AXT (AXTI) Q2 2022 Earnings Call Transcript

AXT (AXTI -2.99%)
Q2 2022 Earnings Call
Jul 28, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone, and welcome to AXT's second quarter 2021 financial conference call. Leading the call today is Dr. Morris Young, chief investor, and Gary Fischer, chief financial officer. My name is Kevin, and I'll be your operator today.

[Operator instructions] I would now like to turn the call over to Leslie Green, investor relations of AXT. You may begin.

Leslie Green -- Investor Relations

Thank you, Kevin, 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, market conditions and trends, including expected growth in the markets we serve, emerging applications using chips or devices fabricated on our substrates, our product mix, our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, to utilize our manufacturing capacity, 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 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, global financial conditions and uncertainties, COVID-19 and other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations in China, market acceptance and demand for the company's products, the financial performance of our partially owned supply chain companies and the impact of delays by our customers on the timing of sales of their products.

In addition to these factors that may be discussed in this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. 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 July 2023. Also, before we begin, I want to note that shortly following the close of the market today, we issued a press release reporting financial results for the second quarter of 2022.

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 second quarter results. Gary?

Gary Fischer -- Chief Financial Officer

Thank you, Leslie, and good afternoon to everyone. We're very pleased and excited with the financial results in Q2. Let's walk through them and get Morris on stage. By the way, Morris just returned from four months in Beijing.

So it's nice to have him back. So OK, revenue for the second quarter of 2022 was $39.5 million, approximately comparable to $39.7 million in the first quarter of 2022 and up 17% from $33.7 million in the second quarter of 2021. For the first half of 2022, revenue was up 22% over the first half of last year. To break down our Q2 2022 revenue for you by product category, indium phosphide came in at $15.7 million, slightly over Q1 and again, a new record.

Gallium arsenide was $12.2 million, and this is another positive number in the quarter, $12.2 million is the highest quarterly revenue for gallium arsenide since the third quarter of 2012. Germanium substrates were $3.9 million and revenue from our two consolidated raw material joint venture companies was $7.8 million. In the second quarter of 2022, revenue from Asia Pacific was 74%. Europe was 13%, North America was 13%.

The top five customers generated approximately 35% of total revenue, and one customer was over the 10% level. We continue to believe that revenue diversity demonstrates our growth is not overly dependent on any particular customer or application. This is another factor contributing to our confidence that we have reached a point of sustainability and can outpace market growth in 2022. Non-GAAP gross margin in the second quarter was 39.4% compared with 33.8% in Q1 of 2022 and 36.4% in Q2 of 2021.

For those who would prefer to track results on a GAAP basis, gross margin in the second quarter was 39.1%, and compared with 33.6% in Q1 and 36.3% in Q2 of last year. As you can see, we made huge progress on gross margin in Q2. While there were many factors that contributed, improved yields, particularly in crystal growth was one of the most significant ones. Morris conducted regular meetings on yields during his four months in Beijing, and part of our margin improvement has come as a result of this focus.

Another contributing factor is that both BoYu and JinMei are two consolidated raw material companies improved their gross margins. A third factor is that we developed a process technology that enables us to recycle remnants of Indian phosphide processing material. In addition to the gross margin benefit, this program is another step forward for us in our ESG commitment. A four factor is product mix by comparison to the first quarter, the mix looks pretty similar.

However, within each substrate product, the diameter mix can impact gross margin. So product mix was more favorable in Q2. Moving on. Total non-GAAP operating expense in Q2 was $9.1 million.

This compares with $8.6 million in Q1 and was 7.4% in Q2 of last year. On a GAAP basis, total operating expense in Q2 was $10.1 million compared with $9.6 million in Q1. For comparison, total GAAP operating expense was $8.3 million in Q2 of 2021. The totals for the current Q2 included a charge for bad debt of about 200K.

We don't experience this very often, but we did this quarter. Non-GAAP operating profit for the second quarter of 2022 was $6.4 million compared with non-GAAP in Q1 of $4.8 million and $4.9 million in Q2 of last year. For reference, GAAP operating profit for the second quarter was $5.3 million, up from an operating profit of $3.7 million in Q1 and an operating profit of $3.9 million in Q2 of last year. Non-operating other income and expense for the second quarter was a net gain of $2.3 million.

This includes a gain of $2.2 million from the unconsolidated raw material companies. The full breakdown is in our press release. The contribution from the equity method raw material companies is higher than usual and reflects higher ASPs for the raw materials and more units sold. For Q2, we had a non-GAAP net income of $6.7 million or $0.16 per share compared with $4.3 million or $0.10 per share in the first quarter of 2022.

