Joining me right now is from AXT. We got Tim Bettles, Vice President, right?
Yep.
Gary Fischer, Chief Financial Officer from AXT. The company's going to do a presentation. After the presentation, we're going to take some questions. Tim, Gary, why don't you get started?
OK, thanks. Just quick housekeeping. How do I forward the slides? This with this thing?
Yeah, bring it. Bring it. The big green button.
The green one on top?
No, no, no. The biggest green.
Yeah.
No, no, no. Big one.
Oh, that one.
Yeah.
It's the one on top, so OK. There you go. Charles, thank you for introducing me. And thanks for coming to hear our presentation. Our idea is to give you a quick overview from 20,000 feet and then open it up to Q&A, which Charles can lead. So briefly, tell you about the history of the company. It's founded in 1986, making alternative substrate wafers for when silicon wafers won't work for chips. There's a lot of proprietary process technology in this kind of a business model. It's a manufacturing business, but it's a material science business. So there's some fundamental stuff, and then there's some secret stuff. So our primary manufacturing is done in Beijing, but our world headquarters is in Silicon Valley, in Fremont. And with that, I'm going to introduce Tim. Tim's Vice President of Sales, Marketing, and Business Development.
So he's going to give you an overview of the product structure and proceed from there. So thanks, Tim.
Thank you, Gary. So yeah, I want to give you an overview, really, of two of the major products that we've got. We work in a number of different materials, but our two main products are Indium Phosphide and gallium arsenide . So let's start with Indium Phosphide. This is a growth engine that was ignited in 2014 with the GPON marketplace in China, specifically in China. So we've seen growth come out of the indium phosphide business. Start from there. And we've seen that business grow since 2014 through to today. And it started off a relatively small portion of our business. It's grown to about 50% of our substrate revenue. So it's a significant market for us today. We only see growth in that market sector. Key applications for here, what we're seeing right now is data center. So it's AI and traditional data center business.
This is an optical transceiver for the data center business. It's used for the lasers, so we are incorporated in DML lasers, EML lasers, silicon photonics, and PICs, so we've seen a lot of growth there. This accounts for the majority of our Indium Phosphide business today and certainly accounts for our big market growth that we're seeing today as well. We're still active in the GPON business. There's still some business going on there. That is a smaller subset at the moment simply because the GPON market is relatively slow. It's been quiet for the last few years, but we're anticipating to see some growth returning to that market throughout 2025, and we hope to see that going beyond 2025, we see a return of growth on that market. There are some other applications, which include telecom infrastructure, so that's 5G infrastructure.
We've really not seen build-out of that at the moment. I think it's coming, but it's a matter of when, and then we're seeing some emerging markets with medical sensors and driverless cars. Something that's not on that list that we do play in is the consumer products. So we do have Indium Phosphide sensors for consumer-type applications as well. That's seen some growth over the past few years. It's slowed down a little bit now. We anticipate to see some growth in that coming on towards the end of the decade. That's always a significant market opportunity for us, but it's a little bit on the slower side at the moment. Some of the market dynamics that we've got here, we're pretty fortunate. There's three customers playing into this market, right? There's three customers, I should say, Sumitomo, Japan Energy, and AXT.
Between the three of us, Sumitomo and AXT own the majority of that share. And we're about equal between the two of us. This is quite a difficult material system to grow. It is prone to a lot of failure, a lot of failure rates. So getting the technology to grow this material and get the defects, get the quality up to where we are, is incredibly challenging. So there's some strong barriers to entry to this market. Unlike some of our other markets, we've not seen the price erosion yet that we have on other markets. I do anticipate that we'll see some price erosion going forward in the next four or five years. But because of the strong barriers to entry here and because of the quality of our material, I think that the erosion is going to be fairly stable. It's going to be relatively low.
