In good shape to move forward
International Quantum Epitaxy (LONDON:IQE)’s full year results confirmed the expected stabilisation in wireless in H2, while Photonics continues to grow strongly. The restructuring initiative enabled margins and earnings to continue expanding despite the overall reduction in sales, and should stand the company in good stead going forward.
Good progress below the top line
Full year results had largely been pre-announced in the trading update, although adjusted operating profit at £17.6m was 6% ahead of our forecast. Helped by the restructuring, operating margin improved from 11.5% in FY13 to 15.7% in FY14, despite the 11.6% reduction (6.9% constant currency) in revenues. Progress is also being made at improving the balance sheet, with net debt reducing to £31.3m (from £34.4m last year) despite £4.8m cash restructuring costs and £8m deferred consideration discounts. With modest capex expectations, no further restructuring anticipated and the final deferred consideration due in FY16, this process should continue in FY15 and FY16.
Strong growth in Photonics
While performance was affected by the inventory cycle in wireless, the 15.7% sequential wireless growth in H2 reflects stability in the wireless business. While wireless revenues have been affected by the transition of switches to silicon on insulator (pre-FY14) and die shrinkage, management believes these headwinds have now largely run their course. Fears that silicon will replace compound semis in mobile power amplifiers appear unfounded. We forecast flat revenue performance in wireless. Revenues from Photonics continued to grow strongly (23% y-o-y, constant currency) and this is expected to continue, driven by design activity across a broad range of applications. The timing and quantum of revenue opportunity in CPV solar and Power Semiconductors are difficult to gauge, but progress is ongoing and both could be significant.
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