Interim Results H1/2008
2 September 2008
IQE plc
Strong demand for high speed wireless products drives rapid growth in
sales and profit
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 2008.
FINANCIAL HIGHLIGHTS
- Sales up 27% to £30.2m (H1 2007: £23.7m)
- Gross profit up 42% to £5.5m (H1 2007: £3.9m)
- EBITDA profit up 135% to £3.6m before exceptional one-off
relocation cost (H1 2007: £1.5m). High operational gearing delivers
treble digit growth in EBITDA profit before exceptional item
- The exceptional cost of £1.6m (H1 2007: £nil) relates to the
relocation of the Singapore facility. This relocation is progressing
on plan and will be completed during the second half of 2008, at an
estimated additional cost of £0.8m
- Operating profit of £1.6m before exceptional item (H1 2007: profit
£0.1m), and £11,000 after exceptional item
- Cash inflow from operating activities of £3.4m before exceptional
item (H1 2007: inflow £0.4m), and £2.8m after exceptional item
- Retained profit of £0.9m before exceptional item (H1 2007: retained
loss £0.5m), and £0.7m retained loss after exceptional item
- Earnings per share of 0.19 pence before exceptional items (H1 2007:
0.12 pence loss per share), and 0.16 pence loss per share after
exceptional item
BUSINESS HIGHLIGHTS
- Rapid sales growth driven by continuing focus on high speed
wireless communications.
- Wireless sales growth continues to outstrip growth in mobile device
sales due to increasing Gallium Arsenide ('GaAs') content in 3G,
smartphone and other high speed wireless systems.
- Singapore relocation on track, majority of the tools already
transferred and in production at new facility. Successfully achieved
without disruption to customers, during a period of strong growth in
demand.
- Independent industry analyst, Strategy Analytics, identifies IQE as
the leading global supplier of GaAs epitaxial wafers.
TRADING OUTLOOK
- Trading in Q3 2008 continues in line with expectations. Increasing
demand for GaAs based products across a range of technologies,
including communications, office, solar and solid state lighting.
- Market conditions continuing to show robust demand for GaAs based
products for mobile devices, driven principally by 3G and other high
speed wireless applications that require a greater density of GaAs
components per handset. Consequently, growth in GaAs demand is
significantly outstripping growth in the overall handset and wireless
communication markets.
- IQE bringing new products to market including advanced laser
products, solar cells for efficient energy generation and solid state
lighting devices.
Dr Drew Nelson, IQE Chief Executive, commenting on the results said:
"Our strong performance during the first half of 2008 reflects our
robust strategy and focus on high growth high volume markets. In
particular the wireless communications market, where 3G and
"smartphone" technology is being rapidly adopted to meet the growing
demand from users for advanced mobile features such as email,
internet browsing and video streaming.
"The relentless drive for higher performance mobile devices and lower
power consumption is only made possible through the increasing use of
GaAs based products. This is driving a significant increase in the
GaAs content of mobile devices, and hence the rapidly increasing
demand for our products.
"In addition we have a range of new technologies that we are
currently in the process of bringing to market, including high
efficiency solar cells, ultra high brightness LEDs for solid state
lighting, advanced laser products, and advanced microprocessor and
memory products.
"The Board remains confident that the strong markets for our products
as well as our high operational gearing will ensure that we remain on
course to deliver strong growth in sales and profits for the full
year."
Contacts:
IQE plc (+44 29 2083 9400)
Drew Nelson
Phil Rasmussen
Chris Meadows
College Hill (+44 20 7457 2020)
Adrian Duffield
Jon Davies
Noble & Company Limited (+44 20 7763 2200)
John Llewellyn-Lloyd
Sam Reynolds
Panmure Gordon (UK) Limited (+44 20 7459 3600)
Aubrey Powell
Ashton Clanfield
NOTE TO EDITORS
IQE plc is this year celebrating its twentieth anniversary as the
leading global supplier of advanced semiconductor wafers with
products that cover a diverse range of applications. It is able to
provide a 'one stop shop' for the wafer needs of the world's leading
compound semiconductor manufacturers, who in turn use these wafers to
make the chips which form the key components of virtually every high
technology system. IQE has particular focus on the growing global
wireless sector for applications including; mobile handsets, wireless
infrastructure, Wi-Fi, WiMAX, base stations, GPS and satellite
communications; as well as for the optical communication sector
including; optical storage (CD, DVD), laser optical mice, laser
printers & photocopiers, thermal imagers, leading-edge medical
products, bar-coding, high efficiency LEDs and advanced 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 is unique in being able to supply wafers using all of the leading
crystal growth technology platforms including Metal Organic Vapour
Phase Epitaxy (MOVPE) and Molecular Beam Epitaxy (MBE) and the Group
is able to leverage its global purchasing volumes to reduce the cost
of raw materials.
