IQE has cut its FY19 revenue and profit guidance in response to reduced demand from wireless customers and an internal issue affecting a major photonics (not VCSEL - vertical cavity surface emitting laser) customer. Following a 25% share price fall, the shares are trading within the range created by photonics peers on most metrics.
IQE’s customers manufacturing wireless semiconductor chips for the mobile phone industry are cutting back inventory levels in response to the uncertainty regarding future demand caused by lengthening mobile phone replacement cycles. This caution is exacerbated by the impact of Huawei’s addition to the US Bureau of Industry and Security’s Entity List. IQE’s initial assessment of this was focused on customers directly involved in the Huawei supply chain, but the interconnected nature of the semiconductor supply chain means many more of IQE’s customers have been affected indirectly. In addition, a major photonics customer purchasing indium phosphide (InP) epitaxy for laser chips has internal issues. Overall, the company guides FY19 revenue in the £140–160m range at an adjusted operating margin significantly below previously guided 10%.
IQE’s dominant position in the outsourced compound semiconductor epitaxy market means it has supply relationships with multiple non-US (and US) customers. It is therefore relatively agnostic to any mid- to long-term shifts in market share at either component or OEM level. For example, it is engaged in initial production activities with two Asian customers who stand to benefit from wireless supply chain shifts. On the photonics side, management expects to start mass production for two additional VCSEL customers in H219, with a further 13 customers at the sampling stage. In addition, IQE is engaging with multiple Asian chip companies on 10G and 25G lasers for data comms. These new business opportunities should mitigate the lack of business from the InP laser chip customer in the medium term.
If we restrict our peer-based comparison to the three listed companies offering epitaxy for VCSELs then IQE is trading within the valuation range for these stocks on most metrics. IQE has a much stronger market position than the other three, so trading towards the upper end of this smaller sample seems reasonable. Taking this approach, we see scope for share price recovery once semiconductor supply chains have stabilised and the current period of destocking is over.