2 November 2015

AXT's revenue falls 12% in Q3

For third-quarter 2015, AXT Inc of Fremont, CA, USA, which makes gallium arsenide (GaAs, indium phosphide (InP) and germanium (Ge) substrates and raw materials, has reported revenue of $18.4m, down 12.4% on $21m last quarter and down 20% on $23.1m a year ago (and below the expected $19.5-20.5m). The drop in revenue is due largely to raw materials business falling by more than $1.3m from Q2, as a result of continued declines in both price and volume for the firm's raw material joint ventures.

Fiscal	Q3/2014	Q4/2014	Q1/2015	Q2/2015	Q3/2015
Revenue	$23.1m	$19.6m	$20.1m	$21m	$18.4m

Of total revenue, 10% came from North America (down from 14% last quarter), 66% from Asia Pacific (up from 59%), and 24% from Europe (down from 27%). Two customers generated more than 10% of revenue, and the top five generated about 45% of total revenue, reflecting diversification of both products and customers.

"Our business has continued to evolve as a direct reflection of the transformation in our industry," says CEO Morris Young. "We are seeing a growing shift within our revenue base towards indium phosphide, which has surpassed both semi-insulating gallium arsenide and semiconducting gallium arsenide as the single largest segment of substrates in our sales composition," he adds. Year-over-year revenue growth rate for the last two years in indium phosphide has been more than 50% per year. "This shift is significant because indium phosphide is a specialized material used in strenuous environments and requires tight specifications," says Young. "In the last two years the primary driver in the demand for indium phosphide has been optoelectronic devices for fiber-optic communications and passive optical networks. More recently, data-center connectivity is gaining momentum as the strong driver for indium phosphide demand," he adds. "The competitive landscape is limited with the number of meaningful barriers to entry. As a result, it commands a premium value and a stable pricing environment. Its growth as a percentage of revenue has a disproportionally favorable impact on our results. This was evident in Q3, as softness in other parts of our business caused us to fall short of our revenue guidance, but we outperformed our bottom-line guidance to achieve break-even profitability."

Due to the favorable product mix, gross margin was 25.1%, up from 20.9% last quarter and 23% a year ago. Despite operating expenses rising further, from $4.7m a year ago and $5.2m last quarter to $5.3m, AXT made a net profit of $42,000, compared with a net loss of $3000 last quarter (although this is still down on a net profit of $644,000 a year ago).

Depreciation and amortization was $1.4m. Capital expenditure (CapEx) was also $1.4m (down slightly on $1.5m last quarter). AXT also used $733,000 of cash to repurchase its stock (making $2.3m in total share repurchases through to the end of Q3/2015). During the quarter, cash and investments hence fell from $46.3m to $45.4m.

"As we look ahead to Q4, we expect to see continued weakness in certain areas of our business, in keeping with the near-term trends," says chief financial officer Gary Fischer.

"For semiconducting gallium arsenide, the market remains challenging," notes Young. "We continue to pursue higher-end [LED] applications such as backlighting, signage and automotive. However, we have made a conscious decision not to pursue certain lower-end applications as a result of serious competitive landscape in corresponding pricing environment. As a result, we are planning for continuous softness in this area in Q4," he adds.

Regarding raw material business, in Q4 AXT expects to see further decline. "This is a reflection of general weakness worldwide in commodities," notes Young. "Though revenues from our joint ventures have come down this year, they continue to provide us with profitable revenue and additional benefit to our vertically integrated business model," he adds.

For Q4/2015, AXT expects total revenue to fall slightly to $17-18m, and the bottom line to show a loss of $0.01-0.03 per share. "However, the longer-term shift in our business towards indium phosphide coupled with potential new opportunities across our portfolio gives us confidence in our renewed growth in the coming year," Fischer adds.

"We continue to growth our indium phosphide customer base amongst a number of customers who have recently had major wins in Taiwan and we are ramping up shipments with some of the largest indium phosphide epi customers in Europe. We are also in qualification with a major customer in Japan and we are just completing qualification with a large client in USA," says Young. Many of these customers are expanding their own capacity in anticipation of growing demand and new applications, he adds. "In total, our indium phosphide pipeline is robust and we're confident in our ability to continue to drive healthy revenue growth."

At the end of July, AXT acquired privately held firm Crystacomm Inc of Mountain View, CA, USA, which makes InP substrates using the liquid-encapsulated Czochralski (LEC) crystal growth technique, supplementing AXT's vertical gradient freeze (VGF) technique. "We are the only company to offer both VGF and LEC crystal growth technologies, which is giving us the flexibility to serve customers with varying technical requirements," says Young. The equipment is being installed in AXT's Freemont facility (where there are already staff that can operate it, so the firm is not adding to the headcount or operating expenses), and the firm is currently bringing up the crystal growth and poly-synthesis processes.

Also, at the end of October, AXT acquired automated process equipment for wax mounting/demounting, edge grinding, wafer sawing, polishing and cleaning of GaAs substrates from Japan's Hitachi Metals (which exited its compound semiconductor substrate business in April, but remains in the GaAs epiwafer business). In addition, AXT licensed associated proprietary wafer processing technology and patents to enable it to use the equipment in full production and to enhance product quality and consistency. The equipment has been uninstalled in Japan and shipped to AXT's production facility in Beijing, China, where it is being installed. SCIOCS, the related spin-off from Hitachi Metals, is assisting in the installation and optimization process. The production line is suited to 4" and 6" GaAs and InP manufacturing processes, and AXT intends to supply GaAs substrates to SCIOCS and other customers. "So, for semi-insulating GaAs, we continue to focus on developing our presence in both mobile and mobile applications," says Young. "We believe that the market is relatively stable around its current levels, having made a major transition in the past several years," he adds. " Now, we are conservative in ways that will forecast this area of our business, we're making strategic investments such as Hitachi Metals equipment purchase that we believe will position AXT to benefit from new opportunities and new applications for our products."

"We continue to actively invest in our future through focused R&D, technology M&A [mergers and acquisitions], the upgrade of our manufacturing infrastructure, and the continued build out of our leadership team," says Young. At the beginning of Q3 (in late June), former Emcore president & CEO Dr Hong Hou joined AXT as chief operating officer. "We are making the right investments in our technology, operations and management team to maximize our business opportunity," Young believes. 

See related items:

AXT acquires automated processing and cleaning equipment from Hitachi Metals

AXT's revenue grows 4.5% in Q2

AXT acquires InP substrate maker Crystacomm

AXT appoints former Emcore president & CEO as chief operating officer

AXT's revenue grows 2.5% in Q1; losses halved year-on-year

AXT's margins grow despite inventory-driven dip in revenue in Q4

AXT's revenue grows a more-than-expected 8% in Q3 as new applications emerge

Tags: AXT GaAs substrate InP Germanium

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