Prepared remarks
Good afternoon, everyone. And welcome to AXT's Second Quarter 2026 Financial Conference Call. Leading the call today is Dr. Morris S. Young, Chief Executive Officer, and Gary L. Fischer, Chief Financial Officer. In addition, Timothy J. Bettles, VP of Business Development, will be participating in the Q&A portion of the call. My name is Kenneth, and I will be your coordinator today. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.
Thank you, Kenneth, 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 forward-looking projections or make other forward-looking statements regarding, among other things, the future financial performance of the company, market conditions and trends, emerging applications using chips or devices fabricated on our substrates, our product mix, global economic and political conditions, including trade tariffs and import and export restrictions, ability to obtain China export permits, timing of receipt of export permits, listing our subsidiary, Tongmei, in Hong Kong, our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, or to utilize our manufacturing capacity. 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 and results to differ materially. In addition to the matters just listed, these uncertainties and risks include, but are not limited to, the financial performance of our partially owned China companies and increased environmental regulations in China. In addition to the factors just mentioned 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 July 30, 2027. Also, 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 2026. This information is available on the Investor Relations portion of our website. I would now like to turn the call over to Gary L. Fischer for a review of our second quarter 2026 results. Gary?
Thank you, Leslie, and good afternoon to everyone. Our Q2 financial results highlight an exciting inflection in our business trajectory, the beginnings of a multiyear growth phase for AXT. Revenue for the second quarter of 2026 is $47.6 million. This is the highest quarterly revenue in AXT history, up nearly 77% from $26.9 million in the first quarter and up 164% from $18.0 million in the second quarter of 2025. To break down our Q2 2026 revenue for you by product category: indium phosphide was $30.7 million, also the highest in our company's history. Let me repeat that: indium phosphide was $30.7 million, also the highest in our company's history, primarily from data center applications. Gallium arsenide was $6.6 million. Germanium substrates were $272 thousand. Finally, revenue from our consolidated raw material joint venture companies in Q2 was $10.0 million. The top five customers generated approximately 30% of total revenue and no customers are over the 10% level. Gross margin showed a substantial improvement again in the second quarter, primarily driven by an increase in total volume and a favorable product mix. Non-GAAP gross margin was 45.0% compared with 29.9% gross margin in Q1 of 2026 and 8.2% gross margin in Q2 of 2025. For those who prefer to track results on a GAAP basis, gross margin in the second quarter was 44.9% compared with 29.6% in Q1 of 2026 and 8.0% in Q2 of 2025. This is a huge, huge positive change from Q1 of 2025. Moving to operating expenses, our total non-GAAP operating expense in Q2 was $10.2 million compared with $8.6 million in Q1 and $7.6 million in Q2 of 2025. On a GAAP basis, total operating expense in Q2 was $10.9 million compared with $9.6 million in Q1 and $8.2 million in Q2 of 2025. Our non-GAAP operating profit for the second quarter of 2026 is $11.2 million compared with a non-GAAP operating loss in Q1 of $550 thousand and a non-GAAP operating loss of $6.1 million in Q2 of 2025. For reference, our GAAP operating line for the second quarter of 2026 was
Hello, Leslie. You disappeared for a sec. You are back now.
Okay. Great. Terrific. Continue, Gary.