I think we'll enjoy growth in the Indium Phosphide market over the next few years coming towards the end of the century. The other main product that we manufacture is gallium arsenide wafers. This is what we founded the company with. This is our core technology and was our main driver to found the company. It has a long product life cycle. It's been used since we founded the company in 1986. It still has a strong market out there today. That market is a little bit more on the slow side. There's still growth there, but it doesn't have the dynamic growth that Indium Phosphide does at the moment. There have been, both in Indium Phosphide and in gallium arsenide , there have been drives to scale this to larger volumes. Gallium arsenide is currently running at 8-inch.
We run all the way down from 2-inch, 3-inch, 4-inch, all the way to 6-inch and 8-inch. The key applications for us here, LED lighting is a strong product driver for us. That goes into automotive lighting applications. That's red tail lights. Gallium arsenide is used for red LEDs, red, yellow, orange. It's used for illumination, orange illumination, red tail lights, braking lights, that kind of stuff. We also see a strong push into the LED business for the horticulture business. Red is used really strong in horticulture. We see that market growing, especially in Europe and Asia. It's an interesting market. It's got a lot of growth potential for it at the moment.
Looking at some of the other applications, industrial lasers has always been a strong market, although with the current economy and a lot of this being used in China, that market has slowed down significantly. Again, expect to see some recovery this year. I think we're going to see some growth again happening in 2026. So it's a strong market. It's been very, very stagnant for the last two, three years. Turn around and see some growth coming up. Same with printer heads. Strong market historically. It's seen a slowdown over the past few years. It saw a big boom during COVID. It's seen a slowdown over the last few years. We expect to see a recovery this year and moving on before that. I'm going to skip down to microLEDs a little bit. This was the driving force for our 8-inch product.
So the goal here was to build micro LEDs for screens, for watches, wearable devices. That market, unfortunately, didn't materialize. And now what we're seeing is we're still seeing a micro LED business out there. It's probably not at the same scale as we were hoping it would be, but there's still a lot of interest in the micro LED sector moving forward. There's still a lot of interest in 8-inch and a lot of interest in consumer-type products for micro LEDs. I'm going to move back now to power amplifiers. Power amplifiers is an interesting market. That's a cell phone power amplifier. This is what amplifies the RF signal from the tower to your cell phone so you can actually hear and receive and send calls. This market has existed for a long time. It may not be very exciting. Compound annual growth rate of around about 5% traditionally.
Obviously, we follow the cell phone market. So as the cell phone market dips, so does the power amplifier market. Historically, this is a market that we've not spent an awful lot of time and energy focusing on. It's an extremely low-cost substrate. It's high volume. It's very high volume, but it's an extremely low-cost substrate. And it's fairly competitive. There are two major players into this market right now. And we've always managed to, or we've always decided to stay away from this market because of the cost. When we were developing the microLEDs, however, we developed a new growth technology and a new manufacturing technology for the 8-inch. This has led to some significant cost savings and has led to significant yield improvements in our process. So it allows us, hopefully, allows us to explore the power amplifier market once more.
Now, just to put things into perspective, this power amplifier market's about $100 million in revenue, TAM. And so far, we're way less than 10% of this market. So it's a big opportunity on the table for us, which exists today. So we're working this market at the moment, looking at ways in which we can explore entry into that market, provided that we can make some cost savings enough so that we can, of course, be profitable into that market. So that's one of the big goals for 2024, 2025, is just exploring that market. We've been qualified on a number of suppliers now, just at smallish levels. We're driving those levels higher, and we're exploring whether or not we can truly make money out of this. If we can, we're going to be very aggressive about attacking that market.
So we could see some big drivers into revenue through the power amplifier market. So there are really two major market dynamics that we're looking at in this market. The market continues to push wafer size. There are two of us in the market, three of us in the market that have 8-inch capability. Really, only two of us. There's us and a German company called Freiberger. Then there's a drive towards lower and lower defect density. Some of the applications that we've got on here, the industrial lasers, the printer heads, and communication lasers, VCSELs , all drive to lower and lower defect density. So there's a drive forward here. There are quite a lot of consumer applications for gallium arsenide. It's not going away. It's here with us. It's here for us, for power amplifiers. It's a big market.
