AES Semigas


8 November 2021

AXT’s year-to-date InP revenue grows 46% year-on-year

For third-quarter 2021, AXT Inc of Fremont, CA, USA – which makes gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge) substrates and raw materials – has reported a seventh consecutive quarter of growth to $34.6m (and a third consecutive quarter over $30m). This is up 2.7% on $33.7m last quarter and 35% on $25.5m a year ago, highlighting the increasing demand for InP and GaAs substrates.

Fiscal Q3/2020 Q4/2020 Q1/2021 Q2/2021 Q3/2021
Revenue $25.5m $27m $31.4m $33.7m $34.6m

Of total revenue, substrate sales were $26.2m, up 5.2% on $24.9m last quarter and 29% on $20.3m a year ago.

InP again set a new record, remaining the single largest product category. “Demand was strong across the board, as capacity in our industry is now tight,” notes founder & CEO Dr Morris Young. “Sequential growth was driven by 4G and 5G telecommunication obligations as well as continued healthy demand for data-center connectivity,” he adds.

GaAs revenue was the highest in more than four years. In semiconducting GaAs, AXT continues to see strong demand for high-end LED applications, including automotive lighting and displays. “We are also seeing rapid growth in high-powered lasers, particularly in China,” notes Young. “On the wireless [semi-insulating] side, IoT [Internet of Things] continues to be strong.”

Revenue from germanium substrates fell modestly again in Q3. “However, the satellite solar market remains healthy, and we are well on track for 2021 to be a growth year,” says Young.

Revenue from AXT’s 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) – was $8.4m, down 4.5% on $8.8m last quarter but up 61.5% on $5.2m a year ago. “Demand continues to be strong. We are on track to achieve significant growth in this area of the business over the prior year,” says Young.

“In 2020, both companies relocated to our campus in Kazuo [China], enabling them to expand capacity in response to market demand,” says Young. “This, coupled with a recovery in pricing of raw materials such as raw gallium, has contributed to their growth this year.”

Of total revenue in Q3/2021, the proportion from the Asia-Pacific region rose to 76% (from 73% last quarter) and North America rebounded slightly from 8% to 10%, while Europe fell back from 19% to 14%.

For the third consecutive quarter, no customers reached 10% of revenue. The top five customers generated about 25% of total revenue (down from 31% last quarter). “Our growth is not overly dependent on one large customer or application,” comments chief financial officer Gary Fischer. “It is a unique and important aspect of our supply chain strategy,” he adds.

“Our third quarter and year-to-date revenue results continue to underscore the gathering momentum of the technology mega-trends that our substrates help to enable – trends such as 5G telecommunications, data-center upgrades, health monitoring, the Internet of Things (IoT), and the proliferation of LED lighting and displays,” says Young. “Year to date, we have increased revenue by 46% over the same period in 2020, including a 36% increase in GaAs and a 46% increase in InP substrates. With our new, expanded manufacturing facilities, we are able to accommodate increasing demand across these applications and others, while meeting the stringent technical requirements of tier-1 customers. As such, 2021 is unfolding to be a pivotal year for our business.”

On a non-GAAP basis, gross margin was 33.8%, down from 34.8% a year ago and 36.4% last quarter, driven mainly by low-margin sales at JinMei, which has been selling materials at a pre-set price to several customers under long-term contracts. Due to the recent rise in the price of raw gallium that JinMei has to buy, the gross margin on those sales has eroded. The overall impact to the consolidated gross margin was about 220 basis points (without which gross margin would have been 36%). “At least one of those contracts expired in Q3 but we expect some continued pressure on gross margin in Q4 as a result of additional contracts that are coming to conclusion,” notes Fischer.

The rise in raw material pricing also impacts cost of goods sold on the substrate side of the business. However, this has been offset by a $1.1m contribution to profitability provided by AXT’s partially owned supply chain companies.

Also in Q3 AXT received two grants from local government totaling $1m for its facilities investments in the Kazuo region.

Operating expenses have risen further, from $6m a year ago and $7.4m last quarter to $7.7m. R&D is a primary driver, due to two major programs: the development of 6-inch InP and the development of 8-inch GaAs. In addition, sales, general & administrative (SG&A) expenses are on track to be up about $5m annually. AXT continues to make necessary investments to enable its initial public offering (IPO) in China. “We’ve hired a number of people to help us on the project. There’s also been a lot of administrative and permit issues,” notes Fischer. “There's a lot of required conformity that we need to follow in some of our employee compensation section in China,” adds Young. “To be a public company in China requires that we pay housing allowances for employees… Our compensation to our employees was not minimum. So, that’s an expanded expense.”

