Q1 2024 AXT Inc Earnings Call

Participants

Leslie Green; Investor Relations; AXT Inc

Gary Fischer; Chief Financial Officer, Vice President, Corporate Secretary; AXT Inc

Morris Young; Chief Executive Officer; AXT Inc

Charles Shi; Analyst; Needham & Company LLC

Richard Shannon; Analyst; Craig-Hallum Capital Group LLC

Tim Savageaux; Analyst; Northland Capital Markets

Dave Kang; Analyst; B. Riley & Co.

Matt Bryson; Analyst; Wedbush Securities

Presentation

Operator

Good afternoon, everyone, and welcome to AXT's first quarter 2004 earnings call. During the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fischer, Chief Financial Officer. My name is John and I'll be your coordinator for today. (Operator Instructions) I would now like to turn the call over to Ms. Leslie Green, Head of Investor Relations for AXT.

Leslie Green

Thank you, John, 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, future financial performance of the company, market conditions and trends, including expected growth in the markets we serve, emerging applications using chips or devices, fabricated on our sub substrates, our product mix, our ability to increase quarter's orders in succeeding quarters to control costs and expenses to improve manufacturing yields and efficiencies to utilize our manufacturing cost yesterday, the growing environmental health and safety and chemical industry regulations in China, as well as global economic and political conditions, including trade tariffs and restrictions.
We wish to caution you that such statements deal with future events are based on management's current expectations and are subject to risks and uncertainties that could cause actual results or events to differ materially. These uncertainties and risks include, but are not limited to, overall conditions in the markets in which the company competes, global financial conditions and uncertainties, COVID-19 and other outbreaks of contagious disease, central tariffs and trade restrictions, increased environmental regulations in China, the financial performance of our partially owned supply chain companies and the impact of delays by our customers on the timing of sales and their products.
In addition to these factors that may be discussed on this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at axt.com through May 2, 2025.
Also, before we begin, I want to note that shortly for following the close of market today, we issued a press release reporting the financial result of first quarter of 2024. This information is available on the Investor Relations portion of our website at axt.com.
I would now like to turn the call over to Gary Fischer for a review of our first quarter 2024 results.