Non-GAAP net income in Q2 of 2021 was $5.4 million or $0.12 per share. On a GAAP basis, net income in Q2 was $5.5 million or $0.13 per share. By comparison, net income was $3.2 million or $0.07 per share in Q1 and $4.4 million or $0.10 per share in Q2 of last year. The weighted average diluted shares outstanding in Q2 of 2022 was 42.5 million shares.

Cash, cash equivalents and investments were $57.2 million as of June 30. By comparison, at March 31, it was $44.3 million. This is an increase of $12.9 million. We did get a bank loan in China for approximately $13.8 million during the quarter.

If you eliminate that loan, the cash is basically unchanged for the quarter. Depreciation and amortization in the second quarter was $2 million and capital investments were $16.8 million, of which about $14.8 million was construction. Most of this is facilities related in Indian phosphate equipment related. Total stock comp was $1.1 million.

Net inventory at June 30 was $77.3 million, invited the current supply constraint environment and should be locked and loaded when demand accelerates, we did buy ahead in Q2. But 50% of the inventory is raw materials and WiP is 46%. Finished goods actually declined in the quarter and makes up only 4% of inventory. This concludes the discussion of the quarterly financial results.

Turning to our plan to list our subsidiary, Tongmei in China on the star market in Shanghai, we did have a very big development recently, which is that the Shanghai Stock Exchange approved Tongmei's application for the initial public offering. The application was approved on July 12 and will now be submitted to the China Securities Regulatory Commission for the next step in the review process. We consider this to be a major, major milestone in our effort to complete the Star Market IPO as we are told that the Shanghai Stock Exchange review is the most detailed, thorough and lengthy of the reviews. We still have more work to do, and we do not want to be overconfident, but the achievement of this milestone will hopefully mean that Tongmei can complete the listing in this calendar year, most likely in Q4.

We're very proud of the team for our progress and believe that our success further underscores our achievements in demonstrating AXT's world-class capabilities. Overall, the IPO is getting a lot of very positive visibility in China and is affording Tongmei a new level of respect and prestige. Before I turn the call over to Morris, I want to take a moment to address the COVID restrictions in China. To date, we have not had any shutdowns of our operations in Beijing, Dingxing or Kazuo.

As we noted last quarter, we have experienced some supply chain disruption as a result of shipment delays and supplier shutdowns relating to products that we use in our manufacturing process. However, so far, we've been able to mitigate the impact with inventory on hand. We've also seen some pockets of softness where customers are on lockdown, but the demand for our products, coupled with the diversity of customers and applications that need them, have allowed us to shift our allocations to other customers or applications that remain in high demand. Like most companies, we are monitoring the situation closely and are managing through these issues with high-level attention.

We remain in close contact with our customers to understand any changes in their demand expectations should those changes occur. OK. Well, with that, I'll now turn the call over to Dr. Morris Young for a review of our business and markets.

Morris?

Morris Young -- Chief Executive Officer

Thank you, Gary. This is a very exciting time in our business. Our strong execution on a number of fronts has set the stage for great opportunities in the coming quarters. We continue to achieve strong growth in highly strategic applications and are currently ramping several tier one customers.

Further, our product quality and technical capability has created a standard of excellence that is increasingly difficult for our competitors to match. As is evidenced by our market share gains in indium phosphide. And despite supply constraints in our industry, we're working hard to meet customer requirements across a growing number of applications. We are also achieving notable success in the development of large diameter substrates that will enable the next generation of technology innovation across a number of end markets.

This strong execution has driven first half revenue growth of 22% over the previous year and continues to enable us to outperform our market with emerging opportunities that were later on over the coming quarters. As Gary mentioned, we set a new record for indium phosphide revenue in Q2. Demand for our product for 5G telecommunications, data center and LiDAR applications continue to grow, overcoming a downstate in the pounds market in Q2. We also saw a healthy growth in our new customer applications with its continued ramp in Q2.

In addition, we're pleased to report that we are now qualifying into a second consumer applications for which we deliver preproduction quantities of indium phosphide wafers in May and June. I cannot stress enough the significance of this achievement. AXT answered the call on a very tough product specification, surpassing the best efforts of our competition and has proven itself up to the challenge of meeting the stringent requirements of a world-class organization. As such, we are now in a position to build meaningful revenue in a brand-new market for AXT, and we are also engaging with other tier one customers for opportunities that were previously not available to us.

