Axt (AXTI) Q2 2026 earnings call transcript

Good afternoon, everyone, and welcome to AXT's second-quarter, 2026 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fisher, Chief Financial Officer.

In addition, Tim Battles VP of Business Development will be participating in the Q&A portion of the call. My name is Kenneth and I will be your coordinator today.

I would now like to turn the call over to Les De Green, Investor Relations for AXT. Thank you, Kenneth, and good afternoon, everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the company, market conditions and trends, emerging applications using chips or devices fabricated on our substrates, our product mix, global economic and political conditions, including trade tariffs, and import and export restrictions, ability to obtain China export permits, timing of receipt of export permits, and list our subsidiary, Tong Mai, in Hong Kong, our ability to increase orders in succeeding quarters to control costs and expenses, to improve manufacturing yields and efficiencies, or to utilize our manufacturing capacity.

We wish to caution you that such statements deal with future events are based on management's current expectations and are subject to risks and uncertainties that could cause actual events and results to differ materially. In addition to the matters just listed, these uncertainties and risks include, but are not limited to, the financial performance of our partially owned supply chain companies, and increased environmental regulations in China.

In addition to the factors just mentioned that may be discussed on this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at axc. com through July 30, 2027.

Also, I want to note that shortly following the close of the market today, we issued a press release reporting financial results for the second quarter of 2026. This information is available on the investor relations portion of our website. I would now like to turn the call over to Gary Fisher for a review of our second quarter 2026 results, Gary.

Thank you, Leslie, and good afternoon to everyone. Our Q2 financial results highlight an exciting inflection in our business trajectory and the beginnings of a multi-year growth phase for AXT. Revenue for the second quarter of 2026 is 47.6 million. This is the highest quarterly revenue in AXT's history, up nearly 77% from 26.9 million in the first quarter and up 164% from 18.0 million in the second quarter of 2025.

To break down our Q2 2026 revenue for you by product category, Indian Phosphide was 30.7 million, also the highest in our company's history. Let me repeat that, Indian Phosphide was 30.7 million, also the highest in our company's history, primarily from data center applications. Galium R studied with 6.6 million, germanium substrates were 272k.

Finally, revenue from our consolidated raw material joint venture companies in Q2 was 10.0 million. The top five customers generated approximately 30% of total revenue and no customers are over the 10% level. Gross margins showed a substantial improvement again in the second quarter, primarily driven by an increase in total volume and a favorable product mix. Non-gap gross margin was 45.0% compared with 29.9% gross margin in Q1 of 2026 and 8.2% gross margin in Q2 of 2025.

For those who prefer to track results on a gap basis, gross margin in the second quarter is 44.9%, compared with 29.6% in Q1 and 8.0% in Q2 of 2025. This is a huge, huge positive change from Q1 of 2025.

Moving to operating expenses, our total non-gap operating expense in Q2 was 10.2 million, compared with 8.6 million in Q1 and 7.6 million in Q2 of 2025. On a gap basis, total operating expense in Q2 was 10.9 million, compared with 9.6 in Q1 and 8.2 in Q2 of last year. Our non-gap operating profit for the second quarter of 2026 is 11.2 million, compared with the non-gap operating loss in Q1 of 2026, the 550K and the non-gap operating loss of 6.1 million in Q2 of 2025.

For reference, our gap operating line for the second quarter of 2026 was a profit of 10.4 million, compared with an operating loss of 1.6 million in Q1 and an operating loss of 6.7 million in Q2 of 2025.

Non-operating other income and expense and other items below the operating line for the second quarter of 2026 was a net profit of 705,000. The details can be seen in the P&L included in our press release today.

In Q2 2026, we return the company to profitability. We are pleased to report a non-gap net profit of 11.9 million or 19 cents per diluted share. This compares with the non-gap net loss of 585K or 1 cent per share loss in the first quarter and the non-gap net loss in Q2 of 2025 of 6.4 million or 15 cents per share loss.

