4 August 2021
AXT’s Q2 revenue of $33.7m up 52% year-on-year
For second-quarter 2021, 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 $33.7m, up 7.3% on $31.4m last quarter and up 52% on $22.1m a year ago, and exceeding the $30.5-31.5m guidance.
“We ended Q2 expecting our revenue to be approximately flat, following strong growth in Q1,” says CEO Dr Morris Young. “We continue to see increasing demand in both gallium arsenide [for LED applications] and indium phosphide substrates as well as healthy growth in our raw material business,” he adds.
Of total revenue, substrate sales were $24.9m, up 6.4% on $23.4m last quarter and up 47% on $16.9m a year ago.
“Indium phosphide set a new revenue record in Q2, and once again surpassed gallium arsenide as our single largest product category,” notes Young. “Data-center connectivity demand remains steady and at a positive level. As a result of the overall growth in adoption of silicon photonics in data centers, silicon photonics technology provides a number of advantages, such as lower power consumption and increasing bandwidth and data transfer capabilities,” he adds. “We completed the direct qualification of a [US-based] tier-one customer [with which AXT has been working for almost the last two years] in Q1, and we believe we’re now selling indirectly into another major player in this space.”
GaAs revenue for LED applications grew by more than 20% in Q2, driven by high-end applications including automotive and lighting and display. As expected, revenue from wireless applications fell modestly.
Revenue from germanium substrates also fell modestly in Q2, as expected.
Revenue from AXT’s two consolidated raw material joint venture companies – BoYu (which makes high-temperature pyrolytic boron nitride crucibles and pBN-based tools for organic light-emitting diodes) and JinMei (a diversified industrial high-purity material supplier) – was $8.8m, up 10% (rather than the expected drop) from the record $8m last quarter (following 45% growth in Q1) and up 66% on $5.3m a year ago. “In 2020, both companies relocated to our campus in Kazuo, enabling them to expand capacity in response to strong market demand,” says Young. “Today, JinMei is processing approximately 12 tons of material per month, which is more than 25% of the world’s yearly consumption of gallium. Its robust growth has been made possible by the new state-of-the-art facilities that not only allows it to handle more demand, but also attract new customers and open up incremental business opportunities, such as material recycling and recombination,” he adds. “Continued expansion, coupled with a recovery in pricing of raw materials such as raw gallium, has allowed both companies to continue to grow.”
Of total revenue in Q2/2021, the proportion from the Asia-Pacific region remained 73%, while Europe rose further from last quarter’s 17% to 19% and North America fell further from 10% to 8%.
For the second consecutive quarter, no customers reached 10% of revenue (illustrating the diversity of applications for indium phosphide, for example). The top five customers generated about 31% of total revenue. “Revenue growth, breaking through the $30m level, is not overly dependent on one large customer, and this diversity is a good thing,” comments chief financial officer Gary Fischer.
Gross margin was 36.3%, down from 36.8% last quarter but up on 30.6% a year ago, driven primarily by product mix and increasing revenue volume.
Operating expenses have risen further, from $6.3m a year ago and $8m last quarter to $8.3m. R&D is one of the drivers creating the increase as a result of two major ongoing R&D programs. “We also have initial expenses associated with going public in China, as well as increased employee stock compensation expense and bonuses,” notes Fischer. Total stock compensation expense was $975,000.
After turning profitable in Q3/2020, unconsolidated partially owned joint ventures in AXT’s supply chain grew their net profit again, from $1.1m to $1.5m.
Despite about $280,000 in tariffs (as a result of the 25% tariff charged on importing wafers into the USA from China), net income has risen further, from just $0.36m ($0.01 per share) a year ago then $3.4m ($0.08 per share) last quarter to $4.4m ($0.10 per share, exceeding the $0.06-0.08 per share guidance).
