AXT Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 7 speakers on the call.

Operator

Good afternoon, everyone, and welcome to AXT's Second Quarter 2023 Financial Conference Call. Leading the call today is Doctor. Morris Young, Chief Executive Officer and Gary Fisher, Chief Financial Officer. My name is Jessica, and I will be your operator today. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Speaker 1

Thank you, Jessica, 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 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 the 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 and 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-nineteen and other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations in China, 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.

Speaker 1

In addition to the 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 ataxt.com through August 3, 2024. Also before we begin, I want to note that shortly Following the close of market today, we issued a press release reporting financial results for the Q2 of 2023. This information is available on the Investor Relations portion of our website ataxt.com.

Speaker 1

I would now like to turn the call over to Gary Fischer for a review of our Q2 2023 results. Jerry?

Speaker 2

Thank you, Leslie, and good afternoon to everyone. Revenue for the Q2 of 2023 was $18,600,000 down from $19,400,000 in the Q1 of 2023 and down from $39,500,000 in the Q2 of 2022. To break down our revenue in Q2 by product category, Indium phosphide came in at $4,600,000 reflecting the expected market softening, particularly in data center, consumer and telecommunications infrastructure. Gallium arsenide was $5,400,000 reflecting a modest improvement across a number of applications, particularly in China. Germanium substrates were $1,000,000 Finally, revenue from our 2 consolidated raw material joint venture companies in Q2 with $7,600,000 which is up from the prior quarter.

Speaker 2

In the Q2 of 2023, revenue from Asia Pacific was 75%, Europe was 16% and North America was 9%. The top five customers generated approximately 24% of total revenue and no customers over the 10% level. Non GAAP gross margin in the 2nd quarter was 9.8% compared with 26.9 percent in Q1 and 39.4% in Q2 of 2022. For those who would prefer to track results on a GAAP basis, Gross margin in the 2nd quarter was 9.2% compared with 26.3% in Q1 of 2023 and 39.1% in Q2 of 2022. There are 3 key drivers affecting the gross margin.

Speaker 2

1 is total volume. Last year's Q2 revenue was 39,500,000 The second key driver is mix. Last year's Q2 indium phosphide was $15,700,000 This recent quarter, it was $4,600,000 which we believe is the bottom of the decline by the way. The 3rd key driver was that our raw material business had lower gross margins due to the fact that they were working through higher priced inventory in Q2. This was especially impactful because raw material sales made up more than 40% of our total revenue.

Speaker 2

As we look ahead to the coming quarters, we believe we will see improvement in our gross margin as a result of several factors. In the near term, we expect to see improvement in the gross margin contribution from our raw material joint ventures as they have worked through much of their higher priced inventory. We're also pleased to report that we expect Genmai to begin production in Q3 on our new gallium arsenide recycling program, which like our indium phosphide recycling program, should have a positive impact on gross margin. Further, we believe that indium phosphide revenues have bottomed out and should begin to recover over the coming quarters. Beyond the near term, we remain confident that we can get back to the mid-thirty percent range as the environment strengthens through higher overall volume, a recovery in indium phosphide mix and the benefits of our recycling programs along with continued efficiency improvements throughout the business.

Speaker 2

Moving to operating expense. With reduction in overall revenue, we have continued to take steps To reduce our operating expenses to align with the current environment, total non GAAP operating expense in Q2 was only 7,800,000 This compares with $8,700,000 in Q1 of 2023 and with $9,100,000 in Q2 of 2022. On a GAAP basis, total operating expense in Q2 was $8,600,000 down from $9,500,000 in Q1. For comparison, total GAAP operating expense was $10,100,000 in Q2 of 2022. Our non GAAP operating income for the Q2 of 2023 was a loss of $5,900,000 compared with a non GAAP operating loss in Q1 of 3,500,000 and a non GAAP operating profit of $6,400,000 in Q2 of 2022.

Speaker 2

For reference, our GAAP operating line for the Q2 of 2023 was a loss of $6,800,000 compared with an operating loss of $4,400,000 in Q1 of 2023 and an operating profit of 5,300,000 in Q2 of 2022. Non operating other income and expense and other The items below the operating line for the Q2 of 2023 was a net gain of $1,800,000 The details can be seen in the P and L included in our press release today. For Q2 2023, we had a non GAAP net loss of $4,200,000 or 0 point $2,400,000 or $0.06 per share in the Q1 of 2023. Non GAAP net income in Q2 of 2022 was $6,700,000 profit or $0.16 per share. On a GAAP basis, net loss in Q2 was 5.1 or $0.12 per share.

