AES Semigas


21 February 2020

AXT’s Q4 revenue down 17% year-on-year, driven by drop in GaAs and Ge substrate sales

For full-year 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 $83.3m, down 18.7% on 2018’s $102.4m. Raw materials business declined by about $6m, mostly due to the changes in ownership positions in Q1/2019 that resulted in consolidating just two of the joint venture raw material companies in revenue results in 2019 (compared with three in 2018). The balance of the decline came from GaAs and Ge wafer substrate sales. “In gallium arsenide, our business weathered a difficult year in 2019,” comments CEO Morris Young. “In germanium substrate, coming off a strong year in 2018 our sales took a meaningful step back in 2019. It is in a softer demand environment, particularly in China,” he adds.

Fiscal Q4/2018 Q1/2019 Q2/2019 Q3/2019 Q4/2019
Revenue $22.2m $20.2m $24.8m $19.8m $18.4m

Fourth-quarter 2019 revenue was $18.4m, down 7% on $19.8m last quarter and 17% on $22.2m a year ago. Of total revenue, the proportion from the Asia-Pacific region actually rebounded slightly from 66% last quarter to 68% and North America rose further from 9% to 10%, while Europe fell from 25% to 22%. Two customer reached 10% of revenue and the top five comprised about 42%.

“Q4 capped off a turbulent year in the geopolitical and macroeconomic climate in which we weathered one of the most difficult demand environments in recent memory,” notes Young. “Overall, this had a negative impact throughout the year on key applications and certain customers within AXT’s gallium arsenide and germanium businesses, making up the majority of our year-over-year revenue decline,” he adds. “The global demand environment in key [GaAs] applications such as LED lighting, automotive lighting, and other high-performance applications was challenging. There were certain customers who were predicting a pick up in Q4, but it did not materialize. Wireless applications were also down from the prior year.”

“Despite these more challenging conditions, our indium phosphide business exceeded our expectations in Q4, and finished 2019 with modest growth over the prior year. In fact, 2019 was the first year in our history that total indium phosphide revenue surpassed total gallium arsenide revenue,” says Young. “The substrate market demonstrates the gathering momentum in the trend driving indium phosphide demand. These trends such as data-center connectivity, 5G telecoms and optical network expansions are powerful and substantial and they are developing as we see.”

Full-year gross margin has fallen from 36.2% in 2018 to 29.8% for 2019. Quarterly gross margin was 21%, down from 29% last quarter. Of the 8% decline, about half (about 4%) was due to lower gross margins on each of AXT’s two consolidated raw material revenue (1.5%) and adjustments in excess and obsolete inventory (2.2%). The other 4% of the decline was due to a decline in manufacturing efficiencies and yields mainly associated with two new products – 6-inch InP substrates and a new 6-inch Ge product configuration for a large customer – addressing new market opportunities for AXT. “We view this decline in efficiency as temporary,” says VP & chief financial officer Gary Fischer. “Larger-diameter substrates are inherently more challenging, where we are already taking steps to refine the processes and expect to show improvement [in manufacturing yields and efficiencies] in the coming quarters. “

Operating expenses were $6.7m, up from $6.2m last quarter as a result of end-of-year bonuses for employees at raw material joint ventures JinMei and BoYu that are part of AXT’s supply chain. However, full-year OpEx rose only slightly, from $24.9m in 2018 to $25.1m for 2019.

Net loss was $2m ($0.05 per share), up from $0.9m ($0.02 per share) last quarter and $1.1m ($0.03 per share) a year ago. Consequently, full-year 2019 saw a net loss of $2.6m ($0.07 per share), compared with net income of $9.7m ($0.24 per diluted share) in 2018.

During the quarter, depreciation and amortization grew to $5.5m. Capital expenditure (CapEx) was increased to just over $7m. Accounts receivables (net of reserves) have risen from $17.4m to $19m.

Cash, cash equivalents and investments have hence fallen to $36.3m, down from $38.5m at the end of Q3/2019 but only $39.4m at the end of 2018. So, net cash burn in 2019 was only $3.1m (even though AXT spent almost $21m in 2019 on the relocation its GaAs crystal growth and wafer processing facilities from Beijing to Chaozhou and Dingxing, respectively). This includes a bank loan of about $5.8m in China, secured in Q3/2019. AXT also has a line of credit at Wells Fargo Bank that it has not utilized.