One thing that's not mentioned down here are VCSELs for facial recognition. There's a big market out there, machine sensing, machine imaging, facial recognition. So there's some big opportunities going on here that are just not going anywhere. So again, pretty key for us here, one of the major suppliers on this market, and we still have plenty of opportunity to grow into this power amplifier section once we've proven that we can do that successfully at a competitive price. Last thing I'm going to touch on, before I move on to this, we also make germanium. Not going to talk a whole lot about that. We use germanium for low Earth orbit satellites. Predominantly, it's a solar cell material. We supply germanium wafers all over the world for satellite materials, but it's a fairly steady market. It's not got a whole lot of growth to it at the moment.
So I've not mentioned it too much in here. I will mention, however, our supply chain, because we own about 10 companies within our supply chain that make our raw materials. So these companies not only supply AXT, but they also supply our competitors. They supply other customers. I'll point two of them out just to bring them up. We have a raw materials company that manufactures our gallium and arsenic, high-purity gallium, high-purity arsenic. And we have a high-temperature ceramics company that manufactures the crucibles for our furnaces. These are the two of the largest of our supply chain. And we've developed a supply chain that's owned in part by AXT to basically mitigate our risk, to drive our costs lower, and also to understand our competitive situation. Obviously, as I say, we supply our competitors as well as supplying AXT with this.
This is actually fairly unique to AXT, and it's something that does drive our tier one customers to AXT. They like to have that security of supply, especially during the days that we're talking about today. At that point, we'll go through the financials, and I'll hand it back over to Gary.
Thanks, Tim. Yeah, just a couple more about the supply chain is that it does create a differentiator between us and our competitors. We're the only competitor that has this kind of strategy. It's also a very attractive strategy to customers because they like the sense of security that we can reach down into the supply chain if things change. So it's a differentiator. And I would say it's one of several barriers to entry into this kind of a marketplace. This is a very sophisticated technical material science concept of the company.
Sumitomo, our competitor, has the same issues. But it's not something you can easily get into. Some years ago, you could see we had some very, very strong growth in 2021, 2022. That was partly driven by a reaction in supply chain to COVID, where there were shortages. Lots of customers overbought. They moved from what I call just-in-time inventory management to just-in-case inventory management, JIT to JIC. We benefited from that because it boosted sales. But then, as you all know, the whole semiconductor industry and lots of other industries went into what's called the inventory correction cycle, which is seen in more recent numbers. That kind of bottomed out. Now, in this year, in three quarters, the last one on the column, year 2024, we're roughly already at the 2023 number.
And so we'll be past that when we report our Q4 results, which we've given guidance on. So I want to mention briefly that our company in China, which is called Tongmei, it began in around 1998, 1999, and it was a captive manufacturing company. Over the decades, it's matured into a full-blown company. It employs over 700 employees. And if you add in the two other companies that Tim mentioned, it's about 1,400 employees, broad product line, broader customer list. So it's really a very attractive company. And we worked with the team there to apply to go public on the STAR Market on the Shanghai Stock Exchange. So that was a process that we started some years ago. It's taken more time than we thought.
We've gone through various changes within the Shanghai Stock Exchange where they reduced the amount of companies that could be in the queue. The economy there did, as we all know, struggle, and especially in the real estate market, it did ripple effect into IPOs. The number of IPOs that were being approved shrank dramatically. We're still in the waiting room, if you will. We're in the green room ready for our show and haven't given up. We're trying to be in an entrepreneurial spirit, not get discouraged that it's taken so long, but we're still at it. We're responsive to the Shanghai Stock Exchange authorities when they ask us questions. I'm going to let Tim give a summary on this last slide then, since he's here. Some of you have seen me many times here.
So Charles is like, "Come on, let Tim talk some more."
