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AXT, Inc. Announces Second Quarter 2006 Results

Revenue Increases 22 Percent From Q1 2006

FREMONT, Calif., Aug. 2 /PRNewswire-FirstCall/ -- AXT, Inc. (Nasdaq: AXTI), a leading manufacturer of compound semiconductor substrates today reported financial results for the second quarter ended June 30, 2006. The company's financial statements have been presented to reflect the opto-electronics division as a discontinued operation for all periods presented.

Second Quarter 2006 Results

Revenue for the second quarter of 2006 was $10.4 million, up 22 percent from $8.5 million in the first quarter of 2006. Total GaAs substrate revenue was $8.1 million for the second quarter of 2006, up 20 percent from $6.8 million for the first quarter of 2006. Revenue in the second quarter from indium phosphide substrate sales was $613,000; germanium substrate sales was $169,000 and raw materials sales was $1.4 million.

Gross margin was 26.6 percent of revenue for the second quarter of 2006. This included a benefit from the sales of approximately $802,000 in fully reserved wafers, which positively affected the quarterly gross margin by 7.7 percent. By comparison, gross margin in the first quarter of 2006 was 17.8 percent. This included a benefit from the sales of approximately $569,000 in fully reserved wafers and a $53,000 reversal of sales returns reserve, which positively affected the first quarter gross margin by a combined 7.3 percent.

Operating expenses were $4.4 million in the second quarter of 2006 compared with $3.8 million in the first quarter of 2006. This increase was primarily the result of increased sales commissions as a result of higher revenues, additional de-commissioning expenses to close out our U.S. property, professional and legal fees, and severance payments. Stock compensation expense for the second quarter of 2006 was $185,000, compared with $257,000 in the first quarter of 2006.

Loss from operations for the second quarter of 2006 was $1.7 million compared with a loss of $2.3 million for the first quarter. The improvement in loss from operations was primarily due to the increase of gross profit partially offset by higher operating expenses.

Net interest and other income for the second quarter of 2006 was $925,000 compared with net interest and other income of $366,000 for the first quarter. Other income in the second quarter included a gain of $1.0 million on the sale of 300,000 shares of Finisar Corporation, compared to a gain of $376,000 on the sale of 100,000 shares of Finisar Corporation in the first quarter.

Net loss in the second quarter of 2006 was $876,000 or $0.04 per diluted share, compared with a net loss of $2.2 million or $0.10 per diluted share in the first quarter.

Management Qualitative Comments

"This has been an excellent quarter for AXT," said Phil Yin, chief executive officer. "Once again, we are pleased to report revenue and earnings that exceeded our expectations. Our sales efforts continue to gain momentum and we are actively engaged in a number of new and returning customer qualifications. Gross margins in the quarter were also above expectations, driven by growing volume, favorable product mix and the benefits of innovative cost-cutting measures, including improvements to our slicing, lapping and polishing processes.

"Sales of gallium arsenide substrates were particularly encouraging in the second quarter, increasing 20.3 percent from the first quarter. Much of this strength came from growing demand for 2-inch to 4-inch semi-conducting gallium arsenide substrates used in LEDs and for 6-inch semi-insulating gallium arsenide substrates used in wireless handsets, and the overall constrained capacity in the industry.

"We are encouraged by this growing market demand because we believe that we are in an excellent position to benefit from the opportunity it creates. In addition to having high quality products produced with VGF technology, we have two significant advantages: First, our China production facility allows us to produce substrates in a low cost environment and reach economies of scale at lower volume productions. Also, while demand is increasing, capacity for manufacturing 6-inch substrates is constrained. However, we can rapidly and cost-effectively scale our manufacturing facility to accommodate increased market demand. We have both the manufacturing space and the furnaces required to increase capacity without significant capital expense. In fact, during the second quarter, we increased our capacity for 6-inch substrates by 50 percent and we are planning to add an additional 40 percent to our six-inch capacity by the end of the first quarter of 2007.

"Over the past year, we have focused tremendous energy into restoring and growing our customer base. The positive results are beginning to show in our continued revenue growth. Our recovery signals our success in consistently providing high-quality products to our customers and is strengthened by the healthy and growing market for our products."

Outlook for Third Quarter, Ending Sept. 30, 2006

AXT estimates that its revenue for the third quarter will increase to between $10.5 million and $11.0 million. Also, the company estimates that its net loss per diluted share will be between $0.05 and $0.07, which takes into account stock compensation expense of $600,000 as the company gives out annual grants to its employees.

Conference Call

The company will also host a conference call today to discuss these results at 1:30 p.m. PT. The conference call can be accessed at 973-935-2100 (PIN 7565185). The call will also be simulcast on the Internet at www.axt.com. Replays will be available at 973-341-3080 until August 16, 2006. Financial and statistical information to be discussed in the call will be available on the company's website immediately prior to commencement of the call. Additional investor information can be accessed at http://www.axt.com or by calling the company's Investor Relations Department at 510-683-5900.

About AXT, Inc.