On a gap basis, net profit in Q2 is 11.1 million or 17 cents per diluted share. By comparison, net loss was 1.6 million or 3 cents per share in the first quarter and a gap net loss in Q2 of last year of 7.0 million. The weighted average diluted shares outstanding in Q2 is 63.5 million. Cash, cash equivalents, and investments increased by 625.6 million dollars to 748.8 million as of June 30th. This was primarily the result of our secondary public offering of common stock, which closed on April 22nd and generated approximately 632 million before expenses.

By comparison, at March 31st, our cash was 120 million. Accounts receivable increased by 4.7 million. During Q2, we signed long-term supply agreements with Casella and Coherent. Under the terms of these agreements, we received prepayments for waivers of 22.3 million and 25.4 million respectively. These type of agreements with significant upfront cash are an additional signpost regarding the important use of Indian FOSFIDE for high-speed optical data transmission required in AI data centers.

Morse is going to talk more about this in a moment. These prepayments are posted on our financial statements as a liability, and they will be converted to revenue and the liability reduces as we ship product against these agreements.

Depreciation and amortization in the second quarter was 2.5 million. Total stock comp was 0.8 million. Net inventory was approximately 6.2 million in the second quarter to 96.3 million, and this concludes our report on financial numbers. Turn to our plan to list our subsidiary Tongmei in China. On June 26, Tongmei notified the stock exchange that it was moving its applications for an initial public offering on the star market.

This was accepted in July. A. S. T. and Tongmei will now instead transfer our efforts towards listing on the Hong Kong exchange, which will likely take about a year to complete. We continue to believe that an IPO in China is a highly beneficial in expanding our capacity in China and the most efficient and effective way to support the rapidly evolving AI infrastructure build-out.

This concludes our China development of its semiconductor supply chain to meet increased China-based demand for Indian fossilized substrates. Tongmei's move to the Hong Kong stock exchange creates a redemption right for the $49 million invested by the PE funds back in 2021. However, we've been in discussion with them, and currently they all wish to continue their investment and not be redeemed.

We have sufficient cash to redeem investments should they be requested. With that, I'll turn the call over to Dr. Morris Young for a review of our business and markets. Morris?

Thank you, Gary. This is an incredibly exciting time for you to see. As Gary mentioned, we have reached an inflection point in our business where the customer demand is extremely strong for our Indian fossilized material. We have committed to doubling our Indian fossilized capacity in 2026, and I'm pleased to report that we are ahead of the schedule in that effort.

But more importantly, I can now report to you that our revenue opportunity for Indian fossilized is on track to more than triple by the end of 2026. With continued significant expansion expected in 2027.

This is happening as a result of three factors. First, we're being able to expand capacity at a faster rate than we expected.

Second, we're making significant strides in driving our manufacturing productivity with new crystal rose furnace designs and increase our output. And third, our customers are moving to larger diameter substrates and higher value products resulting in favorable pricing tracks.

The combination of these factors is driving a step function increasing our revenue in Q2. We recorded our highest quarterly revenue and highest Indian fossilized revenue in our history with backlog that continues to grow, and now it's well over $100 million.

Customer demand continues to outpace supply no matter how fast we add capacity. Broadly, the deployment of optical connectivity in AI data center is accelerating as high just covers, scale KPU dense architectures and look for higher speed, lower power photonics to move data more efficiently.

In the near term, we're seeing high demand from the industry migration to 800D and 1.6T transceivers modules for which Indian fossilized based lasers and detectors are essential for higher performance optical links.

Long-term hybrid scalars are advancing to its near-packaged and co-packaged optics which will continue to drive increasing demand for our material.

Overall, these trends point to a durable long-term build-out of denser optical infrastructure and a multi-year demand cycle for our Indian fossilized. As many of you are aware, the competitive landscape for high-quality Indian fossilized is limited to just a few players. Due to primarily the very high technical barrier to entry, among our peers, we believe AXE is the strongest position to increase manufacturing and manufacturing capacity quickly and at a scale and quality needed to move the needle in our industry and meet our customers' requirements.

