AXT, Inc. (NASDAQ:AXTI) Q4 2025 Earnings Call Transcript

AXT, Inc. (NASDAQ:AXTI) Q4 2025 Earnings Call Transcript February 20, 2026

Operator: Good afternoon, everyone, and welcome to AXT’s Fourth 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.

Leslie Green: 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, ability to obtain China export permits, timing of receipt of export permits, our plan to list our subsidiary, Tongmei in China, our ability to increase orders in succeeding quarters to control costs and expenses, to improve manufacturing yields and efficiencies 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 and increased environmental regulations in China. 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 through February 19, 2027. Also, I want to note that shortly following the close of market today, we issued a press release reporting financial results for the fourth quarter of 2025. This information is available on the Investor Relations portion of our website. I would now like to turn the call over to Gary Fischer for a review of our fourth quarter results. Gary?

Gary Fischer: Thank you, Leslie, and good afternoon to everyone. Revenue for the fourth quarter of 2025 was $23.0 million compared with $28.0 million in the third quarter of 2025 and $25.1 million in the fourth quarter of 2024. To break down our Q4 ’25 revenue for you by product category, indium phosphide was $8.0 million, primarily from data center applications, gallium arsenide was $7.0 million, germanium substrates were $231,000. Finally, revenue from our consolidated raw material joint venture companies in Q4 was $7.6 million. In the fourth quarter of 2025, revenue from Asia Pacific was 81.5%, Europe was 17.5% and North America was 1%. The top 5 customers generated approximately 22.6% of total revenue and no customers were over the 10% level.

Q&A Session

Non-GAAP gross margin in the fourth quarter was 21.5%. For comparison, we reported 22.6% gross margin in Q3 of ’25 and 18.0% gross margin in Q4 of last year. For those who prefer to track results on a GAAP basis, gross margin in the fourth quarter was 20.9% compared with 22.3% in Q3 of 2025 and 17.6% in Q4 of 2024. We continue to be highly focused on driving continued improvement, including further recovery in Q1. Moving to operating expenses. Our total non-GAAP operating expense in Q4 was $7.8 million, compared with $6.5 million in Q3 of 2025. As a reminder, Q3 included some favorable adjustments in R&D that brought our OpEx down to a lower-than-normal level. Non-GAAP OpEx in Q4 of ’24 was $9.8 million. On a GAAP basis, total operating expense in Q4 ’25 was $8.8 million compared with $7.3 million in Q3 and $10.6 million in Q4 of 2024.

Our non-GAAP operating loss in the fourth quarter of 2025 was $2.6 million compared with a non-GAAP operating loss in Q3 of 2025 of $384,000 and a non-GAAP operating loss of $5.4 million in Q4 of 2024. For reference, our GAAP operating line for the fourth quarter of 2025 was a loss of $3.8 million compared with an operating loss of $1.1 million in Q3 of 2025 and an operating loss of $6.2 million in Q4 of 2024. Nonoperating other income and expense and other items below the operating line for the fourth quarter of 2025 was a net gain of $285,000. The details can be seen in the P&L included in our press release today. For Q4 of 2025, we had a non-GAAP net loss of $2.6 million or $0.06 per share compared with a non-GAAP net loss of $1.2 million or $0.02 per share in the third quarter of 2025.

Non-GAAP net loss in Q4 of 2024 was $4.2 million or $0.10 per share. On a GAAP basis, net loss in Q4 was $3.6 million or $0.08 per share. By comparison, net loss was $1.9 million or $0.04 per share in the third quarter of 2025. GAAP net loss in Q4 of 2024 was $5.1 million or $0.12 per share. Weighted basic shares outstanding for the quarter was 44.7 million. Cash, cash equivalents and investments increased by $97.2 million to $128.4 million as of December 31. This is primarily the result of our public offering of common stock, which closed on December 30 and generated approximately $93.9 million. By comparison, at September 30, cash was $31.2 million and accounts receivable decreased in the quarter by $2.6 million. Depreciation and amortization in the fourth quarter was $2.3 million.

