AXT Inc (AXTI) 2020 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to AXT's Second Quarter 2020 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Liz, and I will be your coordinator today. (Operator Instructions) I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Liz, 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 schedule and timeliness regarding our relocation; 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 events or results 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 or other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations in China, market acceptance and demand for the company's products, the financial performance of our partially owned supply chain companies and the impact of delays by our customers on the timing of sales of 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 July 22, 2021. 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 second quarter of 2020. 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 second quarter results. Gary?

Thank you, Leslie, and good afternoon to everybody. Okay. Total revenue for the second quarter of 2020 was $22.1 million. By comparison, revenue in the first quarter was $20.7 million and revenue in the second quarter of 2019 was $24.8 million.

Of our total revenue, substrate sales were $16.9 million in Q2 compared with $16.9 million in the first quarter, and $20.6 million in Q2 of 2019. Revenue from our raw material joint ventures was $5.3 million in Q2, up from $3.8 million in Q1 and $4.2 million in Q2 of 2019.

In the second quarter of 2020, revenue from all of Asia Pacific was 70%, Europe was 19% and North America was 11%. In the second quarter, one customer reached 10% of revenue, and the top 5 customers generated approximately 30% of revenue.

Gross margin in the second quarter was 30.6%, up from 26.6% in the prior quarter. The improvement in gross margin was due to a combination of higher revenue, some improvements in manufacturing as well as strong performance from one of the 2 consolidated raw material companies. By comparison, gross margin was 34% in Q2 of 2019.

Total operating expenses in Q2 were $6.3 million, up slightly from $6.2 million in the prior quarter. Total stock compensation expense for the second quarter of 2020 was $640,000. Operating profit for the second quarter of 2020 was $478,000 compared with an operating loss of $634,000 in the previous quarter. That is a swing of $1.1 million, which is a good shift. Operating profit in Q2 of 2019 was $2.3 million.

Other income net for the second quarter of 2020 is a gain of $1.4 million, this includes a net loss of $168,000 from the partially owned companies in AXT's supply chain accounted for under the equity method. A foreign exchange gain of $52,000, a net loss of $39,000 in net interest income and expense. And a gain of $1.6 million from a provincial government agency grant as an award for relocating to their province. This is, of course, in China.

Income tax for the second quarter of 2020 was a charge of $920,000 compared with a charge of $336,000 in Q1. This is above our usual tax rate because of a onetime tax-related to a rebate we received from our purchase of land use rights when we began the relocation in China. In addition, our Beijing company as well as the two consolidated raw material companies had higher profitability resulting in higher income tax.

Going forward, we expect the taxes to be between -- in the $550,000 to $650,000 range per quarter. Our Q2 results include approximately $278,000 in tariffs as a result of the 25% tariff charge on importing wafers into the United States from China. For Q2 2020, we had a net profit of $361,000 or a profit of $0.01 per share. By comparison, we had a net loss of $178,000 or a loss of $0.01 per share in the first quarter of 2020 and a net income of $1.5 million or $0.04 per share in Q2 of 2019. The share count in Q2 was 40,750,000 shares.

Cash, cash equivalents and investments were $32.5 million as of June 30. By comparison at March 31, it was $28.8 million, so cash is up $3.7 million from the March quarter. You may recall from our comments in last quarter's conference call that our accounts receivable was higher than it normally might be running, probably due to Chinese New Year and also the coronavirus. We worked on it in Q2 and brought the day sales outstanding number down into a more reasonable range. And as a result, the cash increased. So that's good.

We currently forecast that our net cash burn in 2020 will be similar to our cash burn in 2019, which was only about $3 million. Depending on the anticipated growth in the second half, it could initially consume additional cash as we add capacity, driven by growth, of course, and increased raw materials going into WIP. So we feel we have a strong cash position, which is important in light of the uncertainties resulting from the COVID-19. We still have an untapped line of credit with Wells Fargo Bank, and a second bank in China is arranging another line of credit for us as we speak. We do not anticipate tapping all of this, but it is prudent today -- in today's environment.

