AXT Inc 2026 Q3 Earnings Call

Leslie, please go ahead. Thank you, Tracy, 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 and receipt of export permits, our plan to list our subsidiary, Tongmei, in Hong Kong, the closing of the intended investment into Tongmei by a leading Asia-based asset manager, 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, are subject to risks and uncertainties that could cause actual events or 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 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 at axt.com through October 29, 2028.

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

Gary? Thank you, Leslie, and good afternoon to everyone.

Our financial results highlight the continuing inflection in our business trajectory in the early stages of a multi-year growth phase for AXT. Revenue for the third quarter of 2026 was $73.4 million. This is an increase of 54% from $47.6 million in the second quarter of 2026, and an increase of 162% from $28.0 million in the third quarter of 2025. To break down our Q3 2026 revenue for you by product category, indium phosphide was $54.3 million, primarily from data center applications. Gallium arsenide was $9.1 million. Germanium substrates were $344,000. Finally, revenue from our consolidated raw material companies in Q3 was $9.7 million. The top five customers generated approximately 35% of total revenue, and one customer was over the 10% level.

Gross margin showed continued gain in the third quarter, driven by an increase in total volume and a favorable product mix. In addition, market prices for indium phosphide have increased, and a shift from 3-inch to 4-inch wafers has also contributed. Morris will give more color on this in a moment. Non-GAAP gross margin was 56.1%, compared with 45.0% gross margin in Q2, and 22.4% gross margin in Q3 of 2025. For those who prefer to track results on a GAAP basis, gross margin in the third quarter is 56.0%, compared with 44.9% in Q2 and 22.3% in Q3 2025. Moving to OpEx, our total non-GAAP operating expense in Q3 was $11.7 million, compared with $10.2 million in Q2 and $6.7 million in Q3 of 2025.

On a GAAP basis, total OpEx in Q3 was $12.7 million, compared with $10.9 million in Q2 of 2026, and $7.3 million in Q3 of 2025. Our non-GAAP operating profit for the third quarter of 2026 was $29.5 million, or 40.2% of revenue, compared with a non-GAAP operating profit in Q2 of 2026 of $11.2 million, and a non-GAAP operating loss of $384,000 in Q3 of 2025. For reference, our GAAP operating line for the third quarter of 2026 was a profit of $28.4 million, or 38.7% of revenue, compared with an operating profit of $10.4 million in Q2 and an operating loss of $1.1 million in Q3 of 2025. Non-operating income and expense and other items below the line of the operating line for the third quarter of 2026 was a net loss of $2.7 million.

The details can be seen in the P&L included in our press release today. We are pleased to report a non-GAAP net profit of $26.8 million, or $0.41 per diluted share. This compares with a non-GAAP net profit of $11.9 million, or $0.19 per share, in the second quarter of 2026. Non-GAAP net loss in Q3 of 2025 was $1.2 million, or $0.03 a share. On a GAAP basis, net profit in Q3 was $25.7 million or $0.39 per diluted share. By comparison, net profit was $11.1 million or $0.17 per share in the second quarter of 2026. GAAP net loss in Q3 of 2025 was $1.9 million or $0.04 per share. The weighted average diluted shares outstanding in Q3 was 65.9 million. Cash equivalents and investments increased by $77 million to $825.9 million as of September 30th. By comparison, at June 30th, it was $748.8 million.

Accounts receivable increased by only $3 million. In Q3, DSO improved to 49 days as a result of multiple customer prepayments. During Q3, we signed a long-term supply agreement with Lumentum. Under the terms of the agreement, we received a prepayment for wafers of $43.5 million. This type of agreement with significant upfront cash is an additional signpost regarding the important use of indium phosphide for high-speed optical data transmission required in the AI data centers. This prepayment is posted on our financial statements as a liability and will be converted to revenue as we ship products against the agreements. Depreciation and amortization in the third quarter was $2.6 million. Total stock comp was $1.1 million. Net inventory was up by approximately $7.4 million in the third quarter. This concludes the discussion of our financials.

Before I turn the call over to Morris, I want to note that yesterday we announced that our majority-owned subsidiary, Tongmei, has entered into a definitive agreement for private equity financing, selling its own shares, not AXT shares, to provide RMB directly into its operations. This is an exciting milestone for Tongmei as it works towards a public offering on the Hong Kong Stock Exchange. Funds will be used to advance capacity expansion for indium phosphide wafers at a time when demand for these wafers is outpacing supply. Proceeds will also be used to increase capacity at our raw material companies in China. Assuming the maximum amount of the investment at $545 million, AXT will maintain control of Tongmei with approximately 73.4% ownership, down approximately 12.1% following the completion of the transaction. This transaction turns the spotlight on Tongmei, reflecting its substance and generating momentum towards the future.

Finally, as previously stated, Tongmei is proceeding with its efforts towards a listing on the Hong Kong Stock Exchange. We continue to believe that an IPO in China is highly beneficial as expanding both the substrate and raw material capacity in China is the most efficient way to support the rapidly evolving AI infrastructure build-out. Okay, thank you. With that, now I'll turn the call over to Dr. Morris Young for a review of our business and markets.

Morris? Thank you, Gary. This is a pivotal and exciting period for AXT.