Photonics underpins H117 growth The strong photonics growth noted since FY14 continued into H117. A 48% leap in photonics revenues and a 10% currency tailwind delivered a 12% y-o-y increase in group revenues during H117 to £70.4m. Adjusted operating profit from the wafer manufacturing operations grew by 32% to £9.6m. However, this was offset by a reduction in licence fees, which benefited from one-off upfront payments in H116, resulting in small (2%) decrease in group adjusted operating profit to £10.6m. Multiple growth drivers beyond VCSELs Importantly, part of the H117 growth is attributable to the onset of volume deliveries of VCSEL epitaxy for the iPhone X. This is in addition to continued work on a range of programmes that also have potential to become volume contracts in future. This includes VCSELs for other consumer applications such as hand and body tracking, automotive applications, data comms and industrial applications such as heating; InP (indium phosphide) wafers for high-speed data networks and GaN (gallium nitride) wafers for radio frequency and power applications. This range of applications gives potential for growth without the reliance on the handset market that has bedevilled IQE in the past.
http://www.edisoninvestmentresearch.com/research/report/iqe389108/preview Getting ready for multiple VCSEL ramp-ups The funds raised will be used to purchase an additional 40-60 new MOCVD reactors over the next three to five years (IQE currently has around one hundred, but these are used for a different mix of epitaxies). The reactors will be used to make epitaxy for multiple VCSEL programmes as they move into volume production. Towards the end of H117 IQE began to deliver volume VCSEL epitaxy, which we infer was for the new iPhone X. It is currently working on a range of programmes that have potential to become volume contracts in future. Some are for other phone manufacturers wanting to emulate the capabilities of the new iPhone. Some are for other consumer applications including hand and body tracking, automotive applications, data comms and industrial applications such as heating, InP (indium phosphide) wafers for high-speed data networks and GaN (gallium nitride) wafers for radio frequency and power applications. http://www.edisoninvestmentresearch.com/research/report/iqe977766/preview IQE
IQE’s pre-close trading update noted that management expects FY17 revenues to be ahead of market expectations. Noting that the upgrade is driven by delivery of volume epitaxy on a programme that we infer is the new iPhone X, a programme which will continue throughout FY18, we raise our revenue estimates for both FY17 and FY18, but keep EPS numbers unchanged as the proportion of licence revenues in the mix is lower.
{colgroup} {col}{/col} {/colgroup}IQE is the leading supplier of epitaxial compound semiconductor wafers globally. The principal applications include radio frequency semiconductors, devices for optical networks, vertical cavity lasers, infrared semiconductors, power electronics and CPV solar cells.
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Photonics revenues double, while wireless stable Management expects volume VCSEL ramp-up during H217 to result in photonics revenues approximately doubling for FY17 as a whole. Our estimates model photonics revenues remaining at H217 levels throughout FY18. Management expects wireless revenues to be broadly flat year-on-year, with favourable FX rates balancing an inventory reduction. Our estimates model growth from this segment in FY18. IQE expects the increase in wafer sales to drive an expansion of wafer margins in FY17, an effect which we model as continuing through FY18. We revise our group revenue estimates from £145.3m to £150.1m for FY17 and from £160.3m to £165.2m for FY18. We also increase the FY17 cash tax payment by £4.2m to reflect settlement of a prior year tax liability. Potential for multiple VSCEL ramp-ups Our revised estimates model growth from multiple volume VCSEL programmes related to the iPhone X. IQE is currently working on a range of other VCSEL programmes that have potential to become volume contracts in the future. We believe that some are for other phone manufacturers wanting to include Face ID functionality in their devices. Some are for other consumer applications including hand and body tracking, automotive applications, data comms and industrial applications, indium phosphide wafers for high-speed data networks and gallium nitride wafers for radio frequency and power applications. The acquisition of Quasi Photonic Crystal patents for $0.5m will help IQE maintain its technology leadership in these applications and could lead to new growth markets beyond epitaxy. Valuation: Earnings upgrades priced in The shares have performed extremely well in recent months, rising more than 3x from 37.75p a year ago, and are now trading on multiples that suggest that upgrades are already priced in. There remains potential for FY18 earnings to exceed current expectations, especially if other VCSEL programmes move into volume manufacture. Our September outlook note explores the impact of potentially faster rates of VCSEL roll-out on FY18 EPS.
SLX
Price at posting:
42.0¢ Sentiment: Buy Disclosure: Held
A personalised tool to help users track selected stocks. Delivering real-time notifications on price updates, announcements, and performance stats on each to help make informed investment decisions.
