IQE has announced that it expects H120 revenues to be at least £85m. This is 27% higher than H119 and a record first half performance. Despite this encouraging start to the year, we leave our estimates unchanged given the prevailing uncertainty regarding the impact of the coronavirus pandemic on global handset demand.
As flagged by management in April, Q120 was slightly ahead of internal expectations. Since then trading in Q2 has been strong, with no disruption to production from coronavirus-related lockdowns. H119 wireless revenues were adversely affected by the dislocation to global semiconductor supply chains caused by Huawei’s addition to the US Bureau of Industry and Security’s Entity List as well as customers destocking in response to the uncertainty caused by lengthening smartphone replacement cycles. During H120 however, IQE’s long-standing wireless customers have benefited from major design wins and investment in 5G infrastructure. IQE is also taking share in the Asian wireless market. Production for IQE’s major vertical cavity surface emitting laser customer was consistently strong throughout the period.
Given the high proportion of fixed costs, management expects the revenue growth to take the group to a low single-digit million adjusted operating profit in H120 compared with the £1.9m loss reported in H119. Management also expects the group to be cash generative during H120 because the programmes to build infrastructure at the Mega Foundry in Newport, South Wales and to expand capacity in Taiwan and Massachusetts all completed in FY19.
We note that in IQE’s case the impact of potential weakness in global handset demand is likely to be softened by gaining share in both the wireless and photonics markets as well as by government investment in 5G infrastructure as part of stimulus packages.