Depreciation and amortization in the second quarter was $976,000 and capital investments were $4.3 million. Net inventory at June 30 increased modestly to $49.6 million compared to $48.3 million in the March 31 quarter. Indium inventory consisted of approximately 44% in raw materials, 51% work in progress and only 5% in finished goods. These portions stay fairly constant in our business model.

In conclusion, the P&L is flowing in the right direction, and we continue to have a strong balance sheet. This concludes the financial review. I'll now turn the call over to Dr. Morris Young for a review of our business. Morris?

Thank you, Gary, and good afternoon, everybody. Amidst a backdrop of unprecedented global change, AXT substrate material continues to have increasing relevance in the technologies and applications that are likely to define the next decade. We're encouraged to see growth in strategic applications like 5G, which not only drives our growth, but also functions as a catalyst to a number of related technologies.

We saw this most clearly in our indium phosphide sales in Q2. We had expected to take a step back following a strong quarter in Q1. Instead, demand for indium phosphide was again strong in Q2, allowing us to deliver the high end of our revenue range and outperform earnings. We believe that indium phosphide is being used in 10G and emerging 25G laser interconnects for 5G base stations.

Growth in the 5G network construction present a net new opportunity for AXT. We don't yet know how big it will be, but we know that it is beginning to drive both fronthaul and backhaul applications. And it is also likely to continue to fuel a healthy PON market as the 2 technologies are very closely linked.

Further, AXT is well positioned to supply into all of the major supply chain for 5G and its related applications. We believe that our growth to date demonstrates the compelling value proposition that our deep indium phosphide expertise represent for our customers. Growth in 5G is also driving greater bandwidth requirements in the data center. In Q2, we also saw healthy demand for indium phosphide for data center applications. Silicon photonics technology provides a number of advantages, such as lower power consumption and increasing bandwidth and data transfer capabilities. This, coupled with surge in consumer demand for high-speed broadband services, is driving hyperscale cloud and large enterprise data centers to deploy optical modules that can support network speeds of 100G and 400G and beyond.

No growth in the revenue for data center applications stalled earlier this year. We are now seeing it return and expect it to be a meaningful contributor in Q4 and beyond.

In addition to these 3 major applications, we believe we are -- we believe there are significant new applications for indium phosphide based sensors, now visible on the horizon in health care monitoring, lidars for automotive and more. As always, we believe that growth in our indium phosphide business will fluctuate in strength quarter-by-quarter as a result of the emerging nature of many of the application we serve. But the development work, we have been engaged in over the last 2 years, is now beginning to yield tangible business opportunities. Collectively, we believe we are building a powerful portfolio tied to some of the most significant and transformative technology trends of the next decades. We look forward to continuing to demonstrate progress.

Now turning to gallium arsenide. As expected, LED applications, particularly automotive, were weaker in Q2 than the prior quarter. This was offset by the strength in wireless applications, which had good growth for the quarter. We believe the demand is driven by a variety of IoT applications, including WiFi devices a rebound in Q2 after work stoppages in Q1 and possibly cell phone devices in China.

At this point in time, it's difficult to predict the enduring strength of the increased demand, but we do believe that gallium arsenide is going through a resurgence of development activities with a wide variety of new applications being brought to the market every year. For example, micro LEDs. We are currently garnering a lot of attention in the display industry and could have an impact on the photonic industry as well. Micro LED displays are set to deliver a wide color gamut, high luminescence, low power consumption, excellent stability and long life. It is a richly innovative field that could add significantly new value to the LED market in 2022 and beyond, with large Tier 1 players driving its development.

With so many game-changing applications in indium phosphide and gallium arsenide now emerging, Tier 1 interest and focus down to the substrate level is increasing. AXT is now engaged in multiple significant qualification efforts. The first in the area of indium phosphide for data center applications is expected to begin contributing to our revenue results in Q4. In addition, we are working through several other qualifications that can meaningfully impact our business opportunities in 2021.

Through these efforts, we are making a concerted investment of time and resources to elevate our business and manufacturing processes to meet the rigorous standards of some of the most prestigious companies in the world. Center to our work in the continued ramp of our Kazou and Dingxing facilities, we are proud to be making great progress.

