Earnings Call Transcript - AXTI Q4 2025

Operator, Operator

Good afternoon, everyone, and welcome to AXT's Fourth Quarter 2025 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. In addition, Tim Bettles, VP of Business Development, will be participating in the Q&A portion of the call. My name is Audra, and I will be your coordinator today. I would now like to turn the call over to Leslie Green, Investor Relations for AXT. Please go ahead.

Leslie Green, Investor Relations

Thank you, Audra, 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, our plan to list our subsidiary, Tongmei in China, 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 results or events 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 or that may be discussed in 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 through February 19, 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 fourth quarter of 2025. This information is available on the Investor Relations portion of our website. I would now like to turn the call over to Gary Fischer for a review of our fourth quarter results.

Gary Fischer, CFO

Thank you, Leslie, and good afternoon to everyone. Revenue for the fourth quarter of 2025 was $23.0 million compared with $28.0 million in the third quarter of 2025 and $25.1 million in the fourth quarter of 2024. To break down our Q4 '25 revenue for you by product category, indium phosphide was $8.0 million, primarily from data center applications, gallium arsenide was $7.0 million, germanium substrates were $231,000. Finally, revenue from our consolidated raw material joint venture companies in Q4 was $7.6 million. In the fourth quarter of 2025, revenue from Asia Pacific was 81.5%, Europe was 17.5% and North America was 1%. The top 5 customers generated approximately 22.6% of total revenue and no customers were over the 10% level. Non-GAAP gross margin in the fourth quarter was 21.5%. For comparison, we reported 22.6% gross margin in Q3 of '25 and 18.0% gross margin in Q4 of last year. For those who prefer to track results on a GAAP basis, gross margin in the fourth quarter was 20.9% compared with 22.3% in Q3 of 2025 and 17.6% in Q4 of 2024. We continue to be highly focused on driving continued improvement, including further recovery in Q1. Moving to operating expenses. Our total non-GAAP operating expense in Q4 was $7.8 million, compared with $6.5 million in Q3 of 2025. As a reminder, Q3 included some favorable adjustments in R&D that brought our OpEx down to a lower-than-normal level. Non-GAAP OpEx in Q4 of '24 was $9.8 million. On a GAAP basis, total operating expense in Q4 '25 was $8.8 million compared with $7.3 million in Q3 and $10.6 million in Q4 of 2024. Our non-GAAP operating loss in the fourth quarter of 2025 was $2.6 million compared with a non-GAAP operating loss in Q3 of 2025 of $384,000 and a non-GAAP operating loss of $5.4 million in Q4 of 2024. For reference, our GAAP operating line for the fourth quarter of 2025 was a loss of $3.8 million compared with an operating loss of $1.1 million in Q3 of 2025 and an operating loss of $6.2 million in Q4 of 2024. Nonoperating other income and expense and other items below the operating line for the fourth quarter of 2025 were a net gain of $285,000. The details can be seen in the P&L included in our press release today. For Q4 of 2025, we had a non-GAAP net loss of $2.6 million or $0.06 per share compared with a non-GAAP net loss of $1.2 million or $0.02 per share in the third quarter of 2025. Non-GAAP net loss in Q4 of 2024 was $4.2 million or $0.10 per share. On a GAAP basis, net loss in Q4 was $3.6 million or $0.08 per share. By comparison, net loss was $1.9 million or $0.04 per share in the third quarter of 2025. GAAP net loss in Q4 of 2024 was $5.1 million or $0.12 per share. Weighted basic shares outstanding for the quarter were 44.7 million. Cash, cash equivalents, and investments increased by $97.2 million to $128.4 million as of December 31. This is primarily the result of our public offering of common stock, which closed on December 30 and generated approximately $93.9 million. By comparison, at September 30, cash was $31.2 million and accounts receivable decreased in the quarter by $2.6 million. Depreciation and amortization in the fourth quarter was $2.3 million. Total stock comp was $1.3 million. Net inventory was up by approximately $4 million in the fourth quarter to $81.7 million. This continues to be a focus for us, and we expect to bring it down in coming quarters. This concludes our discussion or comments about the quarterly financials. Turning to our plan to list our subsidiary, Tongmei, in China on the STAR Market in Shanghai. We remain very interested in completing the IPO, particularly in light of the rapidly evolving AI infrastructure build-out in China, which is fueling increased China-based demand for indium phosphide substrates. We've continued to keep our IPO application current and Tongmei remains 'in process' as part of a much more selective and smaller group of prospective listings than a few years ago. Though the current geopolitical environment is dynamic, Tongmei is considered a Chinese company and continues to be regarded in China as a good IPO candidate. We will keep you informed of any updates. With that, I'll now turn the call over to Dr. Morris Young for a review of our business and markets.

