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23 December 2009


AXT’s opto-related revenues to grow at 15-20% annually, forecasts analysts

Richard Shannon, senior analyst at securities brokerage firm Northland Securities Inc, has issued an analysis of the optoelectronics business prospects of AXT Inc of Fremont, CA, USA, which manufactures gallium arsenide, indium phosphide and germanium substrates and raw materials, that suggests a good growth market combined with attractive margins in certain product segments. He believes that AXT’s total addressable market (TAM) can grow in excess of 20% annually over the next few years, with optoelectronics markets forming another growth driver in addition to the wireless and solar/concentrated photovoltaic (CPV) markets.

While GaAs is about 75% of AXT’s total revenue, Northland Securities' research on AXT has focused on its semi-insulating (SI) GaAs substrates (43% of total revenue so far in 2009) for power amplifiers and switches in wireless handset (RF) applications, selling directly or indirectly to customers like Triquint Semiconductor, Anadigics, Avago Technologies. However, about 33% of the firm's GaAs revenue comes from semiconducting (SC) GaAs, mainly for optoelectronics applications (most prominently LEDs, although Northland Securities sees solid growth also coming from laser diodes and sensors). The firm believes that the TAM addressed by AXT’s SC GaAs products is growing by 15-20% annually over the next few years (from at least $4.9bn currently).

Recent research and conversations with management suggest that gross margins for certain optoelectronics applications are now at or above corporate average. Specifically, high-brightness LEDs (HB LEDs) and laser diodes bring attractive margins, and AXT is expected to pursue higher market share.

Many investors have focused on the opportunities for backlighting for TVs and notebook screens, which should exhibit strong growth in the next couple of years. There are two types of LED backlighting: direct lighting (with red, green and blue LEDs behind and across the entire span of the LCD panel to create a white light, with AXT supplying the red LEDs); and edge lighting (with white LEDs — which do not use GaAs — on the edge of the panel, and mirrors directing light to each pixel). Edge-lit LCD TVs are becoming increasingly popular because of their lower cost and very thin profile. Overall, Northland Securities views backlightling as a good opportunity for AXT, albeit one that may be moving away from it if more edge lighting is used.

In the automotive market (which uses LEDs in dashboards, tail-lights — which are red, using GaAs — and headlights), Osram Opto Semiconductor GmbH of Regensburg, Germany is a consistent top 10 customer, making the application a focus market for AXT.

AXT also serves the low-brightness LED market, but gross margins are among the lowest that AXT addresses. The firm has sold more into this market at times to fill up capacity, but Northland Securities sees AXT focusing more on other markets in the future.

Overall, AXT is addressing high-growth optoelectronics markets, with the LED market projected to grow 25% annually over the next couple of years, and corresponding growth of 15-20% for AXT achievable, it is reckoned.

While there are product areas such as the low-brightness LED market where gross margins are challenging, these can be offset by much more attractive margins such as for HB-LEDs, laser diodes and sensors. Northland Securities says its conversations with AXT management suggest that a good portion of the recent improvement in gross margins, particularly in third-quarter 2009, come from favorable product mix within the SC GaAs product line (and not just from 6-inch SI GaAs substrates). Hence, AXT’s gross margins can still perform well even with strong growth from the SC GaAs product line, believes Northland Securities.

However, the firm concludes that the main risks for AXT are the following:

  • Since AXT makes a non-proprietary product, it can be subject to commodity pricing environments from time to time.
  • AXT is potentially exposed to difficult pricing for its commodity raw material inputs. Although it appears to be in an advantageous supply agreement, pricing is based on a discount to the market price.
  • AXT derives most of its raw material inputs from its joint ventures in China. The risks inherent in China are highlighted by the potential issue regarding changing tax policies that surfaced in late 2006. While there was ultimately no negative affect to AXT, we believe that its operations would have been materially affected.
  • Much of AXT’s growth plan depends on the handset market (through the sale of SI GaAs 6” wafers), so if this market falters or its primary customers lose share then AXT would be materially affected. GaAs substrates are also at risk of technology substitution for antenna switches.
  • The LED market is focusing on prospects in general illumination, which requires costs to be much lower than they are currently. Northland Securities therefore expects to see strong pricing declines in this market, which impact AXT’s gross margins.

See related items:

AXT grows 28% as end markets continue recovery

Young takes over as AXT sees improving market conditions

See: AXT 2009 Investor Presentation

Search: AXT GaAs GaAs substrate InP Germanium