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IQE

15 August 2022

AXT’s Q2 revenue up 17% year-on-year

For second-quarter 2022, AXT Inc of Fremont, CA, USA – which manufactures gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge) substrates and raw materials at its plants in China – has reported revenue of $39.5m, down slightly on $39.7m last quarter but up 17% on $33.7m a year ago. Also, this was despite COVID playing a role in the last week or two of the quarter, thwarting about $1.5m of deliveries.

Fiscal Q2/2021 Q3/2021 Q4/2021 Q1/2022 Q2/2022
Revenue $33.7m $34.6m $37.7m $39.7m $39.5m

Of total revenue, the proportion from the Asia Pacific region was 74%, Europe was 13%, and North America was 13%. The top five customers generated about 35% of total revenue (up from 29% last quarter), with just one over 10%. “We continue to believe that revenue diversity demonstrates our growth is not overly dependent on any particular customer or application,” says CEO Dr Morris Young. “This is another factor contributing to our confidence that we have reached a point of sustainability and can outpace market growth in 2022.”

Total substrate revenue was $31.7m, level with last quarter but up 27.3% on $24.9m a year ago.

By product category, germanium substrate revenue was $3.9m, down on $4.2m last quarter (following two of AXT’s highest ever revenue quarters for Ge in Q4/2021 and Q1/2022). “The satellite solar cell market, which is the primary driver for germanium, tends to be lumpy,” notes Young.

GaAs revenue was $12.2m, up slightly on $12m last quarter (and the highest since Q3/2012). “Our traditional high-end LED market demand remains strong in applications such as automotive display and high-end signage and lighting. We also continue to see strength in high-power industrial laser applications where we have gained significant market share,” says Young. “Wi-Fi applications for IoT also helped to drive a modest increase in revenue over the prior quarter.”

InP revenue was again a record $15.7m, up on $15.5m last quarter. This “puts us well on track to achieve indium phosphide revenue growth of 30% or more this year,” says Young. “Demand for our product for 5G telecommunications, data-center and LiDAR applications continue to grow, overcoming a downstate in the PONs [passive optical networks] market in Q2. We also saw healthy growth in our new customer applications with its continued ramp in Q2,” says Young.

Revenue was $7.8m 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 (which supplies high-purity materials including gallium and germanium, as well as InP poly and other materials). This is down on $8.8m a year ago but roughly level with $7.9m in Q1/2022, after very strong growth throughout 2021.

“We continue to achieve strong growth in highly strategic applications, and are currently ramping several tier-1 customers,” says Young.

“This strong execution has driven first-half revenue growth of 22% over the previous year and continues to enable us to outperform our market, with emerging opportunities that will layer on over the coming quarters,” Young adds.

On a non-GAAP basis, gross margin was a better-than-expected 39.4%, up from 33.8% last quarter and 36.4% a year ago. “While there were many factors that contributed, improved yields (particularly in crystal growth) was one of the most significant ones,” notes chief financial officer Gary Fischer. “Morris conducted regular meetings on yields during his four months in Beijing [at AXT’s manufacturing facilities, from which he returned recently] and part of our margin improvement has come as a result of this focus.”

Both BoYu and JinMei improved their gross margins. “The contribution from the equity-method raw material companies is higher than usual and reflects higher average selling prices (ASPs) for the raw materials and more units sold,” says Fischer. “A third factor is that we developed a process technology that enables us to recycle remnants of indium phosphide processing material. In addition to the gross margin benefit, this program is another step forward for us in our ESG [environmental, social and governance] commitment,” he adds. “A fourth factor is product mix - by comparison to the first quarter, the mix looks pretty similar. However within each substrate product, the diameter mix can impact gross margin. So product mix was more favorable in Q2.”

Operating expenses were $9.1m, up from $8.6m last quarter and $7.4m a year ago.

Net income was $6.7m ($0.16 per share, exceeding the expected $0.08-0.10), up from $4.3m ($0.10 per share) last quarter and $5.4m ($0.12 per share) a year ago.

Depreciation and amortization was $2m. Capital investments were $16.8m, of which about $14.8m was facilities construction (mostly related to adding equipment to expand indium phosphide growth capacity).

During the quarter, cash, cash equivalents and investments rose by $12.9m, from $44.3m to $57.2m. However, excluding a $13.8m bank loan received in China, cash reserves are basically unchanged.

Net inventory rose further, by $8.5m from $68.8m to $77.3m, despite the current supply-constrained environment, as AXT bought ahead in preparation for when demand accelerates. However, 50% of the inventory is raw materials and work-in-progress (WiP) is 46%. Finished goods actually declined to only 4% of inventory.

