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3 August 2015

AXT's revenue grows 4.5% in Q2

For second-quarter 2015, 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 $21m, down 2% on $21.4m a year ago but up 4.5% on $20.1m last quarter.

Fiscal Q2/2014 Q3/2014 Q4/2014 Q1/2015 Q2/2015
Revenue $21.4m $23.1m $19.6m $20.1m $21m

Of total revenue, 14% came from North America, 59% from Asia Pacific, and 27% from Europe. The top five customers generated about 36% of total revenue (with none over 10% individually), reflecting AXT's diversification of both customers and products.

In particular, in first-half 2015 InP revenue grew by well over 50% year-on-year. "Indium phosphide continues to be a strong contributor to our business for both new and existing applications, including optoelectronic devices for fiber-optic communications, passive optical networks, and data-center connectivity, as well as solar cells and next-generation wireless amplifiers," says CEO Morris Young.

As expected, germanium substrate saw a modest improvement in revenue in Q2/2015, with growth coming largely from traditional aerospace applications.

Following several quarters of healthy growth, revenue from raw material joint ventures was down in Q2. "Gallium pricing has continued to drift lower and we do not expect any major changes in the pricing environment in the near term," says Young. "However, these joint ventures provided us with profitable revenue and additional benefit to our vertically integrated business model."

Even in Q2, AXT posted sequential revenue growth in semi-insulating GaAs substrates, despite the inroads made by silicon-on-insulator (SOI) hitting the GaAs wireless industry. Wireless business as a proportion of total revenue contribution is currently relatively small. "We continue to expand our engagement with customers in both mobile and non-mobile applications," says Young. "The market has stabilized at this current level, having evolved significantly in the past several years," he believes. "Though we are conservative in the way that we forecast this area of our business, we continue to look for opportunities to increase market share and identify new applications for our products."

Semiconducting GaAs revenue also grew in Q2, despite the fierce competitive landscape in LEDs and excess capacity continuing to present business challenges. "For applications such as backlighting, signage and automotive, with specifications now more stringent, we had better success in maintaining a more reasonable margin profile," says Young. "However, we are consciously stepping away from searching for highly competitive low-end opportunities for which pricing pressure would damage our consolidated gross margin performance, and devalue our product at the high end," he adds. "As such, we are not expecting to see meaningful progress in this area in the near future."

Although still up on 19.4% a year ago, gross margin has fallen from 23.7% last quarter to 20.9%, due mainly to product mix as well as the decline in raw material pricing.

Operating expenses were $5.2m, cut from $6.5m last quarter (which included $1.2m of professional fees related to the internal investigation of certain potential related party transactions, completed during Q1). However, this is up on $4.7m a year ago, due largely to R&D spending rising from $1m to $1.4m.

Net loss has been slashed from $1m ($0.03 per diluted share) last quarter to just $3000 ($0.00 per diluted share), although this compares with a profit of $0.3m ($0.01 per diluted share) a year ago.

Capital expenditure was $1.5m. AXT also used $904,000 in cash to repurchase its stock. During the quarter, cash and investments fell by $1.2m from $47.5m to $46.3m.

"Our financial results in the second quarter were in line with our expectations and we continue to invest and build for the future," states Young.

At the end of July, in an all-cash transaction, AXT acquired privately held firm Crystacomm Inc of Mountain View, CA, USA, which makes InP substrates using the liquid-encapsulated Czochralski (LEC) crystal growth technique, supplementing AXT's vertical gradient freeze (VGF) technique. "The acquisition of Crystacomm is highly synergistic to our current indium phosphide business and provides further competitive differentiation and cost benefits," says Young. "It allows us to broaden our technology base and give us the flexibility to serve customers with varying technical requirements," he adds. The equipment is to be installed in AXT's Freemont facility (where there are already staff that can operate it, so the firm is not adding to the headcount or operating expenses).

"We can use this technology to synthesize polycrystalline material for indium phosphide, which happens to be not a trivial technology, and it's an important part of our cost of goods material cost," says Young. "This will enable us to lower our cost overall and increase our ability to improve our quality."

Crystacomm's founder & CEO Dr George Antypas is staying on as a consultant to assist in bringing up the LEC processes. "George is a pioneer in the development of indium phosphide technology for commercial use," comments Young. "This acquisition comes about opportunistically as the results of our long and positive relationship with Crystacomm. While we are not expecting revenue in this calendar year, we believe that additional capability will provide incremental business opportunities for AXT in the years to come."  

For third-quarter 2015, AXT expects some near-term lumpiness in germanium substrate revenue as well as continued pricing weakness in the raw material joint ventures. Revenue should fall to $19.5-20.5m, yielding a loss of $0.03-0.01 per share (compared with a target of $21-22m for breakeven). This is despite InP revenue that is expected to continue good growth year-on-year. "The optoelectronic application is really the driver now," notes Young. "Data-center connectivity is the emerging application which will potentially be a big driver, but it's not a main driver yet."

"While germanium substrate business can be lumpy quarter to quarter, we believe that we have the opportunity to grow and diversify our customer base over time," says Young. "We are pleased to be able to harness extensive industry contacts to engage with a wider set of customers," he adds.

In particular, in late June Dr Hong Hou joined AXT as chief operating officer. "We continue to build strength in our management team," says Young. "Hong has extensive technical and executive level experience in our industry." Hou co-founded Emcore's photovoltaics division and led the commercialization of high-efficiency multi-junction solar cell technology for space power applications. "Having previously served as CEO of Emcore Corp, he has a demonstrated record of success, and he brings the vision and skills necessary to drive further improvement in our operations, and to help us prepare the business for this next level of growth," reckons Young.

See related items:

AXT acquires InP substrate maker Crystacomm

AXT appoints former Emcore president & CEO as chief operating officer

AXT's revenue grows 2.5% in Q1; losses halved year-on-year

AXT's margins grow despite inventory-driven dip in revenue in Q4

AXT's revenue grows a more-than-expected 8% in Q3 as new applications emerge

AXT returns to quarterly profitability ahead of plan

Tags: AXT GaAs GaAs substrate InP Germanium

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