Business Overview and History
AXT, Inc. is a global leader in the design, development, manufacture, and distribution of high-performance compound and single-element semiconductor substrates, also known as wafers. The company's products are used in a variety of applications, including data centers, telecommunications, wireless devices, and renewable energy. With a rich history spanning over three decades, AXT has established itself as a trusted partner in the semiconductor industry, delivering innovative solutions to meet the evolving needs of its customers.
AXT was founded in 1986 and is headquartered in Fremont, California. The company's origins can be traced back to the commercialization of vertical gradient freeze (VGF) technology, a proprietary crystal growth process that enables the production of high-quality semiconductor wafers. AXT's substrate wafers are used when a typical silicon substrate wafer cannot meet the performance requirements of a semiconductor or optoelectronic device. The company's two main product lines are specialty material substrates and raw materials integral to these substrates.
In 1998, AXT formed and founded its consolidated subsidiary Beijing Tongmei Xtal Technology Co., Ltd. (Tongmei) in China, which grew into a major part of AXT's operations over time. In 2015, the Beijing city government announced plans to move most of its offices to the Tongzhou district, where Tongmei's original manufacturing facility was located. As a result, the government instructed nearly all existing manufacturing companies, including Tongmei, to relocate some or all of their manufacturing lines.
AXT elected to relocate its gallium arsenide production lines while keeping its indium phosphide manufacturing line and administrative functions at the original site. The relocation process began in 2017 and was completed by the end of 2019, with Tongmei's gallium arsenide production now taking place at new manufacturing facilities in Dingxing and Kazuo, China. This relocation enabled AXT to expand capacity and upgrade equipment, positioning the company to support growing demand for its products.
Over the years, AXT has built a vertically integrated supply chain, with partial ownership of several raw material companies in China that produce critical materials used in AXT's substrate manufacturing process. This supply chain strategy provides AXT with pricing advantages, reliable supply, market trend visibility, and shorter lead-times for key raw materials.
Financial Performance and Ratios
For the fiscal year 2023, AXT reported annual revenue of $75.80 million and a net loss of $17.88 million. The company's operating cash flow was $3.40 million, while free cash flow was -$7.07 million. In the most recent quarter (Q3 2024), AXT's revenue was $23.64 million, representing a 36.2% year-over-year increase, driven by higher demand for GaAs, InP, and Ge wafer substrates as well as raw materials. The net loss for Q3 2024 was $2.94 million, with operating cash flow at -$5.42 million and free cash flow at -$6.36 million.
The company's gross profit margin improved to 24.0% in Q3 2024, compared to 10.7% in Q3 2023. AXT's debt-to-equity ratio was 0.27 as of September 30, 2024, indicating a moderately leveraged capital structure.
Liquidity
In terms of liquidity, the company's current ratio was 2.13, suggesting a strong ability to meet its short-term obligations. AXT's quick ratio, which excludes inventory, was 1.04, further reinforcing its liquidity position. The company's cash and restricted cash totaled $38.79 million as of September 30, 2024, providing ample resources to fund its operations and strategic initiatives. AXT has various short-term bank loans totaling $52.88 million, with interest rates ranging from 2.40% to 4.30%.
Segmental Performance and Product Highlights
AXT's product portfolio is divided into two main segments: Substrate Group and Raw Materials Group. The Substrate Group, which accounts for the majority of the company's revenue, includes indium phosphide (InP), gallium arsenide (GaAs), and germanium (Ge) wafer substrates. These specialized materials are used in a variety of applications, such as data centers, 5G infrastructure, fiber optic communications, and renewable energy.
InP substrates are high-performance semiconductor wafer substrates used in broadband and fiber optic applications, 5G infrastructure, and data center connectivity. InP is seeing increasing demand, particularly for applications like high-speed data transfer in data centers to support AI. In the third quarter of 2024, revenue from indium phosphide substrates reached $6.8 million, reflecting the continued growth in this strategic product line.
GaAs substrates come in two forms - semi-insulating and semi-conducting. Semi-insulating GaAs substrates are used for high-speed microwave components like power amplifier chips used in cell phones, satellite communications, and broadcast television. Semi-conducting GaAs substrates are used for optoelectronic products like LEDs, lasers, and VCSELs, which have applications in automotive lighting, horticulture, sensors, and machine vision. Revenue from gallium arsenide substrates was $6.6 million in Q3 2024, as the company navigated fluctuating market conditions.
Ge substrates are used in solar cells for space and terrestrial photovoltaic applications.
The Raw Materials Group, which includes the production and sale of materials such as 6N and 7N purified gallium, pyrolytic boron nitride (pBN) crucibles, and boron oxide (B2O3), continued to contribute positively to the company's overall financial results. Revenue from the Raw Materials Group amounted to $8.6 million in the third quarter, reflecting the healthy demand for these critical components in the semiconductor manufacturing process.
In the nine months ended September 30, 2024, the substrate product group generated 63% of AXT's consolidated revenue, while the raw materials group generated 37%.
Geographic Performance
In Q3 2024, 77% of AXT's revenue came from Asia Pacific, 12% from Europe, and 11% from North America. The top 5 customers accounted for 29.4% of total revenue, with no single customer representing over 10% of sales.
Outlook and Guidance
For the fourth quarter of 2024, AXT expects revenue to be in the range of $23.0 million to $25.0 million. This guidance takes into account the growth anticipated in the company's indium phosphide substrate business, driven by continued demand from data center applications, as well as a consistent contribution from its gallium arsenide substrates and stronger raw material revenues. The company expects the decline in germanium substrate revenue to be offset by the performance in its other product lines.
In terms of profitability, AXT anticipates a non-GAAP net loss per share in the range of $0.03 to $0.05, and a GAAP net loss per share of $0.05 to $0.07 for the fourth quarter of 2024. The expected share count is approximately 43.1 million shares.
Risks and Challenges
AXT operates in a highly competitive and rapidly evolving semiconductor industry, which presents several risks and challenges. The company faces intense competition from other substrate manufacturers, as well as the potential for silicon-based technologies to displace the use of specialty materials in certain applications. Additionally, the company's reliance on its China-based manufacturing facilities exposes it to regulatory changes, environmental restrictions, and potential trade tensions between the United States and China.
The COVID-19 pandemic also had a significant impact on AXT's operations, with mandatory factory shutdowns in China disrupting production and resulting in revenue declines. While the company has since navigated these challenges, the potential for future outbreaks or pandemics remains a risk factor.
Furthermore, AXT's strategic investments in raw material joint ventures in China bring additional risks, including the potential for operational disruptions, regulatory changes, and the ability to maintain favorable supply agreements. The volatility in raw material prices has impacted margins at times, highlighting the importance of the company's vertically integrated supply chain strategy.
Strategic Initiatives
AXT is in the process of listing its subsidiary Tongmei on the Shanghai Stock Exchange STAR Market. While this initiative has faced some delays, it remains an active part of the company's strategic plan to enhance its market position and access to capital in the Chinese market.
Conclusion
AXT Inc. has established itself as a leading provider of high-performance semiconductor wafer substrates, catering to the growing demands of the data center, telecommunications, and renewable energy industries. The company's successful relocation of its manufacturing facilities, coupled with its vertically integrated supply chain strategy, has positioned AXT to capitalize on the evolving market trends. Despite the challenges posed by the competitive landscape and geopolitical uncertainties, the company's focus on innovation, quality, and customer-centricity has been instrumental in driving its growth and maintaining its industry leadership. With a strong product portfolio, improving financial performance, and strategic initiatives underway, AXT is well-positioned to navigate the dynamic semiconductor materials industry and capitalize on emerging opportunities in key markets.