IQE demonstrates growth in the merchant epiwafer market despite, or perhaps because of, unfavorable economic conditions, reports Marie Meyer

Agere and Bede join the Compound Semiconductor Portfolio All eyes were on Agere in April, watching its share price performance after its spin-off from Lucent and subsequent IPO. Lucent was unlucky in the timing of the offering, because the sharp downturn in technol-ogy stocks meant that they raised just $3.6 billion in the offering, whereas earlier estimates had been as high as $10 billion (see Compound Semiconductor February, 2001, p87). Nevertheless, the deal still ranks as the largest IPO thus far in 2001, and the fifth largest in US history (it would have been the second largest if the original estimates had held up). Agere was valued at slightly less than $10 billion, which is three to five times lower than earlier estimates. Several analysts noted that the original valuations for Agere could not be supported because of the drop in share prices for comparable companies, and because of uncertainties about whether the current conditions in the telecommunications equipment market might erode Agere s profits over the next few quarters. Indeed, Agere has already warned that its results for the June quarter are likely to be disappointing, because of canceled or rescheduled orders from its largest customers. After several delays and three rounds of reductions in the offering price, Lucent was at last compelled to complete the deal on March 28, knowing that it would receive a less-than-favorable, and at times downright hostile, reception. Lucent desperately needed to raise what cash it could so desperate that each time the deal was repriced Lucent increased the number of shares that would be offered, moving all the way from their original proposal of 100 million shares to the final tally of 600 million shares, roughly 37% of the company. The deal also allowed Lucent to remove around $2.5 billion in short-term debt from its balance sheet. That line item, which Lucent attributed to funding Agere s operations, is now transferred to the new company. If there is a bright spot in this story, it is the fact that Agere s shares have actually done OK since the offering. Although it did dip below the offering price for a brief time, shares are now up more than 25% (see ). Bede makes public debut In addition to Agere, there is another new company in the Portfolio table this month: Bede plc, a manufacturer of characterization equipment. Two-thirds of the company s annual revenues of $7 million came from the compound semiconductor industry. Products offered include both destructive and non-destructive X-ray characterization systems. The company went public in November last year, raising $42.6 million. Bede, which is based in Durham, England, is traded on the London Stock Exchange. The $7 million in 2000 revenues was a 46% improvement over 1999 sales; the company reported profits of $311 000 in 2000 (before one-time charges). Bede s management indicates that while the pace of their growth may be slowing a bit, sales are continuing at a brisk pace and the company had a backlog of $5 million at the end of the March quarter. The proceeds of the IPO are being invested in new facilities and inventories so as to bring down delivery times, which climbed from 11 weeks in 1999 to 16 weeks in 2000 due to the increase in bookings. IQE moves against the cycle In other interesting news from Europe, epiwafer vendor IQE reported record results for the December quarter and for the year 2000. The company appears to be performing in a "counter-cyclical" fashion as times get tough for other companies in the compound semiconductor industry, IQE appears to be thriving. Sales in the December quarter more than doubled to $15.7 million, compared to $7.6 million in the year-ago quarter, and they were up 63% compared to the September quarter. For the full year, sales were $45.1 million, up 58% compared to 1999. Profits for the December quarter, excluding one-time charges, were a record $2.4 million, a six fold increase compared to the year-ago period. Full year pre-tax profits, excluding one-time charges, were $4.8 million, an increase of 168% over profits of $1.79 million reported for the 1999 calendar year. The company also reported record bookings in the December quarter of $18.45 million, giving IQE a backlog at year-end of more than $36.5 million, nearly four times the 1999 levels. The company now has a book-to-bill ratio (the comparison of new orders received vs orders completed and shipped) of 1.17. IQE s results were boosted in part by their acquisition of Wafer Technology, a manufacturer of compound semiconductor substrates. That deal was concluded toward the end of the December quarter. An even bigger factor, according to Drew Nelson, IQE s chairman and CEO, was the bringing on line of several new epi reactors, which increased shipments and gave an added impetus to sales. Four new MOCVD reactors were commissioned at IQE s headquarters in Cardiff, Wales, and two new MBE reactors were brought on-line at IQE s operations in the US (the former QED). "We were successful in transferring a number of existing products to the large capacity platforms," Nelson said, "allowing much more flexibility in catering for customer s needs and allowing us to significantly enhance productivity." He went on to say that these development have also freed up more resources for new product development. Nelson reports that IQE currently has a number of "new and exciting products" that are close to market, particularly in the area of VCSELs and in InP microelectronics. IQE has also recently launched a new effort, IQE Silicon Compounds, aimed at providing epitaxy services for silicon and silicon germanium structures. This business is located at the company s plant in Pennsylvania. Nelson said that the facilities are finished and the first reactors have been installed, and the company has its first customer, is in the qualification process with two other customers, and has signed non-disclosure agreements with more than 15 other prospects. At a meeting with analysts, Nelson also laid out an interesting view of the size of the epiwafer market, shown in the table above. IQE believes that the merchant epiwafers market has strong growth prospects, for three reasons: 1. consumption of compound semiconductor devices is growing at 2540% per year; 2. the value of the epi as a percentage of the value of the device is growing at around 10% per year, as the epitaxial structures become more and more sophisticated; and 3. outsourcing of epiwafers production continues to grow, at the expense of in-house production, also at the rate of around 10% per year. This latter factor also explains why IQE is moving against the general trend in the industry right now. "Our strategy, to be a pure-play outsource epiwafer house, works very well in times like these when capital is at a premium," Nelson told analysts. He also said that the proliferation of new start-up companies also works to IQE s favor, as the companies are attracted to the idea of buying their epiwafers instead of growing their own, freeing up resources to be dedicated to design or processing functions instead (see ).