AXT, Inc. Third Quarter 2026 Earnings Call - AXT INC

Explicit Guidance:

• Q4 2026 Revenue: Approximately $90 million (derived from $73.4M Q3 revenue + $16.6M implied growth), with a high degree of confidence in recognition across substrate product lines and raw materials.
• Q4 2026 Non-GAAP Net Income: $0.57 – $0.59 per share.
• Q4 2026 GAAP Net Income: $0.56 – $0.58 per share.
• Q4 2026 Operating Expenses (Non-GAAP): Approximately $13 million.
• Q4 2026 Operating Expenses (GAAP): Approximately $14 million.
• Q4 2026 Share Count: Approximately 66.1 million diluted shares.
• 2026 Revenue Outlook: Indium Phosphide revenue (54.3% of Q3) expected to drive the remaining Q4 growth, with total company revenue projected to significantly exceed Q3 levels.
• 2027 Revenue/Capacity Outlook: Indium Phosphide capacity is projected to double again in 2027 relative to 2026 levels; cumulative growth from end-2025 to end-2026 is anticipated to be roughly 2.75x – 3.0x.

Business-Segment Outlook:

• Indium Phosphide (InP): Backlog has surpassed $500 million (up from <$100 million previously), comprising long-term agreements, short-term contracts (<12 months), and spot orders extending into 2027. Revenue opportunity has quadrupled in 2026; further substantial expansion is expected in 2027.
• Wavelength/Technology Shift: Transition from 3-inch to 4-inch substrates is accelerating; 4-inch is expected to represent a significant portion of wafer volumes (potentially equal to 3-inch) by end-2027. 6-inch production lines are entering power production status in 2026 with yield improvement and productivity gains expected to expand significantly through 2027.
• Gallium Arsenide (GaAs): Demand for 6-inch and 8-inch GaAs substrates for data center lasers (VIXO) is growing; expected to be seasonal in Q4 but opportunity for market share expansion remains for the full year.
• Raw Materials: Subsidiary Jingmei expanding capacity for high-purity Indium; will provide a meaningful portion of AXT requirements to guarantee supply.
• Gross Margin Trajectory: Expect margins to increase further, potentially breaking the 60% level in the coming quarters due to volume, mix shift to larger diameters (4-inch, 6-inch), and productivity gains.

Market and Competitive Outlook:

• Supply/Demand Dynamics: Demand significantly outstrips supply; all customers remain on allocation. Lead times have extended to nine-plus months.
• Competitive Landscape: AXT viewed as the leader in scaling and meeting stringent performance requirements (specifically low Extended Planar Defect (EPD) densities). Competitors face high technical barriers (crystal growth, EPD control). Six-inch capability is limited to AXT and one other player, with AXT uniquely aggressive on capacity addition for 6-inch.
• Customer Adoption: Rapid transition to 800G and 1.6T transceiver modules driving demand for EML-based lasers/detectors. Momentum building for near-packaged and co-package optics.
• Long-Term Strategy: AXT prioritizing flexibility over locking in formal multi-year Long-Term Supply Agreements (LTSAs) to protect pricing power and volume flexibility; backlog growth is primarily driven by spot orders and annual contracts.

Macro / Industry Outlook:

• AI Infrastructure: Massive demand driven by hyperscalers deploying GPU-dense systems requiring high-speed optical connectivity; expected to sustain multi-year growth.
• China Market: Emerging as a critical growth market for AI supply chain investment; shipments within China do not require export permits, supporting revenue growth.
• Regulatory/Tariffs: Management notes risks regarding export permits and tariffs in the forward-looking statement disclaimer but highlights the strategic advantage of domestic Chinese production via Tongmei for the China market.

Strategic Initiatives:

• Capacity Expansion: Currently in design phase to convert an adjacent building for Indium Phosphide production; expected to begin within several months.
• Subsidiary IPO (Tongmei): Majority-owned subsidiary Tongmei has entered a definitive agreement for private equity financing (up to US$545 million) to fund capacity expansion and raw material upgrades; aims for Hong Kong Stock Exchange listing. AXT ownership will dilute to ~73.4% post-transaction.
• Technology: Rolling out new proprietary crystal growth furnace designs to drive productivity and enable 6-inch scaling.
• Geographic Expansion: Continuing to expand substrate and raw material capacity in China to efficiently support AI infrastructure build-out.

Risks and Headwinds to Outlook:

• Supply/Demand Mismatch: Risk of being unable to add capacity fast enough to meet exploding demand (even doubling capacity in 2027 may not suffice).
• Execution Risks: Potential delays in new facility conversion, furnace deployment, or yield ramp-up for 6-inch substrates.
• Cost Pressures: Rising raw material prices (Indium Phosphide) could impact margins, though management believes productivity gains will offset this.
• Regulatory: Uncertainties regarding China export permits, environmental regulations in China, and geopolitical trade restrictions.
• Financial Performance of Subsidiaries: Risks associated with the financial performance of partially owned supply chain companies.

Management Tone on the Future:

• Confidence: High confidence in revenue recognition for Q4 and sustained multi-year growth trajectory.
• Surprise Factor: Management admits the market size is "bigger than expected" ("we didn't expect it to be so big").
• Strategic Stance: "Laser focused execution," "transformational growth," and "pivotal and exciting period."
• Margin Outlook: Optimistic about margins exceeding 60% in the near term; believes the company has not yet peaked on gross margin potential.
• Capacity Caution: No immediate concern over overcapacity through 2028; will re-evaluate CapEx needs closer to 2029.

Miscellaneous:

• Lumentum Agreement: Long-term supply agreement signed in Q3 includes a $43.5 million prepayment (recorded as a liability, converting to revenue upon shipment).
• Tongmei Financing: Proceeds will fund capacity expansion for Indium Phosphide wafers and raw material companies; transaction closes once the investment is finalized.
• Upcoming Events: Management to attend UBS Global Technology and AI Conference (December), Northland Growth Conference (December), and Needham Growth Conference (January).