21 March 2018
IQE's record full-year 2017 results driven by adoption of VCSEL technology in mass-market consumer applications
© Semiconductor Today Magazine / Juno PublishiPicture: Disco’s DAL7440 KABRA laser saw.
In its final results for full-year 2017, epiwafer foundry and substrate maker IQE plc of Cardiff, Wales, UK has reported revenue of £154.5m, up 16.4% on 2016’s £132.7m (and above the guidance of “not less than £150m”). In particular, due to continued diversification, wafer revenue rose by 21.1% from £126m to £152.6m, with strong growth in high-margin product lines (particularly Photonics).
- Photonics revenue rose by 109%, more than doubling from £22.8m to £47.6m, due largely to the adoption of IQE’s vertical-cavity surface-emitting laser (VCSEL) technology for mass-market consumer applications that ramped strongly in second-half 2017 (for which wafer revenue was up more than 160% year-on-year) as the development program moved to mass-market production in June. “IQE leveraged its expertise of mass-market wireless supply to rapidly ramp the supply of this complex photonics material into unprecedented volumes,” says the firm. The supply of materials into this ramp was delivered under multiple multi-year contracts.
- InfraRed revenue rose by 14% from £10.6m to £12m (exceeding the forecasted 10% growth).
- Wireless revenue was broadly flat at £91.6m (compared with 2016’s £91.3m), affected by a £3m managed reduction in supplier-managed inventory (SMI) to focus capacity on the ramp in Photonics (SMI inventories are expected to replenish in 2018).
- CMOS++ revenue was flat, remaining at £1.4m.
As a consequence of these growth rates, wafer sales continued to diversify, with Photonics rising from 18% of total revenue in 2016 to 31% in 2017, while Wireless fell from 72% to 60%, and InfraRed remained at 8%, and CMOS++ remained at 1%.
License income from sales to joint ventures fell (as expected) from 2016’s £6.7m (which included significant upfront license fees) to £1.9m in 2017.
Excluding license income, gross margin on wafer sales rose from 21.8% to 24.1%, primarily reflecting the benefit of a favourable sales mix with a greater proportion of higher-margin Photonics sales.
Selling, general & administrative (SG&A) expenses rose from £16.6m to £21.6m, reflecting investment for growth.
Adjusted operating profit rose from £22.1m to £26.4m, reflecting an increase in wafer-related profits from £15.5m to £24.5m (due to high operational gearing and the more profitable sales mix) partially offset by the £4.8m reduction in license income.
Adjusted operating margins for the primary segments were 15% for Wireless, 38% for Photonics and 27% for InfraRed. “These represent sustainable margins, and hence provide the opportunity for future margin expansion through continuing diversification of revenues,” believes IQE.
Conversion of adjusted operating profit into operating cash rose from 102% to 113%.
In tune with the firm’s diversification strategy, to address near-term and foreseeable growth opportunities, capital investment has been increased from £19.1m to £28.2m. This comprises:
- Capital expenditure (CapEx) up by £0.3m to £11.3m in cash paid directly to equipment suppliers. In addition, IQE financed £6.6m of CapEx via finance lease (where the bank settled the purchase cost directly with the equipment suppliers). This finance lease was settled prior to the year end (and title to the equipment passed to the group), so the cash flow is classified as part of the repayment of borrowings. Total cash invested in equipment was hence £17.9m (and total investment was hence £34.8m).
- Investment in product development up by £8.2m from £6.3m to £14.5m (due mainly to VCSEL technology that ramped into mass-market production through second-half 2017).
- Investment in intangible assets up by £0.6m to £2.4m. This comprises the purchase of patents from third parties (including the purchase of a portfolio of 54 patents relating to quasi photonic crystals reported in December), the cost of patenting internally generated IP, and software.
