Good afternoon, everyone, and welcome to AXT's Third Quarter 2012 Financial Results 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 Miranda, and I will be your coordinator today. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Miranda, 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 and 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 market 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 and products. In addition to these 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 November 1, 2013. 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 third quarter of 2012. This press release can be accessed from the Investor Relations section of AXT's website at axt.com. I would now like to turn the call over to Raymond Low for a full review of the third quarter 2012 results. Raymond?

Thank you, Leslie. Revenue for the third quarter 2012 was $20.8 million compared with $25.2 million in the second quarter of 2012. Total gallium arsenide substrate revenue was $12.9 million for the third quarter of 2012 compared with $14.9 million in the second quarter of 2012. Indium phosphide substrate revenue was $1.6 million for the third quarter of 2012 compared with $1.3 million in the second quarter of 2012. Germanium substrate revenue was $2 million for the third quarter of 2012 compared with $2.5 million in the second quarter of 2012. Raw material sales were $4.3 million for the third quarter of 2012 compared with $6.5 million in the second quarter of 2012. In the third quarter of 2012, revenue from North America was 15.5%, Asia-Pacific was 59.8% and Europe was 24.7% of total revenue. One customer generated more than 10% of our revenue during the third quarter, while the top 5 customers generated 37.3% of our third quarter revenue. Gross margin in the third quarter was 26.3% compared with 29.8% of revenue in the second quarter of 2012. The drop in gross margin for the third quarter of 2012 was largely the result of lower selling price of raw material gallium, lower tonnage and also lower capacity utilization. Selling, general and administrative expenses were $4.0 million for the third quarter of 2012 compared with $4.0 million in the second quarter of 2012. Research and development costs were $844,000 for the third quarter of 2012 compared with $914,000 for the second quarter of 2012. Total stock compensation expense was $300,000 for the third quarter of 2012, of which $19,000 was including cost of revenues, $245,000 in SG&A and $36,000 in R&D. Income from operations for the third quarter of 2012 was $700,000 compared with income from operations of $2.6 million…

Thank you, Raymond. Business conditions in the third quarter were challenging and we're in keeping with the expectations that we outlined when we announced our results last quarter. The compound semiconductor substrate market is currently experiencing a correction, largely driven by weaker demand and a moderate amount of excess inventory in the channel. The environment continues to persist in the fourth quarter, and we do not expect that it will resolve itself before the end of the year. We're strongly focused on the diversification of our revenue and are actively laying the groundwork for our renewed growth as the market improves. We believe that continued strong execution and conservative planning will allow us to weather this downturn and emerge well-positioned as the new cycle begins. Let's now begin with the market for semi-insulating gallium arsenide. The business environment continues to be challenging as a result of a low -- lower overall demand and some inventory in the channel. As a result, we're projecting weaker sales of our substrates in Q4. However, long-term, the market for gallium arsenide substrate remains bright, as the number of applications for wireless device continues to grow. Further, we're continuing to progress a customer qualification and are hopeful that we will begin layering additional revenue from new customers next year. Turning to semiconducting substrates. The third quarter was quite challenging as expected. We saw greater than 15% drop in revenue. Geographically speaking, the weakness today is widespread. We do not expect this demand environment to improve in the fourth quarter and are taking a conservative view of our business expectations. Having said that, while the market in China continues to be weak, we believe that we have some competitive opportunity here and are focusing our efforts on leveraging our quality and cost structure advantages to grow…

Thank you, Morris. In the fourth quarter, we are expecting to see total revenues of between $17 million and $18 million. We are expecting net income in the fourth quarter between a loss of $0.02 and break-even per share based on approximately $32.9 million common shares outstanding. This concludes our prepared comments. We're now happy to answer your questions.

[Operator Instructions] We'll go first to Richard Shannon with Craig Hallum.

I guess my first question is on gross margins. I had a number of just below 27% just reported in the third quarter and as I recall from the last call, you thought it would be up somewhat. Clearly, volumes are a little bit lower but even then it seems a little bit low given that perspective. Have there been any changes in the pricing environment in any of your substrates in addition to lower gallium pricing?

I guess it's mainly caused by the lower gallium pricing. I mean, substrate, we haven't seen a drastic change in pricing. Although that's a -- it's a moving target. But we haven't seen a dramatic change.

Okay. And what is the starting point from the third quarter and your near-term outlook on gallium pricing, leads you to believe what gross margin should do in, say, the fourth quarter and then kind of a medium-term target for a couple of quarters after that. You talked last quarter about a longer-term goal of 35% that seems difficult to achieve anytime soon given the gallium pricing and your volumes that you're at here, but if you can give us a sense of where you see gross margins going in the fourth quarter and beyond that, that would be very helpful.

