11 May 2023
AXT’s Q1 revenue halved year-on-year
For first-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 revenue of $19.4m, down 27.6% on $26.8m last quarter and 51.1% on $39.7m a year ago, and towards the lower end of the $19–21m guidance range.
“Revenue took a step back in Q1 as the inventory correction that we began to see in gallium late last summer accelerated in phosphide applications,” notes CEO Morris Young.
Indium phosphide revenue was $7.1m, almost halving from last quarter’s $14m, reflecting market softening. “Indium phosphide held fairly firm through January and then experienced a meaningful decline in February and March, most notably in the data-center and consumer applications,” says Young.
Gallium arsenide revenue has fallen further, from $12m a year ago and $5.5m last quarter to $5m, reflecting the overall slowdown across a number of applications, particularly in China. “We are seeing positive signs that our revenue is stabilizing and that certain applications within gallium arsenide such as power amplifiers are beginning to show some improvements,” says Young. “This makes sense as these were among the first applications to experience weakness beginning in September of last year.”
Germanium substrate revenue rebounded further, from $1.3m last quarter to $1.4m, following resolution of a payment issue with one of AXT’s customers.
In addition, revenue was $5.9m from AXT’s two consolidated raw materials 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 on $7.9m a year ago but roughly stable with $6m last quarter, as gallium raw material pricing remained approximately flat.
Of total revenue in Q1, the proportion from the Asia-Pacific region was 68% (down on 70% last quarter), Europe was 18% (up from 15%) and North America was 14% (down slightly from 15%).
The top five customers generated just 28% of total revenue (down from 41% last quarter), with no customers over 10%.
On a non-GAAP basis, gross margin has fallen further, from 33.8% a year ago and 32.5% last quarter to 26.9%, due to the lower InP revenue in the product mix. However, this was better than the expected 21%. “We have continued to focus on manufacturing efficiencies, and are having increasing success in our recycling efforts, which benefitted our gross margin performance,” says Young.
Operating expenses were $8.7m, up slightly from $8.6m a year ago but cut from $9m last quarter.
Net loss was $2.4m ($0.06 per share), compared with net income of $2.1m ($0.05 per share) last quarter and $4.3m ($0.10 per share) a year ago. However, this is better than the expected net loss of $0.10–0.12 per share.
Capital expenditure (CapEx) has been cut back beyond the targeted $3–5m to just $2.7m (mostly related to facilities and InP equipment). During Q1/2023, cash, cash equivalents and investments rose slightly, from $52.8m to $53.6m.
Net inventory was $91.7m. Of this, 45% is raw materials, 51% is work-in-progress (WiP), and just 3% is finished goods.
“We had a very successful quarter in our recycling efforts, which benefited our margins in our ESG [environmental, social and governance] efforts. But when we grow new ingots with recycled InP, it adds to the inventory. Almost half of the increase in inventory is still recycling,” notes chief financial officer Gary Fischer. “Inventory reduction remains a key focus for us this year, and we expect to bring it down as the demand environment improves,” he adds.
Given the continuing inventory correction, for Q2/2023 AXT again expects revenue of $19–21m. Product mix is likely to include growth in GaAs substrates and continued weakness in InP with no improvement in data-center and consumer applications (although they appear to be stabilizing). Net loss is expected to rise to $0.10–0.12 per share.
“As we look forward, we believe that the trends that have driven our revenue and customer expansion remain intact,” says Young. “We continue to excel in our technical capabilities and are readying our business to support new applications and future growth. Further, we continue to work towards improving our efficiency, and are focusing on accelerating our return to profitability,” he adds. “CapEx for the whole year will be below $5m. So we’ve really sort of put a lid on things,” notes Fischer.
Regarding micro-LEDs, Young says that AXT continues to be encouraged by industry progress, as well as its own progress in preparing for this opportunity. “We’re already delivering 8-inch GaAs wafers to customers and generating modest revenue. While formal qualification for the flagship program with our large customer won’t occur until sometime in the second half of 2023, we have visibility into the likely technical specification that will be required… We’re ready to ramp up production for them sometime in 2024,” Young says. “In addition, our 8-inch line for GaAs crystal growth is up and running at our Kazuo facility, and we are very excited by our progress in driving improved efficiency there.”
STAR Market listing update
On 10 January 2022, AXT’s China-based wafer manufacturing subsidiary Beijing Tongmei Xtal Technology Co Ltd submitted its application to list its shares in an initial public offering on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (STAR Market) and the application was accepted for review.
Subsequently, Tongmei responded to several rounds of questions received from the Shanghai Stock Exchange (SSE). On 12 July, the SSE approved the listing of Tongmei’s shares. 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.