IQE's bottom-line buffeted by FX, pre-production costs at new foundry
Wireless semiconductor manufacturer IQE's profits got hammered during the first half of 2018 as a result of currency headwinds and the pre-production costs at its new flagship foundry in Newport, including accelerated customer qualification programs as the company invested in branching out from the production of semiconductors for wireless applications.
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Nevertheless, management put a brave face on the results, with company chief Drew Nelson saying the company's investments in its VCSEL technology for the manufacture of wafers for sensing applications would deliver "strong" increases in revenues and margins.
"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," Nelson said.
Total revenues for the six months ending on 30 June were ahead by 4.0% to reach £73.4m from restated figures for the prior year, but alongside a 28.6% drop in operating profits at its wafer operations, its main line of business, from £10.7m to £7.6m.
Also missing was the prior year's £1.0m in licensing revenues.
Profits before tax meanwhile were down by 21.2% to £7.6m and fully diluted earnings per share by 44.5% to 0.76p.
Nonetheless, were it not for those FX headwinds and other extraordinary costs, then profits before tax would have climbed by 14.4% to £11.1m, the company said in a statement.
On a reported basis, profits before tax were in fact £1.0m higher at £6.6m, despite a drag of £2.0m from the higher level of the pound versus a year ago, IQE added.
Over the six months ending on 30 June, the pound had traded at an average level of 1.38 against the US dollar, which was up from 1.26 during the comparable year-ago period.
Cash from operations also weakened, by 32.3% to £7.6m.
The company had £40.6m of cash on hand at period-end, following a successful share placement in November 2017, versus net debt of £41.9m one year ago.
Before interest and taxes, the company's earnings fell about £2.0m short of Cannacord Genuity analyst Paul Morland's forecast for £7.6m, with £1.5m of that linked to pre-production costs at the new foundry in Newport (£0.9m) and accelerated qualification for certain chip customers (£0.6m) with the remainder being put down to US dollar weakness.
However, according to Morland, management felt comfortable with his "low-end-of-the-range forecast" for full-year 2018 profits before tax of £32.2m, which he therefore retained.
For 2019 on the other hand, he revised his EBIT estimate 9.0% higher to £47.0m.
"We increase revenues to reflect the diversification of VCSEL customers with the addition of Android OEMs for 3D sensing applications and new guidance suggesting stronger Photonics margins. This leads us to increase FY19 EBIT by 9% to £47m. This takes EPS up to 4.8p which leaves the shares on a highly attractive 22x P/E for almost 50% earnings growth in FY19E."
Barclays's Andrew Gardiner chimed-in, reiterating his 'overweight' stance and 170.0p target on the stock.
"Management continue to forecast Photonics to grow by 40%+ p.a. into the next decade, driven primarily by VCSEL adoption for 3D sensing," Gardiner said.
"We expect IQE to remain the leading supplier of VCSEL epiwafers; while competition is trying to bridge the gap, our research shows it is proving challenging and taking longer than anticipated. In the meantime, IQE is working today with 24 customers on VCSEL technology, underlining why, in our opinion, management are right to increase investment."
As of 0845 BST, the company's shares were trading 3.46% lower at 100.40p.