Gary Fischer

Thank you, Leslie, and good afternoon to everyone. Revenue for the first quarter of 2024 was $22.7 million. That's up from $20.4 million in the fourth quarter of 2023 and up from $19.4 million in the first quarter of 2023.
To break down our Q1 '24 revenue for you by product category. Indium Phosphide links sequentially to $8.1 million. That's reflecting strong growth from data center applications, including AI. and continued improvement in passive optical networks. Gallium arsenide also grew to $7.5 million, with broad-based improvement across a number of applications. Germanium substrates were $1.4 million, up from the prior quarter with renewed strength in demand for satellite solar cells.
Finally, as expected, revenue from reconcile those raw materials joint venture companies in Q1 was $5.8 million, down from Q4 as we consumed a greater portion of their output for our growing substrate demand in the first quarter 2024 revenue from Asia-Pacific was 79%. Europe 16% to North America was 5%. The top five customers generated approximately 33% of total revenue, and one customer was over the 10% level. Non-GAAP gross margin in the first quarter was 27.3% compared with 23.2% in Q4 and 26.9% in Q1 of 2023.
For those who prefer to truck it results on a GAAP basis, gross margin in the first quarter was 26.9% compared with 22.6% in Q4 and 26.3% in Q1. Beyond the near term, we remain confident that we can get back to the mid-30% range as the environment strengthens through higher overall volume, favorable product mix and the benefits of our recycling programs, along with continued efficiency improvements throughout our business.
Moving to operating expense. Total non-GAAP operating expense in Q1 was $8.7 million compared with $7.5 million in Q4 of 2023 and $8.7 million in Q1 2023. On a GAAP basis, total operating expense in Q1 was $9.4 million compared with $8.2 million in Q4 and down from $9.5 million in Q1 of 2023. As you've seen from our quarterly run rate in 2023, we had put in a number of constraints in place for OpEx to align with market conditions as things are beginning to trend up, where loosening up some of these constraints, which has brought OpEx up from the previous run rates.
We do expect to hold it at approximately this level throughout the rest of this year. Our non-GAAP operating loss for the first quarter of 2024 was $2.5 million compared with non-GAAP operating loss in Q4 2023 of $2.7 million and a non-GAAP operating loss of $3.5 million in Q1 of 2023. For reference, our GAAP operating line for the first quarter of 2024 was a loss of $3.3 million compared with an operating loss of $3.6 million in Q4 and an operating loss of $4.4 million in Q1. Non-operating other income and expense and other items below the operating line for the first quarter in 2024 was a net gain of $1.3 million.
The details can be seen in the P&L included in our press release today. For Q1 2024, we had a non-GAAP net loss of $1.3 million, or $0.03 per share compared with non-GAAP net loss of $2.8 million or $0.07 per share in the fourth quarter. And non-GAAP net loss in Q1 of 2022 was $2.4 million or $0.06 per share. On a GAAP basis, net loss in Q1 was $2.1 million or $0.05 per share. By comparison, net loss was $3.6 million, or $0.09 per share in the fourth quarter, and GAAP net loss in Q1 of 2023 was $3.3 million, or $0.08 per share. The weighted average basic shares outstanding in Q1 2024 was 43.0 million shares. Cash and cash equivalents and investments were $41.3 million as of March 31, by comparison at December 31 was $52.3 cash down for two main reasons.
First of our revenue billings tended to be back-end loaded in the first quarter as most of China shuts down for Chinese New Years. As a result, it acumen in Tier one accounts receivable increased by $6.1 million. This is simply a timing issue as most of that cash can be collected in Q2. The second reason for the decline in cash in Q1 was CapEx spending of $5.7 million. This is not new commitments to facilities. This was work done in 2023. Payment was due in Q1. As we look to the balance of the year, we expect CapEx to be in the [$2 million $3 million] range per quarter per quarter, most of which goes towards of facilities work, which was done in 2023.
One more note on cash from time to time. We have had outside party approach us with an interest to invest in our supply chain companies. Currently interest in China is growing perhaps related to the change in the economic circumstances in China. We believe that there's real value in these assets to be unlocked and may consider monetizing a portion of this year. As a reminder, we now have over 10 companies in our supply chain where we have partial ownership shared with industry partners. Depreciation and amortization in the first quarter was $2.2 million. Total stock comp was $800,000. Net inventory was down $600,000 in the first quarter.
This includes inventory added to our recycling program, 33% of the inventories, raw materials and with was 63%. Finished goods makes up approximately 4%. The increase is primarily the result of increased crystal growth in anticipation of higher demand in Q2. With improving demand, we hope to bring our total inventory down by approximately $10 million over the year. Okay. This concludes our discussion of our quarterly financial results.
Turning to our plan to list our subsidiary, tongue may in China on the STAR Market in Shanghai. We now believe that we have had some significant developments on the issue that the CSRC previously raised and would lead to less than the likely next step is that the CSRC can resume in consideration of our application. As we've said, this is a lengthy process, but we continue to believe that May is an excellent candidate for listing. With that, I'll now turn the call over to Dr. Morris Young for review of our business in markets. Morris?