IQE also provides bespoke R&D services to deliver customized
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. This is backed by a strategy of
duplicating each key product processes over multiple sites to assure
customers of security of supply as well as provide compelling
customer benefits in terms of flexibility and predictability of cost,
thereby significantly reducing operating risk.
IQE operates six manufacturing facilities; two in Cardiff and one in
Milton Keynes in the UK; two more in Bethlehem, Pennsylvania and
Somerset, New Jersey in the USA; and its most recent acquisition in
Singapore. The Group also has 11 sales offices located in major
economic centres worldwide.
INTERIM RESULTS 2008
1. OVERVIEW
IQE celebrates its twentieth anniversary during 2008, demonstrating
the Group's ability to withstand difficult economic cycles. IQE's
robust strategy and sound execution is now delivering continued rapid
growth in sales and profits, and positions the business well to
continue this trend.
During the first half of 2008 IQE delivered rapid sales growth, and
treble digit growth in EBITDA, before the one off exceptional costs
relating to the Singapore relocation. The powerful leverage of sales
growth into EBITDA growth clearly demonstrates the high operational
gearing developed by the Group.
The Singapore relocation is progressing according to plan and without
any disruption to customers. The relocation will be completed during
the second half of 2008 at a total expected cost of £2.4m.
IQE's strategy is to focus on high growth, high volume markets. The
mobile communications market, which in the past proved resilient to
global economic slowdown, continues to drive strong demand for IQE's
products. The reliance on GaAs devices for advanced mobile features
means that the growth rate for IQE's high speed wireless components
continues to exceed the growth in demand for mobile handsets.
IQE has also developed a unique set of competitive advantages to
ensure that it provides a world leading epitaxial wafer foundry
service to its customers. By delivering against these advantages and
through strong operational performance, IQE has achieved a market
leading position. This was independently corroborated by Strategy
Analytics in its research published in August 2008 which identifies
IQE as the global market leader by a considerable margin.
2. RESULTS
Strong growth in the wireless market contributed to the 27% increase
in sales to £30.2m (H1 2007: £23.7m), representing sequential growth
of 14% compared to the previous six months.
Gross profit increased by 42% to £5.5m reflecting the strong dynamics
within the business and the tight control of costs in this rapid
growth environment.
Selling, general and administrative expenses ("SG&A") were tightly
controlled and, despite the jump in sales, increased only marginally
to £3.9m before exceptional costs (H1 2007: £3.8m), equivalent to 13%
of sales (H1 2007: 16%). The exceptional costs, which amounted to
£1.6m in the half year (H1 2007: £nil), relate to the one-off costs
incurred in relocating the Singapore operation to a new
state-of-the-art facility. This project remains on track for
completion during the second half of 2008. The new facility will
provide considerable room for future expansion in a highly cost
effective manner.
EBITDA before exceptional costs increased by 135% to £3.6m compared
with the first half of 2007, clearly demonstrating the powerful
operational gearing of the business model and the benefit of improved
efficiencies.
Operating profit before exceptional item jumped to £1.6m compared
with £0.1m in the first half of 2007, continuing the clear trend of
increasingly profitable trading.
Retained profit before exceptional item was £0.9m (H1 2007: £0.5m
retained loss). This represents 0.19 pence earnings per share (H1
2007: 0.12 pence loss per share). After exceptional items the
retained loss was £0.7m, representing 0.17 pence loss per share.
The Group has not suffered a tax charge during the period, which
reflects the benefit of the substantial tax losses at its disposal.
These tax losses will enable the Group to shelter up to £90 million
of future taxable profits.
The cash inflow from operations before exceptional items was £3.4m,
compared with £0.4m inflow in the first half of 2007. This powerful
conversion of EBITDA into cash reflects the careful management of
working capital in a high growth environment. Overall working
capital was reduced by a £0.6m on a sales increase of £6.5m.
As planned, capital expenditure of £3.4m (H1 2007: £4.0m) was
directed at bringing additional capacity on-line to address growing
customer demand. The Group also invested £0.8m (H1 2007: £0.7m) in
developing and bringing to market new customer products.
The Group negotiated new significantly increased banking facilities
with Lloyds TSB Corporate Markets for the purpose of financing
continued growth. With its current facilities the Group now has
£9.0m of working capital facilities available. Cash on hand at the
half year was £1.6m (H1 2007: £1.3m).
