Yahoo Finance

Gary Fischer

Gary, Thanks Leslie and Good afternoon to everyone.
Revenue for the third quarter of 2024 was $23.6 million compared with $27.9 million in the second quarter of 2024 and $17.4 million in the third quarter of 2023. Break down our Q3 '24 revenue for you by product category, indium phosphide was $6.8 million reflecting continued demand and data center applications including AI as well as passive optical networks. Gallium arsenide was $6.6 million in line with the pullback we expected after the strong growth in Q2.Germanium substrates for $1.6 million down from the prior quarter based on our decision to walk away from certain low margin business opportunities, finally, revenue from our consolidated raw material joint venture companies in Q3 was $8.6 million based on continued healthy demand.
In the third quarter of 2024 revenue from Asia Pacific was 77% Europe, 12% and North America 11%. The top five customers generated approximately 29.4% of total revenue and no customer was over the 10% level. Non-GAAP gross margin in the third quarter was 24.3% compared with 27.6% in Q2 '24 and 11.3% in Q3 of 2023. For those who prefer to track results on a GAAP basis, gross margin in the third quarter was 24.0% compared with 27.4% in Q2, 2024 and 10.7% in Q3 of 2023.
On the operating expenses total non-GAAP operating expense in Q3 was $9.0 million compared with $8.9 million in Q2 of 2024 and $7.8 million in Q3 of 2023. On a GAAP basis total operating expense in Q3 of 24 was $9.1 million compared with $9.5 million in Q2 and $8.6 million in Q3 of last year, we expect OpEx to be holding up at approximately this level throughout the balance of 2024.
Our non-GAAP operating loss for the third quarter of 2024 was $2.6 million compared with a non-GAAP operating loss in Q2 of $1.2 million and a non-GAAP operating loss of $5.8 million in Q3 of 2023. For reference, our GAAP operating line for the third quarter of 2024 was a loss of $3.4 million compared with an operating loss of $1.99 million in Q2 of 2024 and an operating loss of $6.7 million in Q3 of 2023.
Non operating other income and expense and other items below the operating line for the third quarter of 2024 was a net gain of $469,000. The details can be seen in the P&L included in our press release today. For Q3 2024 we had a non-GAAP net loss of $2.1 million or $0.05 per share compared to the non-GAAP net loss of $800,000 or $0.02per share in the second quarter of 2024.
A non-GAAP net loss of Q3 2023 was $4.9 million or $0.12 per share. On a GAAP basis net loss in Q3 was $2.9 million or $0.07per share. In comparison, net loss was $1.5 million or $0.04per share in the second quarter of 2024. GAAP net loss in Q3 of 2023 was $5.8 million or $0.14 per share. The weighted average basic shares outstanding in Q3 of 2024 was $43.2 million cash and cash equivalents and investments decreased by $4.5 million to $38.8 million as of September 30.
By comparison at June 30th, it was $43.3 million. Depreciation and amortization in the second quarter was $2.3 million total. Stock comp was $0.8 million. Net inventory was up slightly in the second quarter to $86.1 million this includes inventory added through our recycling program. 36% of the inventory is raw materials and wip is 61%. Finished goods makes up approximately 3%.
Okay. This concludes the discussion of our quarterly financial results. Turning to our plan to list our subsidiary Tongmei in China on the star market in Shanghai. Let me give you a brief update on the IPO status. We have continued to keep our application current last year and part of this year, the total value of the Shanghai Stock Exchange struggled as the China economy slowed and the real estate sector moved down significantly. This trend resulted in much fewer IPO's it also led to weaker IPO applicants being removed from the in process category.
We are encouraged that Tongmei was not one of those companies. We are still part of the in process group and it is a much more selective and smaller group than a few years ago. More recently, the substantive stimulus package in China has helped the economy and boosted the total value of the Shanghai Stock Exchange. And we believe these movements may be generating positive momentum for IPO's and for Tongmei.
We have continued to lead the team with a diligent energy as we think that to me is a good IPO candidate. We'll keep you informed and hope to have good news to deliver to you. With that I'll turn it over to Doctor Morse Young for a review of our business and markets, Morse.