Morris Young, CEO

Thank you, Gary. We were disappointed that we didn't receive as many export permits in Q4 as we had hoped based on the average processing time we had seen up to that point in October. The good news is now that we have received permits in Q1 and we are in a stronger position today than we were at the same time in the prior quarter. Gary will take you through our full quarter guidance in a few minutes. But we do expect to achieve sequential growth in revenue in Q1, driven primarily by growth in indium phosphide for data center build-out for AI. We're also very pleased to note that we are seeing a welcome expansion of our customer base for indium phosphide. We're beginning to support leading customers in the optical space that we had limited exposure to prior to this time. This includes Tier 1 laser manufacturers and optical transceiver module makers both in China and around the world. We're excited to be able to demonstrate the technological advantage of our low EPD wafers as the market moves to optical devices with higher speed and greater sophistication for both scale-up and scale-out applications. In total, our backlog for indium phosphide wafers has reached a new high of over $60 million. As we mentioned last quarter, customers are planning for longer lead time by placing longer-term orders and giving us more visibility into their expected demand. As many of you know, the supply chain for optical transceivers is quite complex and highly globalized. We believe this geographical interdependence is providing both opportunity and incentives for the ecosystem to work together in new ways to solve global supply chain shortages. Beyond pluggable receivers, we are seeing a very large developing market for co-packaged optics for both scale-up and scale-out applications. We're actively engaging in discussions with our customers about their technical and timing requirements and believe this could represent another inflection point in our business developing in late 2027 and beyond. From a geographic demand perspective, the massive AI infrastructure build-out and planned CapEx spending by cloud services and AI platform providers in the United States is the primary driver for EML and silicon photonic-based optical transceivers. We believe that today, our materials are being used in multiple U.S. hyperscale and we expect that end customers' usage will continue to broaden. In China, the data center build-out is early in its ramp, but we are seeing rapid growth as China moves to accelerate its data center expansion and AI capabilities. Our revenue related to the data center market in China is expected to grow by more than 60% in Q1 over Q4, highlighting both increased investment in these Tier 1 data centers as well as the strong desire for Chinese domestic suppliers to secure local stores at every level of the AI infrastructure supply chain. Given the strong demand environment, it is important to note that AXT is well positioned to handle increased demand for indium phosphide wafers. Since we last reported to you in October, we have already added approximately 25% more capacity, and we are on track with our current plan to double our capacity from Q4 2025 level by the end of this year. Beyond our current plan for capacity expansion, we're working closely with our customer base to understand their long-term requirements and to align our plans globally. Our recent capital raise will be fundamental to our future expansion as we enter our next significant phase of growth. A major focus of this expansion will be an increased investment in our 6-inch indium phosphide product, and we are excited to work with our customers to meet the rigorous requirements of next-generation EML and silicon photonic-based devices. Now turning to gallium arsenide. We continue to see demand for semi-insulating wafers for wireless RF devices and believe that we have strong opportunity for market share expansion gated primarily by our ability to obtain export permits. In Q4, we saw an uptake in semiconducting wafers for both industrial laser applications and data center laser applications. VCSEL lasers for data center applications typically do not require a lot of gallium arsenide material. As the devices are small, they don't move the needle much as a growth driver for us. However, we are seeing increased demand for VCSEL for autonomous vehicles in the Chinese automobile market, which is currently expanding rapidly. High-growth expansions in addition to our watching with interest emerging applications in robotics for VCSELs that increase the precision and dexterity of a modern robotic hand. Counter the VCSEL used in data center applications, machine vision VCSELs tend to be very large and use more gallium arsenide substrates. They also require high-quality material which we are very well positioned to supply. Again, demand is more today, primarily China-based and covers a diverse set of customers but the breadth of use case and the development is very exciting. Finally, our raw material business was up in Q4 with growth from our subsidiary volume, which manufactures PBN crucibles used in the manufacturing of indium phosphide crucibles. In addition, we're pleased to report that our subsidiary, JinMei, has begun to refine high-quality indium, which gives us now direct control of a guaranteed supply of yet another critical material for our indium phosphide substrates. Globally, there continues to be a greater awareness of the importance of various materials, and we are ahead of the curve in developing our unique integrated supply chain. In closing, this is a very dynamic and exciting time for our company as we enter into 2026. We're a fundamental supplier to the multiyear optical build-out in the AI infrastructure market. We have a broadening customer base of Tier 1 companies and a strong balance sheet to support our continued business expansion. And with a growing backlog, the receipt of indium phosphide and gallium arsenide export licenses remains the single most significant gating factor for our growth. As such, we are highly focused on ensuring that we are proactive, organized, and disciplined about managing the process on behalf of our customers. We also know that we must be laser-focused on running our business with the greatest efficiency. This includes our continued effort to drive gross margin improvement, OpEx discipline, and inventory reduction. With strong ongoing market trends fueling the data center upgrade cycle, we believe that we have tremendous opportunity in 2026 to drive meaningful growth in our business and return to profitability. I would like to personally thank our employees for their dedication and tireless efforts during this singular moment in AXT's history, and I would also like to express my sincere gratitude to our customers, partners, and shareholders for their ongoing support and belief that in the future, we are building together. We look forward to reporting to you on our progress. And with that, I will turn the call back to Gary for our fiscal quarter guidance.

