23 February 2017

AXT's Q4 revenue up 12% year-on-year to a higher-than-expected $20.3m

For fourth-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 down 7.3% on $21.9m last quarter to $20.3m. This included $4.3m from raw material joint ventures (down 12.2% on $4.9m last quarter) and $16m from substrate sales (down 5.9% on $17m last quarter). However, Q4 revenue is up 12% on $18.1m a year ago, and above the $18.5-19.5m guidance.

Fiscal	Q4/2015	Q1/2016	Q2/2016	Q3/2016	Q4/2016
Revenue	$18.1m	$18.7m	$20.5m	$21.9m	$20.3m

Of total revenue, North America comprised 6% (down from 11% last quarter), Asia Pacific 71% (up from 66%) and Europe 23% (level). No customer generated more than 10% of revenue (compared with one last quarter), while the top five customers generated about 35% of revenue (down from 38%), reflecting diversification of both products and customers.

After a modest decline in InP sales in Q3 (while the GPON and EPON markets in China took a pause to rebalance following two years of strong growth), InP bounced back in Q4 as AXT continues to benefit from the demand for passive optical network (PON) equipment. InP remains about 30% of total revenue, although semi-insulating and semiconducting GaAs combined is still bigger. Sales of semi-insulating GaAs showed some weakness in Q4 due to short-term events or adjustment at customers, while sales of semiconducting GaAs were generally flat on last quarter, supported largely by demand from traditional markets.

"Our positive Q4 results capped off a year of growth and diversification," says CEO Morris Young. Full-year revenue grew by 4.9% from $77.5m in 2015 to $81.3m in 2016. Specifically, substrate sales grew by 12.7% from 2015's $58.2m to $65.6m. However, revenue from raw material joint ventures fell by 18.6% from $19.3m to $15.7m. This was due mainly to gallium pricing falling by 30% in first-half 2016 (leading AXT to furlough one of its gallium factories for about six months), although it has recovered by 10-15% since bottoming in September/October. "We saw healthy demand across our substrate product portfolio, driven by a growing number of exciting technology applications," says Young.

"We continued to demonstrate improvement in our business model, achieving meaningful gross margin expansion and delivering solid profitability and positive cash flow," notes Young.

Gross margin has grown further, from 17.1% a year ago and 34.6% last quarter to 37.1% (the highest seen in many years), due to favorable product mix and good progress in manufacturing efficiency programs implemented over the last 18 months as well as yield improvements. Full-year gross margin rose from 21.7% in 2015 to 32.4% in 2016.

Operating expenses have risen only slightly, from $4.8m a year ago and $4.9m last quarter to $5.2m. Despite this, full-year operating expenses have been cut from $21.7m in 2015 to $20m in 2016.

Net profit was $2.2m ($0.06 per diluted share, exceeding the $0.02-0.04 guidance), level with $2.2m ($0.07 per diluted share) last quarter but an improvement on a loss of $1.2m ($0.04 per diluted share) a year ago. Compared with a net loss of $2.2m ($0.07 per basic share) for full-year 2015, full-year 2016 saw a net profit of $5.6m ($0.17 per diluted share).

Depreciation and amortization was steady at $1.3m. Capital expenditure (CapEx) rebounded from just $0.5m last quarter to $0.9m (amounting to less than $4m for full-year 2016, below the usual $4-6m annually). During the quarter, cash, cash equivalents and investments hence rose by $6.4m from $47.3m to $53.7m.

"Improvement in the second half of Q4 is encouraging, but a bit more time perhaps is needed to sort out the inventories," comments Young. "As indium phosphide remains as an emerging material, we expect to see some lumpiness in our sales of the InP product in any give quarter but feel confident that indium phosphide will be a primary source of growth and opportunity in our business for the foreseeable future [as we look ahead in 2017," he adds. "We also hope to see traction in the 3D sensing market later this year [boosting GaAs sales]."

For Q1/2017, AXT expects revenue of $19.5-20.5m (roughly similar to Q4) but earnings per share to be down slightly to $0.02-0.04 as gross margin falls back from the recent peak to the low 30s. Specifically, InP revenue will fall slightly, but semi-insulating GaAs sales should rebound (as customers resume ordering after rebalancing inventory) while semiconducting GaAs revenue is roughly flat. Germanium revenue is expected to rise slightly, as satellite activity is fairly strong. Raw materials revenue should be flat to down slightly.

"The industry transition from the 2.5G to 10G PONs will provide further growth opportunities in second-half 2017," believes Young.

"In addition, we're watching with interest the continued market development of VCSELs [vertical-cavity surface-emitting lasers] for 3D sensing applications such as gaming, mobile phones, smart TV's, high speed communications and high-power material processors [which requires devices with highly precise functionality and consistent reliability]," Young says. "We will see meaningful revenue traction in 3D sensing applications beginning in late 2017 and are preparing our business today for increased demand, including R&D investments, capacity planning and sales readiness," he adds. "The competitive landscape of substrate suppliers that can meet this specification is limited. Therefore we expect to be a player in this market and view this opportunity as another exciting growth driver for our industry and for our business."

See related items:

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

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 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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