22 February 2021
AXT’s Q4 revenue grows 47% year-on-year, driven by InP for 5G
For full-year 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 $95.4m, rebounding by 15% from 2019’s $83.3m, driven by growth in every category across the firm’s portfolio.
“2020 was a year of solid improvement for AXT, capped off by strong indium phosphide growth, particularly in 5G, in Q4, which is typically a seasonally down quarter,” says CEO Morris Young.
Fourth-quarter 2020 revenue was $27m, up 5.9% on $25.5m in Q3 and up 46.7% on $18.4m a year ago.
Specifically, revenue from the two raw material joint ventures that AXT consolidates (BoYu and JinMei) has grown further, from $3.9m a year ago and $5.2m in Q3 to $5.5m. In 2020, both BoYu and JinMei relocated their factory to AXT’s campus in Kazuo. This has enabled both JVs to expand capacity in response to strong market demand. BoYu – which makes high-temperature pyrolytic boron nitride (PBN) crucibles and pBN-based tools for organic light-emitting diodes (OLEDs) – continued to see healthy growth. Diversified industrial high-purity material supplier JinMei is also posting solid results as gallium prices continue to rise, while also supplying InP poly and other materials. Relocation and expansion have allowed both JVs to participate in new business opportunities, which is fueling their continued growth. “Their close proximity to our own manufacturing lines allows AXT to expand recycling efforts, while improving manufacturing economics,” notes Young.
Substrate revenue was $21.5m, up 5.9% on $20.3m in Q3 and 48.3% on $14.5m a year ago.
Q4/2020 was AXT’s second strongest quarter ever for InP revenue, exceeded only by Q2/2019, when AXT received a very large order from a single customer that is building inventory for expected future demand, whereas Q4/2020 revenue was spread across many customers and applications. “The current revenue diversity demonstrates the broad and sustainable nature of our growth opportunities in indium phosphide, says Young. As well as its increasing use in passive optical networks (PON) and for silicon photonics in data centers, InP is now also being used in the front-haul link on 5G base stations. “It was in April of 2019 that we first mentioned 5G revenue on our earnings report. A year later, 5G and its closely related power applications are driving significant growth in our indium phosphide revenue. Demand had been particularly strong in China and Taiwan. China itself is building 600,000 last year, and they're going to just increase... They need indium phosphide to do that linkage,” he adds. “We don’t see any slowing in 2021, as 5G continues to roll out worldwide.”
Of total revenue in Q4/2020, the proportion from the Asia-Pacific region rose further, from 70% last quarter to 71%, while Europe fell further from 17% to 16%. North America remained 13%, while Taiwan was level with it at 13%. Two customers reached 10% of revenue, and the top five generated about 37% of total revenue.
“In data-center connectivity, the ever-expanding number of users, devices and applications is driving the transition to technology that transports faster, more scalable infrastructures,” says Young. “High-capacity connectivity will continue to be essential. In fact, many believe that the evolution from 100G to 400G will happen faster than the move to 100G. We are seeing this growth in silicon photonics reflected in our steady, strong demand in data-center-related revenue. Moreover, we are pleased with the highly productive customer relationships we are developing in this area of our business, and we are applying the tier-one processes we have developed to benefit customer experiences across our portfolio.”
For GaAs substrates, revenue from semiconducting GaAs for LED applications continued to rebound, driven by high-end applications, including automotive. “Wireless gallium arsenide revenue was down seasonally in Q4, but Internet of Things (IoT) applications seem to be providing a lift in ongoing demand for semi-insulating GaAs substrates,” says Young.
Germanium substrate revenue grew by more than 20% in 2020, after a significant slowdown in 2019. “The primary driver is the satellite solar cell market, which appears to have entered a period of recovery,” notes Young. “We expect to see further improvement in 2021.”
Gross margin was 33.9%, down from 34.6% last quarter but up greatly from 21% a year ago, attributed to the favorable product mix as well as “the leverage we get from higher revenue [absorbs more of the fixed cost over more units],” notes chief financial officer Gary Fischer. Full-year gross margin rose from 29.8% in 2019 to 31.7% in 2020.
Operating expenses are up from $6.7m a year ago and $6.6m last quarter to $7.2m (driving full-year OpEx up from 2019’s $25.1m to $26.3m for 2020). This is due primarily to (1) investment in R&D rising by $125,000 to $2.16m (while making “good progress on some R&D programs”) and selling, general & administrative (SG&A) expenses rising by $460,000, driven mostly by year-end employee bonuses totaling about $350,000 (roughly half of which was in BoYu and JinMei) after “a good year with a strong finish”, plus a $50,000 charge for bad debt, plus charges related to the firm’s private equity round and preparing for the initial public offering (IPO) in China. Also, staff travel to China saw an increase.
Operating income was $1.9m, down from $2.2m last quarter but still an improvement on an operating loss of $2.8m a year ago. Full-year operating income was $3.9m for 2020, compared with an operating loss in 2019 of $0.3m.
After turning profitable last quarter (yielding $45,000), unconsolidated partially owned joint ventures in AXT’s supply chain grew their net profit to $354,000. “Many are benefiting from the increase in commodity pricing being driven by a healthy demand environment,” notes Young.