Since we announced the qualification of Dingxing by a major customer in March and a number of additional qualification customers have completed their certification and have given us approval to ramp production. These customers are also reporting an improvement in quality and consistency, a benefit of our new state of the outlines.

We are confident that by Q4, we will have approximately 75% of our gallium arsenide revenue coming out of the new facilities. This represented a significant increase in production volume throughout 2020. We believe that the relocation of our gallium arsenide manufacturing facility has evolved from being a risk factor in our business to becoming a significant competitive differentiator for 2020 and beyond. I want to specifically acknowledge the work of our team in China who have executed the relocation process with real great success and dedication against a very difficult backdrop of rising environmental standards, volatile geographical -- geopolitical conditions and the global pandemic. They have worked tirelessly to meet the needs of our customers throughout the process, while navigating these external factors and the rigorous relocation plan.

I'm proud to say that we have a strong first team senior executives and managers and also strong younger managers and contributors, all of whom shared in doing the heavy weight lifting.

It is worth noting that the challenges presented by COVID are not behind us. I'm grateful to report that AXT employees and their families have remained healthy so far. And all of our 3 China locations were all taking strict protective measures in accordance with best practice and local laws. The safety of our employees remains our number one concern. We're doing the same thing in here in 3 months. Our teams have adapted, and we are collectively moving the company forward.

The biggest challenge to productivity remains the limited travel between our cities in China as well as travel restrictions to and from China. To an extent, this has impeded our ability to address certain manufacturing efficiencies in the new facilities as aggressively as we otherwise would like to. On a positive note, we are not experiencing any noticeable disruption in our supply chain or raw materials required to manufacture our substrates. We are able to obtain everything we need.

And finally, speaking of raw material, we have 2 companies that we consolidate. And our raw material revenue in Q2 was up meaningfully from the prior quarter. In particular, our joint venture, Bo Yu, which is manufacturing high-temperature pBN crucibles and other products, continue to see healthy growth.

In closing, we view 2020 as a turning point in our business. There are clear signs in marketplace that strategic applications like 5G, data center and PONs are strengthening. In addition, we believe new applications across our portfolio are creating exciting incremental opportunities beginning later this year, and we are ready. With the relocation of gallium arsenide manufacturing largely behind us and production is ramping, we are now focusing on elevating our manufacturing and business processes to serve the need of increasingly sophisticated applications and customers' requirements. In total, we believe we are positioning ourselves for revenue expansion and improving profitability.

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

Thank you, Morris. As Morris discussed, the demand environment for our products seems to be improving with a number of growth drivers intact. As such, we expect to see revenue in Q3 of between $23.5 million to $24.5 million. We believe that our net profit will be about breakeven. We won't have the help in Q3 of a grant in China, but that is offset by increased revenue. Growth is good. So we can deal with that. Share count will be approximately 40.750 million shares. Okay, this concludes our prepared comments. Morris and I will be glad to take your questions now. Operator, Liz?

(Operator Instructions) Our first question comes from the line of Richard Shannon with Craig-Hallum.

Congrats on a nice quarter and guide here. I guess my first question from a financial point of view, Gary, you had an awfully good gross margin, certainly, well above what I had modeled here. You're talking about some mix shift and I think some manufacturing efficiencies. How should we think about the third quarter number here and what's implied here in terms of any -- many mix shifts and continued manufacturing improvements?

Okay. In the third quarter, we are pretty confident that it's going to continue to increase, go upward and to the right. It's not going to be like a super high jump, but it's going to continue to trend upwards. We're still saying that midterm, we should -- we hope we can get back into the mid-30s. We think that's reasonable and expect that we can do that, just not quite sure how long it will take. As Morris did mention about some significant opportunities for indium phosphide, that's beneficial for us in terms of the mix. And that will be part of what drives the number in the right direction. So it will be up a little bit again next quarter. Part of the reason probably we were ahead of the -- what your model said, Richard -- because the revenue was a little bit stronger than we thought at the beginning of Q2. So more revenue is a big help in gross margin because there's a fair amount of fixed costs in our cost structure. So -- okay. Go ahead, Richard. Any more questions?

