Temescal

ARM Purification

CLICK HERE: free registration for Semiconductor Today and Semiconductor Today ASIACLICK HERE: free registration for Semiconductor Today and Semiconductor Today ASIA

Join our LinkedIn group!

Follow ST on Twitter

IQE

25 March 2019

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

Epiwafer foundry and substrate maker IQE plc of Cardiff, Wales, UK has reported full-year revenue growth of 1.1%, from £154.6m in 2017 to £156.3m in 2018. Despite being below the guidance of £160m given in mid-November, this has been achieved with a similar manufacturing capacity compared to 2017 and without any license income from sales to joint ventures (which was £1.9m in 2017). Wafer revenue specifically has hence grown by 2.4% from £152.7m.

Wireless wafer revenue grew by 6.6% (exceeding the initial guidance of 5%) from £91.7m to £97.8m (rising from 60% to 62.5% of total wafer revenue). Demand was strong throughout the year, especially for gallium nitride (GaN) products, including £5m from customer last-time buys prior to IQE closing its facility in New Jersey (as part of consolidating US-based GaN manufacturing capacity into the firm’s existing Massachusetts facility). Also contributing to growth was additional manufacturing capacity made available to address gallium arsenide (GaAs) demand, including the replenishment of wireless inventory channels in first-half 2018 that were depleted following the conversion of wireless capacity in second-half 2017 to accommodate the aggressive ramp up of photonics capacity for vertical-cavity surface-emitting lasers (VCSELs) during a period of capacity constraint.

Photonics wafer revenue shrank by 8.1% (compared with the initial forecast for growth of 35-60%) from £47.7m to £43.8m (falling from 31.2% to 28% of total wafer revenue). Demand, especially for VCSEL products, was adversely impacted in first-half 2018 by a substantial inventory correction as excess inventory in the downstream supply chain took longer than expected to be consumed, and the sudden decline in short-term demand for VCSEL wafers in November 2018 also adversely impacted sales and volumes. Despite the decline in revenue year on year, IQE says it has made significant progress to strengthen its position in the VSCEL market, with more than 25 engagements with VCSEL chip companies at varying stages of product development, qualification and production.

Infrared wafer revenue grew by 9.5% (within the initial forecast of 5-15%) from £12m to £13.1m (rising from 7.8% to 8.4% of total wafer revenue). Demand, especially for defence applications, has remained strong, while progress continues to be made in broadening customer engagements into product development for mass-market consumer applications where continued growth opportunities exist.

Revenue from the CMOS++ segment (next-generation compound semiconductor-on-silicon technologies) rose from £1.38m to £1.62m (remaining about 1% of total wafer revenue).

Going forward, the three sectors of CMOS++, Power (power control and switching) and Solar (space PV, concentrated photovoltaics/CPV) – which are all in pre-production – will be combined under an ‘emerging technologies’ umbrella to provide a focus on next-generation applications, and to provide an efficient route to market, says IQE.

“Our disappointing 2018 financial performance was materially impacted by a very substantial VCSEL inventory correction in the first half of 2018 and the sudden disruption in a highly significant supply chain causing greatly reduced short-term demand for VCSEL wafers during the last two months of the year,” notes chief executive Dr Drew Nelson. “Compounding this is the current well-heralded softness in the smartphone market,” he adds.

Excluding license income (which has a 100% margin), the adjusted gross margin on wafer sales fell from 27.5% to 23.5%, reflecting the shift in product mix from higher-margin photonics sales to lower-margin wireless sales.

Adjusted selling, general and administrative (SG&A) rose from £17.3m to £20.7m, reflecting investment for growth alongside IQE’s capital expansion program. This excludes adjusted measures such as charges before tax of £7.2m including:

  • restructuring costs of £3.3m (£1.1m for severance payments and reactor decommissioning plus £2.2m in non-cash impairments) after closing the manufacturing plant in Somerset, New Jersey, and transferring the trade and assets to the plant in Taunton, Massachusetts (requiring process and customer re-qualifications), as part of IQE’s consolidation and expansion of GaN capacity (yielding expected operating cost savings of about £3m per annum from Q2/2019);
  • £1.3m for legal fees from an ongoing patent dispute defence (scheduled for an arbitration hearing this September); and
  • a £4.4m onerous lease provision for unlet and unused space to the end of the lease on the Singapore manufacturing site in 2022.