Net debt of £15.7m (H1 2007: £10.4m) was lower than expected as a
result of strong working capital management. With the additional
capacity that is being brought on-line in 2008, and the completion of
the Singapore relocation in the second half, the Group is expecting
strong free cash flow generation and the reduction of net debt in
2009.
3. STRATEGY
IQE continues to focus on fast growing, large volume technologies,
and in particular, high speed wireless communications and advanced
opto electronics. In this respect, the Group is actively engaged in
developing advanced solar cell technology, high efficiency solid
state light sources, advanced lasers and ultra high speed
microprocessor and memory chip materials technology for these fast
growing, large volume emerging markets.
In order to provide customers with the most competitive outsource
wafer service globally, IQE has developed a unique set of advantages,
including:
* offering a complete range of products covering all major
applications;
* offering global multi-site production capabilities in the
primary manufacturing platforms to allow efficient capacity
planning and for disaster scenario contingency;
* maintaining a broad contact base and global presence with
access to all the key global markets;
* delivering benefits from economies of scale including
purchasing power and research and development efficiencies;
* promoting the sharing of best practices and innovation
across the group to deliver improved operating and cost
efficiencies; and
* providing surge capacity to meet the expected growth in
demand in the mobile device sector and other high volume
activities.
This strategy has delivered tangible results in the current
generation of wireless products that have dominated IQE's output
during 2008 and will continue to deliver on current and next
generation products. In addition, IQE is also able to leverage its
large manufacturing capacity in order 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 increasing adoption of high speed mobile
communications, including 3G, WiFi, WiMAX, WiBro, 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
absolutely critical in the drive to 3G and beyond, along with the
need for backward compatibility and the speed and power to
accommodate features such as high resolution imaging, video, high
speed wireless data access, VoIP and satellite navigation. Each
high speed communication device now contains multiple numbers of
GaAs components compared with earlier generations, creating a
powerful demand driver for GaAs components and wafers which far
outstrips the growth of the overall communications market which is
in excess of 10% pa.
* 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, eventually being incorporated into mobile handsets.
* The accelerating drive for clean, efficient and
sustainable energy sources (solar cells), and highly efficient
light sources (LEDs) in order to reduce the impact on 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 for these
applications, having achieved world leading results through its
partners for solar cell efficiencies.
* 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. IQE has established powerful
positions in both technologies, working with some of the biggest
names in the industry.
Each of these markets has very powerful growth potential, with
wireless being the current key driver.
5. TRADING OUTLOOK
IQE's markets continue to prove resilient to the global economic
slowdown, as demonstrated by strong customer demand and echoed by
recent market comments on the strength of 3G handset and smartphone
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 from users for advanced mobile features such as
email, internet browsing and video streaming. 3G handset sales
currently represent around 12% of the general market but are forecast
to grow 52% in 2008 (Gartner; August 2008).
In addition, IQE continues to innovate and is working with a number
of customers in developing cutting edge technologies in key emerging
fast growing, large volume markets, including solar power generation,
high efficiency solid state light sources, advanced lasers, and
advanced micro processor and memory products. The Group continues to
make good progress in these areas and is on track in bringing these
products to market in the near term.
The Group's diverse customer base and multi-channel supply strategy
ensure a high level of resilience to changes in the market landscape
within its supply chain.
The successful implementation of the Group's strategy, combined with
a strong operational gearing give the Board confidence in both the
short term and long term growth prospects of the business. The Group
remains on course to deliver strong growth in both sales and profits
for the full year.
Dr Drew Nelson
President and CEO
2nd September 2008.
