IQE PLC – 2018 Full Year Results

IQE plc (AIM: IQE; “IQE”, the “Company” or the “Group”), the leading global supplier of advanced wafer products and materials solutions to the semiconductor industry, announces its results for the year ended 31 December 2018.

Financial Summary

£m (except EPS and profit %)	31 December 2018		31 December 2017 (as restated)***	Change %
Revenue	156.3		154.6	+1.1	%
Wafers	156.3		152.7	+2.4	%
Licensing	–		1.9	(100	%)
Wafers Gross Profit*	36.8		41.9	(12.2	%)
Wafers Gross Profit %*	23.5		27.4	(14.2	%)
EBITDA*	26.4		37.2	(28.9	%)
Operating Profit*	16.0		26.5	(39.6	%)
Wafers	16.0		24.6	(35.0	%)
Licensing	–		1.9	(100.0	%)
Operating Profit %*	10.2		17.1	(40.2	%)
Wafers Operating Profit %*	10.2		16.1	(36.5	%)
Licensing Operating Profit %*	–		100.0	(100.0	%)
Share of joint venture losses	(2.0	)	–	N/A
Profit Before Tax*	14.0		24.5	(43.0	%)
Fully Diluted EPS*	1.38		3.38	(59.2	%)
Cash generated from operations	17.0		29.7	(42.8	%)
Capital Investment	42.4		34.8	+21.8	%
Net funds	20.8		45.6	(54.4	%)

* Non-GAAP adjusted measures have been presented as detailed in note 5
** Capital investment represents cash invested in tangible and intangible assets, including assets acquired under finance leases in 2018 of £nil (2017: £6.6m).
*** The comparative financial contained in the financial statements for the year ended 31 December 2017 has been restated following the introduction of IFRS 15 “Revenue from contracts with customers”.

Revenues

• Wafer revenues at constant currency (which excludes licence income) increased 5.3% to $209.3m (2017: $198.7).

• Wireless revenues increased £6.1m (up 6.6%) to £97.8m (2017: £91.7m).  £5m of the increase was from customer last time buys of GaN prior to the closure of our facility in New Jersey.  Replenishment of wireless inventory channels that were depleted following the conversion of wireless capacity to accommodate the aggressive VCSEL ramp in H2 2017 during a period of capacity constraint also contributed to the wireless growth.

• Photonics revenues decreased £3.9m (down 8.1%) to £43.8m (2017: £47.7m). There was a substantial VCSEL inventory correction in H1 2018 and a sudden disruption in a significant supply chain and reduction in demand for VCSELs in November.

• Infrared revenues increased £1.1m (up 9.5%) to £13.1m (2017: £12.0m).

• Wireless represented 62.5% (2017: 60.0%) of wafer segmental revenue in 2018, Photonics 28% (2017: 31.2%) and Infrared 8.4% (2017: 7.8%)

Profit and Margins

• Operating profit and margins were adversely affected by:

• • the currency headwind;
  • production inefficiencies resulting from lower VCSEL production volumes;
  • a higher proportion of lower margin wireless revenues;
  • material investment in low and zero margin VCSEL qualifications for multiple new photonics customers; and
  • Newport foundry pre-production costs for recruitment, increased headcount and training.

Consolidated Cashflow

• Cash generated from operations was £17.0m (2017: £29.7m).  Operating cash conversion was 106% (2017: 112%).

• Net cash used in investing activities was £42.4m (2017: £34.8m).  Investment in property, plant and equipment was £30.4m (2017: £17.9m**) with the major proportion being in the new mega foundry in Newport with additional investment in wireless capacity in Taiwan, GaN facilities in Massachusetts and in infrared production expansion in Milton Keynes. These projects will greatly increase production capacity and operational efficiency.

• Investment in capitalised research and development fell £4.1m to £10.4m (2017: £14.5m) as an intensive period of investment in first generation VCSELs moved into production.

• Free cash outflow was £25.3m (2017: inflow £40.9m) leaving net cash at £20.8m (2017: £45.6m).  Post year-end, the Company secured a three year $35m multi-currency revolving credit facility with HSBC.

