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.
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.
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.
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.