Morris Young

Thank you, Gary. We believe our business is allied foreign path to recovery, as evidenced by the continued growth in our business as solid execution, which allowed us to exceed our Q2 release. In the first quarter, we achieved 11% sequential growth in our revenues and 29% sequential improvement in non-GAAP net income. While certain parts of the demand environment remains somewhat soft, all three of our substrate problems lie the improvement, including a 48% renewables indium phosphide revenue from Q4.
Looking individually at these product lines, any lost five was again became our biggest selling material in Q1. Sales was driven by continued recovery in the pound market and a meaningful increase in demand related to will review we say, excise and in catalyst for indium phosphide in the years to come to the lasers. Detectors for rapid transfer was increased bandwidth, low attenuation and low distortion. Today applications are primarily using gallium arsenide Vixel's, which will require a relatively small amount of substrate material. But as the industry moves to 800 gig and then 1.6 terabytes speed, we expect that there will be a necessary transition to indium phosphide.
We're already seeing development work happening today with next-generation silicon photonics devices, electoral absorption modulated lasers or EMLs for high-speed data center transceivers. Revenue from these applications contributed to our strong indium phosphide Grove in Q1 and will help drive our expected growth in 2024.
Our gallium arsenide revenue grew 24% sequentially in Q1, reflecting increased demand across a broad base of applications, including power amplifiers, HBT applications for wireless US, which is high power lasers and LEDs. We believe much of the excess inventory in the supply chain has been defeated, and we are benefiting from a desire among our customer to diversify their supply base as the market recovers. For example, today, our share of the edge PT market is relatively small, but we believe we have a great opportunity to increase our market share over time and are pleased with early customer traction.
In addition, our eight-inch gallium arsenide development efforts have led to a groundbreaking advancement in both out of our defect densities and the yields. We believe this information can be applied to our six-inch gallium products, allowing us to further enhance our competitiveness across all of our market. We serve and germanium substrate demand for satellite solar cells were down substantially throughout 2023 is now beginning to recover.
Sales increased 25% in Q1 over the prior quarter was renewed strength in Europe and Asia, and finally, coming off three quarters of strong sales in our raw material business as well as contributions from all recycling efforts. Sales from our raw material business declined as we expected in Q1. This decline was primarily the result of our all consuming a greater portion of the output from our consolidated joint venture as our substrate business has strengthened in total, all portfolio joint venture income continues to be a strategic value to our business, providing money of the critical material we use to make our products, allowing us to benefit from the cost efficiency advantages.
Now in closing, we are optimistic about the coming year at the growth and expansion of our business. We are seeing tangible signs of recovery across all of our product lines with new catalyst such as AI providing strong incremental opportunity. We've worked hard over the last two years to pave the way for exciting future by providing world-class products for were highly dynamic technology, Medscape, elevating our own business practices to meet the requirements of Tier one customers, delivering breakthrough innovations in the development of large diameter gallium arsenide and indium phosphide substrates and executing our recycling for one that both advances our ESG commitments and improves our cost structure. We remain steadfastly focused on business efficiency and accelerating our return to profitability.
With that, I will turn the call back to Gary for a second quarter guidance. Gary?

Gary Fischer

Thank you, Morris. In keeping with our comments today, we expect Q2 revenue to be between $25.5 million and $27.5 million. 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. A share count, it will be approximately 43.0 million shares. Okay. What this concludes our prepared comments. I must now be glad to answer your questions now or John, can you take it back?

Question and Answer Session

Operator

(Operator Instructions) Charles Shi, Needham.

Charles Shi

Congrats on the good good our Q1 results and the very upbeat about Q2 guidance. I wanted to start with a I really like a question on the indium phosphide. I think last time we speak well, when we spoke about this, you were talking about semi insulating indium phosphide wafers potentially being used for some of the high speed the detectors applications.
But in your prepared remarks, it sounds like you are getting a little bit more upbeat about the high-speed laser pipeline about applications for 800 gig, 1.6 tera about those kinds of applications for the next generation, Yuma EMR, et cetera. So can you provide us a little bit update on new engagement on these AI applications so far? Do you when do you see the laser application will start to contribute some meaningful revenues off of the phosphate business?

Morris Young

Charles, first of all, the order we received one customer specific grade told us is for AI. and that was from some easily indium phosphide. And the fact that we are guessing if it was what detectors it was at gas. Okay, because usually indium phosphide good semi-insulating are either for electronic applications, all for high speed detectors.
However, recently in the industry, we also heard some of the mill was required semi-insulating substrates. So, you know, it did this, whether it is for lasers of for detectors, we all know from what we are making the customer demand fall product is showed a slight change from silicon doped AMI sulfur to semiconducting substrates. Usually good suiting, Iron Dome, the indium phosphide. But what is will detectors are lasers is it gets really guesstimate. We don't really know Mr. Shi, but we do hear from our customer. It's for a pretty large AI customer.

Charles Shi

Got it. Thanks, Morrison. Thanks for that color you provide, I guess. Yes, it's something we'll continue to chat. And obviously, we don't want to take more yet, but there's something about your customer you don't want to share. So maybe a second question, maybe for Gary. I think your prepared remarks, you talked a little bit more about the stock listing. It sounds like you are making some progress on that front. Can you kind of provide a little bit more color in terms of what kind of a progress exactly and give us a little bit better sense about why you think it's a moving toward a little bit more at this time?

Morris Young

So the process of flu communication with Shanghai Stock Exchange as CSRC is such, that was we spending applications. They will continue to ask questions. They want us to clarify a few things. And there are things which did the Express they have concerns with and we provide them with answers. And we think we may see some good progress on the questions they have. So now we think we are ready to go through the next step, which is go through their review process. Again, Andy will then look at our whole application and either continue to ask questions or on a proof.