6 months to 6 months to 12 months to
CONSOLIDATED INCOME 30 Jun 2008 30 Jun 2007 31 Dec 2007
STATEMENT
(All figures GBP000s) Note Unaudited Unaudited Audited
Revenue from continuing 30,178 23,680 50,065
operations
Cost of sales (24,675) (19,808) (41,838)
Gross profit 5,503 3,872 8,227
Gross profit % 18.2 16.4 16.4
Selling, general and
administrative expenses 3 (5,492) (3,808) (8,053)
(including exceptional
items)
Operating profit 11 64 174
Operating profit % 0.0 0.3 0.3
Operating profit before 1,579 64 613
exceptional items
Exceptional items 3 (1,568) 0 (439)
Operating profit 11 64 174
Operating profit % before 5.2 0.3 1.2
exceptional items
Finance income 20 5 58
Finance costs (740) (572) (1,094)
Loss for the period attributable
to equity shareholders (709) (503) (862)
Loss pence per ordinary 1p 4 (0.16) (0.12) (0.20)
share
Diluted loss pence per 4 (0.16) (0.12) (0.20)
ordinary 1p share
EBITDA before exceptionals
is calculated as follows:
Loss for the period attributable (709) (503) (862)
to equity shareholders
Share based payments 434 198 571
Exceptional items 1,568 0 439
Net interest payable 720 567 1,036
Depreciation of tangible 1,382 1,111 2,400
fixed assets
Amortisation of intangible fixed 205 157 307
assets
Earnings before interest, taxes,
depreciation, amortisation and 3,600 1,530 3,891
exceptionals
CONSOLIDATED STATEMENT OF 6 months to 6 months to 12 months to
RECOGNISED
INCOME AND EXPENSE 30 Jun 2008 30 Jun 2007 31 Dec 2007
(All figures GBP000s) Unaudited Unaudited Audited
Loss for the period (709) (503) (862)
Currency translation differences
on foreign currency net 241 (234) (743)
investments
Total recognised expense for the (468) (737) (1,605)
period
As At As At As At
CONSOLIDATED BALANCE 30 Jun 2008 30 Jun 2007 31 Dec 2007
SHEET
(All figures Unaudited Unaudited Audited
GBP000s)
Non-current assets :
Intangible assets 12,856 11,643 12,110
Property, plant and 19,703 14,510 17,243
equipment
Total non-current assets 32,559 26,153 29,353
Current assets :
Inventories 8,829 8,094 7,643
Trade and other 12,534 8,540 10,599
receivables
Cash and cash 1,646 1,263 11
equivalents
Total current assets 23,009 17,897 18,253
Total assets 55,568 44,050 47,606
Current liabilities :
Borrowings (6,254) (3,584) (5,911)
Trade and other payables (14,208) (8,851) (10,354)
Total current (20,462) (12,435) (16,265)
liabilities
Non-current liabilities
:
Borrowings (11,142) (8,046) (8,259)
Long term creditors (829) 0 0
Deferred income (102) (141) (122)
Total non-current (12,073) (8,187) (8,381)
liabilities
Total liabilities (32,535) (20,622) (24,646)
Net assets 23,033 23,428 22,960
Shareholders' equity :
Ordinary shares 4,324 4,308 4,310
Share premium 172,281 172,154 172,183
Other reserves (422) (952) (1,092)
Profit and loss account (153,150) (152,082) (152,441)
Total shareholders' 23,033 23,428 22,960
equity
6 months to 6 months to 12 months to
CONSOLIDATED CASH FLOW 30 Jun 2008 30 Jun 2007 31 Dec 2007
STATEMENT
(All figures Unaudited Unaudited Audited
GBP000s)
Cash flows from
operating activities :
Cash inflow from 6 2,758 393 1,827
operations
Interest received 20 5 58
Interest paid (475) (427) (762)
Net cash inflow/(outflow)
from operating activities 2,303 (29) 1,123
Cash flows from
investing activities :
Development expenditure (786) (730) (1,372)
Investment in other (100) 0 (20)
intangible fixed assets
Purchase of property, (2,605) (3,974) (7,814)
plant and equipment
Proceeds from sale of 0 0 97
tangible fixed assets
Net cash used in (3,491) (4,704) (9,109)
investing activities
Cash flows from
financing activities :
Issues of ordinary share 107 127 154
capital
Loans and leases 3,738 1,798 2,750
received/(repaid)
Net cash generated from 3,845 1,925 2,904
financing activities
Net increase/(decrease)
in cash and cash 2,657 (2,808) (5,082)
equivalents
Cash and cash equivalents
at the beginning (1,011) 4,071 4,071
of the period
Cash and cash 7
equivalents at the end 1,646 1,263 (1,011)
of the period
1 BASIS OF PREPARATION
These interim results have been prepared under the historical cost
convention and in accordance with International Financial Reporting
Standards ("IFRS") and interpretations in issue at 30 June 2008.
The interim results were approved by the Board of Directors and the
Audit Committee on 01 September 2008. The interim results do not
constitute statutory accounts within the meaning of the Companies Act
1985 and have not been audited. Comparative figures in the interim
results for the year ended 31 December 2007 have been taken from the
published audited statutory financial statements. All other periods
presented are unaudited.