Depreciation & amortization was $1.7m, while capital expenditure (CapEx) rose further from $5.6m last quarter to $7.4m. Inventory rose by $4.2m. Accounts receivable rose by $5.1m, including about $3m due to days sales outstanding (DSO) rising by 8 days to 90 days, as a result of the high proportion of sales in Greater Asia (for which there is a lot longer time to pay in China, Korea and Japan). Accounts payable rose by just $2.7m. Also, AXT made a one-time payment of about $3.7m for purchasing shares in its China-based wafer manufacturing company Beijing Tongmei Xtal Technology Co Ltd that were previously held by minority interests.
Overall, during the quarter, cash, cash equivalents and investments fell from $66.9m to $58.5m.
“The momentum in our business continues to build with major customer wins that are increasingly contributing to our revenue,” comments Young.
“It is clear from the market demand that our new factory and capacity expansion were built at exactly the right time. We are now able to support current and emerging customer requirements across growing applications such as 5G telecommunications and its related technologies, data-center connectivity, LED-based sensing and display and a variety of new consumer-related devices,” says Young. “We are participating in several major technology trends, and we are now in the supply chains of some of the most prestigious companies in the world… In Q2, we qualified with another tier-one customer who plays an important role in the supply chain for major end-customers in many of these areas. This was a very extensive qualification process, and we believe it can open new doors of opportunities for us in the coming quarters. It also underscores the value of our investment in our manufacturing and business processes, in-house expertise and product development. We believe we are now in a strong position to win market share and expand into key new emerging applications.”
For Q3/2021, AXT expects revenue to rise to $34.5-35.5m, with net income of $0.10-0.12 per share.
Germanium substrates and raw materials are expected to be consistent or about equal to Q2. “Indium phosphide, coming off a very strong recent quarter, we believe will see continued growth,” says Fischer. “We also expect growth in gallium arsenide revenue,” he adds.
“As we move into Q3, wireless revenue is expected to grow nicely from Q2 levels as a result of broad-based IoT [Internet of Things] application demand,” says Young.” Our successful development of 8-inch GaAs wafers for LED applications such as micro-LEDs and LiDARs is setting the stage for a new wave of growth. Among the many benefits, we believe 8-inch GaAs will help to enable the scale and efficiency required for very large volume applications. Industry news and customer interest suggests that micro-LEDs are likely to become the next major volume driver for GaAs chips,” he adds. “Tier-one players are driving the development of this technology, and we believe that our wafers are already being used for early-stage activities. The level of customer activity and general industry excitement gives us confidence that micro-LEDs will come to market and it’s also a factor in our motivation to deliver the 8-inch GaAs wafers,” says Young.
“This year, we are on track to grow our indium phosphide revenues by more than 35%, with demand being driven by a number of customers across a diversified set of applications,” stresses Young. “Once again, we believe this indicates an acceleration of some big trends in the technology landscape. In particular, we saw continued strength for 5G and related technologies.
“We’re beginning to ramp volume for a new customer device that we believe is now moving into production [in second-half 2021],” says Young. “We expect the ramp for our substrate related to this application to be gradual over the coming quarters, adding incremental growth to our business. Our qualification into the supply chain for this customer is the result of many quarters of collaboration with both the end-customer and its supply chain partners.” As well as the existing 3- and 4-inch InP substrates, the customer also has a future interest in 6-inch InP (which AXT is currently developing), he adds.
STAR Market listing update
On 16 November, AXT announced a strategic plan to access China’s capital markets and progress to an initial public offering (IPO) by its China-based wafer manufacturing company Beijing Tongmei Xtal Technology Co Ltd on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (STAR Market). AXT is currently preparing the required documents for submission to the STAR Market authorities. “The STAR Market authorities and the China SEC have raised the bar for companies wanting to go public,” notes Fischer. “Their focus includes semiconductor companies and material companies, and we qualify in both of those categories,” he adds. “We of course have healthy revenue and growth. We also have a strong customer list and have partial ownership of 10 raw material companies located in China. We have over 1000 employees in China that are citizens and pay income taxes there,” he adds. “We hope to be ready to file late this quarter or in the fourth quarter.” In addition, the process of going public on the STAR Market includes several periods of review. Tongmei expects to accomplish this goal in mid-2022.