Exceptional Items

• Included in the adjusted measures are charges before tax for the year of £7.2m (2017: £9.4m) consisting:

• • Restructuring costs of £3.3m (2017: £nil) in respect of the closure of the GaN facility in New Jersey.  Of this £1.2m will be cash costs relating to severance payments and reactor decommissioning and £2.15m of non-cash impairments.  The closure is expected to deliver operating cost savings of approximately £3m per annum starting in Q2 2019;
  • £1.3m (2017: £nil) relating to legal fees in connection with a patent dispute defence which is ongoing and scheduled for an arbitration hearing in September 2019; and
  • a £4.4m (2017: £nil) onerous lease provision for unlet and unused space to the end of the lease on our Singapore manufacturing site

Operational and Strategic Highlights

• New mega foundry in Newport has opened with ten reactors now delivered and installed.  Five reactors have already been released for product qualification and the remaining five are in the process of final commissioning.  Throughput, uniformity and yields are significantly better than originally expected at the outset of the project.  Twelve customers are currently in the process of qualifying or have qualified the new facility. The first and largest customer has  now completed all product testing and reliability, has conducted a detailed final audit and has released the site for mass production. Several others are in the final stages of production releases.

• The Taiwan facility expansion, which will increase its wireless capacity by 40%, will complete in Q1 2019.  Massachusetts (GaN) and Milton Keynes (infrared) capacity expansions will also both complete by the end of H1 2019.

• Investment in product development was focused on materials that will directly address next generation 5G wireless and advanced photonics applications, including sensing.

• A milestone first production order of US$250k was received for edge emitting Distributed Feedback (DFB) lasers employing the Group’s Nano Imprint Lithography (NIL) technology.

• The option to acquire the cREO technology and IP portfolio for US$5m from Translucent Inc, was exercised in March 2018 and satisfied in September 2018 with a share issuance.

• A long-term supply contract with a Tier 1 wireless customer was completed, securing an extended range of products and increased share of their epi-wafer requirements.

• The Group completed the sublet of 25,000 square feet of space in the new Newport Facility to the Compound Semiconductor Applications Catapult, underpinning the continued drive and contribution of IQE for creating a global centre of excellence for compound semiconductors in South Wales.

• Mr Timothy Pullen was recruited as Chief Financial Officer, following the tragic death of Mr Phillip Rasmussen on 1^st April 2018.  Mr Pullen took office on 4^th February 2019.

Dr Drew Nelson, Chief Executive of IQE, said:

“2018 was a very difficult and challenging year for IQE group from many perspectives; including the tragic and untimely death of Phil Rasmussen.  Our disappointing 2018 financial performance was materially impacted by a very substantial VCSEL inventory correction in the first half of 2018 and the sudden disruption in a highly significant supply chain causing greatly reduced short-term demand for VCSEL wafers during the last two months of the year. Compounding this is the current well-heralded softness in the smartphone market.

This overshadows and disguises the excellent position and prospects of IQE which should not  be defined by this short-term impact on our growth trajectory and profitability.   Revenue increases in 2019 will be driven by the return to strong growth of our photonics business and emerging opportunities in 5G and will be soundly based on operational improvements, rationalisation and capacity expansions that have been in progress for the last two years and which will complete in H1 2019.

In addition to the capital investment in our new mega foundry in Newport (for photonics), we are completing additional capacity in Taiwan (wireless), Massachusetts (GaN) and Milton Keynes (infrared).  We have also made considerable investment in engaging with more than 25 VCSEL chip companies underscoring IQE’s exceptional leadership position in the emerging VCSEL supply chains based on our technical excellence, proven ability to ramp and dedicated commitment to install capacity, with 12 companies already actively qualifying the new facility.

Complementing this investment in physical infrastructure, we closed on the acquisition of the cREO technology and IP portfolio from Translucent Inc.  We have also continued to invest in our own internal Research and Development projects including materials for high performance HBTs, Porous RF switches, and Crystalline RF filters for 5G, next generation VCSELs and diffusers for VCSELs, and infrared materials for high volume consumer markets.

Alongside its leadership position in VCSELs, IQE is at the forefront of the next generation of millimetre wave wireless communications technology for 5G infrastructure addressing the important challenges of high speed,  high bandwidth and low latency wireless connectivity for 5G. The huge growth of mobile data and consumer demand for video streaming, along with the Internet of Things, driverless vehicles, virtual reality and a multitude of other emerging technologies are going to require fibre-quality data speeds delivered wirelessly and ubiquitously. 

5G networks will function across an unprecedented frequency range from traditional cellular bands to millimetre wave.  IQE offers a powerful array of materials solutions enabling 5G, including enhanced efficiency GaAs HBT PAs, novel RF filter products utilising IQE’s proprietary cREO technology, and high performance switches for mobile devices, GaN HEMTs for wireless infrastructure, InP products for high-speed oscillators and photodiodes, and many more.  Our participation in the DLINK program, announced earlier this week, is another example of how compound semiconductors produced by IQE will continue to fuel the connected world as it transitions to 5G platforms.

The investment we have made in site rationalisation, increased production capacity and new products and the opportunity that this has created in the key sector areas of sensing, connectivity and energy, will deliver margin expansion, growing profitability and increasing free cash flow in 2019 and beyond”.