9 November 2020
AXT grows revenue 15% in Q3
For third-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 $25.5m, up 15% on $22.1m last quarter and 28% on $19.8m a year ago (and above the forecasted $23.5-24.5m).
Of total revenue, the proportion from the Asia Pacific remained at 70%, while Europe fell further from 19% last quarter to 17% and North America rose further from 11% to 13%.
“We had no customer that reached 10% of revenue in Q3 [compared with one 10%-or-more customer last quarter], which speaks to the diversification of our revenue base,” comments chief financial officer Gary Fischer. The top five customers generated about 29% of total revenue (down from 30%).
Revenue from the two raw material joint ventures that AXT consolidates was $5.2m, down slightly from $5.3m last quarter but up 33% on $3.9m a year ago. The BoYu joint venture, which manufactures high-temperature pyrolytic boron nitride (PBN) crucibles and other products, continues to see healthy growth, while the JinMei gallium arsenide joint venture is also positioning for improved sales results as GaAs continues to increase in volume.
Substrate revenue was $20.3m, up 20.1% on $16.9m last quarter and 26.9% on $16m a year ago.
Indium phosphide sales grew from last quarter, exceeding expectations, and again surpassed total gallium arsenide revenue.
“This was driven by meaningful growth in strategic applications such as 5G telecommunications, where we believe that indium phosphide is being used in the 10G laser interconnects and will also be used in the emerging 25G laser interconnects for 5G base stations,” says CEO Morris Young. “In a related application, we also saw strong growth in passive optical networks (PON)… The PON market is currently robust and seems to be reflecting the momentum of 5G adoption in many parts of the world, particularly China,” he adds. “With the build-out of new 5G services capabilities, the ongoing increases in bandwidth requirements and the acceleration of cloud adoption, demand for indium phosphide in hyperscale data centers continues. Remote working has also accelerated the migration of workloads from on-premise data center to cloud. Some cloud providers have cited as much as 30% increase in data usage.”
“Revenue from data-center connectivity has been steady, at a healthy level throughout 2020. We are benefiting from both the overall growth in adoption of silicon photonics in the data center as well as our transition from having an indirect sales relationship with a tier-1 player to a direct sales relationship,” continues Young. “As a result of our ongoing qualification effort, we are excited to report that we began ramping up our direct sales in Q3. This is a validation of our ability to serve strategic high-volume applications and to meet the need of some of the most prestigious, exacting companies in the world.”
Gallium arsenide sales also grew from last quarter, driven by improving LED revenue from automotive and other applications. “This growth spans multiple customers, some of whom are building volume with us once again, now that our move [from Beijing to Kazou and Dingxing] is largely completed,” says Young. “We also saw continued demand from wireless applications, driven by a variety of Internet of Things (IoT) applications including Wi-Fi devices.”
Gross margin has risen further, from 29% a year ago and 30.6% last quarter to 34.6%, due to a combination of higher revenue, product mix, some improvements in manufacturing, and strong performance from one of the two consolidated raw material joint ventures.
Operating expenses (OpEx) rose further, from $6.2m a year ago and $6.3m last quarter to $6.6m. “Over 100% of the increase over Q2 is connected to some of the development work that we are conducting,” notes Fischer. Research & development (R&D) expenses rose by $480,000 (to $2m), while selling, general & administrative (SG&A) expenses actually fell by $124,000 (to $4.6m).
Unconsolidated partially owned joint ventures in AXT’s supply chain yielded a net profit of $45,000, meaning that they collectively turned profitable in Q3/2020 (compared with a loss of $0.2m a year previously).
Despite $320,000 in charges from the 25% tariff on importing wafers from China into the USA, net income was $0.99m ($0.02 per diluted share, better than the expected breakeven), up from $0.36m ($0.01 per diluted share) last quarter and a net loss of $0.9m ($0.02 per basic share) a year ago.
“These results were driven by a meaningful contribution from strategic applications such as 5G telecommunications, passive optical networks, and data-center connectivity, where our indium phosphide substrates play an important role in enabling ongoing technological advancement,” says Young. “We are excited to see so many of the applications and customer opportunities for which we have been preparing over the last two years beginning to take shape,” he adds. “With our gallium arsenide manufacturing relocation largely complete and the success of our efforts visible in customer acceptance, our new facilities are poised to be a cornerstone of our growth and market differentiation.”
Depreciation & amortization was $995,000. Capital expenditure (CapEx) was $5.7m (up from $4.3m last quarter). During the quarter, cash, cash equivalents and investments fell by $2.7m from $32.5m to $29.8m.