Our team in China has done an outstanding job in bringing up new lives in our existing factory facilities as well as innovating to drive higher productivity.

In working closely with our direct customers as well as our major end customers to understand their expected demand and roadmaps well well into the planning process to double our capacity again in 2027 in adjacent locations.

This will make AXE, by far, the largest Indian fossilized producer in the world. In addition to growing our manufacturing footprint, we have also made great strides in development of our 6-in-gene phosphide capability.

6-in-gene phosphide substrate are exponentially more difficult to produce in volume than three or four-inch wafers. And I'm very pleased and proud of our team's progress towards this new offering. I also want to thank our customers who have partnered with us throughout this process. We're excited to support them as we move forward with our own capability.

Partnership is a cornerstone of our business philosophy through which we have been able to deliver game-changing innovation these dates back to the formation of joint ventures that today make up a unique and vertically integrated supply chain.

And in the last 10 years, our work with two globally recognized Indian fossilized customers helped us to raise the bar even further our manufacturing and business processes to be able to support the rigorous standards of some of the most prestigious companies in the world. Strong partnership lists innovation and enables both partners to achieve more. That is why one of the most rewarding aspect of our unfolding chapter in our history is the extent to which we have been able to partner with leading customers around the world who are defining the next generation of data-centered connectivity.

We recently signed strategic long-term supply agreement with Kinsella and Coherent. And this week, we're very pleased to announce an agreement with Lumanten. These agreements deepens our relationship with these important customers, working shoulder to shoulder with them to help them deliver on their own vision and romance. In addition, they gave us the even greater sense of conviction that our capacity build-out is limited and necessary.

From geographic perspective, the massive AI infrastructure build-out and the planned capacity coverage surrounding by cloud services and AI platform providers in the U. S. is the primary driver for EML and silica-fadonic-based optical transceivers, as well as high-speed photo detectors.

We believe that today, our materials are being used in multiple U. S. hybrid skills. We expect that and customer use will continue the problem. We're also seeing huge growth in China as China moves to accelerate its capability throughout the AI supply chain. Our revenue related to any fossil-based lasers markets in China more than doubled in Q2 from the client's quarter.

And we expect continuous strong growth in Q3. This highlights China's increasing investment in AI infrastructure supply chain for the global market. This is a great alternative way to see that there is no permit required to ship our product within China.

Turning to Gowing House Life in Q2 demands for semiconducting swafers for industrial robotics and data center laser application screw sequentially from the prior quarter. We also continue to see demands for semi-insulating swafers for wireless RF devices and believe that we have a strong opportunity for market share accession.

Finally, our longitude business continues to be highly strategic to our growth plan and also generated record third quarter revenue in Q2. As we reported last quarter, our subsidiary, Jim May, is now refining high-purity Indians which gives us direct control of a guarantee supply of yet another critical material for immune phosphory substrates. We're also investing to help Jim May to expand their capabilities so that when AICs demand for poly-material growth, Jim May will continue to provide a meaningful portion of our raw material requirements.

Globally, there continues to be a great awareness of the importance of our raw material supply chain and we are decades ahead of the curve in developing our unique integrated supply chain. We will continue to invest in our portfolio as we believe it is a major competitive depreciate. Now, in summary, we believe the XC is entering one of the most consequential chapters in our company history.

The investment we're making today in capacity, in technology, and in our unique integrated supply chain, position us to meet the extraordinary demand we see building across the optical and AI infrastructure markets. Our customer engagement is deepening, our visibility is improving, and our competitive depreciation is strong.

While we remain disciplined and sought for in our execution, we're confident that the groundwork we are laying now will enable transformational growth in the years to come.

With that, I turn it back to Gary for a third-quarter guide.

Thank you, Morris. As of today, we have approximately 66 million in revenue that can be realized in Q3 across our substrate product lines and raw materials, for which we either already have a permit to ship or for which an export permit is not required. So 66 million. We have a high degree of confidence in recognizing this revenue.

