IQE's record full-year 2017 results driven by adoption of VCSEL technology in mass-market consumer applications
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Mar 22, 2018 12:05PM
In its final results for full-year 2017, epiwafer foundry and substrate maker IQE plc of Cardiff, Wales, UK has reported revenue of £154.5m, up 16.4% on 2016’s £132.7m (and above the guidance of “not less than £150m”). In particular, due to continued diversification, wafer revenue rose by 21.1% from £126m to £152.6m, with strong growth in high-margin product lines (particularly Photonics).
As a consequence of these growth rates, wafer sales continued to diversify, with Photonics rising from 18% of total revenue in 2016 to 31% in 2017, while Wireless fell from 72% to 60%, and InfraRed remained at 8%, and CMOS++ remained at 1%.
License income from sales to joint ventures fell (as expected) from 2016’s £6.7m (which included significant upfront license fees) to £1.9m in 2017.
Excluding license income, gross margin on wafer sales rose from 21.8% to 24.1%, primarily reflecting the benefit of a favourable sales mix with a greater proportion of higher-margin Photonics sales.
Selling, general & administrative (SG&A) expenses rose from £16.6m to £21.6m, reflecting investment for growth.
Adjusted operating profit rose from £22.1m to £26.4m, reflecting an increase in wafer-related profits from £15.5m to £24.5m (due to high operational gearing and the more profitable sales mix) partially offset by the £4.8m reduction in license income.
Adjusted operating margins for the primary segments were 15% for Wireless, 38% for Photonics and 27% for InfraRed. “These represent sustainable margins, and hence provide the opportunity for future margin expansion through continuing diversification of revenues,” believes IQE.
Conversion of adjusted operating profit into operating cash rose from 102% to 113%.
In tune with the firm’s diversification strategy, to address near-term and foreseeable growth opportunities, capital investment has been increased from £19.1m to £28.2m. This comprises:
In November, IQE issued 67.9 million new ordinary shares, raising gross proceeds of about £95m, primarily to finance a capacity expansion program to deliver the scale needed to capture multiple high-growth market opportunities (particularly the continuing ramp in demand for VCSELs as adoption broadens) as well as enabling the acceleration of product development. Part of the proceeds went to repay outstanding borrowings in order to save interest charges. Hence, compared with net debt of £39.5m at the end of 2016, at the end of 2017 IQE had net funds of £45.6m.
“We continue to expand capacity to meet forecast increases in demand, as well as driving throughput and yield improvements to release latent capacity and drive margin expansion in our existing business,” says CEO Dr Drew Nelson.
Central to the capacity expansion is the creation of a new ‘Mega Foundry’ in progress in Newport, South Wales, which will house up to 100 tools. The first five tools are already installed and on track for production in second-half 2018. A further five tools should be installed and commissioned by end the end of Q3/2018. “This is an incredible achievement given that the initial building works only began in September 2017,” comments Nelson. Preparation is underway to acquire at least a further 10 tools in the next 12-18 months, as demand requires. The new foundry is being supported by £37.9m from the Cardiff Capital Region (CCR) City Deal’s Wider Investment Fund, which (following an agreement last May) is funding construction of the infrastructure. IQE is leasing the building under an 11-year lease, which has a 3-year rent-free period and an option to purchase. This support has enabled IQE to focus its own investment on adding new tools, which requires upfront investment in both OpEx and CapEx. The lead time to get new tools into production is 9-12 months, so a fully utilized tool making VCSELs has a payback of about one year.
Progress with technology development includes the demonstration of key enabling technology for high-performance wireless filters; cREO for integration of compound semiconductor materials technologies on silicon; and quasi photonic crystals and nano-imprint lithography for a wide range of optical technologies including distributed feedback (DFB) lasers, integrated 3D sensing solutions and silicon photonics applications.
Also, qualifications are in progress with IQE’s gallium nitride on silicon (GaN-on-Si) technology for base-station and other high-power RF applications (providing a route to accelerating wireless growth).
Customer interactions are broadening for InfraRed, where IQE is now working with major OEM and device companies in developing InfraRed products for mass-market consumer applications.
There has also been continued progress by IQE’s joint ventures in the UK and Singapore. Significantly expanding external customer engagements and improving financial performance reflect the achievement of key milestones for these early-stage businesses.
Driven by expansion of existing business and qualifications of new business streams, in full-year 2018 IQE expects wafer revenue growth of 35-60% in Photonics (based on expansion of products currently in production and the completion of ongoing qualifications), up to 5% in Wireless (with supplier-managed inventories replenishing, and potential for revenue expansion as GaN products make stronger contribution), and 5-15% in InfraRed (with customer engagement broadening).
In addition, in 2019 and beyond IQE believes that there is potential for strong growth from the following:
“The depth and breadth of customer engagements in Photonics provides a solid platform for continuing strong growth, with several new product launches forecast over the next 12-18 months for multiple OEMs,” says Nelson.
Based on existing products, IQE expects compound annual growth rates (CAGRs) over the next 3-5 years of up to 10% in Wireless, 40-60% in Photonics, and 5-15% in InfraRed, with the potential for higher growth through new product introductions.
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