AXT, Inc. (AXTI) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to the AXT's Second Quarter 2013 Financial Conference Call. Today's call is being recorded. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Raymond Low, Chief Financial Officer. My name is Kevin and I will be your coordinator today. [Operator Instructions] I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Kevin, and good afternoon, everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the company and our ability to control costs, improve efficiency, increase orders in succeeding quarters, improve our competitive position as the market improves, as well as other market conditions and trends. We wish to caution you that such statements deal with future events and are based on management's current expectations and are subject to risks and uncertainties that could cause actual events or results to differ materially. These uncertainties and risks include, but are not limited to, overall conditions in the markets 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 the factors that may be discussed in this call, we refer you to the company's periodic results filed with the Securities and Exchange Commission and available online by link from our website for additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at axt.com through July 31, 2014. Also before we begin, I want to note that shortly following the close of the market today, we issued a press release reporting financial results for the second quarter of 2013. This press release can be accessed from the Investor Relations section of AXT's website. I would now like to turn the call over to Raymond Low for a review of the second quarter 2013 results. Raymond?

Thank you, Leslie. Revenue for the second quarter of 2013 was $23.8 million compared with $22.4 million in the first quarter of 2013. Total gallium arsenide substrate revenue was $10.7 million for the second quarter of 2013 compared with $11.7 million in the first quarter of 2013. Indium phosphide substrate revenue was $2 million for the second quarter of 2013, compared with $1.8 million in the first quarter of 2013. Germanium substrate revenue was $5.3 million for the second quarter of 2013 compared with $2.6 million in the first quarter of 2013. Raw material sales were $5.8 million for the second quarter of 2013 compared with $6.3 million in the first quarter of 2013. In the second quarter of 2013, revenue from North America was 8.6%, Asia Pacific was 67.9% and Europe was 23.6% of total revenue. No customer generated more than 10% of our revenue during the second quarter. The top 5 customers generated 32% of our second quarter revenue. Gross margin in the second quarter was 12.9%, compared with 15.6% of revenue for the first quarter of 2013. The decline in the quarter was primarily the result of sales mix. Selling, general and administrative expenses were $4.2 million for the second quarter of 2013, compared with $3.9 million in the first quarter of 2013. Research and development costs were $1 million for the second quarter of 2013, compared with $822,000 for the first quarter of 2013. The increase was for product testing costs. Total compensation expense was $338,000 for the second quarter of 2013, of which $5,000 was included in cost of revenues, $291,000 in SG&A and $42,000 in R&D. Loss from operations for the second quarter of 2013 was $2.2 million, compared with loss from operations of $1.3 million in the first quarter of 2013. Net interest and other income for the second quarter of 2013 was $901,000 compared to net interest and other expense of $512,000 in the first quarter of 2013. This positive swing of approximately $1.4 million is mainly attributable to an $811,000 gain on a minority investment in a privately held company, $289,000 less foreign exchange loss this quarter, $189,000 more equity earnings from unconsolidated joint ventures and $89,000 less withholding tax in China on dividends declared by our consolidated joint ventures. Net loss in the second quarter of 2013 was $1.7 million or a loss of $0.05 per diluted share. This compares with net loss of $2.4 million or a loss of $0.08 per diluted share in the first quarter of 2013. Cash and cash equivalents with maturities of less than 3 months, short-term investments and other investments in high-grade securities with maturities of less than 2 years, decreased by $3.9 million to $45.4 million at June 30, 2013. $2.4 million of this decrease was for dividends paid by our joint ventures to our minorities. Accounts receivables, net of reserves, were $20.1 million at June 30, 2013, compared with $17 million at March 31, 2013. Days sales outstanding were at 77 days for the second quarter compared with 68 days for the first quarter of 2013. Net inventory was $36 million at June 30, 2013, compared with $38.8 million at March 31, 2013. Of this, approximately 53% is raw materials, 37% is work in progress and 10% is finished goods. Depreciation and amortization in the second quarter was $1.4 million and capital expenditures were $732,000. As of June 30, 2013, the company, including our consolidated joint ventures, had 1,268 total employees, of whom 1,051 work in production. This concludes our review of the results. I will now turn the call over to Morris. Morris?