Despite all this, plus a rise from $280,000 to $338,000 in the 25% tariff charged on importing wafers into the USA from China, net income remained level with last quarter at $5.4m ($0.13 per share, exceeding the $0.10-0.12 guidance range), up from $1.6m ($0.04 per share) a year ago.

Depreciation and amortization was $1.8m. Capital expenditure (CapEx) was $6.1m. During the quarter, cash, cash equivalents and investments hence fell from $58.5m to $56m.

Net inventory rose by $1.8m to $60.7m, consisting of 44% in raw materials, 50% in work in progress (WiP) and 6% in finished goods. “There are some customers that require us to build inventory, including customers that want the inventory consigned to their site, but it remains on our balance sheet. One in particular is growing, and so that is a contributor,” explains Fischer. “We need to have inventory to keep growing the revenue and we’re comfortable with our cash position,” he adds.

“The demand environment remains strong in Q4, with some seasonality expected in certain applications like PON [passive optical networks] and GaAs for wireless devices and continued strength in several of the InP applications,” says Fischer. Hence, for Q4/2021 (which is usually a down quarter for AXT), the firm expects revenue of $34-36m, with raw materials down slightly, InP and GaAs both up slightly, and germanium approximately flat. This is despite Q4 including the first 10 days of the national holiday in China as well as part of the Christmas holiday season. Taking into account that (unlike Q3) AXT should receive no China-based tax credits or grants in Q4, net earnings per share are expected to fall to $0.06-0.08.

For full-year 2021, AXT expects revenue growth of more than 40%, and an increase in annual profit of more than 300% on 2020. “This growth is the result of years of cultivating customer relationships, investment in operations and the convergence of technology trends that are likely to drive our growth for years to come,” says Fischer.

The drag on gross margin from gallium pricing at Jinmei is expected to continue in Q4/2021 and “dribble” into Q1/2022. However, those long-term contracts will come to an end soon, and new contracts with new customers will be established. So, the targeted gross margin of 35% is “very achievable” for Q2/2022, believes Fischer. “JinMei is a very healthy business and there’s increasing demand,” he adds.

“Our increasing volume, improving product mix, and continued improvement in manufacturing efficiency will allow us to drive continued gross margin improvement as we progress through fiscal year 2022,” believes Fischer. “This will be a primary focus for us over the coming quarters.”

“We believe 2022 will be another year of strong [revenue] growth [of 15-20%], with existing applications continuing to mature, and new ones being layered on to the current demand,” says Young. “This will take care of some of the added expense that we incurred.”

In particular, InP is expected to grow by more than 30%. “We’re talking to multiple customers in indium phosphide, and they have very exciting new applications,” says Young.

“Gallium arsenide, we are also seeing renewed interest - the high-powered laser in gallium arsenide, especially in China, is giving us a very high expectation for growth next year. Customers are telling us that, for next year, they expect the volume ramp in high-power laser demand,” he adds.

“With 6-inch capacity tightening up in our industry, we’re beginning to see renewed customer interest in GaAs for heterojunction bipolar transistor (HBT) devices and our ability to expand capacity,” says Young. “Industry experts are telling us they are seeing the HBT market demand actually growing almost 40-50% in the next two years. This has not been a strong application for us for more than 10 years, and our facilities give us the opportunity to be competitive,” he adds.

“This is just the golden convergence of market and emerging technologies. For this reason, we’re making important investment in our business, including larger substrates, capacity expansion, and our IPO in China. While these investments bring us to a higher level of operating expenses, they give us a significant competitive advantages in our ability to scale our business and meet the need of tier-1 customers in emerging high-volume applications.”

STAR Market listing update

On 16 November, AXT announced a strategic plan to access China’s capital markets and progress to an IPO by its China-based wafer manufacturing company Beijing Tongmei Xtal Technology Co Ltd on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (STAR Market). The firm expects to subnit the required documents to the STAR Market authorities in Q4/2021.

The process of going public on the STAR Market includes several periods of review and, therefore, is a lengthy process. Tongmei expects to accomplish this goal in mid-2022.

See related items:

AXT’s founder & CEO Morris Young returns to chairman role prior to Tongmei IPO

AXT’s Q2 revenue of $33.7m up 52% year-on-year

AXT’s revenue surpasses $30m per quarter in Q1

AXT supplies first 8-inch GaAs wafers

AXT’s Q4 revenue grows 47% year-on-year, driven by InP for 5G

AXT’s second-tranche private equity investment in China largely complete

AXT to merge raw material companies BoYu and JinMei into Tongmei

Tags: AXT GaAs substrate



Book This Space