IQE PLC Iqe Plc : Final Results

 
TIDMIQE 
 
 
   Embargoed until 7 am on 21 March 2017 
 
   IQE plc 
 
   Final Results 
 
   Record revenues, profits and cash generation reflect the strength of 
IQE's IP portfolio, which is delivering continued growth across a 
diverse range of applications and markets 
 
   IQE plc (AIM: IQE, "IQE" or the "Group"), the leading global supplier of 
advanced wafer products and wafer services to the semiconductor industry, 
announces its final results for the year ended 31 December 2016. 
 
 
 
 
GBP' Million (except EPS)                       2016   2015   Change 
Revenue                                         132.7  114.0   16.4% 
Adjusted(*) Operating Profit                     22.1   18.9   16.6% 
Adjusted(*) Profit Before Tax                    20.6   17.6   17.4% 
Adjusted(*) Fully Diluted EPS                    3.0p   2.6p   15.4% 
Cash generated from operations                   22.5   20.9    7.1% 
Capital investment (tangible plus intangible)    19.1   10.0   90.6% 
Leverage (net debt + deferred consideration)     39.5   40.4   -2.0% 
 
 
   Financial highlights 
 
 
   -- Strong financial performance with continued double digit growth in 
      revenues and  profits 
 
   -- Revenues up 16% to GBP132.7m (PY GBP114.0m), reflects multiple growth 
      drivers and currency benefits in H2 
 
   -- Adjusted* operating profit up 17% to GBP22.1m 
 
   -- Adjusted* fully diluted EPS up 15% to 3.0p 
 
   -- Strong conversion of adjusted* operating profit into operating cash of 
      102% (PY: 111%) 
 
   -- Capital investment increased to GBP19.1m to address near term growth 
      opportunities (PY GBP10.0m) 
 
   -- Deferred consideration from previous acquisitions settled in full (PY 
      GBP17.1m outstanding) 
 
   -- Total leverage reduced by 2% to GBP39.5m (19% reduction in constant 
      currency) 
 
 
   *   Adjustments reflect non-cash charges and exceptional items as 
detailed in note 4 
 
   Operational highlights 
 
 
   -- Diverse range of growth drivers and end markets enables 19% growth in 
      wafer sales,  reflecting organic growth in all markets, supplemented by a 
      currency tailwind in H2 
 
          -- Photonics revenues up 43% to GBP22.8m 
 
          -- Wireless revenues up 15% to GBP91.3m 
 
          -- InfraRed revenues up 19% to GBP10.6m 
 
          -- US dollar strengthened 11% against sterling in H2 following Brexit 
             vote in June 
 
   -- License income of GBP6.7m higher than expected, but lower than prior year 
      (GBP8.0m) which included  a significant element of upfront income. 
 
   -- Direct engagement with multiple Tier 1 OEMs reflect IQE's strong IP 
      position and the increasing importance of epitaxial IP as a key enabling 
      technology within electronic systems; 
 
   -- Major milestones achieved in 2016, enabled by IQE's growing portfolio of 
      leading edge IP, provide a positive lead indicator of significant growth 
      opportunities ahead : 
 
          -- Key milestones delivered on several major photonics programmes 
             during H2 2016, providing significant growth opportunities for 
             2017 and beyond; 
 
          -- Excellent progress with new cREO technology delivers some early 
             wins, including delivering a step change in  GaN on Silicon 
             technology (the elimination of "parasitic channel"), and 
             engagement in development programmes for advanced RF filter 
             applications; 
 
          -- A key customer is engaged in end market qualification using IQE's 
             GaN on Silicon material,  signifying that this technology is close 
             to commercialisation; and 
 
          -- Significant contract wins in InfraRed, and progress in a number of 
             development programmes underpin the continued growth of this 
             business, and progress towards new high volume applications. 
 
   -- Positive market dynamics, including increasing M&A and sector investment, 
      reflect the increasing focus on compound semiconductors as a critical 
      enabling technology to major growth themes, including high speed 
      communication, the "internet of things", big data, advanced medical 
      technology, energy efficiency,  and autonomous vehicles. 
 
   -- Good progress by IQE's Joint Ventures in the UK and Singapore mark key 
      milestones in their development as centres of excellence in driving 
      innovation and commercialisation of advanced CS technologies.   The UK 
      Joint Venture was a catalyst to securing c.GBP300m of funding towards the 
      continued development of a UK CS Cluster, and the Singapore JV has been 
      selected as a partner in a major programme for CS on silicon technology. 
 
