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

For third-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 $28.2m, up 19.5% on $23.6m last quarter and up 29% on $21.9m a year ago (exceeding the forecasted 14% growth to $26.5-27.5m).

“The third quarter was another solid quarter in which we posted revenue growth in all of our product categories, including record revenue in indium phosphide,” says CEO Morris Young. Also, germanium substrate business grew again sequentially as the satellite industry continues its positive trend.

Revenue from substrates rose by 17.3% from $19.1m last quarter to $22.4m (79.4% of sales).

Revenue from raw material joint ventures rose by 28.9% from $4.5m last quarter to $5.8m (20.6% of total sales).

Of total revenue, Asia-Pacific comprised 68%, while North America comprised 8% and Europe 24%. Again, two customers generated more than 10% of revenue, while the top five customers generated about 39% of revenue, again reflecting the continuing diversification of both products and customers.

“We also achieved strong gross margin improvement and outperformed our profitability expectations for the quarter,” says Young.

Gross margin was 39.5%, up from 30.8% last quarter, due mainly to favorable product mix (due to the record InP revenue plus the better-than-expected Ge revenue), higher sales volume (across all substrate types), and greater manufacturing efficiency (including improvement in overall yields and crystal growth, consistently high product quality, and good raw material cost).

Operating expenses (OpEx) have risen from the regular $5m to $5.9m, although this includes one-time expenses of about $500,000 ($250,000 in special R&D expenses for the InP development program plus fees related to AXT’s new facility in China).

Net income was $4.4m ($0.11 per diluted share, exceeding the $0.08-0.10 guidance), up from $1.9m ($0.05 per diluted share) last quarter and $2.2m ($0.07 per diluted share) a year ago.

“These results demonstrate that our products are well positioned in strategic growing markets, and that we are seeing the benefit of the operational efficiencies and improvements that we began successfully implementing more than a year ago,” reckons Young.

During the third quarter, net cash generated from operations was $4.3m. Depreciation & amortization was steady at $1.1m. However, capital expenditure (CapEx) has leapt from just $1.9m last quarter to $15m, mostly in furnace systems for AXT’s new manufacturing facility in the city of Dingxing, China (about 90 miles drive south of the existing Beijing plant). Together with finalizing the purchase of the facility, cash, cash equivalents & investments hence fell by $9.2m from $87.5m to $78.3m.

For the seasonally weak fourth-quarter 2017, AXT expects revenue to drop to $26-27m, due to InP falling back slightly, although germanium will remain strong (despite one customer taking a bit less material because of Christmas) and GaAs will be “surprisingly” strong. Operating expenses should remain at the current level (including about $500,000 in one-time items related to personnel plus end-of-year employee bonuses – in Q1/2018, AXT expects OpEx to drop back to a more normalized and sustainable level of $5.2-5.3m). Net income is expected to be $0.07-0.09 per share.

Full-year 2017 revenue should therefore be about $99m (up 22% on 2016), driving earnings per share up 47% on 2016.

“We’re seeing customers more proactively planning for future demand and working with us to ensure that their need can be met,” says Young. “For example, during this quarter [Q3], we received our first multi-million dollar long-term order for indium phosphide substrates. While this order is not a guarantee of revenue, it does demonstrate that customers are viewing our product as a strategic part of their planning and an important part of their growth,” he adds. AXT is currently increasing InP capacity at its Beijing facility.

The relocation of GaAs manufacturing to Dingxing is on schedule (after being accelerated to take advantage of the market opportunity in 3D sensing). The site has about 140,000ft2 of existing manufacturing space and 50,000ft2 designated for offices and dormitories, plus plenty of space for expansion to support the increasing demand for substrates.

“We are actively preparing the new facility for the requirements of GaAs manufacturing,” says Young. “We are also in the process of installing and testing that new relocated equipment. In addition, we’re working to complete our initial staffing and training requirement,” he adds. “Within only six months of acquiring the facility, we already have our first single-crystal ingots grown. And extensive testing has been shown that they have a consistent quality level as those products produced at our Beijing facility. We continue to expect to have an initial qualification substrate late this quarter, and we’re working with customers to set a qualification beginning in Q1.”

“We are planning for a staged relocation of GaAs throughout 2018, which means that we will produce substrates from both our current location at Beijing and the new Dingxing site for a period of time, then gradually increase production volume at the new site,” Young continues.

“We are not required to move indium phosphide and germanium substrate production lines at this time. Those substrates will continue to be manufactured in our Beijing facility for the foreseeable future,” notes Young. “Over time, we will evaluate our plan for a possible relocation.”