Topsy-turvy year for III-V shares

Views on how the economy has fared over the last year are governed by the eye of the beholder. Those wearing rose-tinted spectacles will point out that gross domestic product is increasing in the US, the Europe Union and many countries in the Far East, and conclude that more prosperous times are just around the corner. According to them, revival will be spurred by cheap borrowing, stemming from low interest rates. Meanwhile, those seeing their glass as half empty will be quick to point out that the economic storm is far from over. They may argue that the recent financial bailouts of Ireland and Greece underline fragility in the global the banking system, and point out that the sharp decline in the public service workforce of many countries will swell unemployment numbers that are already high. This, in turn, will place even greater strain on the welfare state of many nations. What’s more, say those with a more pessimistic outlook, the cost of black gold has shot past $100 a barrel leading to higher energy prices, which have historically been a catalyst for economic downturns. Against this backdrop of economic uncertainly, stock markets around the world have slowly headed north. Between the end of April 2010 and the end of April 2011 the Dow Jones climbed by 16 percent, the value of FTSE increased by 12 percent and the Nikkei fell by 8 percent. The Japanese index was on track to make a small gain during that timeframe, but share prices plunged in the wake of the quake and tsunami. Tech shares have followed the general market trend, with the NASDAQ has rising by 14 percent in the 12 months leading up to the end of April 2011. And III-V shares have fared slightly better on average. Of the 20 companies featuring on the Compound Semiconductor Share Price Leaderboard (see p44), 11 have outperformed the NASDAQ, with three increasing in value by more than 100 percent. In comparison, 9 have been below that benchmark, including Cree, which is now propping up the leaderboard following a dramatic change in fortunes – last year it was in fifth place. Fibre-laser fortunes The canniest investment in a III-V company over the lastyear would have been the buying of a stash of shares inthe vertically integrated, fibre-laser manufacturer IPGPhotonics. During this time period, shares in the leadingfibre-laser maker trebled in value, with most gain made inthe last few months (see Figure 1).  

Figure 1. IPG Photonics’ share price has shot up in the last 12 months on the back of rising sales in the fibre laser market On 25 February 2011, the day that IPG posted its financial results for fourth fiscal quarter 2010, share prices jumped by 40 percent. This was driven by a hike in revenue to $101 million, nearly double the figure for the equivalent fiscal quarter of 2009, and a leap in profit to $27.1 million. In the fourth quarter of 2009, profit was just $3.1 million. Although IPG’s full-year figures do not show such impressive growth, it is abundantly clear that the company is heading in the right direction. Sales for fiscal 2010 were $299.3 million, up $113.4 million year-over-year, and profit was $54 million, ten times better than the previous year. Commenting on these results, company CEO and founder Valentin Gapontsev claimed that the sales growth in fiscal 2010 stemmed from a growing industry acceptance of the firm’s fibre lasers, especially in materials processing applications such as cutting, welding, marking and engraving. Sales to this sector more than doubled in the fourth quarter of 2010, compared to the equivalent quarter of the previous fiscal year. “Geographically, we achieved sales growth in every major region, with China and Europe reporting the largest year over- year increases of 256 percent and 92 percent for the quarter, respectively,” explained Gapontsev. Further success appears to be on the cards for IPG as the company continues to grow its revenues, invest in the development of products and manufacturing technology and expand manufacturing capacity. As Compound Semiconductor went to press, IPG posted sales of $100 million in the first fiscal quarter of 2011, historically the firm’s weakest quarter of the year. Revenue guidance for the second quarter is $102-110 million. Growing wafers, growing business Second on the share price leaderboard list is Cardiffheadquarteredepiwafer supplier IQE. Shares in this firmhave been steadily increasing in value since early 2009,hit £0.59 this February and have dropped back slightlysince to around £0.45. Commenting on the fiscal 2010 sales figures that were released on 29 March, 2011, CEO Drew Nelson said that the company is currently enjoying a great deal of financial success due to very strong growth in its core business, high-speed connectivity, which includes wireless-related products for all forms of mobile device communications. Sales of wireless products for the most recent fiscal year, which ended on 31 December, were up 32 percent yearover- year, and accounted for three quarters of the firm’s £72.6 million sales. Revenue for 2010, which exceeded that of 2009 by £20 million, was bolstered by the acquisition of the US firm Galaxy Semiconductors. That move means that IQE can now produce antimonide wafers, which are used in infrared applications, at two sites: Spokane, WA and Milton Keynes, England. To partly fund the buy-out and also repay borrowings and finance capital expenditure, in the Fall of last year IQE raised $20.8 million through the selling of 65 million new shares. Long-term shareholders in IQE will be delighted to see profits of £6.3 million for fiscal 2010. The previous year’s profit was one-third of this, and prior to that the company had operated at a loss for many years. IQE is very excited about the potential growth of its optoelectronics business, which accounted for 20 percent of 2010 sales and grew at an organic, year-on-year growth of 46 percent. One very promising area is consumer optoelectronics, which includes finger navigation devices and optical interconnects, such as Intel’s Lightpeak technology. Sales of VCSELs that serve these applications increased yearover- year by 120 percent. Concentrating photovoltaics is another area where IQE is active. It’s has developed multi-junction devices in conjunction with solar cell and system partners, and hopes to increase sales when deployment of this technology ramps.   