AXT’s revenue rises 14.6% in Q2

For second-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 $23.6m, up 14.6% on $20.6m last quarter and $20.5m a year ago (and above the guidance of 9% growth to $22-23m).

Revenue from substrates was $19.1m (80.9% of sales), up 15% on $16.6m (80.6% of sales) last quarter. Revenue from raw material joint ventures was $4.4m, up 10% on $4m last quarter (while falling from 19.4% to 18.6% of total sales).

Of total revenue, Asia-Pacific comprised 68% (rebounding from 63% last quarter), while North America comprised 7% (down from 10%) and Europe 25% (down from 27%). Two customers generated more than 10% of revenue, while the top five customers generated about 37% of revenue (up from 35% last quarter), again reflecting the continuing diversification of both products and customers.

“While much attention lately has been placed on certain applications for compound semiconductor substrates, we are seeing an expanding universe of emerging applications and technologies across our portfolio that are driving growth in every one of our substrate product categories,” notes CEO Morris Young. “As a result, we achieved record revenue in indium phosphide substrates in Q2 [comprising about 30% of total revenue], and posted solid growth in semi-insulating gallium arsenide, semiconducting gallium arsenide, and germanium substrates.”

Gross margin has risen further, from 29.4% a year ago and 30.5% last quarter to 30.8%. Substrate gross margin was higher than overall company gross margin. However, this was offset by lower gross margin on raw materials, reducing total gross margin by almost 1 percentage point due to an inventory write-down of raw gallium at one of AXT’s joint ventures in China (since the raw material market continues to struggle with overcapacity, particularly in raw gallium).

Operating expenses were $4.961m, up by just $44,000 from $4.917m last quarter, AXT continues to run relatively flat quarter-to-quarter for OpEx.

Net profit was $1.93m ($0.05 per diluted share), up from $0.665m ($0.02 per diluted share) last quarter and $1.15m ($0.03 per diluted share) a year ago.
Depreciation & amortization was steady at $1.1m, while capital expenditure (CapEx) has been increased from $0.7m last quarter to $1.9m. Overall, during the quarter, cash, cash equivalents and investments hence rose by $767,000, from $86.8m to $87.5m.

“Q3 is shaping up nicely, reflecting an increase in each of our substrate categories,” comments chief financial officer Gary Fischer. For third-quarter 2017, AXT expects revenue to rise by about 14% to $26.5-27.5m.

“We’re seeing a meaningful positive impact by increased volume because our manufacturing overhead costs are spreading over more units,” says Fischer. This is expected to boost gross margin by 1-2% over Q2. “We work diligently with one of our three consolidated joint venture companies to increase the utilization of a very important raw material that they supply for our manufacturing process,” he adds. The cost savings are hence expected to provide an additional 1-2% benefit to gross margin. “This illustrates the tangible benefit derived from our supply chain strategy,” notes Fischer. AXT hence expects earnings per diluted share to rise to $0.08-0.10.

Regarding the relocation of AXT’s GaAs substrate production line from Beijing (which is being accelerated to take advantage of the market opportunity in 3D sensing), Young says that the firm has identified a new site (in a different city in China with lower labor rates, but reasonably close to its existing current location) and that it expects to finalize the agreement in the near future. It has 140,000ft2 of manufacturing space already built plus an additional building that can be used as dormitory and offices. “Existing buildings will ease the logistic requirements for technicians [one of the reasons for choosing the site],” says Young. The first stage (doing some of the crystal growth) should be completed in 3-4 months. Wafer polishing will continue in the Beijing facility until build-out of the cleanroom is completed, after which samples from wafer processing at the new site are expected by the end of first-quarter 2018. The two facilities should operate concurrently for maybe a year to a year and a half, reckons Young (after which the Beijing facility should be monetized).