Good afternoon, everyone, and welcome to AXT Inc.'s Second Quarter 2025 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. In addition, Tim Bettles, VP of Business Development, will be participating in the Q&A portion of the call. My name is Audra, and I will be your coordinator today. I would now like to turn the call over to Leslie Green, Investor Relations for AXT. Please go ahead.

Thank you, Audra, 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, emerging applications using chips or devices fabricated on our substrates, our product mix, global economic and political conditions, including trade tariffs and import and export restrictions, our ability to increase orders in succeeding quarters to control costs and expenses, to improve manufacturing yields and efficiencies of or to use -- or to utilize our manufacturing capacity. 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. In addition to the matters just listed, these uncertainties and risks include, but are not limited to, the financial performance of our partially owned supply chain companies, increased environmental regulations in China and COVID-19 or other outbreaks of contagious disease. In addition to the factors just mentioned or 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 31, 2026. I also want to note that shortly following the close of market today, we issued a press release reporting financial results for the second quarter of 2025. 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 2025 results. Gary?

Thank you, Leslie, and good afternoon to everyone. Revenue for the second quarter of 2025 was $18.0 million, compared with $19.4 million in the first quarter of 2025 and $27.9 million in the second quarter of 2024. To break down our Q2 2025 revenue for you by product category, indium phosphide was $3.6 million, primarily from PON and data center applications in China. Gallium arsenide was $6.2 million, germanium substrates were $1.5 million. Finally, revenue from our consolidated raw material joint venture companies in Q2 was $6.7 million. In the second quarter of 2025, revenue from Asia Pacific was 90%, Europe was 9% and North America was 1%. The top 5 customers generated approximately 30.9% of total revenue and 1 customer was over the 10% level. Non-GAAP gross margin in the second quarter was 8.2%, reflecting a solid improvement from the prior quarter. For comparison, we reported a negative 6.1% gross margin in Q1 and a 27.6% gross margin last year in Q2 of 2024. For those who prefer to track results on a GAAP basis, gross margin in the second quarter was 8.0% compared with negative 6.4% in Q1 and 27.4% last year. We continue to be highly focused on driving continued improvement, including further recovery in Q3. Moving to operating expenses. Given the difficult climate, we have been working hard to hold OpEx down. Total non-GAAP operating expense in Q2 was $7.6 million compared with $8.5 million in Q1 and $8.9 million in Q2 of 2024. On a GAAP basis, total operating expense in Q2 was $8.2 million compared with $9.0 million in Q1 and $9.5 million in Q2 of 2024. Our non-GAAP operating loss for the second quarter of 2025 was $6.1 million, compared with a non-GAAP operating loss in Q1 of 2025 of $9.6 million and…

Thank you, Gary, and thank you to our customers and investors for your ongoing support as we navigate this unique macroeconomic environment. As Gary mentioned, our substrate revenue increased in Q2 from the prior quarter, but the increase was less than we had expected as a result of longer processing time for gallium arsenide export permits, coupled with some sluggishness in the demand environment in China. That said, we made good progress in driving recovery in our gross margins with a strong focus on our manufacturing process and efficiency. We also saw healthy growth in AI-related demand for indium phosphide substrate in China. And as a result of obtaining our first export license in June, we were able to ship initial orders of indium phosphide substrates to our customers outside of China. Since export restrictions are top of our mind for our investors, I'd like to begin there with an update, and then we will discuss our key markets. As many of you know, the China government imposed trade restrictions on export of gallium arsenide in August of 2023 and our indium phosphide in February of 2025. These regulations explicitly seek to restrict the export of materials used for military applications and require that we file an export permit for every customer orders. In our experience, we typically hear back on initial applications with 45 business days, and repeat applications are often processed faster. With that said, we found the permitting process in Q2 for gallium arsenide to be slower than we typically see over the last 2 years. The delays in Q2 resulted in our being able to ship less material outside of China than we had anticipated. About half of our revenue shortfall in Q2 was the result of this factor. On a positive note, the pace of…

Thank you, Morris. In keeping with our comments today, we believe Q3 revenue will grow sequentially to be in the range of $19.0 million to $21.0 million. This guidance range includes a modest contribution from indium phosphide and gallium arsenide for our customers outside of China and only includes revenue for which we currently have permits. Within China, we continue to optimize the emerging opportunities to grow our business in strategic applications for both indium phosphide and gallium arsenide. And finally, we expect our germanium revenue to be down and our raw material business to be approximately flat in Q3 from the prior quarter. As Morris mentioned, we continue to focus strongly on gross margin improvement. In Q3, we expect our margins to improve again and to be in the low mid- to mid-teens. Based on this revenue range and gross margin improvement, we believe our non-GAAP net loss will be in the range of $0.11 to $0.13 and GAAP net loss will be in the range of $0.13 to $0.15. Share count will be approximately 43.8 million shares. Okay. This concludes our prepared comments. We'd be glad now to answer any of your questions. Audra?

