AXT, Inc. (AXTI) Earnings

Management highlights

### Overall Business Trajectory - The company has hit a key inflection point, entering an expected multi-year growth phase driven by surging demand for indium phosphide substrates for AI data center optical connectivity. - The company returned to profitability in Q2 2026, with substantial gross margin improvement driven by higher volume, favorable product mix, and improved manufacturing efficiencies. - AXT raised $632 million (before expenses) via a secondary public offering in April 2026, growing total cash, equivalents and investments to $748.8 million as of June 30, 2026. ### Indium Phosphide Capacity and Product Development - The 2026 target to double indium phosphide capacity is ahead of schedule, with full-year 2026 indium phosphide revenue on track to more than triple from 2025 levels. - Planning is already underway to double capacity again in 2027, which will make AXT the world's largest indium phosphide producer. Management noted demand is outpacing capacity growth, and 2027 capacity expansion could end up larger than the current doubling target. - The company is making strong progress toward volume production of 6-inch indium phosphide wafers, which are far more difficult to manufacture than smaller 3 or 4-inch wafers. ### Customer and Market Developments - AXT signed strategic long-term supply agreements with Casella, Coherent, and Lumentum, which included total prepayments of $47.7 million. Revenue from these agreements will be recognized as product is shipped, with most volume starting in 2027. The growing backlog of committed orders is currently well over $100 million and continues to grow as demand outpaces supply. - Global demand is driven by the migration to 800G and 1.6T optical transceivers for AI data centers, with future demand growth expected from the adoption of near-packaged and co-packaged optics. AXT holds a strong competitive position due to high technical barriers to entry and its vertically integrated supply chain. - Geographic demand: China-based indium phosphide revenue more than doubled QoQ in Q2 2026, with no export permits required for domestic Chinese shipments. For Q2 2026, China made up over 50% of indium phosphide revenue, and management expects a long-term 40%-60% split between China and the rest of the world. ### Other Strategic Updates - AXT's subsidiary Tong Mei withdrew its IPO application for the Shanghai Star Market and will instead pursue an IPO on the Hong Kong Stock Exchange, a process expected to take approximately one year. All existing PE investors have stated they will retain their investments, and AXT holds sufficient cash to cover redemptions if requested. - The integrated raw material supply chain is a core competitive advantage, with ongoing investments to expand in-house refining capacity to support growing indium phosphide production.

Guidance

• Q3 2026 revenue: Management confirms $66 million in revenue is already secured for recognition (for orders with existing export permits or no permit requirement), with potential upside if additional export permits are approved for completed, inventory-ready orders. • Q3 2026 non-GAAP operating expenses are expected to be ~$10.5 million, with GAAP operating expenses expected to be ~$11 million. • Q3 2026 earnings guidance: Non-GAAP net income per diluted share is expected in the range of 30 to 32 cents, with GAAP net income per diluted share expected in the range of 29 to 31 cents, on a weighted average diluted share count of ~66.5 million. • Long-term gross margin guidance: Management targets gross margins above 45%, with a long-term target of gross margins in the 50% range, supported by growing indium phosphide share, larger diameter higher-value wafers, higher capacity utilization, and ongoing manufacturing efficiency improvements.

Segment performance

Total Q2 2026 revenue was a company-record $47.6 million, up 77% quarter-over-quarter (QoQ) and 164% year-over-year (YoY). - Indium Phosphide: $30.7 million (64.5% of total revenue), also a company record, driven primarily by AI data center applications. - Gallium arsenide: $6.6 million (13.9% of total revenue), with growing demand for industrial robotics, data center laser, and wireless RF applications. - Germanium substrates: $272 thousand (0.6% of total revenue). - Consolidated raw material joint ventures: $10.0 million (21.0% of total revenue), hitting a record quarterly revenue, with in-house refining of high-purity indium that secures critical raw material supply for indium phosphide production.

Risks & headwinds

• Uncertainty around the timing and approval of Chinese export permits for orders bound for international markets, which can impact the timing of revenue recognition even for completed orders with committed customer demand. • Future results depend on the ability to continue expanding manufacturing capacity faster than planned to meet sustained, rapidly growing customer demand that currently outpaces supply. • General macroeconomic, political, and trade risks, including changes to trade tariffs and Chinese export control regulations. • Financial and operational risks related to partially-owned supply chain joint ventures, and potential impacts from increasing environmental regulation in China.

Analyst Q&A

• Q: Can you confirm the 2026 exit indium phosphide revenue target of ~$60 million per quarter, confirm 2027 doubling, and share details on the Lumentum supply agreement? /

  A: Management confirmed the 2026 exit target of ~$60 million quarterly indium phosphide revenue, and confirmed plans to more than double this to ~$130 million quarterly revenue by the end of 2027. Management notes demand is growing even faster than current capacity expansion plans, so 2027 growth could exceed the current doubling target. No details on the total size or revenue impact of the Lumentum deal were disclosed.

• Q: How has the Chinese export permit process changed, and is there more certainty around permit approvals today? What is the outlook for gross margins and potential price appreciation? /

  A: Management reports permits still have unpredictable timing and approval certainty, but the process has become more consistent for some regions, with more applications moving through the Ministry of Commerce successfully. Gross margins reached 45% in Q2, and management expects further improvement from higher indium phosphide mix, larger diameter higher-value wafers, full capacity utilization (allowing sale of all produced wafer sizes), and fixed cost absorption from higher volume, with a long-term target of 50%+ gross margins.

• Q: What is the split of indium phosphide revenue between China and the rest of the world, and how will this change long term? Can gross margins reach the 50% range? /

  A: China made up over 50% of Q2 2026 indium phosphide revenue, and management expects a long-term stable split of 40-60% China to 40-60% rest of the world as capacity grows and long-term agreements are signed with global customers. Management confirmed that 50%+ gross margins are a realistic long-term target, supported by volume growth, favorable mix, and productivity improvements, though the company is being conservative about near-term guidance as the business scales quickly.

• Q: Does the faster than expected capacity growth require upsizing the previously communicated CapEx plan? What is the actual size of the backlog beyond the 'well over $100 million' guidance? /

  A: Most of the faster revenue growth comes from improved productivity, larger diameter wafers, and better mix, not just new physical capacity, so there is very little additional CapEx required, and the previously communicated CapEx plan remains unchanged. Management confirmed backlog exceeds two quarters of current run rate, with visibility extending 3-4 quarters out, and does not count uncommitted demand because the company only accepts orders it can schedule for production; total unfulfilled demand would be much larger if AXT accepted all open orders.