Thank you, Raymond. Our results for the second quarter came in within our guidance range with revenue improving modestly from the prior quarter. We continue to see evolution of our business as our revenue further diversified across the substrate product portfolio. While the wireless market remains soft, germanium substrate show strong growth in the second quarter. Germanium substrate was gaining momentum with increasing demand from CPV terrestrial solar cell applications. As we continue to work through challenges in the gallium arsenide substrate side of our business, it is encouraging to see growth in other areas in which we have invested over the past 2 years. We continue to manage our expense carefully and to plan our business conservatively in order to weather the near-term environment and position ourselves with success as the market improves. Beginning with semi-insulating gallium arsenide substrates. We continue to experience weakness in our revenues. We believe that this is the result of several factors: general weakness in the wireless; the ongoing technology transition in our industry, particularly affecting the switch side of our business; and customer specific circumstances, with one of our larger accounts. I will speak briefly to each. The quarterly financial announcement in the wireless space have reinforced our general sense that demand in the second quarter was softer than typical. Forward-looking guidance has been mixed, but the general consensus is that the market will remain softer than normal in the short term. What continued to impact us more significantly, however, is the ongoing technology transition on the switch side of our business to SOI. As you know, a large part of our business has been in pHEMT devices, manufactured using MBE Technology. Much of this tech market has been affected by the adoption of SOI. We have qualified our wafer for MOCVD technology, which is commonly used for HBT devices. But this will take some time to ramp in this area as it has historically not been AXT's primary focus. Finally, our gallium arsenide sales has been impacted by a technical issue that has arisen with semi-conducting substrates sold into a laser application at one of our larger customers. While the sales volume for this application is modest, we are eager to resolve this issue to clear away any business impediment that could affect our long-standing positive relationship with our customer, as well as business opportunities on the semi-insulating side of our business. Turning to semi-conducting substrates. As we have seen in the past couple of quarters, the market continues to be soft. Our revenue in Q2 were approximately flat from the prior quarter and we don't expect much of a change in Q3. Similar to first quarter, we're seeing a greater level of activities from Taiwan and Europe, while China continues to be weak. The market in China is particularly competitive and there are a number of players, especially at the low end of the market. These players are willing to take very slim margins and this dynamic has prohibited us from participating in certain opportunities that we may have in the past. Similarly, we're seeing the Japanese competitors becoming more aggressive on pricing as a result of the weakening yen. Turning to germanium substrate. We saw a 110% increase in revenue from Q1, the largest single quarter increase in our company's history. We're expecting germanium substrate revenue to be somewhat lumpy. We expect to see strong growth in 2013 over last year and believe that demand should continue throughout next year as well. During the second quarter, our tradition of germanium substrate applications, including satellite solar cells, continues to perform well across the geographies that we serve. In addition, we're seeing increased demand from CPV terrestrial solar cells. For some time, we have noted the increasing conversion efficiency of these solar cells, which is a critical factor in the industry as commercial adoption of this technology. As the efficiency increases, the cost per CPV installation become more attractive. AXT has been preparing for growth in this area of our business for some time. While the CPV industry is still nascent, we're carefully monitoring its commercial adoption as we believe it has potential for significant growth. The technology is proving itself to be a reliable and effective way to generate power cost effectively. We remain the smaller of the 2 competitors in the solar market, but we are in a good competitive position and believe that we have plenty of opportunity for growth as the market matures. Our biggest challenge, which we share with our competitor, is that the cost of germanium raw