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3G upgrades pull IQE closer to profit

A focus on wireless applications cut the epiwafer foundry's losses in 2007, and its business model is continuing to evolve to better fit this sector.

The increasing amount of GaAs finding its way into phone handsets has helped IQE to the brink of full-year profitability in spite of the adverse effect of exchange rates.

The epiwafer foundry s sales into wireless applications in 2007 nearly doubled to £38.1 million ($77 million) from £20.3 million in 2006. At the same time, currency market fluctuations forced optoelectronics revenues down to £9.2 million from £10 million the previous year, in spite of modest gains in volumes shipped.

“Last year the upgrade market actually outstripped the new phone market for the first time, and that s going to drive the GaAs demand much more than just the basic phone models,” pointed out Chris Meadows, IQE s investor relations executive.

That trend helped the UK-headquartered company to reduce its loss to £0.9 million in 2007 from £4 million the year before. Barring exceptional costs and financing expense partly related to moving IQE s recently purchased Singapore operations to a new site, the company had actually made a £0.6 million profit.

But the company will readily take that setback, as the Singapore operation and the New Jersey division that IQE bought from Emcore are playing key roles in expanding its business.

“The multi-site global operation is one of the strengths that the customers like,” explained Meadows. “The large blue-chip companies, when they want to rely on an outsource provider they want to spread that risk, so big increases come about just from the business model being able to offer that.”

In the name of risk-spreading IQE has now cross-qualified HBT production between its Cardiff and New Jersey sites, and achieved the same for PHEMT manufacturing in Pennsylvania and Singapore.

Planning for the next expansion
Meadows says that most of these are facilities are now generating cash for the company, which is still carrying a $14.2 million debt. This is partly covered by a $15 million credit line that IQE negotiated with the UK bank Lloyds TSB at the beginning of 2008 to provide it with the funds to expand further, if necessary.

“That s responding to the comments we re getting back from customers wanting to increase demand,” Meadows said.

“When customers look at what we re able to fund in order to meet their demand, if they can see that we do have the facility there, that gives them the confidence that they can put all their eggs in one basket.”

IQE says that for 2008 so far, it has already seen revenues 30-40 percent above the same period in 2007 and has also just signed its largest GaN wafer deal to date, with TriQuint Semiconductor (see related stories). The company is predicting strong sales growth this year, of a similar magnitude to the 50 percent average seen in the past three years.

With its heavy reliance on 3G handsets for this growth, Meadows was keen to point out that some recent suggestions of a slowdown in this sector are not in line with IQE s view.

“Texas Instruments claimed last week that 3G was flattening off or demand was dropping, but I think that's a bit misleading,” Meadows said. “All our customers just want to increase demand.”

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