The epiwafer manufacturer refrained from issuing any financial guidance during its earning release for fiscal 2010. However, Nelson said that the company was playing a key role in driving the deployment of the four technology ‘megatrends’ of this decade: high-speed connectivity; sustainable clean energy generation and the efficient use of energy; the explosion of personal consumer devices for enhanced lifestyle; and the increased sophistication and performance of security related systems. “The Board remains confident that IQE is well-position to continue its strong growth in 2011 and beyond,” said Nelson. The only other company on the leaderboard with an appreciation of at least 100 percent is French MBE toolmaker Riber. Shares in the Paris-based outfit slightly increased in value throughout 2009 before climbing steeply at the start of this year. Late this March, Riber reported its financial results for fiscal 2010, revealing yearon- year increases in sales and profits from €17.4 million to €20.7 million and €0.6 million to €1.6 million, respectively. The French outfit claimed that the increase in revenue had been driven by a 10 percent rise in MBE system business, reflecting an upturn in demand from III-V chipmakers. However, Riber’s income had also benefited from a 38 percent hike in revenue from the services and accessories business, plus a 24 percent increase in sales of evaporation sources and cell sales. According to the company, this has vindicated its decision to diversify into the organic LED and thin-film solar markets. The French toolmaker had an order book worth € 21.8 million at the end of February 2011, which included three production tools, seven research systems and many effusion cell orders. This strong foundation is expected to pave the way to further revenue and profit growth throughout this year. Footing the table Investor’s in Cree have had a painful 12 months. Theshare price failed to kick on from $76, its value in lateApril 2009, instead dropping on two occasions. In the Fallit fell to $50, before recovering in the New Year to $65.But then it plunged again, and by the end of this Aprilshares were valued at $40. However, if anyone hadinvested in Cree two year’s ago, they could consolethemselves with a gain of more than $10 per share (seeFigure 2).   Figure 2. Gains in Cree’s share price from mid-2009 to mid-2010 have been largely wiped out by falls in recent months, which have largely resulted from overcapacity in the LED market. The more recent, bigger, fall in value has stemmed from failure to hit guidance figures. Cree targeted sales and profit of $270-280 million and $51-55 million, respectively, for its second fiscal quarter, ending December 26, 2010. But it posted sales of only $257 million, along with profit of $49.8 million. At that time the company predicted third fiscal quarter revenue and income of $245-265 million and $42-50 million. And again it failed. Sales and profits for this quarter were $219.1 million and $18.9 million, respectively. Cree is primarily blaming the shortfall on a mixture of market weakness and aggressive pricing in Asian markets. In a conference call discussing second fiscal quarter earnings on 18 January 2011, chairman and CEO Chuck Swoboda said that sales to LED component distributors in Asia were lower than expected, due to an inventory correction at their customers. “The correction has been caused by a pause in the China LED streetlight demand, and lower-than-expected growth in LED bulb applications.” Three months later, Swoboda admitted to investors that the recovery in end-customer demand was slower than Cree had expected: “Distributor sales to end customers have improved post-Chinese New Year, but it took longer to work through customers inventories than we originally targeted, and pricing was lower than we had forecast.” Revenue for the fourth fiscal quarter is expected to be £225-245 million, with profit in the range $16-23 million. The company has set itself several goals to turn around its fortunes, and will direct the most attention to the growth of its LED lighting business. “Our LED lighting product line continued to grow in quarter three, led by increased sales in North America for commercial applications and sales of EcoSmart Downlights to Home Depot,” explained Swoboda. International market sales are through Zumtobel, which has recently signed a two-year extension to its deal with Cree. Cree’s second priority is to enable lighting fixture companies to develop their own LED products. To address this, Cree has launched products such as the XLamp MT-G LED that can replace a halogen lamp. Third on Cree’s list is the upgrade of LED production to 150 mm SiC substrates. Product qualification should be complete by the end of quarter four, allowing a manufacturing ramp to commence in the first quarter of 2012. If Cree executes on these fronts it seems unlikely that they will be footing the table this time next year. If they did, they would have the embarrassing accolade of being the first company to be in last place for two years in succession on the leaderboard, which has been a feature of this magazine since 2006. The average rise for the last placed player is 14 places, and the score to beat is a climb of 19, which AXT achieved in 2010 when it rocketed from the bottom to second place. Can Cree go one better? Tune in next year and see.  Disclaimer: Richard Stevenson holds a small number of shares in IQE. © 2011 Angel Business Communications. Permission required.