Unaudited Preliminary Results for the Full Year ended 31 December 2022

IQE plc

(“IQE” or the “Group”)

Unaudited Preliminary Results for the Full Year ended 31 December 2022

Cardiff, UK

17 May 2023

Resilient performance and strategic progress against a challenging industry backdrop

IQE plc (AIM:  IQE, "IQE" or the "Group"), a leading supplier of compound semiconductor wafer products and advanced material solutions to the global semiconductor industry, today provides unaudited preliminary results in relation to the full year ended 31 December 2022.

FY 2022 Financial highlights

^{Note: FY22 financials are unaudited}

1. ^{Reported figures include a £62.7m non-cash goodwill impairment}
2. ^{Adjustments include impairment of intangible assets, restructuring costs, CEO recruitment costs and share-based payment charges.}
3. ^{Capex stated is Property, Plant and Equipment cash capex.}
4. ^{Adjusted net debt is calculated as cash less borrowings but excluding lease liabilities and fair value gains/losses on derivative instruments.}

Group revenue for FY 2022 was up 9% to £167.5m (FY 2021: £154.1m). On a constant currency basis, Group revenue was £151.2m (FY 2021: £154.1m).

Wireless revenue of £76.0m (FY 2021: £83.2m) was down 9% year-on-year on a reported basis and down 18% on a constant currency basis. This decrease reflects a decline in wireless GaAs epiwafer sales and the impact of the closure of the Group’s manufacturing facility in Singapore focused on the manufacture and sale of legacy pHEMT epiwafers. The reduction in wireless GaAs epiwafer sales in particular has been impacted by softness in the broader smartphone handset market which has led to increased inventory levels throughout the manufacturing supply chain. This has continued to adversely affect demand for wireless GaAs epiwafers in H1 2023.

Photonics revenue of £88.7m (FY 2021: £68.1m) was up 30% year-on-year on a reported basis and up 18% on a constant currency basis. This increase reflects the continued strength of demand for VCSELs used in 3D sensing. The Group has benefitted from increased customer diversification following the announcement of a new multi-year strategic agreement with a global consumer electronics leader in early Q4 2022, and higher other Photonics product sales driven by a combination of factors including the re-phasing of certain aerospace and security orders.

CMOS++ revenue of £2.8m (FY 2021: £2.8m) was flat year-on-year and down 9% on a constant currency basis.

Group adjusted EBITDA of £23.4m (FY 2021: £18.7m). Adjusted EBITDA margin of 14% (FY 2021: 12%) as costs were controlled in line with the Group’s efficiency objectives.

Reported operating loss of £73.0m (FY 2021: (£20.0m)) primarily due to the non-cash impairment of goodwill of £62.7m (see below), with an adjusted operating loss of £3.6m (FY 2021: £6.5m).

Reported net cashflow from operations of £8.9m (FY 2021: £18.9m) reflecting cash generated through the Group’s resilient trading performance offset by adverse working capital movements and the cash impact of adjusted non-operational items.

Adjusted net debt position (excluding lease liabilities) of £15.2m as at 31 December 2022 (FY 2021: net debt of £5.8m).

Capital expenditure of £9.4m on PP&E (FY 2021: £15.1m) to support future growth opportunities. The Group continues to invest in research and development with capitalised technology development of £3.8m (FY 2021: £3.0m).

Impairment of goodwill of £62.7m (FY 2021: £nil) is a non-cash impairment principally relating to the Group’s wireless operating segment where reductions in sales volumes, predominantly linked to lower levels of smartphone-related demand and continuing softness in 5G infrastructure, is forecast to result in lower levels of capacity use and profitability in this segment. The impairment results from the near-term softness in forecasts for wireless products as a result of the industry-wide semiconductor downturn driven by inventory build-up throughout the supply chain.

