Good afternoon ladies and gentlemen, and welcome to the AXT, Inc. fourth quarter and fiscal 2007 Earnings Call. I would now like to turn the meeting over to Phil Yin, Chairman and CEO. Please go ahead, Mr. Yin.

Good afternoon, everyone and welcome to AXTs fourth quarter and fiscal year 2007 conference call. I am Phil Yin, Chairman and Chief Executive Officer and I would like to thank you for taking the time to be with us. With me today is Wilson Cheung, our Chief Financial Officer. Wilson will take you through a detailed financial overview of our fourth quarter and our fiscal year results and then I will give you my perspective of our markets and future opportunities. Following the conclusion of my comments Wilson will provide forward-looking guidance and then we will open up the call to your questions. Wilson?

Thank you Phil. 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 maintain profitability, control costs and improve efficiency, the impact of customer qualification of our products, growth in our customer base and expansion of our addressable market, increasing market share, industry trends that are driving increasing demand for our products, the growth in the handset market, increasing prevalence of LEDs in a wide variety of lighting applications, the worldwide adoption of solar energy, our expansion into complementary technologies which allows us to increase our product portfolio, as well as market conditions and trends. We wish to caution you that such statements deal with future events, are based upon management's current expectations and are subject to risks and uncertainties that could cause actual events or results to differ materially. In addition to the factors that may be discussed in this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission 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 February 26, 2009. Also, before we begin I want to note that shortly following the close of market today, we issued a press release reporting financial results for the fourth quarter and fiscal year 2007. This press release can be accessed from the Investor Relations section of AXT's website at AXT.com. Now, turning to our financial results, revenue for the fourth quarter of 2007 was $17.6…

Thank you Wilson, our strong fourth quarter results, concluded that was another solid year for AXT. In addition to posting very meaningful gains in revenue, gross profit, operating income, net income and part of the cash flow from operations, we have continued to grow our customer base, significantly increase our market share and make strategic investments into the technologies and products that will expand our addressable market. We are excited by the long-term trends in all other markets that we serve, including the growth of the handset market. The increasing prevalence of LEDs in a wide variety of lighting applications and a worldwide adoption of solar energy. We believe that our uniqueness of the business model is allowing us to convert these exciting opportunities with the tangible results. During the fourth quarter, we had great success in growing our gallium arsenide revenue, particularly in the 6-inch semi-insulator, in fact our 6-inch business is growing to such an extent that I've authorized another expansion of VGF crystal growing operation by another 27% to be completed some time in Q3 2008. With the uncertainty in the US and global economies, IEC recently noted that the expected single-digit growth in the worldwide handset market in 2008, while we continue to see a healthy demand from our customers, we are planning our business in a conservative manner against this backdrop, however all current indications are that we'll see continued growth in our semi-insulating revenues. In addition to growth that we'll experience as a result of the growing handset market, we are also making tremendous progress in market share gains. In fact Strategy Analytics estimates that AXT finished 2007 with 20% market share in semi-insulating gallium arsenide, up from just 3% in 2005. In 2007 alone, we had 10 new semi-insulating customers. Further Strategy Analytics…

Thank you Phil. We estimate our revenue for the first quarter will increase to between $17.6 million and $18 million, also we estimate our net income per diluted share will be between $0.03 and $0.05, which is in the range that is consistent with our topline growth when you take in to consideration our Q4 results included the gain on sale of investments that accounted for $0.03 per diluted share. Our first quarter EPS take to accounts our diluted weighted average share count of approximately 31.6 million shares. This concludes our prepared comments. We are now happy to answer your questions.

Thank you, we will now take questions from the telephone line. (Operator Instructions) The first question is from Pierre Maccagno of Needham. Please go ahead.

Hi, Phil and Wilson.

Hi Pierre, how do you do.

Fine, thanks. Could you comment on the ASPs for both gallium arsenide semiconductor and semi insulating, as well as the germanium. Any changes that you see there in the market?

Yeah, I think on the semiconductor side, Pierre, we still see ASPs eroding. It’s mostly the Asia-Pacific, Taiwan market, as you know, that's going to keep going down, because the goal is to compete against the rest incandescent light, so there's a lot of pressure to decrease the material, obviously because it’s the big portion of it. On the semi-insulating side, that is stabilizing, I guess maybe that's the term to use, and on the germanium side, it’s sort of holding its own, I guess.

