IQE Profits Surge Thanks to Smartphones and Emerging Opto markets
IQE, a leading global supplier of advanced wafer products and wafer services to the semiconductor industry has announced its Interim Results for the half year ended 30 June 2010.
BUSINESS HIGHLIGHTS
· Strong performance in all main markets: wireless up 52%, optoelectronics up 55% and electronics up 102%
· Wireless growth driven by increasing adoption of smartphones; IQE is designed into the majority of top-tier smartphones by virtue of its broad customer base and its market share of c.30%
· Emerging optoelectronic markets accelerating; CPV solar up 100% and VCSELs for finger navigation and optical USB up 70%
· Electronics driven by advanced BiCMOS and initial sales of IP rich advanced substrates (GeOI and SOS)
· Highly geared business model translates 54% revenue growth into 184% EBITDA growth
· Appointment of Adrian Meldrum to the Board, with specific responsibility for development of the optoelectronics business
· Continued progress in extending portfolio of intellectual property including high-speed VCSELs for next-generation optical communications, 6” CPV solar technology, 4” gallium antimonide substrates and free-standing gallium nitride substrates
· Additional patents granted for Nanocolumn technology
Drew Nelson, IQE Chief Executive, said, “IQE has delivered record results for the first half of 2010 and our strong operational gearing has turned 54% growth in revenues into a 184% increase in EBITDA.”
“Our focus remains on exploiting our powerful intellectual property to deliver innovative and high-quality products to rapidly growing markets. The second half of 2010 has started well with strong demand across our full range of advanced semiconductor products leading us to have every confidence in both the short term and long term prospects of the business,” he continued.
INTERIM RESULTS (unaudited) 2010
Revenues grew by 54% to £33.0m (H1 2009: £21.4m), primarily driven by strong demand for smartphone products during the first half of the year supported by accelerating growth in optoelectronic and advanced silicon components.
Gross profits increased by 93% to £7.3m (H1 2009: £3.8m) with gross margins improving from 17.8% to 22.2%. Selling, general and administrative expenses were unchanged at £4.6m (H1 2009: £4.6m) and therefore reduced as a percentage of sales from 22% to 14%.
EBITDA increased by 184% to £5.4m (H1 2009: £1.9), demonstrating IQE’s highly operationally levered business model.
Operating profit increased by £3.5m to £2.7m (H1 2009: £0.8m operating loss), which after an interest charge of £0.5m (H1 2009: £0.5m) delivered a pre-tax profit of £2.2m (H1 2009: £1.4m loss)
Comparison of Unaudited Financial Data For 2009 & 2010
The Group had no tax charge during the period, reflecting the benefit of the substantial tax losses at its disposal. These tax losses will enable IQE to shelter in excess of £100 million of future taxable profits. Therefore, retained profit for the period was £2.2m (H1 2009: £1.4m retained loss).
Earnings per share were 0.50p (H1 2009: loss of 0.31p), with adjusted EPS of 0.60p (H1 2009: loss of 0.23p). On a fully diluted basis, adjusted EPS were 0.54p (H1 2009: loss of 0.23p).
Cash inflow from operations increased by £1.8m to £1.9m (H1 2009: £0.1m), even after the absorption of £3.1m (H1 2009 : £1.7m) into working capital as the business continued to grow
Net debt stood at £15.6m (H1 2009: £19.0m), resulting in a year-on-year reduction of £3.4m.
IQE’s markets fall into the broad categories of wireless, optoelectronics, and electronics. The charts below show the segmental shares and actual revenues for H1 2010 and H1 2009.
in Millions of Pounds (£)
Wireless products include a wide range of components used for radio frequency (RF) communications in mobile handsets, smartphones, personal computers, tablet PCs and a host of other mobile devices.
Mobile technologies are currently used by more than half the world’s population, with industry analysts predicting handset volumes to increase to around 1.3bn in 2010 and 1.6bn by 2013. Growth of smartphones which employ significantly higher gallium arsenide (GaAs) content than standard handsets, is expected to account for 19% of all handset sales in 2010, increasing to over 50% by 2014.
Growth in compound semiconductor demand is further driven by new applications for WiFi such as machine-to-machine, point-to-point and tablet PCs as well as network operators introducing low-end 3G products to migrate their customers to 3G networks, effectively increasing the compound semiconductor chip content in low-end handsets.
The compound semiconductor content in smartphones is continuing to grow and ranges from $2 to $4 in low-end handsets up to $9 in sophisticated high-end devices.
IQE is in production with all leading wireless chip companies and was recently awarded “TriQuint’s supplier of the year for 2010” based on production support and development of new products. TriQuint is known to supply the majority of wireless chips for a number of smartphones including iPhone, Samsung Galaxy, HTC 4G EVO and the Blackberry Tour.
