AXT Touts Surging Indium Phosphide Demand for AI Data Centers at Needham Conference Amid Export Curbs

AXT (NASDAQ:AXTI) executives highlighted rising demand for indium phosphide wafers tied to accelerating optical connectivity needs in AI data centers, while also addressing China export controls, capacity expansion plans, and the company’s ongoing effort to list its China subsidiary on Shanghai’s STAR Market.

Company overview and product focus

Speaking at the 28th Needham Growth Conference, CFO Gary Fischer said AXT was founded in 1986 and went public in 1998. The company produces specialized compound semiconductor wafers “for when silicon wafers won’t work,” with manufacturing based in China and headquarters in Fremont, California.

Vice President Tim Bettles said AXT manufactures three core compound semiconductor substrate materials: germanium, gallium arsenide, and indium phosphide. Bettles characterized germanium as a relatively small part of the business—less than 10%—and said it is used predominantly in satellite solar cells. He added that the company limits its exposure to germanium because profitability can be highly sensitive to volatile raw germanium prices.

Bettles said gallium arsenide is the material the company was founded on, with applications including industrial lasers, VCSELs used in data centers, LEDs for lighting and display, printer heads, and cell phone power amplifiers. He said AXT continues to pursue growth applications in that segment.

Indium phosphide demand tied to optical interconnect growth

Management emphasized that indium phosphide is the key driver of recent investor interest. Fischer said AXT has “the best product in the market for indium phosphide,” and argued that the market has become more aware of indium phosphide’s role in data center infrastructure. He described indium phosphide as “one of the first items in the value chain” for AI data centers.

Bettles said indium phosphide is the core substrate material for optical transceivers, including pluggable optics and co-packaged optics (CPO). As data rates rise, he said connectivity increasingly shifts from copper and electrical links to optical links.

He described two major demand vectors:

• “Scale-out” optics used for rack-to-rack connections, where Bettles said AXT is seeing significant growth. He said order demand could grow roughly 2x in 2026 and potentially another 2x in 2027 for scale-out.
• “Scale-up” tied to CPO and silicon photonics, where Bettles said silicon handles much of the modulation but indium phosphide is still required to generate light via an indium phosphide-based gain chip. He said AXT expects an inflection point when CPO adoption takes off, pointing to 2028–2029 for “real growth beyond what we’re seeing today.”

In response to a question about current exposure, Bettles estimated that AI data center connectivity is still a small part of revenue today—single digits, “pushing 10%”—but growing rapidly. He also estimated that data center-related demand is roughly 30%–35% of the total addressable market for indium phosphide substrates, with most of that currently tied to traditional (non-AI) data centers.

Vertical integration and customer supply chain positioning

Executives repeatedly highlighted AXT’s vertically integrated supply chain in China. Bettles said the company has about 10 raw material-related companies and capabilities that include producing or sourcing key inputs, making quartz for furnaces, building furnaces, and producing high-temperature furnace materials. He said AXT owns two companies supplying gallium and providing purification and recycling, as well as high-temperature crucibles made from pyrolytic boron nitride.

Bettles said this concentration on a single campus in China helps mitigate supply chain risk, supports recycling, and allows AXT to control raw material costs and scale upstream capacity alongside substrate demand. He contrasted AXT’s “backwards” integration with competitors that integrate “forwards” into devices such as lasers and detectors, which can create conflicts with customers.

When asked about downstream exposure, Bettles said AXT sells bare substrates rather than epitaxial wafers, supplying epi vendors and laser makers. He named epi vendors including LandMark, VPEC, WIN Semiconductors, and IQE, and said laser and related customers include Lumentum, Coherent, Broadcom, Intel, MACOM, and Applied Optoelectronics. He described AXT as operating at the beginning of the value chain, with components ultimately flowing into transceiver manufacturers and then data center systems.

Export controls, geographic revenue mix, and permitting risk

Management said export controls are a key risk factor. In response to a question, Bettles said indium phosphide was added to China’s export control list on Feb. 4, 2025. He said AXT must apply for an export permit for every order shipped outside of China. Fischer said the company experienced a period in 2025 where no permits were received in the first half, followed by permits arriving in the third quarter and then “steadily” since.

Fischer said the permit process is one of the company’s major disclosed risks and noted it is controlled by the Chinese government, leaving AXT with limited control and visibility. Bettles described the process as opaque and said permit timing varied in ways the company does not fully understand. He added that permitting can involve multiple agencies beyond the Ministry of Commerce, including regional bureaus and other government bodies, and that even the Ministry of Commerce may have limited transparency into timing.

On geographic exposure, Fischer said revenue historically has been roughly 40%–50% to China, with U.S. revenue typically in the high single digits and Japan in the double digits, though he did not provide exact figures. Bettles separately estimated that indium phosphide revenue outside China is “more than 70%, 75%” currently, while noting the China market has historically skewed toward GPON and telecom applications and is beginning to show growth in higher-speed areas.

Capacity expansion and pricing comments

AXT said it is expanding indium phosphide capacity. Bettles said the company is doubling capacity through 2026 and expects that by the end of 2026 it will be at double the capacity level of the end of 2025. He said AXT has an advantage because it can repurpose an existing building previously used for gallium arsenide crystal growth, allowing expansion at relatively low cost and on a shorter timeline.

He added that competitor Sumitomo is also doubling capacity, but has indicated it could take two and a half to three years, and that another competitor, Japan Energy, holds roughly 10% share and has announced capacity increases. Bettles said AXT expects market share to depend on which supplier can expand capacity fastest, and said AXT believes it is positioned to gain share.

On pricing, Bettles said the company generally expects pricing to remain relatively stable across most applications, but noted exceptions such as low-average-selling-price GPON markets in China and certain consumer or regional segments. He said AXT is reassessing pricing to establish a more standardized baseline, and noted that one competitor has pursued significant price increases of about 40%, while AXT is avoiding broad across-the-board increases.

Fischer also said AXT continues to pursue a long-delayed plan to take its China subsidiary, Tongmei, public on Shanghai’s STAR Market, describing the process as ongoing and “interactive,” but taking longer than expected as the company remains in the queue and responds to information requests.

About AXT (NASDAQ:AXTI)

AXT, Inc (NASDAQ: AXTI) is a global supplier of compound and single-element semiconductor substrates, offering a range of materials critical for high-performance electronic and optoelectronic devices. Founded in 1986 and headquartered in Fremont, California, AXT specializes in the development, manufacture and distribution of wafers composed of gallium arsenide (GaAs), indium phosphide (InP), gallium nitride (GaN) and other compound semiconductor materials. These substrates serve as the foundational platforms for devices used in data communications, wireless infrastructure, advanced computing, consumer electronics and photovoltaic applications.

AXT’s product portfolio encompasses a variety of wafer sizes, dopant concentrations and crystal orientations, tailored to meet the precise specifications of its customers.