News: Suppliers
24 November 2023
AXT’s Q3 GaAs revenue hit by China export restrictions, offset by rebound in InP
For third-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 a further decline in revenue, from $18.6m last quarter to $17.4m, more than halving from $35.2m a year ago.
By product category, gallium arsenide revenue has fallen further, from $8.1m a year ago and $5.4m last quarter to $4.2m.
“In September Tongmei, our subsidiary in China received initial export licenses and was able to resume shipping gallium arsenide substrates and germanium substrates in the second half of September to a number of our customers,” says CEO Dr Morris Young. “We made good progress in filling customer orders and minimizing disruptions,” he adds.
“We continue to work through that process on behalf of a growing number of our gallium arsenide customers,” says VP & chief financial officer Gary Fischer.
Germanium substrate revenue rebounded by $1.2m from last quarter’s $1m, after receiving the export permits from China on behalf of customers and being able to ship accordingly. “The overall satellite solar cell market is navigating similar cyclical headwinds as the other markets. But we are confident that this area of our business will recover as the market strengthens,” says Young.
Although it is still well down on $17.7m a year ago, indium phosphide revenue has rebounded from $4.6m last quarter to $4.9m, reflecting a stabilizing market with modest improvement in data-center applications.
“The demand environment in the third quarter of 2023 remained stable, and we were pleased to see some encouraging early signs of improvement in the data-center market, resulting in modestly higher indium phosphide revenue,” says Young.
In addition, revenue was $7m 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). This was down slightly on $7.6m last quarter and $8.3m a year ago. “Overall, the pricing environment remains relatively stable. We don’t expect any major changes in Q4,” says Young.
Of total revenue in Q3/2023, the proportion from the Asia-Pacific region has rebounded further, from 75% last quarter to 82%, while Europe has fallen back further from 16% to 14% and North America from 9% to 4%.
The proportion of total revenue contributed by the top five customers has rebounded from 24% last quarter to 31%. Again, no customer comprised more than 10%.
On a non-GAAP basis, gross margin was 11.3%, down on 42.2% a year ago but up from 9.8% last quarter, driven by volume, product mix, and an improvement in raw material business gross margin.
Operating expenses were $7.8m, level with last quarter but cut from $9.2m a year ago. “With the reduction in overall revenue, we have maintained spending discipline in our operating expenses to align with the current environment,” notes Fischer.
Net loss was $4.9m ($0.12 per share), up from $4.2m ($0.10 per share) last quarter and compared with net income of $6.8m ($0.16 per share) a year ago. Depreciation & amortization was $2.2m. Capital expenditure (CapEx) has increased from just $750,000 last quarter to $4m. During the quarter, cash and cash equivalents and investments hence fell from $49.6m to $43.6m.
Net inventory was reduced further, by $700,000 from $87.1m to $86.4m. Of the net inventory, 41% is raw materials, 55% is work-in-progress (WIP), and only 4% is finished goods. “We’ve looked at historic inventory levels when maybe we were doing $25–30m [in revenue] per quarter. We should be able to take inventory down. We should shrink it by at least $10m,” says Fischer.
For Q4/2023, AXT expects revenue to be roughly level, at $16–19m. Net loss should grow to $0.13–0.15.
“As we navigate the near-term environment, we will continue to prioritize cost savings and efficiency, and are focused on accelerating our return to profitability,” says Young.
“While inventory rationalization may persist into the New Year, we believe that the trends that have driven our revenue and customer expansion remain very much intact. Further, we have executed well in our development of larger-diameter substrates that will pave the way for our opportunities in next-generation devices spanning data-center, consumer and other markets,” he adds.
“The market for gallium arsenide remains weak but stable… Inventory digestion is likely to continue into 2024. That said, we are actively preparing for a new wave of innovation in our markets,” notes Young. “We are pleased by the progress we’re making in our 8-inch gallium arsenide for customers. This consumer high-end display and automotive application is for micro-LEDs… today our customers’ specifications for micro-LEDs are exponentially more stringent than they were when our 8-inch development began. Yet we have been able to meet these requirements. We feel very confident in our ability to serve this emerging market. We believe that there will be a growing number of use cases in development. Our expectation is that product development from multiple customers is likely to ramp throughout 2024, with the first micro-LED products come into market in 2025 and beyond.”
“As the data-center market prepares to move to 800Gbps data rates, we are seeing increased development around next-generation silicon photonics devices and electro-absorption modulation laser (EMLs) for high-speed data-center transceivers,” notes Youg. “The growing adoption of AI technology is providing a strong catalyst for the industry transition to higher speed, and we are excited to be engaging with customers for new opportunities as the market expands. Our proven performance in optical devices for the data center, coupled with our success in developing 6-inch indium phosphide substrates, is putting us in a solid position for both current and future generations of data-center optical devices. We are also seeing positive development activities in both consumer and healthcare applications for indium phosphide. This further reinforces our conviction that we are very early stage in our adoption of this material across a multitude of emerging applications,” he adds. “Our early success not only validates indium phosphide as the material of strategic importance, it validates AXT as a world-class supplier to tier-one companies. The next two years we’ll see the further expansion into these and other areas.”
“Beyond the near term, we remain confident that we can get [gross margin] back to the mid-30% range as the environment strengthens through higher overall volume, more favorable product mix and the benefits of our recycling programs, along with continued efficiency improvements throughout our business,” concludes Fischer.
STAR Market listing update
On 10 January 2022, AXT announced that its China-based wafer manufacturing subsidiary Beijing Tongmei Xtal Technology Co Ltd had applied to list its shares on the Sci-Tech innovAtion boaRd (STAR Market) of the Shanghai Stock Exchange (SSE) and that the application had been accepted for review. Subsequently, Tongmei responded to several rounds of questions received from the SSE. On 12 July 2022, the SSE approved the listing of Tongmei’s shares in an initial public offering (IPO) on the STAR Market. 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.
AXT’s Q2 sees InP revenue bottom out, offset by rebound in GaAs
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