6 months to 6 months 12 months
to to
2 SEGMENTAL INFORMATION 30 Jun 2008 30 Jun 31 Dec
2007 2007
(All figures GBP000s) Unaudited Unaudited Audited
Revenue by business segment :
Wireless 23,646 17,327 38,088
Optoelectronics 5,278 5,097 9,212
Electronics 1,254 1,256 2,765
Total revenue 30,178 23,680 50,065
Operating profit by business
segment :
Wireless (including exceptional items
£1,568,000; 2007 £nil) 1,523 1,260 3,583
Optoelectronics (893) (938) (2,840)
Electronics (619) (258) (569)
Total operating profit 11 64 174
6 months to 6 months to 12 months to
3 EXCEPTIONAL ITEMS 30 Jun 2008 30 Jun 2007 31 Dec 2007
(All figures GBP000s) Unaudited Unaudited Audited
Exceptional items comprise :
Relocation costs 1,568 0 439
The exceptional charge of £1,568,000 (2007- £nil) relates to the
one-off costs incurred in relocating the Singapore operation to a new
state-of-the-art facility. The relocation is progressing according
to plan and will be completed during the second half of 2008.
4 LOSS PER SHARE 6 months to 6 months to 12 months to
30 Jun 2008 30 Jun 2007 31 Dec 2007
Unaudited Unaudited Audited
Profit/(loss) for the period
(before exceptional 859 (503) (423)
items) GBP 000s
Loss for the period GBP 000s (709) (503) (862)
Weighted average number of 431,500,695 430,362,629 430,601,406
ordinary shares
Dilutive share options 12,451,008 6,931,004 14,883,360
Adjusted weighted average number 443,951,703 437,293,633 445,484,766
of ordinary shares
Profit/(loss) pence per share 0.19 (0.12) (0.09)
(before exceptional items)
Loss pence per share (0.16) (0.12) (0.20)
Diluted loss pence per share (0.16) (0.12) (0.20)
Profit/(loss) per share is calculated by dividing the loss
attributable to ordinary shareholders by the weighted average number
of ordinary shares during the period. Diluted loss per share is
calculated by adjusting the weighted average number of ordinary
shares in issue on the assumption of conversion of all dilutive
potential ordinary shares.
IAS 33 requires the presentation of diluted loss pence per share when
a company could be called upon to issue shares that would decrease
net profit or increase net loss per share. For a loss-making company
with outstanding share options, net loss per share would only be
increased by the exercise of the out of the money options. Since it
seems inappropriate to assume that option holders would act
irrationally, no adjustment has been made to diluted loss per share
for out of the money share options.
5 STATEMENT OF CHANGES IN 6 months to 6 months to 12 months
to
SHAREHOLDERS' EQUITY 30 Jun 2008 30 Jun 2007 31 Dec 2007
(All figures GBP000s) Unaudited Unaudited Audited
At the beginning of the period 22,960 23,840 23,840
Loss for the period attributable
to equity shareholders (709) (503) (862)
Share option costs credited to 434 198 571
reserves
Shares issued net of issue costs 107 127 154
Net exchange differences offset 241 (234) (743)
in reserves
At the end of the period 23,033 23,428 22,960
6 months to 6 months to 12 months
to
6 CASH GENERATED FROM OPERATIONS 30 Jun 2008 30 Jun 2007 31 Dec
2007
(All figures GBP000s) Unaudited Unaudited Audited
Operating profit 11 64 174
Depreciation of tangible assets 1,382 1,111 2,400
Amortisation of intangible assets 205 157 307
Loss/(gain) on sale of tangible 0 0 (5)
assets
Government grants released (19) (19) (39)
Non cash exceptional costs 961 0 0
Non cash share option costs 434 198 571
Operating profit before changes in
working capital 2,974 1,511 3,408
(Increase)/decrease in inventories (1,186) 487 937
(Increase) in trade and other (1,935) (2,060) (4,119)
receivables
Increase in trade and other 2,905 455 1,601
payables
Cash inflow generated from 2,758 393 1,827
operations
As At As At As At
7 ANALYSIS OF NET DEBT 30 Jun 2008 30 Jun 2007 31 Dec 2007
(All figures GBP000s) Unaudited Unaudited Audited
Cash at bank and in hand 1,646 1,252 0
Highly liquid investments 0 11 11
Total cash and cash equivalents 1,646 1,263 11
Overdraft 0 0 (1,022)
Loans due after one year (11,073) (8,040) (8,170)
Loans due within one year (6,211) (3,583) (4,844)
Finance leases due after one year (69) (6) (89)
Finance leases due within one (43) (1) (45)
year
Total borrowings (17,396) (11,630) (14,170)
Net debt (15,750) (10,367) (14,159)
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