing games with us, okay.

So I think there are many other programs just, if you're going to have the matter gargle, I was told that you need an eye-tracking indium phosphide sensor. And if that market were to take off and -- but then, of course, there's a lot of development program taking a pause right now. But I think those are many, many of these users, which will use indium phosphide and one customer told us there are 12 projects being developed using indium phosphide to improve consumers' experience, to improve their handheld devices. So -- but if you asked me last year, I think, well, maybe there's a few which could come to fruition in 2024, but I think I'm taking more conservative. Yes. They --

Okay.

Yes, let me add something to that, too. It's kind of a big picture comment. But indium phosphide is taking on a life of its own, and it's robust. It's great to watch. It's exciting for us to be a leader in this kind of material. And there's going to be stuff that's going into gaming, automotive sensors, (inaudible) 0:44:05 well-being. So it's definitely taken on a life of its.

Yes. And I think if you -- looking for short term, I would say China is looking to pump up the economy. I think the government may want to do some infrastructure build. As well as, I think in the United States, I think U.S. is thinking about the big infrastructure build wants to make Internet (inaudible) 0:44:41 anything which have anything to do with fiber optic communications. So I think they may help. But I think at this point, 5G base station is not built, which is on a low point and telecommunication is on a low point, but any of these government pumped infrastructure build is going to help on the demand of indium phosphide.

Our final question comes from Hamed Khorsand with BWS.

Just wanted to really understand that if you're talking about a reset in the business in Q1, why you're not considering resetting your business structure as it is? What's giving you the confidence that you will bottom out in Q1?

I think we're taking a reset, Hamid. I think you’d all agree. We're not buying material. We're shutting down most of our construction.

Lower CapEx.

Lower CapEx, we are looking at all possible ways to tighten our budget, lower inventory. But when -- are we looking at cutting back our R&D? That probably is an area we're not cutting back yet, but we're going to take a cautious look because that's the future of the company, such as 8-inch gallium arsenide, we want to keep on developing it so that we can have a robust crystals yield as well as able capacity to deliver to our customers. That revenue is going to come if we can take care of that business. I mean so is indium phosphide. I mean although as we said, we're not building more capacity anymore. I mean if you were to ask us last year, we were saying we're going to increase our capacity by 50% anyway. So this is a reset. We're not building that capacity anymore. That's a reset.

Okay. And then as far as the inventory is concerned, any risk that it becomes obsolete by the time the business turns around?

No, no. 50% of our inventory is raw material and raw material will never go back. I mean we can even sell the raw material, can we? And the other 40% is a work in process, which we're not cutting or polishing to any products, specific product specification. And you know gallium arsenide and indium phosphide has been here. Gallium arsenide being here for 25, 30 years. So it will never go away. Okay. I mean, so anything which is already cut to customer specifications, which is only 4% or 5%. And even then, I don't think we have lost customer. The most severe punishment is that the customer take our product and don't pay and they go bankrupt. That's the only time where we lost. So I don't think there's a whole lot of risk for.

Yes. In this business model, and again, it's different from the semiconductor because I come out of that background. But the fact that we are a material science company, and we start with raw materials, there's not a lot of management need to be micromanaging and watching out for obsolescence or things like that.

There are no further questions at this time. I'll now turn the call back over to Dr. Morris Young for 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 set up a call. We look forward to speaking with you in the near future.

Thank you for attending today's presentation. You may now disconnect.