IQE (IQE) shares plunged nearly 40 per cent in morning trading, after the escalating toll of the US-China trade war forced the UK semiconductor specialist to slash its revenue and profit margin guidance for the year. The cut to expectations comes against a backdrop of deep uncertainty for industrial businesses with exposure to China, and Chinese consumer electronics giant Huawei in particular.
In May, the United States Department of Commerce added Huawei and 68 of its affiliates to a list that bans the sale of products covered by its Export Administration Regulations (EAR), without having secured an appropriate export license. IQE provides epitaxial wafers to a number of chip companies in global supply chains, some of whom supply Huawei. At the time, IQE updated that it anticipated some short-term disruption, particularly in its wireless business unit, with photonics (light science) and infrared “essentially unaffected”. It retained its full-year guidance.
IQE now expects its full-year revenues to sit between £140m and £165m, below a consensus of £175m and against last year’s level of £156m. Adjusted operating margins will sit close to 0 per cent should IQE deliver at the bottom of that range, according to Damindu Jayaweera, an analyst at house broker Peel Hunt, and 5 per cent if revenues come in closer to the mid point. The company had previously predicted margins of 10 per cent.
Significant global supply chain shifts are hurting short-term revenues from IQE’s power amplifier products, contributing to an expected revenue decline in the wireless division of between 20 and 25 per cent, below previous guidance of a 15 per cent reduction. IQE still expects the infrared division, which is mainly exposed to western defence markets, to grow by 15 per cent year on year.
IQE’s last financial year was a torrid one for its photonics division, as disruption to its semiconductor laser diodes (VCSEL) supply chain over the final two months contributed to a fall in demand for VCSEL wafers and an 8.1 per cent decline in photonics revenues. Management warned of headwinds linked to the unwinding of inventory levels in the VCSEL supply chain. External pressures have now compounded this malaise, and revenues are forecast to grow by less than 30 per cent, beneath a previously anticipated level of 50 per cent. The outlook for Indium Phosphide lasers “remains challenging in the short term”, management said.
The semiconductor company is far from alone in this turmoil, though. In mid-June, industry giant Broadcom slashed its revenue forecast by around $2bn (£1.58bn) as it prepares for further disruption. “That tells you that nobody’s safe,” Peel Hunt’s Mr Jayaweera said.
Peel Hunt forecasts adjusted full-year 2019 pre-tax profits and earnings per share of £5.8m and 0.9p, respectively, rising to £20.2m and 1.5p in 2020.
