AXT benefits from a buoyant compound semiconductor market

About the author….John J. Cerilli is the Vice President of Global Sales and Marketing for AXT, Inc. and has been with the company since 2005. He currently manages AXT’s business in NE Asia. He has worked in the semiconductor / compound semiconductor industry since 1976

Q How would you describe the current state of the business?

A This is an exciting time for AXT. The continued recovery that is taking place in the worldwide macroeconomic environment, coupled with advancements in technology in the end markets that we serve, is creating new opportunities for our products. Further, our successful customer qualifications over the last several years are allowing us to supply, either directly or indirectly, to nearly every major customer in our space. We are very pleased to see this continued diversification of our customer and revenue base as well as many positive trends in our markets that highlight our competitive advantages and are likely to provide further opportunities in the months and years ahead.

Q Are sales of semi-insulating GaAs picking up?

A Yes, we have definitely seen a pick-up. The wireless device market that uses our semi-insulating GaAs substrates continues to strengthen. This growth is fuelled by increasing demand for a new generation of smart phones and other sophisticated internet-connected devices, such as netbooks, that support more advanced features and access to a host of new web-based applications and services.

In addition to strong unit sales of these devices, we are also benefiting from the fact that these devices require performance levels that are substantially higher than previous generations and therefore utilize more power amplifiers and switches. This results in a higher content of GaAs substrates per unit. The increasing popularity of these devices coupled with the significant worldwide investment in the advanced networks to support them, indicates that this market has long-term growth potential.

Q Is your growth in semi-insulating GaAs substrates just a reflection of a growing market for these products, or are you taking market share from your rivals?

A In the last several years, our market share in this area has increased from the mid-single digits to more than 20 percent through our strong focus on quality, consistency and customer service. As we continue to grow, we are uniquely positioned to accommodate the increasing demand.

With our manufacturing based in China, we have adequate space and facilities to expand our capacity as needed. In fact, since 2006, we have more than tripled our 6-inch GaAs capacity and can continue to expand as new qualifications and increasing demand require greater production volume. Further, lower labor costs and our ability to build our own crystal growth equipment allow us to grow our business far more cost-effectively than our competitors.

Our facility is now one of the largest compound semiconductor substrate manufacturing facilities in the world, and in 2010 we will begin a new initiative to further upgrade and modernize our factory to enhance our capabilities and our efficiency.

Q You also produce semi-conducting GaAs substrates for LED manufacture. Is this market also growing?

A Absolutely. We continue to see signs of recovery, driven by improved demand from applications such as automotive lighting, and signage and display. In fact, in the third quarter, sales of 2-inch, 3-inch and 4-inch semiconducting gallium arsenide made up nearly half of our total gallium arsenide revenues. In addition to growth from our current customer base, we are also qualifying for a number of new emerging LED applications that require specific substrate characteristics and therefore, are less subject to competitive pressures.

We believe that there are many such opportunities for us and we are focusing our engineering teams on optimizing our products to match the requirements of these applications. We are also encouraged to see continued emphasis, particularly in Europe and Asia, on the use of LEDs in a variety of lighting applications, such as street and traffic lights as well as the development of a commercially viable LED light bulb. We believe that the LED market represents tremendous opportunity for us in the coming years.

Q AXT also produces germanium substrates. What is the dominant application for this product?

A The majority of interest for germanium substrates continues to be for satellite solar cell applications and in expectation of increasing demand across our customer base, we are adding substantial capacity for germanium substrates.

We are also qualifying for the emerging terrestrial solar cell market, where the volumes could be substantially higher when terrestrial applications achieve the cost structure and efficiency to gain wider adoption. We believe that as this market develops, our technology will provide important differentiators from our competition. AXT is the only germanium substrate supplier to offer vertical gradient freeze (VGF)-based technology, a process that we were the first to commercialize more than 20 years ago. Our close collaboration with our customers has revealed that our VGF technology produces germanium substrates with higher mechanical strength and better surface morphology than competing technologies. These characteristics are particularly important in the development of 6-inch germanium substrates, as larger diameter substrates are more prone to breakage.

Our customers are showing strong interest in our development of a larger diameter germanium substrate, particularly for terrestrial applications. Larger wafers would help to lower the cost of producing solar cells, making the technology more commercially viable. AXT has an advantage with tremendous expertise in largediameter substrate production, as we were one of the first manufacturers to introduce 6-inch GaAs substrates in our industry. This is a major R&D initiative for us and we are committed to being a technology leader in next-generation energy solutions.

Q You have several joint ventures with raw materials companies. What are the benefits of this?

A We believe that our raw material joint ventures are providing us with unique advantages in terms of the cost structure for our critical materials as well as the availability to secure enough materials to accommodate our customer requirements. These five joint ventures, located primarily in the Nanjing and Beijing areas in China, were established between 1999 and 2001, and supply nearly all of the critical raw materials used to manufacture our products, including gallium, arsenic, and germanium metal, as well as pyrolytic boron nitride (pBN) and boron oxide (B203). With relatively small investments, we have reaped tremendous financial and strategic rewards. We will continue to explore opportunities to expand our joint venture portfolio, both for current and new materials.

Q You also manufacture InP substrates. How is this market faring?

A The InP substrate market is largely driven by fiber optics, which has been down for several years. Our sales in this area today are not a significant contributor to our total revenue but they are steady and profitable. Further, we produce an outstanding product for this market and will continue to support our customers and engage in new qualification opportunities as they arise.

Q Some researchers have published reports that suggest that the low reserves of several raw materials needed for the manufacture of III-V substrates, such as indium, are a cause for concern. Do you agree?

A No, we have not received any information to date that would support this theory.

Q Do you plan to expand your business, by introducing sapphire, SiC or GaN substrates?

A We are always investigating new materials such as these and others. However, our current focus for expansion is the addition of capacity in strategic areas, such as larger diameter gallium arsenide, the development of differentiated products for emerging applications within the LED market, the development of 6-inch germanium substrates for terrestrial applications and the addition of joint ventures to round out our raw materials portfolio. These expansion initiatives reflect the demand that we are seeing from our customers and their long-term product and technology roadmaps.

Q How would you sum up where you are today?

A This is an encouraging time for AXT. We are seeing renewed growth across all of the primary markets we serve, fueled by long-term positive trends in wireless devices, LED lighting and photovoltaics. We have been successful in our diversification efforts with key qualifications of new customers and new applications that are strategically important to AXT. We are excited to see our hard work resulting in ramping production volumes and higher revenues. Further, careful and conservative management of our business has resulted in the return of our company to profitability, giving us a solid financial foundation for our continued success.

Our strategic and competitive, sustainable advantages clearly illustrate that AXT has a very bright future ahead.