Earnings Call Highlights: AXT (AXTI) | FY26 Q1

1. Summary | AXT: AI Drives an InP Supercycle, and Even Doubled Capacity Can't Keep Up

AXT delivered a strong turnaround in FY26 Q1. Benefiting from huge AI infrastructure demand for EML and silicon photonics, InP (indium phosphide) exceeded 50% of revenue for the first time and drove a sharp gross margin recovery. Management laid out three clear growth levers: a capacity doubling plan, a push to larger 4-inch/6-inch substrates, and early positioning for the 2027 CPO (Co-Packaged Optics) ramp. Backlog has topped $100M, and for the first time end-customer cloud CSPs (hyperscalers) are stepping in directly and pressing the optical supply chain to sign long-term agreements (LTAs), cementing AXT's irreplaceable strategic position in optical communications substrates.

2. Financials (Non-GAAP)

• Revenue: $26.9M (QoQ +17%, YoY +38.6%).

• Gross margin: 29.9% (QoQ +840 bps, YoY +3600 bps), a jump driven mainly by a higher mix of high-margin InP products and better capacity utilization.

• Operating margin: Operating loss narrowed to $0.55M.

• EPS: -$0.01 (vs. -$0.19 a year ago, close to breakeven).

• Operating expenses (Opex): $8.6M (well controlled, up slightly QoQ).

• Cash and equivalents: $123.0M (ample liquidity to fund expansion).

• Inventory: $90.2M (up $8.5M QoQ, built ahead to serve a full backlog).

• Segment revenue:

  • InP: $13.6M (over half of revenue, on strong data center demand).

  • GaAs: $5.4M (steady).

  • Germanium: $0.2M.

  • Raw materials JVs (JinMei, etc.): $7.6M (securing supply of critical high-purity indium).

3. Outlook (FY26 Q2)

• Revenue guidance: A floor of $34.0M (counting only orders with export licenses already granted or not requiring one). If more U.S. licenses are approved this quarter, there is significant upside.

• Profit guidance (EPS): A full swing to profitability, estimated at $0.06 - $0.08.

• Gross margin: Expected to cross the 30% threshold.

• Operating expenses (Opex): About $9.3M.

• Sources of growth: Q2 will set AXT's all-time record for quarterly InP revenue (above the previous $17M high). Demand from China's AI infrastructure build-out is surging: related revenue rose 100% QoQ in Q1 and is expected to double again in Q2.

4. Product Updates

• InP (indium phosphide, the core of AI/optical communications):

  • Technology progress: AXT is actively moving customers from 3-inch to 4-inch and 6-inch. Iron-doped (semi-insulating) substrates have quickly climbed to 40% of the mix (from about 10% before), driven by strong pull from high-speed photodetectors and silicon photonics devices.

  • Capacity and demand: Backlog has surged past $100M. To relieve the bottleneck, InP capacity is expected to double from last year-end levels by the end of 2026 (to $35M of output per quarter).

• GaAs (gallium arsenide, RF/industrial/automotive):

  • Demand is stable, and semi-insulating wafers for RF applications have room to gain share, but growth is still limited by the pace of Chinese export license approvals.

• Raw Materials (JVs):

  • Subsidiary JinMei has started volume refining of high-purity indium. In a rising raw-material price cycle, this not only secures feedstock for AXT's own substrates but also protects gross margin.

5. Long-Term Outlook

• Long-term trend (AI infrastructure and CPO): Substrate demand from the optical components market is set to rise 4x - 6x over the next 3-5 years. Management made it clear that beyond today's pluggable modules, CPO (Co-Packaged Optics) will be the next major growth wave starting in late 2027.

• Product mix and margin impact: The product line is shifting quickly toward higher-ASP 4-inch and 6-inch wafers while the low-end GPON share declines, giving the long-term gross margin target the potential to challenge 40%.

• Capacity and CapEx plan (three-phase expansion over three years):

  • 2026 (Brownfield): Adding crystal growth furnaces in existing facility space to reach $35M per quarter of capacity by year-end, with CapEx of about $30M - $40M.

  • 2027 (Brownfield): Already acquiring an adjacent facility in Beijing, targeting another doubling of capacity to $65M - $70M per quarter, with CapEx of about $100M.

  • 2028 (Greenfield): Planning an all-new facility to meet massive CPO-era demand, with estimated CapEx of $220M - $250M.

• Commercial strategy (LTAs): Major U.S. cloud CSPs are pressing optical component suppliers directly to lock in long-term agreements (LTAs) with AXT to secure capacity for years to come, and AXT is actively advancing LTA signings with several tier-one customers.

6. Q&A Highlights

• Key question: The pace of capacity expansion and a China Plus One footprint.

  • Management response: The barrier to InP crystal growth is very high; announcing expansion does not instantly create output. Expanding the existing Beijing campus is currently the safest and fastest way to meet urgent customer needs. The 2028 greenfield plan will weigh an overseas site based on customers' LTA demand.

• Key question: ASP trends and the ability to pass through raw-material costs.

  • Management indicated: Some prices have already been raised to reflect indium costs, and AXT is unifying global pricing to remove past regional discounts. Bigger ASP upside will come from product upgrades (moving to 4-inch/6-inch wafers).

• Key question: Chinese export controls and the status of U.S. licenses.

  • Management response: China's domestic supply chain is ramping fast (expected to account for 30% of global InP demand in Q2 and 40% in Q4), and that business does not require licenses. Licenses for U.S. customers are still under supplemental review by China's Ministry of Commerce, and AXT will prioritize shipping to customers' sites in other regions to meet demand.

7. Risks and Watch Points

• Export controls: Geopolitics remains the biggest headwind. If U.S. licenses stay unapproved for a long time, or the U.S.-China trade war escalates, AXT's full shipment momentum in the high-end silicon photonics market will be held back.

• Depreciation pressure: With CapEx stepping up sharply in 2027 and 2028 (into the hundreds of millions of dollars), heavy depreciation will erode margins if end-market CPO demand is delayed.

• Delays in technology node transitions: If optical module makers move to 6-inch InP more slowly than expected, it will flatten the slope of AXT's product mix improvement and gross margin expansion.

8. Bottom Line

• One-line positioning: The company is moving past its growing pains and entering a super-growth sweet spot fueled by AI bandwidth anxiety.

• Core moat: Proprietary crystal growth furnace design and a vertically integrated raw-material supply chain (JinMei and other JVs) give AXT the fastest capacity expansion flexibility and a cost advantage in a shortage cycle.

• Investment conclusion: Over a medium-term horizon (6-8 quarters), AXT controls the most critical InP substrate chokepoint of the 800G/1.6T era. With full profitability from Q2, backed by clear LTAs and the coming CPO theme, its valuation and earnings power have significant room for upward revision and re-rating.