Speaker 2

By comparison, net loss was $3,300,000 or 0 point 0 $8 per share in the Q1 and GAAP net income in Q2 of last The weighted average basic shares outstanding in Q2 of 2023 was 42,600,000. Now let's look at the balance sheet, which favored the trends were favorable in several areas. Cash and cash equivalents and investments were were $49,600,000 as of June 30. By comparison at March, it was $53,600,000 The reduction in cash was primarily due to a repayment of a bank loan totaling $7,200,000 This was offset by favorable reduction in our inventory at $4,600,000 As such, several key working capital items trended favorable in Q2. Appreciation and amortization in the Q2 was $1,800,000 and CapEx was $750,000 Our stock comp was 900 was 900,000 As I mentioned, net inventory came down by $4,600,000 to $87,100,000 at June 30.

Speaker 2

44% of the inventory is raw materials and WIP was 52%. Finished goods makes up approximately only 4% of inventory. We continue to do well on recycling of indium phosphide and believe that this will be an important cost advantage for us as the market recovers. Okay. This concludes the discussion of our quarterly financial results.

Speaker 2

Let me turn to our plan to list our subsidiary Tongmei in China on the STAR market in Shanghai. We are making progress on the approval process with the China Securities Regulatory Commission, known as the CSRC. Shortly after Chinese New Year, we were asked to address 2 primary issues and we believe or close to a resolution with them. We remain optimistic that we will get CSRC approval in the coming months. We are excited to move into the next phase of the IPO process and believe that Tong Mei is an excellent candidate for this listing.

Speaker 2

With that, I'll now turn the call over to Doctor. Morris Young for a review of our business and markets. Morris?

Speaker 3

Thank you, Gary. Before I go to a review of our business, I wanted to give you an update China's recent export control regulations. As noted in our July 3 press release, The regulations pertain to contain material that are exported out of China. They do not impact export of indium phosphide products or sales of any products to our customers in China. Since the announcement of the regulations, Tongmei, our subsidiary in China, has moved quickly to prepare permit applications on behalf of customers who may be impacted.

Speaker 3

The permit process opened for our petitions on August 1, We have not been given a timeframe for the expected length of the permitting process, but we are hopeful that we can resolve it quickly. We have been in close contact with our customers through this time and are working with them to minimize any disruption. I'll turn into our business. As expected, our indium phosphide business reached what we believe is the bottom, with consumer and data center applications showing the greatest decline. In consumer, will be selling into 2 applications, one of which we continue to ship into.

Speaker 3

The second, a mobile device application is not expected to be designed into the next generation platform. However, we believe that these applications validated our indium phosphide as a material of strategic importance in consumer products and validated AXT as a world class supplier to Tier 1 Companies. We also believe that there is a significant development work underway for a number of consumer related devices across multiple customers for use in case of retina tracking, health monitoring, LiDAR and more. With our track record of being the dominant commercial supplier for consumer product applications, we are well positioned for current and emerging applications. Turning to data center applications.

Speaker 3

In first half of twenty twenty three, We saw considerable inventory digestion and believe that it is still ongoing. However, We look for if we look beyond the immediate environment, we believe that indium phosphide will play an important role in increasing data throughput and enabling the widespread adoption of AI. Optical interconnects and technologies such as co packaged optics powered by indium phosphide represent a game changing approach to meet involving demand for artificial intelligence workloads. For integrating optical interconnects directly into the processes or switch packages, co packaged optics, minimize latency, increased bandwidth and reduced power consumption and enhancing the overall performance of the data center network. As a result, we believe that AI will drive strong industry wide growth for indium phosphide, likely ramping in 2024 and beyond.

Speaker 3

Further, with our proven performance in optical devices for the data center. We believe we're in an excellent position to benefit from this growth. In telecommunications applications, including passive optical networks or PON, demand appears to have stabilized around the current level. We're encouraged to see some improvement in China and if China moves forward with a national stimulus program As has been discussed, it will likely provide a catalyst for an upgrade cycle in the country's telecommunication infrastructure in 2024 and beyond. In Gallium arsenide, we saw continued modest improvement in Q2 As key applications such as high power lasers and IoT devices continue their recovery, particularly in China.

