IQE warns of headwinds after 'challenging' 2018

IQE's shares dropped on Wednesday after the semiconductor business reported a decrease in annual profits and warned that it faced short-term headwinds.

Profit before tax for the year ended 31 December came in at £14.0m, a decrease of 43% compared to the year before, while a 1% increase in revenue to £156.3m was more than offset by a 3% increase in cost of sales to £118.8m and a 38% jump in administrative costs to £29.9m.

Drew Nelson, chief executive of IQE, said: "2018 was a very difficult and challenging year for IQE group from many perspectives; including the tragic and untimely death of (former CFO) Phil Rasmussen. Our disappointing 2018 financial performance was materially impacted by a very substantial VCSEL inventory correction in the first half of 2018 and the sudden disruption in a highly significant supply chain causing greatly reduced short-term demand for VCSEL wafers during the last two months of the year."

Nelson added that these difficulties were exacerbated by the "well-heralded softness in the smartphone market".

Photonics revenues decreased 8.1% to £43.8m amid the VCSEL inventory correction, supply chain difficulties and reduction in demand in November, while wireless wafer revenues were up 7% to £97.8m and Infrared wafer revenues were up 10% to £13.1m.

The AIM traded company said the softening in demand and other headwinds would continue to affect profit and revenue in the first half of the current year, though it argued this was a "temporary impact" and said "significant growth" can be achieved in the second half and into the following year in its Photonics and Wireless business units.

"Revenue increases in 2019 will be driven by the return to strong growth of our photonics business and emerging opportunities in 5G and will be soundly based on operational improvements, rationalisation and capacity expansions that have been in progress for the last two years and which will complete in H1 2019," said Nelson.

Canaccord analysts said: "We highlighted in our recent notes here & here that IQE is impacted by 'trough' demand in 1H19 as the Semiconductor supply chain digests Apple's severe mid-November production cut while its wireless customers work through elevated inventory. FY19 guidance of a 40:60% split is evidence of this with management encouragingly echoing our view of a strong 2H demand recovery. This scenario is supported by intense ongoing qualification work with new Photonics chip customers, a further rise in capex in 2019 and 3D sensing design wins with Android OEM's by several of its customers."

IQE's shares were down 8.75% at 76.11p at 1033 GMT.