We could see upside, even significant upside to this number in Q3 should we receive permits for additional orders for which we have the inventory to support. But we do not want to stress, but we do want to stress that we cannot predict the future timing of permits or success in obtaining them for any specific customer or individual order.

We have delivered strong gross margin improvement over the past several quarters. Further improvement depends on a number of factors, including total revenue, as it relates to the revenue mixed by product, absorption of fixed costs, and our ability to continue to drive better manufacturing efficiency.

With regards to OPEX, we expect that it will be approximately 10.5 million in Q3 on a non-GAP basis and approximately 11 million on a GAP basis. With these factors in mind, we believe our non-GAP net income will be in the range of 30 to 32 cents and GAP net income in the range of 29 to 31 cents.

We estimate share count for Q3 will be approximately 66.5 million shares. Okay, this concludes our prepared comments. We're glad to answer your questions now. Kenneth?

Thank you so much. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad.

To withdraw your question, press star 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device.

Please stand by while we compile the Q&A roster.

Yeah, that's about right. And that's exactly what we're looking at here. So that's about $60 million there about.

Thank you, Tim. So, yeah, next year, we're looking at doubling slightly more than doubling again. Take our revenue to somewhere in the region about $130 million a quarter exiting the year.

Yeah.

Okay.

Yeah. So, so maybe let me add one point about the capacity expansion. We are planning at least to double next year. But as you know, these target changes.

When, in fact, I think this year we're going to more than double as because customer demand is just mounting. So we are finding, you know, way of a way to increase that capacity expansion. Although, so I'm saying, although we are planning for double next year, but depends about how the business develops in the second quarter. We could find the other way to even better than that.

Thank you. Your line is open. Please go ahead.

You know, permits always remain a bit of an issue on the back of our minds. I was Gary mentioned there. It's not something that we can absolutely put predict both the timing and the certainty of. But we, we are seeing more regularity in the process, especially in certain geographic regions. So that's, you know, that's great news. And we're seeing increased demand in those geographic regions too. So we're, we're focusing now, even with greater intensity on capacity and allocation.

But yeah, the right now, the permits, as I said, we're seeing, we're seeing more regularity in certain geographic regions. And, and, and we're driving more and more permit applications through the Ministry of Commerce.

Well, it's, it is, you know, moving target. And of course, you know, I know you guys are going to quote to me that I would always say, okay, you can go to 35%. But that's not management's target, management targets, a number that begins with four. I'm delighted that we got here as fast as we did. I think I would recommend stick close to what we're at right now. But I have to say again, management target is better than that.

And let's see what we can do. There's, you know, there's, you know, when you add more volume, that helps on your gross margin. Because the fixed costs get absorbed over more units. And also when you add more volume in manufacturing business, you get better at it. So we're just experiencing a lot of positive influences right now to push this over 40%. And stay at 45 for now, but put your seat belts on.

Well, I know that I can't help myself, but make a comment. You know, I'm a CEO, but I know my member. Okay. Look, everybody knows how Indian parts of our business has better margin than the other two businesses. The galleonside and james. Okay. As we grow for next quarter is obviously all the growth happening in Indian parts.

So just by simple math, the growth margin is going to be better. Right. Because the sales of any fast fight is increasing and the other stuff is not increasing as fast. So, so we're off to that. Yeah, but you know, we try and be concerned on this kind of discussion.

Yeah, I want to add another point as well. You know, the market is moving to larger diameters here too. So we're seeing a migration from two inch to three inch, three inch to four inch. And of course now there's a big push towards six inch for the future.

This gives us a great opportunity to increase our gross margins. Yeah, let's not spend on the book, but let me give you another one. Because the demand is so strong.

The whole evening first line line is fully utilized. Let me give you an example. In the past, you know, some of the, let's say smaller diameter two inch. They are not in favor. So they're not sold out.