Morris Young

Thank you Gary, '23 came largely in line with our expectations coming off a stronger than expected. Q2, the primary difference from our guidance is our lower German structure which reflected our choice not to participate in certain low margin opportunities.
I outside of this data center related demand remains solid for indium phosphide substrates and we are beginning to show to grow our market share in HPT devices for wireless headsets. Looking individually at our paradise. Indium phosphide data center, high speed optical connectivity and AI continues to be our strongest drivers.
In particular growth in demand for high speed pixels of 100 gig or faster per line is opening a Greenfield market opportunity for indium phosphide photo detectors, a 400 and 800 gig multimode optical interconnects for short distances.
We saw indium phosphide orders related to 800 gig applications in Q1 and Q2 and have received a follow up order in Q4 which puts us on track for healthy growth in 2035. In addition to photo detector applications, we know that any phosphide will be a necessary material for high speed lasers as the industry moves to 800 gig and 1.60 pluggable transceivers for median to longer distance transmission beginning in 2025. We're working with a number of customers and are already seeing exciting opportunities with next generation silicate photonics devices and electro absorption modulated lasers or EML's.
For example, we're seeing growth in demand with increased orders in Q3 and Q4 from one of our larger silicon atomics customers for optical transceivers. In addition, we have developed a new in the prospect product targeting silicate for targets and EML's.
We have our first design win with our leading customer and multiple ongoing qualifications with additional customers. Our galling off that revenue pulled back in Q3 as expected after growing more than 20% in Q2. Overall, the market recovery is somewhat lumpy particularly given the weak economic conditions in China.
But new fiscal stimulus in China announced in September could provide a catalyst for an improving market environment. This will benefit demand across a broad base of applications including power amplifiers, HPT applications for wireless switches, high speed, high speed power industrial lasers and LED's. We continue to be encouraged by our relatively new traction in HPT applications. By bringing the learnings from our product that's advancing in our eight inch single-element development to our six inch single-element outside labor production.
We believe we can improve our cost structure and provide a highly competitive solution to a market where our penetration historically slow initial shipment into our leading customers gives the confidence that we can be successful in gaining additional share. We expect our revenue from this application to grow in 2025 as we continue to write.
In addition, our gallium arsenide (GaAs) that recycling effort continue to be successful. We're now fully licensed and processing material that we have collected over time but did not have the capability to recycle.
This is visible to the investment community in both our of our revenue and gross margin at gmail. One of our real material venture companies. These efforts also advance our ESG commitment and drive meaningful efficiency in our manufacturing.
Turn to the subject, with director, meaning all mature pricing which negatively affects our growth models. We are being highly in the opportunity we choose to participate in this impacted our revenue in Q3 and will bring our revenue down meaningfully again in Q4. We expect that they will drop in Q4 with limited overall contribution so that they will no longer be headwind to our growth as we expand in other areas of our business.
We do believe that the market for low office satellite, those promised in the coming quarters and we will participate in those activities where we can derive corporate level business values. And finally, our raw material business grew again into three increasing demand. Stable gallon prices and the success of our recycling efforts.
Our joint our portfolio of joint ventures of raw material companies continue to be a strategic value to our business and continually to contribute positively to our results. In closing, we are optimistic about the growth and expansion of our business over the coming quarters.
Data center represents a great opportunity for us in our indium phosphide business and we see further tailwinds in 2025 with recovery of telecom CapEx spending for pound and back occupations. Our gallium arsenide business is poised to benefit from the growth in HPT applications and we believe a strengthening of the economy in China in 2035 is likely to be positive capitals for improvement in wide variety of applications including industrial laser and LED's. We remain highly focused on accelerating our return to profitability and look forward to reporting to you our progress.
With that, I turn the call back to Gary for our fourth quarter guidance, Gary.

Gary Fischer

Thanks Morris.
In keeping with our comments today, we expect Q4 revenue to be slightly improved coming in between $23.0 million and $25.0 million. This takes into consideration growth in our indium phosphide substrates driven by data center applications. As well as approximately consistent contribution from our gallium arsenide substrates and stronger raw material revenues. Growth in these areas is expected to be partially offset by a decrease in German revenues which are likely to bottom out in Q4.
We are pleased by the growth in the most strategic parts of our business and we believe we're positioning ourselves strongly for 2025. In terms of the rest of our guidance, with the expectation of changing healthy gross margin performance, we expect our non-GAAP net loss will be in the range of $0.03 to $0.05 and GAAP net loss will be in the range of $0.05 to $0.07. Share count will be approximately $43.1 million shares.
Okay. This concludes our prepared comments. We'd be glad to answer your questions. Christina operator.

Question and Answer Session

Operator

Yes, Thank you. (Operator Instructions)
Your first question comes from the line of Richard Shannon from Craig-Hallum. Your line is open.

Richard Shannon

Well, Hi, Morrison Gary. Thanks for taking my questions here. I guess there's a number of them that seem important to ask here. Let me, just look back into the third quarter here real briefly and understand the dynamics relative to the germanium business here. How big of a surprise was this of the I would assume is a difficult pricing environment? Is this a business you expect to hope to continue and compete in and generate revenues like you have in the past or is this a seriously lower level of revenue you expect in this business over time?

