CS shares enjoy a tremendous twelve months
Topping this year's shareprice leaderboard are the suppliers of epiwafers, substrates and MOCVD tools
BY RICHARD STEVENSON
If you own a portfolio of shares in compound semiconductor companies, you'll be pleased by performance over the last 12 months. While it's not been as stellar as it was seven years ago, when shares in every firm listed on the Compound Semiconductor Shareprice Leaderboard delivered double-digit growth, the majority of companies have outperformed the technology-rich NASDAQ "“ and even that has shot up by nearly 27 percent in the last year.
Example of success include the two industry heavyweights Qorvo and Skyworks, which have delivered gains in share price of 51 percent and 49 percent, respectively, during the twelve months up to the end of this April. Last year, those performances would have been good enough to secure the second and third spots on the table, but this year it's placed them eighth and ninth.
Topping the table this year is epiwafer supplier IQE, which has seen its share price rocket by more than 200 percent; next on the list is substrate maker AXT, with an appreciation of just over 160 percent; and third is MOCVD manufacturer Veeco, which has seen its share price climb by nearly 80 percent.
According to IHS, the average TV panel size exceeded 40 inches for the first time ever in 2016. This is good news for LED makers, and also MOCVD equipment makers, such as Veeco.
Possible drivers behind the growth in IQE's valuation can be found in the company's results for the year ending 31 December 2016. These figures, which were reported on 21 March, reveal a 16.4 percent hike in year-over-year annual revenue from £114.0 million to $132.7 million. The increase in sales is attributed to success in multiple markets, plus an 11 percent post-Brexit strengthening of the US dollar against sterling. Adjusted operating profit also climbed, increasing by nearly 17 percent to £22.1 million.
Commenting on the 2016 annual results, IQE CEO Drew Nelson picked out the photonics division as the "star of the show", thanks to its year-on-year growth in sales of more than 43 percent. "This is being driven by VCSEL and InP technologies, which enable a broad range of applications, from fibre optic communication to advanced sensors and industrial processes." Margins from this sector are high, with an operating profit of £6.9 million on sales of just $22.8 million.
Sales of IQE's photonic products are expected to increase, with the depth and breadth of photonics development programmes and customer qualifications providing a solid platform for strong growth. The company is now shipping 6-inch VCSEL epiwafers, which are claimed to slash the unit cost of chips, and thereby accelerate the adoption of this technology. Devices can be used in 3D sensing, data communications, data centres, gesture recognition, health and cosmetics.
The lion's share of IQE's sales comes from the wireless sector. Here it claims to have 55 percent of the global market. The company "performed well" in this sector, according to Nelson, with sales up 15 percent. However, margins are far tighter than they are in photonics, with annual sales of £91.2 million producing an adjusted operating profit of £7.9 million.
Infra-red and CMOS++ are the two other divisions of IQE's business. The former, which produces InSb and GaSb wafers, generated an annual revenue of £10.6 million and an adjusted operating profit of £2.2 million; and CMOS++, which involves the growth of III-Vs on silicon substrates, brought in yearly sales of £1.4 million, and made an adjusted operating loss of £1.6 million.
IQE's share price has rocketed since autumn 2016.
The hike in IQE's share price may have been spurred on by its increase in capital investment. This shot up between 2015 and 2016 from £10 million to £19.1 million. Investment in equipment increased by £7.1 million to address growth opportunities, principally in photonics, GaN and its rare-earth oxide technology.
Another possible factor behind the surge in IQE's valuation is the tremendous level of activity associated with establishing a compound semiconductor cluster in Cardiff, where IQE has its headquarters. One of the company's visions is to be at the epicentre of the world's first compound semiconductor cluster, and recent progress towards that goal includes: a £75 million investment by Cardiff University to form the Institute of Compound Semiconductors; a £24 million joint investment by IQE and Cardiff University in the formation of the Compound Semiconductor Centre; a commitment by the UK government to £50 million of funding for a Compound Semiconductor Catapult in Cardiff, which will receive a further £100 million in funding from Innovate UK and Industry; and a £10 million investment by the EPSRC's to create a Compound Semiconductor Manufacturing Hub.
AXT's achievements
Glancing at the financial results from AXT leads one to wonder whether it's just the improvement in the earnings figures that has propelled the company's share price from $2.57 in late 2016 to $6.75 a year on. Sales are up, but not much, with revenue for the first fiscal quarter 2017, ending 31 March, worth $20.6 million, compared to $18.7 million for the equivalent quarter of last year. However, it can be argued that the company's bottom line is getting much better: profit hit $0.7 million in first quarter 2017, compared to $42,000 in the equivalent quarter of 2016.
One can argue that the share price is being spurred on by the ambitious plan for the company and the strength of its management. The firm has recently raised $32.3 million through a public offering of 5.3 million shares. Speaking during the first fiscal quarter earnings call, Chief Financial Officer Gary Fischer remarked: "We expect to use the proceeds for general purposes, which will of course include a relocation of the gallium arsenide product line as well as capital for the expansion of our operations to meet the requirements of exciting business opportunities across our portfolio and other things."