Gary Fischer, CFO

Thank you, Morris. To reiterate a couple of key points from Morris' commentary, we are seeing a strong increase in our indium phosphide wafer demand related to AI and the ongoing data center upgrade cycle. Given the geopolitical complexity surrounding this market trend, our customer base is diversifying and expanding and customers are placing longer-term orders and providing greater visibility into their needs. With all of these positive market and AXT-specific growth drivers, the most significant single factor to our growth in Q1 and beyond is the success and timing of getting export permits. Therefore, guiding for the future is somewhat tricky for us right now as we cannot predict future timing of permits or a success in obtaining them for any customer or individual order. But drawing on what we know and what we've experienced thus far in the export permitting process, we can offer the following insight to our expectations for Q1. As of today, we have approximately $26 million in revenue that can be realized in Q1 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. We have a high degree of confidence in recognizing this revenue in Q1. We could see significant upside to this number in Q1 should we receive more permits for additional orders between now and the end of the quarter. But we want to stress that as we experienced in Q4, the timing for permit issuance is not predictable nor in our control and doesn't necessarily align with our quarterly reporting. As Morris mentioned, we continue to focus strongly on gross margin. Further improvement depends on a number of factors, including total revenue as it relates to absorption of fixed costs, revenue mix by product, and our ability to continue to drive better manufacturing efficiency. With regards to OpEx, we expect that it will remain at approximately $9.0 million in Q1. With these factors in mind, we believe our non-GAAP net loss will be in the range of $0.02 to $0.04 and GAAP net loss will be in the range of $0.04 to $0.06. This represents substantial year-over-year progress towards our return to profitability. We estimate share count in Q1 will be approximately 53.2 million shares. Okay. This concludes our prepared comments. We'd be glad to answer your questions now.

Operator, Operator

We'll go first to Richard Shannon at Craig-Hallum.

Richard Shannon, Analyst

Gary, could you please provide the revenue number for the quarter? My line got mixed up. I heard something about 2026 and your belief in a high likelihood of achieving it. Was there an upside figure mentioned? I apologize for needing to ask this.

