During H118, IQE PLC (LON:IQE) experienced double-digit sales growth on a constant currency basis in each of its three primary markets, although this was partly offset by a currency headwind. The investment in multiple VCSEL qualifications and the Newport foundry depressed margins, but underpins management’s expectations of a sustained photonics ramp-up in H218 and FY19. Acknowledging the currency headwind and one-off H118 photonics costs, we revise our estimates downwards.
Investment in photonics growth a drag on margins
As flagged in the pre-close trading update, total H118 revenues grew by 4% year-on-year to £73.4m, with the photonics segment growing by 30% in constant currency to 26% of the total. Adjusted profit before tax was depressed by several factors, falling by 21% to £7.6m. These include the currency headwind, the cost of multiple low margin VCSEL qualification programmes and the cost of staffing the new Newport facility prior to commencing production. Collectively, these one-off effects totalled £3.5m. If these costs are stripped out, adjusted profit before tax becomes £11.1m, a 14% improvement on the prior year period. Additionally, H117 benefitted from £1.0m licence revenues but there were none in H118. Net cash reduced by £5.0m during the period to £40.6m at the end of June, reflecting continued investment in multiple innovative technologies and capex for the new Newport foundry.
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