Q4 results included about $400,000 in tariffs as a result of the 25% tariff charged on importing wafers into the USA from China.
Despite this, net income has more than doubled from $1m ($0.02 per share) last quarter to $2.06m ($0.05 per share), an improvement on a net loss of $2.05m ($0.05 per share) a year ago. Full-year net income was $3.2m ($0.07 per share) for 2020, compared with a net loss of $2.6m ($0.07 per share) in 2019.
During the quarter, depreciation and amortization rose to $1.37m. Capital expenditure (CapEx) fell back slightly to $5.3m.
Cash, cash equivalents, and investments would have hence remained level with last quarter’s $29.8m. However, they instead rose by $48.8m, to $78.6m, due to the IPO process of partnering with private equity firms in China.
On 16 November, AXT announced a strategic plan to access China’s capital markets and progress to an IPO by its China-based wafer manufacturing company Beijing Tongmei Xtal Technology Co Ltd, on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (the STAR Market). The first step is engaging reputable private equity firms in China to invest funds in Tongmei. “This went smoothly, was met with enthusiasm, and closed faster than we expected,” comments Fischer. In January, the final instalment of $1.5m in private equity investment funding brought the total raised to about $49m in exchange for a stake in Tongmei of about 7.28%. Going public on the STAR Market includes several periods of review. “We hope to file the application with the China Securities Regulatory Commission by the end of June,” says Fischer. Tongmei expects to complete the process in mid-2022.
“Simultaneously, we have been working on some reorganization plans, which will make Tongmei have broader product lines, more consolidated revenue, more customers and, in general, strengthen this company and support the high valuations awarded by that investment community,” says Fischer. “One example is that we are moving our two consolidated raw material companies BoYu and Jin Mei into the Tongmei family. We did receive some very positive feedback from a number of shareholders when we announced this,” he adds.
During Q4/2020, AXT’s net inventory rose by $3.2m to $51.5m, consisting of 48% in raw materials, 47% for work in progress (WiP) and only 5% in finished goods. The largest increase was in raw materials, which was deliberate. “The market for raw materials has tightened up, and this is a good sign [with raw material prices increasing],” comments Fischer. “We think this will hold in 2021.”
“We’re continuing to see strong market demand, maybe not so strong for the gallium arsenide wirelesss [which is still going to hold flat], but every other substrate category is looking good,” notes Fischer.
For first-quarter 2021, AXT expects revenue to grow (which is untypical), to $28.5-29.5m. This is despite February being a short month, and the factory being shut down for about a week due to Chinese New Year. Net income should be $0.05-0.07 per share. “We can still achieve higher than the recent two quarters in terms of gross margin,” believes Fischer. “Initially, we’re trying to just get it back to 35%, but there are still some gains to be made in yields and manufacturing efficiencies, as the manufacturing teams settle into the new locations,” he adds. It also depends how much more business AXT can do on indium phosphide, as well as some high-end gallium arsenide business, Young adds.
“Capacity in our industry remains very tight,” notes Young. “We have and will continue to run capacity at our Beijing facility to keep pace with customer demand. Scaling quickly and cost effectively is something AXT is uniquely able to do, and we expect to gain market share because we have the shortest lead time among our primary competitors,” he adds.
“In 2021, we expect to see the meaningful emergence of additional new applications for InP in such areas as healthcare monitoring and consumer devices,” says Young. “Many are being innovatively driven by tier-one players and showcase the unique properties of indium phosphide. These applications have the potential to represent an entirely new growth area, for which we are well positioned and engaged,” he reckons.
In GaAs, new applications - both emerging today and on the horizon - include world-facing cameras, augmented and virtual reality (AR/VR), automotive sensors and biosensors, notes Young. “Micro-LED may follow as the next major volume driver of GaAs chips. Micro-LEDs are expected to consume less power, provide sharper contrast, and produce brilliant lighting and colors. Their applications are set to scale from wearable devices and handheld devices to very large screens, like high-end televisions of the future,” he adds. “We’re seeing reports that the micro-LED market for small consumer devices like wearables and phones may eventually reach an annual demand of 2 million 6-inch GaAs substrates for the red LED portion alone. It will be larger than the entire current market for semiconducting GaAs substrates. This is an exciting space that could add significant new values to the LED market in 2024 and beyond. Tier-one players are already driving the development, and we believe that our wafers are being used for early-stage activities,” continues Young.
“We completed the relocation of our gallium arsenide manufacturing, elevated our business and manufacturing processes to meet tier-1 standards, and expanded capacity in response to increasing demand. Now, with the gathering momentum of 5G and its related technologies, the technology progression in data-center connectivity, and new applications emerging in healthcare and consumer devices, we believe AXT is in a strong position to lead our industry and enable many of the defining trends of the coming decade… We are ready,” says Young. “In 2021, we expect to bring 8-inch GaAs and 6-inch InP to market. We expect to exceed that elusive $30m revenue quarter-per-quarter mark. We expect to ramp up production with multiple tier-one companies,” he concludes.