Charles Shi

Hi, Ken. Thanks for the update on. Okay. That's all from me for now. Thanks so much and congrats on the chart on the results on back.

Operator

Richard Shannon, Craig-Hallum.

Richard Shannon

Hi, guys. Thanks for taking my question is well, congratulations on a really nice guys. You're going to see to that point here on the guidance here. I'm wondering if you could elaborate in a couple of items here. First of all, just trying to understand the relative growth dynamics of each of your for revenue buckets here. I would assume in the past like probably our best growth driver. But I wonder if you can kind of rank those and whether you expect them all to be growing sequentially.
And then second of all, trying to get a sense of what's implied here for gross margins, given that you said that the OpEx could easily be the same in the second quarters or first. I'm kind of getting a number that's in a slightly higher than the first quarter, maybe as high as 30%. But just wondering if I'm doing the right math on that one.

Morris Young

Yes. So let me in various trial and the business conditions and actually the strongest growth we think next quarter is going to come from gallium arsenide and also due mainly in Germany seems to be very strong. Raw material is very strong as well. In the in-place. Why actually, at this point of the timing that we are projecting flat on? And one other thing which is interesting about this business environment right now is that wherever the customer wants something is sure that the lead time is extremely. Sure. I mean, we usually ask the customer to give us at least four weeks lead time because we need to process the wafers and some that we will have to grow the Crystal.
So then the lead time issue is how long we don't have a standard product for offering. But now days, I'm a customer just one or two weeks lead time. Could you just great. However, it's sort of prevent us from here having better visibility, but we can see that it galley on-site, extremely busy and indium phosphide right now as we see now is it flat quarter, but things can change because we still got almost two months to go. I'm giving two weeks lead time. We have six weeks to take orders and on the margins, Gary?

Gary Fischer

Maybe we can do this in and a follow up coverage because it gets kind of complicated and I didn't I didn't understand exactly what your models telling you, but we can work on it with Visa.

Richard Shannon

Okay. Fair enough. Morris and didn't want to follow up on your comment regarding gallium arsenide being our highest growth driver here. To what degree is this maybe some inventory fill in some product areas that were driven down so hard in the last year and half? And then you think you also mentioned some pickup in the wireless slash HPT. markets. I'm wondering what to what degree that's contributing in this quarter.

Morris Young

Well, first of all, I would say, you know, gallium arsenide was the first product coming down in terms of revenue, right? I mean, I remember was the second quarter of 2022 gone out as they start to come down. So, you know, we take it's usually six weeks before, you know, all the inventory got depleted, so now is coming back. So because unit phosphatase, I think three longer weeks before you start to go downwards three quarters to.
So I expect the indium phosphide perhaps now to recover as quickly as a screening assay, although you know the pickup well-being indium phosphide last quarter, I attribute that to the new business. I because I OIC. pawn business is doing okay, but not through robust. You know, the telecom business is not great and data center from what I see, they are still inventory out there. So I think you know, the AI part of the data center, I think, is pulling the demand for us to increase our revenue by what, 40%-some odd --

Gary Fischer

48%

Morris Young

From Q4 to Q1. So --

Richard Shannon

I didn't mean to interrupt Morrison, please continue.

Morris Young

So what was the other part of question?

Richard Shannon

Yes, yes. Yes, I think seven, but there is an interesting follow up to those comments here, which is like how much of your indium phosphide businesses date there is a I today it seems like given these kind of growth rate is going to be a pretty substantial part now. Can you quantify that in any way?

Morris Young

Well, I think last quarter was significant, I would say could be as much as 20%, although you know is a little difficult for us to really nail it because some customer would tell us and some customer don't okay in pharma business is very extremely interesting. I want to encourage analysts to help us to do that and analysis. There are two cause of indium phosphide, WIN Semi's living and the other is semiconducting. The semi insulating is usually made for for the time and the sulfur doped semiconducting are usually low EBITDA and good for lasers. And they are the dominant demand for indium phosphide for many, many years is almost like a two one in favor of semiconductor wafers.
Okay. But the loss two or three quarters, the trend is reverse. There's so much more demand on semi come semi-insulating, IAMGold wafers. So is us is the laser just didn't grow or maybe this do that too much inventory and this new demand of Iron Dome making either or some color laser or more likely high-speed detector is growing very strong. So what I'm hoping for is that, you know, the sulfur does material will recover, inventory get consume, it will come back again. But this I hand over to actually is a new application will continue his own trajectory of growth.