Speaker 3

As you may recall, gallium arsenide was the first of our material to experience the micro downturn beginning in Q3 of last year. We're also pleased to report that we're making significant Progress with our 8 inches gallium arsenide development program for which MicroLED will likely to be the first application. We believe that the performance of our material is very competitive in the market and that we will do well in the formal qualification That is expected to begin in the second half of this year. We continue to innovate in our crystal growth process to deliver higher and more consistent yield and we are excited to apply these learnings to our 6 inches diameter products. Turning to our raw material business.

Speaker 3

Sales increased in the quarter with both increased demand and rising prices. Since relocating to our Cajun campus, both supply chain companies have been able to increase capacity to meet demand. Regarding the impact of our export license, Jinmei exported outside of China represented only a small portion of their sales in Q2, less than 2%. So we do not expect a meaningful direct impact to our revenue from the new regulations. As we move forward, We will have a better understanding of what the direct impact may be, if any.

Speaker 3

As Gary mentioned, We're pleased to report that our gallium arsenide recycling program will move into production in Q3. This will allow us to drive gross margin improvements and support our ongoing ESG efforts. In closing, Though the micro environment will continue to impact growth near term, the trend that we Have been driven our revenue and customer expansion remain very much impact. We continue to excel in our technical capabilities and we are ready our business to support new applications in AI and consumer products that are likely to drive future growth. Further, we continue to work hard on improving our efficiency and we are focusing on accelerating our return to profitability.

Speaker 3

I would now turn the call back to Gary for our Q3 guidance.

Speaker 2

Gary? Thank you, Morris. We expect Q3 revenue to be between $16,500,000 $19,500,000 product mix is likely to include growth in gallium arsenide substrates, but continued weakness in indium phosphide. We expect our non GAAP net loss will be in the range of $0.11 to $0.13 and our GAAP net loss will be in the range of $0.12 to $0.15 Share count will be approximately 42,700,000 shares. This concludes our prepared comments.

Speaker 2

Morris and I would be glad to answer your questions now. Jessica, operator?

Operator

Great. Thank you. And we will pause for just a moment to compile the Q and A roster. Our first question comes from the line of Richard Shannon with Craig Hallum. Richard, your line is open.

Speaker 4

Great. Thanks, Morris and Gary for taking my questions. I guess the first big picture obvious question here is trying to understand your guidance in the context of the export licenses. I think you said you've starting to apply, but haven't been awarded yet. And so I'm wondering if you're baking in or you expect any, or I guess, explicitly taking out any upside or further sales from the rest of the quarter into this guidance or just kind Give us some guidance here on how you're thinking about that and constructing that, please.

Speaker 3

Sure. I think the first reaction regards We started to apply opportunities actually on August 1, which is 2 days ago because China is one day ahead of us. And we got a fairly quick response, but we still got more questions to be answered. So we don't know how long the actual processing should be. So the lower number range assumes that we cannot do any export shipping for the month of August September.

Speaker 3

And the higher number means we can do some shipping in September, the last month of this quarter. That's why the range is a little large for this quarter.

Speaker 4

Right. Okay. Well, that certainly makes sense. Maybe just looking at other elements of the guidance here, I think you said gallium arsenide is Looks to be improving in indium phosphide weak. I'm not sure if that means it's going to be flat or slightly down.

Speaker 4

And just want to also in indium phosphide, I think you declared it to be the bottom. I'm Assuming that would be in the Q3 then. So if you can delineate that, then probably a couple of follow ups after that.

Speaker 3

Yes, I think you're right. Because I think as we said, we noticed gallium arsenide was the first product to go into a downturn and indium phosphide Actually still had a pretty good shipment even in the Q1 of this year and it started to decline about 6 months ago. So we expect that to continue a little bit more. But gallium arsenide, we actually already seen 2 quarters of improvement, although very, very slight, we hope it will start to accelerate

Speaker 4

Okay. And I guess maybe just on the topic of indium phosphide bottoming out, I guess want to get your sense of where that confidence comes from and you're expecting any sort of meaningful bounce off the bottom or you just think it's not going to go any lower?

Speaker 3

Well, because we still have one more quarter to go. So I don't know whether it's going To have a strong bounce or not, but if you listen to the customers, they are not coming back with very large Order request at this point yet, but we think some of these especially data center customers, Their product shipment is almost like only 25% of what we did last year. So we expect that to bounce back towards the Q4 and that should be a meaningful bounce. And of course, I think the pounds market in China, I I think if there's any stimulus package working to given China's economy is very depressed. So if there is any stimulus package towards infrastructure improvement, that should go into Some of the optical network improvement in China.