Operational highlights

• Positive progress on the implementation of the Group’s growth strategy set out at its November 2022 Capital Markets Day
• Technological innovations supporting IQE’s diversification into high-growth markets including power electronic and microLED display products
  • Development of world's first commercially available 200 mm (8") VCSEL wafer opens significant opportunities with new foundry partnerships
  • Advanced display technology expanded with continued development of microLED based on GaN (Blue & Green) & GaAs (Red)
  • Ongoing capex focused on investment in Gallium Nitride (“GaN”) manufacturing capacity to further strengthen power electronic and advanced display capabilities
• Continued strengthening of operational processes laying foundations for future growth
  • Launch of new manufacturing management software in South Wales ahead of global roll-out will deliver consistent and scalable improvements to operational performance
  • Building commercial engine, including global sales and customer excellence functions
• Positive commercial progress made in line with our growth strategy
  • Long-term and strategic agreements signed with several customers, across existing and new product segments
  • Active pipeline of deals for development and mass production of epiwafers for power electronics
• Global site optimisation programme continued in line with strategy
  • Singapore site closed in June 2022 and Pennsylvania site on track to be closed by 2024
• Established the IQE Innovation Centre at the Cardiff, South Wales site

Current Trading and Outlook

• Current trading is affected by the temporary semiconductor industry downturn, with reduced customer forecasts, orders and associated revenue
• H1 2023 revenue expected to be in the range of £50-56m
• Net debt as at 31 March 2023 was c.£24.0m (net debt is defined as cash less borrowings but excluding lease liabilities and fair value gains/losses on derivative instruments)
• FY23 revenue in line with management expectations set out in March 2023 which include a return to year-on-year growth during the second half of 2023
• Diversification into high-growth markets of power and display, targeting GaN growth opportunities in FY 2024 and beyond
• The Company expects PP&E capex related to essential maintenance and health & safety items and existing commitments to be approximately £7.4m in FY 2023. In addition, the diversification strategy will lead to investment in GaN manufacturing capacity of approximately £8.3m.

Proposed fundraise and banking facilities

The Company has announced today a placing to raise up to £30 million (“the Placing”) and a Rex retail offer of up to £3 million (together with the Placing, the “Fundraising”) in order to ensure that the Company can continue to invest to execute on its strategy, meet its near-term liquidity requirements and deliver a sustainable balance sheet position going forward. IQE is prioritising investment in GaN capacity as part of its long-term growth strategy, underpinning the diversification into the power electronics and microLED display segments.

The Group has entered into an agreement with its lending bank, HSBC, to extend the term of its $35m RCF to May 2026, conditional on the completion of the Placing. The facility was due to expire in April 2024. The Company has also agreed revised leverage and interest cover covenants, with quarterly testing from 31 December 2023.

If the Placing were not to proceed, the Company would receive less preferential terms from HSBC with the likelihood that further Bank support or alternative sources of capital will be required to increase liquidity in the course of 2023 in order to ensure both sufficient headroom and covenant compliance.

The full terms and conditions of the placing are set out in the Fundraising announcement and can be found on our website at https://www.iqep.com/investors/capital-raise-2023/.

Americo Lemos, CEO of IQE, commented:

“IQE delivered a solid full year performance and improved margins in 2022 despite a challenging industry backdrop. Our strategic and long-term customer engagement model was validated by the announcement of several key partnership agreements during the year, and has resulted in a healthy new business pipeline. We remain confident in the strategy we announced at our Capital Markets Day and are focused on diversifying into high-growth markets such as power electronics and microLED displays. The Fundraising we have announced today will enable us to continue to invest in GaN technologies for these applications, while providing us with the fiscal headroom to navigate the current cyclical downturn.”

Results Presentation

IQE will present its FY 2022 Results via webcast and conference call at 9:00am BST on Thursday 18 May 2023. If you would like to view this webcast, please register by using the below link and follow the instructions:

https://brrmedia.news/IQE_FY22

This Announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014, as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 (as amended). This announcement is issued on behalf of IQE by Tim Pullen, CFO.

Contacts:

IQE plc
+44 (0) 29 2083 9400
Americo Lemos
Tim Pullen
Amy Barlow

Peel Hunt (Nomad and Joint Broker)
+44 (0) 20 7418 8900
Paul Gillam
Richard Chambers
James Smith

Numis (Joint Broker)
+44 (0) 20 7260 1000
Simon Willis
Hugo Rubinstein
Iqra Amin

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

https://www.iqep.com/

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

• Smart Connected Devices
• Communications Infrastructure
• Automotive and Industrial
• Aerospace and Security

As a scaled global epitaxy wafer manufacturer, IQE is uniquely positioned in this market which has high barriers to entry. IQE supplies the global market and is enabling customers to innovate 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 employees across eight manufacturing locations in the UK, US and Taiwan, and is listed on the AIM Stock Exchange in London.