Richard Shannon

Okay. Very interesting dynamics here. I'm going to ponder about why I ask a couple other questions here. I guess just a quick one here. You had a 10% customer in the quarter. Can you identify that or at least sector and whether that they've been a 10% customer in the past?

Gary Fischer

It was in every house, Richard. (multiple speakers)

Richard Shannon

Okay,

Gary Fischer

Historically low long-term customer for us that does SAP and I'm okay, we don't know for sure where that was going, but that actually we do know. But we can't say. (laughter)

Richard Shannon

Gary, maybe just a couple last questions here. I'll ask both you put on your view long term lenses here, or I guess we'll call it medium term lengths here, but just kind of once audio conjecture on the opportunity for getting back to breakeven level by the end of this year or early next year. And maybe just as a reminder, what that model looks like in terms of revenues and gross margins?

Gary Fischer

Well, we certainly think that it's a reasonable target and goal to do that maybe this year. So we're not giving up. We're not giving up on.

Morris Young

I will say is this year yet.

Gary Fischer

So yes, it's probably somewhere between $28 million and $30 million a quarter. And we will need to get the gross margins to go up and maybe close to 28% and keep the OpEx somewhere around $9.3 million, $9.4 million. GAAP OpEx by the way.

Morris Young

So yes, and I think we do need some help from Amy phosphor anyway, LOE cost is only 50% of what we used to do it at peak. Yes.

Gary Fischer

Yes, I mean, that's probably the wildcard. And it's what I would say that the the indium phosphide surge, especially since it's centered in the artificial intelligence area, it's happening sooner than we expected with what we thought it would. We believe early on it was going to happen, but it is happening sooner.
So the question is, has what's going to happen in the next two or three quarters, but it's a tremendous opportunity. And others, there's billions and billions of dollars that are being invested in the hardware side of the AI. in the software side. So and of course, we play in the hardware side. So it's pretty amazing what's on the horizon.

Richard Shannon

Okay. one last question. I'll jump out of line here, guys. On the short report that came out on your stock early last month. I think it's something we've established pretty well as a bunch of malarkey for the most part, but does bring up an interesting topic that I think it would be very interesting for you to address that. And it gets a risk that a lot of investors bring up with me, and that is related to the Star listing in the investment by us, private equity investors. And if there's any of the rejection of the application for whatever reason here, what's the what's the risk and how do you get around the risk of having to repay that money and then find other ways to finance the company?

Gary Fischer

Well, as long as we're in the process, they have no right an important date. I want to be redeemed. I mean, the last thing, they want their money back in them. So they're they're very willing to be patient and work with us. And on its feet, if we ever was disappointed that it's taken longer than we all expected.

Morris Young

So let me let me let me turn to help out a little bit here. Gary. Look, I think I mean hard assets and doing manufacturing semiconductor, all mature job industry is hot in demand in China. And that is showing up in the fact that we have no other investors interested in acquiring a minority share of our other joint ventures FKP. So So although you know, the IPO takes longer than we thought it is. But I think, you know, I'll ask it's in China are highly valuable. No, I think the psychology of the of the thinking from a from a from a Chinese investor point of view, your money no longer can go into real estate to invest and, you know, doing materials and doing manufacturing and I will yield fundamental business manufacturing is highly desirable.
So if we go for whatever reason we don't go so IPO, I would say one possibility is to invest in by the other customer. I mean, investors investing into our joint ventures, and we have several of them for job highly valuable. I mean, of course, the most valuable is manufacturing substrates where we have the world ranking euro leadership in those fields, although they are small, but nevertheless is highly desirable. But because we're going public in China, so we cannot put them.
And then by investors into the main body of the investment but for our joint ventures, which is certainly, you know, get other investors investing in those joint ventures.

Gary Fischer

Again, let me give you I mean, we have talked about this internally. So you know, we're not worried about it. But as I said at the PE companies want to want us to go public. They don't want they don't want to pull out. So, these equity private equity investors are all large and premier institutions each with an investment of just under $5 million, which represents a relatively small part of their respective portfolios.
And so far since they have to be patient, no matter what they're being patient. So and you know, another this probably interesting to notice that they don't they don't have any recourse or their investment is not collateralized. So they that's why they need to succeed. So and we made some significant progress since and developments that we really can't give any details. But some some very good steps are taken in the recent quarter, which continues to sustain our hope regarding the IPO.