material continues to increase. Today, it is approximately $1,850 a kilogram. We do have a minority ownership position in a germanium raw material joint venture that helps a bit to offset the higher cost, but the rising cost will continue to impact our margin for this product. Nevertheless, we have several Tier 1 germanium substrate customers, who are excited by the future opportunity that this business presents. In addition to germanium based CPV solar cells, there's a sizable effective effort underway to develop semi-conducting gallium arsenide based CPV solar cells. This technology is proving to be as effective and also certain cost advantage, particularly when the cost of germanium raw material is so high and gallium is at historical lows. AXT is equally well positioned to accommodate the market, should gallium arsenide become more widely utilized for this application. Another interesting part of our business currently is indium phosphide substrates for fiber optic applications. While we have not talked a lot about it in the last couple of years, this area has been quietly gaining momentum and surpassed the $2 million level in the second quarter. For those of you who have followed us over the years, you may recall that indium phosphide substrates were a very significant portion of our revenue in early 2000. While fiber optics fell out of favor for many years, we maintained the product line as our technology is well suited for this application, and our customer reviews of our product has been positive. Further, we have continued to invest in this area in order to provide the technical specifications that our customer base requires. In addition, we had begun to see increased interest in indium phosphide as a result of the emerging silicon photonics technology, in which data is transferred among computer chips by optical arrays. This concept involves combining laser and silicon technology on the same chip for greater available bandwidth and higher processing speed. While the technology is still in the early adoption stage, companies such as Intel and Cisco have announced investments in this area. We continue to watch silicon photonics with interest as it will -- it could potentially drive increased demand in the years to come. Now turning to raw material. While our revenue in this area of our business kept fluctuating quarter-to-quarter, we're seeing some positive trends. First, our run rate has increased over the years as our joint venture has matured. Our revenue is now typically over $5 million a quarter, even during the current cycle when the cost per kilo of the gallium raw material is at historical lows. This is an indication that our joint venture has become strong, independent of AXT demand and they are establishing themselves as a reliable provider within their own perspective market. Looking specifically at gallium, we noted last quarter, sales volume has healthily increased in the recent quarters and we are seeing product prices stabilizing in the recent environment. While it remains too early to determine if gallium prices will increase meaningfully in the coming quarters, but the positive trend is a welcome sign that application into which gallium is sold are gaining strength. In closing, we continue to work through the current challenges in gallium arsenide substrate. Semi-insulating substrate may remain in flux through the duration of the year as we, as well as our competitors, make adjustment in our business to reflect the current market technology trends. The market for semi-conducting substrates, while soft, has not changed in terms of competitive landscape, application of technologies. The recovery in this area of our business will simply be driven by strengthening demand in the end market that we serve. While it is difficult to predict where this will happen, the market can turn very quickly and we are prepared to handle increasing sales when the environment improves. Outside of the current challenges in gallium arsenide, we're seeing healthy growth and positive indicators in other areas of our business. We're pleased by our strong performance in germanium and indium phosphide substrates, and expect both substrate product lines will see substantial growth in 2013 over the prior year. While we work through this turbulent time in our business, we're highly focused on improving our efficiency and cost structure in order to help mitigate the financial effect of these challenges in our business. This is, and will continue to be, a major objective across our organization and we are committed to driving improved results for our shareholders. I would now turn the call back to Raymond to discuss our forward-looking guidance. Raymond?

