4 May 2016

AXT's greater-than-expected growth in Q1 driven by InP

For first-quarter 2016, 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 $18.7m, down 7% on $20.1m a year ago but 3.3% up on $18.1m last quarter and above the expected $17.5-18.5m.

Fiscal	Q1/2015	Q2/2015	Q3/2015	Q4/2015	Q1/2016
Revenue	$20.1m	$21m	$18.4m	$18.1m	$18.7m

Of total revenue, 64% came from Asia Pacific, 23% from Europe, and 13% from North America. Only one customer generated more than 10% of revenue, and the top five generated 41% of total revenue (down from 45% two quarters ago), reflecting diversification of both products and customers.

Indium phosphide was again the largest product category (AXT's strongest InP revenue in recent years) - greater than semi-insulating gallium arsenide, semiconducting gallium arsenide and germanium products - contributing more than 30% of total revenue (up from under 30% last quarter).

"InP is still an emerging material - the drivers for its demand are significant and are becoming clearer as activity steadily increases," says CEO Dr Morris Young. "InP sales continued to be driven by lasers and detectors for fiber-optic communications and passive optical network applications such as EPON and GPON," says Young. "These short-haul networks are used for Internet access, voice-over-Internet protocol (VoIP), digital TV delivery in metropolitan areas, and backhaul connections for 4G cellular base-stations," he adds.

"In addition, silicon photonics continue to grow rapidly as a driver for indium phosphide. A number of leading companies including Cisco, HP, IBM and Intel are developing their technology for next-generation data-centers to improve connectivity both within and between that," says Young. "Here again, InP is a material of choice for the transmitter and receiver at each end of the data stream," he adds.

"Finally, we are seeing increasing evidence that high-performance substrates will be a key element for 5G wireless technology. In order to support ultra-high-definition and 3G video, video frequency front-ends are moving towards multi-mode, multi-band power amplifiers that can operate at significant higher frequencies. These will be challenging for silicon or even gallium arsenide. As a result, RF suppliers are actively evaluating indium phosphide for its performance capabilities in meeting the more stringent requirement of 5G wireless," continues Young. "We are now receiving request from multiple customers for several quantities of 6-inch InP substrates. InP-based derivatives for all of these applications at time specification requirements, limiting the field of competitors that can address them. As we have noted, optoelectronics devices require very low etch-pit density (EPD) material, a specification in which AXT's VGF [vertical gradient freeze] technology strongly excels," he adds.

"In addition, performance is a much larger factor than price. These contribute to a much more stable margin profile and pricing stability than we see total today in gallium arsenide," Young notes. "AXT's superior performance has allowed us to take a market-leading position and enjoy healthy growth as customer demand continues to increase," he claims.

Semi-insulating gallium arsenide revenue was down, but AXT did achieve some yield improvements in manufacturing. "This area of our business has reached a relatively stable level, having weathered a major technology transition in previous years," says Young. "For semiconducting gallium arsenide, we continue to play modestly because of the serious competitive landscape and corresponding pricing environment in the general market. However, we continue to pursue higher-end applications such as backlighting, signage and automotive, where title specification allows us to come in at better margins," he adds.

In addition, AXT is seeing increasing interest in sample wafers for vertical-cavity surface-emitting lasers (VCSELs), driven by applications such as gesture recognition and 3D sensing. "VCSELs bring together the advantage of low cost and optical efficiency within a small footprint," says Young. "Unlike other optoelectronic devices, VCSELs have highly stringent EPD requirements. We believe that the VCSEL markets could become a significant driver for semiconducting gallium arsenide, sometime next year."

For raw materials, the overall market remains challenging. Revenue fell in Q1, due largely to pricing pressures. In particular, the market for gallium has experienced the greatest decline in both sales volume and pricing in recent quarters as a result of oversupply. "However, we believe that several suppliers are now considering cutting their production in an effort to balance demand. We are hopeful that this will result in greater pricing stability in the coming quarters," says Young.  "Overall, raw material pricing remains reflective of the continued general weakness worldwide in commodities. However, these joint ventures had been a positive contributor to our business for the last 15 years, and we believe they continue to represent an important part of our value proposition and competitive differentiation," he adds.

"Q1 was a strong quarter for AXT in which we exceeded our revenue and profitability guidance, and posted a strong increase in both our gross and operating margins from the prior quarter," notes Young. "Our manufacturing team continues to work on efficiency and yield improvement, and these efforts - along with our product mix [favoring indium phosphide] - helped improve our gross margin." Gross margin was 28.1%, rebounding strongly from 17.1% last quarter (when AXT took a lower cost of market inventory write-down charge from one of its gallium raw material subsidiaries, reducing margin by about 3 percentage points). "If you look at our gross margin over the four quarters before Q4/2015, gallium write-down has been averaging close to 24% and then in Q4 it dropped," notes chief financial officer Gary Fischer. "Q1 is a good rebound, driven by more indium phosphide sales and more efficient manufacturing."

Operating expenses were $4.8m, level with last quarter but cut from $6.5m a year ago, due mainly to selling, general & administrative (SG&A) expenses falling from $5.3m to $3.4m.

Net profit was $42,000 ($0.00 per share), compared with a net loss of $1.2m ($0.04 per share) last quarter and $1m ($0.03 per share) a year ago (and better than the expected loss of $0.03-0.05 per share) due to the increased InP in the product mix, increased revenue, and improved gross margin.

Capital expenditure (CapEx) was $0.8m (up from $0.5m last quarter). During the quarter, cash and investments fell from $44m to $43.3m.

For Q2/2016, AXT expects continued growth in revenue, to $19.5-20.5m (led by InP), and between breakeven and a profit of $0.02 per share.

"The Beijing city government has announced that it will expand its offices into the area where our manufacturing facility is located. They want to upgrade this area and they're applying pressure on manufacturing companies to relocate," notes Fischer. "We're cooperating with them and have reached a verbal understanding to reduce our usage of arsenic at the current site by 31 March 2017, and we have agreed to stop production of gallium arsenide wafers at this site by 31 December 2017," he adds. "There is no similar agreement addressing InP or germanium, but internally we believe that they will insist that we also stop manufacturing InP and germanium at this location sometime in 2018. We're in the process of looking at alternative sites and looking for a plant for an orderly phased relocation," Fischer continues. "Eventually, if we do totally vacate our current site, we will probably put it up for sale."

See related items:

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

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

Tags: AXT GaAs substrate InP Germanium

Visit: www.axt.com