“Our strong execution on a number of fronts has set the stage for great opportunities in the coming quarters,” believes Young.

For Q3/2022, AXT expects revenue of $39-41m, with continued strong gross margin and net income of $0.15-0.17.

Germanium revenue is expected to fall further to $2-1.9m, as a result of a customer-specific payment issue that is expected to be resolved before the end of 2022. “Demand is still there. It’s been improving in the last couple of quarters. It’s all tied to satellites,” says Fischer. “Industry forecasts for new satellite launches show continued strength,” adds Young.

“Demand across our portfolio continues to be strong and we are working hard to keep up with customer orders. In particular, we’re expecting indium phosphide to have healthy growth in Q3, with multiple tier-1 customers and the breadth of applications driving this, including data-center, telecom, consumer, driverless cars and others,” says Fischer.

“This year, we doubled our indium phosphide capacity, demonstrating our unique ability to scale quickly and cost effectively to meet customer demand,” says Young. “Even with the additional capacity, we expect that there will continue to be supply constraints into next year. We continue to work closely with our customers to meet their requirements,” he adds.

“We are now qualifying into a second consumer application for which we delivered pre-production quantities of indium phosphide wafers in May and June. AXT answered the call on a very tough product specification, surpassing the best efforts of our competition,” says Young. “We are now in a position to build meaningful revenue in a brand-new market for AXT and we are also engaging with other tier-1 customers for opportunities that were previously not available to us.”

“We are achieving notable success in the development of larger-diameter substrates that we believe will enable the next generation of technology innovation across a number of end-markets,” says Young. “We have achieved an important milestone in the development of 6-inch InP. We are now producing and beginning to sell prime device-quality wafers of 6-inch InP,” he adds. “The material quality of our large-diameter substrates demonstrate our commitment to excellence and the differentiation of our VGF [vertical gradient freeze] crystal growth process. We’re pleased to be able to offer our customers meaningful advantages in scalability, low stress and low defect rates as new high-volume application comes to market.”

Gallium arsenide for lasers and LEDs is also growing well. “In RF devices, demand is expected to come down a bit in Q3 but we continue to focus on strengthening our position for future opportunities. We made good use of the tighter environment to renew our relationship with key customers and believe we have laid important groundwork for future market share growth,” says Young. “Our new manufacturing facility, coupled with our achievement of several tier-1 customers, have demonstrated our ability to support customers in this space with high-volume, high-quality substrates,” he adds.

“On our 8-inch gallium arsenide development program, we now have two major customers for this product and we are working with them on design specifications, giving us increasing confidence that there is a real market developing for large diameter in gallium arsenide,” says Young. “We believe that 8-inch substrate will be an important enabler for new high-volume applications over the next several years,” he adds.

Revenue from the two consolidated joint ventures should remain solid in Q3. “In particular, JinMei has been contributing well. It has continued to diversify its product offering beyond high-purity gallium,” says Young. “Since relocating to our Kazuo location, JinMei has more capacity and state-of-the-art facilities. Today, it also offers purified indium and indium phosphide poly for sale. In addition, JinMei successfully developed the gallium recycling program, which is helping us drive the efficiency in our cost structure. Both indium and BoYu have a strong R&D culture that is contributing to innovation to new offerings that enhance their value.”

Update on STAR Market listing

In late December, AXT’s China-based wafer manufacturing subsidiary Beijing Tongmei Xtal Technology Co Ltd submitted its application to list its shares in an initial public offering on the Sci-Tech innovAtion boaRd (STAR Market) of the Shanghai Stock Exchange (SSE). On 10 January, the SSE formally accepted the application for review. Subsequently, Tongmei responded to several rounds of questions received from the SSE. On 12 July, the SSE approved the listing.

The IPO remains subject to review and approval by the China Securities Regulatory Commission (CSRC) and other authorities. AXT notes that the process of going public on the STAR Market includes several periods of review and is therefore a lengthy process. Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal in second-half 2022, probably in Q4/2022.  

See related items:

AXT Q1 revenue grows 26% year-on-year, driven by 45% growth in InP

AXT grows revenue 44% year-on-year, aided by market share gains

AXT applies for IPO of subsidiary Tongmei on Shanghai’s STAR Market

AXT’s year-to-date InP revenue grows 46% year-on-year

AXT’s Q2 revenue of $33.7m up 52% year-on-year

Tags: AXT

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