Gross margins and capacity

Q: Richard Shannon from Craig-Hallum asked about gross margin sustainability and the drivers behind potential increases, as well as wafer diameter and pricing trends.

A: Gary Fischer (CFO) stated that gross margins are driven by volume, product mix, efficiency, and larger wafer diameters, adding that margins could exceed 60% next quarter. Timothy Bettles (VP of Business Development) and Morris Young (CEO) noted that new crystal growth furnaces and low EPD requirements also benefit margins.

Q: Richard Shannon asked about expected potential indium phosphide revenue capacity exiting this year and next.

A: Timothy Bettles (VP of Business Development) noted that the capacity growth is tied to ASP increases and migration to larger wafers, with indium phosphide revenue expected to grow from Q3 levels.

Capacity expansion and supply demand

Q: Charles Shi from Needham asked about concerns regarding potential overcapacity for indium phosphide substrates next year.

A: Timothy Bettles (VP of Business Development) and Morris Young (CEO) responded that they are significantly overbooked with customers on allocation, and demand continues to outstrip capacity.

Q: Charles Shi asked for clarification on the Lumentum agreement and the sharp increase in backlog.

A: Timothy Bettles (VP of Business Development) clarified that the Lumentum contract was signed in Q3 and that the backlog has surpassed $500 million, driven by long-term agreements, short-term contracts, and spot POs.

Gross margin baseline and long-term agreements

Q: Tim Savageaux from Northland Capital Markets asked if the 60% gross margin level is a new baseline with upside potential.

A: Gary Fischer (CFO) stated that things are moving fast, but crossed over 60% is expected.

Q: Tim Savageaux asked how significant the initial ramps of long-term agreements are in Q3 and Q4 results.

A: Timothy Bettles (VP of Business Development) and Gary Fischer (CFO) explained that LTSAs represent a small percentage of capacity, with most growth coming from spot purchase orders and annual contracts to maintain pricing flexibility.

Wafer size transition and competitive landscape

Q: Matt Bryson from Wedbush Securities asked about the breakdown of shipments by wafer size and the capabilities of competitors at 4-inch and 6-inch substrates.

A: Timothy Bettles (VP of Business Development) and Morris Young (CEO) stated that 3-inch is still the majority, but 4-inch and 6-inch are growing rapidly, with only a couple of main players capable of 6-inch production.

Q: Matt Bryson asked if indium phosphide capacity is still expected to double from Q4 2026 to Q4 2027.

A: Gary Fischer (CFO) confirmed that capacity is expected to double again in 2027.