IQE plc: 2021 Interim Results

7 September 2021

IQE plc
(“IQE” or the “Group”)
H1 2021 INTERIM RESULTS

Cardiff, UK
7 September 2021

Sustained performance year-on-year in line with expectations
Leadership update

IQE plc (AIM: IQE), the leading supplier of compound semiconductor wafer products and advanced material solutions to the global semiconductor industry, announces its results for the six months ended 30 June 2021 and provides an update on the leadership transition of the business.

H1 2021 Financials

^{*   All figures £’m excluding diluted and adjusted diluted EPS.}

^{** Adjusted Measures: Alternative performance measures are disclosed separately after a number of adjusted non-cash, one-off or non-operational items where it is deemed necessary by the Directors to do so to provide further understanding of the financial performance of the Group. Adjusted items are material items of income or expense that have been shown separately due to the significance of their nature or amount as detailed in note 8.}

^{*** Net debt excludes IFRS16 lease liabilities.}

^{The following highlights of the first half results is based on these adjusted profit measures, unless otherwise stated.}

Financial Highlights

• Revenue of £79.5m (H1 2020: £89.9m) representing a -2.5% year-on-year performance at constant currency against a record H1 2020 in line with previous guidance
• Significant FX headwind of c.£8.1m affecting reported revenue in GBP, with the majority of revenues being earned in USD
• Adjusted EBITDA of £11.6m (H1 2020: £16.3m) representing an in line year-on-year result on a constant currency basis in line with previous guidance
• Adjusted cash inflow from operations of £9.1m (H1 2020: £16.2m) representing 78% adjusted EBITDA conversion
• Strong liquidity maintaining a net funds position of £0.9m (FY 2020: £1.9m, H1 2020: (£7.4m) net debt) with cash generated from operations used to fund the Group’s capex and technology development investments in H1 2021
• Reported operating loss of £(1.9)m (H1 2020: £(5.0)m) representing a £2.2m profit on a constant currency basis

Operational Highlights

• Sustained Wireless Handset related growth
  • 30% year-on-year growth in GaAs revenues in H1 2021 due to strong demand for epiwafers used in power amplifiers for 5G handsets and WiFi 6/6E routers
  • Orders placed for three new Aixtron G4 reactors and three refurbished Aixtron G3 reactors, with delivery of tools expected in H2 2021 to increase capacity at IQE Taiwan by over 20%, underpinning further anticipated growth in 2022 and beyond

• Diversification of 5G Infrastructure and other opportunities
  • Overall Wireless business growth YoY of £0.3m with 30% increase in GaAs revenues YoY (constant currency)
  • 53% YoY reduction in revenues for GaN on SiC for 5G infrastructure reflecting global 5G deployment cycles, in particular lower numbers of mMIMO deployments in Asia compared to FY 2020 as previously highlighted
  • Increasing interest from several chip foundries in GaN on Si technologies, with joint development programmes progressing in H2 2021 to develop a diversified and cost-effective offering to the RF infrastructure market, with potential longer-term applicability to power electronics and 5G mmWave
  • Multi-year strategic partnership signed post half year end with a major semiconductor foundry to develop epiwafers for 5G small cells

• Strong Photonics technology leadership
  • Photonics business decrease of -7.6% at constant currency
  • Maintenance of strong market share in VCSELs with volume gains in world-facing LiDAR applications, offset by reduction in VCSEL revenues of 26% YoY due to smaller chip sizes required for facial recognition technology, in line with management expectations
  • Strong development progress on long wavelength VCSELs for below screen applications and advanced sensing for healthcare applications
  • Continued strong demand for advanced sensing for defence and security applications

• Continued technological and operational progress
  • Expansion of VCSEL portfolio with turnkey IQVCSEL™ product line, a value-add solution that accelerates customers' ability to introduce new products, thereby expanding the VCSEL market
  • Achievement of key power and reliability milestones for its IQDN-VCSEL™ technology for advanced sensing applications at longer wavelengths (1100-1600 nm) on 150 mm GaAs substrates
  • Taiwanese Court determination of the acquisition of minority interests in IQE Taiwan received on 18 August 2021. The matter will be finalised upon resolution of an appeal by a small number of shareholders

Board Updates

• Process for the recruitment of a new CEO is nearing completion with a preferred candidate identified, who possesses relevant international semiconductor market experience. Discussions are ongoing with the aim of concluding the appointment process
• Phil Smith to be appointed interim Executive Chairman effective as of today, to prepare the group for the appointment of a new CEO. As announced in November 2020, Drew Nelson will transition to Non-Executive Director with the title of President
• Appointment of Victoria Hull as Non-Executive Director and incoming Remuneration Committee Chair, and appointee to the Audit & Risk and Nominations Committee
• Sir David Grant will retire from the Board and his position as Remuneration Committee Chair on 18 September

"Today’s results reflect the resilience of our business and highlight the ongoing commitment and hard work of our people who have, despite additional headwinds, largely sustained the record levels of performance at IQE that we reported a year ago.

