AXT announces further expansion of operations in China and financial results

"Expansion in China is a key component of our plans to strengthen our position as the world s leading provider of compound substrates and to grow our opto-electronic devices business," said Morris Young, president and CEO. "We consider our China operation to be the cornerstone of our growth strategy. Our presence in China brings us closer to many of our customers and sources of raw materials, and improves our efficiency, competitiveness, and control over production costs. We have already qualified our China-produced substrates with a majority of our customers, and have scheduled qualification with a number of others. The production and investment steps we are announcing today constitute the next implementation phase in our long-term China strategy. We expect our presence in China to continue to enhance our competitiveness as the industry recovers."

Gallium

AXT announced that it is a 51 percent owner of Beijing Ji-Ya Semiconductor Material Company, Ltd., a gallium extraction facility located in Shan Xi, China. The facility, which began production in late 2001, is capable of providing approximately 20 tons of gallium annually, enough to meet most of AXT s peak period needs. AXT and its partners developed the proprietary process used to extract gallium from aluminum ore during the past eighteen months. Gallium constitutes the largest single raw material cost of a gallium arsenide substrate.

Young said, "Our investment in Beijing Ji-Ya Semiconductor Material Company provides us with a secure source of gallium. During early 2001, our production was nearly affected by a lack of this critical raw material and we were forced to pay high prices for some of the gallium we purchased. With our new investment, the likelihood of future supply problems is significantly reduced and we are better protected from price fluctuations. In addition, we believe that Beijing Ji-Ya Semiconductor Material Company will be one of the lowest cost producers of 99.99 percent pure gallium in the world."

AXT has the right of first refusal on Beijing Ji-Ya Semiconductor Material Company production. Beijing Ji-Ya will sell on the open market output that is not consumed by AXT. In addition to its use in GaAs substrates, gallium is also used for other semiconductor compounds, such as gallium nitride, gallium phosphide, and certain industrial gases. Third party processors will be used to refine Beijing Ji-Ya Semiconductor Material Company production to 7N quality, or 99.99999 percent purity.

Indium phosphide polycrystalline material

AXT also announced success in its recent efforts to develop a proprietary process in China to manufacture high volumes of indium phosphide polycrystalline material, the critical ingredient in the manufacture of InP substrates. While both indium and phosphorus are in adequate supply, there have been periodic shortages of the polycrystalline material. Beginning in early 2001, AXT developed its own polycrystalline process in China. After success with a pilot project, manufacturing efforts were transferred to Nanjing Jinmei Gallium, Ltd., a Nanjing company of which AXT owns 88 percent. Current production capacity is approximately 4 metric tons per year.

"Developing our own polycrystalline process assures AXT of an adequate supply of this important material and gives us tighter control of our raw material purity," Young said. "Our Nanjing facility already meets all of our needs and can increase its production rate to meet our requirements during periods of higher demand."

Financial results

Revenue for the fourth quarter of 2001 was $15.4 million, down 32% compared with $22.8 million in the third quarter of 2001, and down 60% compared with $38.2 million in the fourth quarter of 2000. Revenue from the substrate division, which represents 75 percent of total revenue for the fourth quarter of 2001, was $11.5 million. This represents a drop of 44% compared with $20.5 million in the third quarter of 2001 and a drop of 68% compared with $36.3 million in the fourth quarter of 2000. Revenue from the opto-electronics division, which represented 25 percent of total revenue for the fourth quarter of 2001, was $3.9 million. This represents 70% growth sequentially compared with $2.3 million in the third quarter of 2001 and is 117% higher than the $1.8 million recorded in the fourth quarter of 2000.

For the year ended December 31, 2001 total revenues grew by 3.6% to $119.5 million. Substrate revenues fell by 4% to $108.8 million, while optoelectronics revenues grew by 32% to $10.7 million.

Outlook

"While business conditions in the fourth quarter were challenging, as we knew they would be, we continue to take important steps to further strengthen our position as the leading supplier of compound semiconductor substrates," said Morris Young. "We were pleased to see that during the fourth quarter, one of the world s leading providers of cellular handsets introduced a wafer quality specification for its six-inch HBT and PHEMT device production that specifies VGF-type characteristics. We believe this specification effectively narrows the market in favor of AXT. We believe our VGF GaAs and InP substrates continue to offer superior features for manufacturers of high quality electronic and opto-electronic devices, and expect an increasing number of key customers to recognize the superiority of our technology in the future."

"We are running our LED operations around the clock to meet demand and expect to expand our capacity for back-end processes during the first quarter. We are seeing robust demand for our full range of LED products in the signage, backlighting, and consumer device markets," continued Young. "We have made significant advances in brightness over the last year and believe that we have abundant opportunity to grow our revenues and market share in the future."

"In the near-term the industry continues to be affected by excess inventory issues. However, we believe that we are seeing the early signs of recovery in certain segments of our business. We believe that our leadership position in large diameter GaAs and InP substrates, the rapid growth in our LED business, and our progress in VCSEL technology position us well for growth as conditions in the marketplace improve," said Young.

AXT anticipates that revenue in the first quarter will be flat to up 5 percent compared with the fourth quarter. An increase in sales of LED products is anticipated, while substrate revenue is expected to be approximately flat relative to the fourth quarter.
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