Yes. I got a few more. So I think if I heard your language correctly, both of you talked about data center picking up more in the fourth quarter. And it seems like you're suggesting it was helpful in the second and maybe in the third. Did you specifically call out growth in the fourth? And is this from your -- and if that's the case, is this from your consistent long time large customer? Do you have new customers in here? Or if you can help us understand the dynamic here by calling out the fourth quarter?

I think indium phosphide will continue to grow in the third quarter, but fourth quarter would definitely be another up quarter for this data center connectivity business. So let me answer it this way. This is a customer that we have known, but we have not sold directly to them previously. We are, in the path of qualifying with them. And of course, we cannot specifically comment who they are because we are under NDA. But I can let you know that our view is that there's a huge impact because of coronavirus on cloud computation, so this is clearly a strong ongoing growth for now and growth is going to accelerate. And this is a dramatic cultural event, I think it's going to continue for the foreseeable future. So that means it's going to grow a good growth for our customer. And the result is that silicon photonics technology is becoming increasingly strategically important in data center connectivity, and this is a multiple of year opportunity, and we will continue to grow with it. And the qualification position us to increase our market share in the marketplace, which is we're already growing nicely. And all of these cloud players are going to put their foot on the pedal -- gas pedal, we believe. And we are agnostic, as you know, that we should be able to sell to everybody. But specifically, we do are going through a qualification with a specific customer. So we are hopeful that we can increase the market share with this particular customer, but also we can sell more into many installations. And we believe this rigorous qualification, I mentioned previously, will get us to other Tier 1 players. We expect a similar level of certification and maturity pull from their supplier lines. So this is not only good for us. But also with this training into serving the first tier customers, will get us to be able to play into other emerging applications such as health care and other applications, which all have Tier 1 customer demand that will increase the volume of indium phosphide application to a very much unprecedented volume applications for indium phosphide.

I agree. Very interesting comments, Morris. I may jump on the line up for my last question and come back to follow-up on that one. It's a very interesting topic here. But I did want to ask a question regarding your commentary about making your manufacturing processes more rigorous. Can you help us understand what this means in terms of cost and OpEx? Over what time period do you expect this to have an effect? And is this -- can you help us understand what's driving this? Because obviously, quality is important, in general, it always has been here. What is the impetus and where do you need to go with this more rigorous manufacturing process?

Sure. As you know, when you move up the food chain to Tier 1 customers, they are -- they obviously -- #1 requirement is a very high quality standard, okay? And fortunately, we have a very good quality in our indium phosphide inherent properties such as dislocations. And the surface polish, we have a very good high-quality standard. But what we perhaps need to improve is in our manufacturing line, we need to implement a lot of, for instance, SBC control. We need to follow certain protocols to serve the customer -- to give them heads up. If we have any improvement in our quality, we need to communicate ahead of time. And we need to also improve our ability to monitor our quality on a line basis. So you can perhaps imagine this is as an increased cost because we probably need to buy some sophisticated testing equipment. But on the other hand, the Tier 1 customers, they are also more consistent and our experience also is, they don't make mistake. So we can expect -- if we do adhere to the good quality standard, we will have more return of material because there's miscommunication between customer and supplier. And as you know, when you get problems with customers, it's always the supplier for the build. So we do believe that we will get ourselves more engineers and trainers and managers to monitor the progress and actually more communication with the end customers. We have to go through fairly rigorous training as well as fitting to their computer ordering systems, so that there will be less mistake and they are more predictable. But once we get -- we got in, we got latched onto the more automated ordering system and quality monitoring system. We have many portals that we need to connect to. So it's more sophisticated, but I'm glad we are almost through all these requirements. I do believe once we get in, that will elevate AXT to a higher level, which we believe that most of the Tier 1 customer requires this kind of service anyway. So it's going to be a good thing for us.