Gary Fischer, CFO

No, we typically provide a range, but we discussed before the call that we are very confident in the '26 number. We also mentioned that we believe we could exceed that if we obtain more permits, and it could actually be higher than our usual range of $2 million to $3 million.

Morris Young, CEO

Well, let me try to add on to this point. That is our manufacturing are doing the manufacturing as if we can get a permit. So there is a lot of these so-called semifinished goods or finished good staging in our clean room ready to be shipped if we can get an actual permit.

Gary Fischer, CFO

Yes, we are building according to our forecast and backlog, rather than waiting for permits. We are enthusiastic and excited about the progress, although a bit frustrated because our numbers could be significantly higher with more permits. We believe we will secure them. We can provide more details during this call, but we are remaining positive and not giving up.

Richard Shannon, Analyst

Okay. I appreciate understanding your approach to the guidance and it certainly makes a lot of sense in this environment. Let me ask about the licensing process here. Last quarter, you said it was about a business day or a 3-month process here. And obviously, that didn't turn out as we saw from your pre-announcement, which is unfortunate, but we all know how governments can work from time to time here. Do you have any new insights as to how they're working here? And I guess, are there any permits that are being rejected that you don't think should be? Just more insights here on this licensing process.

Tim Bettles, VP of Business Development

Yes, I can answer that one. So this process is not transparent at all. And we're seeing quite a lot of variability. We started off in the end of Q3 by saying it was looking like we're seeing a fairly consistent 60 business day process cycle. We're now seeing a lot more variability as we go through there. And as I say, there's just no transparency to that. It's reasonable to assume that there's geopolitics playing into this as well. It's really hard to determine what and why. And it's difficult, therefore, to figure out which permits are coming in on time, which are taking longer. I'll answer the second question as well, which you asked whether there had been any permits that have been denied and why? We have actually received a couple of denials with the instructions that we can resubmit that application with more information. So this is the first time we've actually received denials on permits and we're not utterly sure why. Again, no transparency to this. We don't see any particular reason why any of these permits should not be approved. And it's a process that we're just working through. So these permits that have been denied, we've already resubmitted with MOFCOM and we're hopeful that we continue to talk to MOFCOM and they will get reviewed quickly and could potentially turn around fairly quickly. I could even make an impact on Q1 numbers if we can get a quick turnaround on them.

Gary Fischer, CFO

And what does MOFCOM stand for?

Tim Bettles, VP of Business Development

That's the Ministry of Commerce in China.

Morris Young, CEO

Let me add an optimistic viewpoint to Tim's earlier comment. Even though an application was denied, it came with specific instructions on how to strengthen it, which we see as a positive sign. If they truly wanted to reject this outright, they could have simply let it languish. The fact that they are asking for more information indicates that we have a fixable permit application. This suggests that they are seriously considering it, and hopefully, that will lead to us receiving the permit.

Richard Shannon, Analyst

Okay. That is helpful. My second question is about the backlog and also following up on your comments about customers placing orders further out. We saw our backlog increase from $49 million to over $60 million, and you mentioned that customers are indeed ordering further out. Can you indicate how far out they are currently ordering? Additionally, what are you hearing regarding the forecasts from these customers?

Morris Young, CEO

Yes. Let me see how to answer that. Actually, one of the interesting comments we had was that we have important meetings with our customers this week, and they're telling us, Tim, at least on two occasions, people are saying, gee, our demand forecast increases every week. So that's the kind of level. I mean we know it is tight and we know it's going up. But I think people are upsizing their demand, and they're telling us what they want to do, whether they're going to go to 4-inch, how much they want to switch from 3 to 4 and 4 to 6. And as far as how much inventory they are building, I think that depends upon customers. Some of the customers, we suspect they're buying into inventory. But they also tell us, if you deliver, I'm going to take it all if you can deliver. Whereas others, I think they are telling us the real demand in the quarter because I think as of now, we cannot deliver enough of their demand. So they are giving us longer lead time to give us more incentive to build up the expansion plan and build the capacity for them. And also, I think the other thing is, Tim, you want to comment on the long-term commitments that you're talking to a customer about?