AXT designs, develops, manufactures and distributes high-performance compound and single element semiconductor substrates comprising gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge). The company's substrate products are used primarily in lighting display applications, wireless communications, and fiber optic communications. Its vertical gradient freeze (VGF) technique for manufacturing semiconductor substrates provides significant benefits over other methods and enabled AXT to become a leading manufacturer of such substrates, particularly in optoelectronics applications. AXT has manufacturing facilities in China and invests in five joint ventures producing raw materials. For more information, see AXT's website at http://www.axt.com. The company can also be reached at 4281 Technology Drive, Fremont, California 94538 or by calling 510-683-5900. AXT is traded on the NASDAQ Global Market under the symbol AXTI.

Safe Harbor Statement

The foregoing paragraphs contain forward-looking statements within the meaning of the Federal Securities laws, including statements related to our aggressive growth plan, market growth, improvements in our product quality and in our manufacturing costs and efficiencies, and opportunities to grow our business, as well as expected quarterly financial results for the third quarter of fiscal 2006. Such forward-looking statements are based upon specific assumptions that are subject to uncertainties and factors relating to the company's operations and business environment, which could cause actual results of the company to differ materially from those expressed or implied in the forward-looking statements contained in the foregoing discussion. Such uncertainties and factors include: our ability to increase sales and maintain product quality improvements, the potential outcome of securities litigation and other litigation filed against us, as well as any other actions that may be filed against us by current or former employees for wrongful termination or health and safety issues, overall conditions in the markets in which we compete, market acceptance and demand for our products, the impact of competitive products and pricing, and other factors as set forth in the company's Form 10-K and other filings made with the Securities and Exchange Commission, all of which are difficult to predict and some of which are beyond the company's control. The company does not undertake any obligation to update publicly any forward-looking statement, either as a result of new information, future events or otherwise.


                                  AXT, INC.
               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               (Unaudited, in thousands, except per share data)

                                          Three Months Ended  Six Months Ended
                                               June 30,          June 30,
                                            2006     2005     2006     2005

    Revenue                                $10,355   $6,032  $18,826  $12,666
    Cost of revenue                          7,596    5,905   14,557   12,260
    Gross profit                             2,759      127    4,269      406

    Operating expenses:
      Selling, general and administrative    3,853    2,716    7,083    6,968
      Research and development                 571      423    1,105      785
      Restructuring charge                      --      237       (2)     362
        Total operating expenses             4,424    3,376    8,186    8,115
    Loss from operations                    (1,665)  (3,249)  (3,917)  (7,709)
    Interest income, net                       111      131      239      250
    Other income (expense), net                814     (196)   1,052     (301)
    Loss before provision for income taxes    (740)  (3,314)  (2,626)  (7,760)
    Provision for income taxes                 138       18      456       53
    Loss from continuing operations           (878)  (3,332)  (3,082)  (7,813)
    Discontinued operations:
      Gain from discontinued operations          2       53        3      411
    Net loss                                 $(876) $(3,279) $(3,079) $(7,402)


    Basic and diluted loss per share:
      Loss from continuing operations       $(0.04)  $(0.14)  $(0.14)  $(0.34)
      Gain from discontinued operations       0.00     0.00     0.00     0.02
    Net loss per share                      $(0.04)  $(0.14)  $(0.14)  $(0.32)


      Shares used in computing basic and
       diluted loss per share               23,052   23,079   23,019   23,113


                                  AXT, INC.
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                          (Unaudited, in thousands)

                                                  June 30,        December 31,
                                                    2006              2005
    Assets:
    Current assets
      Cash and cash equivalents                    $11,053           $17,472
      Short-term investments                         6,199             5,555
      Accounts receivable, net                       7,429             5,226
      Inventories, net                              16,192            16,156
      Prepaid expenses and other current assets      3,602             1,801
             Total current assets                   44,475            46,210

    Property, plant and equipment, net              16,648            17,306
    Other assets                                     3,743             3,832
    Restricted deposits                              7,300             7,450

            Total assets                           $72,166           $74,798

    Liabilities and stockholders' equity:
    Current liabilities
      Accounts payable                              $3,453            $3,070
      Accrued liabilities                            5,531             6,028
      Accrued restructuring                             --               465
      Current portion of long-term debt                450               300
           Total current liabilities                 9,434             9,863

    Long-term debt, net of current portion           6,952             7,420
    Other long-term liabilities                      1,958             1,897
           Total liabilities                        18,344            19,180

    Stockholders' equity:
      Preferred stock                                3,532             3,532
      Common stock                                 156,205           155,464
      Accumulated deficit                         (107,855)         (104,776)
      Other comprehensive income                     1,940             1,398
           Total stockholders' equity               53,822            55,618

           Total liabilities and
            stockholders' equity                   $72,166           $74,798

SOURCE AXT, Inc.
08/02/2006
CONTACT: Wilson W. Cheung, Chief Financial Officer of AXT, Inc., +1-510-683-5900; or Leslie Green of Green Communications Consulting, LLC, +1-650-312-9060, for AXT, Inc.
Web site: http://www.axt.com
(AXTI)