We're now becoming the company to beat indium phosphide wafers. This year, we double our capacity indium phosphide demonstrating our unique ability to scale quickly and cost effectively to meet customer demand. Even with the additional capacity, we expect that there will be continuing to be supply constrained into next year. We continue to work closely with our customers to meet their requirements.

On the innovation front, we have achieved an important milestone in the development of six-inch indium phosphide. We are now producing and beginning to sell prime device quality wafers of six-inch indium phosphide. This is the combination of major R&D initiatives for AXT. The material quality of our large diameter substrates demonstrate our commitment to excellence and the differentiation of our VGF crystal growth process.

We're pleased to be able to offer our customers meaningful advantages in scalability, low stress and low defect rates as new high-volume application comes to market. Turning now to gallium arsenide. Total revenue was up in Q2. Our traditional high-end LED market demand remains strong in applications such as automotive display and high-end signage and lighting.

We also continue to see strength in high-power industrial laser applications where we have gained significant market share. These lasers are commonly used involving improvement, testing equipment, choose for cutting metals robot applications and others. Wi-Fi applications for IoT also helped to drive a modest increase in revenue over the prior quarter. In RF devices, demand is expected to come down a bit in Q3, but we continue to focus on strengthening our position for future opportunities.

We made good use of the tighter environment to renew our relationship with key customers and believe we have laid important groundwork for future market share growth. The sophistication and capability capacity of our new manufacturing facility, coupled with our achievement of several tier one customers have demonstrated our ability to support customers in this space with high-volume, high-quality substrates. Before I leave the topic of the gallium arsenide substitute, I want to give an update on our eight-inch gallium arsenide development program. I'm pleased to report that we now have two major customers for this product, and we are working with them on design specifications.

The level of engagement from our customers is exciting and give us increasing confidence that there is a real market developing for large time in the gallium arsenide. We believe that eight-inch substrate will be an important enabler for new high-volume applications over the next several years. Now, turning to germanium substrates. Coming off of two of our highest revenue quarters in Q4 and Q1 sales were down some in Q2.

The satellite solar cell market, which is the primary driver for germanium tends to be lumpy, though industry forecast for new satellite launches show continued strength. I do want to note that we do expect germaniums revenue to be down meaningfully in Q3 as a result of a customer-specific payment issue that we expect to resolve before the end of the year. Revenue from our two consolidated joint venture was about flat in Q2 and looks to remain solid in Q3. In particular, JinMei has been contributing well.

It has continued to diversify its product offering beyond high-purity gallium. Since relocating to our Kazuo location, JinMei has more capacity and state-of-the-art facilities. Today, it also offered purified the indium and indium phosphide poly for sale. In addition, JinMei successfully developed the gallium recycling program, which is helping us drive the efficiency in our cost structure.

Both indium and BoYu have strong R&D culture that is contributing to innovation to new offerings that enhance their value. In conclusion, our strong execution has paved the way for a remarkable transformation of our business. Today, we are more diversified than ever before with success across a wide variety of customers and applications. We've proven that we can raise the bar on our business processes in order to meet the very high standards of some of the most sophisticated customers in the world.

And in return, we can earn their business in their respect, which is opening doors to growth opportunities across our portfolio. As we look ahead to the next generation of technology that was reshaped everything from connectivity to consumer device to LiDAR, healthcare monitoring and more AXT is bringing to market innovations in large diameter substrates that will help make them possible. And all of this is being validated by our continued progress in a very diligent IPO process for Tongmei's STAR market listing in China. I couldn't be prouder of our team are more excited about our future ahead.

I will now turn the call back to Gary for our third quarter guidance. Gary? Gary?

Gary Fischer -- Chief Financial Officer

I had myself on mute. So can you hear me now?

Morris Young -- Chief Executive Officer

Yes.

Gary Fischer -- Chief Financial Officer

OK. Thanks, Morris. Demand across our portfolio continues to be strong, and we are working hard to keep up with customer orders. In particular, we're expecting indium phosphide to have healthy growth in Q3 with multiple tier one customers and the breadth of applications driving this, including data center, telecom, consumer, driverless cars and others.

Gallium arsenide for lasers and LEDs is also growing well. On the top line, growth in these areas will likely be somewhat obscured by a decline in germanium substrates caused by the customer-specific issue that Morris mentioned. Once it is resolved, draining substrate revenues are expected to rebound. The important read-through for our business is that we are growing and seeing strong demand across our business with new growth drivers that are just gaining momentum.