Total stock comp was $1.3 million. Net inventory was up by approximately $4 million in the fourth quarter to $81.7 million. This continues to be a focus for us, and we expect to bring it down in coming quarters. This concludes our discussion or comments about the quarterly financials. Turning to our plan to list our subsidiary, Tongmei, in China on the STAR Market in Shanghai. We remain very interested in completing the IPO, particularly in light of the rapidly evolving AI infrastructure build-out in China, which is fueling increased China-based demand for indium phosphide substrates. We’ve continued to keep our IPO application current and Tongmei remains “in process” as part of much — a more selective and smaller group of prospective listings than a few years ago.

Though the current geopolitical environment is dynamic, Tongmei is considered a Chinese company and continues to be regarded in China as a good IPO candidate. We will keep you informed of any updates. With that, I’ll now turn the call over to Dr. Morris Young for a review of our business and markets. Morris?

Morris Young: Thank you, Gary. We were disappointed…

Operator: Pardon me for interruption, this is the operator. We have lost our speakers. Give me one moment to reconnect. [Technical Difficulty]

Morris Young: Hello? Am I back up?

Operator: Yes, you are.

Morris Young: Okay. Let me start on the beginning again, just in case I missed part of it. We were disappointed that we didn’t receive as many export permits in Q4 as we had hoped based on the average processing time we had seen up to that point in October. The good news is now that we have received permits in Q1 and we are in a stronger position today than we were at the same time in the prior quarter. Gary will take you through our full quarter guidance in a few minutes. But we do expect to achieve sequential growth in revenue in Q1, driven primarily by growth in indium phosphide for data center build-out for AI. We’re also very pleased to note that we are seeing a welcome expansion of our customer base for indium phosphide.

We’re beginning to support leading customers in the optical space that we have not — we had limited exposure to prior to this time. This includes Tier 1 laser manufacturers and optical transceiver module makers both in China and around the world. We’re excited to be able to demonstrate the technological advantage of our low EPD wafers as the market moves to optical devices with higher speed and greater sophistication for both scale-up and scale-out applications. In total, our backlog for indium phosphide wafers have reached a new high of over $60 million. As we mentioned last quarter, customers are planning for longer lead time by placing longer-term orders and giving us more visibility into their expected demand. As many of you know, the supply chain for optical transceiver is quite complex and highly globalized.

We believe this geographical interdependence is providing both opportunity and incentives for the ecosystem to work together in new ways to solve global supply chain shortages. Beyond pluggable receivers, we are seeing a very large developing market for co-packaged optics for both scale-up and scale-out applications. We’re actively engaging in discussions with our customers about their technical and timing requirements and believe this could be — represent yet other inflection point in our business developing in late 2027 and beyond. From a geographic demand perspective, the massive AI infrastructure build-out and planned CapEx spending by cloud services and AI platform providers in the United States is the primary driver for EML and silicon photonic-based optical transceivers.

We believe that today, our materials are being used in multiple U.S. hyperscale and we expect that end customers use will continue to broaden. In China, the data center build-out is early in its ramp. But we are seeing rapid growth as China moves to accelerate its data center expansion and AI capabilities. Our revenue related to the data center market in China are expected to grow by more than 60% in Q1 over Q4, highlighting both increased investment in these Tier 1 data centers as well as the strong desire for Chinese domestic suppliers to secure local stores at every level of the AI infrastructure supply chain. Given the strong demand environment, it is important to note that AXT is well positioned to handle increased demand for indium phosphide wafers.

Since we have last reported to you in October, we have already added approximately 25% more capacity, and we are on track with our current plan to double our capacity from Q4 2025 level by the end of this year. Beyond our current plan for capacity expansion, we’re working closely with our customer base to understand their long-term requirements and to align our plans globally. Our recent capital raise will be fundamental to our future expansion as we enter our next significant phase of growth. A major focus of this expansion will be an increased investment in our 6-inch indium phosphide product, and we are excited to work with our customers to meet the rigorous requirements of next-generation EML and silicon photonic-based devices. Now turning to gallium arsenide.

We continue to see demand for semi-insulating wafers for wireless RF devices and believe that we have strong opportunity for market share expansion gated primarily by our ability to obtain export permits. In Q4, we saw an uptake in semiconducting wafers for both industrial laser applications and data center laser applications. VCSEL lasers a data center — for data center applications typically do not require a lot of gallium arsenide material. As the devices are small, so they don’t move the needle much as a growth driver for us. However, we are seeing increased demand for VCSEL for autonomous vehicles in China, Chinese automobile market, which is currently expanding rapidly. High-growth expansions in addition to our watching — we are watching with interest and emerging application in robotics for VCSELs that increase the precision and dexterity of a modern robotic hand.

