Interim Results 2009: Solid financial performance despite economic crisis; smartphones driving recovery
02 September 2009
IQE plc (AIM: IQE, the “Group”), the leading global supplier of advanced wafer products and wafer services to the semiconductor industry, announces its Interim Results for the half year ended 30 June 2009.
- Sales of £21.4m (H1 2008: £30.2m)
- Gross profit of £3.8m (H1 2008: £4.3m)
- EBITDA of £1.9m (H1 2008: £3.6m before exceptional charges of £1.6m).
- Operating loss of £0.8m (H1 2008: profit £1.6m before exceptional charges of £1.6m)
- Cash inflow from operating activities of £0.1m (H1 2008: inflow £2.8m)
- Loss per share of 0.31 pence (H1 2008: 0.19 pence profit per share before exceptionals)
- Net debt of £18.9m, better than expectations reflecting strong cash management
- Sharp increase in orders from May 2009 as destocking began to reach its conclusion
- Continued strength in smartphone and advanced wireless shipments (e.g. notebooks) despite global recession.
- Management actions in Q4 2008 to restructure the business and reduce costs have underpinned a solid H1 performance.
- Opportunities taken during the downturn to capture market share, attract new talent, and drive operational efficiencies.
- Further evidence of trend towards outsourcing as customers seek to control capital and operating expenditure.
- Trading has returned to pre-recession levels in Q3 2009, positioning the Group for a strong second half performance.
- Outperformance of smartphone market likely to accelerate in recovery.
- Significant progress in high-growth emerging markets of solar and solid state lighting.
- IQE’s industry-leading CPV solar cell products gaining market share, contributing to H2 sales.
Dr Drew Nelson, IQE Chief Executive, commenting on the results said:
“IQE is in a strong position, having taken decisive action to cut costs and restructure for growth. Our core smartphone market has recovered quickly and is now growing rapidly as phones become more connected and multi-functional, demanding ever more of our products. Furthermore, we have significant opportunities ahead of us in the emerging solar cell and solid state lighting markets.
“Even at the lowest point of the destocking cycle, IQE remained EBITDA positive, demonstrating the effectiveness of our restructuring and the resilience of our business. Now that trading has recovered, our high level of operational gearing should produce a strong second half with substantial free cash flow generation.”
INTERIM RESULTS 2009 1. OVERVIEW
IQE has a proven track record of more than 20 years as a world-leading supplier of advanced wafers to the semiconductor industry. The group has demonstrated its ability to withstand tough economic cycles and the combination of robust strategy and early management action was decisive in steering the business successfully through the global economic downturn that began during the second half of 2008.
A severe slowdown in sales started towards the end of 2008 and continued into early 2009 as customers aggressively destocked to minimise their risks during a period of significant economic uncertainty. Evidence of an end to the destocking appeared towards the end of the first quarter, with orders in the second quarter picking up sharply. Now, in the third quarter of 2009, the Group is confident that orders have returned to the higher levels seen in 2008.
IQE’s strategy is to focus on high-growth, high-volume markets. Despite the global economic slowdown, the smartphone and 3G segments of the handset market have proven to be robust. Indeed, they are showing signs of higher-than-anticipated growth as economies emerge from the recession and consumers opt for more multifunctional handsets. Their reliance on GaAs devices for the advanced mobile features means that the growth rate for IQE’s high-speed wireless components continues to outstrip the overall growth in demand for mobile handsets.
The Group has developed a unique set of competitive advantages to provide customers with world-leading epitaxial wafer foundry services. By delivering these advantages both consistently and globally, and through its strong operational performance, IQE has become a leader in its field.
Despite the economic turmoil, IQE has announced a number of significant contract wins including some strategically important R&D contracts with DARPA and TriQuint. The Group has also bucked the industry trend by strengthening its team with a number of high-profile senior appointments during the downturn.
Revenues of £21.4m (H1 2008: £30.2m) reflected a challenging first quarter in which destocking continued from the downturn of late 2008. However, sales picked up strongly towards the end of the first half as destocking ended and manufacturing began to accelerate to previous levels. The reduction in sales volumes was in part offset by a weaker pound.
However, gross margins of 18% remained in line with the prior year (before exceptional items) thanks to significant reductions in labour and overhead costs, combined with a more favourable sales mix. This demonstrates a strong degree of resilience in a highly leveraged business model.
