27 July 2020
AXT’s Q2 sees stronger-than-expected growth in InP
For second-quarter 2020, 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 $22.1m, up 6.8% on $20.7m last quarter but down 10.9% on $24.8m a year ago.
Of total revenue, the proportion from the Asia Pacific was 70% (rebounding from 62% last quarter, which was impacted by Chinese New Year then the Coronavirus-related shutdowns in China, plus reduced operation of the firm’s manufacturing facilities in China to limit staff exposure). Meanwhile, North America rose from 9% to 11% and Europe fell back from 30% to 19%. Only one customer reached 10% of revenue, and the top five generated about 30% of revenue (down from 49% last quarter).
Revenue from raw materials joint ventures was $5.3m, up almost 40% on $3.8m last quarter and 26% on $4.2m a year ago.
Substrate revenue was $16.9m, level with $16.9m last quarter but down 18% on $20.6m a year ago.
Germanium substrate revenue was down only slightly from last quarter (which had been the highest since Q3/2018).
“We are encouraged to see growth in strategic applications like 5G, which not only drives our growth but also functions as the catalysts for a number of related technologies. We saw this most clearly in our indium phosphide sales,” says founder & CEO Dr Morris Young. “We had expected to take a step back following the strong quarter in Q1, instead demand for indium phosphide was again strong in Q2, allowing us to deliver the high end of our [$20.5-22.5m] revenue range and outperform earnings. We believe that indium phosphide is being used in 10G and emerging 25G laser interconnects or 5G base stations. Growth in 5G network construction presents a net new opportunity for AXT. It is beginning to drive both front-haul and back-haul applications and it is also likely to continue to fuel a healthy PON [passive optical network] market, as the two technologies are very closely linked. Further, AXT is well positioned to supply into all of the major supply chain for 5G and its related applications,” he adds.
“Growth in 5G is also driving greater bandwidth requirement in the data center. In Q2, we also saw healthy demand for indium phosphide for data-center applications. Silicon photonics technology provides a number of advantages such as lower power consumption and increasing bandwidth and data-transfer capabilities. These, coupled with a surge in consumer demand for high-speed broadband services, are driving hyperscale cloud and large enterprise data centers to deploy optical modules that can support network speeds of 100G and 400G and beyond,” says Young.
Regarding, gallium arsenide, as expected, LED applications - particularly automotive – were weak again. “This was offset by the strength in wireless applications, which had good growth,” says Young. “Demand is driven by a variety of Internet of Things (IoT) applications, including WiFi devices, and a rebound in Q2 after work stoppages in Q1, and possibly cell-phone devices in China.”
Gross margin was 30.6%, down from 34.3% a year ago but up from 26.6% last quarter (and well above the expected mid-20s) due to a combination of the higher revenue, improvements in manufacturing, and strong performance from one of the two consolidated raw material companies.
Operating expenses were $6.3m, up slightly from $6.2m both last quarter and a year ago.
Despite $278,000 in charges from the 25% tariff on importing wafers from China into the USA, net income was $0.36m ($0.01 per share), down from $1.45m ($0.04 per share) a year ago but an improvement on a net loss of $0.18m ($0.01 per share) last quarter (and better than the expected net loss of $0.01-0.03). However, this includes a grant of $1.6m from a provincial government agency in China as an award for AXT relocating its GaAs manufacturing facilities from Beijing to its province.
Depreciation & amortization was $976,000 and capital expenditure (CapEx) was $4.3m (rebounding from $2.1m last quarter).
During the quarter, cash, cash equivalents and investments rose by $3.7m from $28.8m to $32.5m.
“Our accounts receivable is higher than it normally might be running, probably due to the Chinese New Year and also the Coronavirus. We worked on it in Q2 and brought the day sales outstanding number down into a more reasonable range and, as a result, the cash increased,” says VP & chief financial officer Gary Fischer.
Net inventory rose modestly from $48.3m to $49.6m, consisting of 44% in raw materials, 51% work in progress (WiP) and only 5% in finished goods.
“Our net cash burn in 2020 will be similar to our cash burn in 2019, which was only $3.2m,” forecasts Fischer. “Depending on the anticipated growth in the second half, it could initially consume additional cash as we add capacity [more furnaces] driven by growth of course and increased raw materials going into WiP. So we feel we have a strong cash position, which is important in light of the uncertainties resulting from COVID-19,” he adds. “We still have an untapped line of credit with Wells Fargo Bank, and a second bank in China is arranging another line of credit for us... We do not anticipate tapping all of this, but it is a prudent in today’s environment.”
“The challenges presented by COVID are not behind us,” says Young. “We’re not experiencing any noticeable disruption in our supply chain of raw materials required to manufacture our substrates. We’re able to obtain everything we need. The biggest challenge to productivity remains the limited travel between our teams in China as well as travel restriction to and from China. This has impeded our ability to address certain manufacturing efficiencies in the new facilities as aggressively as we otherwise would like to,” he adds.
“The demand environment for our products seems to be improving, with a number of growth drivers intact,” notes Fischer. For third-quarter 2020, AXT expects revenue to grow to $23.5-24.5m, including continued growth in InP. Gross margin should continue to increase. Net profit should be about breakeven. “We won’t have the help in Q3 of a grant in China, but that is offset by increased revenue. Growth is good, so we can deal with that,” he adds.
“We view 2020 as a turning point in our business,” says Young. “There are clear signs in the marketplace that strategic applications like 5G, data centers and PON are strengthening. In addition, we believe new applications across our portfolio are creating exciting incremental opportunities beginning later this year. Further, with the relocation of our GaAs manufacturing largely completed and production ramping, we are now focusing on elevating our manufacturing and business processes to serve the needs of increasingly sophisticated applications and customer requirements,” he adds.
“AXT is now engaged in multiple significant qualification efforts. The first in the area of indium phosphide for data-center applications is expected to begin contributing to our revenue results in Q4,” notes Young.
“In addition, we are working through several other qualifications that can meaningfully impact our business opportunities in 2021,” he adds. “Since we announced the qualification of Dingxing by a major consumer in March a number of additional qualification customers have completed their certification and have given us approval to ramp production. These customers are also reporting an improvement in quality and consistency, a benefit of our new state-of-the-art lines. By Q4 we’ll have approximately 75% of our gallium arsenide revenue coming out of the new facilities. It represents a significant increase in production volume throughout 2020. Relocation of our gallium arsenide manufacturing facility has evolved from being a risk factor in our business to becoming a significant competitive differentiator for 2020 and beyond.”
“In total, we believe we are positioning ourselves for renewed revenue expansion and improving profitability,” concludes Young.