Speaker 4

Okay. Fair enough. Let me ask some more I'll jump out of the line and that really goes to the spending here, specifically in the OpEx that Gary mentioned. And it's clear to see a fairly good cut from the 1st quarter, which is great to see. Wondering if to what degree these are sustainable and structural versus one time in nature?

Speaker 4

And then how do we think about going forward in spiscally in the 3rd quarter?

Speaker 2

Well, I think it might tick up a little bit in the next quarter, dollars 100 or $200,000 But in general, I think it's going to be in this neighborhood through December 31. We haven't done a grounds up Going forward after that yet. But so I think flat or up a little bit, but I'm very encouraged. It's just I think the team's really pulled together. It's a good illustration of How leadership affects company culture.

Speaker 2

And Morris is back from China now, but he's been in China for a number of months. And it's easy to make the team there and the team here is responsive to leadership. So We put the word out that we're tightening up and it's helping. So it's a great illustration of company culture stuff. Let me add one more point.

Speaker 2

I think

Speaker 3

we are Trying to make ourselves ready for the AIM program, although the official ramp In production probably comes in the Q4 of 2024. But In preparation for the official ramp, we got to make some still a few equipment purchase to make it ready for because once we got qualified, that process will be frozen and we'll be ready ourselves for the ramp. So We need to spend a little bit more money for the microLED program.

Speaker 4

Okay. I guess I lied here and I said when I said I was going to be done here. Since you were brought the topic of MicroLED here, I Didn't want to hit on this one here. So it sounds like you're going through a call process here in the second half and you They have a very specific timeframe of ramping in the Q4 of next year. So I guess, want to get a sense of where that specificity comes from and Any sense of scale of this when this can start when it does start to ramp up?

Speaker 3

Yes. Although I think I'm happy to see that finally MicroLED is Confirmed because I think we including myself and a number of analysts really believe there's a lot of who is ahead of MicroLED, but I think the customers are showing confidence and they're moving ahead. And then we have A scheduled qualification going and we expect it to be finished before the end of the year. And we believe that Our position is pretty good on it. As far as the ramp into production is concerned, we do have some number from customers.

Speaker 3

I would say It's about $4,000,000 to $5,000,000 next year and could double that by 2025, yes.

Speaker 4

Although Doctor. Thor, I think

Speaker 3

What?

Speaker 4

I didn't mean to interrupt, Morris. Please continue.

Speaker 3

Yes. That's assuming that if we can get 50% of the market. Okay.

Speaker 4

Okay, excellent. That's great detail. I will jump at the line. Thank you.

Speaker 2

Thanks, Richard.

Operator

Your next question comes from the line of Charles Shi with Needham. Charles, you may go ahead.

Speaker 5

Hi, Morris, Gary. Just the first question, when After I mean, over the past 2, 3 years, whenever the U. S. Government puts on export restrictions on China, the companies got impacted, actually saw a pop in the near term to the revenue numbers, but apparently we're not seeing you're going to have a pop. I was kind of curious why is that the case because I would have thought ahead of August 1 deadline, Some of your overseas customers outside China may probably wanted to accelerate some shipment, especially given that you have relatively high inventory can turn things Very quickly, why we not seeing that pop?

Speaker 5

That's my first question.

Speaker 3

Well, we did. We have a bit increased shipment in July. But there are 2 restrictions on that. One is that the order came in fairly late. We got the notice in July 3 and even we start cranking out a lot of Production is still limited on how much we can actually produce in the month of July.

Speaker 3

And the second is that although The official restriction come in July not until August 1, but China Custom actually put Sort of the delay tactics on most of the shipment in July already. Okay. We do have, I would say, a good uptick on the shipment in July and that sort of alleviated some of the missing shipment revenue we can recognize in, let's say, August and part of the September. That's why it's a flat quarter. If we're missing out 2 quarter 2 months of the quarter, Then you would expect the revenue to be down substantially, but it's not.

Speaker 3

So it's a fact of we overshipped some in July. Another factor, Charles, is that several customers outside of China

Speaker 2

Do operate under a consigned inventory program where we just to explain people that may not be familiar with the concept, but we ship to them, But we continue to own the inventory on our books until they pull it. And so In a couple of cases, they've got enough to stay in full production with their schedule for August September, Even if we don't ship to them in August September. So now they could have an issue in October, November if we're not shipping by then, but by then we think we will be shipping.

