20 February 2023
AXT’s revenue falls 24% in Q4, as InP hit by cooling data-center market and softness in 5G telecoms in China
AXT Inc of Fremont, CA, USA – which makes gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge) substrates and raw materials – says that its full-year revenue rose by 2.7% from $137.4m in 2021 to $141.1m for 2022.
However, revenue for fourth-quarter 2022 was $26.8m, down 23.9% on $35.2m last quarter and 28.9% on $37.7m a year ago, and towards the low end of the $26–29m guidance range.
“The softening of the macro-environment continued as expected,” notes CEO Dr Morris Young. “We saw a step back in revenue across our portfolio as customers continue to digest inventory in the channel and evaluate their needs for the coming quarters.”
Indium phosphide revenue was $14m, up 6.9% on $13.1m a year ago but down 26% on last quarter’s record $17.7m due mainly to continued cooling in the data-center market as well as ongoing softness in 5G telecom infrastructure, particularly in China. “The PON [passive optical networks] market was coming down off its peak, but has been fairly resilient,” says Young.
Gallium arsenide revenue has fallen further, more than halving from $11.3m a year ago and down by a third on $8.1m last quarter to $5.5m. “Our gallium arsenide revenue is down significantly off its mid-2022 highs, with customers in China having slowed significantly,” notes Young. “We’re seeing a strong impact on applications using wireless devices for IoT and headset markets, as well as industrial lasers, LED lighting and display.”
Although it is still down on $4.2m a year ago, Germanium substrate revenue rebounded slightly from $1.1m last quarter to $1.3m, after resolving a payment issue with certain germanium customers.
Total substrate sales were therefore $20.8m, down 22.7% on $26.9m last quarter and 27.3% on $28.6m a year ago.
In addition, revenue was $6m from AXT’s two consolidated raw materials 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 was down from $8.3m last quarter and $9.1m a year ago, due to pricing pressure and the softer demand environment.
Of total revenue in Q4, the proportion from the Asia-Pacific region was 70% (down on 74.9% a year ago), Europe was 15% (down from 16.7%) and North America was 15% (up from 8.4%). The top five customers again generated about 41% of total revenue, including one customer over 10%.
On a non-GAAP basis, gross margin was 32.5%, roughly level with 32.4% a year ago but down more than expected from 42.2% last quarter. This was due mainly to the significantly lower revenue but also a less favorable product mix than expected as well as a significant drop in the price of raw gallium, which resulted in low margin contribution from JinMei. Nevertheless, full-year gross margin still rose from 34.8% in 2021 to 37.2% for 2022.
Full-year operating expenses rose from $30.4m in 2021 to $35.9m for 2022. However, despite still being up on $8.1m a year ago, quarterly OpEx was cut slightly from $9.2m last quarter to $9m.
Net income was $2.1m ($0.05 per share) in Q4/2022, down from $6.8m ($0.16 per share) last quarter and $4.1m ($0.09 per share) a year ago, but at the top end of the $0.03–0.05 per share guidance range. Full-year net income still grew from $19.1m ($0.44 per share) in 2021 to $19.8m ($0.46 per share) for 2022.
During Q4/2022, cash, cash equivalents and investments rose from $48.2m to $52.8m.
“2022 was a productive year in which we grew both our revenue and our profitability, and invested in innovations,” says Young.
“As we head into Q1, we’re seeing a business slowdown continue as customers across our portfolio are evaluating and reducing inventory,” says Young. “We continue to perform well in our [InP-related] consumer applications but, because of inventory digestions, we expect it to take a meaningful pause in the first half of 2023 [after only starting to see softness in InP for consumer products in mid-Q1].”
The effect in first-quarter 2023 is exacerbated by the typical business interruption of Chinese New Year as well as the lingering effect of COVID shutdowns in China. AXT hence expects revenue to fall to $19–21m in Q1/2023.
“This lower revenue is expected to have a significant impact on our manufacturing overhead being spread over fewer units, which will have a negative impact on gross margin,” notes chief financial officer Gary Fischer. “Product mix is also less favorable as a result of lower expected revenue for indium phosphide.” AXT therefore expects gross margin to fall to about 21%, yielding a net loss of $0.10–0.12 per share.
“In addition to clamping down on inventory, we’re going to put the brakes on CapEx as well, say $3–5m,” says Fisher. “We’re not buying material. We’re shutting down most of our construction,” adds Young. “Last year, we were going to increase our [InP] capacity by 50%. We are not building that capacity anymore.”
“We are planning for a major reset in Q1, but we do expect that we could see improvement beginning in Q2 as China re-opens more fully,” says Young. “After such a strong decline, the gallium arsenide market appears to be stabilizing and we could see incremental improvement beginning in Q2.”
“While the germanium substrate market has also been affected by the macro softness, we will be working towards sequential growth in the coming quarters,” he adds.
“With consumer coming back in China, I think the market will start to bounce back in Q3 and Q4 of this year,” says Young. “As business returns, I think we should be looking forward to mid-30%s and even high-30%s [gross margin],” he adds. “When things rebound, all the stuff that we’ve done for the last two years to improve gross margin is going to blossom again. It’s just taking a pause because of the disruption in the marketplace right now,” adds Fisher.
“Though a softening of the macro-environment has reset our growth trajectory, the trends that have driven our revenue, customer and application expansion remain very much intact,” believes Young. “We are continuing to see active development for new applications and technology investments using our materials. While the near-term environment is working through a significant inventory correction, the mid-term and longer-term prospect for our markets are vibrant. In addition to the core applications that are driving our revenue today, new uses in automotive sensing, consumer products, health sensing, displays and more [communications infrastructure, data center] are taking shape in a very real way.”
“We are looking at all possible ways to tighten our budget, but R&D is an area we’re not cutting back yet,” Young notes. “We have made significant progress this year in the development of next-generation large-diameter substrates for gallium arsenide and indium phosphide,” he adds.
“We are making good progress in our 8-inch gallium arsenide wafer development [currently shipping hundreds of wafer to customers]. This product will be a cornerstone for micro-LED adoption in a variety of consumer devices. While a meaningful revenue ramp isn’t expected to begin until sometime next year [albeit now late 2024 rather than early 2024], product qualification at the substrate level are scheduled to begin this year. AXT is well positioned to be a prime player in this market,” Young reckons. “We view micro-LED as a breakthrough display technology for consumers, as it is expected to deliver significant improvement in power efficiency as well as greater brightness and more brilliant colors. Tier-1 companies are advancing its development [for a commercial ramp up in volume production probably late 2024 to 2025], and we believe it has the potential to reshape the gallium arsenide substrate industry.”
STAR Market listing update
In late December 2021, 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). The application was formally accepted for consideration on 10 January 2022.
Subsequently, Tongmei responded to several rounds of questions received from the Shanghai Stock Exchange (SSE). On 12 July 2022, 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.
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.