1 May 2017

AXT’s Q1 revenue exceeds original guidance after faster-than-expected recovery from fire

For first-quarter 2017, 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 $20.6m, up on $20.3m last quarter and $18.7m a year ago. This is well above the revised guidance of $18-18.5m, and even slightly above the original guidance of $19.5-20.5m.

Fiscal	Q1/2016	Q2/2016	Q3/2016	Q4/2016	Q1/2017
Revenue	$18.7m	$20.5m	$21.9m	$20.3m	$20.6m

This was despite a short-circuit electrical fire at the firm’s manufacturing facility in Beijing, China on the evening of 15 March that caused no damage to InP crystal growth or wafer production, nor the 6-inch GaAs and Ge crystal growth furnaces, nor the electrical supply supporting them, but affected the electrical power supply supporting 2-inch, 3-inch and 4-inch GaAs and Ge crystal growth. In addition, the critical wastewater pipe that services wafer processing was accidentally damaged by the fire department while locating and suppressing the fire, and that part of the facility was shut down at their request.

Due to the pause in production for those products, AXT lowered its Q1 revenue guidance from $19.5-20.5m to $18-18.5m. However, a faster-than-expected recovery allowed production to be resumed on 20 March (just four days after the fire), due to several factors:
(1) the wastewater pipe was repaired much faster than expected, allowing AXT to resume wafer processing and orders shipments after just four days (critical to Q1 backlog);
(2) AXT’s custom-designed furnaces enabled it to rotate key furnace hardware between crystal growth diameters, allowing some 6-inch furnace capacity to be used for 2-, 3- and 4-inch GaAs and Ge crystal growth production;
(3) AXT had sufficient redundancy in its furnaces to relocate some within the plant to an area designated for crystal growth expansion and begin bringing them back online in their new location (AXT expects to be back to full production during Q2/2017).

“Through the adaptability of our equipment and facility and a reserve of stage inventory of smaller-diameter crystalline ingots that we quickly moved to wafer processing, we were able to mitigate the effects of the fire on our production,” notes chief financial officer Gary Fischer. “Throughout the process, our primary focus was on supporting the needs of our customers without interruption,” he adds. “We succeeded in fulfilling all customer orders.”

In Q1, substrate revenue was $16.6m (80.6% of sales), up on $16m last quarter. Revenue from raw material joint ventures was $4m (19.4% of sales), down on $4.3m last quarter.

Despite being down slightly on last quarter, InP sales were again strong. The EPON and GPON passive optical network market (particularly in China) has historically been the key driver of InP demand in application such as fiber-to-the-home and -office. “In the last four quarters [especially second-half 2016], there was a slowdown in purchasing from carriers as well as inventory buildup in the supply chain that constrained market growth,” says CEO Morris Young. “Despite some recent mixed signals in the news, we have been encouraged by indications from our customers that suggest improved conditions in key regions,” he adds. In addition, the silicon photonics sector has grown and now accounts for 20-25% of AXT’s InP revenue (compared with a negligible amount just two years ago), reckons Fischer.

GaAs sales were up substantially in Q1. There was particular strength in wireless applications, where demand has stabilized in the wake of the incursion of silicon-on-insulator (SOI) technology into the market. “Certain applications remain best suited for GaAs and are likely to remain so for the foreseeable future,” says Young. “Semiconducting GaAs demand was also a bit stronger than expected, with revenue primarily coming from our traditional markets,” he adds.

Ge substrate sales were roughly flat, but still reflect an improvement in the worldwide satellite market, particularly in China. “Remote sensing, communications and positioning and navigation remains the predominant applications for certain regions like China,” notes Young.

Of total revenue, Asia-Pacific comprised 63% (down from 71% last quarter), while North America comprised 10% (up from 6%) and Europe 27% (up from 23%). One customer generated more than 10% of revenue, while the top five customers generated about 35% of revenue, again reflecting diversification of both products and customers.

Although still up on 28.1% a year ago, gross margin fell more than expected, from 37.1% last quarter (which was particularly strong as a result of yield improvements and other efficiencies) to 30.5% in Q1, due partly to a less favorable product mix and foreign exchange rates but also through prioritizing customer requirements over production efficiency while recovering from the fire.

Operating expenses fell $5.2m last quarter to $4.9m. Net income was $0.67m ($0.02 per diluted share), down from $2.2m ($0.06 per diluted share) last quarter but up from just $42,000 (breakeven, $0.00 per diluted share) a year ago.

Depreciation and amortization was $1.1m (down from $1.3m last quarter). Capital expenditure (CapEx) has been cut from $0.9m to $0.7m.

During the quarter, cash, cash equivalents and investments rose by $32.9m from $53.7m to $86.8m. However, this was mainly because on 7 March AXT closed a secondary public offering of 5.3 million shares of common stock (including an overallotment option of 692,307 shares) at a price of $6.50 per share. After deducting underwriting fees and offering expenses, net proceeds were $32.3m.

AXT expects to use the proceeds for general purposes, including capital for expanding operations to meet the requirements of business opportunities across its portfolio, as well as the relocation of its GaAs substrate production line to a new site (the location of which will be decided in the next few weeks), which will occur in stages over the next two years (in response to the China Central Government’s re-development plan for the area where AXT’s existing GaAs manufacturing facility is located).

For second-quarter 2017, AXT forecasts quarter-to-quarter revenue growth of about 9% to $22-23m (including a record quarter for InP). Gross margin is expected to recover (with the longer-term goal being at or above 35%, driven mainly by growth in InP). Net income should rebound to $0.04-0.06 per share.

“We are seeing encouraging progress in the adoption of several emerging technologies and are continuing to invest in our product development, production capacity, and customer engagement and support capabilities in order to position ourselves for coming business opportunities,” says Young.

“Ge substrate sales continue to provide steady profitable revenue, and strengthening market conditions could provide additional opportunity over the coming years,” he adds.

“The 3D sensing market can provide a new growth opportunity for high-end substrate manufacture [using GaAs-based vertical-cavity surface-emitting lasers], should the technology enjoy more widespread adoption into a variety of products,” says Young. “In mobile phones the technology is likely to be used for augmented reality applications by enhancing camera capability to enable facial recognition, guest data and greater precision and object replacement. Gaming and facial recognition for security are examples of two early applications,” he adds. “The technology also has applications outside of the mobile in smart TV, automobiles, industrial and medical devices and gaming consoles, among others. The strict requirement of 3D sensing are likely to provide a strong barrier to entry to new players in the market. Today, only three competitors including AXT are able to provide low-EPD [etch pit density] substrates in sufficient volume for production,” reckons Young.

“2017 will likely be an important year for AXT, and I believe we are taking the correct steps to ready our business for our next phase of growth,” Young concludes.

See related items:

AXT resumes substrate production at Beijing manufacturing facility

AXT prices public offering to raise $27.7m

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

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 

Tags: AXT GaAs substrate InP Germanium

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