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IQE

30 March 2020

IQE pre-announces 2019 financial performance in line with November trading update

Following advice to its auditor KPMG from the Financial Reporting Council (FRC) in the midst of the COVID-19 Coronavirus outbreak, epiwafer foundry and substrate maker IQE plc of Cardiff, Wales, UK has delayed reporting its full-year 2019 financial results (which were due for publication on 24 March) for at least two weeks. Instead, IQE has provided a trading update (representing a pre-announcement based on unaudited financial accounts) for 2019 and for first-quarter 2020.

Revenue is £140m, down 10% on 2018’s £156.3m but in line with November’s revised guidance of £136-142m (which was reduced from June’s guidance of £140-160m). By segment, Photonics grew by 4% and Wireless fell by 23%. The year-on-year reduction in revenue was primarily due to two customers, one in Wireless and one in Photonics.

Compared with a profit of £16m in 2018, 2019 yielded an adjusted operating loss was £4.7m, in line with the November trading update guidance, reflecting negative operating leverage and an increase in depreciation and amortisation from targeted investments.

Capital expenditure (CapEx) rose from £30.4m in 2018 to £31.9m in 2019 (as expected, towards the bottom end of the initial guidance of £30-40m), as IQE completed the infrastructure phase of the capacity expansions at its Newport, Taiwan and Massachusetts sites.

Adjusted operating cashflow was £16.5m (down from 2018’s £17m), representing 100% adjusted EBITDA to adjusted operating cash conversion.

Net debt (excluding lease liabilities of £16m) as at end-December 2019 was near the lower end of the the November trading update’s £15-20m guidance range (against increased debt facilities of £57m announced in June), reflecting strong working capital management.

Operational highlights in 2019 are listed as follows:

Infrastructure phase of the capacity expansion program completed:

  • The Mega Foundry in Newport, South Wales entered production for 3D sensing products in May following full and comprehensive end-to-end supply-chain qualification with IQE’s lead vertical-cavity surface-emitting laser (VCSEL) customer.
  • Capacity in Taiwan has been increased by 40%, enabling growth in revenues within expanding Asian markets. Five tools are now qualified for wireless products for a major Taiwanese foundry, with four currently in production.
  • Consolidation and investment in gallium nitride (GaN) capacity in Massachusetts has been completed, to capitalize on upcoming 5G infrastructure deployments.

Newport Mega-Foundry 3D sensing production and qualification progress:

  • The foundry was in mass production for the existing major supply chain on four tools at year-end, with stable demand forecast through first-half 2020. Currently five tools are in production for this customer.
  • Commencement of production in second-half 2019 is expected with a second major customer serving Android supply chains.
  • Device and module qualification was announced in second-half 2019 with a third major customer related to Android supply chains, and other Android qualifications are ongoing.

Next-generation product development:

  • IQE made continued strong progress in the development of filters (based on the firm’s patented cREO technology) and switches for 5G.
  • IQE introduced 10G and 25G full-service distributed feedback (DFB) laser for high-speed datacoms using nano-imprint lithography (NIL), and 10G and 25G avalanche photodiodes (APDs), both for high-speed datacoms serving the 5G infrastructure and data-center markets.
  • Continued Photonics roadmap progress was made, including best-in-class results for long-wavelength VCSELs for future smartphone and LiDAR deployment plus lasers and sensors for environmental and health monitoring.

Evolution of board and executive management to support growth ambitions and scalability of operations:

  • Phil Smith CBE was appointed as chairman;
  • Carol Chesney FCA was appointed as non-executive director and chair of the Audit Committee;
  • Tim Pullen ACA was appointed as chief financial officer (CFO);
  • The eecutive management board was established and is fully operational.

Increase to credit facilities to support navigation of challenging market conditions:

  • £30m asset financing facility put in place, increasing total available facilities to ~£57m (£25m drawn down at 31st December 2019).

“In 2019 IQE faced extremely challenging market conditions and our financial performance reflects the considerable disruption in global semiconductor markets and supply chains, caused by the geo-political environment,” says IQE’s CEO Dr Drew Nelson.

“We remain confident in IQE’s ability to adapt to changes in global technology markets as a result of our geographic and product diversity. We have also made significant strategic and operational progress in 2019, including the completion of the infrastructure phase of our global expansion projects,” he adds.

“The spread of Coronavirus has introduced significant near-term uncertainty into global economies and markets. However, to date we have not experienced any significant disruption to our current production or order intake relating to coronavirus, but we have implemented appropriate business continuity measures and we are well placed to withstand the near-term market uncertainty,” Nelson continues. “We continue to monitor this fast-moving situation very closely”.

First-quarter 2020 trading update

IQE says that it has been trading in line with expectations in first-quarter 2020. “Forecasts from customers are relatively strong, with high levels of production in March in particular for Wireless products and 3D sensing VCSELs,” the firm notes. The revenue trajectory for March is currently, on a weekly run rate, significantly higher than average monthly revenue for 2019.

2020 outlook

Concerns over the spread of Coronavirus (COVID-19) are currently creating significant near-term uncertainty across global markets, notes IQE. The firm’s production has so far not been affected by any disruption, with all sites continuing to operate as normal.

“There is a still-evolving risk to future production at IQE or at others within our supply chains. However, as a critical technology supplier, IQE is less likely to be affected by ‘lockdown’ scenarios than other businesses,” believes IQE. “This is evidenced by our classification as a ‘critical infrastructure provider’ in both the States of Pennsylvania and Massachusetts, where the Department of Homeland Security deems IQE to have a ‘special responsibility to maintain (our) normal work schedule’,” the firm adds.

“The effects of Coronavirus on global economic output in 2020 and on semiconductor demand are as yet uncertain. Given the significant current levels of uncertainty, we are unable to provide more explicit guidance at this point in time,” IQE cautions.

IQE has access to material debt facilities, should they be required in the event of a significant downturn. “IQE has a long-standing and trusted relationship with our bankers HSBC, who remain supportive,” the firm notes. “We are in close ongoing dialogue regarding the evolving effects of Coronavirus on supply chains and markets. In the event of a significant slowdown, we will work proactively with HSBC to ensure the ongoing liquidity of the group,” it adds.

2020 investment guidance

With the infrastructure phase of the capital investment program completed in 2019, the property, plant & equipment (PPE) cash capex guidance for 2020 is set at less than £10m. IQE says that it will continue to invest in R&D programs to underpin future growth opportunities, with intangibles capitalizzation in 2020 expected to be less than £10m. Capital spend can be reduced further if conditions require additional cash preservation measures.

See related items:

IQE cuts 2019 revenue guidance from £140-160m to £136-142m due to inventory reductions by US RF chip customers

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

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