2 August 2018

AXT’s revenue grows 11% in Q2

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For second-quarter 2018, AXT Inc of Fremont, CA, USA – which makes gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge) substrates and raw materials in Beijing, China – has reported revenue of $27.1m, up 11.1% on $24.4m last quarter and up 15% on $23.6m a year ago (and exceeding the $25.5-26.5m guidance), reflecting “solid demand in each of our primary product categories,” says CEO Morris Young.

Fiscal	Q2/2017	Q3/2017	Q4/2017	Q1/2018	Q2/2018
Revenue	$23.6m	$28.2m	$26.3m	$24.4m	$27.1m

Of total revenue, raw material joint ventures (namely the three companies consolidated into AXT’s results) contributed $5.5m, up 7.8% on $5.1m last quarter. “We have seen an uptick in the price of raw materials,” notes Young. For example, gallium has risen from last year’s all-time low of $110-120/kg to about $200/kg (although still down on 2011’s $800-900/kg). “This has enabled a financial improvement in some of the [seven] raw material companies in which we have partial ownership [non-consolidated, accounted for using the equity method, and hence contributing to improved profitability],” he adds. “Q2 was the first time that these seven companies have previously presented a collective gain to our financial statement in ten quarters. Each provides strategic advantage for our business.”

Substrate sales contributed $21.6m, up 11.3% on $19.4m last quarter.

“Broadly, the demand environment for our wafers remains strong, and we continue to focus on producing high-quality products that meet rigorous application requirements, as well as achieving greater efficiency in our manufacturing process,” says Young.

In particular, revenue from both semi-insulating and semiconducting GaAs grew, due mainly to a wide variety of applications showing incremental growth. “Gallium arsenide appears to be experiencing a resurgence of demand with new applications and advancement in existing applications driving its use,” notes Young. “The largest contributor to all revenue continued to be power amplifiers and Wi-Fi chips for wireless devices, LED lighting, signage and display and infrared applications. But we have seen smaller but meaningful demand from many other applications including solar panels, surveillance cameras, biometric centers, horticultural lighting and more,” he adds.

Germanium substrate revenue was again strong (growing by more than 70% since Q1/2017) as the satellite industry continue its positive trend.

InP revenue was a record. “Demand was particularly strong in China, driven by increasing number of broadband subscribers,” says Young. “The passive optical network (PON) market was really strong in the first quarter and second quarter, but towards the end of the second quarter the PON market started to turn south, since customers have built some inventory,” he adds.

Of total revenue, 67% came from Asia Pacific, 8% from North America and 25% from Europe. No customer reached 10% of revenue, and the top five generated about 33% (down from 38%), showing that growth is “diversified in both products and customers,” says AXT.

Gross margin has risen further, from 30.8% a year ago and 39.2% last quarter to 40.6%. This is due to (1) a favorable product mix; (2) the increase in raw materials pricing that positively impacted margins at the three consolidated raw material joint ventures; and (3) no longer writing down gallium at one of the three JVs (boosting total company gross margin by about 1%).

Operating expenses have risen from $5m a year ago and $5.6m last quarter to $6.5m, due largely to an extra $0.56m from: (i) a one-time bonus payout at one of the subsidiaries of about $0.35m; (ii) site consulting fees of $0.12m regarding the relocation of GaAs and Ge manufacturing from Beijing to the new facility about 90 miles south in Dingxing, China; and (iii) $0.01m in filing fees for business licenses and registrations as a result of the relocation. For first-half 2018, operating expenses are $12.1m (about $6m per quarter, in-line with the expected run rate for the year).

Net income has risen further, from $1.9m ($0.05 per diluted share) a year ago and $2.9m ($0.07 per diluted share) last quarter to $3.9m ($0.10 per diluted share, exceeding the $0.07-0.09 per share guidance).
Depreciation and amortization was again steady at $1.2m. Capital expenditure (CapEx) was $8.7m.

During the quarter, cash, cash equivalents and investments fell from $67m to $54m, due mainly to spending on the new facility and equipment as well as an increase in inventory from $51.1m to $57m, of which 52% was in raw materials, 44% in work in progress (WiP) and only 4% in finished goods.

“The increase in inventory was a deliberate decision based on two primary factors,” remarks VP & chief financial officer Gary Fischer. “First, with the ramp of our new manufacturing facilities [in Dingxing], we are carrying inventory in multiple locations. Second, the prices of both raw gallium and raw germanium have been increasing meaningfully and our supply-chain investments allow us to be a first responder to such changes. As such, we have taken certain opportunities to purchase ahead in order to achieve a better cost structure for our substrate business. It is important to note also that 80% of our total inventory consists of raw materials and ingot WiP. At this stage, there is no customization and no shelf-life concerns. This makes the possibility of obsolescence of no real concern. The additional 16% is wafer WiP, which can contain some customization but a huge percentage is for existing high-volume customers,” he adds. “Looking ahead, we expect to be able to turn the total inventory number down over time.”

For third-quarter 2018, AXT expects revenue to grow to $27.5-28.5m, with earnings per share of $0.08-0.10.

“The ongoing need for faster networks and increasing fiber-to-the-home (FTTH) requirements will continue to fuel InP-based applications, although it may be somewhat lumpy in the second half,” notes Young. “We are beginning to see an improvement in demand for indium phosphide for data-center connectivity that recurred in Q1 and Q2,” says Young. “The continued adoption of silicon photonics technology in hyperscale and enterprise data centers, as well as the transition over time to 100G and 400G technologies, will drive the need for indium phosphide for many years to come,” he believes.

For germanium, positive market conditions are likely to provide an opportunity for sustained growth over the coming quarters, reckons the firm.

For GaAs, emerging application such as 3D sensing, LiDAR for autonomous cars and wireless-based Internet connectivity are expected to provide an opportunity for growth over the next 18 months. “The timing of these opportunities coincides nicely with our relocation and capacity expansion,” notes Young. “We will continue to make solid progress in bringing up new product production lines, hiring and training personnel, and working with customers to fulfill their qualification requirements. Our internal qualification results to-date demonstrate consistent specifications across our sites. In addition, we have completed a number of customer qualifications and are in the process with many more including all of our major customers,” he adds. “Our strategy is to execute the move in a measured and incremental way. This enables us to mitigate risks and provide a seamless transition for our customers while ramping up to meet our increasing demand. By the end of the year, we expect to have relocated approximately 60% of our wafer production, and we expect to complete the process by mid-2019.”

See related items:

AXT’s Q1 revenue falls 7.2% after China government-ordered factory shutdown days

AXT’s Q4/2017 revenue grows a more-than-expected 30% year-on-year, driven by InP and Ge

AXT’s revenue grows 19.5% in Q3, driven by record InP sales

AXT’s revenue rises 14.6% in Q2

Tags: AXT GaAs substrate InP Germanium

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