Speaker 3

Charles, you didn't ask this question, but let me try to explain some of the dynamics in this restriction Asking for applications for permit to export. As far as we're concerned, we are substrate maker. So it's easier, I believe, for us to identify the specific application and specific customer need, and we believe it's more transparent. Whereas our competitor in making gallium arsenide substrates, they need the raw material of gallium, which is a bit more difficult because then they need to explain to who their ultimate customer is and in what portion of That shipment of Gallium to those customers are, which I believe I think the worst case scenario, we would have been even in terms of comparing to our competitors. But if there's any tilt towards Caution in terms of China's restriction in supplying gallium to the world.

Speaker 3

Then I think we may gain some advantage of shipping more because our permitting process It's probably more clear and easier to get than our competition. That's the way I analyze the situation.

Speaker 5

Got it, Morris. Actually, that was my second question, but you already answered it. Thank you very much.

Speaker 2

Hi, Charles.

Operator

Your next question comes from the line of Matt Bryson with Wedbush. Matt, go ahead.

Speaker 6

Thanks for taking my questions. First one is just within the enfosified Kind of normalized, it seems like normalized revenue run rate before COVID, before you added those consumer applications was Somewhere between $9,000,000 $10,000,000 per quarter. I guess now Do you have a feel for what normalized revenues might look like when inventories get worked down?

Speaker 3

You put the number right there. I think it's going to be 9010. I think that normalized run number I would expect. Without the increased demand, which I do believe is going to come once The first line of increased demand is AI. You need more calculation and more processing, but Eventually, the data has to be fed in and taken out.

Speaker 3

And I believe that's the 2nd wave that should increase the device by demand for data center and telecommunications.

Speaker 6

And I know you don't have a ton of visibility into Kind of how much inventory is beyond you, but any idea at all that you can give us in terms of What inning we're in and seeing that inventory get worked down and in terms of Those revenues getting back to normalized levels?

Speaker 3

I think I will put it in the Q1 of next year because I think You would say, it normally takes about a year to digest all the inventories. And we did check with the Customers, I mean, they're still saying Q3 is still not good. But Q4, we really don't have much visibility yet. But I'm quite sure our customers are happy with us. I mean, they just got inventory in their hand.

Speaker 3

So they need to work that down. And also during a more recessionary kind of period, everybody wants to control their inventory, including ourselves. We want to work down Our inventory. So we got customers and we got customers, customer, everybody wants to work on their inventory. And we are on the bottom of the totem pole.

Speaker 3

So I think the inventory probably start to hit us more than normal. But I think once they come back, then they should

Speaker 2

come to us too. From a bigger picture go ahead, Matt.

Speaker 6

No, sorry, Gary. After you.

Speaker 2

I was going to say from a big picture point of view, one of the unexpected consequences of COVID Was that there was a lot of supply chain disruptions in 2021. And so a lot of companies, including us in 2022, Bought instead of just in time, we bought just in case. So the overhang is probably more than a normal cyclical thing. It was probably accentuated to be larger than normal because of that. But it's going to work through and we're seeing it on our own balance sheet and We're in good communication with the customer, so it's just going to take a bit more time.

Speaker 6

Yes. No, understood there. I guess For you, Gary, in terms of getting back to those mid-thirty percent type gross margin levels, Is there a certain revenue number that we should be thinking about?

Speaker 2

Well, we probably have to be Close to or above $28,000,000 to $32,000,000 somewhere in that range. But the volume is You're asking correctly, Mac, and you know I mean, I know you know this, but the volume is a critical factor. But An equally strong variable is the mix. So if the mix is heavily weighted in one direction, meaning probably indium phosphide, then Somewhere maybe $28,000,000 $29,000,000 should be fine. But if it's weak, then I got to be $32,000,000 $33,000,000 So There's somewhere in there, but from a again, what I would say is we're going there.

Speaker 2

There's no doubt in our mind. And There's some stuff that Morris has been working on while he's in China in the supply chain system and Some things that we've done that's going to contribute. The whole recycling program is pretty new. It's strong with indium phosphide, but now we're just on the threshold of going with gallium arsenide. If that goes the way Morris thinks it's going to go, that's So we're very optimistic about some of this stuff.

Speaker 2

We haven't been sitting around sleeping during the slowdown. We've been working hard.

Speaker 6

No, completely understood. I guess that's my last question is that when you're thinking about those mid-30s levels, does that assume that the recycling program in gallium arsenide is successful? Cycling program in gallium arsenide is successful, as the one in indium phosphide, or is that Offer some potential that you can again get up into the high 30s 40% range. I guess, do you need something else there other than just to lift volumes, Get mix back to normal.