We expect to ramp these opportunities through the end of this year and well into next year. That said, Q3 revenue will be between $39 million and $41 million. We also expect gross margin to continue to be strong. As such, we expect our non-GAAP net profit will be in the range of $0.15 to $0.17 and GAAP net profit will be in the range of $0.12 to $0.14.

The share count will be approximately 42.661 million shares. OK. Well, this concludes our prepared comments. Morris and I will be glad to answer your questions.

Kevin? Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Charles Shi with Needham. Your line is open.

Charles Shi -- Needham and Company -- Analyst

Hey, Morris and Gary. Good afternoon. Congrats on the very nice results and especially improvement in the profitability level. I want to start with the new opportunity of indium phosphide.

Again, congrats on winning this new application, I believe this is a second. I think either yesterday or the day before No. 1 customer did announce that they are winning some indium phosphide applications in smartphones and following the first one in the TWS earbuds. Well, I don't know if you want to comment on this, but are you talking about the same application or not? Or maybe give us a little bit quantitative insight here.

You do have a little bit of an incremental revenue, of course, offset by some weakness in germanium. But in the third quarter, but should we expect this new opportunity to bring you more incremental revenue than the first application that you want earlier this year or end of last year? Thank you.

Morris Young -- Chief Executive Officer

Sure. Let me take that first, Gary. So the second opportunity, yes, Charles, I think we believe it's bigger than the first one. We are ramping with them on pilot production now.

And we believe probably toward Q3 and Q4, it should be twice the number of wafers going into this application. As to what application it is, I tell you, it really puzzles us. As you know, often we only provide substrate and we provide it to epigrowers. And so, -- and even if I know I'm not allowed to talk about it anyway.

But we think it's somewhat related to a indium phosphide laser coupled with a detector application. And we think it's consumer product related. And we believe that in the beginning, they offer a certain product lines in the beginning, and if it becomes popular, then the volume could grow as it spreads to other models.

Charles Shi -- Needham and Company -- Analyst

It sounds like, this is like -- will be implemented a subset of this particular consumer product than it could be proliferated kind of, means you expect a certain runway ahead even for the same application. Is that right?

Morris Young -- Chief Executive Officer

Yes.

Charles Shi -- Needham and Company -- Analyst

Maybe the next question really, can you give us some update on the microLED opportunity? I know understandably, you are working on larger gallium arsenide wafers size and the microLED if that really becomes a reality, it sounds like it's going to consume a lot of gallium arsenide wafers. I'm not sure if you have enough capacity today, but -- can you give us some update where you are in terms of that microLED qualification? And is it one year away, two years away, three years away?

Morris Young -- Chief Executive Officer

Sure, Charles. I believe the best estimate -- I mean, we now have two customers. We are working with them and designing the product specification right now, we're sending sample quantities, hundreds of wafers to them, one of them for several months now and the other one just beginning. And we believe they're going to start to go through their production line, and they will start to see we need to be to have improvement where they think it's good.

And they have given us some preliminary volume but we're not holding them to it because I think we obviously need to work with them because if we were to take their commitment, then we have to sign up for the commitment to deliver. So at this point, it's still a little bit too early. But I would say it probably will start to ramp up in production mode in 2024. And the volume could be in the -- I would say the total addressable market in the first year, at least in my estimation, it could be somewhere around $30 million.

Charles Shi -- Needham and Company -- Analyst

Maybe a question for Gary. The gross margin strength you have in this quarter, I think you did mention several factors, but it sounds like it improved the yields of crystal growth is the primary one. And I would assume this is something that will provide you a sustainable margin benefit. And what's your thought about gross margin going forward? Are you sort of expecting maybe the high 30s is going to be the baseline now or you are still want to hold on to your original guidance, maybe it's like low to mid-30s?

Gary Fischer -- Chief Financial Officer

No. I'm willing to surrender and move off the conservative position. I think higher 30s is a good general range for the rest of this year. So I do want to stress that Morris and I really take seriously that we want to not just top to top.

We want to walk the walk. So the most important thing for us is to run the business well. We certainly made tremendous progress in Q2. We know we've been working on all along, but it wasn't quite getting to the surface to be seen.

So yes, I'm OK. I think it's not going to be realistic for me to have the people that run model stay right at 35%. But I want to add something else is that it's correct. The yield improvement is very helpful and significant, but there are other things going on with that that are important.

