Well, good afternoon, everyone, and welcome to AXT's Third Quarter 2013 Financial Conference Call. Today's conference is being recorded. Leading the call today is Dr. Morris Young, Chief Executive Officer. Also joining the question-and-answer session is May Wu, Controller for AXT. My name is Kelsie, and I will be your coordinator today. I will now turn the conference over to Leslie Green, Investor Relations for AXT. Please go ahead, Ms. Green.

Thank you, Kelsie, and good afternoon, everyone. Before we begin, I would like to remind you that, during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the company and our ability to control costs, improve efficiency, increase orders in succeeding quarters, improve our competitive position as the market improves, as well as other market trends and conditions. 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 events or results to differ materially. These uncertainties and risks include, but are not limited to, overall conditions in the markets in which the company competes, the global financial conditions and uncertainties, market acceptance and demand for the company's products and the impact of delays by our customers on the timing of sales of products. In addition to the factors that may be discussed in this call, we refer you to the company's periodic 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 October 30, 2014. 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 2013. In addition, while we will discuss highlights of the third quarter results on today's conference call, we have also posted the full summary of these financial results on the Investor Relations portion of our website at axt.com. I would now like to turn the call over to Morris Young for a brief review of the third quarter 2013 results, as well as a full market update. Morris?

Thank you, Leslie. As many of you know, we announced, early this month, the departure of our CFO, Raymond Low, who has left AXT to take on other executive position. The Board of Directors currently has a search underway for a new CFO. We are pleased to report that we are seeing some excellent candidates already. In the meantime, our finance organization remains in the capable hands of May Wu, our Controller of 12 years, with oversight by me and AXT's Board of Directors. We look forward to updating you on the results of our CFO search as soon as we have news to report. Therefore, for the purpose of our call today, we have posted a full financial summary on the Investors Relations portion of our website. While I will cover third quarter highlights, we refer you to our press release and financial summary, as well as SEC filings, for a complete discussion of our third quarter results. Revenue for the third quarter of 2013 was $20.5 million. Of this, total gallium arsenide substrate revenue was $9 million, indium phosphide substrate revenue was $1.4 million, germanium substrate revenue was $5.5 million and raw materials sales were $4.6 million. Gross margin in the third quarter was 12.2% compared with 12.9% of our revenue for the second quarter of 2013. The slight decline in the quarter was primarily the result of sales mix. However, we believe our margins have stabilized, as many of the factors that have negatively impacted our business over the several -- last several quarters have been resolved, and we are beginning to see improvement. Net loss in the third quarter of 2013 was $2.2 million or a loss of $0.07 per diluted share. And finally, cash and cash equivalent at September 30 increased by $3 million to…

[Operator Instructions] Our first question will come from Avinash Kant with D.A. Davidson & Co. Avinash Kant - D.A. Davidson & Co., Research Division: So I think I know you already talked about the guidance a little bit, I just needed some clarity. You said raw material and indium phosphide will be up slightly and gallium arsenide and germanium kind of flattish. So we should expect margins to remain pretty similar to what we had in Q3?

I think it should stabilize and uptick a bit. Avinash Kant - D.A. Davidson & Co., Research Division: One slight difference I saw in the press release, you talked about gross margins of 11.9%. And I think in the prepared remarks, you talked about 12 point...

Yes, Avinash, thank you for making note of that. It was actually 11.9%. When we prepared the script, we forgot to change it in the last minute. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. So it's not 12.2%, it's 11.9%?

Yes, it's 11.9%. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. And any changes we should expect in tax rate in 2014? And also, CapEx, what should we think about CapEx? What was the CapEx in the quarter and depreciation in the quarter?

What's the CapEx for this quarter and next quarter, May?

The CapEx for this quarter is about $1.6 million. And next quarter, we have, I don't know. Maybe less than $1 million.

For next year, I think we have a budget between $4 million to $5 million, CapEx. Avinash Kant - D.A. Davidson & Co., Research Division: And in Q4, you said...