I see. So, even though there is so much demand, I guess, it still continues to drop on pricing?

Yeah, specifically on semi conducting for LED application. Yes.

The additional customer that you were talking about, is this a very large handset customer or..?

He is a North America guy that I was talking about?

Yes.

No, that’s an LED customer.

An LED customer, okay, that's all I have. I might ask questions later.

Thank you.

Thanks

Thank you, the next question is from Avinash Kant of Broadpoint Capital. Please go ahead.

Good afternoon, Phil and Wilson

Hi, Avinash.

Hi, Avinash.

A few questions, if you could talk a little bit about the germanium side, where you are in terms of - you talked about one particular customer in Europe, but where are you in terms of qualification with the other three in Europe, and what is the situation with the American customers on the germanium side?

Okay, as I mentioned, one of them has completed qualification. He actually has already completed the audit of our facility last week. Audit was very successful. We are going to be supplying some additional samples, just for some minor checks, and we should see some production samples, most likely before the second half. The other customers were still in qualifications, some of them are in early stages, and some of them are in second phase of qualification, European customers. Our American customer has released the final batch for their completion of their qualification. So, as I stated, we should see some sort of a ramp starting in the second half of 2008.

So, we would have an anticipation. I believe you said your germanium revenues were roughly $2.2 million in calendar year of '07.

Right, compared to the $909, 000 of last year.

So, what kind of expectation do you have in '08 from germanium?

Well, it's kind of hard to predict, because we haven't had any forecast from these customers yet. There will definitely be a ramp. How big that ramp is, which is really hard to tell until we get some production releases.

Right, right. And question for Wilson. Wilson, how should we model other income line item for the current quarter and for the year?

Well, that line item actually comprises several numbers in there. There is obviously the minority interest, because we are majority share owner of three of the majority joint ventures. So the more profit that we have in those three joint ventures, you will see, the larger the other expense. But what's going to offset that, of course, is the interest income, and other income line, as we're generating more cash. And having a higher cash balance, hopefully that would offset some of the minority interest expense number.

So we would still be in the positive going there.

I think it would fluctuate. But I would say, that it would almost be neutral.

And in terms of going forward for the year, and during the quarters, should we expect much margin improvement, or should we model margin at similar levels?

Well, definitely we've got a lot of leverage in the margin side right now. As I've mentioned earlier in the call, I think in terms of expectations, we should be seeing the margins in the range in the low 30% range, but having said that, we've got over 80 cost reduction programs in place right now. Phil mentioned the fact that we've got these joint ventures where we are aggressively negotiating long term contracts and pricing with them, so that we can stabilize the raw materials prices as much as possible. We also look at the product mix fairly carefully. We may even think of weeding out some customers that have negative margins. We want to pick those out, so that we can protect the margins going forward.

And one final question, if I may? At IQE, they had an option to order additional 3.5 million worth of gallium arsenide substrate. Do you have much clarity on that, and did you replace somebody, one of your competitors at IQ

We think we replaced them because we wanted him in there that heavily first, so we obviously had to replace someone. As far as another option, their run rates are pretty linear right now, so we expect that they will, or we will, use that option up.

Okay.

One other point, based on what we talked about earlier, we certainly look at the gross margin line, very, very closely, but at the same time, we also look at the overall business objective, which really is to grow the revenues and to improve our bottom line, and the good news is, for 2008, that any incremental revenues would hit the bottom-line, because we have pretty much covered our fixed cost. So, in other words, the quality of our earnings is really improving by the day.

Very good. Great quarter, guys. Thank you.

Thanks.

Thank you, the next question is from Richard Shannon of Northland Securities. Please go ahead.

Hi Phil, and Wilson. How are you?

Good. Hi Richard

Hi, Rich.

I guess, first question for Wilson, looking at your guidance for the first quarter, what are your assumptions in terms of gross margins and operating expenses?

Well, as I've said earlier to Avinash, I think that the margins, we're expecting that to be in the low range, and then, we should be pretty stable in terms of operating expenses, because our infrastructure right now is ready to support [$20] million in revenue.

Okay, second question. Phil, you mentioned a capacity increase. I'd be interested to know what you’re planning to spend for CapEx and also associated depreciation for the year 2008.

Our CapEx we expect to be less than $6 million. In term of depreciation, this particular quarter in Q4, we are at $394, 000 for the quarter. So we expect probably roughly $400, 000 to $425,000 per quarter for 2008.