And another big contributor was the utilization of the new process technology that we've developed, where we can recycle the remnants of indium phosphide. So that made a big contribution. It contributed a little bit in Q1 and even a smaller amount in Q4 of last year, but they really made great progress in Q2. And it's really a big step so.

And then, always we look to product mix. And that's why we're so excited about the indium phosphides the phenomenon going where that helps drive the gross margin. So --  OK, next question.

Operator

One moment. Our next question comes from Matt Bryson with Wedbush. Your line is open.

Matt Bryson -- Wedbush Securities -- Analyst

Thank you. Congrats on a great quarter, and congrats particularly on the gross margin line. Just on the germanium side of things, can you quantify at all what you're thinking about in terms of headwinds in calendar Q3?

Gary Fischer -- Chief Financial Officer

Go ahead, Morris.

Morris Young -- Chief Executive Officer

Go ahead. I mean, you're on the numbers.

Gary Fischer -- Chief Financial Officer

Well, we came in at Q2 about 3.9, right? And I think we'll be around maybe $2 million or $1.9 million in Q3. The thing I want you all to understand is that we're going to try and get this thing resolved now. We're not going to wait until December 31. And the demand is still there.

It's been improving in the last couple of quarters. It's all tied to satellites, and we all know satellites are going -- continue to go up. But in case we don't get it resolved fast enough, then we've taken our forecast down, and we're giving you the conservative forecast. But we're working this problem, and it's not laying in on the back burner.

Matt Bryson -- Wedbush Securities -- Analyst

And then shifting over to kind of capacity and inventory, Gary, can you just remind us what a more typical inventory mix might look like or more typically what you'd be carrying in terms of finished goods?

Gary Fischer -- Chief Financial Officer

Well, it's pretty small. Over time, it could be 5% or 6%. It's in my memory, maybe more so you can correct me, but I don't ever remember it being like 10%. So we tend to get that stuff shipped out.

I'm just looking at my notes here, but -- so it usually stays flat. This quarter, it went down in -- but it to me, from a business standpoint, if we're going to have inventory increase, I want it to be in raw materials and WiP and not just be building FG or finished goods so.

Matt Bryson -- Wedbush Securities -- Analyst

And then I guess my last question is simply, so it sounds like if you had more material and particularly more indium phosphide you could ship more material, I guess, when we're thinking and clearly, you're spending money on capex. Can you talk a bit about how that spend equates to increased capacity, both heading out of this year and then into next?

Gary Fischer -- Chief Financial Officer

Morris, do you want to take that or do you want me go first?

Morris Young -- Chief Executive Officer

Sure. It's a continuous process. I actually Yes, I want to expand on this question a little bit. First of all, I said in our script, we are doubling our capacity this year.

But as we see on the second consumer product ramping up, we think potentially should still supply a little bit tight now. And we do have two other products or and the qualification for other consumable consumer variable product, which is in qualification. No, not in qualification, but will be in qualification in the second half of the year. And we believe that it could start to ramp up in the second quarter of next year.

And yet, we have -- our other customer inquiry about product, which driverless car market, a laser LiDAR kind of specification for indium phosphide. So there's a lot of moving parts. If we put it all together, we think this doubling of this year probably is not going to be good enough, and we're going to continue to grow. But of course, we also are recommending the fact that economy may be on sort of a downturn.

But on the other hand, these are new product development. Are they going to be affected greatly by the recession coming recession or not? I think that's the question. But for us, I think it's a little bit easier because you see in our production, the thing which have the most cost building to our production capacity expansion is facilities. In other words, to build our claims to build DI waters, etc.

And for us to just to add processing equipment, crystal growth equipment, which we may design and make most of them ourselves, the move is relatively easy, OK? And recently, that we are expanding our indium phosphide production facility in a very solid way in Beijing, which is a very good thing because as you recall, our Beijing facility used to be able to do indium phosphide, gallium arsenide and germanium wafer processing altogether. And three years ago, we decided to move out gallium arsenide wafer processing. So that left out a big hole in the Beijing facility. And this big demand for indium phosphide just fits right into that hole.

All we need to do is a little bit modification because cleanroom, cleanroom and the water. So we can save ourselves quite a bit of money, as well as the paying to build a new cleanroom and spend the money. So I think AXT is very fortunate. But I don't know if I answer all the questions for you.

So although, as I said, I think we're doubling our indium phosphate capacity this year. But we think we still need to do some finding for more expansion next year as well.

