Shares of AXT (NASDAQ:AXTI) more than doubled in value Wednesday, surging 27% in regular trading to $46.94 and adding another 23.9% after hours to $58.15. The compound-semiconductor supplier delivered a broad second-quarter earnings beat, with revenue exceeding consensus by 39.6% and adjusted earnings nearly tripling estimates. The rally left the stock 57.3% above its previous close, signaling strong investor confidence in the company's AI-driven growth story.
The most striking signal came from the company's margin conversion. Revenue grew by $20.7 million sequentially from the first quarter, while gross profit increased by $13.4 million, yielding an incremental gross margin of 64.8%. Operating profit improved by $12.0 million, implying a 58.1% incremental operating margin. Gross margin widened by 15.3 percentage points to 44.9%, and operating margin swung to 21.9% from negative 5.9% in the prior quarter. "We have reached an inflection point in our business," said CEO Morris Young, citing data-center optical demand, added capacity, and better factory productivity. AXT also recorded its highest quarterly revenue for indium-phosphide (InP) wafers, a key material for AI data center optics.
Management raised the bar sharply with third-quarter guidance. The company expects revenue of exactly $66 million, which is 70.1% above the pre-call consensus estimate of $38.8 million. Adjusted earnings are guided to $0.30–$0.32 per share, compared to the consensus of $0.11. The sales guide implies 38.7% sequential growth, and at that level, quarterly revenue would annualize to $264 million—a run-rate calculation, not an annual forecast. This guidance underscores the rapid acceleration in demand for AXT's products, particularly in the AI and data center markets.
Demand visibility received a further boost from a customer agreement announced Wednesday. AXT signed a six-year capacity reservation with Lumentum Holdings (NASDAQ:LITE), covering indium-phosphide wafer substrates. The deal includes an initial deposit of $43.5 million, representing 91.4% of AXT's second-quarter revenue, with a second deposit of the same amount to be determined during 2028. Total deposits stand at $87 million, or 182.8% of Q2 revenue. While the deposits will become credits against future shipments and are not immediate revenue, their scale signals a substantial capacity commitment from Lumentum and underscores the strategic importance of AXT's InP technology.
Profit quality requires a closer look. AXT generated $10.4 million of operating income, but net interest income added $4.7 million, representing 31.2% of pretax profit. The company's diluted share count increased 45.2% year over year to 63.47 million, which reduces per-share operating leverage. Cash and investments stood at $715.8 million, against $84.23 million in short-term loans. These financial metrics suggest that while the operating leverage is real, the company's profitability is also supported by its cash position and interest income.
Supply remains a geopolitical risk. China has restricted indium-phosphide export licenses since February 2025, and AXT manufactures most of its InP substrates there. SemiAnalysis analyst Konrad Wang called InP "one of several supply chain bottlenecks collectively gating AI data center buildouts." Export-permit timing remains outside AXT's control, and the company must convert added capacity into permitted shipments. The 45% share-count increase also tempers the per-share impact of operating leverage. Friday's regular session will test the repricing, and the next proof points will be permit throughput, shipped revenue, and gross-margin durability.
In summary, AXT's Q2 results and Q3 guidance paint a picture of a company at an inflection point, driven by AI demand for its indium-phosphide wafers. The strong margin expansion, capacity reservation with Lumentum, and robust guidance suggest that AXT is well-positioned to capitalize on the AI data center buildout. However, investors must monitor geopolitical risks and share dilution as key factors in the company's long-term outlook.
