AXTI — Q2 2026 Financial Report Analysis

Indium phosphide export permits turn AXT profitable: Q2 revenue up 165% to $47.6 million

AXT makes the thin wafers ("substrates") that other companies build chips and lasers on, using materials that outperform silicon for light and high-speed signals: indium phosphide (InP), gallium arsenide (GaAs) and germanium (Ge). All of its wafers are made in China by its majority-owned subsidiary Tongmei. In the second quarter of 2026, revenue rose to $47.6 million from $18.0 million a year earlier and from $26.9 million in Q1. The 10-Q attributes the substrate jump to "higher demand for InP wafer substrates used for data center applications and in passive optical networks, as a result of additional export approvals granted by the China government." AXT earned $11.1 million ($0.17 per diluted share), compared with a $7.0 million loss a year ago and a $1.6 million loss in Q1.

At a glance

• Gross margin of 44.9%, up from 8.0% a year ago and 29.6% in Q1. Gross margin is the share of revenue left after the direct cost of making the product. AXT credits the jump to fixed factory costs being spread over many more wafers, plus a richer product mix.
• Europe revenue up 473% to $9.2 million. That is the clearest sign that Chinese export permits are now flowing. Sales to North America were just $161,000 (0% of revenue), because no InP or GaAs permits for US customers have been approved yet.
• $748.8 million of cash and investments, against $35.1 million a year earlier. Almost all of it came from selling new shares, not from the business: the April 2026 offering raised $600.1 million net at $64.25 per share.

Key figures

n/m = not meaningful: a percentage change from a loss to a profit has no useful reading.

What drove the quarter

It was an InP quarter, and the limit was export permits, not demand. Since February 2025, China has required a Ministry of Commerce permit for every InP shipment abroad, on top of the permits it already required for GaAs and germanium wafers. Tongmei got its first InP permits in June 2025, for customers in Europe and Japan. Since then more have come through, and the regional figures show the effect:

Not everything grew. Management says sales in China were partly offset by "lower demand for our Ge and GaAs wafer substrates," so the older product lines are not the story here. The raw materials business (purified gallium and pBN crucibles, the ceramic vessels used to grow crystals) grew 50% on stronger market demand. The CEO said Q2 was "our highest quarterly indium phosphide revenue to date." Neither the release nor the 10-Q gives a dollar figure for InP alone.

Operating leverage did most of the work. Operating leverage means profit growing faster than sales because many costs stay fixed. Revenue rose $29.6 million, while operating expenses rose only $2.8 million: SG&A was up 29% (legal, compensation, travel) and R&D up 45% (materials for new product development). As a result, operating expenses fell from 45.5% of revenue to 23.0%, and the operating line swung by $17.2 million.

Customers are paying in advance to lock in supply. In June and July, AXT signed three supply deals for InP wafers:

• Coherent: a three-year agreement for 6-inch InP wafers, with a $22.3 million prepayment.
• Lumentum: a six-year capacity reservation, with an initial $43.5 million deposit due within 30 business days of signing on July 26, and a second $43.5 million deposit to be scheduled in 2028.
• Nanjing Casela: a commitment to buy about $25.4 million (RMB 173 million) of wafers in 2027, with half paid up front.

Customers that put down deposits this large are treating supply as the constraint.

What the headline numbers hide

• The cash flow from operations does not yet match the profit. For the first half of the year, net income was $11.5 million, but operating cash flow was −$0.9 million. Over the same six months, inventories rose $12.2 million (to $96.3 million), receivables rose $9.2 million (to $36.7 million, +37% since December) and prepaid expenses rose $10.0 million. Customer money helped close the gap: contract liabilities, meaning customer cash received before AXT has delivered the product, went from $0.1 million in December to $12.1 million current plus $1.9 million long-term at June 30. Without those prepayments, the half would have shown a clear operating cash outflow. Some of this is normal when a business is ramping up, but receivables and inventory are still growing faster than cash collections.
• About a third of pre-tax profit came from interest, not wafers. Net interest income was $4.7 million, compared with an expense of $0.2 million a year ago. That is 31% of Q2's $15.1 million pre-tax income, and it came from investing the $632.5 million gross raised in April and the roughly $100 million raised in December. Operating income ($10.4 million) is the cleaner measure of the business. It is real, but smaller than the bottom line suggests.
• Profit per share is being diluted. The diluted share count rose 45% year on year to 63.5 million, and 65.6 million shares were outstanding at June 30. Any future EPS growth has to come from a much larger base of shares.
• The GAAP and adjusted figures are close. Non-GAAP earnings exclude only stock-based compensation ($0.8 million in the quarter). That moves EPS from $0.17 to $0.19, and the release lists no other adjustments.
• Minority owners get a bigger share as Tongmei earns more. Tongmei is about 14.5% owned by other investors, and $1.9 million of Q2 net income went to them, compared with them absorbing $0.7 million of losses a year ago.
• The planned Tongmei listing in China has been dropped, and that has a cost. On July 8, 2026, Tongmei withdrew its application to list on Shanghai's STAR Market. That gives the private-equity investors who put about $49 million into Tongmei in 2020–21 the right to have their money returned, at the original price and without interest. AXT says it has the funds to repay everyone and now plans a Hong Kong listing focused on the InP business. The withdrawal may also force AXT to write off previously deferred IPO costs, which would be a one-off charge in a later quarter.
• The tax rate is low and may not stay that way. The effective tax rate was 13.9% ($2.1 million on $15.1 million). The 10-Q warns it "can vary greatly" depending on how much profit is earned in the US versus China.

Forward look

AXT's Q2 release gave no numerical revenue or margin guidance. Management described the quarter as "an inflection point" and said it is adding InP capacity: the Coherent deal commits AXT to expanding 6-inch InP output in Beijing through 2028, and the share-sale proceeds are earmarked mainly for that. Our view: the order book does not look like the constraint. With customer prepayments and a six-year Lumentum reservation, demand is well documented. The two things that can stall the ramp are outside AXT's control or still unproven:

1. The pace of Chinese export permits. The 10-Q says there is "a backlog of orders for which we have not yet received permits" and that timing is "beyond our control." US customers remain fully blocked.
2. Whether capacity can grow fast enough without hurting margins. Capex was $8.6 million in the first half, compared with $0.8 million a year earlier, and inventory is building.

Takeaway: The 44.9% gross margin shows how profitable AXT's China-based InP factory is when export permits let wafers leave the country. But first-half cash flow was still negative, about a third of Q2 pre-tax profit was interest on newly raised cash, and the share count is up 45%. Whether the quarter repeats depends less on demand, which customers are pre-paying for, than on Beijing's permit decisions.

What to watch in Q3: whether revenue holds above $45 million; whether the $43.5 million Lumentum deposit arrives and contract liabilities rise; whether operating cash flow turns positive without help from prepayments; how many Tongmei investors ask for redemption, and any write-off of IPO costs; and any first InP export permit for a US customer.

Source: AXT Form 10-Q for the quarter ended June 30, 2026 (filed August 13, 2026); non-GAAP and Q1 2026 comparisons from the Q2 earnings release (8-K Exhibit 99.1, July 30, 2026).