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

[Operator Instructions] And we'll take our first question from Edwin Mok with Needham & Company. Edwin Mok - Needham & Company, LLC, Research Division: So first question, Morris, just to get some more detail on this customer-specific issue you mentioned. And you mentioned, I think on the prepared remark you mentioned that you guys are working on it. Is it something that you expect to largely resolve in the back half of this year? And is that something that is -- that could potentially reoccur in other situation? Can you give us some color on that?

Sure. I think we are working on this issue with our customers. I believe we are fairly close to the end of resolving the issue. I do expect it to be resolved within the quarter. And also to answer your other part of the question is, this is a very specific customer on a very specific product. And the -- although the revenue opportunity is modest and it doesn't affect the other customers or other product at all. Edwin Mok - Needham & Company, LLC, Research Division: Okay. Great. And then I think on the semiconducting part, you talked on that side, you talked about Japanese customer being a little more competitive because of kind of falling yen helping them on the cost side. Is that only limited to semi-conducting? And are you seeing that as a risk for your semi-insulating side as well?

Well, so far as we see, it's mostly on the semi-conducting side because in the semi-insulating side, there's not a whole lot of supplier on that side, and we are not seeing particularly aggressive pricing behavior. But the yen, obviously, is presenting some challenges when they depreciated 20%. Edwin Mok - Needham & Company, LLC, Research Division: Of course, right. It helped them on the cost side. Great. And then on the germanium side, so it looks like the CPV finally take off really driving that very, very strong growth this quarter. And I think you mentioned on the call that you expect this year to be a strong year for that business. I'm just wondering, is that a big lumpy order that you got in this June quarter, and as a result you expect it to at least moderate in the September quarter and maybe we see more bigger orders somewhere down the road? Or is this $500 million level sustainable going to the back half?

Well, Edwin, the germanium market actually is exciting is because we're not only seeing -- it's not coming from one customer, it's coming from several customers. I think the specific applications are probably the end market is, one, is probably Middle East and the other strong demand is from China. We are cautiously optimistic and we're sending our marketing people out there and we certainly hear customer saying that they're increasing demand, they have a next big project, but we've not put that into bank. I mean, we want to be cautious seeing they really having a next big project to work on. I think the next big project I heard was something like 300 megawatts, which is a huge project they're working on. But again, we need to confirm that. Edwin Mok - Needham & Company, LLC, Research Division: I see. Okay. That's fair. Sorry, 2 more questions and I'll go away. On the raw material side historically, you guys have or at least -- over the last 2 years, your raw material revenue come down on the back half of the year, largely because you start generating some of those material in the substrate side of the business. With the struggle or the challenge in this gas substrate business, should we think that your raw material revenue can be more stable over the next 2 orders?

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

No. Not really.

But they do come -- they're not as steady as they are and you know also there is other factor is that when we use the material ourselves, we don't count it as revenue. And as our gallium business sort of declined a little bit, so maybe that's the other factor, they are selling more to the outside rather than to sell ourselves. So it helps on one side, but that means also we're losing on the other side. Edwin Mok - Needham & Company, LLC, Research Division: I see. Okay. Great. You kind of confirmed what I was thinking. Last question on the gross margin side. 12.9% looks pretty low, you did last quarter. Any onetime affect that affected gross margin this last quarter? And based on your guidance, it kind of implies similar kind of gross margin level. How do you kind of think of gross margin over beyond just the September quarter?

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

So let me take you to the longer-range future. I think Raymond hit the nail on the head on the germanium cost. I mean we've been trying to talk to our customers and say, "Hey, look, germanium raw material is increasing in price and we're suffering." But some of these customers, they are long-range customer, they signed contract with us over a year ago. They say, "Well, you can't increase our price." They have certain commitment. But we would definitely try to negotiate a better term for next year's contract. And I think everybody realized that germanium price significantly increases our cost. We're just seeing a competitive market, and we only have one competitor. So we're looking forward to see if we can improve somewhat. I think the other side of the coin is also as you can see, gallium arsenide is at historical lows. I mean, had we had some gallium arsenide business to shoulder some of these fixed overhead and depreciation costs and whatnot, it definitely would help a lot, okay. And I do believe that we are going through a very difficult time and I do expect -- I don't expect it to improve dramatically next quarter. But I hope, by next year, we should be able to improve on that side. So that's the second point. And looking forward, also, I do see that we have -- we are seeing plenty opportunity for us to, again, cut our cost, improve our efficiency across our factory. As you know that AXT has gone through several of these cycles before. And not very long ago, we were looking at mid- to high-30s as our target gross margin. I'm not going to be that aggressive now, but I will say, I think you are right. 15% is really low. I'm looking for a better margin days ahead.

[Operator Instructions] Moving next to Avinash Kant with D.A. Davidson & Co. Avinash Kant - D.A. Davidson & Co., Research Division: So I think, historically, you have given us some average pricing of gallium over the quarter. Could you give us -- what did you see the average pricing was on gallium side?

