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2 May 2008


AXT’s 57% year-on-year growth driven by SI GaAs and Ge

For first-quarter 2008, substrate maker AXT Inc of Fremont, CA, USA has reported revenue of $19.6m, up 11% from $17.6m last quarter and up 57% on $12.5m a year ago.

While indium phosphide (InP) substrate revenue was just $477,000 (up from $330,000 last quarter but down from $518,000 a year ago), t he ‘solid quarter of growth’ included “strong increases in revenue from strategically important areas of our business such as 6-inch semi-insulating gallium arsenide [for mobile handset applications] and germanium substrates [for solar applications]," according to chairman and CEO Phil Yin.

Gallium arsenide (GaAs) substrate revenue was $13.7m, up 12% on last quarter’s $12.2m and 56% on $8.8m a year ago. In particular, revenue for 6-inch semi-insulating GaAs has risen 37% sequentially from $4.3m to $5.9m (55% of total GaAs sales, versus 45% for semiconducting GaAs). This is being driven by the market for low-cost handsets (particularly in emerging markets such as India, China and other developing countries). “This market hold tremendous potential, and we’re delighted to see companies such as Anadigics, Skyworks and TriQuint focusing on it as a priority,” says Yin. “Further, continued strong growth in the video and smart-phone markets is fueling solid performance in the replacement handset market, as well as driving GaAs content as a result of their increasing feature-sets and functionality” he adds. As part of the growth in 6” GaAs substrate revenues, Yin singled out the large order in Q4/2007 from epiwafer foundry IQE for its 2008 manufacturing requirements.

Demand also continues to be strong in semiconducting GaAs (thanks to increased penetration of LEDs in products such as digital cameras, notebook PC backlights and automotive applications, and the ‘strong push’ towards use in LED lighting). “As in the case of semi-insulating GaAs, we’re having renewed success with tier-1 customers that supply significant portions of the market,” Yin says.

Much of AXT’s overall revenue growth is attributed to market share gains as key customer qualifications are beginning to generate revenue, says Yin.

For example, germanium (Ge) substrate revenue has almost doubled from last quarter’s $747,000 to $1.4m, due to the volume ramp of existing customers as well as orders from new customers (with two of the five customers in qualification in Europe now having entered pre-production). “Europe continues to outpace the world in investment in solar technology,” says Yin, citing the example of Emcore recently winning a $4.6m follow-on production order for receiver assemblies for the 500x concentrator photovoltaic (CPV) systems of Spain’s Concentration Solar la Mancha (for shipment from the September quarter through to early 2009). Chief financial officer Wilson Cheung expects germanium sales to ramp significantly, starting in second-half 2008, as qualifications complete with customers.

AXT says it is encouraged that CPV-related companies such as Solfocus, Emcore, Spectrolab and others are joining forces by creating a CPV Consortium [to be launched the week after next at the 33rd IEEE Photovoltaic Specialists Conference in San Diego, CA] in order to raise the visibility of GaAs-based solar cells as a viable and efficient material for solar energy. “This is a good step towards CPV-related companies achieving greater penetration in the solar market,” says Yin.

Yin is also pleased by recent announcements by Emcore and Spectrolab that they are converting from 4” to 6” germanium substrates for III-V solar cells. “This is a significant step forward for the industry because it will allow CPV solar cells to become more cost-effective, as there are more die per unit area.” AXT developed a process more than a year ago for manufacturing 6” germanium substrates in anticipation of an industry shift in this direction, he points out.

“Our customer engagement and qualification activity is very high and we are pleased to see progression with a number of key companies in our space as a result of significant competitive differentiators,” says Yin. In particular, he cites AXT’s ability to scale its manufacturing capacity according to demand (due to its vertical gradient freeze crystal growth method) and its access to critical raw materials (due to its China-based raw materials manufacturing joint ventures).

AXT’s sales of raw materials (mainly 99.99%-pure gallium) were $4m in Q1/2008, down from $4.3m last quarter but up from $2.6m a year ago. “We are once gain seeing an increase in process for raw materials,” says Yin. Year-on-year, the price of four-nines gallium metal has risen 37% from $330/kg to about $550/kg, and arsenic 22% from $130/kg to about $165/kg. In particular, germanium is forecasted to increase from $600/kg a year ago and $1350/kg now to as much as $1800/kg (a further 44% rise).

The firm expects the prices of four-nines gallium and arsenic to stabilize in the coming quarters, but the price of germanium could continue to rise. “While sharp rises in raw material pricing are detrimental to the margins of every company in our space, our joint venture agreements allow us to offset much of the impact through our ability to sell some materials on the open market, and most importantly these agreements protect our own ability to supply our needs as availability of these materials becomes tighter,” says Yin.

Overall gross margin in Q1/2008 was 31.7%, up from last quarter’s 30.1% (although down from 43.2% a year ago). Net income has risen from $1.3m a year ago and $1.9m last quarter to $2m. Cash and cash equivalents rose during the quarter from $18.4m to $23.2m, althoughy this is largely due to closing the sale of property in Fremont on 28 March for $5.1m.

“While we remain cautious in the way that we plan and forecast our business, we believe that the industry trends support positive growth opportunities in the coming quarters,” reckons Yin. For second-quarter 2008, AXT expects revenue to rise slightly to $19.7-20m but gross margin to fall to 30-31%. Chief financial officer Wilson Cheung cautions that AXT may continue to experience pressure on gross margins in 2008 as raw materials prices are projected to increase, the firm’s depreciation expenses are higher, and average selling prices may fall slightly. However, some of the gross margin pressure will likely be offset by AXT’s ongoing cost-reduction programs, as well as plans to increase overall manufacturing capacity. “We’re preparing for the continued increased demand for semi-insulating GaAs with another 27% increase in our 6” GaAs capacity,” he adds. Already, during Q1/2008, staffing (including joint ventures) has risen from 1057 to 1118 (mostly in production).

Regarding semiconducting GaAs (for LED applications), “due to competitive pressure, the margins can be very low, therefore we have adopted a policy of selectively accepting only the business opportunities that meet our corporate market and strategic goals,” says Yin. “Our priority is to develop our ability to provide liquid-encapsulated Czochralski (LEC) crystal growth, where this process technology for producing small-diameter substrates will open up new markets for our products and allow us to further improve our cost structure.”

Regarding germanium, AXT’s plan to develop Czochralski crystal growth processing will become increasingly important, it is reckoned, allowing greater flexibility in providing optimal products for each application, as well as allowing an improvement in cost structure. “These capabilities will be essential as the solar market gains significant momentum,” Yin believes, adding that AXT is pleased by the traction it is experiencing in this emerging market.

Cheung adds that, during Q1/2008, AXT built up inventory from $24.8m to $29.1m. More than half of this increase is in anticipation of interruptions in the supply from its raw materials joint ventures to its Beijing substrate manufacturing plant due to the Chinese government moratorium on transporting goods around Beijing leading up to and during the summer Olympic games. The remaining rise is largely due to increased work-in-progress for increased production based on the higher sales forecast for the remainder of 2008.

See related items:

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

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

AXT receives IQE GaAs order worth up to $18.6m

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See: AXT Company Profile