Spark subsides at IQE

We’re particularly concerned that the photonics business – whose biggest customer is presumed to be the company that provides Apple with its face recognition software – has failed to maintain the momentum from the second half of 2017 when revenues hit £32m. In the six months to June 2018, revenues from that customer were flat as inventory from the first big order “was consumed in the supply chain”.

It is also worrying that the company, which claims to be the global leader in VCSEL epi wafers, having “first established the technology over 25 years ago, and since developed it to mass production” is still having to spend heavily on expanding its manufacturing capacity. Costs associated with construction at its Newport site ate into margins and resulted in a 22 per cent drop in operating profits at the core wafers business in the first half.

But strip out the currency headwinds and infrastructure development costs and there are positives to be found in these results. All three divisions reported double-digit revenue growth at constant currencies, with the photonics business leading the way, up 30 per cent. It is also a relief that the division seems to have reduced its reliance on a single large customer – according to Peel Hunt, IQE is now engaged with more than 20 partners. The broker thinks this will help boost pre-tax profits to £31.5m in 2018, from £24.3m last year, although the recent equity placing (which helped IQE swing into a net cash position) means adjusted EPS will be flat at 3.3p.