In November 2020 the Company announced the search for my successor and my intention to continue in an ambassadorial and advisory role at IQE. As I now formally step aside as CEO, I am extremely proud of everything we have achieved at IQE to date and the critical role the business plays within the broader global industry, and Compound Semiconductor Cluster in South Wales. I look forward to supporting the Company in the next stage of IQE’s development in my role as President and Non-Executive Board member, while also helping drive the development of the Compound Semiconductor Cluster."

Dr Drew Nelson outgoing Chief Executive Officer of IQE

"Thanks to Drew Nelson’s vision and drive, IQE has established a solid platform with strong market positions and global leadership in compound semiconductors. I share his enthusiasm for the future opportunities that lay ahead for IQE and I want to thank him for his incredible contribution to the business. I would also like to thank Sir David Grant for his contributions to IQE since 2012.

As part of my expanded role, I will focus on the execution of IQE’s strategy and preparing the business for the arrival of the incoming CEO."

Phil Smith Executive Chairman of IQE

Current trading and FY 2021 outlook

The market for GaAs power amplifiers is expected to continue to be strong through H2 2021 and grow further in FY 2022, driven by continued 5G penetration of the smartphone handset market and by WiFi 6 & 6E.

The market for GaN for 5G infrastructure has been weak in the first half of the year due to the nature of global 5G deployments. This is expected to continue in Q3. The Group sees potential opportunities for higher volumes in Q4 ahead of an anticipated return to growth in FY 2022.

In Photonics, production of VCSELs and advanced sensing for defence and security markets is expected to continue at relatively stable levels, with possible volume opportunities in VCSEL in Q4 related to the success of handset launches.

A significant foreign exchange headwind is being experienced in FY 2021 on a reported basis, as the Group’s revenues are predominantly earned in USD but are reported in GBP.

Full year revenues are expected to be similar to the prior year on a constant currency basis. At this level, adjusted EBITDA is also expected to be similar on a constant currency basis.

The Group reiterates guidance for capital expenditure on PP&E for FY 2021 in the range of £20m to £30m as investments are made in tool capacity to underpin anticipated growth in both Wireless and Photonics products in FY 2022 and beyond. A total of nine new, refurbished or re-commissioned tools will be coming online at the end of FY 2021/beginning of FY 2022.

Capitalisation of development costs is expected to be in the range of £5m to £8m for the full year as the Group continues to invest in its IT transformation and in future products to meet anticipated growing demand for compound semiconductors driven by the macro trends of 5G and connected devices.

Contacts:

IQE plc
+44 (0) 29 2083 9400
Phil Smith
Tim Pullen
Amy Barlow

Peel Hunt LLP (Nomad and Joint Broker)
+44 (0) 20 7418 8900
Edward Knight
Paul Gillam
Nick Prowting

Citigroup Global Markets Limited (Joint Broker)
+44 (0) 20 7986 4000
Christopher Wren
Peter Catterall

Headland Consultancy (Financial PR)
+ 44 (0) 20 38054822
Andy Rivett-Carnac: +44 (0) 7968 997 365
Chloe Francklin: +44 (0)78 3497 4624

ABOUT IQE
http://iqep.com

IQE is the leading global supplier of advanced compound semiconductor wafers and materials solutions that enable a diverse range of applications across:

• handset devices
• global telecoms infrastructure
• connected devices
• 3D Sensing

As a scaled global epitaxy wafer manufacturer, IQE is uniquely positioned in this market which has high barriers to entry. IQE supplies the whole market and is agnostic to the winners and losers at chip and OEM level. By leveraging the Group’s intellectual property portfolio including know-how and patents, it produces epitaxy wafers of superior quality, yield and unit economics.

IQE is headquartered in Cardiff UK, with c. 670 employees across nine manufacturing locations in the UK, US, Taiwan and Singapore, and is listed on the AIM Stock Exchange in London.