AXT, Inc. Q3 2021 Form 10-Q Summary
Business context and reporting period
AXT develops and manufactures compound and single-element semiconductor substrates, including indium phosphide, gallium arsenide and germanium wafers, and sells related raw materials such as refined gallium and pBN crucibles. Manufacturing is conducted in China. The unaudited filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $34.6 million | $25.5 million | $99.7 million | $68.3 million |
| Gross profit | $11.5 million | $8.8 million | $35.3 million | $21.1 million |
| Gross margin | 33.3% | 34.6% | 35.4% | 30.9% |
| Income from operations | $2.4 million | $2.2 million | $9.9 million | $2.0 million |
| Net income attributable to AXT | $3.8 million | $1.0 million | $11.6 million | $1.2 million |
| Diluted EPS | $0.09 | $0.02 | $0.27 | $0.03 |
| Net cash from operating activities | Not separately provided | Not separately provided | $(10.7) million | $6.3 million |
- Q3 revenue increased 35.8%; nine-month revenue increased 45.9%. Substrate revenue rose 28.8% in Q3 and 37.7% for nine months, while raw-material revenue rose 63.3% and 76.9%, respectively.
- Growth was driven primarily by stronger demand for InP wafers used in 5G and data-center connectivity, GaAs wafers used in LED and automotive applications, refined gallium and pBN crucibles.
- Q3 operating margin was approximately 6.9%; nine-month operating margin was approximately 9.9%. Q3 net margin attributable to AXT was approximately 11.0%; nine-month net margin was approximately 11.6%.
- Equity income from unconsolidated joint ventures was $1.1 million in Q3 and $3.7 million for nine months, versus $45,000 and a $243,000 loss in the comparable periods. The improvement primarily reflected stronger results at raw-gallium companies.
- Other income included a $1.0 million Chinese provincial relocation grant in Q3. Nine-month 2021 other income was $0.9 million, compared with $2.9 million in 2020, when relocation grants totaled $3.0 million.
- Cash and cash equivalents were $43.6 million at September 30, 2021, down from $72.6 million at December 31, 2020. Cash, short- and long-term investments totaled $56.0 million, compared with $78.6 million at year-end 2020.
- Operating cash flow was negative because of increases in accounts receivable and inventory and reductions in accrued liabilities. Capital expenditures were $19.1 million, primarily for new facilities and equipment.
- Total debt was approximately $14.2 million, consisting of $13.3 million in current bank loans and $0.9 million of related-party long-term debt. The company also had $2.5 million of operating lease liabilities.
- Accounts receivable increased to $36.6 million from $24.6 million at year-end, and inventory increased to $60.7 million from $51.5 million. Excess and obsolete inventory reserves were $19.2 million.
Material changes versus the prior comparable period
- Revenue and profitability improved substantially, although Q3 gross margin declined 130 basis points because of product mix and other manufacturing factors; nine-month gross margin expanded 450 basis points.
- SG&A increased 40.1% in Q3 and 26.4% for nine months, while R&D increased 30.0% and 52.2%, respectively, reflecting personnel, professional services and development of larger-diameter GaAs and InP products.
- Operating cash flow shifted from $6.3 million provided in the first nine months of 2020 to $10.7 million used in 2021, while capital expenditures increased from $12.1 million to $19.1 million.
- China revenue more than doubled for the first nine months, rising 108.5% to $48.1 million and representing 48% of total revenue. Taiwan revenue declined 8.3%, while Japan, Europe and North America increased.
- Tongmei formed ChaoYang XinMei, a 58.5%-owned subsidiary, and borrowed $0.9 million from a minority investor. AXT also transferred AXT-Tongmei to Tongmei as part of the proposed STAR Market IPO restructuring.
Guidance, outlook, risks and unusual items
- The filing does not provide a clear numerical revenue or earnings guidance figure. Management states that it expects available cash and investments to fund operating needs and capital expenditures for the next twelve months.
- Tongmei plans to submit its formal STAR Market IPO application in the fourth quarter of 2021 or first quarter of 2022 and expects completion around mid-2022, but there is no assurance the IPO will occur.
- Private-equity investors in Tongmei may require redemption at the original approximately $49 million investment if a material adverse change occurs or the IPO is not achieved by December 31, 2022, subject to the filing and acceptance conditions described in the agreements. A redemption could require AXT to obtain additional capital.
- Key operating risks include COVID-19 disruptions, China-U.S. trade restrictions and tariffs, foreign-exchange movements, Chinese environmental or manufacturing shutdowns, customer qualification requirements at relocated facilities, product yields, inventory obsolescence and semiconductor industry cyclicality.
- Approximately 10% of revenue is associated with wafers imported into the United States; tariffs paid during the first nine months were approximately $892,000.
- All products are manufactured in China, and approximately 90% of revenue is international. One customer represented 11% of accounts receivable at September 30, 2021, although no customer represented 10% of nine-month revenue.
- The company reports no material pending legal proceedings, no off-balance-sheet financing arrangements and effective disclosure controls as of September 30, 2021.
Important facts for investors to verify
- Whether demand for InP, GaAs and raw materials remains strong and whether China-related growth is sustainable.
- Whether increased capital spending and construction at Dingxing, Kazuo and other facilities translate into higher utilization, yields and gross margins.
- The causes and persistence of negative operating cash flow, rising receivables and inventory balances.
- The timing, regulatory acceptance and ultimate completion of the Tongmei STAR Market IPO and the potential for investor redemption obligations.
- Exposure to China-U.S. tariffs, export restrictions, environmental shutdowns, COVID-19 disruptions and foreign-exchange volatility.
- The effect of nonrecurring or less predictable items, including Chinese relocation grants and equity income from unconsolidated raw-material companies, on reported earnings.