Well, I think. Let me take a crack first and then, the gross margin, obviously, is Raymond's territory. But I see, at this plant utilization rate, we're not going to benefit a whole lot from the capacity issue. I think gallium raw material price, certainly, is not contributing a whole lot. So we definitely need to see some turning points. The demand environment for substrates, as well -- product mix is at a very, very helpful sign. Some of the product we have better margin, but overall I think it's utilization and gallium price. Raymond?

Yes, that's right. Richard, obviously, we don't specifically comment on a percentage of gross margin, but the overall targets that we had showed that has come down and it's a different ballgame with the lower prices of raw gallium now in our joint ventures and lower tonnage sold and, of course, again, within our factory, the lower capacity utilization.

Okay, fair enough. Maybe one more question for me, I'll jump out of line. I guess in your wireless business here, you've given guidance for revenues downward somewhat. Morris, you and AXT have done a good job the last few years here in really gaining share in the wireless business. Wondering if this -- does this reflect any sort of challenges from either market share perspective within gallium or do you see any other technological alternatives creeping in here and hurting your near-term outlook there?

Sure, Richard. Obviously, everybody knows that SOI it's a very much talked about technology, sort of showing its presence in the RF chip market. We don't deny that. A lot of our companies are talking about utilizing SOI. But I think, overall, the news is out there already and gallium arsenide still has a stronghold, I think, in as far as power amplifier HBT market is concerned. And in certain higher frequency market, we hear gallium arsenide is still King of the Hill. I think, what is going to turn out to be, ultimately, in the future, I think gallium arsenide still has -- I would still say, it's a dominate RF chip solution. But I think, overall, in the last few quarters, SOI certainly is making its impact. I think overall, I think, I must say that we are perhaps losing some of the market share either through the fact that we're concentrating in certain market and we're not gaining the qualification, therefore, it has not given us a whole lot of help. But I think we are concentrating our effort in those prospect and I'm still hopeful that something would turn loose.

We'll take our next question from Avinash Kant with D.A. Davidson & Company. Avinash Kant - D.A. Davidson & Co., Research Division: A few questions. So it looks like in your prepared remarks, you talked about segment revenues in Q4 compared to Q3. In most of the segments you do expect some decline. Is there any particular segment where you see more than average decline versus the others?

I think it's probably semiconducting. Avinash Kant - D.A. Davidson & Co., Research Division: Semiconducting?

Yes. Avinash Kant - D.A. Davidson & Co., Research Division: And then you talked about in the material segment also, you said revenues could be modestly lower from where they are. But I believe that you do expect pricing to be kind of maybe slightly better, so that does it mean that there's a bigger impact on volume in Q4 compared to Q3?

Not really. The estimation of the market going forward is always an estimate. I think so far, we're not seeing great increase in pricing, but I think the volume is probably going to hold its present pace or slightly lower, but it's not a whole lot. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. Just some clarification on the comment you made just a little bit before that, this the market share loss, by market share loss, you mean losing market share to other technologies or other gallium arsenide pairs?

I would say both. The fact that we are concentrating our sales of semi-insulating into a smaller segment of the market that perhaps, if they're not selling well, then we're not selling well. Our customers are not gaining market share. That brings us to a losing market share, that's one explanation I could think of. And I am also very much aware that SOI is making its inroad into the RF Chip market. And that could be a contributing factor to the fact that we're losing market share. Avinash Kant - D.A. Davidson & Co., Research Division: Would you say that the customers you are at, you're maintaining your share or you have lost...

I think we're maintaining our share. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. And so the recovery and in terms of -- the final question is, of course, on the side of new qualifications, when should we expect some news on that front whether it be the 2 customers that you have talked about in the past?

I think it's going to be sometime in 2013. I think we are doing -- I think the good news is that we're still in there, we're still -- to our satisfaction, I think we've done our due diligence of how we've done our technological qualification. But given the demand environment being very challenging today, I think it's taking some of the vigor from the customer side from switching to new suppliers, although we are still in the running. Avinash Kant - D.A. Davidson & Co., Research Division: Did you break down your gallium arsenide revenues by semiconducting and semi-insulating?

In the third quarter, didn't we?

Yes. Well, basically the split almost the same as the second quarter. It's approximately 55%, 45%: 55%, semiconducting; 45%, semi-insulating.

We'll go next to Tom Sepenzis with Northland.