[Operator Instructions] We'll go first to Ross Cole at Needham & Company.

And it's great to hear that you're starting to get some of the permits, especially for indium phosphide. But I was wondering, given that there's still been a bit of a delay in the permitting, are you concerned about any potential share loss to customers if they're continuing to wait for this licensing process?

Tim, go ahead.

Sorry, Morris. Yes, I can answer to that. So, in the near term, obviously, it has taken some extra time to get these permits. And the customers are working in every channel they can to get material in on time. But we do continue to receive permits. And if we continue to receive permits for -- specifically for those larger orders, we have a very healthy backlog that's ready to ship. And we believe that the market is just growing too fast to be adequately serviced by just 2 players at this moment. So long term, I think the business still holds good.

Yes. If I may add to that point, I think indium phosphide is at a critical juncture at this point, I think. I think indium phosphide traditionally has been serving the faster data center activities such as transceivers. But now with AI going from 800G to 1.6T to 3.2T, as the speed goes up higher and higher, the need for indium phosphide is more and also the requirement for lower EPD material becomes that much more important. And so not only I believe with AI's advancement in data center applications will increase the need for indium phosphide tremendously, and also because of the device size becomes larger and the power requirement for these higher speed indium phosphide devices will need better quality material. And that -- all that said, should increase our indium phosphide business opportunity for AXT. And with all that said, AXT is also a significant player on indium phosphide substrate supply overall. We believe we are either #1 or #2 in the world of indium phosphide substrate supply, which we estimate to be at least 40% of the world indium phosphide supply. So, I think although the permitting and the geopolitical restriction is hurting our business at this point, but I think the demand is there, we believe we should recover.

Great. That was really helpful. And then I have another question. It looks like it's great to see your gross margin improving again. And I wanted just to confirm, I remember in the first quarter, there had been a bit of a yield issue associated with germanium arsenide for a wireless HPT customer. It seems like that's been resolved. And have you resumed the business opportunity with that customer at this time?

Yes, we have. But although, we're taking -- as we said in the script, we're taking a fairly conservative approach. And so, we're not taking a big portion of it, but we want to not only serve the customer well, also holding our -- improving our margin. So, I think we should be able to continue to see the improvement throughout the second half of the year on that business. And if we can improve the margin, so that also implies better yield and efficiency, we should ask for a higher portion of our business with that customer. So that should grow our revenue as well.

Next, we'll move to Tim Savageaux at Northland Capital Markets.

I want to go back to something Tim said or the other Tim, about the market growing too fast to be serviced by 2 players. And I want to kind of dig into that a little bit more. Obviously, we've got a lot of indications of that, both from what the hyperscale guys are planning to spend and what we're hearing from various members of the technology kind of ecosystem, demand seems to be pretty strong. I wonder from AXTI's perspective, any more details on what you're seeing there in terms of the growth and -- or growth potential on, and whether that's how your backlog may have increased during the quarter, given the export issues and -- and how you see that playing out for the rest of the year? I guess, were we not facing these export issues in indium phosphide, is the growth rate that you had been looking for before -- has that accelerated? What are the trends there?

