Cardiff-based chip-maker IQE yesterday took the unusual step of releasing a profit warning at 4.20pm after rumours broke in the US that Apple suppliers were anticipating a decrease in demand for its handsets. The price reaction to this news was perhaps understandable: a fall of 30% which included a slide throughout the day. Another RNS was put out first thing this morning which has seen the share price recover somewhat:
The warning comes in two parts. Perhaps in reaction to sustained selling of the share on the day, a clipped release was put out reading as such:
IQE plc issues this trading update in response to reports made by a major chip company in the VCSEL supply chain on 12th November 2018 that they had received notice from one of their largest customers for 3D sensing laser diodes to materially reduce shipments for the current quarter.
The Company is currently assessing the impact of this news but at this stage, it expects there will be a material reduction in its financial performance in the current year.
A combination of things the market hates: ‘material reductions’, lack of detail and poor timing. No doubt there were a lot of holders disappointed by this news, as the share price has been very volatile recently.
IQE redeemed themselves by releasing a more details update at 7am this morning which quantifies the impact:
IQE confirms it was notified on 12th November 2018, following an announcement made by a major chip company in the VCSEL supply chain on the same day, that the chip company had received notice from one of their largest customers for 3D sensing laser diodes that they would materially reduce shipments for the current quarter.
As a consequence of the change in market conditions, IQE announces that it now expects to deliver revenues of approximately £160m for FY 2018 (H1 2018 £73.4m, FY 2017 £154.6m).
There was some more detail on which segments would be hit:
…. Photonics wafer revenues growth for FY 2018, on a constant currency basis, is now expected to be approximately 11% (previous guidance for FY 2018 Photonics wafer revenue: 35% to 50%)
And some where this would be made up:
Wireless wafer revenues for FY 2018, on a constant currency basis, is expected to grow at 8%, above the top end of the 0% to 5% revenue growth guidance, given in the Company’s H1 trading statement.
Infrared wafer revenues, on a constant currency basis, is also expected to grow at or exceed the top end of current CAGR guidance range of 5% to 15% for FY 2018 and remain in the 5% to 15% range for FY 2019.
The bottom line as such:
As a result, FY 2018 Adjusted EBITDA is now expected to be approximately £31m (FY 2017 £37.1m).
This (for me, anyway) is quite a tough business to understand. It manufacturers semi-conductor wafers which are used in a wide variety of appliances, and counts Apple as a major customer. It is an exciting business for investors because we are very much at the growth stage – the company is investing heavily in capex. Many of their products are niche in use and are bespoke, produced for specific requirements. The bull case is easy to see: potentially a captive market for their products with very large barriers to competition.
But some of the problems have come due to this excitement. The share’s valuation has historically been extremely high: a year ago, it was in excess of 180p, giving a market valuation of well over £1bn. For a company that was only reporting profits of c.£20m, it was clear that large growth was expected.
This in turn attracted the shorters, people that thought the price was simply too high. And they came in some numbers as well: even today, IQE is one of the most shorted companies out there. And for the moment, they are winning: the share price has declined all year, and we sit today at under 50% of the all year high.
In terms of business safety, there is nothing untoward here. There are genuine profits being made, which are being reinvested back into the business. The financial position is not distressed at all: last year there was an equity raise which gave net proceeds of £95m, which cleared debt and as of the end of the last year, £45m sat in their accounts, giving them a healthy position.
Stockopedia dislikes this business, awarding it a score of just 17. But to counter this, many businesses in the initial growth stage would have poor metrics.
Opinions on this are likely to be polarised, with some established bull and bear cases. The share price has been volatile, showing rapid gains and losses (but mainly losses this year).
There is a possible governance concern. The share price yesterday showed sharp declines ahead of the 4.20pm RNS. That suggests to me that the news was leaked somewhere, and no doubt some people made a quick buck, in the knowledge that a fuller explanation would be forthcoming.
With all the short interest, it could well be that we see a squeeze as people look to close their positions. The RNS does not paint the picture of a business struggling, and that growth will return in the next year. And for sure, I would not like to bet against Apple. It could be the case that with their recent release of iPhones, they may well have reached a saturation point in their market: people are not going to be paying £1,000 for a phone. But crucially with releases happening so often they will be able to reformulate things.
I don’t profess to having a clear opinion on this. The latest news here seems to have set growth back, and promised it at a later date. EBITDA also takes a hit from last year, but forecasting where we could be in a few years seems to have become even more uncertain. At the very least IQE have suffered from customer concentration, which will mean a degree of volatility in the price is always present.
Until better news presents itself it is difficult to see the share price going too far. The market cap now stands at around £500m, which on one hand seems cheap for a company of its prospects, but on the other hand the price action still suggests that further falls could happen. In this climate I am happy to sit this out and rate this a 3/5.