Yes. Around $280 to $330 -- $320. Avinash Kant - D.A. Davidson & Co., Research Division: $280 to $320?

Right. And it's stabilizing. It has been stable for almost a quarter, quarter and a half. Avinash Kant - D.A. Davidson & Co., Research Division: And on the gallium arsenide side, especially on the wireless front, you're talking about competition from SOI. Again, could you kind of quantify a little bit -- I think I have tried to ask this question in the past also. What percentage of your business is competing with SOI? What percentage of the gallium arsenide wireless business is competing with SOI?

Sure. You know I think, traditionally, we have been strong in the MBE type of applications. And MBE, especially strong in the recent past in making the pHEMT switches. And from what we understand is that, that segment of that market is being impacted big time by the SOI invasion or coming to the market. And so I think we are seeing a very significant impact. I think on the HBT side, which we participate to a lesser extent, is not affected by the SOI or CMOS as best we can tell. Our industry leader has been calling everybody saying the HBT still has a better efficiency as well as linearity and the cost of making these HBTs are not more expensive than CMOS. So most people are very confident that the HBT will remain to be a strong point for gallium arsenide. But the challenge for AXT is that we have been historically strong in the pHEMT market in making MBE, and that market is significantly impacted by the SOI. Avinash Kant - D.A. Davidson & Co., Research Division: So you would say that pHEMT will be roughly 40% of your overall gallium arsenide wireless sales?

No. I would say more than 50% on the pHEMT. Avinash Kant - D.A. Davidson & Co., Research Division: And that is where you're seeing the competition?

Yes. Well, we're not seeing the competition, but we're seeing the customer adopting SOI from what we're seeing. Avinash Kant - D.A. Davidson & Co., Research Division: Yes. From SOI, yes, exactly. Okay. And on the LED front, you said this market is kind of -- you're expecting it to be flat?

Yes. Yes. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. And that's primarily because of competition in China?

Yes. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. And could you talk a little bit about your margins in the materials business?

Material business, I think, it's sort of flat. And we can definitely get some help from the increase in gallium price, but I think it's flat, right?

Yes.

Raymond, that's the best way to describe it. I think we are -- I mean the good news is that our joint venture has very low cost structure, so they are -- they are definitely not losing money. And so the volume is up, so they are sort of comfortable there. And they don't have a big infrastructure, they don't have to pay lawyers and [indiscernible]. Avinash Kant - D.A. Davidson & Co., Research Division: And given what you have been saying about the germanium market, it looks like your margins in the germanium business are lower than the corporate average right now?

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

But I would say this though, I think -- I definitely welcome the opportunity in germanium that is, first of all, there is not a whole lot of competitors in the space. And if we suffer, as we said in our comments, that our competitor has to suffer as well. So either we're gaining a huge amount of market share or we will be able to negotiate a better price. I mean this is a problem that the whole industry has to face. And I think the exciting thing is that if the CPV technology is gaining momentum, then you can -- I'm assuming that will solve the problem of using gallium arsenide substrate to make CPV. So that they have to resolve each other, whether germanium is a better substrate for CPV or gallium arsenide is a better substrate for CPV. And we can provide both. Avinash Kant - D.A. Davidson & Co., Research Division: And final question. So your key customer on the wireless side has been talking positive things, and how come you don't see it yet?

I don't know, Avinash, which key customer are you talking about, but... Avinash Kant - D.A. Davidson & Co., Research Division: Like your largest. Your largest customer in the gallium arsenide wireless side.

Is it TriQuint or is it... Avinash Kant - D.A. Davidson & Co., Research Division: Yes.

Well, TriQuint, I think -- I mean, I listen to their call. My take is that they are saying gallium arsenide is doing well because HBT is doing great. But they're also seeing a great opportunity in the future [ph] business. So you're right, I think if TriQuint were to recover, we definitely think that we should recover with them. But on the other hand, if they are going to adopt part of their switch from gallium arsenide pHEMT to SOI, that will hurt us. Avinash Kant - D.A. Davidson & Co., Research Division: Is that happening?

Well, we think so.