[indiscernible] Avinash Kant - D.A. Davidson & Co., Research Division: Go ahead.

The depreciation per quarter is what?

About $1.4 million.

$1.4 million?

Yes.

Okay. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. So we should expect less than $1 million in Q4 CapEx?

Yes.

Yes. Avinash Kant - D.A. Davidson & Co., Research Division: And then, for the full year, $4 million to $5 million, right?

Yes. Avinash Kant - D.A. Davidson & Co., Research Division: And the depreciation was $1.4 million? Depreciation and amortization both combined?

Right.

Right. Avinash Kant - D.A. Davidson & Co., Research Division: $1.4 million. So, Morris, perhaps talking a little bit about the dynamic of the business, you talked about semi-conducting and semi-insulating.

Yes. Avinash Kant - D.A. Davidson & Co., Research Division: Could you talk first a little bit about just the pricing of gallium and then the -- how has that been tracking?

Well, gallium price is kind of stabilized. I think it's on the bottom for almost 2.5 quarters, 3 quarters now. But you can track those prices on the open quote [ph] but of course, the actual transaction -- I think that the good news out of that, as I see it, is that the volume is not declining. So we're selling quite a bit of those gallium at low prices. And then I hope, by having such a low prices, quite a few of these higher manufacturing cost gallium producers are shutting their door down. So I think the market is adjusting itself to stabilize. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. And the growth that you see in semi-conducting next year, is it based on the qualifications you have had thus far? You have had customers with customer wins in that? Are you selling into those customers? How do you...

Yes. Well, and -- I think both. We're saying traditionally some of this low end market because its margin was lower and we didn't really aggressively going after those market. As you can see, the average gross margin that AXT is having. And so, we have turned our aggressiveness towards those market. I think we should have good success in those market, although you cannot just literally turn around over night, but I think we have some initial success. And so, we expect that segment to grow, as well as we do have a few of these major customer qualifications going on with the semi-conducting side. So we expect that revenue starting from 2014. Avinash Kant - D.A. Davidson & Co., Research Division: So when you get those wins, would you announce them?

Usually, no. The reason, Avinash, is that, when a customer qualify us, they usually takes a modest amount of volume and we can't -- they won't commit. But as we start to ship more and more then they just increase the volume shipment. So there's not a whole lot you announce anyway. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. And any progress on the qualification on the semi-insulating side at the key customers?

On the semi-insulating side, as we said, that we resolved the issue with our major customer and, hopefully, that will open up some of the doors so we can go in there. So I think we are guardedly optimistic that we have -- trying to rebuild the balance between AXT and our customer. Avinash Kant - D.A. Davidson & Co., Research Division: So this is the existing customer, or the customer you're qualifying at?

It's an existing customer. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. So you should see them come back in Q1?

We hope so. Avinash Kant - D.A. Davidson & Co., Research Division: And looks like the SOI thing has stabilized. You're not losing any more share to SOI?

That's right.

[Operator Instructions] We'll now hear from Edwin Mok with Needham & Company. Y. Edwin Mok - Needham & Company, LLC, Research Division: First question, just on the GaAs business, can you break down between semi-conducting and semi-insulating?

I think it's 54%, semi-conducting; and 46%, semi-insulating. Is that right, May?

Yes. 54%, 46%.

Yes. Y. Edwin Mok - Needham & Company, LLC, Research Division: I see, I see. So -- okay. Maybe I'll -- that leads to the next question. On the semi-insulating side, you talked about this HBT as a new opportunity, as you guys are targeting that and that area doesn't see as much SOI impact, right? Is this something that you guys have already been selling and that it will be quick -- pretty quick as to a customer ramp, or is this something that you still need a long qualification process at the customers?