Am I just on the speaker on your cell phone now? Can you hear me okay? For the benefit of people listening, it is afternoon where you are. We are in China right now, and we are at the conference room of the Tongmei headquarters, so we have a little bit of a hiccup on the phone equipment. All right. Non-GAAP operating profit for the second quarter of 2026 was $11.2 million compared with a non-GAAP operating loss in Q1 of 2026 of $550 thousand and a non-GAAP operating loss of $6.1 million in Q2 of 2025. For reference, our GAAP operating line for the second quarter of 2026 was a profit of $10.4 million compared with an operating loss of $1.6 million in Q1 and an operating loss of $6.7 million in Q2 of 2025. Non-operating other income and expense and other items below the operating line for the second quarter of 2026 was a net profit of $705 thousand. The details can be seen in the P&L included in our press release today. In Q2 2026, we returned the company to profitability. We are pleased to report a non-GAAP net profit of $11.9 million or $0.19 per diluted share. This compares with the non-GAAP net loss of $585 thousand or $0.01 per share loss in the first quarter and a non-GAAP net loss in Q2 of 2025 of $6.4 million or $0.15 per share loss. On a GAAP basis, net profit in Q2 is $11.1 million or $0.17 per diluted share. By comparison, net loss of $1.6 million or $0.03 per share in the first quarter and a GAAP net loss in Q2 of 2025 of $7.0 million. The weighted average diluted shares outstanding in Q2 is 63.5 million. Cash, cash equivalents and investments increased by $626 million to $749 million as of June 30. This was primarily the result of our secondary public offering of common stock which closed on April 22 and generated approximately $632 million before expenses. By comparison, at March 31, our cash was $123 million. Accounts receivable increased by $4.7 million. During Q2, we signed long-term supply agreements with Casella and Coherent. Under the terms of these agreements, we received prepayments for wafers of $22.3 million and $25.4 million respectively. These types of agreements with significant upfront cash are an additional signpost regarding the important use of indium phosphide for high-speed optical data transmission required in AI data centers. Morris is going to talk more about this in a moment. These prepayments are posted on our financial statements as a liability, and they will be converted to revenue as the liability reduces when we ship product against these agreements. Depreciation and amortization in the second quarter was $2.5 million. Total stock-based compensation was $800 thousand. Net inventory was up approximately $6.2 million in the second quarter to $96.3 million. And this concludes our report on financial numbers. Turning to our plan to list our subsidiary Tongmei in China: On June 26, Tongmei notified the stock exchange that it was moving its application for an initial public offering on the STAR Market. This was accepted in July. AXT and Tongmei will now instead transfer our efforts towards listing on the Hong Kong Stock Exchange which will likely take about a year to complete. We continue to believe that an IPO in China is highly beneficial in expanding our capacity in China and is the most efficient and effective way to support the rapidly evolving AI infrastructure build-out. This contributes to China's development of its semiconductor supply chain to meet increased China-based demand for indium phosphide substrates. Tongmei's move to the Hong Kong Stock Exchange creates a redemption right for the $49 million invested by the PE funds back in 2021. However, we have been in discussion with them and currently, they all wish to continue their investment and not be redeemed. We have sufficient cash to redeem investments should they be requested. With that, I will turn the call over to Dr. Morris S. Young for a review of our business and markets. Morris?
Thank you, Gary. This is an incredibly exciting time for AXT. As Gary mentioned, we have reached an inflection point in our business where the customer demand is extremely strong for our indium phosphide material. We are committed to doubling our indium phosphide capacity in 2026 and I am pleased to report that we are ahead of schedule in that effort. More importantly, I can now report to you that our revenue opportunity for indium phosphide is on track to more than triple by the end of 2026, with continued significant expansion expected in 2027. This is happening as a result of three factors. First, we are able to expand capacity at a faster rate than we expected. Second, we are making significant strides in driving our manufacturing productivity with new crystal growth furnace designs and increased output. And third, our customers are moving to larger diameter substrates and higher-value products, resulting in favorable pricing trends. The combination of these factors is driving a step function increase in our revenue in Q2. We recorded our highest quarterly revenue and highest indium phosphide revenue in our history, with the backlog that continues to grow and is now well over $100 million. Customer demand continues to outpace supply no matter how fast we add capacity. Broadly, the deployment of optical connectivity in AI data centers is accelerating as hyperscalers scale GPU-dense architectures and look for higher speed, lower power photonics to move data more efficiently. In the near term, we are seeing high demand from the industry migration to 100G and 1.6T transceiver modules, for which indium phosphide-based lasers and detectors are essential for higher performance optical