Okay, and Phil, also on the capacity increase, is that related just to gallium arsenide, or is that to germanium as well?

That is all gallium arsenide.

All gallium arsenide, okay, I guess. And related to germanium then, just based on the capacity that you have planned for right now, what is the maximum potential germanium revenue that you could do this year?

Maximum potential revenue, well that is kind of hard to say right now, because one, we don't know what the forecast is from our customers. Two, some of these customers, we haven't negotiated the price for '08 period. But again, we think long term, we view that our germanium customers will be a big, big contributor to our revenue. I can't really give you a number.

The only thing I can tell you, Rich, is that if you look at the capacity utilization for germanium substrate, they are probably in the 30%-40% range right now.

Yeah.

So, that means that if we double our capacity, we don't have to spent lots of money in terms of adding furnaces and what have you, but that is obviously in the plan, and how we are going to expand that germanium substrates based on the timeline and when we get qualified by the European customers.

Okay, and last quick question, also on cash. Do you have any significant commitments to cash as you go through 2008, and I guess I specifically identified the situation with your joint ventures? Do you foresee any potential ability and/or desire to top your investments in that, such that you can …?

Obviously, I think that the majority of our cash will be used for working capital purposes. As we work more closely with the tier 1 customers, I think that the chances that we are going to have consignment inventory arrangements with those guys would be very high, meaning that we would pick their forecast and start building up inventory for them. On the other hand, I think some of the cash we may use, and Phil has mentioned this a couple of quarters now, that we're also looking at any opportunities for increasing our share ownership of our JVs, and maybe even M&A opportunities, if there is anything out there. So that would be kind of the use of our cash for 2008.

Okay, great thanks a lot guys. Good quarter.

Thanks.

Thank you. The next question is from Dave Kang of Roth Capital, please go ahead.

Thank you good afternoon. I guess the first question is, can you just talk about the inventory at the channel level, because a couple of our RF chip vendors talked about a soft Chinese market, and I guess there was some inventory crashing. Can you talk about what you've seen from your side?

As far as our inventory, you mean consignment?

Well, I mean just inventory at various channel levels like RF and DMs, Skyworks, and to their customers I guess like Motorola and…?.

Yeah, I could tell you, I hate to say, but we are behind in consignment inventory. They have taken inventory faster than we can put it in. That's all I could tell you, Dave.

Okay. All right, and then Wilson, how much of the fully reserved wafers are left?

We still have over 8 million

8 million?

Yeah, in fully reserved wafers, and I can tell you that we probably build in about 200 to 250 per quarter for 2008. But, for sure, that number’s going to decrease.

Right.

By the time we reach 2009.

Right, okay. So I mean, so guys, many, many years left before running out, I guess?

I don't think, many, many years left.

No?

Because most of the good stuff is going to be gone.

Okay, good point.

So, the rest, we don’t know what we are going to do, melt it down or whatever, fire sale, we haven't decided yet.

Got it.

We are not at that point yet.

Sure, sure. Then on the raw materials, can you talk about the capacity situations? Seems like if prices are stabilizing, raw materials sales will be going down, so demand picture really is not changing there much?

Well, right now, the supply has equaled demand. Prior to that, it was the other way around, there was constraint in both gallium and germanium. But, for instance, our operation’s keys are, Dave, they've increased capacity, I think. I know MCT increased capacity. So, there is no more constraint, lets say, in gallium. There is a constraint in germanium, because the price has gone up, but I think it’s right around $1,325 to $1,350 a kilo right now.

Yeah.

So, we've seen the price, basically, stabilized on [$4.90s] like around $5 in a quarter, $5.10, $5.16, somewhere around there. We don't see any indication that it is going to go down any further or go up further, so it’s sort of stabilized.

Got it. And speaking of Germanium, can you just talk about Solaris as a competitor. Seems like at least one of your customers is taking Solaris fairly seriously, just going from Umicore, and now you're dealing with Umicore plus Solaris?

Yeah. Well, again, Solaris is a newcomer on board, we have learned that they are a privately held company. We know that they’re in one of our customers. That's about it. We don't see them anywhere else. That's the only thing I know about it.

Got it, got it. And then on your guidance, Wilson. Can you just talk about some of your assumptions? So you indicated raw materials will be down little bit, will germanium and gallium arsenide? Obviously, growth has come from those two. I was wondering if you can just qualitatively talk about germanium versus gallium arsenide, as far as what we should expect for?