Counter the VCSEL used in data center applications, machine vision VCSELs tend to be very large and use more gallium arsenide substrates. They also require high-quality material which we are very well positioned to supply. Again, demand is more today, primarily China-based and covers a diverse set of customers but the breadth of use case and the development is very exciting. Finally, our raw material business is — was up in Q4 with growth from our subsidiary volume, which manufactures PBN crucibles used in manufacturing of indium phosphide crucibles. In addition, we’re pleased to report that our subsidiary, JinMei, has begun to refine high-quality indium, which gave us now direct control of a guaranteed supply of yet another critical material for our indium phosphide substrates.

Globally, there continues to be a greater awareness of the importance of various materials, and we are ahead of the curve in developing our unique integrated supply chain. In closing, this is a very dynamic and exciting time for our company as we enter into 2026. We’re a fundamental supplier to the multiyear optical build-out in the AI infrastructure market. We have a broadening customer base of Tier 1 companies and a strong balance sheet to support our continued business expansion. And with growing backlog, the receipt of indium phosphide and gallium arsenide export license remains the single most significant gating factor for our growth. As such, we are highly focused on ensuring that we are proactive, organized and disciplined about managing the process on behalf of our customers.

We also know that we must be laser-focused on running our business with the greatest efficiency. This includes our continued effort to drive gross margin improvement, OpEx discipline and inventory reduction. With strong ongoing market trends fueling the data center upgrade cycle, we believe that we have tremendous opportunity in 2026 to drive meaningful growth in our business and return to profitability. I would like to personally thank our employees for their dedication and tireless efforts during this singular moment in AXT history and I would also like to express my sincere gratitude to our customers, partners and shareholders for their ongoing support and believe that in the future, we are building together. We look forward to reporting to you on our progress.

And with that, I will turn the call back to Gary for our fiscal quarter guidance.

Gary Fischer: Thank you, Morris. To reiterate a couple of key points from Morris’ commentary, we are seeing a strong increase in our indium phosphide wafer demand related to AI and the ongoing data center upgrade cycle. Given the geopolitical complexity surrounding this market trend, our customer base is diversifying and expanding and customers are placing longer-term orders and providing greater visibility into their needs. With all of these positive market and AXT-specific growth drivers, the most significant single factor to our growth in Q1 and beyond is the success and timing of getting export permits. Therefore, guiding for the future is somewhat tricky for us right now as we cannot predict future timing of permits or a success in obtaining them for any customer or individual order.

. But drawing on what we know and what we’ve experienced thus far in the export permitting process, we can offer the following insight to our expectations for Q1. As of today, we have approximately $26 million in revenue that can be realized in Q1 across our substrate product lines and raw materials, for which we either have — already have a permit to ship or for which an export permit is not required. We have a high degree of confidence in recognizing this revenue in Q1. We could see significant upside to this number in Q1 should we receive more permits for additional orders between now and the end of the quarter. But we want to stress that as we experienced in Q4, the timing for permit issuance is not predictable nor in our control and doesn’t necessarily align with our quarterly reporting.

As Morris mentioned, we continue to focus strongly on gross margin. Further improvement depends on a number of factors, including total revenue as it relates to absorption of fixed costs, revenue mix by product and our ability to continue to drive better manufacturing efficiency. With regards to OpEx, we expect that it will remain at approximately $9.0 million in Q1. With these factors in mind, we believe our non-GAAP net loss will be in the range of $0.02 to $0.04 and GAAP net loss will be in the range of $0.04 to $0.06. This represents substantial year-over-year progress towards our return to profitability. We estimate share count in Q1 will be approximately 53.2 million shares. Okay. This concludes our prepared comments. We’d be glad to answer your questions now.

Audra? Operator?

Operator: [Operator Instructions] We’ll go first to Richard Shannon at Craig-Hallum.

Richard Shannon: Gary, I’m going to do a quick request to give me the revenue number you gave for the quarter. It got — my line got garbled here. I heard about ’26 that you believe you can get — highly likely to get. Was there a number to the upside there? Apologies for needing to ask this.