Richard Shannon

Great. I appreciate all the detail. I think a lot of investors wanted to hear that, and I think that's a great great response. So appreciate the time, guys. That's all from me.

Operator

Tim Savageaux, Northland Securities.

Tim Savageaux

Hi, good afternoon and congrats on both the results and the outlook from especially the growth in indium phosphide. And there was a mention of kind of peak levels that you had achieved in indium phosphide that's getting up towards $20 million in quarterly, maybe $18 million. At that point, you also had some additional consumer business.
And I guess my question is, as you look at it now the market opportunity you're seeing, do you think there's a I kind of optical data center opportunity can move you back toward peak in the info five levels by itself? I have a follow-up.

Morris Young

That's a good question, I know that customers who use our product for consumer product at this time. I mean, are they still have when people are using it for consumer product, by the way, they didn't go all completely.
And we are, I believe, a big dominant supplier for that product. And we are also in negotiation and in qualification for yet out of product, although I do know was the launch time and whatnot. And the other thing is that a talking to their engineers a one-time. They told us they have 11 projects centered around using indium phosphide. There are a consumer product devices.
So I don't think I'm giving that up. But you know, in advance of I just had so many different characteristics such as volume forever and using as a detector, et cetera, et cetera. So it is unique in its place to be used as a technology device where, as you know, AI application, I think it's a extension of what people use it for data center. You know, if you want high bandwidth is high speed data transfer, no low attenuation.
I mean, that's the perfect choice. And if you have a I guess that means you've got to access data much a 100 times, 1,000 times, even 10,000 times. And you have so many more data center, you want to exchange information, what's the best way to transfer the inflammation? It's a no-brainer. It has to be some kind of optical device to transfer that data. So I think it's difficult for me to say when it's going to be so strong. And so how big but what is going to rival home to know the consumer product. But I think both of them, I do need indium phosphide.

Gary Fischer

Yes, one more says, optical, that means it's got to have the indium phosphide because it is the wavelengths can be read by Indian phosphide.
So but yes, we believe we will get back to those levels, Tim, as more says, we're not sure on the timing and it very well could get back to that level sooner than we thought because of PI. six months ago, we didn't have this kind of at expectation. I don't know for the people listening with. I think last week there is really amazing article in the New York Times about the amount of money invested in Q1 of this year. And it was, I think, $32 billion, and that's not just software that's hardware to so as data center stuff. So I mean, we've all been around a long time.
And so we've seen stuff, but I was an isolated Morris and Leslie, I said to our Board of Directors on because that's going to we know we're at the bottom of the food chain or the end of the trend, but that's going to benefit indium phosphide substrates in them. So to that, the dream or the hope is that the consumer comes back and it competes against a I for who's going to be the biggest contributor to indium phosphide revenue. And and we don't need a miracle for that to happen. I think it's very reasonable goal.

Tim Savageaux

Got it. And wanted to ask a little bit more about the improvement or the pretty dramatic growth that you saw in Q1 and indium phosphide. And you've already talked to you have a unique perspective on within the ecosystem. And maybe I'm going to ask you to give us a little bit more here. But I guess my question was around the breadth and how would you characterize that strength? Obviously, you can sell through a lot of different folks in this arena, whether it's at the wafer suppliers or vertically integrated laser manufacturers are module manufacturer orders.
And I think you've done business with all of those types of governors. And so whether it's looking at the type of customers and we're looking at wafer sizes. So what does that tell you about the breadth of demand that I'm uses are historically you've had a couple of major customers on the data center side. Or can you see if you extend new customers are showing up? Are there a couple of customers are moving the needle for you used to be this extraordinary growth from?

Morris Young

Q1 customer actually is new. I mean, they have they are a customer either product. But for that application for a guy was new and they're telling us they're a customer, but I can't repeated big, big customer.

Gary Fischer

Well, there's a hey, we know we know the players, right? There's Meta, there's Google, Microsoft other all of those data centers are going to and where indium phosphide is going to have a play is a rack to rack to rack to the aggregation point within the data center and then the aggregation point to a different data center, all of that nice high speed. If you think of the data that's computed in AI, then you've got a transparent and move it around in order to get an end result. And so it was in the rack. We don't think they'll go to AI. two I. indium phosphide, but rack to rack and beyond. That's where our indium phosphide has a definite application.

