AXT INC Q1 FY2025 earnings call

• Export restrictions: China imposed trade restrictions on indium phosphide export on February 4, and AXT is undertaking an export permit process similar to gallium arsenide. Submitted applications for indium phosphide, expecting initial shipments by mid-June at earliest. - Tongmei IPO: AXT continues to keep its IPO application for Tongmei on the STAR Market current; Tongmei is considered a good IPO candidate in China. - Market opportunities: In China, the cloud and data center connectivity market is accelerating, with increasing sales of indium phosphide for data center applications. Gallium arsenide is seeing recovery in applications like high-power industrial lasers and wireless routers, with a focus on a more measured approach to market share expansion. Raw material joint ventures had strong Q1 sales and are being expanded.

In the first quarter of 2025, revenue was $19.4 million. By product category: Indium phosphide was $3.8 million (primarily from PON and data center applications), gallium arsenide was $6.7 million, germanium substrates were $0.6 million, and revenue from consolidated raw material joint venture companies was $8.3 million. Revenue by region: Asia Pacific was 83%, Europe 11%, and North America 6%. The top 5 customers generated approximately 35.9% of total revenue, with no customer over 10%.

• Q2 revenue is expected to be in the range of $20.0 million to $22.0 million, excluding indium phosphide contributions from customers outside China in Q2. - Expect gross margin recovery to around 10% in Q2 based on manufacturing improvements. - Non-GAAP net loss is expected to be in the range of $0.12 to $0.14 in Q2, with share count approximately 43.7 million shares.

• Geopolitical risks including export restrictions and trade tariffs. - Yield issues in semi-insulating gallium arsenide wafers due to aggressive scaling. - Impact of current political and economic environments on IPO and business operations. - Potential impact of COVID-19 and other contagious diseases.

Q: Dive deeper into yield issues in semi-insulating gallium arsenide and when to expect resolution?

A: Morris Young stated they were too aggressive in entering the HPT wireless market, encountered a yield problem but found the source, expect quick recovery to ~10% gross margin next quarter, and will take a more measured approach.

Q: Why will it take more than a quarter or two to fix yields in gallium arsenide?

A: Morris Young explained that changing customer specifications require recalibration of production lines, making it take time to align with customer needs while maintaining consistent supply.

Q: Indium phosphide permitting process and risk of customers going to other suppliers?

A: Morris Young and Tim Bettles stated AXT is a major indium phosphide supplier with a significant market share, customers are waiting and placing orders, and no lost orders to competitors yet; permits expected by mid-June allowing quick shipment of backlogged orders.

Q: Impact of tariffs on U.S. sales?

A: Tim Bettles mentioned Section 201 tariff is 25% on some products, revenues to U.S. were 8% in 2024, and tariff situation is under negotiation with no immediate major impact on gross margin yet.

Q: Quantify yield issue impact on gallium arsenide revenue?

A: Morris Young stated it's a little more than $1 million per quarter.