Gary Fischer: No. We normally give you guys a range, but we discussed before the call today that we’re very, very confident at the ’26 number. We did say just a moment ago that we believe we could go higher if we get more permits, but we — it wouldn’t even — it could even be more than just a normal range, which we usually have a $2 million or $3 million range for you guys.

Morris Young: Well, let me try to add on to this point. That is our manufacturing are doing the manufacturing as if we can get a permit. So there is a lot of these so-called semifinished goods or finished good staging in our clean room ready to be shipped if we can get an actual permit.

Gary Fischer: Yes. We are building to forecast and to the backlog, whether or not — we’re not building to permits. We’re not waiting until we get a permit and then say, okay, let’s get going. And so it’s building and we’re enthusiastic, we’re excited and of course, yes, we’re a little bit frustrated because it would be pretty big numbers if we can get some more of these permits. And we think that we will. We can comment more on this call, but we’re hanging in there. We’re not discouraged and giving up. So…

Richard Shannon: Okay. I appreciate understanding your approach to the guidance and it certainly makes a lot of sense in this environment. Let me ask about the licensing process here. Last quarter, you said it was about a business day or a 3-month process here. And obviously, that didn’t turn out as we saw from your pre-announcement, which is unfortunate, but we all know how governments can work from time to time here. Do you have any new insights as to how they’re working here? And I guess, are there any permits that are being rejected that you don’t think should be? Just more insights here on this licensing process.

Timothy Bettles: Yes, I can answer that one. So this process is not transparent at all. And we’re seeing quite a lot of variability. We started off in the end of Q3 by saying it was looking like we’re seeing a fairly consistent 60 business day process cycle. We’re now seeing a lot more variability as we go through there. And as I say, there’s just no transparency to that. It’s reasonable to assume that there’s geopolitics playing into this as well. It’s really hard to determine what and why. And it’s difficult, therefore, to figure out which permits are coming in on time, which are taking longer. I’ll answer the second question as well, which you asked whether there had been any permits that have been denied and why? We have actually received a couple of denials with the instructions that we can resubmit that application with more information.

So this is the first time we’ve actually received denials on permits and we’re not utterly sure why. Again, no transparency to this. We don’t see any particular reason why any of these permits should not be approved. And it’s a process that we’re just working through. So these permits that have been denied, we’ve already resubmitted with MOFCOM and we’re hopeful that we continue to talk to MOFCOM and they will get reviewed quickly and could potentially turn around fairly quickly. I could even make an impact on Q1 numbers if we can get a quick turnaround on them.

Gary Fischer: And what does MOFCOM stand for?

Timothy Bettles: That’s the Ministry of Commerce in China.

Morris Young: So let me add an optimistic viewpoint, the comment about that Tim just gave you. That is — although there is a denial of an application, but they come with a specific instruction how to strengthen the application, which we think is a good indication. In other words, if they really want to deny this, one of — they can just let it sit there. I mean the fact that they want more information about — actually, I think it’s a fixable permit application we have. And that means, hey, they are taking a very serious look at it. And hopefully, that will turn to be a permit.

Richard Shannon: Okay. That is helpful. Second question here is kind of the backlog here and also following up on, Morris, your comments about customers booking further out. So we went from a backlog of $49 million to above $60 million here, and you also commented that people are — customers are ordering further out. Could you suggest how far out they’re going right now? And also, how far out are you hearing forecasts from these customers as well?

Morris Young: Yes. Let me see how to answer that. Actually, let me first answer my part of the question, and I will turn it over to Tim. Well, the reason why that Tim really works with customers hearing what their demand is. Actually, one of the interesting comments we have was that we have important meetings with our customers this week, and they’re telling us, Tim, at least in two occasions, people are saying, gee, our demand forecast increases every week. So that’s the kind of level. I think — I mean we know it is tight and we know it’s going up. But I think people are upsizing their demand, and they’re telling us what they want to do, whether they’re going to go to 4-inch, how much they want to switch from 3 to 4 and 4 to 6, okay?

