27 October 2016

AXT's revenue grows 7% in Q3, driven by stronger-than-expected demand for GaAs

For third-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 $21.9m. This is up 7% on $20.5m last quarter and up 19% on $18.4m a year ago (and above the expected $20.5-21.5m), driven by stronger-than-expected demand for gallium arsenide (GaAs).

Fiscal	Q3/2015	Q4/2015	Q1/2016	Q2/2016	Q3/2016
Revenue	$18.4m	$18.1m	$18.7m	$20.5m	$21.9m

Of total revenue, 66% came from Asia Pacific, 23% from Europe, and 11% from North America. Only one customer generated more than 10% of revenue, and the top five generated 38% of total revenue (down from 42% last quarter), reflecting the ongoing diversification of both products and customers.

"The global build out of fiber-optical connections continue to be the leading driver of our indium phosphide sales," says CEO Morris Young. "Fiber-optic technology is helping to enable the fruition of applications such as cloud computing, the Internet-of-Things and video streaming. Worldwide fiber deployment has 100 million connections in 2015 and is expected to continue to grow for the long term," he adds. However, the GPON and EPON markets in China are taking a pause to rebalance following two years of strong growth, notes Young. "This softness caused a modest decline in indium phosphide sales in Q3."

"Our raw material business remain under pricing pressure," says Young. Revenue from AXT's seven consolidated joint ventures was down $581,000. "But we are seeing price start to stabilize and in some cases improve," he notes. "Gallium price during the quarter seems to have stabilized and has ticked up a little bit, as has germanium pricing. This could lead to a more favorable pricing environment in quarters to come."

Gross margin has risen further, from 25.1% a year ago and 29.4% last quarter to 34.6% (the highest since Q1/2012). This was due to higher production volume, a favorable product mix (including InP substrate and other materials with high-end applications), and good progress in manufacturing efficiencies and yield improvements (especially in crystal growth).

Operating expenses have been cut further, from $5.3m a year ago and $5.1m last quarter to $4.9m. "Through the implementation of a number of programs, we are achieving improved deals for both ingots and wafer processing," says Young. "The benefit of these in-progress and other cost-reduction measures are becoming increasingly visible in our financial results," he adds.

Net income has recovered further, from just $42,000 ($0.00 per diluted share) a year ago and $1.2m ($0.03 per diluted share) last quarter to $2.2m ($0.07 per diluted share, above the expected $0.03-0.05 per diluted share).

Depreciation and amortization were steady at $1.2m. Capital expenditure (CapEx) was $0.5m (halved from $1m last quarter). With AXT generating positive cash flow during the quarter, cash, cash equivalents and investments rose by $2.4m, from $45m to $47.3m.

For Q4/2016, total revenue is expected to fall to $18.5-19.5m. InP revenue will rebound slightly, as increasing growth for fiber-to-the-home (FTTH) deployment and data-center connectivity will offset the continuing GPON- and EPON-related inventory adjustment in China. However, this will be outweighed by declines of $0.15m in germanium, $1m in GaAs (due mainly to temporary inventory adjustments by two major customers for semi-insulating GaAs following an unusually strong Q3, plus a slight $100,000-150,000 decline in semiconducting GaAs), and $1.5m in raw materials (following a strong Q3, which had included a sizable delivery to Japan of about 10 tons of gallium). Net income should be $2-4 per diluted share.

"In spite of these near-term factors that are expected in a down quarter in Q4, we do not see any fundamental changes in our key markets," notes chief financial officer Gary Fischer.

"In general, sales of semi-insulating GaAs has reached a relative stable level that provides a healthy base of profitable revenue," says Young. "In addition, we are working with customers on certain investigations of new applications for the material that could provide future upside potential," he adds. "In the semiconducting GaAs market, we continue to participate selectively in high-end LED applications such as backlighting, signage and automotive," continues Young. "While the LED market remains highly competitive and fragmented, we are seeing relative stable demand that we expect to continue into 2017."

"Over the long term, we are closely watching the continued market development of VCSELs for 3D sensing applications, such as gaming, mobile phones, smart TVs, high-speed communications and high-power material processing. 3D sensing requires devices with relative high-precision functionality and consistent reliability," Young notes. This translates into the need for very low defect densities, i.e. very low etch-pit density (EPD). "Our VGF [vertical gradient freeze] technology and proprietary processes allow us to offer industry-leading specifications that creates a significant competitive advantage for high-end VCSEL applications. This application could provide an attractive opportunity for our business if it is adopted into high-end smartphones, which could total 500-600 million units per year," he believes.

"We are focusing our resources on strategic product applications in indium phosphide, gallium arsenide, and germanium substrates that are showing promising market trends," Young concludes. ""InP is a growth driver for our business in fiscal year 2017 and beyond, and we expect that GaAs will continue to provide a stable revenue base with upside potential from VCSELs and other investigational applications," adds Fischer.

See related items:

AXT's Q2 revenue up 9.6%, driving higher-than-expected profit

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

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 acquires InP substrate maker Crystacomm

Tags: AXT GaAs substrate InP Germanium

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