AXT NASDAQ: AXTI reported sharply higher third-quarter revenue and profitability as demand for indium phosphide substrates used in AI data-center optical connectivity continued to outpace supply. Management said it is expanding manufacturing capacity and expects further growth in 2027 as customers adopt larger-diameter, higher-value wafers.
Third-quarter revenue was $73.4 million, up 54% sequentially from $47.6 million and 162% from $28.0 million a year earlier. Indium phosphide accounted for $54.3 million of quarterly revenue, primarily tied to data-center applications. Gallium arsenide revenue was $9.1 million, germanium substrate revenue was $344,000, and consolidated raw-material operations contributed $9.7 million.
The company said its five largest customers represented about 35% of revenue, while one customer accounted for more than 10%.
Margins and Earnings Improve
AXT’s non-GAAP gross margin increased to 56.1% in the third quarter, from 45.0% in the second quarter and 22.4% a year earlier. GAAP gross margin was 56.0%. Chief Financial Officer Gary Fischer attributed the improvement to higher volume, a favorable product mix, increased indium phosphide market prices, and a shift from 3-inch to 4-inch wafers.
Non-GAAP operating profit was $29.5 million, or 40.2% of revenue, compared with operating profit of $11.2 million in the prior quarter and an operating loss of $384,000 a year earlier. On a GAAP basis, operating profit was $28.4 million.
Non-GAAP net income totaled $26.8 million, or $0.41 per diluted share, compared with $11.9 million, or $0.19 per share, in the second quarter. GAAP net income was $25.7 million, or $0.39 per diluted share. Cash equivalents and investments rose by $77 million during the quarter to $825.9 million as of Sept. 30.
Accounts receivable rose by $3 million, while days sales outstanding improved to 49 days, helped by customer prepayments, Fischer said.
Lumentum Agreement and Expanding Backlog
During the quarter, AXT signed a long-term supply agreement with Lumentum that included a $43.5 million prepayment for wafers. The prepayment is recorded as a liability and will be recognized as revenue as products are shipped under the agreement, Fischer said.
Chief Executive Officer Morris Young said the company’s indium phosphide backlog exceeded $500 million, including multiyear agreements, contracts of less than 12 months and spot purchase orders. He said demand remains ahead of supply despite AXT’s accelerated expansion efforts.
“We have well surpassed our historical record levels for both indium phosphide revenues and corporate revenues,” Young said. He attributed the opportunity to rising deployment of 800G and 1.6T optical transceiver modules, which use indium phosphide-based lasers and detectors for high-speed data transmission in AI data centers.
Management said demand is also being supported by future development of near-packaged and co-packaged optics. Young said AXT’s 6-inch indium phosphide production lines have reached pilot-production status, with productivity continuing to increase.
In response to analyst questions, executives said customer demand and allocation conditions do not currently point to an overcapacity concern for 2027. Vice President of Business Development Tim Bettles said customers are seeking to increase supply commitments and that demand is growing faster than the company can add capacity.
Capacity Plans and Product Transition
AXT entered 2026 intending to double its indium phosphide capacity and surpassed that target in August, Young said. The company is designing a conversion of a newly acquired adjacent building for additional indium phosphide manufacturing, with work expected to begin in the coming months.
Young said the company’s indium phosphide revenue opportunity has more than quadrupled since the start of 2026. He said AXT expects to be at roughly 2.75 to three times its end-of-2025 capacity level by the end of 2026 and is aiming to double capacity again in 2027.
Management also highlighted proprietary crystal-growth furnace designs that it said are improving productivity and supporting the move from 3-inch to 4-inch and eventually 6-inch wafers. Bettles said 4-inch substrates are increasingly being used for high-speed photodetectors, while laser-material demand is expected to transition more meaningfully to 4-inch wafers during 2027.
AXT expects gallium arsenide demand in several markets to decline seasonally in the fourth quarter, though management said it sees market-share expansion opportunities next year. The company also said its Jinmei subsidiary is refining high-purity indium, giving AXT more direct control over a key raw material.
Fourth-Quarter Outlook
For the fourth quarter, Fischer said AXT has approximately $90 million of revenue across substrates and raw materials that can be realized from products with shipping permits already in hand or that do not require permits. He said the company has a “high degree of confidence” in recognizing that revenue during the quarter.
AXT expects non-GAAP operating expenses of about $13 million and GAAP operating expenses of approximately $14 million. The company forecast non-GAAP earnings of $0.57 to $0.59 per share and GAAP earnings of $0.56 to $0.58 per share, based on an estimated diluted share count of 66.1 million.
Separately, AXT said its majority-owned Tongmei subsidiary entered a definitive agreement for private-equity financing to support indium phosphide and raw-material capacity expansion in China. Assuming the maximum $545 million investment, AXT expects to retain control of Tongmei with approximately 73.4% ownership, while Tongmei continues pursuing a Hong Kong Stock Exchange listing.
About AXT (NASDAQ:AXTI)
AXT, Inc develops and manufactures compound semiconductor substrates used as the foundation for various high-performance electronic and optoelectronic devices. Its principal products include gallium arsenide (GaAs), indium phosphide (InP), and germanium substrates, along with other specialty materials such as gallium antimonide and indium arsenide.
The company's substrates are used in applications including wireless communications, fiber-optic and data-center networks, lasers, light-emitting diodes, solar cells, consumer electronics, and aerospace and defense systems.
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