Other customers have significant content in RIM, Samsung and other leading handset manufacturers with IQE providing BiHEMT wafers for better power performance and longer battery life.
Wafer inventories remain at low levels throughout the supply chain with no evidence of inventory build-up.
Optoelectronic
Optoelectronic components cover a broad range of applications including data communications, consumer applications, solid state lighting and CPV solar cells.
Optical fibre communications have been used for many years for long-haul voice and data communications. Today’s PCs and peripheral devices are increasingly data hungry to the extent that communications between such devices require the same capacity that just 10 years ago would have been sufficient to carry over one million voice calls across the Atlantic. Over the next four years, optical cables are predicted to replace copper cables for interconnecting a wide range of devices. Demand for semiconductor lasers (VCSELs) is anticipated to grow from around 1m units in 2009 to over 650m units in 2014.
In addition to optical communications, VCSELs are beginning to be deployed as finger-navigation devices by a number of leading handset manufacturers such as RIM, LG, Samsung, Sony Ericsson and HTC.
Data storage devices (from CDs to Blu-ray discs) utilise lasers and optical detectors made using semiconductor wafer products. The storage capacity of a digital recording disc is determined by the wavelength (colour) of light emitted by the read/record laser with audio/data CDs operating at the red end of the spectrum and Blu-ray at the blue end. Modern devices such as Blu-ray HD video and games consoles employ multiple laser components to allow backward compatibility. Shipments of Blu-ray optical storage devices are expected to grow from 40m units in 2009 to over 200m units in 2012.
Red green and blue lasers are also used to generate images in an emerging range of pico projectors. It is anticipated that pico projectors will become commonplace within handset and tablet PCs within the next five years in the same way that cameras have become during the last five years.
The drive for sustainable generation of electricity is expected to yield a mix of alternative power options over the coming years within which solar energy is likely to emerge as a key source of renewable energy. IQE’s technology provides the material for the most efficient and cost effective solar cells for power generation in the form of CPV solar cells. Industry analysts estimate that less than 0.5% of current electricity is generated by solar power but predict that this will increase to 64% in 2100. IQE is uniquely positioned as high-efficiency solar power emerges over the coming years.
Closely linked with sustainable power generation is the move towards high efficiency lighting which also uses IQE’s wafer technology. Over 20% of the world’s energy consumption is taken up by lighting. A key driver for the adoption of alternative lighting technology will be the almost universal banning of incandescent lighting technology from 2012. LED Solid State Lighting is emerging as the major technology to displace existing lighting, which dates back over a century. The market for ultra-high brightness LEDs is expected to grow from less than $2Bn in 2009 to over $4Bn by 2012.
Electronics
The ever-increasing demand for higher speed and improved performance from today’s electronic devices is ushering in a new era of semiconductor materials that combine the versatility of silicon, which has been the default semiconductor material for the last half century, with the power and performance of compound semiconductors that have emerged as true 21st century materials.
TRADING OUTLOOK
Growth in demand for IQE’s products during the first half of 2010 was largely driven by the increasing demand for wireless components used in smartphone and tablet PC technologies, which contain a significantly higher content of gallium arsenide (GaAs) products than previous generations of handheld devices.
Smartphones represent a fundamental structural shift in mobile communications and will still only account for 19% of the total handset marketplace in 2010. The Group sees the annual growth rate of 30-40% continuing for several years to come. In addition, the proliferation of wireless applications such as with smart meters and point to point communications will add further demand for IQE’s wireless products.
Demand for wireless products is strongly supported by accelerating growth in demand for optoelectronic devices across a range of exciting new technologies and applications, including finger navigation, short range data communications, lasers for projection, high efficiency LEDs and CPV materials for advanced solar energy generation.
Significant growth is also occurring in IQE’s silicon based product division with the adoption of new engineered substrates launched in 2009 such as Germanium on Insulator (GeOI) and Silicon on Sapphire (SOS) for next-generation integrated circuits and high speed devices.
The second half has begun well, with sales now anticipated to be ahead of expectations as a result of a strong performance across all of the Group’s product ranges. The continued successful implementation of the Group’s strategy combined with strong operational performance give the Board every confidence in both the short term and long term prospects of the business.
The group incurred losses in the 6 months to 30 June 2009 and, as such, options and warrants that may be converted were considered anti dilutive, since they would reduce the loss per share.
IQE operates six manufacturing facilities located in Cardiff (two) and Milton Keynes in the UK; in Bethlehem, Pennsylvania and Somerset, New Jersey in the USA; and Singapore. The Group also has a dedicated R&D facility in Bath, UK and operates 11 sales offices located in major economic centers worldwide.