In November, IQE issued 67.9 million new ordinary shares, raising gross proceeds of about £95m, primarily to finance a capacity expansion program to deliver the scale needed to capture multiple high-growth market opportunities (particularly the continuing ramp in demand for VCSELs as adoption broadens) as well as enabling the acceleration of product development. Part of the proceeds went to repay outstanding borrowings in order to save interest charges. Hence, compared with net debt of £39.5m at the end of 2016, at the end of 2017 IQE had net funds of £45.6m.
“We continue to expand capacity to meet forecast increases in demand, as well as driving throughput and yield improvements to release latent capacity and drive margin expansion in our existing business,” says CEO Dr Drew Nelson.
Central to the capacity expansion is the creation of a new ‘Mega Foundry’ in progress in Newport, South Wales, which will house up to 100 tools. The first five tools are already installed and on track for production in second-half 2018. A further five tools should be installed and commissioned by end the end of Q3/2018. “This is an incredible achievement given that the initial building works only began in September 2017,” comments Nelson. Preparation is underway to acquire at least a further 10 tools in the next 12-18 months, as demand requires. The new foundry is being supported by £37.9m from the Cardiff Capital Region (CCR) City Deal’s Wider Investment Fund, which (following an agreement last May) is funding construction of the infrastructure. IQE is leasing the building under an 11-year lease, which has a 3-year rent-free period and an option to purchase. This support has enabled IQE to focus its own investment on adding new tools, which requires upfront investment in both OpEx and CapEx. The lead time to get new tools into production is 9-12 months, so a fully utilized tool making VCSELs has a payback of about one year.
Progress with technology development includes the demonstration of key enabling technology for high-performance wireless filters; cREO for integration of compound semiconductor materials technologies on silicon; and quasi photonic crystals and nano-imprint lithography for a wide range of optical technologies including distributed feedback (DFB) lasers, integrated 3D sensing solutions and silicon photonics applications.
Also, qualifications are in progress with IQE’s gallium nitride on silicon (GaN-on-Si) technology for base-station and other high-power RF applications (providing a route to accelerating wireless growth).
Customer interactions are broadening for InfraRed, where IQE is now working with major OEM and device companies in developing InfraRed products for mass-market consumer applications.
There has also been continued progress by IQE’s joint ventures in the UK and Singapore. Significantly expanding external customer engagements and improving financial performance reflect the achievement of key milestones for these early-stage businesses.
Driven by expansion of existing business and qualifications of new business streams, in full-year 2018 IQE expects wafer revenue growth of 35-60% in Photonics (based on expansion of products currently in production and the completion of ongoing qualifications), up to 5% in Wireless (with supplier-managed inventories replenishing, and potential for revenue expansion as GaN products make stronger contribution), and 5-15% in InfraRed (with customer engagement broadening).
In addition, in 2019 and beyond IQE believes that there is potential for strong growth from the following:
- increasing VCSEL adoption for 3D sensing accelerating across multiple smartphone OEMs, the introduction of world-facing 3D technology, and the first deployment of LiDAR (light detection and range-finding) and several other high-volume sensing applications;
- increasing deployment of indium phosphide (InP) for high-speed fiber-to-the-premises (FTTx) and data-center applications;
- increasing compound semiconductor content in 5G communication systems and increasing adoption of GaN for base-station and other high-power RF applications (including consumer-driven opportunities);
- increasing use of Infrared products in mass-market consumer applications;
- revenues from both the power switching and non-terrestrial solar markets;
- the adoption of IQEs broad IP portfolio into multiple commercial applications utilizing cREO (rare earth oxide), nano-imprint lithography (NIL) and quasi photonic crystal (QPC) technologies; and
- multiple qualifications in progress with DFB laser products.
“The depth and breadth of customer engagements in Photonics provides a solid platform for continuing strong growth, with several new product launches forecast over the next 12-18 months for multiple OEMs,” says Nelson.
Based on existing products, IQE expects compound annual growth rates (CAGRs) over the next 3-5 years of up to 10% in Wireless, 40-60% in Photonics, and 5-15% in InfraRed, with the potential for higher growth through new product introductions.