Speaker 3

Yes. I think we probably counted that Recycling program in there. We do have quite a few of this program we assume and we've been working on it for almost Last year, year and a half. So I think there's no question in my mind those will work, but I think we did count it. We cannot have it's factored in.

Speaker 3

Yes.

Speaker 2

But we're excited about it. So

Speaker 6

Okay. Understood. Thank you so much for the answers.

Speaker 2

Thanks, Matt.

Speaker 3

Yes. Good luck to you.

Operator

Your next question comes from the line of Richard Shannon with Craig Hallum. Richard, go ahead.

Speaker 4

Great. Thank you. A few follow-up questions here. I think I'll throw one the obligatory one out here on the STAR listing process. I think your prepared remarks are Related to a couple of comments you're still responding to.

Speaker 4

I wonder if you can tell us the nature of those comments and How fast do you think those will be or kind of completed? And then any other steps? I think late last year you thought it would be Completed early this year and we're obviously quite a bit past that point. So I'm sure you feel a little snake bitten about trying to predict things too closely, but I want to get your sense of, as an example, do you expect to be done this year or not necessarily?

Speaker 3

Yes. I don't want to overpromise and deliver. I think that's what we're assuming. And because this is a process which is now we're not very familiar with it And we really rely heavily on our bankers in China. And we were surprised to see that these two A little question took so long to get the authorities to be comfortable with our answers.

Speaker 3

We think we provided good answers. But as I've been telling my Board that I expect it next week, but don't count on it. But we do we only have one question to be answered. I think if they're comfortable with it, And then we should go have it go through. Yes.

Speaker 4

Okay. Fair enough. And a couple more quick ones.

Speaker 3

Yes. So to answer your question is, it could be as quick as next month. But yes, I think so. And if not, definitely towards the end of the quarter.

Speaker 4

Okay. That was more specific than I was But good to hear. Let's hear a couple more questions. Gary, on cash flows, obviously absent any Debt dynamics that you as what you had in the Q2 here, but what are you expecting for cash flow here positive or negative? Obviously, net income will be negative, but I think you've been trying to Generate cash from inventory, want to get your sense of what the second half of the year looks like.

Speaker 2

Well, yes, we know we start with P and L loss on a non GAAP basis, take out some of the we take out all the stock comp, Take out the depreciation on a cash basis is less, which is what happened this quarter, by the way, so for Q2. So I think we will still be able to bring inventory down and work on some of the other working capital accounts on the balance sheet. So if it's a negative cash flow, it will be hopefully similar to what we had this recent quarter. By the way, take note that if we hadn't paid that bank loan off, which was $7,200,000 cash would have gone up, not down. So because it only went down by $3,600,000 $3,900,000 So I think we're in that, what I would call, noise level.

Speaker 2

And I think we can manage it okay. So and then as Morris pointed out, we expect that The cash balance is going to change significantly at some point, hopefully this quarter.

Speaker 4

Is that a reference to the star listing, Gary?

Speaker 2

A vague and veiled blessing, yes, reference though.

Speaker 4

Okay. That's what I figured. Last quick question for me. I'll jump out of the line again. Kind of following up one of the immediately prior questions Here regarding gross margins and getting to that 35% level of revenues required for that, which I think you said was centered around $30,000,000 a quarter.

Speaker 4

What do you think your OpEx would be in that case? I mean, you obviously had a nice drop down here, you talked about tightening expenses. Are you going to continue to Keep those tightened down even as you approach that revenue level or open up the spigot or how should we think about that?

Speaker 2

Well, We're going to have to open it up some, so we shouldn't pretend that we can magically flat. But we're looking at On a GAAP basis, what it looks like for next year and we'll probably get into the Maybe $9,300,000 to $9,600,000 a quarter by the middle of next year. I'm hoping we don't reach 10, And I think that we need to try and keep a lid on things to keep it at or below $10,000,000 a quarter by the end of next year.

Speaker 4

Okay, perfect. That is all for me guys. Thank you.

Speaker 2

Thanks, Richard.

Operator

Thank you for your questions. At this time, I will turn the call back over to Doctor. Morris Young, CEO for closing remarks.

Speaker 3

Thank you for participating in our conference call. This quarter, we will be presenting at Needham Virtual Semiconductor Conference, the Jefferies Semiconductor Communication Technology Summit and the Northland Capital Market Chinno Investor Conference. As always, please feel free to contact me, Gary Fisher or Leslie Green directly. If you would like to set up a call, we look forward to speaking with you in the near future.

Operator

Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.

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