AXT Triples Its Indium Phosphide Growth Targets as AI Data Center Demand Overwhelms Supply, Gross Margins Rocket to 45%
Q2 2026 earnings call, July 30, 2026
AXT delivered what CEO Morris Young called an inflection point in the company's history, posting record revenue of $47.6 million in the second quarter, up 77% sequentially and 164% year-over-year, while raising its internal capacity targets for indium phosphide substrates for the second time this year. The results and guidance suggest the specialty substrate maker has moved from a marginal supplier serving a niche optical component market to a critical bottleneck supplier in the AI data center buildout, with demand from optical transceiver makers now outstripping AXT's ability to add capacity no matter how fast it moves.
Capacity Targets Raised Again, Now Tripling Rather Than Doubling
The headline change from this call is a substantial upward revision to AXT's indium phosphide capacity plan. Management had previously targeted doubling indium phosphide capacity in 2026 from a base of roughly $20 million in quarterly revenue capability. VP of Business Development Timothy Bettles confirmed the company is now targeting approximately $60 million in quarterly indium phosphide capacity exiting 2026, effectively tripling rather than doubling. For 2027, the plan is to more than double again, taking capacity to roughly $130 million per quarter by year-end.
Young was candid that even this upsized target may prove conservative. "We are planning at least to double next year, but as you know, this target changes... I think this year we're going to more than double, and it's because customer demand is just mounting," he said. "The demand is moving faster than we can move. We're doing great to move fast, but the demand is even stronger." Notably, Bettles said the capacity acceleration is not primarily a function of higher capital spending. Charles Shi of Needham pressed management on whether CapEx guidance of roughly $40 million this year and $100 million next year was still intact, and Bettles confirmed it was, attributing the extra output to productivity gains from new crystal-growing furnace designs and a mix shift toward larger-diameter wafers rather than incremental hardware spend.
Gross Margin Inflection: 45% Today, Target Starts With a 5
Gross margin expansion has been as dramatic as the revenue growth. Non-GAAP gross margin hit 45.0% in the quarter, up from 29.9% in Q1 2026 and just 8.2% in the second quarter of 2025. CFO Gary Fischer indicated the trajectory has further room to run, telling analysts management's internal target is "a number that begins with a 4," before eventually saying under questioning from Craig-Hallum's Richard Shannon that the company should be "targeting a number that begins with the 5." The dynamics are straightforward: indium phosphide carries higher margins than AXT's gallium arsenide and raw material joint venture businesses, and since nearly all incremental growth is coming from indium phosphide, the mix effect alone lifts blended margins. Compounding that, the migration to larger-diameter wafers (from 2-inch toward 3-inch, 4-inch, and eventually 6-inch) improves pricing, and full capacity utilization means even previously less-favored smaller-diameter product is now selling. As Fischer put it, "whatever we can produce, we can sell."
Major Customer Agreements Lock In Multi-Year Demand
AXT signed long-term supply agreements with Coherent and an unnamed partner referred to as Casela during the quarter, receiving prepayments of $22.3 million and $25.4 million respectively, which are booked as liabilities and recognized as revenue as shipments occur. This week the company also announced a new agreement with Lumentum, though management declined to disclose the deal's total revenue impact. Notably, the Casela agreement does not begin contributing until 2027, and Bettles confirmed the recent wave of long-term agreements had limited impact on Q2 results, with a bigger contribution expected in Q3 and further ramp into 2027. Backlog now exceeds $100 million, though management was deliberately vague about the precise figure. Young explained the company is intentionally not booking all available demand: "We are not taking orders... because once we take the order, we're going to put them on the production queue. Right now, it's full... if we open up the floodgate it's going to be huge." Fischer added that visibility now extends three to four quarters versus the one-to-two-quarter visibility typical in past cycles, making the backlog figure not directly comparable to historical periods.
China Now More Than Half of Indium Phosphide Revenue
China represented more than 50% of AXT's indium phosphide revenue in the second quarter, with China-related indium phosphide laser revenue more than doubling sequentially. Bettles expects the geographic split to settle into a 40% to 60% range between China and the rest of the world going forward as both regions build out AI infrastructure. Importantly, product shipped within China does not require an export permit, which removes a persistent source of revenue timing uncertainty that has dogged AXT in prior periods given restrictions on Tongmei, its Hong Kong-based subsidiary. Matthew Bryson of Wedbush asked directly about the export permit process, and Bettles indicated some easing, saying, "We are seeing more regularity in the process, especially in certain geographic regions," while cautioning that timing and certainty for any individual permit remain unpredictable.
Balance Sheet Transformed by $632 Million Raise; Tongmei IPO Redirected to Hong Kong
Cash, cash equivalents and investments jumped by $625.6 million sequentially to $748.8 million as of June 30, driven by a secondary offering that closed April 22 and generated approximately $632 million before expenses. Separately, AXT disclosed that its China subsidiary Tongmei has abandoned its STAR Market listing application in favor of a Hong Kong Exchange listing, a process management expects to take about a year. The shift triggers a redemption right for $49 million invested by private equity funds back in 2021, though Fischer said those investors have indicated they intend to remain invested rather than redeem, and AXT has sufficient cash on hand to cover redemptions if requested.
Return to Profitability and Q3 Guidance
AXT swung to a non-GAAP net profit of $11.9 million, or $0.19 per diluted share, reversing a $585,000 non-GAAP net loss in Q1 2026 and a $6.4 million loss in the second quarter of 2025. For the third quarter, Fischer guided to approximately $66 million in revenue that can be recognized without further export permit approval, with non-GAAP earnings per share of $0.30 to $0.32. Management flagged potential upside if additional permits come through for inventory already on hand, but declined to bake that into formal guidance given the unpredictability of permit timing.
VCSEL Competition Acknowledged, But Speed Advantage Favors Indium Phosphide
Asked about competing vertical-cavity surface-emitting laser (VCSEL) technology built on gallium arsenide for shorter-distance scale-up applications, Young acknowledged the technology's staying power but argued indium phosphide retains a structural edge as data rates increase. "The speed is the killer... in favor of indium phosphide," he said. "VCSEL, I think it's more difficult to reach 200G, both in terms of laser emitter as well as detectors. When you go to 200G, it has to be indium phosphide detectors, and also indium phosphide laser works better." Bettles confirmed AXT already supplies gallium arsenide substrates to two large data center and laser customers pursuing VCSEL solutions, framing the two technologies as coexisting rather than competing head-on, though he noted growing customer focus is skewing toward indium phosphide as speed requirements rise.