Well, Edwin, we've been working on the qualification, and we've been trying to get back into -- you see, the substrate used for both the pHEMT and HBT are the same substrates. They are all 6-inch semi-insulating substrates. However, the customer grouping are different. AXT traditionally has been stronger in the pHEMT market. And as the pHEMT market was being affected by SOI so, in fact, we lost more business. But when we try to get into the HBT market, seeing still now that we are a newcomer, so we have to do, still, the qualification. But that we have been doing for the last year. So hopefully, that -- we're going to start to have some business for the HBT going forward into 2014. Y. Edwin Mok - Needham & Company, LLC, Research Division: Okay. Morris, maybe you can help clarify. I thought your largest customer actually acquired some capacity that is HBT, right? My question, I guess, is do you need to go through a qualification with that customer?

Any time you're getting into a new product, obviously, you need to go through qualification, yes. Y. Edwin Mok - Needham & Company, LLC, Research Division: I see. Okay. I just wanted to get through that. And then, on the low-end semi-conducting GaAs business that you guys -- you have highlighted, what kind of margin profile do you think those businesses can get to? Is it similar to the [indiscernible], which is I guess in the teens percentage? Or is it closer to, kind of, historical level, which is 20%, 30% kind of range?

Well, I don't know if you have a good memory. I think, several years ago, we have been always defending that, in semi-conducting, the average gross margin is similar for -- well, I mean in the overall AXT. But I think, specifically, we're talking about the low-end market for LED traditionally is in the low teens. And because we're used to have much higher average margin, so we sort of leave that segment of the market alone. So we're turning more aggressive to it. So I mean, they can help us in 2 sides. One is that our capacity utilization is much lower now. And so filling up the factory definitely will help us. And as we also -- time goes, we start to be able to tighten our yield, increase our yield and to be more competitive in these markets, that should also enable us to get into that. So for me to give you a quoted gross margin, I think, is different because every customer is different. For every size, it's different. So I would just leave it as to say they are on average lower than what we used to do. But because of the filling up the factory capacity, that should help us both in terms of revenue, as well as gross margins. Y. Edwin Mok - Needham & Company, LLC, Research Division: I see. Okay. I understand the logic now. That's very, very helpful. On the material side of your sales, I know you said sales has been going down in the last 2 quarters even though you're using less gallium on your GaAs substrate business, right? I would think that if you're using less wouldn't then you'd have more volume to sell to your customer? And you mentioned that, over the last few -- at least few months, pricing has been pretty stabilized. So why is volume coming down?

Well, you see our material business is not gallium alone. It also includes pBN, as well as refining of gallium. I mean, I can tell you one of the effect is that one of our joint venture, which makes 6i [ph] and 7i [ph] gallium to sell into China and there are actually LED companies in China which went out of business. That affected our revenue. And so, it's a good news, bad news. Good news is that there are a China LED substrate manufacturer who cannot compete and go out of business, and yet they affect our raw material revenue business. Y. Edwin Mok - Needham & Company, LLC, Research Division: Great. And then, lastly, on the germanium side of the business, it has been really strong this quarter and as well as the last quarter, you guys were flattish, right? How much of that is -- how much do you think of that is due to some kind of near-term pickup in business versus kind of long term? I'm trying to understand because part of that business go to sell at the SOI [ph] industry, which could be kind of lumpy. I'm trying to understand if there is any kind of lumpy risk going through 2014?

Yes. Well, I think we always say that, in the germanium business, you can think of as 2 segments. The satellite [ph] solar cell is more steady, higher priced and yet, it's limited -- potential for growth is very limited. You don't expect -- the annual growth may be 5% to 10% the most. And you -- for us to increase our revenue, we have to penetrate new geographic regions, such as United States, which we don't supply today and where we have a good presence in Europe, China, Asia, et cetera. So the other segment of the business is the CPV. As we said in our script, that we did -- we do know there's quite a bit of upticking in CPV installation, as well as loan guarantees. So that segment seems to be very, very busy. But, however, I think -- I don't have a crystal ball whether it's going to continue. I mean, normally, industry, when they develop, they don't just go into a scratching halt. So I think it's a good sign that the industry is firming itself up. And then, as you can see, our revenue almost doubled. All of those growth are actually from CPV.

