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11 November 2019

AXT’s Q3 revenue hit by China-related absence of expected data-center and PON market growth

For third-quarter 2019, 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 $19.8m, down 20.2% on $24.8m last quarter and 30.8% on $28.6m a year ago, and below the original guidance of $24.5-26m. “2019 has proven to be a challenging year, given the turbulent geographical, geopolitical and global economic conditions,” comments CEO Dr Morris Young.

Fiscal Q3/2018 Q4/2018 Q1/2019 Q2/2019 Q3/2019
Revenue $28.6m $22.2m $20.2m $24.8m $19.8m

Of total revenue, the proportion from the Asia-Pacific region fell from 75% last quarter to 66%, while Europe rose from 19% to 25% and North America from 6% to 9%. Just one customer reached 10% of revenue and the top five comprised about 40% (down from 48% last quarter, showing diversification of the customer base).

Each product category was lower than expected, indicating broad-based market declines.

Revenue from substrate sales was $16m, down 22.3% on $20.6m last quarter and 29.8% on $22.8m a year ago. “Results in Q2 were strengthened by the completion of a large order from a telecommunication customer in Asia that we did not expect to repeat in second-half 2019,” notes Young. “Coming into Q3, our customers in data-center and PON [passive optical network] markets were predicting an improvement in the demand environment which would have resulted in renewed growth in demand for our substrates. However, this improvement in the demand environment did not materialize. Data-center was particularly soft compared to expectations, which may be a result of US-China trade tensions,” he adds. “Ultimately, our indium phosphide substrate revenue for data-center and PON remained fairly steady sequentially in Q3, but we were not able to make up for the absence of the telecommunication order that we had in Q2.”

In GaAs, LEDs and lasers have been slow to recover from the downward trend of recent quarters. “LED is particularly impacted by the slowdown in China,” says Young. “Automotive applications have been particularly hard hit and continued to be weak in Q3,” he adds. “Wireless applications are holding steady at their reduced rates.”

Germanium substrate sales fell by about 8% from last quarter due to the softer demand environment.

“The sluggishness in the substrate market appears to have a negative ripple effect on the raw material companies that we consolidate,” says Young. Revenue from raw material joint ventures was $3.9m, down 7.1% on $4.2m last quarter and 32.8% on $5.8m a year ago (although, as of this year, AXT is consolidating only two companies into its results, rather than three last year).

Due mainly to the lower volumes and changes in product mix (specifically the lower InP business), gross margin has fallen further, from 37.1% a year ago and 34.3% last quarter to 29%.

Operating expenses were $6.2m, roughly level with $6.2m last quarter and $6.3m a year ago.

Net loss was $0.9m ($0.02 per diluted share), compared with net income of $1.5m ($0.04 per diluted share) last quarter and $3.9m ($0.10 per diluted share) a year ago.

Depreciation and amortization was steady at $1.3m. Capital expenditure (CapEx) was $4.6m (reduced from $5.5m last quarter). Accounts receivables (net of reserves) fell from $18.2m to $17.4m.

During the quarter, cash, cash equivalents and investments rose from $37.5m to $38.5m. The firm also has a $10m line of credit with Wells Fargo Bank (which it has not utilized) and in Q3 it established a bank loan of about $5.8m in China.

Net inventory fell from $50.3m to $49.1m (47% in raw materials, 46% in work in progress, and only 7% in finished goods). “Reduction in inventory has been a focus for us in 2019,” notes chief financial officer Gary Fischer.

“The demand environment remains challenging and is not expected to improve in Q4,” says Fischer. For fourth-quarter 2019, AXT expects roughly flat revenue of $19.5-20.5m, and increased loss per diluted share of $0.06-0.08.

GaAs revenue should be a little stronger in Q4 than in Q3. “The LED market is coming back,” notes Young. However, germanium substrate sales are expected to remain soft (while excess inventory at certain customers is digested) and InP should fall again.

“Despite these near-term challenges in environment, we remain optimistic about underlying large-scale technology trends that build the demand for our products,” says Young. “We do expect indium phosphide to bounce back,” he adds.

“The data-center upgrade cycle is well underway to accommodate massive growth in bandwidth requirements at hyperscale and large enterprise data centers. We believe that the silicon photonics market will continue to grow, driven by the technology transition to 100G and beyond to 400G,” continues Young. “Related to the data-center upgrade is the nascent 5G infrastructure roll out and the continued build out and upgrade of passive optical networks worldwide. The increase in video streaming, new services enabled by 5G, and strong growth in data-intensive cloud-based services will continue to drive increasing demand for optical components that will require indium phosphide substrates,” he adds.

“The gallium arsenide market holds significant opportunities,” believes Young. “Our traditional applications will recover in 2020, so that we see great promise in applications such as power lasers for industrial welding and cutting, VCSELs for a variety of customers, industrial and automotive applications, and micro-LEDs, which use gallium arsenide for the red portion of the red-green-blue light spectrum,” he adds.

“In the meantime, we are taking the opportunity to effectively execute our relocation [from Beijing],” says Young. In Q4/2019, AXT expects to spend about $5m on the relocation of its manufacturing facilities, in line with its expectation for full-year 2019 of about $21m. “After a lengthy process, we have reached a significant milestone in completing the necessary permitting requirements for both our Dingxing and Chaozhou locations. In addition, we now have sufficient capacity outlying in both facilities to be able to handle large-volume production,” he adds. Chaozhou (which is mostly crystal growth facilities) has been ramping up very rapidly so that most of AXT’s output crystal can come from there. The Dingxing wafer processing facility is now providing up to 20% of customer demand so, in the next quarter or two, AXT is going to start to qualify major customer requirements from there. “I definitely expect two major customers to complete the shift of taking products from the new Dingxing facility by the end of Q1/2020,” states Young.

“We have also placed significant focus on the recruitment, training and relocation of our employees,” continues Young. “We are encouraged by the quality of talent we are being able to attract and retain and believe we now have all the essential components in place to meaningfully ramp up production in both locations [Dingxing and Chaozhou] over the coming quarters. As such, we are prepared for renewed growth when the demand environment improves as expected in 2020.”

See related items:

AXT reduces Q3 revenue guidance from $24.5-26m to $19.6-20m

AXT’s revenue grows a more-than-expected 22.8% in Q2

AXT’s margins rebound despite revenue falling further in Q1

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

AXT grows revenue an above-expected 5.5% in Q3

Tags: AXT GaAs substrate InP Germanium

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