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IQE Issues Trading Update

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Low smartphone demand and delayed 5G infrastructure roll-out will lower full year revenues to around £152m

IQE plc, the compound semiconductor wafer and materials company, has announced a trading update for the year ending 31 December 2021 due to lower GaAs volumes than expected and weaker sales of GaN epi-wafers in the wireless market.

Demand for Wireless GaAs epi-wafers has continued to grow in H2 2021, driven by 5G penetration of the smartphone handset market and WiFi 6. Whilst growing year-on-year, GaAs volumes are below management expectations in Q4, in the context of softening demand within the broader smartphone supply chain.

Despite the challenges of supply chain constraints within the broader semiconductor industry, the solid performance of GaAs throughout 2021 has resulted in high utilisation at the Group's Taiwan facility, where the Group is investing in eight new and refurbished tools. This includes three new Aixtron G4 reactors which are now on-site and being commissioned to support further growth in 2022.

Sales of Wireless GaN epi-wafers have continued to be weak due to end-market dynamics, including significantly lower levels of mMIMO base station deployments in Asia and the slow rate of deployments in Western markets. GaN remains an essential material for 5G infrastructure and demand is still expected to recover over the multi-year deployment cycle.

Photonics Update

Demand for VCSELs used in 3D sensing applications has remained solid throughout H2 2021 but is expected to tail off towards the end of the year in line with supply chain seasonality and general softening in smartphone supply chains.

Sales of other Photonics products are also below management expectations in Q4 due to the re-phasing of certain defence and security orders associated with large programmes into 2022 and the slower introduction of sales of new DFB products.

R&D Update

Strong progress continues to be made on research and development programmes, with significant milestones reached for long wavelength VCSELs, advanced healthcare sensing, Porous Silicon for front-end module switching and the commercialisation of GaN on Si technologies for infrastructure markets.

Operational progress

Operational progress has also been strong, with the closure of the Group's Pennsylvania facility and associated consolidation of MBE capacity in North Carolina which is on schedule for completion by 2024.

The recently announced closure of the Singapore facility is also on track and due to be completed by mid-2022. These closures are part of the Group's consolidation strategy and will improve production efficiency and margins in the medium to long term.

Outlook and Guidance

A significant foreign exchange headwind has been incurred in 2021 on a reported basis, caused by the relative strength of Sterling, versus the US Dollar in which the majority of IQE's revenues are denominated.

As a result of softening demand in Q4, IQE now expects full year reported revenues to be in the region of GBP £152m. This is equivalent to circa £164m at constant currency, representing circa 8 percent reduction in revenues year-on-year.

The resultant reported Adjusted EBITDA is expected to be in the region of GBP £18m. This is equivalent to circa £25m at constant currency, representing an EBITDA margin of circa 15 percent at constant currency (FY2020 17 percent).

Cash capex in the year is expected to be in the range of £14m to £17m compared to the previous guidance of £20m to £30m, due to the phasing of payments for certain tool purchases into 2022. Net debt is expected to be less than £10m.

"Whilst it is disappointing that 5G infrastructure deployments have remained weak all year, we still expect this macro trend to provide a multi-year growth cycle for IQE. In the immediate term, broader semiconductor market shortages have softened demand in some supply chains but we believe these effects to be temporary and remain excited by the opportunities ahead, " said Phil Smith, executive chairman of IQE

"Meanwhile IQE has made significant strategic and operational progress in 2021. This has laid strong foundations, which newly announced CEO Americo Lemos will look to capitalise on as he sets out his strategy for the future direction of the business next year."
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