And as far as how much inventory they are building, I think that depends upon customers. Some of the customers, we suspect they’re buying into the inventory. But they also tell us, if you deliver, I’m going to take it all if you can deliver. Whereas others, I think they are telling us the real demand in the quarter because I think as of now, we cannot deliver enough of their demand. So they are giving us longer lead time to give us more incentive to build up the expansion plan and build the capacity for them. And also, I think the other thing is, Tim, you want to comment on long-term commitment that you’re talking to a customer about?

Timothy Bettles: Yes, I’ll definitely — I’ll comment a little bit on that, and I’ll also comment a little bit more on backlog and what we’re seeing from this. So a lot of this backlog, remember, is scaled up based on the permit dynamics, right? So the permit dynamics, once we receive a permit to export material, we have a 6-month window to export. So a lot of backlog is built at the moment that permit comes in, we have a 6-month window maximum to deliver. And in many cases, that window, the window of which the customers are looking to receive material is a lot shorter than 6 months. So really and truthfully, this is all being gated by permits, as we mentioned during the discussion. In terms of what we’re seeing in build-out for inventory, I think at this moment in time, people would like to keep more inventory.

But as Morris mentioned, just about everybody we’re talking to is telling us that the demand is growing literally on a weekly basis. So we just see the numbers expanding and expanding over and over. Now turning to forecast and what kind of visibility we have we are definitely talking about long-term supply agreements with a number of customers right now. And we’re planning our business according to those long-term supply agreements. We’re seeing forecasts out beyond 2030 for many of these customers, but of course, as I’ve just said, those numbers are increasing on a week-by-week basis. So it’s difficult to keep track of things, but people are talking about minimum demand requirements. Moving forward for at least the next 2 to 3 years, given us forecast out beyond 2030.

So all in all, I think this backlog is real. It’s achievable, and it’s kind of being limited by our permits at the moment.

Richard Shannon: Makes sense. I’ll ask one more question and jump out of line here, guys. This is on capacity additions. Just a few kind of multipart question here. I think I heard you say you’re going to double your capacity from the end of ’25 to the end of ’26. If you could verify that? And if so, can you help us understand what level of CapEx is going to be requiring? And then looking beyond that, and Tim, you just mentioned forecast going out beyond 2030, which is interesting to hear, how much more capacity beyond that could you need? Let our minds wonder about what kind of scale an opportunity you’re thinking about here?

Morris Young: Yes. I think we just said we have increased our capacity by 25% now, and we do expect to double our capacity by the end of this year, okay? And how much budget would we need? It could be about $30 million, and that is sort of on the low end in a way because the first phase of the expansion, which is doubling our capacity mainly use brownfield. In other words, existing Tongmei facility, we already have a clean room available. We have the building there already and power supply and water. So I think that budget is lower. Looking beyond 2026, we are looking at possibly doubling it again in 2027. And that budget is lying somewhere around $100 million to $150 million depending upon how we want to build it because then we are talking about a greenfield. We need building, we need clean room, we need power, et cetera.

Operator: We’ll move next to Tim Savageaux at Northland Securities.

Timothy Savageaux: Let’s continue with that capacity discussion, but maybe try to put some numbers around it. If I look at where you’ve peaked historically, and I think we’re talking exclusively about indium phosphide here, that’s getting up towards $20 million a quarter in substrate revenue. And I imagine your capacity is now slightly above that given the increase you talked about in Q4. I guess question one, is that reasonable? And should we expect you to exit calendar ’26 with revenue capacity roughly double those levels? And would you anticipate having the demand to fulfill that at that time or you’re building maybe a little bit ahead?

Morris Young: Let me first answer the question. The — I think we calculated, I think it’s approximately $35 million a quarter by the end of the year run rate, okay? It could be a little bit more — given the price environment is dynamic as we — the cost of indium are going up. And can we use up all this capacity? I think looking at the backlog, we can certainly do, but the problem is the gating factor is the permit.

Timothy Bettles: I’ll add something in here as well. Irrespective of permits, we mentioned we are seeing growth in this business in China as well. And looking at it quarter-to-quarter, Q4 was probably double revenue in China than Q1 in 2025. And we would expect — we’re looking at potentially doubling again through 2026. So we’re definitely seeing growth there in China that warrants expansion as well as growth outside of China where we would need permits for.

Morris Young: Tim, I agree with you, but then I don’t want to minimize the importance of outside of China. I think the AI growth, the budget we’re seeing is really fueling the demand for indium phosphide substrates.

