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26 February 2009


AXT’s revenue falls 13%, as GaAs sales drop by a third

For full-year 2008, AXT Inc of Fremont, CA, USA has reported revenue of $73.1m, up 26% on 2007’s $58.2m. Most recently, for fourth-quarter 2008, revenue was $15.6m, down 13% on last quarter’s $17.9m. As a proportion of total revenue, North America fell from 28% to 24% and Asia-Pacific from 56% to 45%, while Europe rose from 16% to 31%.

In particular, gallium arsenide (GaAs) substrate revenue was $9.1m, down as much as 33% on last quarter’s $13.6m. The decline was due mainly to an overall market slowdown, with lower-than-expected demand from customers and some push-out of scheduled shipments to first- and second-quarter 2009, which also resulted in lower production levels. Semi-insulating (6-inch) wafers (e.g. for handset applications) fell to just 48% of GaAs revenue, versus 52% for semiconducting (2-3-inch) wafers (e.g. for LED applications). This contrasts with AXT’s normal 55:45 semi-insulating/semiconducting split for GaAs.

Indium phosphide (InP) substrate revenue was $473,000, down slightly on $484,000 last quarter but up 43% on $330,000 a year ago. Germanium (Ge) substrate revenue was $684,000, down 16% on $795,000 last quarter. Raw materials sales (mainly 99.99%-pure gallium) were $5.3m, up 77% on $3m last quarter (which had been restricted due to the Olympics and Paralympics) and up 23% on $4.3m a year ago.

Gross margin has fallen from 25.4% last quarter to 4.8%. This was due mainly to the following factors:

  • the gallium joint venture Ji Ya Semiconductor in China ceased production for five weeks as a result of a supply shortage of raw materials from the affiliated aluminum plant in which it is housed (which had reduced production and halted operations due to falling aluminum prices in second-half 2008). To meet customer supply obligations, 99.99%-pure (4N) gallium had to be sourced from an independent third-party supplier, lowering gross margin.
  • gross margin was negatively impacted by lower production volume (less overhead recoveries), higher warranty expense as a result of warranty reserves from certain customers due to failure to meet specification requirements, and higher unfavorable variances due to lower yields from the GaAs production line.

This contributed to full-year 2008 gross margin falling from 34.8% in 2007 to 24.6%.

Q4/2008 net loss grew to $2.4m, compared with $1m last quarter and net income of $1.9m a year ago. This contributed to full-year 2008 net loss of $689,000, compared with net income of $5.3m for 2007. Nevertheless, AXT generated cash flow of $2.7m from operations in Q4/2008, helped by capital expenditure of just $1.4m.

“2008 was a challenging but productive year for AXT,” says chairman & CEO Phil Yin. “We successfully negotiated a new 2009 contract worth nearly $15m with one of our largest customers [IQE], concluded a major qualification with a leading germanium substrate customer, expanded our customer base to include several top tier companies and laid important groundwork for growth when the macro-environment strengthens,” says Yin. “Still, the economic downturn in 2008, coupled with the inventory overhang in our industry and customer-specific issues that we continue to work through, put pressure on our financial performance and will have a significant impact on our first-quarter 2009 results.”

For first-quarter 2009, AXT expects revenue to almost halve to $7-8m. Half of this revenue drop is expected to be due to 6-inch semi-insulating GaAs (mainly from one customer). A request for a major order push-out in Q1 is being addressed in order to help the customer to digest inventory and prevent a further build-up. Also, gross margin should bounce back to more normal levels, helped by Ji Ya getting up to full capacity (allowing it to build inventory, minimizing the impact of potential future shutdowns).

However, most excess inventory at customers should be consumed in Q1/2009, which will represent the bottom of the slump in demand (for semi-insulating GaAs substrates for handset applications), believes AXT, before the start of a slow ramp up from Q2 (driven by demand for WCDMA and CDMA2000 3G standards, especially in China, for which handsets have greater GaAs content). “As we look beyond the first quarter, we believe that the business will begin to improve as a result of pockets of strength in our gallium arsenide business, new qualifications of customers in the LED and photovoltaics market, and our improved cost structure as a result of efforts to streamline our business in relation to the current demand environment,” says Yin.

Cost cutting includes reducing headcount by 70 (mainly in production) to 1120, helping to reduce operating expenditure from $4-4.5m in 2008 to $3.5-3.7m in 2009. Meanwhile, capital expenditure is expected to shrink to less than $4m in 2009. Gross margin is expected to rebound to the low to mid 20% level (assuming revenue of $15m per quarter). Also, cash flow is expected to improve in 2009.

In addition, for concentrating photovoltaic (CPV) technology, AXT’s germanium substrates have now been qualified with a large European solar cell manufacturer for space applications (with a first order received, for shipment in Q2/2009), while further qualifications are underway for terrestrial application. Additional qualifications with two more European manufacturers are underway, for completion this year. After moderate growth in Q1, germanium revenue should ramp up from Q2/2009. Yin also highlights that NREL’s 40.8% efficient triple-junction solar cells late last year were grown on GaAs substrates, opening up a potential new market. Also, in February, at the first annual meeting of the CPV Consortium, Yin was elected to its board of directors.

“We remain encouraged by the overall trends in our industry and believe that we will successfully leverage our competitive advantages for growth and market share gains as the economy improves,” says Yin.

See related items:

AXT expects Q4/2008 revenue down 27% on guidance

AXT renews GaAs substrate deal with IQE for up to $14.3m

AXT’s revenues fall due to requalifications and post-Olympics restrictions

See: AXT Company Profile

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