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Mixed Fortunes For UK Compound Effort

Although epiwafer foundry IQE is returning to financial health, the UK's two biggest compound semiconductor chip facilities are still struggling to make ends meet. Michael Hatcher evaluates their performance.

For a country that has such a strong tradition of innovation and some of the world s leading universities, commercial compound semiconductor facilities are thin on the ground in the UK.



Manufacturing is now largely banished to low-cost sites in the Far East, and the only major influences on the global III-V stage are the epiwafer foundry IQE and the chip fabs owned by Filtronic and Bookham, with Bookham based in California. These three are complemented by a smattering of equipment and materials firms like Oxford Instruments Plasma Technology and EpiChem (now owned by Sigma-Aldrich), and smaller fab operators such as the Centre for Integrated Photonics, Intense Photonics and CST Global.

For the publicly listed IQE, Bookham and Filtronic, the past couple of years have been tough. But trends in these three companies individual share prices over the past year reveal a different story in each case. Things are looking up for IQE, but problems seem to be mounting for Bookham and Filtronic.

Investors have responded positively to IQE s global-expansion strategy. Since February 2006, the firm s stock price has risen steadily from 11 p (20 ¢), peaking at 20 p early this year, before settling back to just over 18.50 p at the time of writing – easily outperforming both the AIM index on which it is listed and the electronics sector.

In addition to acquiring Emcore s electronic materials division in New Jersey and Singapore s MBE Technology over the past year, IQE has steadied its core business, and demand across all sectors is looking strong. It now has a global presence and can multi-source certain products if required, and has access to some key new technologies – in particular GaN HEMT and BiFET epiwafers. In its latest trading update, IQE said that its future BiFET products should prove beneficial to sales revenue later this year.

Next to IQE, Filtronic s share-price performance has looked extremely volatile. Valued at £1.85 a year ago, the stock has endured a series of peaks and troughs in what has been a tumultuous 12 months for shareholders of the GaAs RF chipmaker.

Filtronic s stock price peaked at over £2.29 in early July 2006, shortly after executives revealed plans to sell off the largest part of the business – its wireless-infrastructure division. But that boost was short-lived, and the stock soon tumbled back below £1.80. After a late summer recovery, the sale of the infrastructure unit to US-based Powerwave appeared to spark another slump, and was followed by a change in CEO, as founder David Rhodes retired and CFO Charles Hindson moved into the corner office.

Since last summer, Filtronic has been forced to scale back its anticipated ramp of GaAs PHEMT switches because of a huge overestimate of demand. Unfortunately, that miscalculation has come at a big cost – Filtronic had already ordered lots of chip manufacturing equipment that it does not now need, resulting in contract-cancellation charges of £7 million.

Those charges knocked all the shine off of Filtronic s latest trading statement. For the six months leading up to November 30, 2006, the firm s compound semiconductor division enjoyed a strong increase in sales revenue to £15 million, compared with only £8.5 million for the same period in the previous year.

At first glance, the division s underlying operating loss also looked to be much improved – cut from nearly £5 million one year ago to just £1.5 million in the last six months. But when the equipment cancellation charges were added, that operating loss swelled to £8.5 million.

Filtronic still appears to be heavily reliant on RF Micro Devices (RFMD), which has significantly increased its own in-house production of PHEMT switches in recent months. The good news for Filtronic is that RFMD will continue to source PHEMTs from the UK foundry, as it works to keep up with strong demand from companies like Nokia.

However, Filtronic chairman John Poulter now says that lower-than-expected demand for its compound semiconductor devices will continue for the first half of 2007 at least, with no likely growth in revenue. "This is not an acceptable situation, and [the Filtronic board] will be pursuing further measures in the coming months," concluded Poulter.

While Filtronic executives will now be facing some tough choices, the company appears to be in better shape than Bookham. Bookham s latest trading update had a depressingly familiar ring to it, and recent cutbacks include the total shutdown of its 2 inch InP line in Caswell, and of development facilities in Ottawa. Company executives say that the cutbacks will save Bookham $6–7 million each quarter. While that estimate seems to bode well for Bookham, it still may not be enough to make the company profitable.

A year ago, Bookham s NASDAQ-listed stock price boomed suddenly to a long-time high of $9.50 on the back of a generally resurgent market for optical telecommunication components. But that price was short-lived, and the stock has mostly hovered between $2.00 and $4.00 since that time. Needham & Company is maintaining a "buy" rating on Bookham, although even it has become more pessimistic, reducing its target price from $6.00 to $4.00. Considering Bookham s apparent abandonment of a merger with Avanex, which could have created a stronger company, even a $4.00 stock price is now looking wishful.



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