Morris Young

Yeah, I think that the main raw material price more than doubled during the third quarter and it's difficult to increase price to our customers because most of our customers are satellite. Yeah, to build this and so they have their own budget. So we opted not to quote those yeah, now very attractive margin.
So we're going to decline some more business in Q4. So that will reduce our expectation of germanium. However, the germanium substrate business I believe still has a, we have a solid footing in that business other than the fact that it's very much dependent on the cost of raw material. But what I see is our competitors will have the same problem as we are.
So we think as the market settles down and everybody start to come we believe we're highly competitive. So as the market settles down, we will come back to the market as you know that low office by business is booming and it is scheduled to have, I think even months, it should have 40,000 low, low satellite, low altitude satellite and China is going to launch a number of satellite up there as well. So I think that market eventually will come back, but we will see how the pricing structure evolves.

Richard Shannon

Okay. That, that's helpful and good to know. Thanks for that, Morris. Let's touch a question or two on indium phosphide probably the most strategic business here. I just wanted to get the sense of the drivers here you're talking about for for growth here. I mentioned data centers that mean you know, photo detectors or silly Photonic or maybe just be more clear on what the growth drivers are.

Morris Young

Yeah, so yeah, I can take that.
Yeah, go ahead.

Tim Bettles

Sorry, thanks. Thanks for your question. This is Tim. Yeah, we believe that you know AI and data center revenues will be strong growth for us. And we think we're seeing the beginnings of that right now. We're seeing some good increases in demand in Q3 and Q4.
So what we're really looking at here is we're looking at indium phosphide based high speed photo detectors that go into a pixels photo detector pair for a for a multi mode transceiver. So we all know that the the short distance multi mode transceiver market is growing quickly at the moment. And as the speeds of the pixels go to 100gig per line and higher doesn't need to move to an in gallium arsenide (GaAs) photo detector. So we're seeing quite a lot of increase in that and we're participating well in that.
And so we believe that's a Greenfield opportunity for us that is only set to grow through the rest of this year and then into next. We're also participating strongly and we've chosen to focus on the silicon photonics and the EML applications where are substrate benefits really count to these devices. So we've penetrated some key silicon photonics customers and also some EML customers and we're seeing growth in there as well.

Richard Shannon

Okay and Tim just to follow up on this just to be clear on this last topic here, silica the photonic these are basically four lasers and that photo detectors. Is that correct?

Tim Bettles

Yeah, that's correct. It's predominantly CWDFB lasers or other lasers that go into that silicon photonics business, correct?

Richard Shannon

Okay. Fair enough here. And how would you characterize the breadth of engagements and visibility into that growth? Do we have wins in place? We have forecasts in place? How do we think about the kind of general trajectory here? And what could this mean for a [ T ] over the next say 1 to 2 years?

Tim Bettles

Right. So, yeah, we're, definitely participating heavily in that. I think we're in a number of the key customers in this space.
And and what we're seeing so far is we're seeing growth in our silicon photonic sector over the next 1 to 3 years as being one of the largest sectors of the data center business and specifically at this time for the transceiver product, we are, as they say, participating heavily with a number of customers in that market already for their lasers. We've still got some more work to do.
We've still got some other customers that we need to get qualified with. But as Morris said in the discussion, we have a design win with a new product that we've launched specifically for silicon photonics and EML. And we're qualifying a number of other customers. So we see the opportunities there of being really big.

Richard Shannon

Okay, wonderful. Thanks for that detail. Tim Let me one last question. I'll jump out of line. Morris, you mentioned your prepared remarks about some opportunities here with with HPT's. You know, noting as I think most of us know that it's been a very a market you've been under penetrated for quite some time. Maybe talk to where and how you're getting design wins.
What kind of, again, what kind of visibility you're seeing here? What kind of share if possible in this market. Again, it's one where you haven't been and I would imagine the incumbents here might be, might resist losing share here. So I just want to get a sense of how big we can see this market getting over time.

Morris Young

Yeah, this market size is about $80 to $100 million and it's a sort of a steady business and depending on how much more 5G form I build because they require more HPT,s per phone. And I think the interest in our participation in the HPT market really comes from a number of China customers who worried about because of the gallium restrictions from exporting out of China.
So they want a diversified supplier. So we got sort of that door opening for us. And we believe, we spend a lot of development effort into the age development. We think that was very successful. We have been able to improve our yield as well as our characteristic of the age. But unfortunately, that age program has slowed, but we find that what we learned on the age, we can just easily apply into the six inch program so that we should be able to reduce our cost, improving our yield.
And with the new demand for the HPT for six inch, I think we're highly competitive because I mean, I think right now we have approximately 10% of their market share. And as you know, there are only three players in this competitive landscape. So we believe that we have plenty of opportunity to increase our share.

Richard Shannon

Okay, appreciate those details. I will jump on the line guys. Thank you.