Yes. Let me underline a couple of things there that Morris touched on. I would say from a big picture standpoint, these particular customers were thinking of, we have to be -- they want more transparency. They want more data. So we have to figure out how to do that properly. A good example, though, is a change in the manufacturing process, which could be a very small change, in which case, we wouldn't, in the past, necessarily have notified some of the customers. But now if we make even small changes, we have to step up and be transparent about that, and let the because of things like that. And we do have statistical process to control SBC. We've been using it for years, but now this particular customer specifically -- couple of customers have said, well, we also want you to do this with your SBC and that with your SBC. And so they broadened the scope and the depth. So we're very excited about it. We think it's going to make us an even better company, and it's a fun process, and there's a lot of enthusiasm within the ranks of the company.

Our next question comes from Gus Richard with Northland.

In terms of some of the new applications you highlight, like Direct Drive LED and health monitors, et cetera. Which ones do you expect to start to see revenue from first?

We're running parallel lines on that. In all of them. But I think the -- we think the first coming online for revenue -- regular volume production is probably from data center business.

Okay. And then just touching on the germanium business. How is that trending? There seems to be -- yes, just any color there?

What business you're talking about?

Germanium.

Germanium. Germanium is, kind of, flat and slightly down this quarter. We see it's probably going to be sort of meandering around this line and not dropping significantly either, but it all depends upon whether the satellite launches. And satellite launches are fairly consistent but sometimes the customer have one launch after launch and then they will buy more and other quarters, they don't. And this is not any -- let me say, the focus business for AXT, as of now -- right now, anyway. But if, what's that, the constellation satellite covering the whole web infrastructure, if that were to build, then obviously, there's going to be a lot more opportunity for germanium. But as of now, it's going to be a $2 million to $3 million per quarter business.

Okay. And you're referring to like Skynet and what SpaceX is doing?

Yes, yes, yes.

Okay. And then finally, on the raw materials business, do you expect that to hold in flat moving forward? That business seems to be pretty strong. And is that still being driven by OLED?

Yes. I think we're going to see, from our joint venture, they can see through Q3. They think Q3 is -- still will be a pretty good, strong quarter, but they don't have visibility for Q4.

Our next question comes from Quinn Bolton with Needham.

Wanted to follow-up on Richard's question about the data center application. First, is this the beginning of what you think is a sustained ramp with this customer? Or do you see it as kind of a shorter-term 1 or 2 quarter project that would then tail off after some period of time?

Well, in Q2, we have not started. We will start to see some revenue coming in Q3. And our customers telling us it's going to be a big ramp for Q4 because they've got to build some inventory. So -- but it's going to be a consistent performer for the rest of 2021. And if -- obviously, if 400G becomes adopted more rapidly as we expect it and data center growth will definitely kick up their business demand. So this is -- to answer the question, I mean, it's definitely going to be an uptick in quarter in Q3, but a big quarter in Q4 because of inventory build. And in over 2021, we believe it's going to be a more consistent revenue driver for us.

And I think you've given us a couple of hints, but just wondering, it sounds like this is a silicon photonics-based 400-gig optical module product that you'll be shipping lasers into or the indium phosphide substrates for the lasers?

Yes, but also 100G was -- we're also using. We believe this is mainly for 100G and 400G.

So it's both 100 and 400-gig?

Yes.

Got it, got it. And then you guys had talked about the mini LED opportunity on the call. Just wondering what do you think the timing of that going to higher volume is?

Well, we think that the opportunity probably is going to be more towards 2022. And I think later, we got some samples in the qualification line. But I think our customer probably still got a few things that need to be ironed out, such as sorting and the placing of these very tiny LED lights. And obviously, we think this is a great, great opportunity, but it's still sort of fairly early. I mean, as you know that, we believe we have a strategic advantage in tackling this business because we are one of the 3 western high-quality substrate manufacturer in the world. We are the major LED 6-inch supplier to one of the German LED makers. And these LED -- micro LED that customer is proposing to use, they need not only high-quality, but also they have very high volume, and they also need very competitive price. I think if you want to combine the 3 on top of it, the customer probably is also thinking about how you're going to manage the upstream supply lines such as pBN crucibles and gallium arsenide. Obviously, if you combine all these things, we are ahead of the competition. But obviously, this is still early. I would not declare victory, and we are working very hard trying to be a supplier in that business.

