21 December 2017
IQE’s full-year revenue to exceed market expectations
In a pre-close trading update for 2017, epiwafer foundry and substrate maker IQE plc of Cardiff, Wales, UK says that it expects full-year revenue to be ahead of market expectations, and not less than £150m (up from £132.7m in 2016). In particular, wafer sales are on track to deliver strong double-digit growth and to continue to diversify. The three primary markets are Photonics, InfraRed and Wireless.
Over the past few years the Photonics business has seen strong double-digit growth, driven largely by new product development and pilot production for a wide range of applications. This growth continued to accelerate sharply in second-half 2017 as a vertical-cavity surface-emitting laser (VCSEL) product development program moved to mass-market production in June. As a result, the Photonics division is on track to achieve about 100% growth in 2017 over 2016. IQE believes that it has created a sustainable lead in this market by virtue of its intellectual property, its ability to scale this complex technology into the mass market, and its dual-site supply strategy. This is further underpinned over the next few years by several, multi-year supply contracts.
The InfraRed business is the global leader in supplying antimonide wafer products, claims IQE, with a history of delivering steady growth and on track to deliver growth in 2017 of about 10%. This business has historically focussed on advanced ‘see in the dark’ technologies in the defence sector, but it is now engaged with major OEM and device companies in product development programs targeting mass-market consumer applications.
Wireless sales are expected to be broadly flat year on year, with a forex (foreign exchange) tailwind mitigated by a reduction in inventories downstream. IQE managed this inventory reduction to enable it to focus capacity on the rapidly expanding photonics division. This was achievable through supplier-managed inventory (SMI) relationships with its customers. These inventory levels will normalize in 2018 as IQE replenishes normal SMI levels.
License income from joint ventures will (as expected) decline from 2016 (which included significant upfront amounts) to no more than £2m for 2017.
Most of IQE’s revenue is denominated in foreign currency. A forex tailwind of about 5% in 2016 turned into an approximate 5% headwind in second-half 2017. However, this is largely presentational as the majority of IQE’s costs are also in foreign currency.
The increase in wafer sales will continue to drive an expansion of wafer margins in 2017. As a result, profit before tax is expected to be ahead of current market expectations. In particular, wafer sales are expected to be materially higher, partially mitigated by lower license income.
This margin expansion is after upfront investment in overheads to establish the new foundry that will begin operations in 2018. Progress with the new foundry is on track, with the first five new tools ordered being scheduled for installation in early 2018, and generating revenue by mid-year. In addition, IQE has agreed terms for a further ten production tools, and is in the process of agreeing the specification for the first five of these.
Net funds are expected to be in the range of current market expectations.
As reported in October, a prior-year tax liability estimated to be £4.2m was identified and settled in full. The firm’s tax advisors have now completed their review of the tax computations and the tax return has been filed. While there were no indications of any further potential omissions, the board commissioned an international independent tax firm to complete a comprehensive review of IQE’s tax compliance in the UK, the USA and Asia. This review is ongoing and has not identified any further unrecorded liabilities. This review is scheduled for completion during Q1/2018.
Additionally, the US Government’s plan to reduce the corporation tax rate from 35% to 21%, if passed, would have a positive long-term financial benefit for IQE, which has operations in the USA. However, this change would give rise to an upfront non-cash deferred tax charge relating to a reduction in the associated deferred tax asset. The size of the potential reduction has not yet been evaluated.
IQE is scheduled to report its full-year results for 2017 on 20 March 2018.
“IQE is on track to achieve record financial results in 2017,” says IQE’s chief executive Dr Drew Nelson. “The adoption of VCSELs in the mass market has been a key revenue driver in the year. IQE has built a strong and sustainable lead in this complex materials technology. We see VCSELs being a long-term growth driver for the group across a diverse range of applications including sensing, LiDAR, optical communications, industrial heating, machine vision and heat-assisted magnetic recording,” he adds.
“VCSEL is just one of many advanced materials technologies that IQE has developed which will drive continuing growth in the near and mid term,” Nelson continues. “IQE has created strong differentiation in the industry through its broad portfolio of materials technologies and its ability to scale and supply reliably in the mass market,” he adds. “Combined with our recent fundraising to pump prime our expansion, IQE’s outlook is for strong, diverse and sustainable growth.”