You mentioned that there's excess inventory in the channel. I'm just wondering where that stands in terms of maybe weeks and what has to happen and when do you expect that to be at normal levels?

I think that's our guestimate. We see our customer are not pulling as much and so we guess, either they have inventory or the demand is not strong.

Do you know how much excess inventory is in the channel?

We also listen to our customers' conference call and they talk about inventory. So we're guesstimating.

And then just in, I don't know if you want to take a stab at this, but based on what you're seeing out there and where your revenue run rate is getting to, when should we maybe expect a turn here? In March, is March going to be up? I know that your customers are saying pull in, in the March quarter, a lot of people in the wireless food chain are for handset ramps in March, and so that's going to be unseasonably flat to up. Are you seeing the same thing or do you expect continued or a normal seasonal weakness in the March quarter as well?

We are very -- we are at the end of the food chain. So we always admit that. We don't have much visibility. So if we can see one quarter, that's great visibility already. So I think it's premature for us to speculate the Q1 environment. Although, normally, Q1 is a down quarter among the whole year, but I just wondered how bad could it be compared to fourth quarter. I mean fourth quarter is down sequentially, which we do expect. I mean even Q3, we don't expect to be down. But the environment out there is pretty tough. Customers are correcting inventory and then so it's a tough environment out there.

We'll go next to Dave Kang with B. Riley. Dave Kang - B. Riley & Co., LLC, Research Division: Morris, regarding your top end customer, actually their numbers were pretty good and their Q4 guidance was pretty good as well, except that they announced that they're going to work down inventories to increase their inventory turns. So if that is the case, then should we see them come back in Q1?

Well, I hope your analysis is correct. Dave Kang - B. Riley & Co., LLC, Research Division: They're not giving any kind of indication of what's going to happen next quarter, meaning Q1?

Dave, again, this is our customers' customer. So we don't have visibility. And also from our customers' visibility, they just tell us how much they put into consignment. So that visibility is limited as well. So we're just working off one quarter at a time. Dave Kang - B. Riley & Co., LLC, Research Division: All right, okay. Fair enough. And then on the LED side, hearing that things are stabilizing, certainly saw the LED companies are indicating that the market is stabilizing and yet you're still expecting down quarter. Where's the disconnect here?

Well, I think, we're looking -- we're scrubbing our future markets here. I think what we see -- the Japan market doesn't seem to be that great and we're talking to our Taiwan customers recently. They are sort of cautious as well. I think as we said, I think the greatest potential for us is now, perhaps China, I mean, although we don't have a whole lot of hope but then that market can turn very fast. Dave Kang - B. Riley & Co., LLC, Research Division: Can you just give us a little bit of flavor how big these countries are like Taiwan, China, Japan, how do they stack up?

I think we normally have evenly distributed. It's characterized by a lot of smaller to medium sized customers, $0.5 million a quarter kind of a customers. And they are equally distributed in China, Japan, Taiwan, United States and Europe. Right, Raymond?

Dave, the 5 or 6 geographies that we do sell readily these into, each of those countries range between like 15%, 18%. There's not one that dominates like a 40% geography. So it's probably [indiscernible] Dave Kang - B. Riley & Co., LLC, Research Division: Sure. It sounds like though that China is essentially the weakest region, is that a fair statement?

Yes. Dave Kang - B. Riley & Co., LLC, Research Division: Okay. And that's more just their economy or any other factors behind that?

Yes. I think overall, I think, we see some weakness. And also I think going into the Q4, we do see Japan not doing much as well. Raymond?

I think that China, we originally said before, we've seen like participating the lower end, which is more affected by the general economy.

We'll go next to Edwin Mok with Needham & Company. Edwin Mok - Needham & Company, LLC, Research Division: So first question, going back to gross margin, Ray. If I take your guidance in play, gross margin will be down a little bit in the coming quarter, is that -- did I read that correctly and was that again due to raw material pricing or some other factors there?

That's always a very complex question. The gross margin has so many dynamic factors, but largely from the lower selling price of raw material, gallium, and then also the lower tonnage sold in it and then, again, overall, in the substrate side, it's just lower sales volume, obviously, then leads to lower capacity utilization and production in the factory. Edwin Mok - Needham & Company, LLC, Research Division: I see. That's helpful. And then can I touch on substrate pricing? Have you seen any comp pricing change over, let's say, the last 2 quarters or baked into your coming guidance, in terms of substrate pricing, maybe pricing pressure because of kind of the weaker demand?