Gary Fischer: Yes, Tim, this is Gary. And I still speak conservative, but — and I am. But I’m not sure you guys are getting the point is that every customer is worried about getting enough for their needs. There’s a general concern. The meetings we’ve had this week, we’re not meeting with the purchasing manager. We’re meeting with CEOs and general managers. They all want to talk to Morris about capacity and about future growth. So there’s a phenomenon going on here that all of — it’s unusual for — no matter what we do for our jobs, including the analysts, this is very unique and unusual situation. I mean, I’ve been around the block a few times and Morris has, and this is very, very unusual. And it’s actually intense. We’re excited but we’re scrambling, we’re scrambling.

And I don’t see any into it near term. This is — people are telling us that their demand is going to be going up 3, 4 or 5x over the next 4 or 5 years. And there’s not how many suppliers are there. You know the answers to that, too, and we’re one of them.

Morris Young: Yes. I think let me add to that. I think the investor usually asks the CEO, the toughest question is what keeps you up at night? I think what’s keeping us up at night is calculating how we’re going to expand that capacity, how we’re going to get that product to our customers and how to develop the technology that a customer wants. I mean it’s very exciting but it’s also very straining. We need to be very much aware of what the customer wants and satisfy their demand.

Gary Fischer: Fortunately, we have recent experience at adding capacity. What — it was almost about 10 years ago, when we learned that we needed to get gallium arsenide moved out of Beijing. And so we had 2017, ’18 kind of time period where we did add capacity from green grass fields. So we have some strength here but it’s going to tax us even though we are experienced.

Morris Young: Yes. I do want to give the analyst point to ask the question, but I think we’re talking to each other.

Gary Fischer: We’re too excited, yes.

Morris Young: We’re too excited, but I think it is a very good point. I think we — prior to this, we probably overspent because the IPO preparation, we actually expand from one facility to three facilities. But now I think we’re looking at a great demand for indium phosphide, which I think it’s really meeting our challenge. And I think Gary is right. We are very well positioned to meet that demand. I think we are probably the best suited to increase capacity and also because the vertical integration we have in terms of supply chain, and we’re in control of a lot of other material, which could ensure supply if indium phosphide substrate continue to grow like what we are talking about, and we have plans for that as well.

Gary Fischer: A good example is our subsidiary, JinMei. JinMei makes the indium phosphide poly for Tongmei. So we have in — our supply chain is supporting this growth process. Next question, Tim?

Timothy Savageaux: I’m a little bit afraid now. But — you actually highlighted — you highlighted in the release even the increased presence with some big Tier 1 customers. I guess in the commentary, you mentioned maybe some in China, but elsewhere. In terms of what’s going on there? Are we talking about orders with major new customers qualification? Any specific programs? And I’m not sure these 2 comments were related or not. But I’ll ask if they were with regard to your increased investment in 6-inch indium phosphide, if you can maybe cover both of those points. Appreciate it.

Timothy Bettles: Yes. I’ll take a stab at that one, Tim. So yes, we are gaining more traction with customers, as we’ve said on previous calls as well that we’ve not been so prolific in. So we are gaining design in, we’re gaining qualifications on existing products as well as new products as we move forward. And the customers are looking to expand on their demand for indium phosphide. As Morris mentioned in the call, there’s already been a big move from 3-inch to 4-inch, so we’ve spent a lot of time and effort on scaling up our 4-inch business. . And we’re also seeing a lot of interest now. And of course, we all know one customer that’s really driving 6-inch demand. So we’re really taking 6-inch very, very seriously. And we’re expanding — as we expand capacity both now and are doubling capacity through ’26 and beyond, we’re looking at adding significant 6-inch capacity in there during that expansion.

And we’re just plowing through the numbers right now to see what we need to drive 6-inch and how we scale 6-inch compared to 3, 4 and more of the traditional wafer sizes.

Morris Young: Yes. I think — sure, Tim. I think one part of it perhaps is the cooperative effort. Usually, when your customers don’t go to me, they probably talk to the sales guy and give us orders. But I think now the dynamics is such that we sort of need to interact more to make sure that we’re putting the right amount of attention to both in terms of development and capacity expansion to where they need it, okay. And then virtually also to convince us, this is the right investment we should have. Is that right?