And the next question comes from Richard Shannon with Craig-Hallum.

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

Well, every cycle is different. If I take my optimistic hat, I usually say the gallium will increase price for 2 to 3 years in a row and it will decline, and you will get rid of the high-cost producer, it will start to climb. I think, honestly, what I fear now is that this particular cycle is impacted by the fact that perhaps the pHEMT business is on decline. I don't know what kind of effect that is. I don't have no idea what proportion it is. But of course, gallium business is not supported not only by gallium arsenide, but also supported by other things such as LED, as well as other strong magnet and gallium nitride as a catalyst for petroleum refining. So most of the others are not being affected. So my crystal ball about is telling me that we more than doubled our capacity in the last cycle and we're selling just about all the capacity we can make. I think we are thankful because of our low-cost structure we're still making money. I can definitely tell you I know of, even in China, there are gallium plant closed. In the tune of -- I mean, the one I know of is around 30 tons per year capacity. But no matter what I say, still, I mean we haven't seen a substantial increase in gallium price. So I can't predict what it's going to be. I mean, if I do, I have to quit my CEO job and just speculate on gallium price.

I appreciate those thoughts, Morris. Second question on germanium. It sounds like a fairly lumpy business, which I guess isn't surprising here. You mentioned a forthcoming project, the 300 megawatts might be coming up. Are these deals single sourced? Do they source from both the major suppliers in this market? And how many more projects of similar sizes you see coming down the pipeline in the next, say, 2 to 4 quarters?

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

Okay. Fair enough. Last question from me. We've had 3 straight quarters of small losses here and looks like another one coming up here. Can you give us your thoughts on what does your path look like getting back to breakeven in terms of revenue levels, gross margins and OpEx? And what's your level of urgency or when do you think you can get back there?

Well, we certainly are working very hard to do that. I mean, obviously, we need -- from a business perspective, we definitely need to repair that relationship with our major customer. Hopefully, that is helping us. We are working very hard to get back into the HBT. I mean, we are qualified with customers in HBT arena. But just, traditionally, we have been stronger in the MBE field, which is being impacted by SOI. So it will take us some time, probably towards around the beginning of next year. So that will repair our revenue stream in the semi-insulating side. On the semi-conducting side, I think we just need to keep in touch with our customers and making sure if they were to increase their demand, the business revenue would come to us. On germanium and indium phosphide, we have no issues. I think they are -- If we just take care of the business, we should have a good ride. On the raw material end, really, there's nothing we can do I think. But on the side of business, structure wise, in terms of efficiency, improving our yield, China is certainly having its challenge recently because of the higher cost of living and inflation, and we have increased our employee salaries substantially in the last 2, 3 years. But we are a technology company. So if we better organize ourselves, I think we can overcome those salary increases as we have done it in the past. So I'm really hopeful that we can -- with a little bit of help from the metal price side and we get ourselves act together to regaining our momentum in the semi-insulating side, I think we should be able to breakeven and shoot for better margins ahead.

We'll take the next question from Tom Sepenzis from Northland Capital Markets.

Sorry if I missed this, but the germanium business, obviously, was a very low in the June quarter and I just was wondering is that -- are you expecting that to stay flat to higher for the remainder of the year and something else is coming off? Or will that lump back down in the September quarter?

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

So then you think the midpoint of your guidance is around $21 million. Where would you expect the fall off to come from? Is it primarily in the gallium arsenide business, is that going to continue to decline? Or is it coming from raw materials? Where would the drop be?

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

And then in terms of the raw materials, in June, obviously down about $1 million sequentially on the top line. But pricing hasn't been improving all year and improved in the second quarter over the first quarter. So I'm just curious as to why the business itself was down and what your thoughts are on that moving ahead?

No, no. Tom, I think the pricing in raw gallium actually went down between Q2 and Q1. It actually went down.

Okay. All right. Well, then I guess I looked at the wrong charts, which has happened before.

Sure, Tom.

[Operator Instructions] And we'll go next to Matt Reiner with Adirondack Funds.

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

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

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

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.