Got it. And then just for Gary. Gary, you mentioned that the Beijing JV were more profitable and that led to sort of higher taxes. Do you expect the profitability of the JVs to kind of step back down to more normal levels in Q3 and beyond? Or any further comments you can make about the JV profitability?

We think those two guys -- those 2 companies are going to continue to be profitable. We don't -- we see it jumping around a bit from time to time. And they're not that great at forecasting. It's not their strength. But -- and so we don't press them for too far out. But -- so yes, they will continue to be profitable. I'm not sure where the tax thing is going to settle out, but I think 550 to 650 is probably close the -- we did have an extra charge in Q2 because, retroactively, we had to pay a tax on a rebate that we got like 1.5 years, 2 years ago. So sometimes that happens in China. It's like, hey, we forgot we want you to pay taxes on this, so.

Yes, they're looking good. They're going to be profitable.

Our next question comes from Hamed Khorsand with BWS Financial.

So first off, could you just quantify the current environment that you're seeing for indium phosphide with data center and 5G compared to the last cycle, you saw? You think that as far as the demand you're seeing, do you think that this is towards the end of the cycle? Or are you thinking it's really a starting point?

Okay. This is Morris. I definitely think this is the beginning. I think we're starting to see the 5G applications just starting. As you know, I think that I saw some reports that say the base station build in China is 600,000 for this year and next year. It's going to jump up to 1.6 million base stations per year in 2022 and 2023. And so I believe this is only the beginning. But this is only China. What about Europe and what about United States? As you know, that we are the substrate supplier. So no matter where you're going to build a base station, you need indium phosphide substrates as long as you need fiber optic connectivity. As far as data center is concerned, I think we're getting into a new trend of growing. I believe data center will definitely keep on growing. However, with the improvement, you can increase the switching speed, so perhaps you need less devices. But I think the fiber optic part of the silicon photonics, it's going to enjoy an extra growth opportunity that is when you're down to 40G or below, you can still deal with that kind of photonics connection with coaxial cable even and maybe gallium arsenide VCSEL is partly fiber. But as you go up in speed, you need to consume less power as -- data transmission reliability and transmission distance you need. So indium phosphide, single-mode fiber is absolutely needed. And then we also know that silicon photonics when you get to higher speed because of a (inaudible) kind of switching mechanism enables it to compete very well at higher frequency rate. So although -- so there are two level of growth opportunity, we believe that we can enjoy. One is that, with coronavirus everybody is complaining about bandwidth is not big enough and then everybody wants instant connectivity. And you now have a layer on top of it, the 5G, which will increase the data traffic again. And then you add on to it the work from home and then the speed is going to be higher and the data center is going to get bigger. So I believe there are many multi layers of benefit, which will benefit the silicon as well as indium phosphide.

So why -- if you have so many different endpoints that are doing so well, why is revenue not anywhere close to what you were doing in the last cycle, whereas you didn't have these many endpoints available to you?

I'm not so sure, Hamed. You're right. I mean, I don't recall the revenue level, but I can tell you, over the last 10 years, we grew our indium phosphide revenue by effect of 20. All right? So that's a real growth. But quarter-to-quarter, you may have up and downs. For instance, last year, sometime we had a big Huawei order, and we didn't get it for many quarters. So quarter-to-quarter, it's difficult to say this particular quarter got to be higher than the last quarter. But overall, the other thing I can tell you is that, again, this quarter, indium phosphide is equal to both gallium arsenide semi-insulating and semi-conducting combined. And we, again, believe next quarter and the quarter after, indium phosphide is going to continue to grow, that we have the visibility of, and gallium arsenide, we think it's going to be okay, but we don't see the growth. So if I were to predict that indium phosphide would definitely surpass gallium arsenide as the revenue contributor for our business in Q4 and beyond. But of course, next year, who knows, maybe micro LED will start coming and VCSEL will start coming. And gallium arsenide has nine live. So don't kick it, right? So -- but it's good. You have 1 product line growing and the other one growing with it. So let them compete as #1.

Yes, Hamed. This is Gary. One thing I would say to add is, the opportunity that we are into now, it really wasn't in full production in Q2. So as we start to ramp in real production in Q3 and then even more in Q4, I think the dots will get connected. So stay tuned.

