IQE Reduces 2018 Photonics Wafer Revenue Guidance

Epiwafer foundry and substrate maker IQE plc of Cardiff,
Wales, UK says that - after a major vertical-cavity surface-emitting laser
(VCSEL) chip maker said on 12 November that one of its largest customers had
requested a reduction in shipments of 3D sensing laser diodes due for delivery
in the December quarter - it now expects revenue of about £160m for full-year
2018, up just 3.5% on 2017's £154.6m.

Photonics demand was facing a later but steeper ramp for
VCSELs for consumer products moving into fourth-quarter 2018, a reflection of
the 6”-wafer VCSEL inventory overbuild in 2017 being larger and taking longer
than expected to be consumed during 2018. With the impact of the VCSEL chip
maker's announcement at this critical time, IQE now expects Photonics wafer
revenue growth for full-year 2018 (on a constant currency basis) to be about
11% (rather than the guidance of 35-50% given at the end of August) and (based
on early initial indications) 2019 revenue growth to return to previously
guided levels of 40-60%.

Wireless wafer revenues for 2018 (on a constant currency
basis) is now expected to grow at 8%, above the top end of the prior 0-5%
guidance range. Wireless demand, especially for gallium nitride (GaN) products,
has been strong and capacity was retained through third-quarter 2018, to
continue to address demand following the replenishment of inventory channels
depleted during second-half 2017. IQE says that the late ramp of Photonics
production has also provided an extended opportunity for additional engagement
and qualification programs with more than 25 VCSEL chip makers.

Infrared wafer revenue (on a constant currency basis) is
also expected to grow at or above the top end of the compound annual growth
rate (CAGR) guidance range of 5-15% for full-year 2018 and remain in the 5-15%
range for full-year 2019.

As a result, full-year 2018 adjusted EBITDA (earnings before
interest, taxes, depreciation and amortization) is now expected to be about
£31m (up from 2017's £37.1m).

“The much reported VCSEL inventory overbuild, following the
successful second-half 2017 ramp for a new 3D sensing consumer product
application for this technology, took longer to work through the inventory
channels than the industry expected,” notes CEO Dr Drew Nelson. “It is now
clear that some of this inventory likely satisfied product build as late as
September and October 2018. This resulted in a steeper and later ramp for VCSEL
production in Q4/2018. The impact of an immediate slowdown in shipments of
VCSEL wafers will therefore materially impact our expected year-end revenues
and profitability,” he adds.

Nevertheless, Photonics revenues (on a constant currency
basis) from full-year 2016 through to full-year 2018 is still expected to
deliver revenue growth of at least 45% (within the guidance range retained for
full-year 2019). “We have retained approximately 90% share of the VCSEL epiwafer
market that we enjoyed last year and, based on early initial indications, we
expect a similar market share in full-year 2019, but with a significantly
broader OEM end-customer spread as the technology penetrates many more devices
and applications,” says Nelson.

“IQE is the premier solution provider for this VCSEL
technology, serving the mobile, sensing and datacom applications. We have
demonstrated the three key elements for establishing a pre-eminent position for
this high-growth material: technical competence, 6-inch production capability
through an aggressive ramp, and finally a commitment to install and qualify
significant capacity to meet industry assumptions for future VCSEL demand,” he
adds. “Our technical leadership is underwritten by more than 25 years'
experience with these highly complex structures, and this will be maintained by
an unrivalled technology roadmap,” Nelson continues.

“The added capacity to be provided by our Newport Foundry is
progressing, with 10 reactors now installed and four of which are already
engaged in multiple customer qualification activity with some initial volume
mass production possible at the very end of the current quarter. The
throughput, yield and quality (uniformity) of the qualifications currently
underway are very encouraging,” Nelson states.

“Our Photonics business is building a wide customer base
across multiple chip manufacturers providing VCSELs for a number of different
end-market applications including 3D sensing, and this increasing customer
diversification will in time produce a better-balanced and more uniformmly
distributed demand profile,” he continues. “I am also delighted by the strong
performance of both our Wireless and Infrared business units and the
opportunities they face for 2019 and beyond.”

“We reiterate our long-term guidance for each of the
photonics, wireless and infrared businesses,” Nelson concludes. IQE's 3-5 year
CAGR forecast is up to 10% for Wireless, 5-15% for InfraRed and 40-60% for
Photonics.