AXT INC annual report, FY2023

AXT, Inc. Fiscal 2023 Form 10-K Summary

Business context and reporting period

AXT develops and manufactures compound and single-element semiconductor substrates, including indium phosphide (InP), gallium arsenide (GaAs) and germanium (Ge), plus related raw materials such as purified gallium and pyrolytic boron nitride crucibles. All products are manufactured in China, while approximately 90% of 2023 revenue came from customers outside North America.

The filing covers the fiscal year ended December 31, 2023, filed March 15, 2024. Quarterly data included in the filing shows fourth-quarter 2023 revenue of $20.4 million, gross profit of $4.6 million and net loss attributable to AXT of $3.6 million.

Key financial metrics

Metric	2023	2022	Change
Revenue	$75.8 million	$141.1 million	Down 46.3%
Gross profit	$13.3 million	$52.1 million	Down 74.4%
Gross margin	17.6%	36.9%	Down 19.3 percentage points
Operating income (loss)	$(21.6) million	$12.6 million	Declined $34.1 million
Net income (loss)	$(19.2) million	$18.7 million	Turned to loss
Net income (loss) attributable to AXT	$(17.9) million	$15.8 million	Turned to loss
Basic and diluted EPS	$(0.42)	$0.37	Declined
Cash flow from operations	$3.4 million	$(8.8) million	Improved by $12.2 million
Capital expenditures	$10.5 million	$28.5 million	Down $18.0 million

Substrate revenue was $47.5 million, down 57.3%; raw-material revenue was $28.3 million, down 5.6%. Product mix shifted to 63% substrates and 37% raw materials, compared with 79% and 21%, respectively, in 2022.
Operating expenses were $34.9 million, including $22.8 million of selling, general and administrative expense and $12.1 million of research and development expense.
Equity income from unconsolidated joint ventures was $1.9 million, down from $6.0 million, including $1.9 million of impairment charges related to investments.
Other income was $2.2 million, including $2.6 million of Chinese government subsidies and a $0.2 million foreign-exchange gain.
Accounts receivable declined to $19.3 million from $29.3 million. Inventory was $86.5 million, net of a $21.9 million excess and obsolete inventory reserve.
Cash, restricted cash and cash equivalents totaled $50.1 million at year-end, and total cash, restricted cash, cash equivalents and investments totaled $52.3 million. Approximately $42.0 million of cash and investments was held outside the United States.
Bank loans totaled $52.9 million at December 31, 2023, compared with $47.1 million at year-end 2022. Most facilities had terms of 12 months or less.
Net property, plant and equipment was $166.3 million, including $38.5 million of construction in progress, primarily related to Chinese manufacturing facilities and equipment.

Material changes versus the prior comparable period

Revenue fell sharply because of lower demand for InP used in 5G, data-center upgrades and consumer applications; lower GaAs demand for LEDs, industrial lasers and other applications; and lower Ge demand from Chinese customers.
Gross margin compressed substantially because lower volume spread fixed manufacturing costs over fewer units and product mix became less favorable. Management cited industry-wide inventory correction and reduced manufacturing utilization.
The company reduced SG&A by 11.1% and R&D by 13.2%, but these reductions were insufficient to offset the gross-profit decline.
Operating cash flow returned to positive territory, primarily because accounts receivable decreased by $9.3 million and inventory decreased by $1.1 million.
Financing activities provided $8.6 million, including $56.5 million of short-term loan proceeds and $49.2 million of repayments. No common shares were repurchased.
Revenue improved sequentially in the fourth quarter from $17.4 million in the third quarter to $20.4 million, and fourth-quarter gross margin improved to approximately 22.6% from 10.7% in the third quarter.

Guidance, outlook, commentary and unusual items

Management stated that it was beginning to see market recovery and increased orders, and that the GaAs market appeared to have largely worked through excess inventory. The filing does not provide clear full-year 2024 revenue or earnings guidance.
Management continues to emphasize InP demand related to high-speed data transfer, data centers and potential AI applications, as well as development of 6-inch InP and 8-inch GaAs wafers. The 8-inch GaAs product was shipping in small quantities.
One customer’s end-user cancelled a consumer project that had been expected to begin production in 2025, eliminating a potentially high-volume opportunity for 8-inch GaAs wafers.
Tongmei’s proposed STAR Market listing remained subject to CSRC and other regulatory approvals. Investors in Tongmei have redemption rights if the IPO fails specified conditions or is cancelled; the aggregate potential redemption amount is approximately $49 million.
China’s export-license requirements for gallium- and germanium-related materials became effective August 1, 2023. Licenses have been issued for some shipments, but the filing states that licenses were not issued in some cases and shipments were delayed.
AXT paid approximately $1.0 million in U.S. tariffs during 2023, compared with $3.3 million in 2022.
In January and February 2024, the company obtained $7.9 million of new one-year loans and repaid $14.5 million of existing loans. In January 2024, it also borrowed $5.9 million under a new $9.9 million, five-year credit facility secured by Chinese real estate.
The company reported effective disclosure controls and effective internal control over financial reporting, and BPM LLP issued unqualified opinions on the financial statements and internal controls.

Key risks and contingencies

Semiconductor industry cyclicality, customer inventory corrections, order cancellations and lower utilization can materially reduce revenue and gross margin.
All manufacturing is concentrated in China, exposing the company to regulatory intervention, environmental shutdowns, hazardous-material requirements, power and transportation disruptions, export controls, tariffs and geopolitical tensions.
The company depends on limited suppliers for certain critical materials and equipment, including quartz tubing, arsenic, phosphorus and polishing solutions.
Product yields, quality issues and lengthy customer qualification cycles could delay shipments, increase warranty costs or cause customer losses.
Inventory remains significant, and the $21.9 million reserve for excess and obsolete inventory depends on management’s demand forecasts.
The Tongmei redemption obligation could require approximately $49 million of cash if the STAR Market listing is not completed or other triggering conditions occur.
AXT has $2.9 million of accrued Series A preferred-stock dividends and has never paid or declared dividends on its common stock or Series A preferred stock.
Potential tax, environmental, legal, cybersecurity and foreign-exchange exposures could adversely affect results. No individually or collectively material legal proceeding was reported.

Important facts for investors to verify

Whether the reported recovery in orders continues and translates into sustained revenue growth and improved manufacturing utilization.
Current status, timing and regulatory approval prospects of the Tongmei STAR Market IPO and the associated approximately $49 million redemption exposure.
Availability and timing of Chinese export licenses for GaAs and Ge products, and any resulting customer or shipment impact.
Inventory aging, reserve adequacy and the ability to convert the $86.5 million inventory balance into cash without further write-downs.
Debt maturities, refinancing needs and the extent to which short-term Chinese bank loans are secured by deposits or company assets.
Demand recovery across InP, GaAs, Ge and raw-material businesses, including the effect of the cancelled 8-inch GaAs consumer project.
Cash accessibility within the Chinese corporate structure, including PRC withholding tax and SAFE approval requirements for transfers and dividends.