AXT to Shift Focus Amid Rising Germanium Prices: Challenges and Future Outlook

AXT

AXT, a leading US compound semiconductor supplier, is adjusting its strategy in response to soaring germanium (Ge) prices, which have significantly impacted its margins. The company, primarily known for its production of Ge substrates, announced that it would be pulling back from the germanium substrate market in the fourth quarter due to unsustainable production costs and lower margins. This decision comes after a sharp rise in Ge prices during the third quarter, driven by supply concerns stemming from China's government-imposed export restrictions.

Rising Ge Prices and Impact on AXT’s Business

The price of germanium, a critical material in semiconductor manufacturing, surged in the third quarter, tightening profit margins for AXT. As the world’s primary supplier of germanium, China’s export restrictions have created significant supply chain disruptions. As a result, AXT faced increased production costs that it was unable to pass on to customers, leading the company to pull back from low-margin Ge substrate business.

In the third quarter, AXT’s revenue from germanium substrates dropped to $1.6 million from $2.9 million in the second quarter, though this was still an improvement compared to $1.2 million from the same period last year. The decline in revenue was attributed to the inability to absorb rising material costs and the overall tightening of profit margins. Despite these challenges, AXT remains optimistic about re-entering the Ge substrate market as demand from low-orbit satellite services, such as Elon Musk's Starlink and China’s satellite launches, continues to grow.

AXT’s Shift to Indium Phosphide and Future Prospects

While germanium substrate business faces short-term setbacks, AXT is focusing on its indium phosphide (InP) product line, which has been seeing increased demand, particularly from data centers and artificial intelligence (AI) applications. InP revenue reached $6.8 million in the third quarter, driven by continued demand in AI and passive optical networks. AXT has also launched a new InP product targeting silicon photonics and electro-absorption modulated lasers (EMLs), receiving positive response and a design win from a major customer.

The company remains confident about the future of InP and its potential for growth, especially as AI and data centers continue to expand. Additionally, AXT anticipates a recovery in demand for light-emitting diodes (LEDs) and EMLs, supported by stimulus measures in China’s economy, which could bolster demand from the automotive industry. However, the company has experienced a dip in revenue from gallium arsenide (GaAs) substrates, which was $6.6 million in Q3, down from $9.1 million in Q2, largely due to lower demand and the ongoing economic slowdown in China.

Demand for Gallium and HPT Market Growth

AXT’s joint venture, which supplies gallium raw materials, saw increased demand in the third quarter, but the company’s sales of gallium arsenide substrates have slowed. This trend is in line with broader market conditions, including reduced demand in telecoms after a sharp decline last year. However, the company is still optimistic about future growth in the high-power telecom (HPT) market, driven by the 5G telecom expansion.

AXT continues to see interest from customers in China, particularly those looking for diversified gallium suppliers due to concerns over Chinese export restrictions on gallium. Despite challenges, AXT’s raw material supply chain remains stable, and the company expects growth in its core markets, particularly with 5G technology and emerging industrial applications.

Conclusion

AXT’s strategic decision to step back from the germanium substrate market reflects the company's commitment to maintaining profitability despite volatile raw material costs. While facing challenges in Ge and GaAs markets, AXT is diversifying its portfolio and focusing on high-demand products like InP. As the demand for AI, data centers, and satellite technologies grows, AXT remains poised to capitalize on emerging opportunities in the semiconductor industry, with an optimistic outlook for medium- to long-term growth.