10 August 2023
AXT’s Q2 sees InP revenue bottom out, offset by rebound in GaAs
For second-quarter 2023, 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 $18.6m, down slightly on $19.4m last quarter but more than halving from $39.5m a year ago.
By product category, InP revenue is believed to have bottomed out, at $4.6m, down on $7.1m last quarter and $15.7m a year ago. This reflects the expected market softening after starting to decline about 6 months ago, particularly in the data-center, consumer and telecoms infrastructure markets.
GaAs revenue was $5.4m, less than half the $12.2m a year ago but rebounding slightly from $5m last quarter. “We saw continued modest improvement in Q2 as key applications such as high-power lasers and IoT devices continued their recovery, particularly in China,” says co-founder, CEO & chairman Dr Morris Young. “Gallium arsenide was the first of our materials to experience the micro-downturn, beginning in Q3 of last year,” he notes. “We actually already have seen two quarters of improvement, although very, very slight.”
Germanium substrate revenue fell back from $1.4m last quarter to $1m, down on $3.9m a year ago.
In addition, revenue was $7.6m from the 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). Due to both increased demand and rising prices, this was up on $5.9m last quarter and almost equal with $7.8m a year ago. “Since relocating to our Kazuo campus, both supply chain companies have been able to increase capacity to meet demand,” notes Young.
Of total revenue in Q2/2023, the proportion from the Asia-Pacific region has rebounded from 68% last quarter to 75%, while Europe has fallen from 18% to 16% and North America from 14% to 9%.
The proportion of total revenue contributed by the top five customers has fallen further, from 35% a year ago and 28% last quarter to 24%. Again, no customer comprised more than 10%.
“Though the macro-environment continues to impact our growth near-term, the trends that have driven our revenue and customer expansion remain very much intact,” notes Young.
On a non-GAAP basis, gross margin has fallen further, from 39.4% a year ago and 26.9% last quarter to just 9.8%, driven by (1) sales volume, (2) product mix, and (3) the raw material business having lower margin due to working through higher-priced inventory, especially since raw material sales exceeded 40% of total revenue.
“With the reduction in overall revenue, we have continued to take steps to reduce our operating expenses to align with the current environment,” notes chief financial officer Gary Fischer. Operating expenses have hence been cut further, from $9.1m a year ago and $8.7m last quarter to $7.8m.
Net loss was $4.2m ($0.10 per share), up from $2.4m ($0.06 per share) last quarter and compared with net income of $6.7m ($0.16 per share) a year ago.
Depreciation & amortization was $1.8m. Capital expenditure (CapEx) was $750,000. During the quarter, cash and cash equivalents and investments fell from $53.6m to $49.6m. However, this was due mainly to a repayment of a bank loan totaling $7.2m, offset by a favorable reduction in net inventory of $4.6m, from $91.7m to $87.1m.
Of the net inventory, 44% is raw materials, 52% is work-in-progress (WIP), and only 4% is finished goods. “We continue to do well on recycling of indium phosphide and believe that this will be an important cost advantage for us as the market recovers,” says Fischer. “We continue to expand our recycling program and are focused on improving our efficiency and accelerating our return to profitability,” says Young.
For third-quarter 2023, AXT expects revenue of $16.5–19.5m, with further growth in gallium arsenide. However, there is continued weakness in indium phosphide. “In first-half 2023, we saw considerable inventory digestion [in data-center applications] and believe that it is still ongoing,” says Young.
OpEx should rise slightly, by $100,000-200,000. Net loss is expected to rise slightly to $0.11–0.13 per share.
“As we look ahead to the coming quarters, we believe we will see improvement in our gross margin as a result of several factors,” says Fischer. “In the near term, we expect to see improvement in the gross margin contribution from our raw material joint ventures as they have worked through much of their higher-priced inventory. We expect JinMei to begin production in Q3 on our new gallium arsenide recycling program which, like our indium phosphide recycling program, should have a positive impact on gross margin. Further, indium phosphide revenue should begin to recover over the coming quarters [normalizing at $9-10m per quarter after inventories are worked down, after Q4/2023],” he adds.
“Beyond the near term, we remain confident that we can get back to the mid-30% range as the environment strengthens through higher overall volume, a recovery in indium phosphide mix and the benefits of our recycling programs, along with continued efficiency improvements throughout the business,” Young says.
STAR Market listing update
On 10 January 2022, 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 Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (STAR Market) and the application was accepted for review.
Subsequently, Tongmei responded to several rounds of questions received from the Shanghai Stock Exchange (SSE). On 12 July, the SSE approved the listing of Tongmei’s shares. On 1 August 2022, the China Securities Regulatory Commission (CSRC) accepted Tongmei’s IPO application for review. The STAR Market IPO remains subject to review and approval by the CSRC and other authorities.
“Shortly after Chinese New Year, we were asked to address two primary issues, and we believe we are close to a resolution with them,” says Fischer.
AXT notes that the process of going public on the STAR Market includes several periods of review and, therefore, is a lengthy process. Nevertheless, Tongmei hopes to accomplish this goal in the coming months.
China export restrictions
Regarding the announcement on 3 July by China’s Ministry of Commerce (MOFCOM) and General Administration of Customs (GAC) that control measures would be imposed from 1 August on the export of gallium- and germanium-related semiconductor raw materials, Tongmei has applied for export licenses. “We have not been given a time-frame for the expected length of the permitting process,” notes Young. “We have been in close contact with our customers through this time and are working with them to minimize any disruption,” he adds. However, JinMei’s exports outside of China comprised less than 2% of their sales in Q2. “We do not expect a meaningful direct impact to our revenue of the new regulations,” concludes Young.