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IQE

22 February 2019

AXT’s revenue falls 22.4% in Q4/2018, due partly to weak China LED market

For full-year 2018, AXT Inc of Fremont, CA, USA – which makes gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge) substrates and raw materials – has reported full-year revenue growth of 3.7% from $98.7m in 2017 to $102.4m in 2018, aided by another record for InP sales as silicon photonics passed the tipping point of broader market adoption.

However, for fourth-quarter 2018 revenue is just $22.2m, down 22.4% on $28.6m last quarter (and well below the original guidance of $26.5-27.5m).

In particular, substrate sales were $17.2m, down 25% on $22.8m. Revenue from raw material joint ventures (namely the three companies consolidated into AXT’s results) was $5m, down 13.8% on $5.8m.

Of total revenue, 69% came from Asia Pacific (down from 72%), 10% from North America (down slightly from 11%), and 21% from Europe (up from 17%). One customer comprised 10% of total revenue and the top five generated about 35% (down from 39%, showing diversification of the customer base).

“Coming off of a strong Q3, we entered Q4 with the understanding that our customers across our portfolio were cautious regarding Q4 requirements,” says CEO Morris Young. “This shortfall was a combination of trade tension, weakness in the LED market (particularly in China and for applications such as automotive), a slowdown in growth in data-center market, as well as inventory rebalancing at several of our large customers and the natural lumpiness of revenue from emerging applications for our gallium arsenide product,” he adds.

“Global economic conditions were made more difficult by the uncertainty of trade tensions, and spending in certain end markets took a pause, impacting our expected growth and profitability for the year,” he adds.
Full-year gross margin has risen from 34.9% in 2017 to 36.2% in 2018. However, quarterly gross margin has fallen from 37.1% last quarter to 26.3% in Q4/2018. This was due to (1) lower revenue (and hence greater overhead costs per unit sold; (2) increased manufacturing overheads after hiring and training new staff and accruing other costs from relocating GaAs and Ge manufacturing from Beijing to Dingxing, China; and (3) a sharp rise in raw materials costs (especially germanium) in late Q3 and Q4.

Operating expenses have grown further, from $6.1m a year ago and $6.3m last quarter to $6.5m, driving full-year OpEx up from $21.8m in 2017 to $24.9m in 2018.

Net income has fallen from $10.1m ($0.26 per diluted share) in full-year 2017 to $9.7m ($0.24 per diluted share) in full-year 2018. Specifically, quarterly net income has gone from $3.1m ($0.08 per diluted share) a year ago and $3.9m ($0.10 per diluted share) last quarter to a net loss of $1.1m ($0.03 per share) in Q4/2018.
Depreciation and amortization was $1.4m. Capital expenditure (CapEx) was $11m. Due mainly to the new facility and equipment, cash, cash equivalents and investments hence fell during the quarter from $42m to $39m.

After previous increases in net inventory due to the ramp-up of AXT’s new GaAs and Ge manufacturing manufacturing facilities in Dingxing, net inventory fell slightly during the quarter from $58.7m to $58.6m, of which raw materials fell from 51% to 46% while work in progress rose from 44% to 48% and finished goods from 5% to 6%. “We did let inventory grow on the front end of the relocation program and then we slowed that down last spring and inventory has been relatively flat since 30 June 2018,” says VP & chief financial officer Gary Fischer. “We have made the reduction in inventory a focus for our team in China. We will begin to see more meaningful results over the coming quarters. With the programs we have in place, we would expect to be able to drive it below $50m and perhaps a bit more over the coming year,” he adds.

“We do not expect business conditions to improve meaningfully in the first quarter,” comments Fischer. “The markets and geographies that were weak in Q4 will remain so throughout Q1, and the inventory correction at certain customers will also continue through Q1,” says Young.

For Q1/2019, AXT expects revenue to fall further to $20-21m, with loss per share rising to $0.04-0.06.

“Although Q1/2019 is challenging, as we look ahead we are encouraged that the tone of customer comments includes an expectation for market recoveries later this year,” notes Young. “Despite the challenges in 2018 we saw growth in a host of new gallium arsenide applications that further suggest this material is entering its next period of expansion,” he adds. ““In our current discussion with customers, sentiment is improving for 2019 demand in all of our key applications that drive our business.”

Regarding gross margin, Fischer believes that AXT can get it back to the previous ranges (of the first two quarters of 2018). “The timing will depend on the recovery in the markets we serve, as an increase in revenue will be a primary driver for the improvement. In addition, we are also implementing programs to improve yields and stabilize and optimize the efficiencies of multiple manufacturing sites. These are expected to contribute to an improvement over the next couple of quarters,” he adds.

“Our competitive position remains strong,” believes Young. “This will enable us to return to growth when the markets recover. In the meantime, we intend to continue the relocation [from Beijing], strengthen our business and drive greater efficiencies in our model,” he adds. At least 90% of AXT’s GaAs and Ge production capability should be established in the new Dingxing facility by the end of Q2/2019. “This positions us well for new and recovering gallium arsenide business opportunities. In addition, we are now well underway with current customer qualifications, including all of our major customers,” says Young.

“Our primary expenditure will be focused on the completion of the facility [in Dingxing], for which we expect to spend about $21m over the course of 2019,” says Fischer. “Some of this cost will be offset in our cash balance by our reduction in inventory, as well as our expectation of returning to positive operating cash flow in the second half of 2019. Also, the current facility in Beijing has considerable value that we will be able to monetize in the future.”

See related items:

AXT cuts Q4/2018 revenue guidance from $26.5-27.5m to $22-22.4m after caution-induced order slowdown

AXT grows revenue an above-expected 5.5% in Q3

AXT’s revenue grows 11% in Q2

AXT’s Q1 revenue falls 7.2% after China government-ordered factory shutdown days

AXT’s Q4/2017 revenue grows a more-than-expected 30% year-on-year, driven by InP and Ge

Tags:  AXT GaAs substrate InP Germanium

Visit:  www.axt.com

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