AXT, Inc. 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended June 30, 2023; filed August 9, 2023. AXT designs, manufactures and sells compound and single-element semiconductor substrates, including indium phosphide, gallium arsenide and germanium wafers, plus related raw materials. Manufacturing is conducted through subsidiaries and joint ventures in China. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $18.6 million | $39.5 million | $38.0 million | $79.1 million |
| Gross profit | $1.7 million | $15.4 million | $6.8 million | $28.7 million |
| Gross margin | 9.2% | 39.1% | 18.0% | 36.3% |
| Operating income (loss) | $(6.8) million | $5.3 million | $(11.3) million | $9.0 million |
| Net income (loss) attributable to AXT | $(5.1) million | $5.5 million | $(8.4) million | $8.7 million |
| Diluted EPS | $(0.12) | $0.13 | $(0.20) | $0.20 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $2.8 million | $5.5 million |
Substrate revenue fell 65.2% in Q2 and 61.4% year to date, primarily because of weaker demand for InP wafers in data center, consumer and telecommunications applications and lower GaAs and Ge demand, particularly in China. Raw-material revenue declined 2.9% in Q2 and 14.1% year to date.
Operating expenses declined, but not enough to offset the gross-profit reduction. Q2 selling, general and administrative expense was $5.8 million and research and development expense was $2.7 million. Net interest expense increased to $365,000 in Q2 and $762,000 year to date because of higher debt levels and interest rates.
Other income included government grants of $1.3 million in Q2 and $1.8 million year to date. Equity income from unconsolidated joint ventures was $941,000 in Q2 and $2.0 million year to date. The Q2 result included gains related to the partial sale and remeasurement of the Jia Mei investment, partly offset by a $754,000 impairment recorded by JiYa.
Liquidity, Debt and Capital Resources
- At June 30, 2023, cash and cash equivalents were $30.1 million, restricted cash was $10.8 million, short-term investments were $7.1 million and long-term investments were $1.6 million.
- Total cash, restricted cash, cash equivalents and investments were approximately $49.6 million, compared with $52.8 million at December 31, 2022.
- Accounts receivable declined to $19.9 million from $29.3 million at year-end 2022. Inventories were $87.1 million, including $26.8 million of excess and obsolete inventory reserves.
- Bank loans totaled $45.6 million at June 30, 2023, compared with $47.1 million at December 31, 2022. Most borrowings mature within 12 months; certain loans are secured by land, buildings, accounts receivable or time deposits.
- Six-month cash flow included $2.8 million from operating activities, $3.1 million used in investing activities and $1.7 million from financing activities. Capital expenditures were $6.8 million.
- Management states that existing cash and investments are adequate for operating needs and capital expenditures over the next 12 months, but warns that lower sales could accelerate cash usage and require additional capital.
Material Changes and Unusual Items
- Revenue declined 52.9% in Q2 and 52.0% for the first six months compared with the prior-year periods.
- Gross margin contracted sharply because of lower factory utilization, under-absorbed overhead, unfavorable product mix and lower raw-material margins while higher-cost inventory was sold.
- Inventory reserves for excess and obsolete inventory increased to $26.8 million from $24.7 million at December 31, 2022.
- In May 2023, AXT sold 15% of its Jia Mei investment, reducing ownership from 25% to 10%. The transaction and remeasurement generated gains totaling approximately $958,000.
- In July 2023, the company obtained $4.2 million of new one-year unsecured bank loans and repaid $2.8 million of an existing loan.
- China adopted new export controls on gallium- and germanium-related materials effective August 1, 2023. The company expects to seek required permits; InP substrates are not subject to these stated controls.
Outlook, Commentary and Risks
The filing does not provide clear numerical revenue or earnings guidance. Management describes demand as weak and identifies continued uncertainty in the compound-semiconductor cycle. The company is awaiting additional customer feedback on 8-inch GaAs wafers and continues to invest in capacity and facilities in Dingxing and Kazuo, China.
- Demand and utilization: Prolonged weakness, order cancellations, customer inventory, lower utilization and fixed manufacturing costs could further pressure margins and liquidity.
- China and geopolitical exposure: All products are manufactured in China. Regulatory changes, environmental shutdowns, hazardous-material requirements, tariffs, export controls, trade restrictions and U.S.-China tensions could disrupt production or sales.
- Tongmei IPO and redemption exposure: Tongmei’s proposed STAR Market IPO remains subject to review and approval. Private-equity investors have redemption rights of approximately $49 million if specified IPO conditions are not satisfied or the application is canceled.
- Supply chain and investment risk: AXT depends on Chinese raw-material subsidiaries and minority investments. Partner performance, commodity prices, environmental requirements and investment impairments could affect results.
- Foreign exchange and interest rates: The company has significant renminbi and yen exposure and uses limited yen hedges. Q2 other comprehensive loss included $7.2 million of foreign-currency translation loss.
- Customer and product risks: Long qualification cycles, product defects, yield problems and dependence on end-market demand may cause revenue volatility and customer losses.
- Contingencies: The filing reports ordinary-course legal proceedings that management does not expect to have a material adverse effect. Accrued product warranty liabilities were $852,000 at June 30, 2023.
Investor Verification Checklist
- Verify whether demand for InP, GaAs and Ge substrates is recovering and whether factory utilization and gross margin are improving.
- Track inventory levels, excess-and-obsolete reserves and the effect of higher-cost raw-material inventory on future margins.
- Assess near-term bank-loan maturities, refinancing needs and the availability of unrestricted liquidity, recognizing that $10.8 million of cash was restricted.
- Monitor Tongmei’s STAR Market IPO status and the potential approximately $49 million redemption obligation.
- Confirm the practical impact of China’s gallium and germanium export controls, including permit timing and affected products or customers.
- Evaluate exposure to U.S. tariffs, China-U.S. trade restrictions, foreign-exchange movements and potential Chinese environmental or operating restrictions.
- Review customer qualifications and commercial adoption of the new 8-inch GaAs wafers and relocated manufacturing capacity.