Selling, general and administrative expenses remained firmly under control, but increased from £4.3m in H1 2008 to £4.6m in H1 2009 as a result of foreign currency translation.
EBITDA remained positive throughout the half year, even at the lowest point of the cycle in January. Nevertheless, the reduction in sales inevitably resulted in lower profitability, with EBITDA of £1.9m (H1 2008: £3.6m, before exceptional items of £1.6m). The Group reported an operating loss of £0.8m, compared with a profit of £1.6m in H1 2008.
Interest payments fell from £0.7m to £0.5m.
The retained loss for the period was £1.4m (H1 2008: £0.9m retained profit before exceptionals), representing 0.31 pence loss per share (H1 2008: 0.19 pence profit per share before exceptionals).
The Group had no tax charge during the period, reflecting the benefit of the substantial tax losses at its disposal. These tax losses will enable IQE to shelter up to £100 million of future taxable profits.
The cash inflow from operations was £0.1m (H1 2008: £2.8m inflow), reflecting a £1.7m absorption of cash into working capital during the first half of 2009 as trading activity recovered from the destocking.
Capital expenditure was controlled tightly at just £0.7m (H1 2008: £3.4m) which included £0.3m to complete capital projects begun in 2008.
Net debt of £18.9m (H1 2008: £15.8m) was lower than expected, leaving more than £5.0 million of funding headroom. With strong growth in Q3, the Group expects strong free cash flow generation and the reduction of net debt during the second half.
IQE continues to focus on fast-growing, large-volume technologies and in particular high-speed wireless communications and advanced optoelectronics. The Group continues to develop advanced solar cell technology, high-efficiency solid-state light sources, advanced lasers and ultra-high-speed microprocessor and memory-chip materials technologies for these large-volume emerging markets.
IQE has established itself as a clear world leader by offering its customers a unique set of advantages, including:
- a complete range of products covering all major applications;
- global multi-site production capabilities in the primary manufacturing platforms to allow efficient capacity planning and for disaster scenario contingency;
- maintenance of a broad contact base and global presence with access to all the key global markets;
- delivery of benefits from economies of scale including purchasing power and research and development efficiencies;
- sharing of best practices and innovation across the group to deliver improved operating and cost efficiencies; and
- provision of surge capacity to meet the expected growth in demand in the mobile device sector and other high-volume
This strategy has continued to deliver robust results despite the global economic downturn and will continue to deliver on current and next-generation products. In addition, IQE is able to lever its substantial manufacturing capacity to deliver tangible benefits to customers, shareholders and other stakeholders.
4. PRODUCTS AND MARKETS IQE’s product roadmap and strategy continues to be driven by four key market dynamics, all of which have high-growth, high-volume prospects:
- The acceleration in the adoption of advanced, high-speed mobile communications, including 3G, WiFi, GPS and other wireless technologies. As mobile technologies continue to advance at an enormous pace with new features constantly emerging, the role of advanced compound semiconductor materials such as GaAs has become critical in enabling high-speed data processing whilst maintaining low levels of power consumption. IQE’s products are critical in the drive to 3G and beyond, along with the need for backward network compatibility. They enable the speed and power to accommodate features such as high-resolution imaging, video, high-speed wireless data access, VoIP and satellite navigation. Today’s high-speed devices contain many more GaAs components than previous generations.
- The ubiquity of applications for high-volume semiconductor lasers, including HD DVD, laser mouse, laser projection, gaming and office and industrial applications. In particular, laser projection is viewed as one of the most exciting applications of this technology, with first-generation projectors already being incorporated into mobile handsets and cameras.
- The drive for clean, efficient and sustainable energy sources (solar cells), and highly efficient light sources (LEDs) in order to reduce the impact of global warming, reliance on fossil fuels and provide a much cleaner environment. Compound semiconductors are playing a critical role and IQE is involved in leading-edge development of materials for these applications, including solar-cell technologies that are achieving record levels of energy conversion.
- The continuing need for higher-speed, more powerful microprocessors and higher-speed, ultra-high-density memories. This is driving the demand for new materials solutions based on silicon substrates including the incorporation of compound semiconductors directly onto silicon substrates, as demonstrated by the recent release of new engineered substrates such as Germanium on Insulator (GeOI) for next-generation integrated circuits and devices. IQE has established powerful positions in both technologies, working with some of the biggest names in the industry.
