AXT’s revenue grows a more-than-expected 22.8% in Q2

For second-quarter 2019, 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 $24.8m, down 8.5% on $27.1m a year ago but up 22.8% on $20.2m last quarter (and above the expected $23.5-24.5m).

Fiscal	Q2/2018	Q3/2018	Q4/2018	Q1/2019	Q2/2019
Revenue	$27.1m	$28.6m	$22.2m	$20.2m	$24.8m

In particular, revenue from raw material joint ventures was $4.2m, down 23.6% on $5.5m a year ago but up 23.5% on $3.4m last quarter. Substrate sales were $20.6m, down 4.6% on $21.6m a year ago but up 22.6% on $16.8m last quarter.

Of total revenue, 75% came from Asia-Pacific (rebounding from a low of 65% last quarter), 19% from Europe (down from 22%) and just 6% from North America (down from 13%). There were again two 10%-or-more customers. The top five customers generated about 48% of total revenue (up from 35% last quarter).

“Amidst a backdrop of turbulent geopolitical and global economic conditions, AXT posted a solid quarter,” says CEO Morris Young. “Revenue came in just ahead of our expectations and our indium phosphide sales achieved an all-time high, having surpassed gallium arsenide as the single largest revenue contributor again this quarter,” he adds.

Over the past four years, AXT’s revenue from InP has grown from $1-2m per quarter to more than $10m. “Four years ago, PON [passive optical networks] was the only meaningful driver for our indium phosphide revenue. Three years ago, we reported that the data center will begin adding to the demand for indium phosphide. Earlier this year, we saw telecom beginning to contribute,” says Young. “During the second quarter we completed the shipment of the large order relating to 5G infrastructure… evidence that a major infrastructure upgrade cycle for 5G is on the horizon.”

In contrast, GaAs revenues for both wireless and LED applications have seen setbacks in recent quarters. “Overall, 2018 has seen a softer year for gallium arsenide market. We have used this opportunity to execute a methodical and careful relocation of our gallium arsenide manufacturing [from Beijing to Dingxing, China],” notes Young. Up to 20% of AXT’s GaAs revenue came from the new Dinxing facility in Q2/2019, he adds. “We are delivering qualification samples… utilization is only 20%.”

“With continued focus on manufacturing efficiency, inventory reduction and cash management, we improved our gross margins and achieved positive cash flow,” says Young.

“With the changes we made last quarter to our portfolio raw material companies, we are able to show improvement in the overall contribution to our results in Q2. In particular, those we account for with the equity method had a cumulative gain in this quarter,” says Young. “This comes at a time when the pricing environment for raw material is stabilizing and we are doing a better job and leveraging the benefit of our portfolio in improving our substrate cost structure.”

Although down on 40.6% a year ago, gross margin of 34.3% is up from 33.1% last quarter due primarily to product mix.

Operating expenses were $6.2m, up from $6.1m last quarter but cut from $6.5m a year ago. Income from operations was $2.3m, up from $0.63m last quarter but almost halving from $4.5m a year ago.

Although down on $3.9m ($0.10 per diluted share) a year ago, net income was $1.5m ($0.04 per diluted share, at the upper end of the $0.02-0.04 guidance range), an improvement from a net loss of $1.1m ($0.03 per share) last quarter.

Depreciation and amortization was steady at $1.4m. Capital expenditure (CapEx) was $5.5m (up from $4.2m last quarter). Overall, during the quarter, cash, cash equivalents and investments rose from $34.1m to $37.5m. “In a difficult demand environment, we achieved solid financial results, including profitability expansion and cash generation,” notes Young.

Net inventory fell from $53m to $50.3m (48% in raw materials, 47% in work in progress, and only 5% in finished goods). “Reduction in inventory is the focus for us in 2019,” says chief financial officer Gary Fischer.

“We are continuing to execute on the relocation of our facility,” says Young. AXT still estimates that it will use about $21m of cash for the relocation in 2019. “We are increasingly now focused on assisting our customers through the process of a qualification shipment and shipment grant from the new facility. Those efforts will likely continue through the balance of the year and into Q1/2020,” he adds. AXT now reckons on spending about $9m in first-half 2019 and $12m in second-half 2019. “We are laying a solid foundation for the significant technology trends that are likely to drive growth in our business over time,” believes Young.

“We are operating cash-flow positive for the first half of 2019 for approximately $5m, which helps offset the outflow,” notes Fischer. “We do have a $10m line of credit with Wells Fargo Bank, which we have not utilized, and we are setting up a bank loan in Chinese renminbi in China as another source of cash,” he adds. “Further, we think the second half of 2019 will also be positive operating cash flow. We are continuing to monitor cash and remain confident that we have sufficient resources. The current facility in Beijing has considerable value that we will be able to monetize in the future.”

“We had a strong increase in our revenue in Q2 in part driven by a sizable order for indium phosphide and that will not repeat in Q3,” notes Fischer. AXT is not expecting incremental growth from PON applications in Q3. “However, we are pleased to see indications of an improving demand environment for indium phosphide in the data center and for gallium arsenide in LEDs,” he adds.

For third-quarter 2019, AXT therefore expects revenue of $24.5-26m, and earnings per share of $0.01-0.03. “Gross margin will not be as good in Q3 and it’s primarily because of product mix, as indium phosphide revenue will be down sequentially,” says Fischer. Revenue from LEDs should grow. “While weakness is persisting in wireless applications, we are now pleased to see the beginning of a potential improvement in the LED market for higher-end applications as we enter into Q3,” says Young. “Discussions with certain customers are taking a more positive turn than in the previous quarters and we are seeing incremental stronger demand,” he adds.

“Indium phosphide could fuel other major applications based on the development work being done right now. These include health monitoring, advanced 5G wireless devices and LiDAR for the automotive industry,” Young concludes.

See related items:

AXT’s margins rebound despite revenue falling further in Q1

AXT’s revenue falls 22.4% in Q4/2018, due partly to weak China LED market

AXT grows revenue an above-expected 5.5% in Q3

AXT’s revenue grows 11% in Q2

Tags: AXT GaAs substrate InP Germanium

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