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AXT margins hit by aluminum shutdown

But the Californian firm believes that it will soon begin a slow ramp from its current financial low point.

Substrate and materials supplier AXT is hopeful that the current quarter will represent the bottom of a slump in demand for semi-insulating GaAs substrates.

During the company s February 25 investor conference call, CEO Phil Yin said that despite a steep decline in orders for GaAs material, including some orders pushed out to later in 2009 to prevent further inventory build-up, the second quarter of the year would show the first signs of a recovery.

Yin believes that much of the excess inventory in the handset supply chain will be digested in the current quarter, allowing a "slow ramp" to follow as demand for 3G handsets with higher GaAs content begins to flow.

The CEO had already described 2008 as a "very challenging but productive year", in which AXT posted a 25 percent increase in annual sales to $73.1 million, but saw its profitability hit by material supply issues.

Towards the end of 2008, the firm s internal supply of high-purity gallium was unexpectedly disrupted as a side-effect of the global recession.

Responding to the slump, the aluminum plant housing AXT s gallium-producing joint-venture Ji Ya Semiconductor halted production for five weeks. This meant that the substrate maker suddenly had to find an alternative supplier of 99.99 percent-purity (“4N”) gallium.

That hurt AXT s gross margins in the December quarter, as it posted a net loss of $2.4 million on sales of $15.6 million.

The 12 percent sequential decline in revenue was largely due to falling sales of GaAs substrates "“ which dropped from $13.6 million to $9.1 million.

A further steep decline is expected to follow, with CFO Wilson Cheung predicting another loss on revenues of only $7 million-$8 million.

But Yin expects that to be as bad as things get, with solid demand for red, orange and yellow LEDs, as well as the emerging market for concentrating photovoltaics (CPV), underpinning a steady recovery.

Yin has himself now been elected to the board of directors representing the CPV Consortium, an industry group seeking to promote the merits of this technology more widely. Other members of the CPV Consortium include epitaxy equipment vendor Veeco Instruments and Californian system integrator SolFocus.

As CPV deployments increase, AXT is expecting to benefit from sales of both germanium and GaAs material. Although germanium is used for most multi-junction cells at the moment, newer technologies based on GaAs substrates look very promising for the future (see related stories).

On the germanium side, Yin said that it had recently qualified its material with a large European customer for space-based applications of multi-junction cells. Substrates are set to begin shipping in the second quarter, and two other European customers are currently qualifying AXT material.

"Q1 really looks like it s the bottom," concluded the CEO.

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