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27 February 2008


AXT grows 31% as SI GaAs market share passes 20%

Substrate and raw material supplier AXT Inc of Fremont, CA, USA has reported full-year 2007 revenue of $58.2m (up 31% on 2006’s $44.4m), with gross margin of 34.8% (up from 28.7%) and net income of $5.3m up from $944,000, which included a $3.3m gain on the sale of Finsar stock).

For the fourth-quarter, revenue was $17.6m, up 21% on Q3’s $14.5m and 34% on $13.1m a year ago. Of total revenue, 17% came from North America (down from 19%), 67% from Asia-Pacific (up from 64%), and 16% from Europe (roughly level on 17%).

Gallium arsenide (GaAs) substrate revenue was $12.2m, up 23% on Q3’s $9.9m and 10% on $11.1m a year ago. In particular, revenue for 6” semi-insulating (SI) wafers was $4.3m, almost double Q3’s $2.2m. According to market research firm Strategy Analytics, this took AXT’s market share in SI GaAs to 20% at the end of 2007 (up from just 3% in 2005), as the firm added 10 new customers during 2007. Since AXT designs and builds its own furnaces and has space for expansion, it increased capacity for 6” SI GaAs quickly when supply was constrained and competitors could not increase their capacity, reckons the firm.

Revenues for semiconducting GaAs grew 37% year-on-year, driven by growing demand for LEDs. However, despite making market share gains, AXT remains selective in the business it accepts, in order to preserve gross margins, according to chairman and CEO Phil Yin. However, it is experiencing “many opportunities” to supply tier-1 customers (making major progress during 2007 in qualifying a major north Americam supplier that has not been a customer of AXT’s for many years). Initial qualification has indicated positive device results. With additional testing, AXT expects to obtain official vendor approval, followed by production releases in late Q2 or early Q3/2008.

Indium phosphide (InP) substrate revenue was $330,000, down 19% from Q3’s $408,000 and down 28% from $456,000 a year ago.

Germanium (Ge) substrate revenue was $747,000, up 39% on Q3’s $536,000 and 135% on $318,000 a year ago. AXT says it continues to hear positive announcements that the market for concentrator photovoltaics (CPVs) is developing, says Yin. Strategy Analytics forecasts that CPVs (currently only about 1% of the solar market) will grow at a compound average annual growth rate of about 350% through 2012.

For full-year 2007, Ge substrate revenues grew 145% from 2006’s $909,000 to $2.2m (with just one customer). Yin says that AXT now has three customers going into volume production (including two in the very early stages of their ramp-up). Regarding European customers, one has completed qualification, and finished auditing AXT’s facility just last week. Another three are currently in qualification (some at an early stage; some in a second phase). AXT should therefore see a ramp-up in second-half 2008 and expects that, long term, Ge should be a big contributor to revenue (Ge capacity utilization is currently just 30-40%, so production could be expanded greatly without much expense). Yin adds that the solar business is so hot that AXT wouldn’t be surprised if, in 3-5 years, Ge substrate revenue surpassed that for GaAs.

Yin reckons that AXT’s Ge materials supply joint venture will therefore become an important competitive advantage, as it gives it volume and price guarantees for raw materials, ensuring that AXT can cost effectively meet the demands of the market as it matures.

Raw materials revenues (mainly 99.999% pure gallium) were $4.3m, up 19% on Q3’s $3.6m and 258% on $1.2m a year ago due to additional sales to Asian customers.

During 2007, AXT doubled the output of all five of its raw materials joint ventures (in three of which AXT had majority ownership), allowing AXT to provide all its own raw materials needs (providing considerable cost benefits).

Throughout 2007, the industry experience shortages in both GaAs and Ge. The joint ventures allowed AXT to maximize its revenue opportunity, says Yin, by supplying to customers that could not get substrates from AXT’s competitors, raising the firm’s market share. The joint ventures also generated sales of excess raw materials on the open market. Yin says that AXT is continuing to look at using some cash to increase its stake in its joint ventures, as well as perhaps merger and acquisition opportunities.