The wireless market currently provides the group with high-volume sales and the expectation of continued high growth. However, the other markets are undergoing rapid development and offer further near-term, high-growth potential and product diversity.
5. TRADING OUTLOOK
IQE’s markets continue to prove resilient to the global economic slowdown, as demonstrated by the return of strong customer demand and industry analysts’ reports on the strength of 3G handset, smartphone and advanced wireless system sales.
The growth in demand for IQE’s products is largely being driven by the increasing content of GaAs within mobile devices, which reflects the rapid adoption of 3G and smartphone technology to meet the growing demand for mobile features such as email, internet browsing and video streaming. 3G smartphone handset sales are expected to double from 131 million in 2008 to more than 300 million by 2012 (Park Associates; July 2009).
As economies emerge from the global recession, there have been a number of statements from leading semiconductor companies indicating strengthening commitments towards outsourcing, as businesses seek to cut capital and operational costs.
The continued increase in sales volumes during Q3 supports the outlook for the second half remaining strong. This positive outlook, despite the continuing backdrop of global economic uncertainty, reflects the Group’s powerful positioning in its high-growth markets, principally in wireless communications, including 3G and feature-rich smartphones.
In addition, IQE continues to innovate with excellent progress in new product development such as CPV solar cells, where customers are achieving record efficiencies using IQE materials. This market continues to develop rapidly, addressing the need for utility-scale deployment of efficient solar cell technologies.
Further progress is also being made in cutting-edge technologies for emerging and fast-growing, large-volume markets such as advanced lasers, high-speed microprocessor and memory devices, ultra-low power LED products and next-generation electronic materials, as demonstrated by the recent release of new engineered substrates such as Germanium on Insulator (GeOI) for next-generation integrated circuits and devices.
The continued successful implementation of the Group’s strategy, combined with strong operational performance during an extremely tough economic period, give the Board confidence in both the short term and long term growth prospects of the business. IQE remains on course to deliver significant growth in sales during the second half of 2009 and beyond.
Dr Drew Nelson President and CEO 2nd September 2009.
IQE plc (+44 29 2083 9400) Drew Nelson Phil Rasmussen Chris Meadows
College Hill (+44 20 7457 2020) Adrian Duffield Carl Franklin
Noble & Company Limited (+44 20 7763 2200) John Llewellyn-Lloyd Sam Reynolds
Note to Editors
IQE is the leading global supplier of advanced semiconductor wafers with products that cover a diverse range of applications, supported by an innovative outsourced foundry services portfolio that allows the Group to provide a 'one stop shop' for the wafer needs of the world's leading semiconductor manufacturers.
IQE uses advanced crystal growth technology (epitaxy) to manufacture and supply bespoke semiconductor wafers ('epi-wafers') to the major chip manufacturing companies, who then use these wafers to make the chips which form the key components of virtually all high technology systems. IQE is unique in being able to supply wafers using all of the leading crystal growth technology platforms.
IQE's products are found in many leading-edge consumer, communication, computing and industrial applications, including a complete range of wafer products for the wireless industry, such as mobile handsets and wireless infrastructure, Wi-Fi, WiMAX, base stations, GPS, and satellite communications; optical communications, optical storage (CD, DVD), laser optical mouse, laser printers & photocopiers, thermal imagers, leading-edge medical products, barcode, ultra high brightness LEDs, a variety of advanced silicon based systems and high efficiency concentrator photovoltaic (CPV) solar cells.
The manufacturers of these chips are increasingly seeking to outsource wafer production to specialist foundries such as IQE in order to reduce overall wafer costs and accelerate time to market.
IQE also provides bespoke R&D services to deliver customised materials for specific applications and offers specialist technical staff to manufacture to specification either at its own facilities or on the customer's own sites. The Group is also able to leverage its global purchasing volumes to reduce the cost of raw materials. In this way IQE's outsourced services, provide compelling benefits in terms of flexibility and predictability of cost, thereby significantly reducing operating risk.
IQE operates six manufacturing facilities located in Cardiff (two) and Milton Keynes in the UK; in Bethlehem, Pennsylvania and Somerset, New Jersey in the USA; and Singapore. The Group also has 11 sales offices located in major economic centres worldwide.
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