Matt Bryson -- Wedbush Securities -- Analyst

Excellent.  I think you answered my question and more. Again, congrats on the great quarter.

Morris Young -- Chief Executive Officer

Thanks, Matt.

Operator

One moment for our next question. Our next question comes from Sam Peterman with Craig Hallum. Your line is open.

Sam Peterman -- Craig-Hallum Capital Group -- Analyst

Hi, guys. Sam on for Richard here. First one, it looks like your top five customers grew in dollar terms, a good bit quarter over quarter. I'm curious, are those top line customers with same five customers as you had in the first quarter or are they different?

Morris Young -- Chief Executive Officer

Gary, do you know?

Gary Fischer -- Chief Financial Officer

No, I don't know. I can find out, but I didn't study -- I didn't do a quarter-to-quarter comparison.

Morris Young -- Chief Executive Officer

On the usual subject --

Gary Fischer -- Chief Financial Officer

Yes. There is one that's been inching up that hasn't made the top five the last time I looked. But generally, it's pretty constant. The ones that we name as 10% from time to time, we didn't have any 10% customers in all of last year.

But prior to last year, frequently, Osram and LandMark different quarters would be 10%. And they're always in the top echelon. But with this phenomenon that Morris described, and I call it phenomenon because there really is something going on out there for indium phosphide and we're just at the right place at the right time. And of the three substrates that we produce, we're probably the best in producing indium phosphide wafers.

So that's -- it's a very difficult process technology because it's grown under pressure. So we're better than our competitors for sure. So there really is a phenomenon. And I want to underline that word because there's something going on for indium phosphide and we're right in the right spot.

So the reason I say that is some of the things that Morris described are going to generate business with new customers who are not in the top 5. And a year from now, that some of them will be.

Sam Peterman -- Craig-Hallum Capital Group -- Analyst

That answers my question well. I understand that dynamic with indium phosphide and that's kind of what I was asking after with if any of those new customers you kind of made it yet. So that's helpful. sticking with indium phosphide in that topic.

I'm just running out the numbers here. And I think last quarter or maybe the past few quarters, you talked about indium phosphide growing 30% year-on-year for fiscal '22 as a whole. And just looking at where the numbers shake out, it seems like that number might end up being closer to 40% year-on-year growth in 2022. Is that how you guys are thinking about it or is that a little too aggressive?

Morris Young -- Chief Executive Officer

Well, next quarter is definitely a strong quarter. We're counting on it, but I don't know what the fourth quarter is going to be like. I think it's going to be a strong growth this year. Last year, I think our indium phosphide grew something like 44%, right, Gary?

Gary Fischer -- Chief Financial Officer

I'm looking here 41%.

Morris Young -- Chief Executive Officer

41% Sorry. I tried to achieve 3% --

Gary Fischer -- Chief Financial Officer

Hang on a second. I'm just going to quickly add something up and -- yes, you're correct. It's 30% likely to be too conservative. And I think just doing a quick handheld calculator thing here.

So it'll definitely be more than 35%, I think. So -- and it could begin with a four again. So I don't have the Q4 number on my worksheet right now. So -- but I've got two actions plus what we think is going to happen for Q3.

Q3 in cost is going to grow double digit over Q2. So --

Sam Peterman -- Craig-Hallum Capital Group -- Analyst

And I think my last question, just on the large diameter substrates that you seem like you had some success, both with six-inch indium phosphide and eight-inch gallium arsenide. Curious if you could describe that just a little bit more and maybe talk about, where you think you sit on both of those large diameter substrates relative to your competitors.

Morris Young -- Chief Executive Officer

So let me understand. You want me to compare ourselves with our competitors on these two products?

Sam Peterman -- Craig-Hallum Capital Group -- Analyst

Yes. I'm just curious, it's not like your -- you had some advances in your large diameter substrates in the quarter. And just curious to hear how you think that kind of changed your position relative to your competitors or where you think you sit with those products right now?

Morris Young -- Chief Executive Officer

Well, these two products is in the development stage. So they are not selling like generating a lot of revenue yet, OK? So as far as we know in the world, there is one -- well, actually two competitors know how to make an eight-inch gallium arsenide substrates but we don't know each other's capability and ability or quality of their wafers and for that matter, cost. As far as indium phosphide is concerned, we know of one other competitor's knows how to do indium phosphate six-inch wafer. The reason I'm proud to announce it and showing off is that we have done a lot of work just achieving it.