links. Longer term, hyperscalers are advancing towards near-package and co-packaged optics which will continue to drive increasing demand for our material. Overall, these trends point to a durable long-term build-out of denser optical infrastructure and a multiyear demand cycle for our indium phosphide. As many of you are aware, the competitive landscape for high-quality indium phosphide is limited to just a few players due primarily to the very high technical barrier to entry. Among our peers, we believe AXT is in the strongest position to increase manufacturing capacity quickly and at the scale and quality needed to move the needle in our industry and meet our customers' requirements. Our team in China has done an outstanding job in bringing up new lines in our existing factory facilities as well as innovating to drive higher productivity. In working closely with our direct customers, as well as our major end customers, to understand their expected demand and roadmaps, we are well into the planning process to double our capacity again in 2027 in an adjacent location. This will make AXT by far the largest indium phosphide producer in the world. In addition to growing our manufacturing footprint, we have also made great strides in development of our 6-inch indium phosphide capability. Six-inch phosphide substrates are exponentially more difficult to produce in volume than 3- or 4-inch wafers, and I am very pleased and proud of our team's progress towards this new offering. I also want to thank our customers who have partnered with us throughout this process. We are excited to support them as we move forward with our own capability. Partnership is a cornerstone of our business philosophy, through which we have been able to deliver game-changing innovation. This dates back to the formation of joint ventures that today make up a unique and vertically integrated supply chain. In the last 10 years, our work with two globally recognized indium phosphide customers helped us to raise the bar even further on our manufacturing and business processes to be able to support the rigorous standards of some of the most prestigious companies in the world. Strong partnership lifts innovation and enables both partners to achieve more. That is why one of the most rewarding aspects of our unfolding chapter in our history is the extent to which we have been able to partner with leading customers around the world who are defining the next generation of data center connectivity. We recently signed strategic long-term supply agreements with Casella and Coherent, and this week we are very pleased to announce an agreement with Lumentum. These agreements deepen our relationship with these important customers, working shoulder to shoulder with them to help them deliver on their own vision and roadmaps. In addition, they gave us an even greater sense of conviction that our capacity build-out is mirrored and necessary. From a geographic perspective, the massive AI infrastructure build-out and the planned capacity capital spending by cloud services and AI platform providers in the U.S. is the primary driver for EML and silicon photonics-based optical transceivers as well as high-speed photodetectors. We believe that today, our material is being used in multiple U.S. hyperscalers, and we expect that end-customer use will continue to broaden. We are also seeing huge growth in China as China moves to accelerate its capability throughout the AI supply chain. Our revenue related to indium phosphide-based lasers market in China more than doubled in Q2 from the prior quarter, and we expect continued strong growth in Q3. This highlights China's increasing investment in AI infrastructure supply chain for the global market. This is a great opportunity for AXT as there is no permit required to ship our product within China. Turning to gallium arsenide: in Q2, demand for semiconductor wafers for industrial robotics and data center laser applications grew sequentially from the prior quarter. We also continue to see demand for semi-insulating wafers for wireless RF devices and believe that we have a strong opportunity for market share expansion. Finally, our raw material business continues to be highly strategic to our growth plan and also generated record revenue in Q2. As we reported last quarter, our subsidiary Jingmei is now refining high-purity indium which gives us direct control of a guaranteed supply of yet another critical material for indium phosphide substrates. We are also investing to help expand their capabilities so that when AXT's demand for poly material grows, Jingmei will continue to provide a meaningful portion of our raw material requirements. Globally, there continues to be a great awareness of the importance of our raw material supply chain, and we are decades ahead of the curve in developing our unique integrated supply chain. We will continue to invest in our portfolio as we believe it is a major competitive differentiator. In summary, we believe AXT is entering one of the most consequential chapters in our company history. The investment we are making today in capacity, in technology, and in our unique integrated supply chain position us to meet the extraordinary demand we see building across the optical and AI infrastructure markets. Our customer engagement is deepening, our visibility is improving, and our competitive differentiation is strong. While we remain disciplined and thoughtful in our execution, we are confident that the groundwork we are laying now will enable transformational growth in the years to come. With that, I turn the call back to Gary for third quarter guidance. Gary?
