IQE cuts 2019 revenue guidance to £140-160m due to impact of Hauwei export ban

In a trading update ahead, epiwafer foundry and substrate maker IQE plc of Cardiff, Wales, UK says that for first-half 2019 it now expects revenue of £65-68m (compared with the consensus of £68m).

As previously guided, first-half 2019 has been impacted by a weak smartphone handset market, particularly affecting the Wireless business unit. IQE has also experienced a reduction in indium phosphide (InP) laser revenue for the datacom market due to a customer-specific issue outside of IQE’s control. This has been partially offset by new qualifications and revenue streams coming into production at the firm’s Taiwan facility, where it has invested in capacity and which offer increased customer diversification.

IQE announced on 2 May that it’s new Newport Mega Foundry received its first mass-production order from its leading existing vertical-cavity surface-emitting laser (VCSEL) customer. This has had a beneficial impact on Photonics revenue for May and June, in line with previous guidance.

On 24 May, in response to external geo-political uncertainties, IQE said that it may experience some delay to orders and the potential for adjustment of supplier-managed inventory levels, predominantly in its Wireless business unit.

IQE notes that it is operating in an increasingly cautious marketplace and has very recently received a reduction in forecasts from a number of chip customers, in Wireless and also in Photonics, impacting anticipated second-half 2019 revenue.

Expecting that uncertain market conditions will continue in the short-term, IQE now expects revenue of £140-160m for full-year 2019 at prevailing exchange rates (compared with the consensus of £175m). This is a larger impact than the previously guided risk related specifically to Huawei, due to the far-reaching impacts on other companies and supply chains that are now becoming evident.

Photonics

For the Photonics segment (on a constant-currency UD dollar basis), IQE has cut guidance for year-on-year revenue growth from over 50% to less than 30%.

Strong progress continues to be made at the Newport Mega Foundry for VCSEL production. Four reactors are in mass production with the first major customer, and two further customers are expected to enter mass production in second-half 2019. Sampling continues with an additional 13 customers as part of ongoing qualifications that provide breadth of exposure to global supply chains. IQE remains confident that it will continue to show strong revenue growth in the Photonics business through customer diversification in 2020 and beyond.

While the outlook for InP lasers remains challenging in the short term, IQE is engaging with several new customers who are forecasting growth, as global supply chains adapt to current conditions. The firm is in the final stages of qualification for what it says is a significant opportunity for full-service 10G distributed feedback (DFB) laser production, with revenues anticipated in fourth-quarter 2019. In addition, major progress has been made in developing next-generation 25G full-service DFBs for high-speed datacoms, hyperscale datacenters and 5G applications.

Wireless

For the Wireless segment, IQE now expects the year-on-year decline in revenue for full-year 2019 to be 20-25% rather than the prior guidance of just 15%.

IQE says that it is seeing significant global supply chain shifts that are affecting short-term revenues from power amplifier (PA) products, but is engaged in initial production activities with two key Asian customers who stand to benefit from significant additional volumes in the medium term, with the anticipation of second-half 2019 revenues from these customers.

IQE says that, in first-half 2019, continued strong progress has been made in R&D on the unique 5G RF filter materials portfolio based on its patented cREO (crystalline rare-earth oxide) technology, and the firm remains actively engaged with several chip customers to bring this product to market.

Infra Red

Guidance for the Infra Red segment remains unchanged, at 15% year-on-year growth. IQE says that this segment continues to perform strongly and provides a source of stability and customer diversification to its portfolio.

Adjusted Operating Profit

Given the reduction in expected revenues, IQE expects to remain profitable in 2019 but with adjusted operating profit margin significantly below the previous guidance of over 10%.

While its cost base is largely fixed in the short term, IQE is taking steps to reduce costs and avoid non-critical capital expenditure. This includes the acceleration of the assessment of strategic projects to optimize the firm’s global manufacturing footprint. Active management of all cashflows will ensure that IQE remains within the limits of its current revolving credit facility in 2019.

Outlook for 2020

IQE says that it remains cautiously optimistic about growth opportunities for 2020 and, as global supply chains adjust, it expects that the significant market drivers such as 5G, connected devices and LiDAR will regain momentum. The firm reckons that it remains in a very strong position to capitaliez on this, due to its unique breadth and depth of products, global production capacity and intellectual property. IQE adds that the steps being taken to adapt and manage through this period of uncertainty will ensure that it is well placed to grow revenue and expand margins in the eventual rebound cycle.

“These are unprecedented times for the global semiconductor industry as geo-political conditions affect interconnected global supply chains,” notes chief executive Dr Drew Nelson. “It is now clear that the impact of Huawei’s addition to the US Bureau of Industry and Security’s Entity List is having far-reaching and long-lasting impacts on global supply chains. This is a matter outside of IQE’s control, but we have responded swiftly to leverage our breadth of relationships and to pursue new sales opportunities,” he adds. “We are also taking prudent expenditure actions in order to manage through this period of uncertainty. IQE remains well placed to adapt to mid- to long-term share shifts at both the component (chip) and the OEM level. Indeed, we are now seeing increasing activity from customers in alternative supply chains across our business units as these supply chains respond to current market dynamics. We anticipate significant new customer qualifications during the second half of 2019 as a result. As global markets adjust and recover, we remain extremely well placed for significant future growth.”

See related items:

IQE maintaining full-year revenue guidance despite US adding Huawei to Entity List

IQE’s wireless wafer growth in 2018 outweighs VCSEL-driven drop in photonics

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