Trade Resources Industry Views AXT's Q2 Revenue up 9.6%, Driving Higher-Than-Expected Profit

AXT's Q2 Revenue up 9.6%, Driving Higher-Than-Expected Profit

For second-quarter 2016, 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 $20.5m, down slightly on $21m a year ago but up 9.6% on $18.7m last quarter, and at the high-end of the expected $19.5-20.5m.

Of total revenue, 65% came from Asia Pacific, 22% from Europe, and 13% from North America. Two customers generated more than 10% of revenue, and the top five generated 42% of total revenue (down from 45% three quarters ago), reflecting diversification of both products and customers.

"Q2 was another strong quarter for InP sales," notes CEO Morris Young. "Our indium phosphide revenue have grown at an average rate of more than 50% annually for the last two years [to about 30% of total revenue]." Fiber-optics communications continues to be the leading application.

Regarding GaAs, AXT saw some sequential growth in revenue from semi-insulating substrate, which have reached a relatively stable quarterly level of contribution. Semiconducting gallium arsenide also grew modestly. "The majority of our revenue continues to be driven by demand for higher-end LED applications such as backlighting, signage and automotive," says Young.

Regarding raw materials, AXT saw no substantial changes to the pricing or demand environment for its key material in Q2. "However, several China-based gallium suppliers, including two of our own joint venture companies, are in the process of scaling back production to align with market demand. In addition, others [in China] may be shutting down altogether," says Young. "Further market stabilization and eventual rebound in raw material pricing may come as a result of this decrease in volume production and as excess inventory is being consumed," he adds.

About two years ago AXT began implementing programs to reduce manufacturing costs. More recently, it has focused on increasing yield for both ingots and wafering process. "Single-crystal growth and the resultant wafer creation are highly technical and we have strengthened our proprietary process technology during this quarter," notes Young. "Over time, all these programs have begun to contribute meaningfully to our gross margin performance."

Gross margin has risen further, from a low of 20.9% a year ago and 28.1% last quarter to 29.4%. This was due to increased production volume, a favorable mix (namely, increased sales of indium phosphide substrates and other materials for high-end applications), progress in manufacturing efficiency, and yield improvements.
Operating expenses were $5.1m, level with a year ago but up from $4.8m last quarter due mainly to a one-time restructuring charge of $226,000 related to a staff reduction at one of the firm's gallium-producing joint ventures in China.

Net profit was $1.15m ($0.03 per diluted share, about $0.01 above the guidance range of breakeven to $0.02 per share), up from $42,000 last quarter and just breakeven a year ago.

Depreciation and amortization were $1.2m. Capital expenditure (CapEx) increased again, from $0.8m last quarter to $1m. With AXT generating positive cash flow during the quarter, cash, cash equivalents and investments hence rebounded by $1.6m from $43.3m to $44.9m.

"AXT remains focused on maximizing opportunities in strategic emerging areas, such as indium phosphide substrates, where we are solidly positioned with the expertise, technology and manufacturing capability to support further growth," says Young.

For third-quarter 2016, AXT expects revenue of $20.5-21.5m, with InP again driving growth. Net profit should be $0.03-0.05 per diluted share.

"We are closely monitoring semiconducting gallium arsenide applications requiring very low-defect-density material [low etch pit density (EPD) for vertical-cavity surface-emitting lasers (VCSELs)]," says Young. This emerging technology is gaining momentum in applications such as 3D sensing. "The mobile phone and tablet market will likely to be among the earliest adopters. But the technology is also very well suited for other areas such as smart TV, high-speed communications and high-power material processing," he adds. "The very low-EPD requirement for VCSEL devices provides a great opportunity for AXT as our VGF technology and proprietary processes allow us to offer industry-leading specifications," Young believes. "Similarly to indium phosphide, these requirements create a meaningful significant barrier to entry. Our belief is that we could see meaningful contribution from VCSEL applications sometime next year. It will benefit the topline but also contribute towards the higher gross margins," he adds. "There is plenty of room for further improvement [in gross margin]. We expect to see sustainable benefit and continue to study additional areas in which we feel we may drive further improvements," concludes Young.

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