Thanks, Gary. So yeah, our market opportunity, where do we stand? So as Gary's already mentioned, we manufacture in China. We've got three facilities now in China with probably the largest capacity for gallium arsenide and indium phosphide in the world. I say probably. We've definitely got the largest capacity for indium phosphide without a shadow of a doubt. We're actually currently increasing our indium phosphide capacity. We're seeing growth in some long-term major trends. The AI traditional data center is definitely driving our business. We saw some growth in 2024. We're seeing increased growth throughout 2025 in that market sector. So we continue to drive that product forward, and we continue to drive the capacity for that product forward. We also see, as I say, return to some of our more traditional markets.
That's the industrial laser, the LED lighting market, and the GPON market in indium phosphide as well. So as we look at that, we look at 2025, we expect to see some growth over 2024, some modest growth over 2024. We expect to see some return on some of our traditional markets. We expect to see growth in the AI data center market. And we also expect to tackle some of the cost issues surrounding the power amplifier market, driving us into that power amplifier business. We have very limited competitive landscape. There really is only a few of us in here. We look at it, there really are three companies in here that we're competing against. And we believe that we're the market leader in indium phosphide and gallium arsenide with some strong technical barriers to entry. We have proprietary processes for those barriers to entry.
We have patents surrounding our crystal growth, our wafer processing, and all of our manufacturing technology. We're the only player in the market that has a position in raw materials. So we feel that that really strengthens our business. And we believe that these markets are growing. So we believe we're in a great place for recovery in 2025 and then return to real growth in 2026 with, as I say, both traditional markets, some new markets there, and then us attacking that power amplifier market. And then lastly, we've got this STAR Market listing that gives us access to more financing, gives us more funding through that at a reasonable cost. That allows us to add more capacity and more growth. So with that, I thank you. And I'll hand it over to Charles for questions.
Yep. All right. Let's take some questions from the audience. Anything? Yes, please.
So you've got a lot of your manufacturing capacity in China. I mean, how did the U.S. export restrictions affect you guys?
Yeah, let me repeat the question. So it's about U.S. export control since you have manufacturing mostly in China. And what do you see if any impact?
Yeah, I can take that question. Thank you. Good question. Yeah, all of our manufacturing is in China. So export controls were put in place in August the 1st, 2023. And we have to apply for a permit for everything that we ship these days. Other than adding some more paperwork and maybe an additional week or two to the lead time, for the most part, it makes no difference to our business whatsoever. We have yet to receive a permit for exporting from China into the U.S., however.
So we've not yet received a permit to ship to the U.S., but we're receiving permits everywhere else. So everything we apply for, we basically receive. It is a dual-use material. Gallium arsenide is a dual-use material. However, the majority of what we ship is consumer products and non-military applications. So we really don't have an issue with it. On December the 3rd, 2024, China put a ban on selling gallium arsenide to the U.S. for military applications. Clearly, this doesn't affect us at all because we haven't received a permit beforehand. So a ban, I think it formalizes the fact that we're not going to receive a permit, but really, it makes no difference to 2023. I'll also make a comment that the U.S. is a relatively small market for us personally in gallium arsenide.
It accounts for our gallium arsenide sales are probably less than 5% in the US. So it gives us a little bit of heartburn, but it's not the end of the world. We focus more in the US on indium phosphide-based business.
And you haven't had any trouble?
No, there's no permitting required for exporting indium phosphide. So the only thing that we get faced with is the Section 301 tariff, which was put in place in 2018. And we've managed that, and we've been managing it for all of these years. So moving forward, I see no issues at the moment.
Good question, though.
Yeah, thank you.
Can you maybe talk more about the power amplifier opportunity you were seeing in Taiwan? Wait, Tim wants to. This is about the power amplifier opportunity in Taiwan. Yeah.
Yeah, so again, good question. So the power amplifiers, the majority of power amplifiers are the epitaxy is done in Taiwan. There's a number of customers or a number of companies in Taiwan that manufacture epitaxy that then go to device processing outside of Taiwan. And that could be in China or it could be in the U.S. So what we've focused on in the short term is selling wafers into Taiwan, initially focused on them being forwarded for Chinese power amplifier manufacturers. So the epi wafers would be manufactured within Taiwan and then sent back over to China for manufacturing as power amplifiers in China. It's a growing market in China, but also there are government incentives for Chinese companies to use Chinese materials. So it means that we don't have to meet the stringent ASPs that we would need to hit for the U.S. customers.
