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Yield Improvements Spin AXT To Operating Profit

The substrate vendor reports its first profit since 2000, thanks largely to an unexpectedly strong boost to process yield and faster crystal growth.

GaAs, InP and germanium substrate vendor AXT has capped its turnaround story by posting a net profit of $3.4 million for the quarter that ended on December 31.

CEO Phil Yin, who has masterminded the company s change in fortunes since taking over at AXT two years ago (see related magazine interview), described 2006 as "a great year".

With orders from top-tier GaAs manufacturer Skyworks Solutions in the pipeline, as well as a major ramp in demand for germanium expected from photovoltaics applications, 2007 looks likely to be an even better year for the company.

Yin highlighted recent process improvements such as longer GaAs ingot growth, faster crystal production, and more efficient slicing into GaAs wafers, as the key reasons behind a sudden upturn in AXT's operating performance.

In the latest quarter, AXT swung to an operating profit of $1.2 million on total sales of $13.1 million. That marked a huge improvement on the year-ago quarter, when AXT posted an operating loss of $3.4 million on sales of only $7.7 million.

BiFET qualification
Optimistic about the company s prospects for 2007, AXT is enjoying stronger demand from top-tier customers in the GaAs IC business, and key chip manufacturer Skyworks is currently qualifying GaAs material from AXT for use in its new BiFET process, which combines an HBT and FET structure on the same chip die.

Although this means that less GaAs material is required to achieve equivalent functionality with two individual chips, Yin remains confident that it will not impact overall wafer volumes. "This is not going to have a negative effect: [it means that] more phones will be sold."

If the BiFET qualification with Skyworks goes according to plan, it should mean shipment of around 500-1000 GaAs substrates per month initially. "This is a customer that went to zero," said Yin, referring to the wafer quality problems that AXT experienced some three years ago. "They have let us back in the door." AXT is also in talks with Skyworks main rival, RF Micro Devices.

As a result, AXT is continuing to expand its manufacturing capacity at its large factory in China. One key advantage AXT has over its rivals is that it makes its own vertical-gradient freeze (VGF) furnaces, in which GaAs ingots are grown, rather than purchasing them from equipment vendors.

In a conference call to discuss the financial results with investors, Yin explained that each furnace costs in the region of $0.5 million on the open market, and that to make a significant increase in GaAs wafer capacity requires investment in at least 25 new furnaces.

By sourcing its furnaces internally, Yin estimates that AXT can yield a return on its investment in capacity within three months. In contrast, the high cost of the furnaces on the open market means that other vendors might have to wait more than two years before such an investment yields a return.

Although he is not expecting any significant upturn in the market for InP substrates used to make fiber-optic devices, Yin is very confident indeed about the prospects for germanium material.

Currently engaged in tests with a key US customer and several European companies, Yin is expecting volume production of germanium wafers for terrestrial photovoltaics applications to begin in 2007.

Quoting figures from Strategy Analytics, Yin expects the market for germanium substrates to reach $126 million in 2010. $68 million of that total is expected to come from the fast-growing terrestrial sector, with the remainder used in satellite power applications.

"We are not far off from this market exploding," Yin said.

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