7 September 2018

IQE’s first-half 2018 revenue growth driven by Photonics segment

© Semiconductor Today Magazine / Juno PublishiPicture: Disco’s DAL7440 KABRA laser saw.

For first-half 2018, epiwafer foundry and substrate maker IQE plc of Cardiff, Wales, UK has reported revenue of £73.4m, up 4% on first-half 2017’s £70.6m (or up 5.4% on £69.6m from wafer sales, excluding first-half 2017’s £0.95m of license income from joint ventures).

Wireless revenue fell slightly from £48.1m to £47.8m. CMOS++ revenue rose from £0.7m to £0.83m. Photonics revenue grew by 24% from £15.2m to £18.9m (rising from 21.9% to 25.8% of wafer sales), remaining IQE’s most rapidly growing business segment.

However, overall revenue growth was despite a currency headwind of about 10%, reflecting strong sales growth in each of the firm’s main business sectors. On constant-currency basis, Wireless sales were up 11%, InfraRed sales were up 11%, and Photonics sales were up 30%.

Wireless inventory channels, depleted as a consequence of the rapid ramp of VCSELs in second-half 2017, were partially replenished during first-half 2018.

Photonics revenue growth was despite revenue from the largest photonics customer being flat while inventory from the aggressive first mass-market ramp of vertical-cavity surface-emitting laser (VCSEL) epiwafers in second-half 2017 was consumed in the supply chain. Demonstrating the breadth and depth of photonics engagements, revenue from other photonics customers hence rose 40% as photonics capacity was directed to satisfy more than 20 VCSEL chip manufacturer engagements in order to significantly broaden IQE’s global reach in the rapidly growing markets for 3D sensing in consumer and other high-growth applications.

Wafer gross margin contracted from 24.7% to 23.3%. Specifically, Photonics gross margin was adversely impacted by pre-production costs for Newport Foundry of £0.9m (recruitment, increased headcount and training to support 24/7 operation) and low-margin customer-funded product development (primarily new VCSEL customers) reducing photonics margins by a further £0.6m.

Operating profit (from wafers) has fallen from £9.7m (excluding £1m from license income) to £7.6m, with operating margin falling from 13.8% to 10.4%. Specifically, Wireless operating margin fell from 15.6% to 13.9% due to conversion costs for switching reactors from Photonics to Wireless production during first-half 2018. Photonics operating margin fell from 41.6% to 25.8% due to the high level of low-margin photonics customer qualifications in first-half 2018 and the pre-production costs expensed in relation to the new Newport Foundry. Taking into account the Newport Foundry pre-production costs and the investment in qualification programs for new VCSEL customers, the underlying Photonics operating margin was 33.4%. Photonics margins will return to 35% for H2 2018 as production efficiencies of the ramp in output are realised.

Profit before tax rose from £5.6m to £6.6m, depressed by about £3.5m: £2m from the impact of the ForEx headwind and £1.5m from the Newport Foundry pre-production costs and VCSEL qualifications. Without these, profit before tax would have risen from £9.7m to £11.1m.

Operating cash generation fell from £11.2m to £7.6m (from 105% to 100%) after funding a £6.6m increase in working capital (from £4.5m in first-half 2017) as a consequence of an increase in both trade and other receivables and inventories since end-2017.

Investment in capital expenditure (CapEx) and product development was £13m. Specifically, capitalized R&D expenditure relating to VCSELs, gallium nitride (GaN), cREO (crystalline rare-earth oxide, for which an option was exercised in March to acquire the technology and IP portfolio from Translucent Inc for $5m) and dilute nitride developments was £6.4m. Spending on property plant & equipment (associated predominantly with the new Newport Foundry) was £6.3m. This was funded through organic cash generation and from surplus cash reserves following the share placing in November 2017.

Net cash at end-June 2018 was £40.6m, down from £45.6m at the end of 2017 but a reversal from net debt of £41.9m at end-June 2017 due to the placing completed in November, raising more than £90m to repay debt and fund capacity expansion.

“The Newport, UK foundry construction and fit out is proceeding well,” says president & CEO Dr Drew Nelson. Five reactors had been installed by the end of first-half 2018 and a further two have been delivered in August. Three more are scheduled for second-half 2018, bringing the total to ten reactors. Commissioning and qualifications are ongoing and initial production is expected to begin in the latter part of second-half 2018.

“IQE has taken the opportunity during first-half 2018 to accelerate and expand its qualification activities for the fast-growing VCSEL market for consumer applications, and is now successfully engaged with over 20 companies in this arena,” notes Nelson. “Coupled with the installation, staffing and run up of the initial high-volume production tools in our flagship Newport Epi-Foundry, these activities represent major steps forward in securing and further strengthening IQE’s leading position in the global supply of VCSEL wafers for multiple consumer and industrial 3D sensing applications. Although the costs of these investments have impacted first-half profitability, we are confident they will be pivotal in delivering strong increases in revenue, margin expansion and profitability as 3D sensing is widely adopted in global mobile platforms and other large-volume applications,” he adds.

“Together with the renewal of our long-term supply agreement with our largest tier-1 wireless customer [securing an extended range of products and increased share of their epiwafer requirements, through to September 2019] and the manufacturing milestone reached with our first nano-imprint lithography (NIL) edge-emitting distributed feedback (DFB) laser production order [worth $250,000], this demonstrates both the strength of our existing core business and the new opportunities that we are creating as we continue to bring our unique innovative material capabilities and associated nanoscale fabrication technologies to market.”

A healthy wireless business and VCSEL engagements with more than 20 chip companies for sensing, mobile, industrial and data communications demonstrates the breadth and depth of customer engagements across a range of technologies and applications and sets the scene for increasing revenue diversity and growth through second-quarter 2018 and beyond, believes IQE.

“As we transition our business model from being the global leading supplier of advanced semiconductor wafers to a global leader in advanced material solutions, we already see significant engagements for our other core technologies, including GaN-on-silicon, cREO and QPC (Quasi Photonic Crystals),” says Nelson. “We look forward to the rest of 2018 and in particular the further multi-customer ramp which is expected in 2019, with considerable anticipation.”

IQE’s updated guidance for wafer revenue compound annual growth rate (on a constant-currency basis) for full-year 2018 is up to 5% for Wireless, 5-15% for InfraRed and 35-50% for Photonics. Initial guidance for 2019 is given as up to 5% for Wireless, 5-15% for InfraRed and 40-60% for Photonics. The 3-5 year CAGR forecast is up to 10% for Wireless, 5-15% for InfraRed and 40-60% for Photonics.

See related items:

IQE expects first-half 2018 revenue of £73m, with double-digit sales growth on constant-currency basis in each primary market

IQE’s Wireless business unit renews major contract with tier-1 customer

IQE’s nano-imprint lithography technology production qualified by DFB laser manufacturer

IQE's record full-year 2017 results driven by adoption of VCSEL technology in mass-market consumer applications

IQE places new shares to raise £95m

IQE extends production of VCSEL epiwafers with Aixtron AIX 2800G4-TM MOCVD systems

IQE’s first-half wafer revenue up 17% year-on-year, driven by Photonics growth of 48%

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