- 06th November 2006 -

AAXT GaAs Substrate Revenue Up 30%

In its latest financial results, AXT, Inc., reported revenue for the third quarter 2006 of $12.5 m, up 21% from $10.4 m in the second quarter of 2006. Total GaAs substrate revenue was $10.6 m up 30% over the second quarter 2006. By contrast, revenue in the third quarter from InP substrate sales was $340,000, down from $613,000 in the second quarter. Meanwhile, Ge substrate sales were $387,000, compared with $169,000 in the second quarter. Finally, materials sales were steady: $1.3 m, compared with $1.4 m in the prior quarter.

Gross margin was 27.7% of revenue for the third quarter of 2006. This included a benefit from the sale of approximately $802,000 in fully reserved wafers, which positively affected the quarterly gross margin by 6.4%. By comparison, gross margin in the second quarter of 2006 was 26.6%. This included a benefit from the sales of approximately $818,000 in fully reserved wafers, which positively affected second quarter gross margin by 7.9%.

Loss from operations for the third quarter of 2006 was $1.0 m compared with $1.7 m for the second quarter. The reduction in loss from operations was primarily due to the increase in gross profit and reduction in selling, general and administrative expenses, partially offset by the impairment charge.

"We are extremely proud today to report another strong quarter of growth in our revenue, as well as several exciting developments regarding our customer base," said Phil Yin, CEO. "The third quarter was a very productive and rewarding quarter as we began to reap the benefits of the changes we have made over the past 18 months.

"Our GaAs revenue growth was driven by increasing demand for our 4" and 6" SI GaAs substrates, used primarily in HBT and PHEMT devices for wireless handset applications. We have several significant customer qualifications going on for both semi-insulating and semi-conducting substrates with Tier 1 companies. These customer qualifications are particularly important to AXT because the invitations by these customers to re-qualify our substrates indicate that our industry is recognizing the improvements that we have made. We have shipped wafers to these customers for qualification and hope to move into volume production with these customers in early 2007.

"Germanium substrates also continue to be a very interesting part of our business. While our revenue in this area is comparatively small, it has experienced significant growth over the past several quarters. AXT now has shipped qualification samples to customers all over the world and is in volume production with two customers in Asia. We believe that the greater efficiencies of triple junction concentrator solar cells, coupled with the shortage of polysilicon, are causing Ge substrates to become the material of choice for photovoltaic applications.

However, in September 2006, tax authorities in the People's Republic of China (PRC) announced their intention to impose customs duties on, and to reduce or eliminate refunds of value-added taxes that companies pay when they purchase certain raw materials, including gallium and arsenic. The combination of these actions could significantly increase costs warned AXT: “Implementing regulations will not be published before late November, and it is possible that these regulations will not be adopted or that changes will be made in their outline before adoption. Lobbying efforts are being made to remove gallium and arsenic from the list of affected materials, but there is no way to know if these efforts will have any impact on the final form of the regulations. There appears to be a possibility that the value-added tax refund on gallium will not be completely eliminated, but merely reduced.

“If the regulations are adopted as currently proposed, they would not have a material impact on our fourth quarter results because they would only be in effect for a portion of the quarter. They may, however, potentially have a significant adverse impact on our gross margins and net income (loss) in 2007, although we do not have the facts necessary to estimate its magnitude at this time. We are also exploring ways of restructuring our operations in the PRC in order to mitigate the impact of these regulations if and when they are adopted. We will not know the exact impact of any restructuring or the amount of time that it might take to accomplish until toward the end of this year”.

Web: www.axt.com