Dave, I think you have hit the nail in the head. While we believe that the raw material sales may trend down a little bit because of the ASPs, the majority of the incremental revenues, we think, would come from the semi-insulating 6-inch gallium arsenide wafers, than the larger diameter wafers. We think that is going to come in continually to be strong, and we expect we are going to continue to have a solid year for 2008. But like Phil has said earlier, because we also see the same news headlines like you do, and given the volatile economic backdrop, we just want to be conservative in the way that we forecast our business.

Got it, and Phil can you just talk about -- this will be my last question?

You can ask as many as you want, Dave.

The gallium arsenide industry capacity, just not so long ago, you felt that that was very tight. Is that still the case, and if it is, I am just kind of scratching my head why you don't have that much leverage in terms of pricing?

I don't think it is as tight as it was before, but it is really interesting, because our current customers have really increased their demands, and therefore that's one of the reasons I have approved this expansion plan, because we do get a forecast with some of these guys. But as far as constrained capacity in the industry, we don't see it, not in 6-inch anyway semi insulating material.

Okay.

Maybe, perhaps, in the small diameter semi-conducting, because there was a constraint in raw materials, but I think a lot of these competitors have gotten the raw materials now, whereas last year they couldn't get it. So I see it easing up a little bit.

Got it. Okay thank you.

Okay.

Thank you. The next question is from Jiwon Lee of Sidoti & Company, please go ahead. Jiwon Lee - Sidoti & Company: Good afternoon.

Hi, Jiwon.

Hi, Jiwon. Jiwon Lee - Sidoti & Company: Some of my questions have been answered, but just a quick question on your visibility, for especially the semi insulating gallium arsenide, how much visibility should we expect for beyond first quarter '08?

Well, Jiwon, we don't normally disclose things like book-to-bill ratio, but what I can tell you is that we do have a good visibility for maybe about 60 days. Jiwon Lee - Sidoti & Company: Fair enough and one housekeeping item. Was there options expense in the quarter?

The stock compensation expense, I actually said, that we have about $157,000. Jiwon Lee - Sidoti & Company: Okay, and that's sort of the level that we should be expecting going forward?

Absolutely. Jiwon Lee - Sidoti & Company: Okay. I think the rest of the questions actually were answered. So thank you very much.

Thanks.

Thank you.

Thank you. (Operator Instructions). The next question is from Peter Castellanos of Glacier Partners. Please go ahead.

Hi. I just want to take another crack at this germanium volume. You mentioned in 2007, you had one customer that did $2.2 million, and then you also mentioned that you have got three customers now in volume production?

No, we have three customers that are going into production, correct. They haven’t ramped up yet.

So by these, potentially, these $2 million potentially, $2 million bigger, smaller customers, I mean can you get -- it may not be this year, but can you give us some idea where they sit in that?

Well, you know, as I mentioned before, we see a ramp probably starting in the second half of the year, on the germanium customers. This is all based on the qualification phase, where we are from, where we are now, and where we are going to be in the second half of the year, the ramp up in production and things like that. So…

Yeah. Let me ask you, since the Needham conference, the last time I saw you was at that conference, and I think you'd mentioned at that time that you had some customers, that they were coming in for qualification, so that would be at back end, the end of January.. Since that time, have you had any of these customers who had qualified yet, or qualified you yet, or where do you stand?

Well, as I mentioned in my talk, we had one customer that’s already qualified, they have already come in and audited our facility last week. In fact, I went back for the audit to China and the audit was very successful. We do have to provide them with some more samples, they want to look at some other areas of their devices, and we expect some production quantities realized somewhere and sometime in the early second half.

Also, you earlier, not in this call, but in your earlier presentations a few months ago, you mentioned that under the legacy business, your older business, you had lost a lot of customers, and your diligent attempts to try to get some of them back, have you had any success in that area?

You mean, as far as overall customers.

Yeah.

Of course, I mean, we have gotten lot of them back. In fact, one of my goals when I first came on board, I spent a few weeks on the road visiting every customer, telling them this is our get-well plan, and that we are now going to come back to you until we get our quality resolved and things like that, and then when we come back, when we are ready, all we are doing is, we want to ask you for one more try to qualify us. In fact, when you look at our market share back in 2005 in semi-insulating, it was 3% and most recently, it went up to 20%, and then estimated that we are going to hit 29% this year. So, that's an indication of getting our customers back.