Operating profit and operating margin were adversely affected by:

  • the currency headwind;
  • production inefficiencies resulting from lower VCSEL production volumes;
  • a higher proportion of lower-margin wireless revenue;
  • material investment in low- and zero-margin VCSEL qualifications for multiple new photonics customers; and
  • Newport foundry pre-production costs for recruitment, increased headcount and training.

Adjusted operating profit hence fell from £26.5m (or £24.6m for wafers alone, excluding the license income) in 2017 to £16m in 2018 (reducing operating margin to 10.2% of total revenue, from 2017’s 17.1%, or 16.1% for wafers alone). By segment, Wireless margin fell from about 15% to 12%, partially reflecting costs associated with switching capacity from Photonics to Wireless in first-half 2018 and the competitive nature of the wireless market. Photonics margin fell from 38% to 26%, reflecting the decline in volume and the focus on lower-margin customer development work as IQE has sought to strengthen its position in the VCSEL market by engaging with all the major VCSEL chip firms. Infrared margin remained robust at about 26% (down only slightly from 2017’s 27%) as the segment continues to grow.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) has fallen from £37.2m to £26.4m, below both mid-November’s guidance of £31m and late January’s reduced guidance of £27.5m.

Cash generated from operations has fallen from £29.7m in 2017 to £17m in 2018. Operating cash conversion was 106% (down from 112%).

Cash invested rose from £28.2m in 2017 to £42.4m in 2018 as IQE continued with a significant two-year investment program (begun in 2017) across its global operations. Specifically, capital expenditure (CapEx) rose from £11.3m to £30.4m as IQE focused on capacity expansion with:

  • construction of the firm’s new flagship 30,000m2 mega epi foundry in Newport, Wales (leased from the Cardiff Capital Region in September 2017 as an empty shell, and dedicated initially to photonics for sensor applications);
  • the installation of additional wireless capacity in Hsinchu, Taiwan;
  • the GaN capacity expansion in Taunton, Massachusetts; and gallium antimonide (GaSb) and indium antimonide (InSb) infrared production expansion in Milton Keynes, UK.

These projects will greatly increase production capacity and operational efficiency, says IQE. In addition, the firm is continuing to invest in technology and intellectual property with cash expenditure totaling £12m.

Free cash outflow was hence £25.3m (compared with inflow of £40.9m in 2017). Net cash has therefore fallen during 2018 from £45.6m to £20.8m. After year-end 2018 (on 24 January 2019), IQE secured a three-year $35m multi-currency revolving credit facility with HSBC Bank.

“2018 represented a year of transformation, consolidation and preparation to position our business to maximise the opportunities ahead,” says Nelson.

“During the last two years, great efforts have been made to consolidate our research, development and manufacturing activities, enabling the transfer of technologies and processes. This in turn has led to the closure of our activities in Bath, UK and Somerset, New Jersey, with activities being transferred to other IQE facilities whilst maintaining consistency of supply with our customer base,” says Nelson.

“Whilst it is intended to maintain specialist manufacturing and development activities at some IQE sites, we have been implementing a long-term strategy to focus our high-volume manufacturing at four key ‘production-optimized’ facilities in Greensboro (North Carolina), Taunton (Massachusetts), Hsinchu (Taiwan) and our new flagship operation in Newport (Wales, UK),” he adds.

“We are also focussing on our three primary market sectors of wireless (connectivity, 5G), photonics (sensors, optical communications) and infrared (high-end imaging, healthcare technologies).”

Investment in product development in 2018 focused on materials directly addressing next-generation 5G wireless and advanced photonics applications including sensing:

  • A milestone first production order of US$250,000 was received for edge-emitting distributed feedback (DFB) lasers employing the firm’s nano imprint lithography (NIL) technology.
  • The option to acquire the cREO (crystalline rare-earth oxide) technology and IP portfolio for $5m from Translucent Inc of Palo Alto, CA, USA was exercised in March 2018 and satisfied in September with a share issuance.
  • A long-term supply contract with a tier-1 wireless customer was completed, securing an extended range of products and increased share of their epiwafer requirements.
  • IQE completed the sublet of 25,000ft2 of space in the new Newport Facility to the Compound Semiconductor Applications Catapult (underpinning IQE’s continued contribution to creating a global center of excellence for compound semiconductors in South Wales).

“Revenue increases in 2019 will be driven by the return to strong growth of our photonics business and emerging opportunities in 5G and will be soundly based on operational improvements, rationalization and capacity expansions that have been in progress for the last two years and which will complete in first-half 2019,” says Nelson.