Thank you, Tim. It's a good question. So yes, I just basically want to repeat a little bit what Morris has just said. Obviously, we are seeing market trends that the demand for optical interconnectivity is growing rapidly. The move to higher-speed transceivers is moving rapidly just as we expect. This not only -- we've said for a long time now, this has a bit of a double benefit for us, because we are not only seeing that people as we move to larger and larger -- higher and higher speeds, the constraints on the lasers and detectors become higher and higher. So higher quality material is required, lower EPD material is required. So, we also see some market share coming our way because of that. But in addition to that, a lot of these new devices are large. As we move into some of the larger EML devices and we move to silicon photonics, the acreage of indium phosphide that is used goes up, too. So, we do see the demand for indium phosphide substrates increasing very healthily, certainly at least at the growth rates that we were predicting earlier this year and probably even higher. As Morris again said, we own about 40% market share in this. So, when I say, it's difficult for this market to be served by 2 players. We've got a quality and technology improvement over our competition. We've got 40% market share already. It's very difficult to fill that hole very quickly. We are still seeing orders, although the permit process is going slow. We're receiving new orders on pretty much a daily basis for indium phosphide. So we're definitely seeing the demand for AXT is still there. Once we start getting these orders -- these permits come through, I'm sure we're going to see more demand coming our way.

Okay. And then just a follow-up. I think you mentioned the $10 million backlog for both indium phosphide and gallium arsenide. And I guess looking at the shortfall in the quarter, I think you said half of that was gallium arsenide export. So, should we infer from that, that the majority, not the vast majority of that backlog is indium phosphide? And without the permits, I mean, could you ship all that this quarter? Or I guess, how quickly do you think you can get back to $10 million or get to $10 million a quarter in indium phosphide substrate revenue?

Right. Again, good question. Thank you, Tim. So yes, more than 50% of backlog is indium phosphide. And we've got a large amount of capacity there right now. We're typically turning orders around in 4 to 6 weeks. Sometimes, if we need to, we can turn them around faster than that. Of course, before all of this permit procedure came into place, we've got a lot of WIP, and we've built up WIP waiting to go to get some of those permits coming in as well. So, it is possible that we can turn all of this backlog around pretty quickly. But of course, it's going to be very dependent on the timing that those permits come in and how they come in throughout Q3. But we do anticipate that this will -- if we get more permits, we're confident we will, we'll see an upside to our Q3 guidance.

We'll go next to Richard Shannon at Craig-Hallum Capital Group.

This is Tyler Anderson on for Richard Shannon. Could you expand upon why the gallium arsenide export licenses slowed down as the indium phosphide licenses began to be issued? And is this the same agency that's issuing these? And are you expecting any lower cadence of the indium phosphide licenses than what you expected before because of the gallium arsenide slowdown?

Again, I can answer -- I can at least start to answer and then Morris can probably elaborate a little bit more. It's difficult for us to speculate really what is going on here. What we do know is that it is not AXT specific. The whole industry has been faced with delays with gallium arsenide permits. What we have seen, however, is that through Q3 and certainly through this past month, the permits seem to be -- the permit approval process seems to be speeding up again. And we've received quite a few more permits just in July. But I think it looks like they're now catching up through some of the backlog that we've seen there. So hopefully, things will return to normal fairly soon, both on gallium arsenide. And then hopefully, we'll see the same kind of cadence on indium phosphide as we approach normality on gallium arsenide.

Yes. I think Tim doesn't want to speculate, but I can sort of tell you, if you see the news that the ongoing of the restriction of rare earth in China implementing the policy probably has something to do with it. In other words, China will want to use this as a negotiating tool. So, I think they started to restrict the number of permits. But I think we are seeing the latter part of it start to relax more now. I think it's -- hopefully, it's getting into a more regular session that we should be able to get more permits regularly.

And are you seeing any sort of advanced order makings where customers are starting to build inventory? And could we see any kind of spikes in your revenue moving forward as you work through the backlog and people start to place larger orders while they can get a permit?

I would tend to think there are they are threatening to give us big inventory orders to anticipate the -- getting the permits. But I don't think we are at that stage because we're not delivering even the first big large orders. We do have a lot of very urgent order needs to be delivered. And so the customer said, okay, if we could get the first order through, they will give us other anticipated order, they want to build inventory. But I don't think we are at that stage to worry about that yet, because we're not even delivering the first batch. I mean, as far as big orders is concerned, we've so far delivered, we said $700,000 worth of indium phosphide orders outside of China. But the backlog is 6x, 7x or even 10x that.

And that concludes our Q&A session. I will now turn the conference back over to Leslie Green for closing remarks.

Thank you all for participating in our conference call. We will be participating in the Annual Needham Virtual Semiconductor & SemiCap Conference in August and hope to see many of you there. And as always, please feel free to contact us if you would like to set up a call. We look forward to speaking with you in the near future. Thanks.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.