Our next question comes from Richard Shannon with Craig-Hallum.

I guess, just a few questions from me. Again, I'm going to address a couple to the semi-conducting low-end initiatives that you have going on. By my calculations, from one of your responses, it sounds like the semi-conducting has about a $5 million per quarter run rate. Can you give us a sense of what kind of share you think you have in the market and then what kind of opportunities for dollar growth you might be able to see within 1 to 2 years from these initiatives?

We only usually predict out 1 quarter at a time. But I think, if I were to wear a more aggressive hat, the semi-conducting market itself should be a $150 million market. That's traditionally been said. If you take our revenue, when we were running good, we were around $8 million to $9 million a quarter. Now it's only down to $5 million. I think -- so our shares is not a whole lot. I think if we were to turn it more aggressive and with the new customer qualification, we could look at pretty sizable growth opportunity for us. But on the other hand, I've got to caution myself about being too optimistic is that some of this aggressive in the lower end will help us for us to fill up the capacity. And that should be helping us in terms of gross margin and revenue and everything else. But as the capacity utilize is better and if we were to have better business to do, such as semi-insulating or this CPV, we may then need to switch that off because capacity utilization is the main focus for us right now, as you can see. We've got to sort of allocate the allocation. But that's a good problem to have. I won't think about that now.

Okay. Let's see, a couple more questions for me and I kind of ask this pretty much every quarter and I'll ask again, Morris, to ask about your crystal ball in gallium pricing. Especially, you made some comments earlier about seeing some higher cost producers perhaps falling off. I mean, have you specifically identified specific ones that you're seeing come offline or are having material impact on capacity? Or is this...

Oh, absolutely. I mean, I know there's a company -- I mean, actually, one of our competitor in China, and he has a factory -- actually, 2 factories absolutely shut down and it's for sale. So they are. And of course, we don't actually keep track of each one of them. The one in Germany, I don't think, is operating either. So there's quite a few of them, which are the high-cost ones, and the industry is saying that somewhere around gallium at around $400 a kilogram is the cut-off point for a lot of factories to operate profitably. So we're down to very low, and I think our joint ventures are fairly tough and competitive in those arena. And so, we hope it will stabilize and start to go up. But what's the specific question, when it's going up, Richard, really I don't know. I can't tell. Yes.

Okay. Fair enough. I'd like to ask you because you have been following this market for a number of years. So I appreciate your comments.

I will have to call you if I really know that.

Okay. Maybe just one more big picture question for me, Morris. Clearly, you've been in a loss situation for a few quarters here. You've clearly chosen a growth strategy to increase utilization. Any thoughts you've given to perhaps paring down in capacity and getting to a breakeven in a faster way, has that been contemplated? And if not, how do you see your path to breakeven getting? How do you see yourself getting there?

That's a good question. I mean, that -- we always ponder on that. As you know, the industry of SOI getting into gallium arsenide is impacting the whole industry for the last year. I mean, hopefully, it stabilized. And so, we now perhaps even start to see maybe pHEMT is not dead forever. There are certain applications that still use them. So I think you'll definitely -- we're making the budget, and we're trying to, as you know, stabilize the situation. And hopefully, we can get some growth opportunity to utilize the capacity. And if not, we definitely can look at alternative strategy to make AXT profitable. As you know, that -- one of the things which I've been reviewing with May and now I'm acting as a CFO right now is that everything is -- the beginning of 2012, we have increased our cash position from $40 million to $48 million, right? So as you can see, this downturn, although, it's affecting us, but when we -- in 2010 and 2011, we were making $18 million and $20 million profit per year. And now, we're down to losing of $6 million or $7 million a quarter -- a year. I think, next year, we shall see. My goal is to turn this ship around.

We have no further questions. Dr. Young, I'll turn the conference back to you for closing or additional remarks.

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

And again, ladies and gentlemen, that concludes our conference for today. We thank you, all, for your participation.