But once we've established our cost structure there, then we're going to be more aggressive on looking at the Taiwanese selling wafers to Taiwan to go towards U.S. power amplifiers. Thank you.
All right. Maybe I'll ask a question. How much of your business today is domestic China and how much of that is international and where the trends are? And are you seeing any divergence in the business for reasons like export control or maybe the general cyclicality, maybe a little bit different in China, outside of China?
So it varies, Charles, year to year, but China can be at 35% of total worldwide revenue. And I think in some quarters, it's been as high as 60%. So although it jumps around, it's a significant amount. Now, in terms of exporting to China, it's not a concern because we don't manufacture in the United States.
What is sold by the China sales team to China customers is considered an in-country transaction. So it's not subject to direct U.S. controls. However, the U.S. controls do extend to technology. But Tongmei, as a mature manufacturing company, has their own technology. It was originally technology transferred from the United States back in around 1999. But if you're a true manufacturing company that you build something that you can touch, feel, and see, and you're still using 1999 technology, then you're out of business. So it's evolved over time. And therefore, the technology is not an issue. So generally, there's no doubt that the increased tension on a geopolitical sense between the two countries is on the front burner for us as a watchdog, as a concern. And it has had impact in terms of regulations and rules and getting a license or all these things.
But we've managed through it okay. And we hope that we'll continue to do so. However, there's a lot of unknowns now. And so it is a factor that we have to be cognizant of, so.
All right. Yeah, go ahead. We got three more minutes. Okay.
So I find it strange that a relatively small company like yours has ownership stakes in your Chinese supply chain. And I understand that your customers might like that. But I was wondering if you could elaborate more on why your customers like it besides supply chain certainty. Curious.
Well, okay. I'll answer the first part, and then you can answer why the customers like it. But this grew out of the vision of our founder/CEO to take advantage of being in China for the wafers. And then if you look down through the supply chain, there were some gaps.
There were also some technology gaps. There was insufficient technology in the supply chain to meet our standards. So basically, we formed some partnerships with companies in China that maybe were in this, let's say, the crucible business. And we helped them hire a management team. We matured them. We trained them. We allowed them to sell to third parties, so they weren't captive. But they, of course, had to give favorable treatment to us. So that's the origin. And we did this. And when I say we, the company did this. I've been in the company for 11 years. But when I joined, we weren't still doing lots of new companies. Okay, we have done some more new ones recently. But it grew up, let's say, from 2000 to 2015 and matured and stabilized.
It does give us cost advantage, visibility advantage, planning advantage, source of security if there are shortages. Now, why do the customers like it?
Yeah, so the customers like it because of those reasons, right? When we built the expansion, we built a facility. We built a campus. A lot of our suppliers are on that campus. It allows us, obviously, as Gary just said, it manages our costs. It manages our supply. But what it also does, it allows us to do some recycling. Because they're on our campus, we can transport waste material backwards and forwards. It allows us to do a lot of recycling. We've spent over the last few years, we've spent a great deal of effort on recycling gallium, recycling indium. Some of our tier-one customers are very, very big on recycling.
So that's one of the driving factors for them.
So now that you've gotten all the commercial advantages, I know we're halfway through. But now that you've gotten all the commercial advantages, does it make sense to unlock value by divesting from that?
It could make sense to do that. And we actually have publicly stated one of your companies publicly quietly that it would be a way for us to raise additional capital if we thought we needed to, which right now we don't think we need to, but we could in the future. So it's there. They are valuable. There is a market and interest within China to own some of these companies or own parts of them. So yes, it's a good business tool for us. Yes.
All right. Have to cut you off. And that's a wrap, everybody. We got to finish up this session.
Thank you so much, Tim and Gary.
Thanks, Charles.