Chip maker IQE warns on profits, shares tumble

Chip maker IQE warned on profits on Wednesday due to softening demand in the fourth quarter.

In an update on trading for the year to the end of December, the Apple supplier also cited a "significant" forex headwind due to the relative strength of sterling versus the US dollar, in which the majority of its revenues are denominated.

The group now expects full-year reported revenues of around £152m, equivalent to £164m at constant currency and representing a drop of around 8% year-on-year. Reported adjusted EBITDA is expected to be around £18m, or £25m at constant currency, which represents an EBITDA margin of approximately 15% at constant currency versus 17% a year earlier.

IQE also said capex in the year is expected to be between £14m and £17m, down from previous guidance of £20m to £30m, due to the phasing of payments for certain tool purchases into 2022. Net debt is expected to be less than £10m.

The company said demand for Wireless GaAs epi-wafers has continued to grow in the second half, driven by 5G penetration of the smartphone handset market and WiFi 6. However, GaAs volumes are below management expectations in the fourth quarter amid softening demand within the broader smartphone supply chain.

Meanwhile, sales of Wireless GaN epi-wafers have continued to be weak. IQE put this down to "end-market dynamics, including significantly lower levels of mMIMO base station deployments in Asia and the slow rate of deployments in Western markets".

As far as the photonics segment is concerned, IQE said demand for VCSELs used in 3D sensing applications has remained solid throughout the second half but it set to "tail off" towards the end of the year in line with supply chain seasonality and general softening in smartphone supply chains.

Sales of other photonics products are also below management expectations in Q4 due to the re-phasing of certain defence and security orders associated with large programmes into 2022 and the slower introduction of sales of new DFB products.

Interim executive chairman Phil Smith said: "Whilst it is disappointing that 5G infrastructure deployments have remained weak all year, we still expect this macro trend to provide a multi-year growth cycle for IQE. In the immediate term, broader semiconductor market shortages have softened demand in some supply chains but we believe these effects to be temporary and remain excited by the opportunities ahead .

"Meanwhile IQE has made significant strategic and operational progress in 2021. This has laid strong foundations , which newly announced CEO Americo Lemos will look to capitalise on as he sets out his strategy for the future direction of the business next year."

At 1010 GMT, the shares were down 18% at 41.50p.

Russ Mould, investment director at AJ Bell, said: "On stated basis, sales and profits now look set to drop by 15% and 40% respectively this year. Currency movements have something to do with the weak numbers. But the real blows are lower-than-expected global sales of fifth-generation (5G) mobile telecoms network infrastructure and emerging signs of slackening demand in the smartphone market, which may be related to supply-chain disruption and chip supply shortages elsewhere.

"This goes to show that IQE is far from immune to global trends, even if the Cardiff-headquartered company tends to march to its own beat."