26 February 2016

AXT's Q4 revenue hit by gallium pricing, but InP annual revenue up 50%

For fourth-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 $18.1m, down 1.6% on $18.4m last quarter and 7.6% on $19.6m a year ago but slightly above the expected $17-18m. For full-year 2015 revenue was $77.5m, down 7.2% on 2014's $83.5m.

Of total Q4 revenue, 66% came from Asia Pacific, 24% from Europe, and 9% from North America. Only one customer generated more than 10% of revenue, and the top five generated 42% of total revenue (down from 45% last quarter), reflecting diversification of both products and customers.

After growing more than 50% from the prior year, InP substrates now represent AXT's single largest product category (nearly 30% of total revenue in Q4), driven mainly by demand for optoelectronic devices (specifically fiber-optic communications and telecommunications and passive optical networks). "For these InP-based devices, performance is a much larger driver than price. This contributed to a better substrate margin profile and pricing stability than we see today in gallium arsenide," says CEO Dr Morris Young.

"The most significant near-term headwind in our business is raw materials, which were down meaningfully in Q4 as a result of both price and volume decline," notes Young. In particular, gallium pricing has continued to reach historic lows (taking a very severe hit, starting in October-November) due largely to oversupply, resulting in a one-time charge at one of AXT's joint ventures to write-down inventory to market-level pricing. "At the beginning of 2015 we thought gallium prices had hit the bottom [about $200/kg], but now gallium pricing is quoted somewhere around $140/kg," adds Young. Germanium pricing has also dropped significantly in recent months, leading to AXT's germanium joint venture incurring a loss.

Gross margin has fallen from 25.4% a year ago and 25.1% last quarter to 17.1%, but this includes the write-down charge from AXT's gallium raw material subsidiary (reducing consolidated gross margin by about three percentage points). In addition, the historically low gallium pricing currently also affected gross margin on consolidated sales from the firm's gallium subsidiaries (an additional hit to consolidated gross margin of about 2.5%). The balance of the difference compared to last quarter (2.5%) is related to product mix. Despite Q4, full-year gross margin was 21.7%, up from 20.6% for 2014.

"During 2015, our semi-insulating GaAs substrate revenue reached a relatively stable level, having weathered a major technology transition in previous years," says Young. "This area of our business now requires comparatively modest ongoing investment that holds upside potential to qualify with meeting customers' demands in RF device markets," he adds.

Operating expenses have been from $5.6m a year ago and $5.3m last quarter to $4.8m in Q4, led by a reduced level of R&D spending in one of the raw material subsidiaries. Operating loss has risen from $0.7m last quarter to $1.7m, due to the impact of gallium pricing.

Compared with net income of $42,000 last quarter ($0.00 per share), net loss was $1.2m ($0.04 per share, slightly worse than the expected $0.01-0.03 per share due to the raw material write-downs). Full-year net loss was $2.2m ($0.07 per share), up from $1.4m ($0.04 per share) for 2014.

In Q4, depreciation and amortization was $1.3m. Capital expenditure (CapEx) was just $0.5m (down from $1.4m last quarter). AXT also used a small amount of cash to repurchase stock (taking the total for full-year 2015 to $2.3m). Altogether, during the quarter, cash and investments hence fell from $45.4m to $44m (down on $48.9m a year ago).

"2015 was a year of transformation for AXT as we continued to realign our business with the trends that are driving growth in compound semiconductor substrates," says Young. "This process began in earnest two years ago following the significant customer consolidation and technology transition in our industry. As we began to pivot our business in 2014, we made meaningful improvements in our cost structure and began to see a positive shift in our revenue mix," he adds.

"With our recent purchase of the production equipment for GaAs wafer processing and handling for Hitachi Metals, we believe we can improve our manufacturing capability for quality and consistency and enhance our ability to pursue growth opportunities," says Young. "With semiconducting GaAs we continue to play modestly. We are pursuing higher-end applications such as backlighting, signage and automotive; we have made a conscious decision not to participate in certain lower-end applications as a result of the serious competitive landscape and corresponding pricing environment," he adds.

"In 2015, we focused on strategic investments in our technology and manufacturing capabilities that will position AXT to benefit from the growth in InP and will improve us in driving improved consistency and efficiency across our substrate portfolio," continues Young. "We are pleased with these investments, and in the early results of our efforts," he adds.

For first-quarter 2016, AXT expects the continued weakness from near-term trends to yield flat revenue of $17.5-18.5m and a loss of $0.03-0.05 per share. "However, the longer-term shift in our business towards InP, coupled with the potential new opportunities across our portfolio, gives us confidence in our renewed growth this year," says chief financial officer Gary Fischer.

"Although raw material pricing is providing a near-term headwind, we expect to continue to see a positive shift in our revenue mix in 2016 driven by InP, providing the potential for both revenue and margin expansion," says Young. "AXT is the market leader [in InP] and we're now clearly in the early stages of increased market adoption."

"Further, we continue to focus on helping our customers optimize the benefit of indium phosphide and we are actively in development of the industry's first 6-inch InP substrates," notes Young. "We are confident that we will be able to drive continued growth in indium phosphide sales and an increasing shift in our revenue mix towards this emerging material."

See related items:

AXT's revenue falls 12% in Q3

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

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

Tags: AXT GaAs substrate InP Germanium

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