As of today, we have approximately $66 million in revenue that can be realized in Q3 across our substrate product lines and raw materials for which we either already have a permit to ship or for which an export permit is not required. So $66 million. We have a high degree of confidence in recognizing this revenue. We could see upside, even significant upside, to this number in Q3 should we receive permits for additional orders for which we have the inventory to support. But we do want to stress that we cannot predict the future timing of permits or success in obtaining them for any specific customer or individual order. We have delivered strong gross margin improvement over the past several quarters. Further improvement depends on a number of factors, including total revenue as it relates to the revenue mix by product, absorption of fixed costs, and our ability to continue to drive better manufacturing efficiency. With regards to OpEx, we expect that it will be approximately $10.5 million in Q3 on a non-GAAP basis and approximately $11.0 million on a GAAP basis. With these factors in mind, we believe our non-GAAP net income will be in the range of $0.30 to $0.32 and GAAP net income in the range of $0.29 to $0.31. We estimate share count for Q3 will be approximately 66.5 million shares. Okay. This concludes our prepared comments. We are glad to answer your questions now. Kenneth?
Questions and answers
Thank you so much. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press Star 1 on your telephone keypad. To withdraw your question, press Star 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Timothy Savageaux from Northland Capital Markets. Timothy, your line is open. Please go ahead.
Hey. Well, good afternoon from here at least, and wow, congrats on the results and the guide. My first question is about the comments on the call about, I guess, an increased target for indium phosphide capacity for this year and looks like, and I assume most of the growth you are guiding to in Q3 comes from the new phosphide. But I think we were looking at doubling from a $20 million-type level as the original target, maybe $35 to $40. Am I right to think the new sort of target exiting the year is something in the neighborhood of $60 million in quarterly indium phosphide capacity? And I will follow up from there.
Yeah, that is about right, Timothy. That is exactly what we are looking at here. So that is $60 million, thereabouts. Great.
Good answer. And then you are looking to double that still, I guess, exiting calendar 2027. So just confirmation on that. And then around the Lumentum deal, I wonder if you could—you know, obviously you have larger prepays and a longer term—I wonder if you could speak to maybe the overall size of that opportunity, you know, from a baseline standpoint or upside or however you want to talk about it. Thanks, and congrats again.
Thank you, Timothy. So, yeah, next year we are looking at doubling, slightly more than doubling again, to take our revenue to somewhere in the region of about $130 million a quarter exiting the year. About the Lumentum deal: clearly, we have got some prepayments on that but we are not discussing the total revenue impact of that deal at this moment.
Yeah. So let me add one point about the capacity expansion. We are planning at least to double next year, but as you know, this target changes. In fact, this year we are going to more than double, and it is because customer demand is just mounting. So we are finding whatever way to increase the capacity expansion. Although I am saying that we are planning for double next year, depending on how the business develops in the second half of the year, we could find another way to do even better than that. So that is my point: it is a moving target, but we think it is going to be more than double in 2027.
The demand is moving faster than we can move. We are doing great to move fast.
But the demand is even stronger.
Okay. Not much faster, but you guys are moving pretty fast. But okay. Thanks. Appreciate it.
Your next question comes from the line of Matthew Bryson with Wedbush Securities. Matthew, your line is open. Please go ahead.
Hi. Thanks for taking my question, and congrats on the results and guide. Just when it obviously, you are having a whole lot more success in getting permits and it seems like with the Coherent deal, you have to have certainty that you are going to get permits to ship out of China given the terms of that deal. I guess, can you talk about how the process has changed, and about how you have more confidence in getting these permits or what has changed?
Yeah. Sure. Thanks, Matthew. You know, permits always remain a bit of an issue in the back of our minds. As Gary mentioned, it is not something that we can absolutely predict—both the timing and the certainty of. But we are seeing more regularity in the process, especially in certain geographic regions. That is great news, and we are seeing increased demand in those geographic regions too. So we are focusing now even with greater intensity on capacity and allocation. Right now, the permits, as I say, are showing more regularity in certain geographic regions, and we are driving more and more permit applications through the Ministry of Commerce.