For Q4/2007, gross margin however fell to 30.1%, from 31.3% in Q3 and 38.2% a year ago. Net income was $1.9m, up from Q3’s $858,000 but down from $3.4m a year ago. Cash reserves rose from $41.9m to $45.9m. Capital expenditure was $1.3m.

“Our strong fourth quarter results concluded what was another solid year for AXT,” says chairman and CEO Phil Yin. “In addition to posting very meaningful gains in revenue, gross profit, operating income, net income and positive cash flow from operations, we have continued to grow our customer base, significantly increase our market share and make strategic investments into the technologies and products that will expand our addressable market,” he adds. As positive long-term trends, Yin cites the growth of the handset market, the increasing prevalence of LEDs in a wide variety of lighting applications, and global adoption of solar energy.

Strategy Analytics forecasts that AXT’s market share in 6” SI GaAs will grow further to 29% in 2008, making it again the number-one supplier in the world. Such growth is likely to come from new customers that will begin contributing to revenue in 2008, as well as from expanded opportunities with current customers, says Yin.

During Q4, AXT agreed a deal with IQE to provide primarly 6” substrates for their 2008 worldwide substrate requirements (beginning shipments in Q1). The deal is worth about $15.1m, with an option to buy a further $3.5m worth.

Due to the increase in 6” semi-insulating (SI) GaAs wafer sales and forecasts of increased demand from existing customers, Yin says that he has authorized another expansion of VGF growth operations, by 27% (to be completed in Q3/2008). CapEx should be “a little less than $6m”.

However, regarding raw materials, chief financial officer Wilson Cheung says that, with suppliers increasing capacity, gallium supply and demand are back in balance and there is no longer constraint. Consequently, average selling prices (ASPs) are stabilizing (currently about $510-516/kg for four-nines gallium) and may trend down slightly in 2008. Although there is still constraint in germanium (with the price being as much as $1325-1350/kg currently), AXT expects raw materials revenue to return to $3.5-4m in Q1/2008.

Consequently, for first-quarter 2008, AXT expects overall revenue of $17.6-18m (flat to slightly up on last quarter, with most growth coming from 6” SI GaAs). Much of the growth will come from market share gains as well as new customer agreements from 2007 that will begin to contribute to revenue in 2008, says Yin. Also, customers are starting the year with relatively low levels of inventory. Long-term market trends present opportunities for significant growth in the coming years, he adds.

In first-quarter 2008, gross margins should be in the low-30% range, reckons Cheung. Operating expenses should be stable, because AXT’s infrastructure is able to support a quarterly revenue of $20m. Also, AXT has over 80 cost reduction programs in place, he adds. However, to protect overall gross margin, AXT is looking at product mix carefully, and is even thinking of weeding out customers that have negative margins.

Also, during Q4/2007, AXT announced that it had retained the services of scientist Grant Elliott to augment R&D efforts under chief technology officer Chia-Li Wei. Elliott is focusing on VGF technology enhancements (for SI GaAs) and Czochralski and liquid-encapsulated Czochralski (LEC) crystal growth (of small-diameter substrates, which should open up new markets and further improve AXT’s cost structure). AXT’s current use of the slow, short-ingot VGF growth technique yields low margins for the low-cost semiconducting LED application (which can also tolerate the lower constraints on etch pit density defects rsulting from LEC). LEC should be in production as early as Q1/2009, says Yin. Also, Cz growth will be an important part of the firm’s Ge revenue growth strategy, as it will provide flexibility in terms of price and performance, and allow AXT to explore the viability of new compound semiconductor substrates, such as gallium phosphide, he concludes.

See related items:

AXT retains Elliot to extend VGF and Cz/LEC R&D

AXT receives IQE GaAs order worth up to $18.6m

AXT promotes Wei to CTO

AXT’s 6” GaAs sales dip due to BiFET transition

Search: AXT GaAs GaAs substrate germanium InP

See: AXT Company Profile