IQE’s trading update reported stable revenues with 2% growth y-o-y and strength in Photonics due to numerous end-market drivers. Total revenue growth was slightly held back by temporary production disruption at one of its customers, but this has now been solved and Q3 has had a good start. The stable performance should alleviate fears of a revenue collapse caused by silicon PAs displacing compound semis in the important mobile phone market, which increasingly appear to be unfounded.
Three of IQE’s key customers had very strong quarterly results recently. Qorvo, Skyworks and Avago reported y-o-y revenue growth of 46%, 58% and 130%, respectively. This growth has come from a number of sources including the release of the new generation of smartphones, but the main driver has been the growth in filter sales due to the multi-band and therefore multi-filter requirements for 4G phones. Increased filter sales do not directly benefit IQE but they do reflect the strength of the 4G mobile market, which is a positive sign for compound semiconductor-based power amplifiers and IQE.
The strength in photonics was driven by growth in data centre, optical communication, industrial heating and sensing applications. Revenue by segment has not been disclosed in the trading update but in H114 Photonics accounted for 19% of revenue compared to 80% for Wireless; therefore, overall revenue growth should accelerate as Photonics and Solar become a greater proportion of revenue. Operating profit and EPS were up 5% y-o-y and net debt is expected to drop to £31.1m from £35.5m last year. This is before the normalisation of working capital following the restructuring of the business at the end of the last financial year, which could add further positive cash flow.
IQE continues to trade at a significant discount to both its peers and the market (10.3x FY15 P/E), presumably due to continuing fears that wireless revenues remain under threat from weakening smartphone growth and silicon-based alternatives to compound semiconductors. Further periods of stable wireless revenues and growth in the other verticals therefore remain key to changing people’s perceptions and triggering a re-rating of multiples.