IQE warns on profits amid tough trading conditions

(Sharecast News) - Semiconductor wafer products and materials solutions provider IQE updated the market on its trading for the year on Monday, reporting that it now expected to deliver revenue of between £136m and £142m, down from its previous guidance range of £140m to £160m, including a forex tailwind of circa £3m.
The AIM-traded firm said a mid-single digit adjusted operating loss was now expected for the year ending 31 December, resulting from revenues being slightly below the previous guidance range, additional one-off commissioning costs at the new foundry in Newport, general diseconomies of scale associated with operating at low volume in some sites, and the inclusion of losses for the Singapore CSDC entity, as it announced in October.

It said that in photonics, "consistently strong" 3D sensing volumes with the company's largest vertical cavity surface-emitting laser (VCSEL) customer had been achieved in the second half, which the board said underlined the firm's position for epi-wafers in this supply chain.

The company said it was continuing to make good progress on a significant number of Android-related supply chains, including two recently-announced production qualifications.

It said the market for Indium Phosphide lasers for datacom and telecom had remained weak, but there were said to be signs of growth for 2020, particularly in Asian markets.

In wireless, IQE said there had been continued low volumes of orders and reductions in inventory by its major radio frequency (RF) chip customers in the United States, offset "to a limited extent" by a promising increase in production for Asian supply chains.

IQE said it had qualified three tools, with two further tools in the process of qualifying, with a major Taiwanese foundry.

The company said it was continuing to make "good progress" on new product development in the areas of RF filters and switches for 5G.

Since June, it had taken steps to reduce costs and capital expenditure as the infrastructure phase of capacity expansion had been completed.

Capital expenditure was set to be towards the bottom end of its previous guidance of £30m £40m, with the company's net debt position at year-end expected to be between £15m and £20m, against increased debt facilities of £57m, as announced in June.

The company said the outlook for 2020 included a seasonally-weak first quarter, and continued supply chain transitions in the wireless market.

Beyond the first quarter of 2020, IQE said it was "cautiously optimistic" about a return to growth, driven by expected content gains in an expanding market for 3D sensing, demand for GaN to meet accelerating 5G infrastructure deployments, and expanding Asian market opportunities for both photonics and wireless products as supply chains continued to localise.

Taking all of that into account, the firm said it was expecting total revenue to return to moderate growth in 2020.

"IQE has experienced very challenging market conditions in 2019," said chief executive officer Dr Drew Nelson.

"Shortfalls in revenue relate predominantly to two major customers, with whom IQE is confident it has not lost share and who remain very well positioned for returns to growth in 2020."

Dr Nelson said the company remained well-positioned to capitalise on an expanding future compound semiconductor market opportunity, driven by the macro trends of 5G and connected devices.

"In order to fully realise this opportunity, the recently-announced executive management board is already making good progress in driving the company's approach to increasing profitability, with specific responsibilities assigned for programs on operational execution, new technology introduction, revenue expansion through customer proximity and diversification, and strong cost management."