“Last summer, we took out a $5.8m bank loan in China. That loan has now been renewed but the bank requires that we pay back the loan and then they reissue it again. So we paid the full amount back in Q3 but the bank issued half back in Q3 and the other half in October, which is our Q4,” explains Fischer. “Our cash decrease would have been offset by the amount of $2.9m that slipped into October and we would have been cash positive for the quarter. As a result, we continue to feel good about our cash management and our cash balance.”
Due to the increased sales during the quarter, net inventory fell by $1.2m from $49.6m to $48.4m, consisting of 48% in raw materials, 48% in work-in-progress (WiP) and only 4% in finished goods. “These portions stay fairly constant in our business model,” notes Fischer.
The continued ramp of AXT’s Kazou and Dingxing facilities has now become “significant competitive differentiators,” Young reckons. “In Q3, we had another important milestone in the transitioning of our manufacturing to these locations. One of our largest gallium arsenide customers, who has been ramping its volume from Dingxing since early this year, is now taking 100% of its volume from our new facility. Customers such as this one and others that continue to ramp are reporting an improvement in quality and consistency as the benefit of our new state-of-the-art lines,” notes Young. “We’re confident that we will have approximately 75% or more of our gallium arsenide revenue coming out of the new facility by the end of Q4. In addition, another tier-1 customer conducted a week-long visit to our Beijing site, Kazou site and Dingxing site - our two new manufacturing sites. They have employees in China, so international travel and quarantines were not an issue,” he adds. “With the gallium arsenide manufacturing relocation now largely being behind us and the success of our effort clearly evident in customer acceptance, our new facilities are now poised to be a cornerstone of our growth and market differentiation.”
“The demand environment remains healthy, with a number of growth drivers leading the way,” says Fischer. “While Q4 is typically a seasonally down quarter for us, we believe that we can achieve results in line with or even a bit better than Q3,” he adds. “The order book Q4 is still steady,” notes Young.
For fourth-quarter 2020, AXT expects revenue to be level at $25-26m. Gross margin should be roughly flat on Q3. Net profit is expected to be steady at $0.01-$0.03 per share. CapEx should be no more than in Q3, and will “probably trend down a bit, and will keep trending down”.
“Indium phosphide will be up,” says Young. “Wireless is probably going to be down slightly and semiconducting LEDs will be up. Raw material is going to be flat and germanium is going to be down slightly,” he adds.
“OpEx will be a bit higher for a couple more quarters, so $6.6-6.7m,” notes Fischer. “Then we'll try and unwind it a bit going forward… This is all because of R&D.”
“As hyperscale data centers transition to faster more reliable and scalable infrastructure, high-capacity connectivity will continue to be essential to keep pace with the ever-expanding number of users, devices and applications,” says Young. “Some believe that the transition from 100G to 400G will happen faster than the move to 100G. This is a great news for the entire supply chain for data-center equipment providers including AXT. The low defect density and other key specifications of our indium phosphide substrates made them particularly well suited for a number of applications. To support what we believe will be a growing demand in 2021, we are investing in our own technology advancements,” he adds. “We have substantial R&D efforts underway to bring this to the market of our 6-inch indium phosphide substrates… Equally important, we are encouraged by the strong level of customer interest in larger-diameter substrates, as we believe this advancement will enable the market to ramp higher-volume applications.”
“We are also investing in our manufacturing processes with increased automation and many other capabilities that will further improve our quality and consistency,” continues Young. “All of these investments will benefit our ability to serve customers in our core applications of 5G, PON and data center. We are also positioning ourselves positively in the new applications in categories such as healthcare monitoring, consumer products and LiDAR [light detection & ranging].”
“Gallium arsenide is going through a resurgence of development activities. Collectively, gallium arsenide applications appear to be poised for substantial growth in the next couple of years. New applications may include world-facing cameras, augmented and virtual reality (AR/VR), automotive sensors, biosensors and more,” says Young. “On the horizon, micro-LEDs may follow as the next major volume driver for gallium arsenide chips. Micro-LEDs use one red, one green, and one blue LEDs for each pixel. The modular nature of the micro-LED is expected to allow them to scale from wearable devices and handheld devices to very large screens like high-end television of the future. They will consume less power, provide sharper contrast and produce brilliant lighting and colors. This is an exciting space that will add significant new value to the LED market in 2024 and beyond. Tier-1 players are already driving this development, and we believe that our wafers are being used for early-stage activities,” he adds.
“Similar to indium phosphide, customers in several gallium arsenide applications are also expressing real interest in larger-diameter substrates. As such, we also have a significant R&D effort underway to bring 8-inch gallium arsenide to the market,” says Young. “Once again, our VGF [vertical gradient freeze] technology is highly suitable for the requirement of producing larger-diameter substrates,” he adds. “With the amount of growth opportunities across our portfolio, our capability to expand our manufacturing capacity has never been more valuable or timely.”