Tim Bettles, VP of Business Development

Yes, I will provide some insights on that, as well as on our backlog and current observations. Much of our backlog has increased due to permit dynamics. Once we obtain a permit to export materials, we have a maximum of six months to make the export. Therefore, a significant amount of backlog accumulates at the moment we receive a permit, and the actual timeframe that customers expect to receive materials is often shorter than six months. This process is largely influenced by permits, as we previously discussed. Regarding inventory build-out, at this point, clients are inclined to maintain higher inventory levels. However, as Morris mentioned, nearly everyone we are engaged with indicates that demand is rising consistently week by week. We are witnessing continuous increases in numbers. As for our forecasts and visibility, we are currently in discussions about long-term supply agreements with several customers, planning our operations based on those agreements. We are observing forecasts extending beyond 2030 for many of these clients, and as I mentioned, these numbers are growing each week. However, it is challenging to keep track of everything since clients are indicating minimum demand requirements for at least the next two to three years, allowing us to project beyond 2030. Overall, I believe this backlog is substantial, attainable, and currently confined by our permit situation.

Richard Shannon, Analyst

Makes sense. I'll ask one more question and jump out of line here, guys. This is on capacity additions. Just a few kind of multipart question here. I think I heard you say you're going to double your capacity from the end of '25 to the end of '26. If you could verify that? And if so, can you help us understand what level of CapEx is going to be requiring? And then looking beyond that, and Tim, you just mentioned forecast going out beyond 2030, which is interesting to hear, how much more capacity beyond that could you need? Let our minds wonder about what kind of scale an opportunity you're thinking about here?

Morris Young, CEO

Yes. I think we just said we have increased our capacity by 25% now, and we do expect to double our capacity by the end of this year, okay? And how much budget would we need? It could be about $30 million, and that is sort of on the low end in a way because the first phase of the expansion, which is doubling our capacity mainly uses brownfield. In other words, existing Tongmei facility, we already have a clean room available. We have the building there already and power supply and water. So I think that budget is lower. Looking beyond 2026, we are looking at possibly doubling it again in 2027. And that budget is lying somewhere around $100 million to $150 million depending upon how we want to build it because then we are talking about a greenfield. We need building, we need clean room, we need power, etc.

Operator, Operator

We'll move next to Tim Savageaux at Northland Securities.

Timothy Savageaux, Analyst

Let's continue with that capacity discussion, but maybe try to put some numbers around it. If I look at where you've peaked historically, and I think we're talking exclusively about indium phosphide here, that's getting up towards $20 million a quarter in substrate revenue. And I imagine your capacity is now slightly above that given the increase you talked about in Q4. I guess question one, is that reasonable? And should we expect you to exit calendar '26 with revenue capacity roughly double those levels? And would you anticipate having the demand to fulfill that at that time or you're building maybe a little bit ahead?

Morris Young, CEO

Let me first answer the question. I think we calculated it's approximately $35 million a quarter by the end of the year run rate. It could be a little bit more given that the price environment is dynamic and the cost of indium is going up. Regarding whether we can utilize all this capacity, looking at the backlog, we can certainly do that, but the issue is that the permit is the gating factor.

Timothy Bettles, VP of Business Development

I'll add that we are experiencing growth in our business in China. Comparing quarter-to-quarter, Q4 revenue in China was likely double that of Q1 in 2025, and we anticipate potentially doubling again through 2026. This growth in China supports our plans for expansion, as well as our growth efforts outside of China, where permits will be required.

Morris Young, CEO

Tim, I agree with you, but then I don't want to minimize the importance of outside of China. I think the AI growth, the budget we're seeing is really fueling the demand for indium phosphide substrates.

Gary Fischer, CFO

Yes, Tim, this is Gary. I still speak conservatively, but I want to make sure you understand that every customer is concerned about meeting their needs. There is a general worry. The meetings we've held this week are not with purchasing managers; we are speaking with CEOs and general managers. They want to discuss capacity and future growth with Morris. There is an unusual phenomenon happening here. Despite what we all do for our jobs, including the analysts, this is a very unique situation. I have seen quite a bit in my time, and so has Morris, and this is truly exceptional. It's intense. We're excited but also trying to keep up. I don't foresee any near-term end to this. People are informing us that their demand is expected to increase by three, four, or five times over the next four to five years. The number of suppliers is well known, and we are one of them.

