AXT (AXTI) Q2 Revenue Drops 36%

Key Points

• Non-GAAP loss per share widened to ($0.15) versus estimates of ($0.13), reflecting soft demand and margin compression.

• Positive movement seen in indium phosphide (InP) substrate shipments linked to early artificial intelligence demand, but not enough to offset broader weakness.

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AXT (NASDAQ:AXTI), a specialty materials producer known for high-performance semiconductor substrates, reported second-quarter 2025 earnings on July 31, 2025. The headline news from the release was a sharper-than-expected revenue decline, as GAAP revenue was $18.0 million, missing the analysts' estimate of $19.78 million by $1.78 million, or 9.0%, with non-GAAP earnings falling short of market estimates amid ongoing pressure from regulatory delays and a slow demand environment in China. GAAP revenue was $18.0 million, missing the $19.8 million GAAP analyst estimate, while non-GAAP loss per share was ($0.15), instead of the expected ($0.13) (non-GAAP). The quarter's overall performance showed persistent challenges, with some improvement in gross margin from the prior period but continued losses and steep year-over-year declines (GAAP gross margin 8.0%, up from (6.4)% in Q1 2025 and down from 27.4% in Q2 2024; non-GAAP gross margin 8.2%, up from (6.1)% in Q1 2025 and down from 27.6% in Q2 2024).

Source: Analyst estimates provided by FactSet. Management expectations based on management's guidance, as provided in Q2 2025 earnings report.

About AXT: Business Overview and Strategic Focus

AXT manufactures compound semiconductor substrates such as gallium arsenide (GaAs), indium phosphide (InP), and germanium (Ge). These substrates serve as foundational materials in products for the data center, wireless, 5G, LED, and automotive sectors. Its products are used in applications such as artificial intelligence, optical networking, and advanced sensing.

The company has recently focused on strengthening its position in high-growth areas like AI-driven optical interconnects, where efficient data processing and transmission are key. Maintaining a vertically integrated supply chain and pushing for advanced substrate quality have also become central, as has managing exposure to geopolitical and regulatory headwinds in China. Successfully expanding manufacturing scale and securing export permits remain crucial factors going forward.

Quarter in Review: Revenue Declines, Margin Recovery, and Emerging Demand Trends

This was also a sequential decline from the previous period's $19.4 million GAAP revenue. GAAP revenue came in $1.8 million below analyst expectations. Management attributed this shortfall mostly to longer processing times for gallium arsenide export permits and a sluggish demand environment in China. Raw material sales also faced pressure from these trends.

While non-GAAP gross margin improved from negative territory in the previous quarter to 8.2%, this still lagged well behind last year’s non-GAAP gross margin of 27.6%. The partial margin recovery reflects some success in process and operational improvements, though it remains well below optimal levels due to lower sales volume and ongoing cost challenges.

One positive development for the business was the growth in substrate shipments for AI-related applications. Indium phosphide (InP) substrates, essential for high-speed optical data transmission in data centers and advanced computing, saw increased demand in China. Management pointed to its first successful exports of InP substrates outside China following new export permit approvals in June. Even so, these gains did not offset widespread softness in other end markets.

Geopolitical and regulatory obstacles, especially related to China, were major themes this quarter. The delay and complexity of export permit processes weighed on expected sales, as did continued uncertainties in the broader Chinese economy. The ongoing regulatory review for the company’s STAR Market IPO—the planned public offering of its subsidiary Tongmei in China—remains unresolved.

Business Drivers, Product Lines, and Key Risks

AXT’s performance relies on the demand for high-quality substrates in data-intensive and high-speed applications. Its key product types—gallium arsenide, indium phosphide, and germanium substrates—are used for things like 5G base stations, lasers for data centers, and high-efficiency solar cells. Success in offering superior technical specifications, like low etch pit density (a measure of crystal quality), helps the company meet evolving customer requirements for next-generation devices.

The company operates a vertically integrated supply chain, with partial ownership of raw material companies in China. This setup should, in theory, help with pricing, supply reliability, and cost control. However, increased operational costs and limited flexibility amid falling revenue have highlighted the balance between integration benefits and the risks of heavy concentration in China. Regulatory and trade restrictions remain a material risk, as delays in exporting key substrate products impact revenue and growth plans. No explicit dividend was declared this quarter, aligning with the company’s current practice.

Looking Ahead: Guidance and Investor Focus

Instead, it underscored a focus on improving operational efficiency, supporting next-generation technology needs, and working to expand access to markets outside China as new export permits are granted. There are some early signs of demand recovery tied to AI-driven uses for InP substrates, but these remain small relative to the company's overall scale and current headwinds.

Investors should watch for developments around external orders for high-speed substrates, trends in inventory and cash flow, and any updates on the STAR Market IPO for Tongmei. The company’s ability to access capital and scale production as demand recovers will be critical. AXT does not currently pay a dividend.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.

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