And the big demand is on three inch now because the demand is so strong. The customer are forced or they want everything. So whatever we can produce, we can sell that also will help us in terms of logic.

Your next question comes from the line of Richard Shannon with Craig column. Richard, your line is open. Please go ahead.

So go ahead, Tim. Yeah, I don't want to go into a lot of details about how big exactly our backlog is, but. But I can tell you that it is growing and I can tell you it continues to grow, even as we ship more material. So demand just completely outpaces our ability to increase capacity, even though with increased capacity or we're about to increase capacity three x this year. Just simply can't keep up with it. So backlog continues to grow as I say beyond a hundred million dollars right now.

In terms of. Twenty twenty seven. Yeah, we would cover with backlog going out into twenty twenty seven. Obviously a lot of our customers, if we could deliver the majority of that today, they would take it today. But that does cover going out to twenty twenty seven. And of course we have these long term supply agreements that take us out into twenty twenty seven and beyond as well. So we've got a lot of next year and beyond covered with LPSAs.

And even in some cases, backlog. Look, I think the other answer why we're not giving out the backlog. Perhaps he said we are not taking orders.

If customer wants to place order, we're looking at whether we can deliver. Because once we take the order, we're going to put them on the production queue right now is full. So it's difficult to know how much the backlog is. In fact, I think we opened up the floodgate. It's going to be huge. So we're not coming right.

And as far as twenty twenty seven is concerned. I think we want to sign up a lot of work team is working on other long term supply agreement. But that doesn't mean that twenty twenty seven is all spoken off. That is we are measuring how much we're expanding. How much we want to sign up for long term supply agreement.

And some of them we want to reserve for customers coming in. So I think right now order is not a problem. Mostly is how fast we can grow.

That's a great question, Richard. So there's certainly a lot of market opportunity in China right now. As we've said, we're, we're, we're doubling in our capacity trip in our capacity in 2026.

And, and China is, is definitely taking some of that capacity as we move forward. What we're, what we're seeing with the permits.

And with the demand globally, this is a global market remember. We are seeing growth across all sectors. So China right now is, is definitely above 50% of our revenue in Q two. I would anticipate that we would see a revenue split moving forward. Somewhere in that 40 to 60 ranges, we build up both capacity and we build up long term suppliers. Both within China and throughout the rest of the world.

So yeah, I would kind of model that as a, as a China being 40 to 60% of our revenue.

Well, let's see. Can we get there? It would be a record for us, that's for sure. But yes, further increases in volume and improvements in productivity, as well as continued favorable mix moving towards larger diameter substrates.

We, we should definitely be targeting a number that begins with the five, but I don't want you to, Richard. Okay.

That's fine. I won't. I just want to know. You know, we all think of these. Obviously, this is, as Moore said, sort of a more than an inflection point. This is a huge step up. So, so we're, you know, we'll try and be as specific and accurate as we can, but it's, it's, it's moving pretty fast. So, yeah, we want to be careful what we tell you. So, but yeah, we're going to target or something that begins with the file. So.

Kenneth, next.

Thanks, Charles. So the, the, the, the capacity is growing faster than we thought. Certainly, you know, in terms of revenue. That, that comes out from a number of factors is more reset. We've, we've been able to accelerate the actual physical capacity that we have here. We are moving to larger diameter substrates, which of course helps the revenue.

And we're seeing greater productivity. As Gary mentioned, moving to larger and larger volumes increases the productivity of the facility. We've seen this time and time again. So part of the capacity increase that we're seeing here isn't just a CapEx spend, but it's, it's a productivity and a product mix. Change here and that that's what's really allowing us to, to grow the revenue quicker than we anticipated. So there's a lot, there's a lot going on here. Now, you know, when you look in our CapEx spend to get this additional capacity, there is actually not a lot of additional CapEx spend here.

Is that right? That's correct. Okay. Okay.

