IQE issues trading update

Huawei ban having "far-reaching and long-lasting impacts on on global supply chains", says CEO Drew Nelson

Advanced wafer company IQE has issued a trading update ahead of the financial close for H1 FY2019.

IQE expects to deliver revenue of £65m to £68m for the first half of FY2019 (consensus £68m). As previously guided, the first half of 2019 has been impacted by a weak smartphone handset market, particularly affecting the Wireless Business Unit.

In addition, IQE has also experienced a reduction in InP laser revenues for the datacom market due to a customer specific issue outside of IQE˙s control. This has been partially offset by new qualifications and revenue streams coming into production at our Taiwan facility where we have invested in capacity and which offer increased customer diversification.

IQE announced on 2nd May 2019 that its recently constructed Newport Mega Foundry received its first mass production order from its leading existing VCSEL customer. This has had a beneficial impact on Photonics revenues for May and June in line with previous guidance.

On 24th May 2019 IQE announced, as a response to external geo-political uncertainties, that the group may experience some delay to orders and the potential for adjustment of supplier managed inventory levels, predominantly in its Wireless Business Unit.

IQE is operating in an increasingly cautious marketplace and has very recently received a reduction in forecasts from a number of chip customers, in Wireless and also in Photonics, impacting anticipated revenues for the second half of FY2019.

As a result of the above and with the expectation that uncertain market conditions will continue in the short-term, IQE now expects to deliver revenues in the range of £140m to £160m for FY2019 at prevailing exchange rates (consensus £175m).

This is a larger impact than the previously guided risk related specifically to Huawei, due to the far-reaching impacts on other companies and supply chains that are now becoming evident.

Photonics

The group issues revised constant currency (USD) guidance for the Photonics segment which it now expects to grow by less than 30 percent year on year (previous guidance of over 50 percent)

Strong progress continues to be made at our Newport Mega Foundry for VCSEL production. Four reactors are currently in mass production with the first major customer. Two further customers are expected to enter mass production in H2. Sampling continues with an additional 13 customers as part of ongoing qualifications which provide breadth of exposure to global supply chains. The company remains confident that it will continue to show strong revenue growth in the Photonics business through customer diversification in 2020 and beyond.

Whilst the outlook for InP lasers remains challenging in the short term, IQE is engaging with several new customers who are forecasting growth, as global supply chains adapt to current conditions. IQE is in the final stages of qualification for a significant opportunity for full service 10G Distributed Feedback (DFB) laser production, with revenues anticipated in Q4 FY2019. In addition, major progress has been made in developing next generation 25G full service DFBs for high speed datacoms, hyperscale datacentres and 5G.

Wireless

IQE issues revised constant currency (USD) guidance for the Wireless segment which it expects to decline by 20 percent to 25 percent year on year (previous guidance of a decline of 15 percent).

The group is witnessing significant global supply chain shifts that are affecting short-term revenues from Power Amplifier products, but is engaged in initial production activities with two key Asian customers who stand to benefit from significant additional volumes in the medium-term, with the anticipation of H2 2019 revenues from these customers.

In H1 2019, continued strong progress has been made in the research and development of the unique 5G RF Filter Materials Portfolio based on our patented cREO technology and we remain actively engaged with several chip customers to bring this product to market.

Infra Red

Constant currency (USD) guidance for the Infra Red segment remains unchanged at 15 percent year on year growth. This segment continues to perform strongly and provides a source of stability and customer diversification to IQE˙s portfolio.

Adjusted Operating Profit

Given the reduction in expected revenues, IQE expects to remain profitable in 2019 but with Adjusted Operating Profit margin significantly below the previous guidance of over 10 percent.

Whilst the company˙s cost base is largely fixed in the short-term, IQE is taking steps to reduce costs and avoid non-critical capital expenditure. This includes the acceleration of the assessment of strategic projects to optimise the company˙s global manufacturing footprint. Active management of all cashflows will ensure the company remains within the limits of its current revolving credit facility in 2019.

Outlook for 2020

IQE remains cautiously optimistic about growth opportunities for 2020 and as global supply chains adjust we expect that the significant market drivers such as 5G, connected devices and LIDAR will regain momentum. IQE remains in a very strong position to capitalise on this with its unique breadth and depth of products, global production capacity and intellectual property. The steps being taken by the group to adapt and manage through this period of uncertainty will ensure it is well placed to grow revenues and expand margins in the eventual rebound cycle.

Drew Nelson, CEO of IQE, said: "These are unprecedented times for the global semiconductor industry as geo-political conditions affect interconnected global supply chains. It is now clear that the impact of Huawei˙s addition to the US Bureau of Industry and Security˙s Entity List is having far-reaching and long-lasting impacts on global supply chains.

"This is a matter outside of IQE˙s control but we have responded swiftly to leverage our breadth of relationships and to pursue new sales opportunities. We are also taking prudent expenditure actions in order to manage through this period of uncertainty.

"IQE remains well placed to adapt to mid - long-term share shifts at both the component (chip) and the OEM level. Indeed, we are now seeing increasing activity from customers in alternative supply chains across our business units as these supply chains respond to current market dynamics. We anticipate significant new customer qualifications during the second half of 2019 as a result. As global markets adjust and recover, we remain extremely well placed for significant future growth."