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16 September 2014

IQE increases underlying profit in first-half 2014 despite 17% year-on-year drop in revenue

After giving a trading update for first-half 2014 in late July, epiwafer foundry and substrate maker IQE plc of Cardiff, Wales, UK has confirmed revenue of about £52m, down 17% on first-half 2013’s £63m. This primarily reflects an industry-wide inventory de-stocking of about £8.5m plus the impact of a strong sterling-to-US dollar exchange rate (the latter accounting for £4.2m, or 8% of the 17% decline).

Despite this, adjusted gross margin has risen from 20.5% to 24.5%, attributed to cost reductions, efficiency gains, economies of scale and product mix.

EBITDA (earnings before interest, taxes, depreciation and amortization) was up 6% year-on-year (more than the expected 5%) from £10.5m to £11.1m. Despite the lower revenue, adjusted profit before tax (PBT) rose by 11% from £5.1m to £5.6m, which includes the benefit of cost reductions realised from the firm’s restructuring program (which is on track to deliver annual recurring synergies in excess of £7m per annum). However, after £4.8m in non-cash exceptional charges and £3.1m in cash costs of restructuring (which included redundancy costs, requalification costs and the duplication of overheads to support the transition of customers between production facilities), the loss before tax (LBT) was £2.3m (compared with a profit of £2.5m a year ago).

Despite being up from £34.4m at the end of December 2013, net debt of £35.5m is still down from £37.7m at the end of first-half 2013 (and better than the targeted £36m).

“The group has again demonstrated the resilience of its business model through the delivery of continued growth in profitability despite the lower-than-expected revenues resulting from adverse effects of a significant inventory correction in the wireless industry and the translational effect of a strengthening of the sterling exchange rate against the US dollar,” says IQE’s chief executive Dr Drew Nelson.

In constant currency (dollars), Wireless revenue has fallen by 17% from $82.8m (85% of total revenue) a year ago to $69m (79.5% of total revenue). “IQE is unquestionably the global leader in the manufacture and supply of the industry's broadest portfolio of advanced semiconductor wafer products for the wireless sector [with market share of about 55%],” says Nelson. Wireless demand recovered during Q2/2014 from the customer inventory de-stocking. “Wireless will continue to be a long-term growth driver for our business as increasing connectivity continues to drive increasing demand for compound semiconductor devices,” he adds.

Photonics revenue has risen by 22% (more than the expected 20%), from $13.8m (14.2% of total revenue) a year ago to $16.8m (19.4% of total revenue). Growth is largely from the increasing adoption of vertical-cavity surface-emitting lasers (VCSELs), as well as indium phosphide (InP)-based devices. “Our technology leadership and credibility in photonics are translating into contract wins,” says Nelson. “This is being driven by a range of end-market applications including optical communications for backhaul, fiber-to-the-home [particularly in China], and data centres, gesture recognition and sensing, and industrials applications,” he adds. “This growth will be further supported with the transition from the development phase into commercial production for high-efficiency solar power (CPV), anticipated for the second half of 2014.” With reliability testing finished by the end of July and cell qualification completed, supply chain qualifications are at an advanced stage, and the first production orders are expected to yield revenue in second-quarter 2014, prior to an expected strong production ramp-up in 2015.

“All of our lead indicators are pointing in the right direction,” notes Nelson. “The destocking was concluded during Q2 and customers are forecasting an upbeat second half. Our investment in photonics technology is delivering tangible benefits, and has resulted in multiple contract wins. Our CPV [concentrated photovoltaic] business is in the final stages of end-customer qualification and remains on track to move from final development and customer qualification to production in second-half 2014,” he adds.

The firm’s restructuring is now largely complete and should deliver further recurring savings from second-half 2014 onwards. “Despite anticipating lower full-year revenues due to the inventory corrections during the first half, coupled with changes in product mix, the board remains confident in the group being on track to deliver full-year earnings in line with expectations,” comments Nelson.

“Having established a world-leading position in the wireless communications market, IQE is beginning to replicate this across our other markets including photonics, infrared, power, solar and CMOS++, the last of which is focussing on advanced technologies combining the simplicity of CMOS with the power of compound semiconductors,” says Nelson. IQE’s CMOS++ development comprises III-V materials such as gallium arsenide, gallium nitride or antimonides (e.g. InSb) on silicon wafers. “We have also made significant technical and commercial progress in areas such as gallium nitride (GaN) development and we are well positioned to enjoy a transition to volume production in the next 2-3 years,” Nelson says. IQE expects the silicon industry to transition to III-Vs-on-Si in 2017-2020.

In addition, in mid-September, IQE entered into a memorandum of understanding (MOU) with Taiwan’s WIN Semiconductors Inc (the world’s largest pure-play gallium arsenide foundry) and Singapore’s Nanyang Technological University (NTU) to form the Compound Semiconductor Development Centre (CSDC) at IQE’s facility in Singapore, to be jointly owned by IQE, WIN, NTU, local management and key academics.

The project forms part of IQE’s reorganization plan and rationalization of its global facilities, which is on track to deliver recurring savings of more than £7m per annum. However, as part of its contribution to the joint venture, IQE will provide facilities, equipment and IP on favourable terms to CSDC. The firm has hence booked provisions of £5.7m for asset impairment, comprising the transfer of tools to CSDC and £6.2m for the lease of existing buildings and facilities.

See related items:

IQE agrees MOU with WIN and Nanyang for Singapore centre of excellence

IQE’s first-half revenue down 17% year-on-year to £52m, but profitability up

IQE’s revenue and profits rise strongly, driven by robust wireless business and diversification

IQE expects revenue growth of 43% for 2013 to record £126m

IQE’s first-half revenue up 80% year-on-year to nearly £63m

Tags: IQE WIN Semiconductors

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