Awesome. That is really helpful. Second question, Gary: my math has gross margins staying relatively stable in Q3. Is that roughly the right way to think about things? And I guess as part of that, given how tight indium phosphide seems, is there any more room for price appreciation in our models?
Well, it is a moving target. And, of course, I know you guys are going to quote to me that I would always say you can go to 35%. But that is not management's target. Management's target is a number that begins with a 4. I am delighted that we got here as fast as we did. I think I would recommend sticking close to what we are at right now. But I have to say again, management's target is better than that. Let's see what we can do. There are a lot of positive influences right now. When you add more volume, that helps your gross margin because the fixed costs get absorbed over more units. Also, when you add more volume in a manufacturing business, you get better at it. So we are just experiencing a lot of positive influences right now to push this over 40% and stay at 45% for now. But put your seat belts on.
Well, I know I cannot help myself, but let me make a comment. Everybody knows our indium phosphide business has better margin than the other two businesses: the gallium arsenide and the joint ventures. As we grow next quarter, it is obviously that all the growth is happening in indium phosphide. So just by simple math, the gross margins could be better.
Right. Because the sales of indium phosphide are increasing and the other stuff is not increasing as fast. So we are optimistic.
But, you know, we try and be conservative on this kind of discussion.
I want to add another point as well: the market is moving to larger diameters here too. So we are seeing a migration from 2-inch to 3-inch, 3-inch to 4-inch, and of course now there is a big push towards 6-inch for the future. This gives us a great opportunity to increase our gross margins.
Let me give you another example. Because the demand is so strong, the whole indium phosphide line is fully utilized. In the past, some of the smaller diameters, let's say 2-inch, were not in favor and were not sold out, while the big demand was on 3-inch. Now because demand is so strong, customers want everything. So whatever we can produce, we can sell. That also will help us in terms of margin.
All right. Next question, please.
Answers my question. Thank you so much.
Your next question comes from the line of Richard Shannon with Craig-Hallum. Richard, your line is open. Please go ahead.
Well, hi, guys. Thanks for taking my questions, and I will add congratulations on an awesome quarter. Keep up the great work here. I guess my first question is the language you used for the backlog may have been slightly different; you used the same number of $100 million. I think you are just saying a lot more than $100 million. Wonder if you can clarify that number anymore. And then specifically comment how much of your calendar 2027 is covered by backlog?
I am going to let Timothy answer that. So go ahead, Timothy.
Yeah. I do not want to go into a lot of details about how big exactly our backlog is, but I can tell you that it is growing and it continues to grow even as we ship more material. Demand completely outpaces our ability to increase capacity. Even though we are about to increase capacity threefold this year, we simply cannot keep up with it. So backlog continues to grow beyond $100 million right now. In terms of 2027, we are covered with backlog going out into 2027. Obviously, a lot of our customers, if we could deliver the majority of that today, they would take it today. But that does cover going out to 2027. And, of course, we have these long-term supply agreements that take us out into 2027 and beyond as well. So we have a lot of next year and beyond covered with LTSAs and even in some cases backlog.
Look, I think the other answer why we are not giving out the backlog is that we are not taking orders if a customer wants to place an order and we are looking at whether we can deliver. Once we take the order, we are going to put them on the production queue. Right now it is full, so it is difficult to know how much the backlog is. In fact, if we opened up the floodgate, it would be huge. So we are not counting on that. As far as 2027 is concerned, the team is working on other long-term supply agreements, but that does not mean that 2027 is all spoken for. We are measuring how much we are expanding and how much we want to sign up for long-term supply agreements, and some of them we want to reserve for customers coming in. So orders are not the problem; mostly it is how fast we can grow.
Okay. I appreciate that perspective. More questions for me I will jump on the line here. The next one is on the new 5-inch here, and specifically, how much of that was shipped into China versus the rest of the world? How do you see that going over the next couple of years? I ask because you have signed up agreements with a Chinese laser company and also two North American-based laser companies here. While I am sure those are not the only customers you are going to have for indium phosphide, I would love to get a sense of how this ratio changes over time. What is the peak from China, and what do you see as that long-term stable share between China and the rest of the world?