Morris Young

So of course, Gary, are you not say anything different? And why is it AI did I said you're already doing this. Yes. Okay. It's just that data center has to get so busy talking to each other and exchange inflammation, a 1,000 times or 10,000 times that requires higher speed tightly that where is where union Phosphate company.

Gary Fischer

The other thing that one of our marketing guys taught me has added some of the large data centers are now having a shortage of power electricity to run the thing. So they're they're downsizing in the future architecture to smaller, more data centers that are smaller, but are spread around and that's going to be fit us.

Tim Savageaux

Got it. Sounds like there was sort of a big customer helping to drive that growth in Q1. And sort of the rest of the color I was looking for I know there's only so much you can say, but clearly, you're at the substrate level, we've gotten epi wafer supplier who you know, maybe selling into a module manufacture. I mean, I imagine that you're maybe not all the way up to the cloud provider level, but you have customer touch points all along that eco system.
And I was just looking for, as you see the pieces move around what you're seeing in terms of opportunity it at any of those levels, right, whether it's going directly to a chip supplier, I'm going to see used to do a lot of business with Intel and their module assets or over at Jabil. Now, are you seeing sort of different customers you kind of show up at different parts of the food chain, I guess, in driving this growth?

Morris Young

Not yet seeing bad cutting device? I mean, we have some from China customer which showing up taking a lot of wafer as well. Forget about telling us anything. I mean, I think that the customer base seems to be shifting somewhat. You know, before these things all happen, it's a consumer product that sort of went away. And then there was a data center, you know that you were talking about, which was a picky on all of wafer day on prime customer at the table right now. There's a new Chinese customer Cami, but we don't know whether it's coming from and this new customer, you're taking this scenario maybe in the past. Why and we know they're telling us is going to AI but I wish I can see that the [second one or third one] company, that would be great.

Gary Fischer

We think, again, we think we understand the architectural needs well enough that there's little doubt in our mind. There's no doubt, frankly, that we end up benefiting and getting into multiple data centers along the big names that I just ran off.

Operator

Dave Kang, B. Riley Securities.

Dave Kang

Good afternoon. My first question is actually on gallium arsenide. So you're expecting that to be the main driver from first quarter to second quarter. Just wondering, are there any applications or customers kind of driving this strong growth?

Morris Young

LED is Strong for automobile lasers is strong, but not as as high at the peak, I would say is about 50% of the peak level. Automobile is probably 70%, 80% of the peak. And HPT is a new, I believe, opportunity for us, and we're trying very hard to getting up, get ourselves back into it. And if we are successful, we can expect more revenue growth by HPT as well. And the China market seems to be really strong in gallium arsenide.

Dave Kang

Got it. And just wondering how sustainable, you know, your expectation is on gallium arsenide. Are we talking multi-year cycle?

Morris Young

I cannot guarantee multi-year. I would say we have we have probably good visibility at least to Q3. I mean, demand is strong. But as you know, that I do worry about the world economy, I mean, I think. But then your people are saying as a recession, but never come right?

Gary Fischer

Most of our cycles are more than one quarter. So yes, gallium arsenide is more robust than we expected it to be, but we're not thinking like of then it's going to drop back down in July.

Dave Kang

Got it. Just on the indium phosphide for AI applications. Is there any data on market share topic that is and the market share between new versus our competitors?

Gary Fischer

No, we don't know. There is some public projections on markets that coherent shared publicly in their presentations. If you haven't seen it, you haven't seen that you might want to take a look because there's some there's some stuff in there that might give you some information.

Dave Kang

Just on the market share, I mean, you think of a should we expect maybe one-third each for you and your competitors or somebody has a dominant market share just for AI. Any color on that?

Morris Young

Yes, the customer we have I think they are giving us all to order, but I don't know whether our competitors taking order from a different customer.

Dave Kang

Okay.

Morris Young

And what's the order we got we know we've got 100% of that order from that customer and they told us is for a high, but I don't know whether our competitor are serving yet out of China.

Operator

Matt Bryson, Wedbush Securities.

Matt Bryson

Thanks for taking my questions. On the HPT side of things. If you're successful in getting traction and any idea what the size of that opportunity?

Morris Young

Say it again, I didn't quite hear the expected value of --

Gary Fischer

How big is the HPT market --

Matt Bryson

What could that look like on a quarterly or annual revenue run rate, assuming you're successful in getting traction in that market?

