AXT (NASDAQ:AXTI) reported record second-quarter revenue and a return to profitability, driven by strong demand for indium phosphide substrates used in optical connectivity for AI data centers. Management said it is accelerating capacity expansion as customer demand continues to exceed supply.
Second-quarter revenue totaled $47.6 million, up nearly 77% from $26.9 million in the first quarter and 164% from $18.0 million in the year-earlier period. Chief Financial Officer Gary Fischer said the result marked the highest quarterly revenue in the company’s history.
Margins and Earnings Improve Sharply
Non-GAAP gross margin increased to 45.0% in the second quarter, from 29.9% in the prior quarter and 8.2% a year earlier. GAAP gross margin was 44.9%, compared with 29.6% in the first quarter and 8.0% in the second quarter of 2025. Fischer attributed the improvement primarily to higher volume and a favorable product mix.
Non-GAAP operating profit was $11.2 million, compared with an operating loss of $550,000 in the first quarter and a $6.1 million operating loss a year ago. On a GAAP basis, operating profit was $10.4 million.
AXT posted non-GAAP net income of $11.9 million, or $0.19 per diluted share, reversing a non-GAAP loss of $585,000, or $0.01 per share, in the first quarter. GAAP net income was $11.1 million, or $0.17 per diluted share, compared with a GAAP net loss of $1.6 million in the preceding quarter.
Cash, cash equivalents and investments rose to $748.8 million as of June 30, from $123 million at the end of March. The increase was primarily related to a secondary public offering that closed April 22 and generated about $632 million before expenses.
Long-Term Supply Agreements Support Expansion
During the quarter, AXT signed long-term supply agreements with Casela and Coherent. The company received prepayments of $22.3 million and $25.4 million, respectively, under those agreements. The prepayments are recorded as liabilities and will be recognized as revenue as products are shipped.
Chief Executive Officer Dr. Morris Young said AXT also announced an agreement with Lumentum during the week of the call. Management did not disclose the total revenue opportunity associated with the Lumentum agreement. Executives said the recently announced supply arrangements are expected to have a larger impact in the third quarter and beyond, while the Casela agreement is not scheduled to begin under its contract terms until 2027.
Young said the company’s indium phosphide backlog is “well over $100 million” and continues to grow despite higher shipment volumes. Management declined to provide a more specific figure, saying it is limiting orders to those it believes it can support with planned production capacity. The company said backlog and long-term supply agreements extend into 2027 and beyond.
Capacity Targets Increase as AI Demand Builds
Management said it is ahead of schedule on its plans to double indium phosphide capacity in 2026. In response to analyst questions, executives said they expect to exit 2026 with quarterly indium phosphide capacity of roughly $60 million, and anticipate more than doubling that level again during 2027 to approximately $130 million in quarterly revenue capacity by year-end.
Young said the expansion is being supported by faster capacity additions, higher manufacturing productivity from new crystal-growth furnace designs, and customers’ migration toward larger-diameter and higher-value substrates. AXT is also developing six-inch indium phosphide capabilities, which Young described as substantially more difficult to produce in volume than three-inch and four-inch wafers.
The company said it is planning an additional capacity expansion at an adjacent location for 2027. Young said demand is moving faster than AXT’s own capacity expansion, and the company could pursue more than its currently planned doubling of capacity next year depending on business conditions.
Management said much of the higher capacity is expected to come through productivity gains and product mix, rather than requiring materially higher capital expenditures beyond previously discussed plans.
China, Permits and Tongmei Listing Plans
AXT said revenue related to indium phosphide-based lasers in China more than doubled sequentially in the second quarter and is expected to continue growing in the third quarter. The company noted that shipments within China do not require export permits. Management said China represented more than 50% of revenue in the second quarter and suggested its longer-term revenue mix could fall in a 40% to 60% range between China and the rest of the world.
Fischer said AXT has approximately $66 million in third-quarter revenue across substrates and raw materials for which it either already has a permit to ship or does not need an export permit. The company said it has a high degree of confidence in recognizing that revenue, while cautioning that additional upside depends on the timing and receipt of permits for other orders.
AXT and its Tongmei subsidiary withdrew their planned STAR Market IPO application, which had been accepted in July, and will instead pursue a Hong Kong listing that management expects could take about a year. Fischer said private-equity investors that invested $49 million in 2021 have redemption rights following the change, but currently wish to maintain their investments.
For the third quarter, AXT expects non-GAAP operating expenses of about $10.5 million and GAAP operating expenses of about $11 million. The company forecast non-GAAP net income of $0.30 to $0.32 per share and GAAP net income of $0.29 to $0.31 per share, based on an estimated 66.5 million shares outstanding.
About AXT (NASDAQ:AXTI)
AXT, Inc (NASDAQ: AXTI) is a global supplier of compound and single-element semiconductor substrates, offering a range of materials critical for high-performance electronic and optoelectronic devices. Founded in 1986 and headquartered in Fremont, California, AXT specializes in the development, manufacture and distribution of wafers composed of gallium arsenide (GaAs), indium phosphide (InP), gallium nitride (GaN) and other compound semiconductor materials. These substrates serve as the foundational platforms for devices used in data communications, wireless infrastructure, advanced computing, consumer electronics and photovoltaic applications.
AXT’s product portfolio encompasses a variety of wafer sizes, dopant concentrations and crystal orientations, tailored to meet the precise specifications of its customers.