The new mega foundry in Newport has opened, with 10 MOCVD systems now installed (in a first-phase construction designed for up to 20 systems). Five systems have already been released for product qualification and the remaining five are in the process of final commissioning. Throughput, uniformity and yields are significantly better than originally expected at the outset of the project. Twelve customers are currently qualifying or have qualified the new facility. The first and largest has now completed all product testing and reliability, has conducted a detailed final audit and has released the site for mass production. Several others are in the final stages of production releases.

The expansion of the facility in Hsinchu, Taiwan (which will boost its wireless capacity by 40%) will complete in Q1/2019. Massachusetts (GaN) and Milton Keynes (infrared) capacity expansions will also both complete by the end of first-half 2019.

“We have also made considerable investment in engaging with more than 25 VCSEL chip companies, underscoring IQE’s exceptional leadership position in the emerging VCSEL supply chains based on our technical excellence, proven ability to ramp and dedicated commitment to install capacity, with 12 companies already actively qualifying the new facility,” says Nelson.

“Complementing this investment in physical infrastructure, we closed on the acquisition of the cREO technology and IP portfolio from Translucent Inc. We have also continued to invest in our own internal R&D projects including materials for high-performance HBTs, porous RF switches, and crystalline RF filters for 5G, next-generation VCSELs and diffusers for VCSELs, and infrared materials for high-volume consumer markets,” Nelson adds.

With the New Jersey site closure, capacity expansion projects in Massachusetts and Taiwan and the start of production at the Newport epi foundry all completing in first-half 2019, IQE reckons that it has made significant progress in positioning itself for operational execution at scale.

Given the market opportunity and IQE’s operational readiness, the outlook for 2019 and beyond remains strong. Short-term headwinds are (1) the unwind of inventory levels in the VCSEL supply chain (given the sudden disruption experienced in Q4/2018) and (2) general market softness in the semiconductor industry in general and the mobile handset market in particular. These will affect revenue and profitability in first-half 2019. However, IQE believes that this is a temporary impact and there are strong signs that significant growth can be achieved in second-half 2019 and into 2020 in both the Photonics and Wireless business units. Key drivers for this growth will be (1) broader adoption of 3D sensing VCSELs across multiple devices and multiple OEMs and (2) anticipated 5G technology deployments into products and infrastructure.

For 2019, IQE expects revenue growth (on a $US constant-currency basis) of 9%, including growth of more than 50% in Photonics and 15% in Infrared outweighing a 15% drop for Wireless. For 2020, IQE expects Wireless to return to growth, continued Photonics growth, and consistent growth in Infrared. Over a 5-year period, the firm expects compound annual growth rates (CAGRs) of 0-20% for Wireless, 40% for Photonics and 5-15% for Infrared.

During 2019, the H1:H2 split of revenue is expected to be ~40:60, influenced by the handset market softness in the first-half 2019, and expected completion of Photonics customer qualifications in first-half 2019 leading to higher production volumes in second-half 2019.

IQE expects adjusted operating margin of over 10% in 2019, with first-half in particular being affected by general market softness and high levels of customer qualification work associated with future revenue streams. Operating profits are expected to increase towards the end of 2019 and in 2020 and beyond due to the expanding revenue opportunity and IQE’s ability to drive industry-leading production yield.

IQE says that, to fuel this growth, it continues to be committed to investing in capacity. For example, when fully occupied, the Newport facility will house up to 100 high-volume production tools comprising both MOCVD and MBE systems. IQE previously operated about 100 legacy tools across its global facilities, so the expansion will create almost three times the manufacturing capacity. To ensure that the growing revenue opportunities can be captured, capital expenditure will rise to about £40m in 2019 before dropping back to a more normal £15m in 2020.

“The investment we have made in site rationalization, increased production capacity and new products and the opportunity that this has created in the key sector areas of sensing, connectivity and energy will deliver margin expansion, growing profitability and increasing free cash flow in 2019 and beyond,” concludes Nelson.

See related items:

IQE reduces 2018 guidance for revenue from £160m to £156m and for adjusted EBITDA from £31m to £27.5m

IQE reduces 2018 Photonics wafer revenue guidance from 35-50% to 11% after VCSEL-making customer cuts guidance

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

IQE's record full-year 2017 results driven by adoption of VCSEL technology in mass-market consumer applications

Tags: IQE

Visit:  www.iqep.com

Share/Save/Bookmark
See Latest IssueRSS Feed

EVG