Morris Young

Okay. So I would say close to $20 million a year.

Matt Bryson

Got it. With the most big round number of similar. We are slightly different question. I think a lot of focus on indium phosphide around the area of opportunity. But do you have any sense of how close to the point where inventories normalized we are so you've got two, three quarters out? Is it a year out?
And then any idea in terms of how much revenue you think you're losing because there's inventory out there right now or what might your revenue look like if got inventory didn't exist, any thought?

Morris Young

Yes, I see it right now. It's very difficult for me to estimate. I don't even know whether they are in full production on, although the amount of substrate be acquiring, it doesn't look like it's pilot adding, they're making something. But we haven't seen. I mean, the first thing I'd like to see is -- the largest order was two or three months, I think it was either six months order aimed at increasing our estimate and better yet. Is it just a second customer, solo coming once the same thing and that's even better at this point.

Matt Bryson

Sorry to interrupt more some. I'm actually on kind of that traditional indium phosphide business, probably, you know, you have inventory kicking around in supply chain if you have any idea. So not so much the SAI side, but that traditional business or do you have any idea of fleet? How what the impact on your revenue is today, how much it's it's holding it off? And then any thoughts on when that inventory might get worked out in might resume normal revenue run rate on that older business?

Morris Young

I think that's because the businesses right now I've done just beginning is hard for me to tell, but I mean, I think we have the capacity we can definitely meet [three to five] times what they are ordering. Now, how you've been 10 times. It's giving us a little bit time to increase our facility. So on do I think the volume is no problem. And I think our product quality really fits well with what they wanted. So at this point is I think I don't know whether I'm answering your question on that. I think I'm excited about it, and we're trying to get as much information as we can to manage is large. I think they're fully around. So hopefully be coming back with increased order or somebody else is going to coming following the nice lead. So I think that's the best I can.

Gary Fischer

Yes, I've had some of these conversations with our marketing guys and on that they expect that we're going to continue to work through the inventory into the second half of this year.

Morris Young

But that's not AI.

Gary Fischer

It's not AI mean, it's just in general data center centric. (multiple speakers) Yes, it was just saying that. Yes. So that's what I was referring to. So yes, I'm okay. Just an update.

Matt Bryson

But yes, we can get out and restoring normal level. That's probably early 2025 phenomenon. Is your thinking right now?

Gary Fischer

Maybe Q4 this year, but definitely in 2025. So if it's it's going to happen, so we can't wait. We're so excited about it.

Matt Bryson

I guess last one from me, Gary, I completely understand that customers don't want to hold inventory and so they're putting in a rush orders, which makes it hard on Europe and to clear out your inventory because you don't want to turn down business.
But I guess given that environment, how confident you can take down inventory by $10 million or what are the dynamics evolve in that and where you're not effectively our Internet business because you can't meet those rush orders?

Gary Fischer

Well, I wanted to take it down $10 million last year in a year came down last year, but not as much as I as our target. However, I have a couple of reasons that I think it's a realistic target. one is if you look back at our historical inventory levels compared to our revenue run rate levels, you know, it was the inventory was in the $60 million level range, $65 million range.
So this so the differences we have more we have more inventory in the consolidated joint ventures now because they have different netted product lines and things like that. And our recycling program, which is good. It helps us on gross margin and helps us with ESG but you're converting what I would cause scraps of materials or slurry, which has little or no book value, and then you bring it in its standard cost. So your inventory goes outside is it counterintuitive? But even so I'm absolutely convinced we can we can take money out of the inventory is going to be $10 million. That's my target in if revenue grows for us than it makes it a little easier to take the inventory down.
So I don't need a miracle to have that happened. I just need some good business decisions and it was easier, frankly, when I could go to China because I would hold inventory review meetings itself and haven't been there for a while because of the COVID thing. But I'm going to go this year. So we're getting back in the cycle, but it's a good question. So thanks.

Operator

As there are no further questions at the key this time, this concludes our Q&A session. I would like to turn the call over back to Dr. Morris Young for closing remarks.

Morris Young

Thank you for participating in our conference call. This is a quarter we will participate in enormously and securing key Growth Conference on June 25. I hope to see you there. As always, please feel free to contact me, Gary Fischer or Leslie Green. If you would like to send them a call, please. As we look forward to speaking with you in the near future.

Operator

Ladies and gentlemen, this concludes today's conference call for your participation. You may now disconnect.