Despite rising slightly by $81,000 to $49.2m in Q4, net inventory has still been cut by $9.4m from $58.6m at the end of 2018. Of this reduction, $5.8m was a result of no longer consolidating Jia (one of AXT’s raw material supply chain companies) and $3.6m was a result of operations and a focus on reducing inventory (near to the target of $1m per quarter during the year – a “good result”, given the lower revenue). End-of-year inventory consisted of about 42% in raw materials, 51% in work in progress (WiP) and only 7% in finished goods.

“As we move into 2020, AXT is poised for growth and improvement in our financial results,” believes Young. “Our indium phosphide business is healthy, with exciting applications contributing today, and new ones on the horizon. Our gallium arsenide and germanium businesses are also well positioned to benefit from a recovery.”

“During Q4 we met a major milestone by completing the relocation of our all GaAs crystal growth to Chaozhou, which opens many new doors for AXT. This facility was designed and built by us from the ground up and is optimized for innovation and best-practice manufacturing,” notes Young. “Q1/2020 also marks other important milestone in our relocation of our GaAs wafer processing [to Dingxing]. We are making good progress with several customers regarding site qualification and results thus far have been positive, with final signing off expected later this quarter. We also expect to be able to drive additional customer qualification in the coming months. This will open the door to incremental business opportunities from new and returning customers,” Young believes.

For first-quarter 2020, AXT expects revenue to rise to $18.5-20.5m. This is a wider-than-normal guidance range as a precaution to allow for unanticipated effects in the supply chain from the coronavirus. “All three of our facilities are in operation and have strong local management teams providing oversight,” notes Young. “We continue to be able to meet customer requirements and have the benefit of inventory and manufacturing redundancies between our locations, should the need arise.”

“In Q1 our indium phosphide revenue is off to a good start. Sales in the quarter will include a mix of applications including data-center, PON [passive optical networks] and 5G telecoms,” says Young”. Our customer relationships remain strong and we hope we can build upon our customer list more this year.”

OpEx will likely be cut slightly to $6.4-6.5m in Q1 – despite increases in other general & administrative (G&A) areas such as insurance, payroll taxes and legal expenses – as customers transition to the new facility and some of the duplicative expenses continue to diminish. Loss per share should be $0.03-0.06.

“We expect to show incremental improvement in our gross margin, and we’ll be focused throughout the year on improving our manufacturing efficiencies across all of our product lines,” says Fischer.

“The biggest challenge we face currently [regarding the coronavirus] is the travel restrictions, both to and from China, and also within China,” says Young. “These restrictions make it more difficult for our leadership to address certain issues that benefit from the hands-on problem solving, such as manufacturing efficiency, and yield for the launch of our larger-diameter substrate. As a result, we expect the rate of improvement may be a bit slower than it would under normal circumstances. We are also limited in the number of employees that are allowed to be in the factory on any given day. As such, productivity may not be quite as high until the government-mandated restrictions are lifted,” he adds.

“As we move into 2020, the satellite solar cell market [for AXT’s germanium substrates] is poised for improvement. With a number of satellite launches expected to increase worldwide, we expect we will participate in that improvement,” says Young. “As we talked to our customers over the last several quarters about their current and future requirement, we came to believe that our ability to offer a new configuration of our 6-inch germanium wafers can open up new alternatives for AXT. It is a natural expansion of our current capability and will allow us to support our high-volume demand,” he adds. “We are highly focused on driving manufacturing efficiency with this larger-diameter product and believe that we will be able to bring the gross margin up to a more normalized level in the coming quarters.”

“While gallium arsenide had a difficult year in 2019 it is poised for renewed growth in year 2020 and beyond,” believes Young. “This is likely to be driven by recovery in our traditional applications of high-performance LEDs used for example in automobile lighting and lasers as well as a number of new and promising applications, such as mini- and micro-LEDs, laser-based sensing and, over time, 5G wireless. We’re excited to be able to open the doors with our new facilities at a time when gallium arsenide is experiencing its next leap of innovation, new applications and expansion.”

AXT expects to spend about $5m in CapEx for gallium arsenide in 2020 and is considering additional investments in indium phosphide. “There are significant new trends visible on the horizon involving InP-based sensors for new applications in healthcare, automotive and more. Collectively, these applications position indium phosphide as one of the most important material of this new decade,” says Young. “We are setting the pace in our market for technical innovation and we are expanding facilities and additional equipment. That will allow us to keep pace with the market demand,” he believes.

“We are also bringing to market larger-diameter indium phosphide substrates. This is a capability that most current and potential new customers are asking for,” Young adds. “This new capability will be essential to emerging large-volume applications for indium phosphide. It will also provide new barriers to entry for substrate manufacturers looking to move into this space.”

See related items:

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

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

Tags: AXT GaAs substrate InP Germanium


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