But I think if I were to compare product in the marketplace, this is not the time to compare because there's very few demand, we're only making the first product offering, and it would take quite some time to make this product more mature and fix the specification, etc. So I'll be very happy to talk about, let's say, three-inch and four-inch pushes. If you want 10,000 wafers, we can talk about what specification you want and how do we differentiate our product specification and capability compared to my competitors. I think that's the way I would describe it.

So on this newly developed product, it's difficult to say how do we compare to our competitors, mainly because it's difficult to know what they are. I mean, we know where we are.

Gary Fischer -- Chief Financial Officer

Yes. I agree you, Morris. I want to add one thing, though. I think that where we do stand out in terms of differentiation is that we're the only competitor who has new facilities, new equipment, upgraded facilities, upgraded equipment, add capacity quickly.

So when we get into a competitive bake-off, we think we'll do well on specs and technology. But I think we have an edge over our competitors because some of these applications are very high volume. And the customer that's buying for this stuff is nervous about capability. And that's where I think we shine.

So --

Sam Peterman -- Craig-Hallum Capital Group -- Analyst

Appreciate the perspective. That's it for me.

Operator

One moment for our next question. Our next question comes from [Inaudible] with B. Riley. Your line is open.

Unknown speaker -- B. Riley Financial -- Analyst

Hi there. Thanks for taking my question. Could you provide some additional color on your backlog and how you see that playing out directionally over the next few quarters, especially with this big capacity buildup?

Gary Fischer -- Chief Financial Officer

Go ahead, Morris.

Morris Young -- Chief Executive Officer

Well, we don't ever run the backlog, do we?

Gary Fischer -- Chief Financial Officer

No.

Morris Young -- Chief Executive Officer

Because I don't know how to drill that backlog number. I mean, maybe I can answer it this way. I think in the past few years, we always say it's difficult for us to come up with a solid forecast because our customers can always cancel their orders and they don't give us a long-term forecast of how much they want. But in the last five, six quarters, we have been able to tell our investors our visibilities are much better.

We are forecasting, let's say, on some product is a lot more clear for instance, in indium phosphide. We've got customer lineup and they're telling us how much they want. And in some cases, we don't have enough to fulfill their current short-term needs. And so, we have to push out the lead time to six to eight weeks.

But as we increase our capacity, we should be able to shorten that lead time. But for instance, germanium, and I know the need is there. But obviously, we're not going to forecast that they're going to be my next month's forecast because we haven't resolved the price and payment issue. I mean, germanium is the weird thing to talk about.

But germanium carries a very large portion of germanium raw material as cost of our goods sold and germanium raw material price has increased quite substantially almost doubled in the last year or so. So as you can see, if they constitute 50% of my costs were sold and that cost doubled that squeezes my margin tremendously. So obviously, we want to talk to our customers and see if they can help. If they can, then we need to find some out of way to make ourselves not a terrible organization.

So I don't know if I have answered that question, but we've never done the big to bill ratio in our organization ever yet.

Gary Fischer -- Chief Financial Officer

So let me give a little more color. But the nature of our business model is that we go purchase order to purchase order. The key is that the customers -- we work off a forecast and we built the forecast and the reason we can do that instead of build to orders is that the orders are cyclical. Once you're in, it's very difficult for a customer to qualify a wafer substrate supplier.

Once they qualify you, they don't want to get somebody else or get a third source. So we don't -- most correct, we don't really monitor backlog in that way, but we monitor forecast. So we have a forecast all the way through Q4 already. And they're usually pretty reliable.

So because of the nature of the business model where they need us and we need them, and it's hard to switch. So OK. Go ahead.

Unknown speaker -- B. Riley Financial -- Analyst

So do you think that you see like double ordering as an issue?

Morris Young -- Chief Executive Officer

That is always a fear. Yes, absolutely. But we try to talk to each other. We try to talk to them and say, "Hey, are you aware your customers ordering the same thing? I mean are you double ordering? We do make sure we don't want to stuff the channel, for sure.

But so far, we don't see it.

Gary Fischer -- Chief Financial Officer

Yes. We're not seeing that now. And we're pretty close to the big customers. So again, they have a vested interest to not abuse the relationship because they need the product.

So especially right now, it's tight out there right now from the supply side for our competitors and for us, we know that it's running tight. So there's not a lot of gamesmanship in terms of pretend that so.

Morris Young -- Chief Executive Officer

Yes. The other thing is our wafers are actually perishable and they have a guaranteed shelf life. If they order it and they sit on the shelf, then they cannot use it. They have to return the wafer for us to repolish, sometimes we do it for free, but sometimes we have to charge for restocking fee.

