IQE plc announces its pre-close trading update for the full year ending 31 December 2017.

The Group announces that it expects full year revenues to be ahead of market expectations, and to be not less than £150m for the year ending 31 December 2017. Wafer sales are on track to deliver strong double-digit growth in 2017 and to continue to diversify. The three primary markets are Photonics, InfraRed and Wireless.

(Image: IQE)

The Photonics business has enjoyed strong double-digit growth over the past few years largely driven by new product development and pilot production for a wide range of applications. This growth continued to accelerate sharply in the second half of 2017 as a VCSEL product development programme moved to mass market production in June. As a result, the Photonics division is on track to achieve approximately 100% growth in 2017 over 2016. IQE believes that it has created a sustainable lead in this market by virtue of its intellectual property, its ability to scale this complex technology into mass market, and its dual-site supply strategy. This is further underpinned over the next few years by several, multi-year supply contracts.

The InfraRed business enjoys global leadership in the supply of advanced antimonide wafer products. It has a history of delivering steady growth, and is on track to deliver growth in 2017 of approximately 10%. This business has historically focussed on advanced “see in the dark” technologies in the defence sector, but it is now engaged with major OEM and device companies in product development programmes targeting mass market consumer applications.

Wireless sales are expected to be broadly flat year on year, with a forex tailwind mitigated by a reduction of inventories downstream. IQE successfully managed this inventory reduction to enable it to focus capacity on the rapidly expanding photonics division. This was achievable by virtue of its strong Supplier Managed Inventory (“SMI”) relationships with its customers. These inventory levels will normalise in 2018 as we replenish normal SMI levels.

The Group also generates license income from Joint Ventures. As anticipated, this will reduce from the prior year, which included significant upfront amounts. License income is expected to be no more than £2m for the full year.   

The majority of the Group’s revenues are denominated in foreign currency. A forex tailwind of approximately 5% against the prior year turned into an approximate 5% headwind in the second half. However, this is largely presentational as the majority of the groups costs are also in foreign currency.

The increase in wafer sales will continue to drive an expansion of wafer margins in 2017. As a result, profit before tax for the Group is expected to be ahead of current market expectations. In particular, wafer sales are expected to be materially higher, partially mitigated by lower license income. This margin expansion is after upfront investment in overheads to establish the new foundry that will begin operations in 2018. Progress with the new foundry is on track, with the first five new tools ordered being scheduled for installation in early 2018, and generating revenues by mid-year. In addition, the Group has agreed terms for a further ten production tools, and is in the process of agreeing the specification for the first five of these additional tools. 

Net funds are expected to be in the range of current market expectations.

As reported in October, a prior year tax liability estimated to be £4.2m was identified and settled in full. The Group’s tax advisors have now completed their review of the tax computations and the tax return has been filed. Whilst there were no indications of any further potential omissions, the Board commissioned an international independent tax firm to complete a comprehensive review of the Group’s tax compliance in the UK, the US and Asia. This review is ongoing and has not identified any further unrecorded liabilities. This review is scheduled for completion during Q1 of 2018.

Additionally, the US Government’s much publicised plan to reduce the corporation tax rate from 35% to 21%, if passed would have a positive long term financial benefit for the IQE group, which has operations in the US. However, if enacted, this change will give rise to an upfront non-cash deferred tax charge relating to a reduction in the associated deferred tax asset. The quantum of the potential reduction has not yet been evaluated.

The Group is scheduled to report its full year results for 2017 on 20 March 2018, and will provide forward looking guidance at that time.

Dr Drew Nelson, Chief Executive of IQE, said:

"I’m very pleased to confirm that IQE is on track to achieve record financial results in 2017. The adoption of VCSELs in the mass market has been a key revenue driver in the year. IQE has built a strong and sustainable lead in this complex materials technology. We see VCSEL being a long term growth driver for the Group across a diverse range of applications including sensing, LIDAR, optical communications, industrial heating, machine vision and heat assisted magnetic recording.

“VCSEL is just one of many advanced materials technologies that IQE has developed which will drive continuing growth in the near and mid term. IQE has created strong differentiation in the industry through its broad portfolio of materials technologies and it ability to scale and supply reliably in the mass market. Combined with our recent fund raising to pump prime our expansion, IQE’s outlook is for strong, diverse and sustainable growth”