Our next question comes from Dave Kang with B. Riley.

Speaking of Huawei. So whatever happened to their follow-on?

We haven't seen anything yet. So we are waiting patiently. No, we don't have any order from Huawei at this point.

What's been the message from them? I mean, is it coming? Or is it pretty much dead? Or what's the status?

Yes. Our sales force has been in contact with them. I think the feedback is still, they like our product. They like our quality. They like our service, but one thing their management's message to us, is they don't like the fact that we are a U.S. company. So...

It could be part of a decoupling process?

I hope not. And for us, under the current law, we can supply them. We would definitely treat them like a customer, if we serve them. If we don't violate laws. And we don't, we're not. But the other thing I think I'd like to remind you is that indium phosphide substrate supplier, there's not a whole tons of it. And you cannot go to the street corner and order indium phosphide from the other supplier. There's only three. It's us, Sumitomo and JX. And the third supplier are not even using the good quality VGF technology. So I don't know. I think definitely, it's a challenge and I hope we can work it out. And as I said, again, there's not a whole lot of supply line and capacity is also a consideration, and we are definitely eager and ready to serve whoever wants to use good quality indium phosphide substrates.

Got it. And then regarding our fourth quarter, I know you're not giving official outlook. But since you talked about this new data center customer being qualified and expected to ramp in fourth quarter. Could they be enough to offset seasonality and maybe even fourth quarter be up sequentially or still going to be down?

Dave, that's our plan. We think potentially first quarter -- I mean, it's still early, but we think we fan of first quarter -- in first quarter.

Sorry, so Dave, I just think about this listening. Traditionally, we do tend to go down. We do go down in Q4. So you guys all expect that. And there's no sense trying to speak between the lines and not -- just flat out, we'll just say it, we think we're going to grow in Q4. It's just going to be a change for at least this calendar year.

Can you remind us why fourth quarter is seasonally soft? Is it mainly because of PON? Or is there something else?

No. Dave, let me give you the analysis. First of all, the fourth quarter have the Chinese national holiday, October 1, right? And second of all, we lost half a month in December. Nobody works beyond December 15. So the fourth quarter is traditionally a slow quarter. And then on top of it, a lot of this product launch happens in the fall. So we are at the beginning of the food chain. So when Q2 and Q3 is supposed to be everybody ordering stuff and then make it build in Q4 and then sell into the market. And in Q4, everybody take a breather. So -- but we do have some visibility from our customers. They are expecting to ramp. They are talking to about us about the possible capacity. So we are preparing ahead of time. So hopefully, now we can meet the demand. But I think, hopefully, according to our calculation, we should be able to continuing the growth even in Q4 of this year.

Got it. And Gary, just numbers. I just wanted to clarify if I heard them correctly. I heard depreciation is $976,000. But then I didn't hear your CapEx. What was the CapEx?

The investment was something about , I think, $4.3 million.

$4.3 million. Okay. You think it's going to remain kind of elevated because of expansion -- you're in a expansion mode? Or how should we think about CapEx going forward?

I think it could be in that range for another couple of quarters. We're buying -- and the shift is, it's a little bit less than -- it's not so much facility stuff as some equipment stuff. We'll order more furnaces. We ordered a tester that Morris alluded to that tests indium phosphide stuff. So -- but it's -- all in all, the numbers look very, very similar in terms of cash to 2019. And in 2019, the total net burn was $3.2 million. So we feel comfortable with cash. So yes.

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

All my questions have been asked. You can take me out of the queue.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Dr. Young for closing remarks.

Thank you, everybody, in participating in our conference call. And we are participating in several conferences. Let me see where is the number of conferences that we're participating. So -- but if you need time to connect to the management, please contact Gary Fischer or Leslie Green for -- yes, here we go. We're going to participate in the Annual BWS Growth and Value Summer Series virtual event, August 12, the Needham Virtual SemiCap and EDA Conference on August 13. And Jefferies Virtual Semiconductor, IT Hardware & Communications Infrastructure Summit on September 1 and September 2. As always, please feel free to contact me, Gary or Leslie, if you need to speak to us. Thank you very much. Bye now.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.