That is a great question, Richard. There is certainly a lot of market opportunity in China right now. As we have said, we are tripling our capacity in 2026 and China is definitely taking some of that capacity as we move forward. What we are seeing with the permits and with the demand globally is that this is a global market. We are seeing growth across all sectors. China right now is definitely above 50% of our revenue in Q2. I would anticipate that we would see a revenue split moving forward somewhere in that 40% to 60% range as we build up both capacity and long-term supply agreements both within China and throughout the rest of the world. So I would model China as being 40% to 60% of our revenue going forward.
Okay. Thanks for that, Timothy. And last question for me is on the topic of gross margins. I know there was a previous question on this topic. I will ask it slightly differently, Gary, which is you know, we have—and I think even Morris commented today, and we have heard many times in the past—indium phosphide has a positive margin dynamic, and it is only seemingly getting better given the pricing comments. But also, we are going to see from your capacity expansions some increased depreciation costs. We would love to get a sense of from the number you just reported in the second quarter, which is utterly fantastic, how much more can it go? Can you get to a number that starts with a 5?
Can we get there? It would be a record for us, for sure. But yes, further increases in volume and improvements in productivity as well as continued favorable mix moving towards larger diameter substrates—we should definitely be targeting a number that begins with a 5. But I do not want to be overly specific yet. We will try and be as specific and accurate as we can, but it is moving pretty fast. So we want to be careful what we tell you. But yes, we are going to target something that begins with a 5.
Understood. Makes sense. And that is all the questions for me. Thank you.
Thanks. Appreciate it.
Kenneth, next. Your next question comes from the line of Charles Shi with Needham. Charles, your line is open. Please go ahead.
Hi. Good morning. I guess you guys are in China right now. So the first question I have regarding the capacity: exiting the year raising from basically $35 million per quarter to $60 million, and then next year basically raising from $70 million per quarter to $130 million per quarter—are those numbers correct? And I think previously, on the previous capacity numbers, you planned to spend, well, I am looking at my numbers, $14 million in CapEx this year, $100 million in CapEx next year. Do you have—what is the new CapEx number because it does look like the capacity growth has upsized a lot. I want to get some thoughts on CapEx. Thank you.
Thanks, Charles. So the capacity is growing faster than we thought, certainly in terms of revenue. That comes from a number of factors as well. We have been able to accelerate the actual physical capacity that we have here. We are moving to larger diameter substrates which, of course, helps the revenue. And we are seeing greater productivity. As Gary mentioned, moving to larger and larger volumes increases the productivity of the facility. We have seen this time and time again. So part of the capacity increase that we are seeing here is not just a CapEx spend but it is productivity and a product mix change. That is really allowing us to grow the revenue quicker than we anticipated. So there is a lot going on here. When you are looking at CapEx spend to get this additional capacity, there is actually not a lot of additional CapEx spend here. As I said, as we are gaining capacity through other factors rather than just hardware deployment, it means that we can gain capacity without huge additional CapEx spend on that.
Okay. So basically you sound like you are reaffirming the CapEx plan you previously communicated. Is that right?
That is correct. That is correct.
Okay. The second question again on backlog: Maurice, I understand what you said. You only want to book the order—only a booked order can be put in backlog when you can commit to ship to the customers given that you are probably still trying to catch up with the demand by increasing supply. $100 million plus backlog, but I am looking at— you are already shipping $30-plus million this quarter. It looks like implied for the September quarter you will probably be able to ship $50 million. I wonder if you can give us a little bit more. How much more than $100 million you actually can see? Because it sounds a little bit too low to me that your backlog only covers a little bit over two quarters of the next two quarters of the expected indium phosphide revenue at the implied Q3 run rate. I want to get some thoughts. What exactly is your visibility now and why do you not book more orders? We would like to see—maybe the backlog can be a little bit higher than what you just communicated. Thank you.