Yeah, the, the backlog, as I say, we're not giving actual backlog numbers out here. It's, I can say that it's, it's well over 100 million. It exceeds two quarters, for sure. I just don't want to give out too much information about that at this time. And the, the backlog is, is also covered with a lot of long term supply agreements that are in place to that.

There's a lot of commitment going out well beyond two quarters, both, both in terms of backlog and long term supply agreements. So I really don't worry that this is a short term thing. And remember, a lot of this backlog here is, is a course is a factor of the permits as we wait for permits. And it doesn't include a lot of the China business.

So we can turn the China business a lot quicker than we can turn the permits in business. As Gary said, permits are, are certainly getting freer, they're getting quicker, but it still takes time to apply for a permit. And we cannot apply for a permit without an order in place.

Yeah. So, so let me come in on the backlog issue. The backlog, when we, our visibility was not good, then usually is only one quarter on, maybe two quarters issue. But right now, this ability is so good that it extend out three or four quarters. So it's not a fair comparison in a way. And the other thing is that we are actually, honestly, we're not taking orders.

When customer gave us the demand, we look at what we can, you know, plan the production capacity will be and talk to customers about. Okay, you can place this order because we have now planned capacity, we can accommodate this order. But beyond that, we are not taking orders. So the backlog can be much bigger if we take orders, but then we are not expanding the capacity. So why are we taking an order? You understand what I'm saying? So it doesn't make any sense to give you all. We could have a $150 million spec order. It's not the same measure anymore.

But, okay, the maybe a third question I have, maybe a technology question, maybe for Morris. Morris, you guys also have a pretty strong guy and I pop a line. And I'm sure you've heard about potential use of VIXO for scale up, rather than use Indian fast back for scale up. It's a shorter distance and VIXO probably. I have some advantages there and wonder if you have any customer discussion.

Around the VIXO around the megasupplying them, the galleons often I substrate there and how do any of the conversation going so far. Thank you.

Yeah, well, we have customers in China who are developing VIXO solutions.

And in fact, that is a US customer also talking to us about using our asset for virtual solutions, correct? Yeah, right. We're currently a supplier to galleons fast now VIXO for too large data center companies, laser companies. So, yeah, we do have some visibility out there and we are seeing that these technologies coexist. Right. So the people that are deploying gallium arsenide VIXOs are also very, very strongly focused on Indian phosphate as well.

I'm seeing more focus on the Indian phosphate side of the business than the VIXOs. But as I say, the VIXO technology has been out there for a long time. And I don't see it going away. I see an Indian phosphide lasers silicon photonics and the gallium arsenide based VIXOs coexisting in this marketplace. So from what I understand, looks like it's a speed is the killer or it's in favor of any phosphide.

VIXO, I think, is more difficult to reach 200G, both in terms of laser emitter as well as detectors. So when you go to 200G, it has to be Indian phosphate detectors and also Indian phosphate laser work better. Well, I am in favor of the Indian phosphate for sure. The reason is that Indian phosphate, we have more margins out of the supply chain, and we are a dominant player in Indian phosphate.

So that's the action.

We have another question from Tim Savage from Northland Capital Markets. Tim, your line is open. Please go ahead.

That's a great question, Tim. The latter is the answer. We have a fair bit of that in front of us. We're supplying materials to back up those long-term supply agreements to get qualified and get ready for them. So they don't move the needle too much on Q2. We're going to see a bigger impact in Q3. And then we're going to see further growth moving out through Q4 and into next year and beyond.

Doesn't start until 2027. Right. That's a good point. That's not even happening right now in terms of that contract, even though we are selling stuff to them.

There are no further questions at this time.

I will now turn the call back to Leslie Green for closing remarks. Thank you for participating in our conference call. We will be participating in the Needham Virtual Investor Conference in August, and the B-Riley Securities Consumer and TMT Conference in September. And we hope to see many of you there. As always, feel free to contact us if you'd like to set up a call. And we look forward to speaking with you in the near future.

This concludes today's call. Thank you for attending. You may now disconnect.