Trading update and comment on VCSEL supply chain

13 November 2018

Cardiff, UK. 13th November 2018: IQE plc (AIM: IQE; "IQE", the “Company” or the "Group"), the leading global supplier of advanced wafer products and materials solutions to the semiconductor industry, provides the following trading update further to the announcement made by IQE on 12th November 2018.

IQE confirms it was notified on 12th November 2018, following an announcement made by a major chip company in the VCSEL supply chain on the same day, that the chip company had received notice from one of their largest customers for 3D sensing laser diodes that they would materially reduce shipments for the current quarter.

As a consequence of the change in market conditions, IQE announces that it now expects to deliver revenues of approximately £160m for FY 2018 (H1 2018 £73.4m, FY 2017 £154.6m).

Photonics demand was facing a later but steeper Photonics ramp for VCSELs for consumer products moving into Q4 2018, a reflection of the 6 inch VCSEL inventory overbuild in FY 2017 being larger and taking longer than expected to be consumed during FY 2018. With the impact of this recent announcement coming at this critical time, Photonics wafer revenues growth for FY 2018, on a constant currency basis, is now expected to be approximately 11% (previous guidance for FY 2018 Photonics wafer revenue: 35% to 50%) and based on early initial indications, is currently expected to return to previously guided levels of 40% to 60% revenue growth in FY 2019.

Wireless wafer revenues for FY 2018, on a constant currency basis, is expected to grow at 8%, above the top end of the 0% to 5% revenue growth guidance, given in the Company’s H1 trading statement.  Wireless demand, especially for GaN products, has been strong and capacity was retained through Q3 2018, to continue to address demand following the replenishment of inventory channels depleted during H2 2017. The late ramp of Photonics production also provided an extended opportunity for additional engagement and qualification programs with more than 25 VCSEL chip manufacturers.

Infrared wafer revenues, on a constant currency basis, is also expected to grow at or exceed the top end of current CAGR guidance range of 5% to 15% for FY 2018 and remain in the 5% to 15% range for FY 2019.

As a result, FY 2018 Adjusted EBITDA is now expected to be approximately £31m (FY 2017 £37.1m).

Dr Drew Nelson, Chief Executive of IQE, said:

“The much reported VCSEL inventory overbuild following the successful H2 2017 ramp for a new 3D sensing consumer product application for this technology, took longer to work through the inventory channels than the industry expected.  It is now clear that some of this inventory likely satisfied product build as late as September and October 2018. This resulted in a steeper and later ramp for VCSEL production in Q4 2018.  The impact of an immediate slowdown in shipments of VCSEL wafers will therefore materially impact our expected year end revenues and profitability.

Nonetheless, Photonics revenues, on a constant currency basis, from FY 2016 through to FY 2018 is still expected to deliver revenue growth of at least 45%, which is within the guidance range we retain for FY 2019. We believe that we have retained approximately 90% share of the VCSEL epi-wafer market that we enjoyed last year and based on early initial indications, we expect a similar market share in FY 2019, but with a significantly broader OEM end customer spread as the technology penetrates many more devices and applications.

IQE is the premier solution provider for this VCSEL technology serving the mobile, sensing and datacom applications.  We have demonstrated the three key elements for establishing a pre-eminent position for this high-growth material; technical competence, 6 inch production capability through an aggressive ramp and finally a commitment to install and qualify significant capacity to meet industry assumptions for future VCSEL demand. Our technical leadership is underwritten by more than 25 years’ experience with these highly complex structures and this will be maintained by an unrivalled technology roadmap ensuring we continue to excel. The added capacity to be provided by our Newport Foundry is progressing, with 10 reactors now installed and 4 of which are already engaged in multiple customer qualification activity with some initial volume mass production possible at the very end of the current quarter. The throughput, yield and quality (uniformity) of the qualifications currently underway are very encouraging.

Our Photonics business is building a wide customer base across multiple chip manufacturers providing VCSELs for a number of different end market applications including 3D sensing and this increasing customer diversification will in time produce a better-balanced and more uniformly distributed demand profile. I am also delighted by the strong performance of both our Wireless and Infrared business units and the opportunities they face for 2019 and beyond.

We reiterate our long-term guidance for each of the photonics, wireless and infrared businesses.”

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

GLOSSARY OF TERMS
VCSEL......................... Vertical Cavity Surface Emitting Laser
GaN............................. Gallium Nitride
CAGR…………………..Compound Annual Growth Rate
Adjusted EBITDA…….EBITDA after adjusting for the impact of one-off, non-cash and non-operational items

CONTACTS:

IQE plc 
Godfrey Ainsworth
Drew Nelson
Chris Meadows

 
+44 (0) 29 2083 9400
Canaccord Genuity (Nomad and Joint Broker) 
Simon Bridges
Richard Andrews

 
+ 44 (0) 20 7523 8000

 
Peel Hunt (Joint Broker)
Edward Knight
Nick Prowting
+44 (0) 20 7418 8900