The backlog, as I said, we are not giving actual backlog numbers out here. It is well over $100 million. It exceeds two quarters for sure. I just do not want to give out too much information about that at this time. And the backlog is also covered with a lot of long-term supply agreements that are in place. There is a lot of commitment going out well beyond two quarters, both in terms of backlog and long-term supply agreements. So I really do not worry that this is a short-term thing. Remember, a lot of this backlog is a factor of the permits as we wait for permits, and it does not include a lot of the China business. We can turn the China business a lot quicker than we can turn the permitting business. As Gary said, permits are certainly getting freer and they are getting quicker, but it still takes time to apply for a permit. And we cannot apply for a permit without an order in place.
Let me comment on the backlog issue. When our visibility was not good, then usually it was only one quarter or maybe two quarters. But right now visibility is so good that it extends out three or four quarters, so it is not a fair comparison in a way. And the other thing is that we honestly are not taking orders indiscriminately. When a customer gives us demand, we look at what we can plan for in production capacity and talk to customers about whether they can place the order and if we have planned capacity to accommodate it. Beyond that, we are not taking orders. So the backlog could be much bigger if we took all the orders, but then we would be overcommitting. We could have $150 million backlog—that is not the same measure anymore.
Got it. So Morris, just to clarify, backlog is not that issue. You have proven that is not an issue. I have a third question which may be a technology question: you guys also have a pretty strong gallium arsenide product line, and I am sure you have heard about potential use of VCSELs for scale rather than indium phosphide for some short-reach applications. VCSELs probably have some advantages there. I wonder if you have any customer discussion around VCSELs, around maybe supplying the gallium arsenide substrates for them and how those conversations are going so far. Thank you.
Yeah. We have customers in China who are developing VCSEL solutions, and in fact we have a U.S. customer also talking to us about using our arsenide for VCSEL solutions.
Correct. We are currently a supplier of gallium arsenide substrates for VCSELs to two large data center or laser companies. We are seeing that these technologies coexist. People deploying gallium arsenide VCSELs are also very, very strongly focused on indium phosphide as well. I am seeing more focus on the indium phosphide side of the business than the VCSELs, but VCSEL technology has been out there for a long time and I do not see it going away. I see indium phosphide lasers, silicon photonics, and gallium arsenide-based VCSELs coexisting in this marketplace.
From what I understand, speed is the key and is in favor of indium phosphide. VCSELs are more difficult to reach 200G in both terms of the laser emitter as well as detectors. When you go to 200G, you need indium phosphide detectors and indium phosphide lasers work better. I am in favor of indium phosphide for sure. Also, indium phosphide gives better margins throughout the supply chain, and we are a dominant player in indium phosphide. So that is the issue.
Thank you. Appreciate the answers.
We have another question from Timothy Savageaux from Northland Capital Markets. Timothy, your line is open. Please go ahead.
Hey. Thanks for the follow-up. Wanted to stick with that one-question, one-follow-up thing. To what extent were the new deals/long-term supply agreements you have announced in recent weeks contributors either to the Q2 results or Q3 guide, or do we have a fair bit of that in front of us?
That is a great question, Timothy. The latter is the answer. We have a fair bit of that in front of us. We are supplying materials to back up those long-term supply agreements to get qualified and get ready for them. They do not move the needle too much on Q2. We are going to see a bigger impact in Q3 and then we are going to see further growth moving out through Q4 and into next year and beyond.
In the Casella deal—
That does not start until 2027, right.
But great. Great. I probably should have known that. But anyway, I appreciate that. Cheers.
There are no further questions at this time. I will now turn the call back to Leslie Green for closing remarks.
Thank you for participating in our conference call. We will be participating in the Needham Virtual Investor Conference in August and the B. Riley Securities Consumer and TMT Conference in September, and we hope to see many of you there. As always, feel free to contact us if you would like to set up a call, and we look forward to speaking with you in the near future.
This concludes today's call. Thank you for attending. We may now disconnect.