IQE’s (LON:IQE) ability to apply its epitaxial IP to multiple market segments is expected to deliver year-on-year revenue growth of over 15% for H116. In yesterday’s trading statement, management states that the group is on track to achieve full-year expectations. We leave our estimates unchanged, noting that this confirmation of growth through diversification should help catalyse an upwards rerating of the shares.
Demonstrating benefits of diversification strategy
The key driver of the strong H116 revenue growth is the Photonics business. This is expected to show double-digit growth during H116, as multiple applications have started to transition to volume production. Growth is being driven by an increasing demand for VCSELs (vertical cavity lasers) in data communications, gesture recognition in consumer devices and industrial heating applications and for InP (indium phosphide) lasers in fibre optic communication systems. Photonics revenues are typically higher margin than those derived from wireless applications, so this trend is expected to have a beneficial impact on profits as well. Reassuringly, wireless revenues showed a small year-on-year increase, suggesting that the segment has stabilised. The move to leverage IP through involvement in JVs is also paying off, with licence income expected to total c £3.5m for the period.
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