So I don't think it makes any sense for somebody to overbuy it and stock it.

Unknown speaker -- B. Riley Financial -- Analyst

Thanks. That's really helpful. Congrats again on the quarter.

Operator

One moment for our next question. Our next question comes from Hamed Khorsand with BWS Financial. Your line is open.

Hamed Khorsand -- BWS Financial -- Analyst

Hi. So just a follow-up on that question. How much of the clarity and variability is there in the orders that you received from customers, how would you describe the clarity you have within the current quarter and beyond the current quarter?

Morris Young -- Chief Executive Officer

The current quarter is this current quarter much clearer and better than the order that we receive forecast for next quarter. I do understand. I mean order is an order --

Hamed Khorsand -- BWS Financial -- Analyst

Well, I'm just trying to understand the last quarter, you guided what was it, 38% to 41%, you end up closer to the lower end. So I'm just trying to understand what the variability is in the ordering trends in your guidance that you provide and how you ended up at 39% instead of 41% and how that spills over into this quarter.

Morris Young -- Chief Executive Officer

OK. And that's a very good question. Actually, COVID did play a role in the last week or two in the last quarter, Q2. By the end of Q2, as you know, COVID start to ramp up a little bit in our neck of the wood.

So we are missing one or two of these orders that we cannot deliver to our customers. So originally, we saw we're going to be almost another 1.5 million more than what we delivered. But it is what it is. I mean, as you said, it could be pushed over to next quarter, right? But yes, but if you want to look at that way, I don't remember that we have pushed over last quarter or we're pooling any order last quarter or not.

We thought toward the end of Q2, it was a very strong quarter.

Gary Fischer -- Chief Financial Officer

Hamed, just to point out, 39.5% isn't at the low end of the range. It's exactly at the midpoint of the range. So --

Hamed Khorsand -- BWS Financial -- Analyst

Gary, about the bad debt charge, your receivables, how are you managing that? And are you making adjustments in who you're giving credit terms to?

Gary Fischer -- Chief Financial Officer

No. We haven't changed our policy, but we're pretty tight. For existing customers, there's no issue. But every once in a while, an existing customer gets in trouble.

I'm not saying every year, but I don't think we've had any big write-off like this maybe in a couple of years. So we -- if it's a new customer, then we do the credit checks, they have to fill out a credit application and we use down a bread street or similar services like that internationally. So I think we're pretty good at that. For the small accounts like universities and stuff, there's not much credit risk there so -- but yes, we have a pretty diligent process and we haven't needed to change it.

So it's working.

Hamed Khorsand -- BWS Financial -- Analyst

OK. And my last question was that these two tier one customers that you're ramping or actually several, sorry, to quote several. Are any of them under the 10% line that -- or the 5% line that could actually become a big deal for you as you start ramping them? And what's the timeline to seeing optimal revenue from these tier one ramps?

Morris Young -- Chief Executive Officer

Hamed, I haven't done that conclusion, but it really depends upon when do they start to ramp and some of these customers, they have a cross-line effect. One customer takes the wafer and they build app and they give it to the other one. And so, I'm not so sure I can predict who is going to be the No. 3 and it's going to ramp up to number two or one now.

But so far, I don't see any very dramatic change. But all I know is indium phosphide will grow very nicely next quarter.

Hamed Khorsand -- BWS Financial -- Analyst

OK. Thank you.

Morris Young -- Chief Executive Officer

Thanks, Hamed.

Operator

And I'm not showing any further questions. I'd like to turn the call back over to Dr. Morris Young for any closing remarks.

Morris Young -- Chief Executive Officer

OK. Thank you for participating in our conference call. This quarter, we will be presenting at the virtual BWS Financial Conference on August 23 and the 3rd Annual Needham's Virtual Semi Cap Conference on August 24 and Jefferies 2022 Semiconductor Conference in Chicago August 30. We look forward to seeing many of you there.

As always, please feel free to contact me, Gary Fischer or Leslie Green directly if you would like to set up a call with us. We look forward to speaking with you in the near future.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Leslie Green -- Investor Relations

Gary Fischer -- Chief Financial Officer

Morris Young -- Chief Executive Officer

Charles Shi -- Needham and Company -- Analyst

Matt Bryson -- Wedbush Securities -- Analyst

Sam Peterman -- Craig-Hallum Capital Group -- Analyst

Unknown speaker -- B. Riley Financial -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

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