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27 April 2020

AXT’s revenue grows 12.5% in Q1

For first-quarter 2020, 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 $20.7m, up 12.5% on $18.4m last quarter and 2.5% on $20.2m a year ago, and above the expected $18.5-20.5m.

Fiscal Q1/2019 Q2/2019 Q3/2019 Q4/2019 Q1/2020
Revenue $20.2m $24.8m $19.8m $18.4m $20.7m

Revenue from raw material joint ventures was $3.8m, roughly flat on last quarter but up 1.2% on $3.4m a year ago.

Substrate revenue was $16.9m, up just 1.2% on $16.7m a year ago but up 16.6% on $14.5m last quarter.

In particular, for indium phosphide, demand for data-center connectivity and passive optical networks (PON) was stronger than anticipated, growing nearly 25% from last quarter. “This is due in part to the timing of orders from certain customers,” believes CEO Morris Young.

GaAs revenue grew from last quarter, driven mainly by an increase in LED applications. “Lead times for some orders have been short but we have been able to adapt and respond quickly to support customer demand,” says Young.

In Ge substrates, AXT has seen an uptick in demand in recent quarters, driven primarily by growth in satellite solar cell applications. Revenue in Q1 reached its highest level since Q3/2018.

Of total revenue, the proportion from the Asia Pacific was 62% (dropping back from 68% last quarter), so Europe rebounded from 22% to 30% while North America was roughly level at 9%. Again, two customers reached 10% of revenue, while the top five collectively rose 42% to 49%.

“For much of the first quarter, our manufacturing facilities in China were operating at reduced staffing levels to limit the risk of COVID-19 exposure for our employees,” says Young. Consequently, over 40% of revenue came in March, following Chinese New Year and then the shutdowns in China. “Other provisions we implemented remain in place, including employee temperature screening, protective gear, including face masks, limited group meeting and changes in our cafeteria food provision, among other precautions… Thankfully none of our employees have contracted the virus so far,” Young adds.

“We’re not experiencing any noticeable disruption in our supply chain of raw materials required to maintain our substrate manufacturing. We are also able to obtain everything we need,” Young notes.

“The biggest challenge to productivity remains the limited travel between our three facilities in China, as well as travel restrictions to and from China. In addition, shipping and delivery has slowed, which has implications for obtaining parts and services needed for our manufacturing, as well as our ability to ship rush orders to our customers,” Young continues.

“Despite the impact to productivity, we were able to meet customer demand in the first quarter, posting revenue and earnings results that were slightly ahead of our expectations.”

Although down on 33.1% a year ago, gross margin rose from 21% last quarter to 26.6%, due mainly to product mix and volume, as well as incremental improvements in manufacturing efficiency.

Despite still being up slightly from $6.1m a year ago, operating expenses were just $6.2m, cut from $6.7m last quarter and better than the expected $6.4-6.5m.

Operating loss was $0.63m, cut from $2.8m last quarter but compared with an operating profit of $0.63m a year ago. Other income (net) was a gain of $1.2m, but this includes a grant of $1.4m from a provincial government agency in China as an award for relocating to its province, offset by a net loss of $120,000 from the partially owned companies and AXT supply chain (accounted for under the equity method), plus a foreign exchange loss of $43,000 and a net loss of $29,000 interest income.

Net loss was hence just $0.18m ($0.01 per share, better than the expected $0.03-0.06), cut from $2m ($0.05 per share) last quarter and $1.1m ($0.03 per share) a year ago.

Depreciation & amortization was $1m. Capital expenditure (CapEx) was $2.1m (down from over $7m last quarter). During the quarter, cash, cash equivalents and investments fell from $36.3m to $28.8m. This was mainly due to accounts receivable being higher than expected, rising from $19m last quarter to $23.6m. “We under-collected by about $4m, which would have brought ending cash-in at about $33m,” notes chief financial officer Gary Fischer. “We think it’s a result of both Chinese New Year and the coronavirus. Some companies are slowing down cash disbursements due to work disruption and also being cautious and conservative. This is probably especially noticeable with our customers in China,” he adds. “We do not view this $4m to be impaired as a credit risk… Several of these customers that are behind [with paying] are state-owned companies in China. There tends to be a culture to slow pay with state-owned companies… We’re confident we will collect it.”

Net inventory fell by $900,000, from $49.2m to $48.3m, consisting of 43% in raw materials, 52% in work in progress (WiP) and only 5% in finished goods.

“In March one of our largest gallium arsenide customers completed its site qualification of our new facilities for volume production, an important milestone for our manufacturing relocation… Over the balance of the year, we expect to ramp production from Beijing,” says Young.

“The demand environment for our products remains steady to improving, with a number of growth drivers intact,” says Fischer. “We are seeing pockets of strength in wireless, data-center connectivity and solar cell applications,” adds Young.

AXT is not expecting InP revenue to be strong in Q2, after over-ordering by some customers in Taiwan and China that were building inventory because they were worried about shortage of supply. “More broadly though, we continue to see a trend towards higher-speed networks and increasing bandwidth requirements that is likely to drive growth in both of these applications for years to come,” says Young. “Customers of these applications are providing positive, straight signals about their demand requirements.” In GaAs, AXT is expecting weakness in automotive applications and flat revenue for LEDs, offset by strength in wireless applications. In Ge, the firm expects to see continued improvement. “Both germanium as well as wireless GaAs had a strong first quarter and will continue to grow into the second quarter,” reckons Young. Raw material revenue is also expected to grow in Q2, as most of the firm’s joint ventures are back to full production following the reduced staffing precautions put in place for employee safety early in the year.

“However, given the macro-economic uncertainty caused by the global pandemic, we’re taking an appropriately modest view of Q2,” he adds. “We’re also widening our typical guidance range a bit to allow for unanticipated effects from the coronavirus.” AXT therefore expects revenue of $20.5-22.5m.

Also, given the expected product mix shift in Q2, margins will be in the mid-20s again. Loss per share should be $0.01-0.03, aided by another expected award from a government agency in China.

“In recent weeks, the government mandates have evolved, allowing us to return to full staffing levels at all three manufacturing locations,” notes Young. “As such, we believe we are well positioned to support improved demand in the quarters ahead.” Regarding GaAs in particular, he adds: “With our new Chaozhou and Dingxing facilities now in operation, we are in a strong position to be able to support customer requirements across new and emerging applications.”

“Net cash burn in 2020 will be similar to our cash burn in 2019, which was only about $3m,” forecasts Fischer, citing that CapEx should be lower for 2020 than in 2019. “So we feel we have a strong cash position, which is important in light of the uncertainties resulting from COVID-19,” he adds. “We also still have an untapped line of credit with Wells Fargo Bank, and a second bank in China is arranging another line of credit... We do not anticipate tapping all of this, but it is a prudent path for today’s environment.”

“AXT continues to have a healthy balance sheet and we will continue to emphasize strong fiscal discipline as we navigate these unusual times, and plan and prepare for better days ahead,” concludes Young.

See related items:

AXT GaAs substrate customer qualifies new wafer processing facilities

AXT’s Q4 revenue down 17% year-on-year, driven by drop in GaAs and Ge substrate sales

AXT’s Q3 revenue hit by China-related absence of expected data-center and PON market growth

AXT’s revenue grows a more-than-expected 22.8% in Q2

AXT’s margins rebound despite revenue falling further in Q1

Tags: AXT GaAs substrate InP Germanium

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