Edwin, we have not seen dramatic change in the pricing. Gallium arsenide, it's normally down as we always say, 5% to 8% per year. I think we're still seeing the same pattern. I think the weakness right now is no demand rather than price pressure. Edwin Mok - Needham & Company, LLC, Research Division: I see. But in terms of the substrate margins, Ray, because we know [ph] utilization has impact there but it sounds like pricing is not really a factor there, is that correct?

That's what we think. Edwin Mok - Needham & Company, LLC, Research Division: I see, great. That's very helpful and just going back to semiconducting, gallium arsenide, right? You talk about China being a little bit weak, right? And I understand the main end markets of that is the LED space, right? Is that more to do with just customer slowing down towards the end of year because of where those red LEDs are going into -- what kind of power application they're going to or is it just because customer, your customer in China is struggling. What other -- what end market factor is driving that slow demand?

We thought it was -- last quarter we were saying our customers in Taiwan and Japan and Europe was doing well and yet our China customers were not doing well. And we attribute that to the fact that China market -- the economy was turning down, as well as a lot of our China customers, perhaps, are focusing on the lower end market. And as the Christmas shopping season for Christmas lights or toys, perhaps being weaker. So that may drive their business down. So that was our explanation. But this coming quarter, Q4, we're seeing general weakening all across the board. So in China, although as we said in our prepared statement, we do see potential for it to come back. But we haven't seen a great demand coming back up yet. Edwin Mok - Needham & Company, LLC, Research Division: I see. Great. That was helpful. And then finally on the raw material side, Ray. Given the weak pricing that we imply, there was an oversupply on raw material production, right? In the marketplace, right? Have you guys taken any steps to compare value production there and have you seen any of your competitors on anything like that?

I will not -- I think, obviously, the demand and supply is depicting the pricing out there. And I think that the silver lining of all of these is that the gallium price, although it came down from $1,000 a kilogram about 6 to 8 quarters ago, now down to somewhere around $300 a kilogram. But our revenue from those raw material actually held constant. That is safe to say that our volume or tonnage that we sell, compared to last year, is more than double. So the good thing is that demand is still out there. It's just that because there's a whole lot of supply, it drives the price down. And as I said, right now, it's in the low 300s and I hope it's finally finding its bottom. In fact, in last 2, 3 weeks, it's ticking up just so slightly. But, no, I'm not going to venture out to say that it's going to turn up from this point on. And so that's where the demand and the supply is. And the other good thing is that we believe that we have the lowest cost of producing gallium without joint ventures. So we will probably be the last one to get out of this market. From... Edwin Mok - Needham & Company, LLC, Research Division: So your point is, basically, the demand is -- the volume is there, right, so it doesn't make sense for you to pare back on your production?

Right.

[Operator Instructions] We'll go next to West Whittaker with Caramel Capital Management.

This is Eric Lofgren for West Whittaker. So Morris, your stock is trading around the value of your net working capital, is continuing to generate cash in this current weak environment. Why wouldn't you consider doing something to take advantage of your stock price, like a share repurchase program?

Sure. I mean this is something we do discuss with our Board of Directors and to benefit our shareholder and we also hear a lot of urgent requests for us to buyback our stock. But, we're still talking about it. But given the very challenging overall world economy out there, I think the prudent thing to do, at least in the short-term, in the next few months, is still look after cash and then making sure the company's going to be able to weather all the storm well. And so, again, we're constantly talking about it. But again, as we see the world economy being very challenging, so we're perhaps not pulling the trigger still yet.

You have, I think, $45 million of cash and short-term investments on the balance sheet...

$51 million.

How much do you need to run your business and keep a buffer for the downturn and how much excess cash do you think you have right now?

Eric, also what you don't see there is that the $51 million cash, about $15 million is actually within the joint ventures. Although we do control them, consolidate the results, that is actually at a joint venture level. So AXT cash is about $36 million.

Raymond, I think Eric is right. We do have a lot of cash and we feel I mean even though the environment is very challenging, we're not seeing a whole lot -- even for the guidance going forward, it's still break-even approximately. So it is a great question, why we're not buying shares back? But I think, as I've said, I think we have been considering it and we are talking to our Board of Directors and I think the decision right now is that, I think, given the uncertain environment out there, we think, in the short term, the best course to take is to hunker down and not buying the stock at this moment. But we are considering it.

And we have no further questions from the phone audience at this time. I'll turn things back over to Dr. Young for any additional or closing comments.

Thank you for participating in our conference call this quarter. We will be marketing in various locations around the country and we look forward to seeing many of you there. As always, feel free to contact me, Raymond, also, Leslie Green directly if you would like to meet with us. We look forward to speaking with you in the near future. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.