When unexpected difficulties arise at AXT, the company acts quickly and effectively. On 15 March, an electrical short-circuit fire broke out at the Beijing manufacturing facility, impacting the electrical power supply supporting 2-inch, 3-inch and 4-inch GaAs and germanium crystal growth. Making matters worse, the fire department accidentally damaged the critical wastewater pipe that services wafer processing.
Initially, AXT revised down its forecast for the first quarter 2017 to reflect the halt in production of certain products. However, it didn't take long for the company to address this delay.
Veeco's share price has more than recovered from the fall it took during 2015 and early 2016
"We were able to repair the wastewater pipe much faster than we anticipated, which allowed us to resume wafer processing and orders shipments after four days," explained Fischer in the recent earnings call. What's more, thanks to the use of custom-designed furnaces, engineers were able to rotate key hardware between crystal growth diameters, allowing some 6-inch furnace capacity to be used for producing 2-inch, 3-inch and 4-inch diameter GaAs and germanium crystals.
The upshot of all of this, in combination with exploiting some redundancy in the furnaces, is that sales for first quarter 2017 did not just exceed the revised forecast "“ they topped the original guidance. This has helped the share price to recover from its pre-fire value, which dropped by about 20 percent in the days after the emergency.
For the second fiscal quarter of 2017 sales are expected to be in the range $22 million to $23 million, a sequential increase of 9 percent. Profit for the quarter should be in the range $1.5 million to $2.3 million, indicating a promising future for AXT.
Veeco rebounds
Last-but-one on last year's leaderboard is Veeco, which has rebounded to third place this year. Between the end of April 2015 and April 2016 its share price fell from just over $30 to below $17, but since then it's climbed from that nadir to hit $33. A driver behind the recovery and soaring share price is a growth in sales and bookings of MOCVD tools, which currently account for the majority of the company's revenue.
Speaking to investors on 4 May, 2017, to discuss the results for the first fiscal quarter, Veeco CFO Sam Maheshwari explained that sales to makers of lighting, display and power electronics products increased by 39 percent quarter-over-quarter, and accounted for 58 percent of the $94 million quarterly sales. "[The] vast majority of this business was derived from EPIK MOCVD reactors to support ongoing demand for blue LED applications. Demand for red, orange, and yellow LEDs drove incremental K475i product sales."
During the call, Veeco's chairman and CEO John Peeler spoke in more detail about the recovery of the LED industry. "Demand for LCD panels has remained healthy, particularly for larger size TVs, which require more LEDs to backlight them. According to IHS, the average TV panel size exceeded 40 inches for the first time ever in 2016, and the firm predicts another 7 percent increase in panel size this year."
Peeler also discussed the growing market for fine-pitch digital signage, which is also known as direct view displays. In these products, an LED forms each pixel, with its size dictating the minimum viewing distance for an optimal image. "For the past few years, the recommended viewing distance was something greater than 40 feet; however, with the advent of fine-pitch LEDs, that distance is now only about 8 feet."
This reduction in viewing distance has driven a dramatic increase in the deployment of these screens. "We're seeing increased use in stadiums, lobbies, and retail stores," said Peeler. To meet increased demand, customers need to produce more devices, and this has led Veeco to witness increased MOCVD demand for its tools.
For quarter one sales, the company made a loss of $1.1 million, but gross margins are expected to improve once the company has completed renovating its New Jersey facility to combine manufacturing operations for ion beam, optical, and other components. Veeco expects revenue for the next quarter to be in the range $85 million to $100 million, and for the full year it expects the bottom line to lie between a profit of $3.6 million and loss of $2 million.
Infinera's issues
Footing this year's table is Infinera, the maker of InP photonic integrated circuits that are used in its systems for optical and data communication. In the twelve months up to 28 April 2017, its share price fell by almost 17 percent, a reflection of its declining sales. Revenue for the first fiscal quarter of 2017 was $176 million, down $5.5 million sequentially, and a fall of $69.3 million compared to the equivalent quarter of 2016. In conjunction with the falling revenue, there has been a reduction in gross margin: for the latest quarter it is 40.3 percent, compared to 41.8 percent for the previous quarter, and 50.2 percent for the equivalent quarter of 2016.
Speaking to investors on 4 May, 2017, in an earnings call for the first fiscal quarter of this year, Infinera CFO Brad Feller spoke about the tough market conditions for this sector, and explained that the relatively low gross margin was due to ongoing pricing conditions. He argued that there is a need to invest, in order to preserve existing business ahead of the delivery of new products. "In addition, we continue to be negatively impacted by the reduced volumes within our manufacturing infrastructure."
In the next few quarters Infinera will launch many products. "Pent-up customer demand suggests that our new products are well suited to address evolving architectures that require the most scalable and cost-efficient networks," commented CEO Thomas Fallon during the call.
Products coming out in the third quarter include the XT-3300 for long-haul and metro, the XTM Series with a 400-gig module for metro, and the XTS-3300 for the subsea market.
Although Infinera's management are upbeat about the future, they know that a return to profitability will take some time. "We won't start to see margin recovery until our new products gain traction in the market, which should enable us to realize cost structure benefits and to re-establish fixed cost leverage from our vertical integration model," explained Feller.
If Infinera starts to turn the corner, its share price will climb, and it could go up the leaderboard next year. Currently the top three spots are occupied by firms that support the production of chips, but are not device makers. Will that be the case in 12 months' time?