Yeah, and yes, but you did mention earlier, not again, that you gave them some price concessions to get back into the game, is that still a case here?

Well, I mean obviously in some areas we do, but our quality has obviously returned to the level that meets the customer specifications, so we didn't gain market share by lowering price. We gained market shares through a lot of reasons, where we are, customers feel very confident with us, don't forget there was constraint in raw material. We are the only company that is completely vertically integrated. We have our own source of raw materials. So, put yourself in the customer’s shoes, if you’ve got a constraint in raw materials, who are you going to go to. Right?

Yeah.

So, that was very, very important competitive advantage that we had. Secondly, we increased capacity when there was the constraint in 6-inch semi insulating, where some of the competitors couldn't provide the requirements to their customers. Their customers came to us, and we were able to provide their requirements, because we can put capacity online very, very quickly, because we designed our own furnaces and build our furnaces, plus we have the space and our competitors basically have to go greenfield.

Also just switching over to the JVs, I think at one point you mentioned that there was an attempt there to actually change the structure of some of the JVs, possibly become a bigger partner in those, is there any progress on that?

We're still discussing.

So its -- is it I mean is it progressing or is it just sort of…

It is progressing. These things are -- takes some while.

Yeah.

Especially in China.

And then the last question I got for you, and I appreciate your patience here, and this is a difficult question to answer, but maybe I just wanted to throw it out. Maybe you can give us some parameters on it. If you look at three or four years between the handset volume, the LED volume and those markets and the solar market, could you give us some idea how they stack up against each other?

Well, as Wilson has been saying, he is saying our germanium business is a blue bird, what he is really saying is that we think, or we estimate that our germanium business, which is really solar and you know the solar market is so hot these days.

Right.

That if you are looking out three to five year, that might equal or even surpass our gallium arsenide business.

Okay. We won't be surprised.

Yeah, we won't be surprised by it if it does.

And so, where would that put it, and then the LED business would be just a minor part of the plan?

No, I mean, it’s not going to be minor, obviously. I mean, just think when the world adopts or starts transferring all fluorescent and incandescent lighting into LEDs.

Yeah.

I mean, just think, it’s actually hard to phathom.

Okay, well thanks very much, good quarter.

Sure, thank you.

Thank you, the next question is from Jiwon Lee of Sidoti & Co. Please go ahead. Jiwon Lee - Sidoti & Company: Hi.

Hi Jiwon Lee - Sidoti & Company: You have forgot something, any preliminary thoughts back on your capacity expansion on the incremental revenue contribution that you are looking for when it’s done?

You mean? Jiwon Lee - Sidoti & Company: Did you put it in the market share in terms of 29%?

You’re saying? Jiwon Lee - Sidoti & Company: Yeah. So, let me re-phrase the question, are you saying the capacity increase that I mentioned of 27%, how is that going relate to revenue, is that what you are saying? Jiwon Lee - Sidoti & Company: Yeah, that's right you did mention 27% of that.

Yeah. Jiwon Lee - Sidoti & Company: All right, thank you.

Okay.

The next question is from Rusty Cannon of RKC Capital. Please go ahead.

Phil, I had a quick question for you on this LEC stuff that you are working on.

Yes.

Is that designed to try to solve the low margin problem of that business?

You hit right on the head. It’s essentially the [parameter]. As you know, VGF is a slow process, it short ingots LEC .The cycle time is much shorter. You get much longer ingots, and most importantly the EPD level is not as tight for semi-conducting with LED application, versus for the semi-insulating handsets, for HBTs and PMs.

So, it is too early to start thinking about that.

Yes, that’s why you get away by growing using LEC for LED applications using VGF.

I mean, is it too early to forecast when that might…

Well I think I mentioned it, I think I mentioned, towards the end of this year or early Q1 of 2009, before we really start producing or manufacturing in production.

So not too far away then?

No, no. Not at all. I mean from my standpoint, I wish had enough.

Yeah. All right. That was my only question.

Okay. Thanks.

Thank you. There are no further questions registered at this time so I will return the meeting over to Mr. Yin.

Thank you, everybody for participating in our conference call. During the first quarter we will be visiting investors in several cities and around the country around the industry, and we look forward to seeing many of you there. So we will talk to you next quarter. Thanks again.

Thank you. The conference has now ended. Please disconnect your lines at this time.