IQE’s first-half 2019 revenue down 9% year-on-year

For first-half 2019, epiwafer foundry and substrate maker IQE plc of Cardiff, Wales, UK has reported revenue of £66.7m, down 9% year-on-year from £73.4m in first-half 2018, impacted by a weak smartphone handset market and reduced demand in the context of a technology market slowdown, international trade tensions and fall in demand from a major indium phosphide (InP) laser customer.

Wireless revenue fell by 29% from £42.5m to £30.1m. CMOS++ revenue fell from £0.79m to £0.53m. However, Photonics revenue grew by 18% from £30.1m to £35.5m (overtaking Wireless).

Since last year, segmental information has been restated to reflect changes in IQE’s operating and reporting structure following the establishment of an Executive Management Board that has consolidated responsibility for primary markets and operating segments under the leadership of an executive VP, global business development, Wireless and Emerging Products and an executive VP, global business development, Photonics & Infrared. Certain revenues and associated costs pertaining to a specific site, which has shared production, have also been reclassified between segments to reflect a change in allocation methodology.

Adjusted operating loss of £1.9m (compared with a profit of £7.6m in first-half 2018) reflects negative operating leverage from a cost base scaled for volume which includes an increase in depreciation and amortization of £2.4m resulting from the investment in capacity.

Due to the operating loss, plus a one-off non-cash deferred US tax charge (resulting from a shift in the balance of future projected manufacturing between the US and UK/Asia), earnings per share (EPS) was negative at 1.29p, compared with +0.76p in first-half 2018. Due to the lower trading volumes, cash generated from operations has fallen from £7.6m to £4m.

“IQE has delivered results which are in line with the trading update from June this year,” notes CEO Dr Drew Nelson.

IQE reiterates its full-year guidance “despite a number of challenging market conditions facing our industry in the first half of 2019,” Nelson says. “We remain confident in IQE’s ability to adapt to global supply chain shifts and have made significant strategic and operational progress with our global expansion projects,” he adds. “This includes completing the infrastructure phase at our Mega Foundry in Newport, South Wales as well as the capacity expansion in Taiwan and Massachusetts, USA. These investments in IQE’s global manufacturing footprint, coupled with IQE’s unique breadth of compound semiconductor materials experience and IP portfolio, position the Group well for future growth and margin expansion as volumes increase, driven by the growth opportunities in 5G and connected devices.”

Operational highlights are listed as:

Major investment program substantially completed:
- The infrastructure phase at Mega Foundry in Newport, South Wales is now finished, with ten tools installed (and the option to add up to 90 more);
- Capacity in Taiwan has been increased by 40%, enabling growth in revenue with Asian supply chains;
- Investment in gallium nitride (GaN) capacity in Massachusetts will capitalize on upcoming 5G infrastructure deployments.

Start of production at Newport Mega-Foundry:
- First mass-production order received from IQE’s leading vertical-cavity surface-emitting laser (VCSEL) customer;
- Extensive product qualifications ongoing with 12 other chip customers across broad supply chains;
- Start of production (post half-year end) with a second customer, serving Android supply chains;
- Signature of a contract extension (post half-year end) with one of IQE’s largest VCSEL customers, running through to the end of 2021. In addition, two other existing contracts have also been extended, with several other new contracts anticipated.

5G product development:
- Continued strong results in the development of filters and switches for 5G, based on IQE’s patented cREO technology, with customer engagement for commercialization proceeding well;
- Introduction of a full-service distributed feedback (DFB) laser for high-speed datacoms using nano-imprint lithography (NIL).

New management structure implemented to support growth ambitions and scalability of operations:
- Dr Drew Nelson, chief executive officer (CEO);
- Tim Pullen, chief financial officer (CFO);
- Dr Rodney Pelzel as executive VP, Global Innovation (CTO);
- Keith Anderson as executive VP, global operations (COO);
- Dr Wayne Johnson as executive VP, global business development, Wireless and Emerging Products;
- Dr Mark Furlong as executive VP, global business development, Photonics and InfraRed.

Development of the IQE’s board, with the appointment of:
- Phil Smith CBE as chairman;
- Carol Chesney (FCA) as non-executive director & chair of the Audit Committee.

Post-half-year-end (on 29 August) increase to available credit facilities:
- £30m asset financing facility in place (provided by HSBC), increasing total available facilities to about £57m (with £12m drawn down as of 30 June).

IQE’s guidance remains in line with the trading update it gave on 21 June. The three key factors affecting revenue outlook for 2019 are:

continued uncertainty related to the geo-political landscape, the effects on global technology markets and, in particular, the confidence for supply chains to rebuild inventory;
the market for smartphone handsets in second-half 2019;
the speed of formation of new Asian supply chains, the associated product qualifications and volumes of initial orders.

Balancing these factors, for full-year 2019 IQE therefore reiterates its revenue guidance of £140-160m (compared with 2018’s £156.3m). By segment, Wireless is expected to fall by 25-30%, while Photonics grows by more than 30%.

Second-half revenue is expected to comprise 52-58% of full-year revenue. So, given the additional contribution against a largely fixed cost base, a return to adjusted operating profitability is expected in second-half 2019. This will be strengthened by cost-management actions that support the strategic direction of IQE.

EBITDA margin will remain low in full-year 2019 as the utilization of facilities remains low versus capacity and a high number of product qualifications continue. Full-year adjusted operating margin guidance (whereby IQE expects to remain profitable in 2019, but with adjusted operating margin significantly below the original guidance of over 10%) is reiterated.

With the infrastructure phase of the capital investment program substantially complete in first-half 2019, full-year CapEx guidance of £30-40m is reiterated. The range relates to the timing of the decision to invest in further tools at either Newport or Taiwan (which is discretionary, depending on prevailing market conditions). IQE says that it has sufficient installed capacity to underpin significant revenue growth.

See related items:

IQE announces qualification and initial production of HBTs at Taiwan facility for Asian customer

IQE cuts 2019 revenue guidance to £140-160m due to impact of Hauwei export ban

IQE’s wireless wafer growth in 2018 outweighs VCSEL-driven drop in photonics

IQE’s first-half 2018 revenue growth driven by Photonics segment

Tags: IQE

Visit: www.iqep.com