Morris Young, CEO

Yes. I think let me add to that. I think the investor usually asks the CEO, the toughest question is what keeps you up at night? I think what's keeping us up at night is calculating how we're going to expand that capacity, how we're going to get that product to our customers and how to develop the technology that a customer wants. I mean it's very exciting but it's also very straining. We need to be very much aware of what the customer wants and satisfy their demand.

Gary Fischer, CFO

Fortunately, we have recent experience at adding capacity. It was almost about 10 years ago, when we learned that we needed to get gallium arsenide moved out of Beijing. And so we had 2017, '18 kind of time period where we did add capacity from green grass fields. So we have some strength here but it's going to tax us even though we are experienced.

Morris Young, CEO

Yes. I do want to give the analyst point to ask the question, but I think we're talking to each other.

Gary Fischer, CFO

We're too excited, yes.

Morris Young, CEO

We're very enthusiastic, and I believe that is an important point. Before this, we likely overspent due to preparing for the IPO, and we expanded from one facility to three. Now, we see significant demand for indium phosphide, which aligns well with our challenges. Gary is correct; we are well positioned to meet that demand. We are likely the best equipped to increase capacity, and due to our vertical integration in the supply chain, we control a lot of other materials, which can ensure supply if the demand for indium phosphide substrates continues to grow as we anticipate, and we have plans in place for that.

Gary Fischer, CFO

A good example is our subsidiary, JinMei. JinMei produces the indium phosphide poly for Tongmei, and our supply chain is supporting this growth process.

Timothy Savageaux, Analyst

Next question, Tim? I'm a bit concerned now. You pointed out in the release the increased involvement with some major Tier 1 customers. In your comments, you mentioned some activity in China, but what is happening elsewhere? Are we seeing orders from significant new customer qualifications? Are there any specific programs? I'm not sure if these two comments are related, but I would like to know about your increased investment in 6-inch indium phosphide and if you could address both of those points. Thank you.

Tim Bettles, VP of Business Development

Yes. I'll take a stab at that one, Tim. So yes, we are gaining more traction with customers, as we've said on previous calls as well that we've not been so prolific in. So we are gaining design-in, we're gaining qualifications on existing products as well as new products as we move forward. And the customers are looking to expand on their demand for indium phosphide. As Morris mentioned in the call, there's already been a big move from 3-inch to 4-inch, so we've spent a lot of time and effort on scaling up our 4-inch business. And we're also seeing a lot of interest now. And of course, we all know one customer that's really driving 6-inch demand. So we're really taking 6-inch very, very seriously. And as we expand capacity both now and are doubling capacity through '26 and beyond, we're looking at adding significant 6-inch capacity in there during that expansion. And we're just plowing through the numbers right now to see what we need to drive 6-inch and how we scale 6-inch compared to 3, 4, and more of the traditional wafer sizes.

Morris Young, CEO

Yes, I believe part of the situation involves a collaborative effort. Typically, when our customers do not come to me directly, they tend to communicate with the sales team and place their orders. However, the current dynamics require us to engage more actively to ensure that we are giving adequate attention to both development and capacity expansion where it is needed. Additionally, we need to be persuaded that this is indeed the appropriate investment to make.

Tim Bettles, VP of Business Development

That's correct. We're also getting a lot more customer buy-in with commitments, NRE, purchase orders to drive that business forward as well.

Operator, Operator

And that concludes our Q&A session. I will now turn the conference back over to Leslie Green for closing remarks.

Leslie Green, Investor Relations

Thank you, Audra, and thank you all for participating in our conference call. We will be participating virtually in the Loop Capital Conference in March and hope to see many of you there. As always, feel free to contact us if you would like to set up a call, and we look forward to speaking with you soon. Thanks.

Operator, Operator

And this concludes today's conference call. Thank you for your participation. You may now disconnect.