Timothy Bettles: That’s correct. We’re also getting a lot more customer buy-in with commitments, NRE, purchase orders to drive that business forward as well.

Operator: We’ll move next to Matt Bryson at Wedbush Securities.

Matthew Bryson: Just can you talk a little bit about what might have been unfettered demand or shipments in Q4 or what you might be guiding to if you weren’t restricted by permits?

Gary Fischer: If we’re not restricted by permits, then the basic question is our ability to manufacture high volume because there’s no issue about demand or backlog. So the variable that you’re really focusing on is manufacturing capability.

Morris Young: Yes. I don’t know whether the customers are telling us more demand than we can deliver. But I think we definitely have more orders than we can actually manufacture now. As we add the capacity, we’re counting on who we can supply to, but of course, there’s other leading factor, which is the permits.

Matthew Bryson: Got it. So I mean hypothetically, assuming you could be manufacturing around $20 million of indium phosphide, you could ship it all if you could get permitted?

Morris Young: Yes, correct. And that will — we expect it to increase it to about $35 million a quarter by the end of the year. And then we are making sure every point along the supply chain receives equal attention in terms of poly, in terms of crucible furnaces, et cetera, et cetera.

Matthew Bryson: Understood. And then — so you’re completely confident that of that $35 million in capacity, if you can bring it on and you can get permits that come to end of this year, you could possibly be shipping $30 million, $35 million in orders. I guess is there — are there any customer commitments or LTAs or anything else that kind of solidifies that demand?

Morris Young: What’s that term you’re saying? LTAs?

Timothy Bettles: We’ve got a lot of purchase orders in that right now, and we’re going through long-term agreements. Long-term agreements, I think in terms of locking up capacity are easy and we’re talking to customers to lock that capacity up. The gating factor, and we’ve reiterated this a lot today and previously, gating factor with long-term agreements is how much can we actually ship out of the country? What can we get permits for? So we’re trying to address that through LTAs. But for sure, we can definitely cover this kind of revenue volume with purchase orders and LTAs.

Matthew Bryson: And then, Gary, I think the last one I have is for you. if you get to those numbers in terms of shipments for indium phosphide, so $30 million plus, can you give us some of the parameters we should be thinking about in terms of gross margins, what are the puts and takes? And hypothetically would you be able to get back to the kind of COVID era highs that you’re reporting back in 2021, 2022?

Gary Fischer: Yes. I mean we always like indium phosphide. And if you have to pick of our 3 substrate products that you want to see go through the ceiling in terms of volume and demand, it’s the right one for us. I think getting somewhere at $40 million a quarter in aggregate, not just indium phosphide, but we should be getting hopefully somewhere close to 35% gross margin.

Morris Young: I will add another point. I always describe AXT, it’s a fairly unique company because we — I describe our substrate business as the locomotive engine in the front, but we have a lot of cars in the back following us, such as indium, such as phosphorus, quartz, PBN crucibles, furnaces we make. So if our business is good, we’re pulling these guys along, and that should help us. So what you’re seeing here, I’m more optimistic and Gary said, I think that 35% is the normal substrate business. If we can pull those guys along, that should help us even further.

Gary Fischer: Yes. Yes. Our internal goal is higher, Matt, but — so that we don’t overstate expectations from — for your community, we want to be a little bit cautious. So we’re very optimistic. So it’s pretty exciting.

Matthew Bryson: And just one quick follow-up. The shift to 4-inch and 6-inch, does that change the parameters on a gross margin perspective?

Morris Young: I think normally the larger the size we go, the better the margin we will get. On the other hand, I’ll be more cautious about 6 inches. We are still a little bit in development stage. So I think initially, looking at lower margin, but looking for ways to compensate that, right, Tim?

Timothy Bettles: Right. And product mix is still very much geared towards 3-inch and 4-inch at the moment. And as Morris says, we’re running 6-inch up. It is still a bit of a development project at the moment. It will be growing through this year. But again, remember, as we do that, 3-inch and 4-inch are still a big percentage of our business.

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

Leslie Green: Thank you, Audra, and thank you all for participating in our conference call. We will be participating virtually in the Loop Capital Conference in March and hope to see many of you there. As always, feel free to contact us if you would like to set up a call, and we look forward to speaking with you soon. Thanks.

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