Danny Cheng: Got it. And just wondering how sustainable your expectation is on gallium arsenide, I mean are we talking just a few quarters or kind of a multiyear cycle.
Morris Young: I can guarantee multiyear. I would say 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 people are saying there’s a recession, but it never come, right? It’s — I mean…
Gary Fischer: Yes, most of our cycles are more than one quarter. So Gallium arsenide is more robust than we expected it to be, but we’re not thinking like, oh, then it’s going to drop back down in July. So…
Danny Cheng: Got it. And then just on indium phosphide for AI applications. Is there any data on market share? How big that is and the market share between you versus competitors?
Gary Fischer: No, we don’t know. There is some public projections on markets that coherent shared publicly in one of their presentations. If you haven’t seen that, you might want to take a look because there’s some stuff in there that might give you some information. So…
Danny Cheng: But just on the market share. I mean, you think — should we expect maybe one-third each for you and your competitors or somebody has a dominant market share — just for — on the AI. Any color on that?
Morris Young: The customer we have, I think, they are giving us all the order, but I don’t know whether our competitor is taking order from a different customer okay? In other words, the order we got, we know we got 100% of that order from that customer. And they told us it’s for AI. But I don’t know whether our competitors are serving yet down the channel.
Danny Cheng: Got it. All right. Thank you.
Morris Young: Thanks, Danny.
Operator: The next question comes from the line of Matt Bryson from Wedbush Securities. Please go ahead.
Matt Bryson: Hey thanks for taking my questions. On the HPT side of things, if you’re successful in getting traction, any idea of what the size of that opportunity might be?
Morris Young: Say it again, I didn’t hear. The expected value…
Matt Bryson: How big is the HBT market — what could that look like on a quarterly or annual revenue run rate, assuming you’re successful in getting traction in that market?
Gary Fischer: Okay. I would say close to $20 million a year.
Matt Bryson: Got it. So that’s a nice big round number. Similarly, or slightly different question. I think a lot of the focus on indium phosphide has been around the AI opportunity. But do you have any sense of how close to the point where inventory is normalized, we are? Like is that 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 that inventory didn’t exist, any thoughts?
Morris Young: Yes. I think right now, it’s very difficult for me to estimate because I don’t even know whether they are in full production or not, although the amount of substrate are buying doesn’t look like it’s pilot. I think they’re making something. But we haven’t seen — I mean, the first thing I’d like to see is, I mean, the last order was at three months. If they give us other six months order, if they’re increasing, then I can estimate and better yet is if there’s a second customer sort of coming and wants the same thing, and that’s even better. At this point…
Matt Bryson: And sorry to interrupt Morris. So I’m actually — I’m asking on kind of that traditional indium phosphide business, like where you know you have inventory kicking around in the supply chain. If you have any idea, so not so much the AI side, but the traditional business, if you have any idea like how — what the impact on your revenue is today, how much it’s holding it off? And then any thoughts on when that inventory might get worked out, and you might resume normal revenue run rate on that older business.
Morris Young: I think that’s — because the business is right now just beginning, it’s hard for me to tell. But I mean, I think we have the capacity. We can definitely make 3 times to 5 times what they are ordering now or even 10 times if giving us a little bit of time to increase our facility. So I think the volume is no problem. And I think our product quality really fits well with what they wanted. So at this point, it’s I think — I don’t know whether I’m answering a question or not. I think I’m excited about it, and we’re trying to get as much information as we can. And we know the customer and customer which is large, I don’t think they’re pulling around. So hopefully be coming back with increased order or somebody else is going to come in following their lead, please. So I think that’s diversion.
Gary Fischer: Yes. I’ve had some of these conversations with our marketing guys. And I think 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: No, no. It’s not AI. It’s just in general.
Morris Young: Data center…
Gary Fischer: Data center Inventory. Yes. So that’s what I was referring to. So — there’s still some out there. But…
Matt Bryson: You’re getting cleared out and then restoring normal levels, that’s probably a — an early 2025 type phenomenon as you’re thinking right now?
Gary Fischer: Yes, maybe Q4 of this year, but definitely in 2025. So it’s going to happen. So we can’t wait. We’re so excited about it.
Matt Bryson: Yes. I guess last one for me, Gary. I completely understand that customers don’t want to hold inventory. And so they’re putting in rush orders, which makes it hard on your end to clear out your inventory because you don’t want to turn down business. But I guess given that environment, how confident are you can take down inventory by $10 million? Or what are the dynamics involved in that where you’re not effectively having a turn down business because you can’t meet those rush orders?
Gary Fischer: Well, I wanted to take it down $10 million last year in — it came down last year, but not as much 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, it was the inventory was in the $60 million level range, $65 million level range. So the difference is we have more inventory in the consolidated joint ventures now because they have different added product lines and things like that. And our recycling program, which is good, it helps us on gross margin and it helps us with ESG, but you’re converting what I would call scraps of materials or slurry, which has a little or no book value, and then you bring it in at standard cost.
So your inventory goes up. So it’s counterintuitive. But even so, I’m absolutely convinced we can take money out of the inventory. Is it going to be $10 million? That’s my target. And if revenue grows for us, then it makes it a little easier to take the inventory down. So yes, I don’t need a miracle to have that happen. I just need some good business decisions, and if it was easier, frankly, when I could go to China because I would hold inventory review meetings and I 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 that cycle. But it’s a good question. So thanks.
Matt Bryson: Awesome. Thanks for taking the question.
Operator: As there are no further questions at the queue 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 quarter we will participate in the Northland Security Growth Conference until June 25, and I hope to see you there. As always, please feel free to contact me, Gary Fischer or Leslie Green, if you would like to set up a call with us. We look forward to speaking with you in the near future.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation.