Operator

(Operator Instructions)
Okay. And we do have another question from Richard Shannon from Craig-Hallum . Your line is open.

Richard Shannon

Well, great. I'm not sure I got out of line but thanks for another opportunity here. Maybe just one or two quick ones guys. Morris, you talked about the stimulus opportunity in China. Maybe you can talk to which product or product line or lines you expect to see impact how fast that might happen. And then if we're trying to judge you on your China based revenues over say the next couple of quarters, how should we think about where that can go?

Morris Young

Yeah, I think our indium phosphide opportunity mainly our direct customers we believe are mainly Western customers, although we sell to customers, but where do, where do they go? They probably go through one or two layers of device makers, but they could then go into the hyper centers in the United States. And although China Data Center, I believe the speed is slower. But that's definitely they will also enjoy that market when they expand.
I mean, China market really, I think from what we know the laser market, high power laser market is really very sensitive to the economic activities as you know, that lasers are mainly used for high power cutting tools and so both in battery manufacturing, as well as the automobile manufacturing, when the economy slow a bit, their demand dries up and LED is another example. And if you make a whole lot more cars, I think the LED demand is going to go up.
So is cell phones was sort of having a recovery sometime early this year coming from a really low selling volume during COVID. But I think the economy in China right now, especially second half of the year is not really strong. So we believe that anything related to consumer industrial activities and cell phone in particular, I think if they goes up that should help us.
So I think, you know, the stimulus package will not only help us in terms of our product offering activities, but also I believe will possibly impact us to help us to go IPO because the Shanghai Stock Exchange, the index has moved from the bottom I last I saw was almost like 30% up. So I think that if the momentum builds, I think that should clear the way for us to go public in China.

Richard Shannon

Okay. That is helpful. Thanks for that, Morris.
I'm going to touch on my last question related to that in a second here, but I just want to touch on again. I mean, you classified, I think you made a brief comment relative to the telecom market which we haven't heard about in a little while here. It sounds like you're seeing some signs of visibility in that market. I assume again, that's to be clear is excluding the pond market if you can. If that's the case, please be clear on that one. But are you getting any sense of visibility in terms of orders or other things that indicate telecom is going to be an improvement next year?

Morris Young

Richard, I think right now, I think it's steady but it's not going down. I mean, it's not like last year. Last year was all dried up. Everybody said they got too much inventory. But right now we gauge that by looking at our palms market activity and they are, if I would say the boom time is 100 the low was maybe 20 we were around 30.

Gary Fischer

Okay.

Richard Shannon

All right. That's fair. One last question here just kind of hitting on the topic of China as it relates to the the potential star listing, you mentioned the market regulator, whatever winnowing out some of the weaker opportunities there and HTP has been left in here, I guess maybe if there's any positive signs or interactions, you can suggest that we're seeing some progress moving forward. Obviously, you've been talking about this for more than a couple of years and want to get a sense of if there's any positive signals here rather than just a lack of negatives.

Morris Young

Yeah, Richard, that's it's a good question, but it's a hard question for me.
I think that the one of the difficulty, I mean, I think when we first applied, we were fairly optimistic because at that time, China Stock Exchange was approving something like 3 to 4 companies going public per week. Okay. But everything early 2020. But we got some questions with the China Stock Exchange. They go through each of the companies all the way from executive personal finances.
They look very thoroughly on your account payable, account receivable as well as your inventory and who you sell to. And they do, I would say 100% more due diligence on everything what you do. But ever since COVID happened and the market collapsed, especially in real estate. And that drives up all the the Shanghai Stock Exchange, public market activities.
So they start to blame and say, hey, don't bring any more public company public unless they are stellar in performance as well as their they are needed for the to drive the economic advancement, especially in high technology. I think we fit on the letter bill. But however, with the revenue run down for us for the last two years definitely didn't help.
But I think our revenue is coming back and the Shanghai Stock Exchange because of the stimulus package is coming back of it as well as we have resolved that I was saying a major issue with one of their concerns in the last quarter or so and hopefully that we are seeing the light at the end of the channel. Here is that I think sort of dancing a little bit because I, although I think I'm fairly optimistic, but it's really very much up to them. They have to check all the boxes, they have to approve everything before they let us go.

Richard Shannon

Right? Okay. Well, I appreciate all that detail. Morris Young I will jump on the line again. Thank you.

Operator

Thank you. And with no further questions, I'll turn the floor back over to Dr Morris Young.

Morris Young

Thank you for your participation in our conference call. Before we report earnings to you again, we will be participating in the Needham Growth Conference. We hope to see you many of you there. As always, please feel free to contact me, Gary Fisher or Leslie Green. If you would like to set up a call with us, we look forward to speaking with you in the near future.

Operator

Thank you. And this does conclude today's conference call. You may now disconnect. Have a great day.