AXT INC Q3 FY2026 earnings call

• Capacity Expansion: AXT surpassed its goal to double Indium Phosphide capacity in August 2026. The company is currently designing a new facility adjacent to existing production lines for Indium Phosphide manufacturing, expected to begin operations within several months.
• Technological Advancements: Introduction of proprietary crystal growth furnace designs has improved productivity. The company is transitioning customers to larger diameter substrates (moving from 3-inch to 4-inch and preparing for 6-inch), which commands higher ASPs and improves margins.
• Market Demand: Demand for optical connectivity in AI data centers is rapidly growing due to the transition to 800G and 1.6T transceiver modules. Backlog has exceeded $500 million, including long-term agreements and spot orders, indicating demand significantly outpaces supply.
• Competitive Positioning: AXT maintains a leadership position in Indium Phosphide due to high technical barriers and low Edge Dislocation Density (EPD) capabilities, which are critical for high-power lasers. Competitors struggle with yield and defect density, giving AXT a distinct advantage.
• Subsidiary Development: Majority-owned subsidiary Tang Mei entered into a definitive agreement for private equity financing to fund capacity expansion for Indium Phosphide wafers and raw materials. This supports Tang Mei’s path toward an IPO on the Hong Kong Stock Exchange.
• Regional Growth: Strong demand persists in US hyperscalers and emerging markets in China. Chinese shipments do not require export licenses, providing a strategic advantage and contributing to strong sequential revenue growth in that region.

Revenue for the third quarter of 2026 was $73.4 million, a 54% increase from Q2 2026 and a 162% increase from Q3 2025. The financial performance by product segment is as follows: Indium Phosphide generated $54.3 million in revenue, primarily driven by data center applications; Gallium Arsenide contributed $9.1 million; Germanium substrates accounted for $344,000; and consolidated raw material companies provided $9.7 million. In terms of revenue contribution, Indium Phosphide represented approximately 74% of total revenue, while Gallium Arsenide represented roughly 12%. Gross margins showed significant improvement, with Non-GAAP gross margin reaching 56.1% compared to 45.0% in Q2 2026 and 22.4% in Q3 2025, driven by higher volume, favorable product mix, increased market prices for Indium Phosphide, and a shift from 3-inch to 4-inch wafers.

• Q4 2026 Revenue: Management expects approximately $90 million in revenue realization across substrate products and raw materials, based on permits already secured or not required.
• Operating Expenses: Non-GAAP operating expenses are expected to be approximately $13 million, while GAAP operating expenses are projected at approximately $14 million.
• Net Income Guidance: Non-GAAP net income is guided to be between $0.57 and $0.59 per diluted share. GAAP net income is guided to be between $0.56 and $0.58 per diluted share.
• Share Count: Estimated weighted average diluted shares outstanding for Q4 2026 is approximately 66.1 million.
• Margin Outlook: Management indicated that gross margins are likely to continue improving beyond the current levels, potentially entering the high sixties, driven by volume, mix, and efficiency gains.

• Supply Chain Dependencies: Financial performance is influenced by partially owned supply chain companies and environmental regulations in China.
• Export Controls: Ability to obtain China export permits for certain products remains a variable risk factor affecting shipment timing.
• Execution Risks: Challenges include controlling costs, improving manufacturing yields, and effectively utilizing expanded manufacturing capacity during rapid scaling.
• Market Volatility: Exposure to global economic conditions, trade tariffs, and import/export restrictions could impact future financial performance.

Q: Analyst asked about gross margin sustainability and potential for further increases given recent jumps, wafer size migration, and contract vs. spot pricing dynamics. / A: CFO stated margins are driven by volume, mix, and productivity improvements from larger databases allowing better statistical process control. CEO added that customer demand for lower EPD (Edge Dislocation Density) allows for premium pricing. CFO confirmed margins have not peaked and expect them to enter the high sixties next quarter due to these efficiencies and migration to larger diameters.

Q: Analyst questioned concerns about overcapacity in Indium Phosphide substrates next year and asked for insights on supply/demand balance and competitor actions. / A: VP of Business Development stated the company is significantly overbooked with all customers on allocation, and demand grows faster than capacity addition. CEO noted that while new entries exist in China, the technical barriers (low EPD) favor AXT, who has decades of experience. He expressed confidence that supply will remain tight for at least two to three years despite aggressive capacity expansion plans.

Q: Analyst asked for clarification on the Lumentum supply agreement and the composition of the $500 million backlog, specifically whether it is driven by long-term agreements (LTAs). / A: VP clarified that the Lumentum deal announced in Q3 was a single new agreement, not a renewal. Regarding backlog, he explained that while LTAs exist, they represent a small percentage of total capacity. The majority of the $500 million backlog consists of run-rate business, short-term contracts, and spot purchase orders, reflecting strong immediate demand rather than just locked-in multi-year commitments.

Q: Analyst inquired about the breakdown of shipments by wafer size (3-inch vs. 4-inch vs. 6-inch) and competitive capability in delivering larger substrates. / A: VP detailed that 3-inch dominates current laser volumes, but 4-inch is firmly established for photodetectors and is shifting for lasers in 2027. By end of 2027, 3-inch and 4-inch volumes may equalize. CEO noted that very few competitors can deliver 6-inch substrates; besides AXT, only one other major player is comparable, while others are distant. AXT is aggressively adding 6-inch capacity via new furnace designs.