 
   Dr Drew Nelson, IQE Chief Executive, said: 
 
   "IQE delivered a strong set of results in 2016, with revenues up 16%, 
PBT up 17%, and EPS up 15%.     The continuing growth in revenues, 
profits and cash generation is being enabled by the Group's portfolio of 
cutting edge intellectual property, and is being delivered through a 
diverse range of growth engines. 
 
 
 
   "Revenues were up in all key markets: wireless, photonics and InfraRed. 
Photonics continues to be the star of the show with 43% year on year 
growth in sales, and a CAGR of more than 35% over the past three years. 
This is being driven by VCSEL and InP technologies which enable a broad 
range of applications from fibre optic communication, to advanced 
sensors, and industrial processes.   The depth and breadth of  photonics 
development programmes and customer qualifications provide a solid 
platform for continued strong growth over the coming years. 
 
   "InfraRed sales were up 19% with a number of notable contract wins 
during 2016.   This division has gone from strength to strength, with 
good technological and commercial progress.   Our largest division, 
Wireless, also  performed well, with revenues up 15%.   Good progress 
within the wireless division in 2016, including continued innovation, 
new product development and new qualifications, has strengthened IQE's 
strong leadership position in this space and provides a good platform 
for further growth. 
 
   "Our focus on building a strong IP portfolio reflects our vision of 
global leadership across a range of markets as advanced semiconductor 
materials become an increasingly important enabler of a wide range of 
electronics applications. This strategy underpins our strong financial 
performance, and the exciting outlook we see for our business." 
 
   Contacts: 
 
 
 
 
 
 
 
 
IQE plc                 [phone] 
Drew Nelson 
Phil Rasmussen 
Chris Meadows 
 
Canaccord Genuity      + 44 (0) 20 7523 8000 
Simon Bridges 
 
Peel Hunt              + 44 (0) 20 7418 8900 
Richard Kauffer 
 
Capital Access Group    [phone] 
Scott Fulton 
Jessica Bradford 
 
   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 ('epiwafers') 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; and optical communications. 
 
   The Group also manufactures advanced optoelectronic and photonic 
components such as semiconductor lasers, vertical cavity surface 
emitting lasers (VCSELs) and optical sensors for a wide range of 
applications including optical storage, thermal imaging, leading-edge 
medical products, pico-projection, finger navigation ultra-high 
brightness LEDs, and high efficiency concentrated 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 a number of manufacturing and R&D facilities across Europe, 
Asia and the USA. The Group also delivers its products and services 
through regional sales offices located in major economic centres 
worldwide. 
 
   Overview 
 
   IQE has been at the forefront of the Compound Semiconductor (CS) 
industry for nearly 30 years, and has developed an unparalleled depth 
and breadth of technology. 
 
   The Group leverages its technology leadership and scale to deliver the 
performance, cost points and security of supply to support increasing 
mass market adoption across a significant number of high volume market 
verticals. 
 
   IQE is the clear global leader in the supply of advanced materials to 
mass market wireless applications. The Groups strategy is to replicate 
this success in its other markets: photonics, infrared, advanced solar 
(CPV), LED, power switching and CMOS++(advanced electronics). 
 
   The Group has established a powerful platform for delivering this 
strategy, through the following USPs: 
 

   --    Global footprint spanning US, Europe and Asia 
 
   --    Breadth and depth of advanced semiconductor materials technology 
 
   --    Talented, committed and experienced team 
 
   --    Proven credibility and reputation 
 
   --    Secure multi-site supply 
 
   --    Scale and cost leadership 
 
   --    Largest capacity in the industry 
 
   The Vision 
 
   By harnessing the properties of semiconducting materials, scientists and 
engineers have enabled the electronics revolution that has transformed 
the way we live our lives. 
 
   Silicon has been at the heart of this revolution by virtue of dramatic 
improvements in performance combined with reducing costs.  This has been 
enabled by the continued reduction in the size of silicon chips 
("Moore's Law"), combined with heavy investment in scaling up the 
industry.  However, chip shrinkage is now facing diminishing returns, 
and the industry needs a new dimension to continue its expansion.   This 
is where epitaxy and compound semiconductors play an enabling role. 
 
   Epitaxy is the technology of combining different semiconducting elements 
to make more advanced semiconductor materials, also known as compound 
semiconductors.  These materials have superior optical and electronic 
properties, and operate at frequencies and speeds not achievable with 
silicon.  Amongst other things, compound semiconductors are the enabling 
technology behind high speed wireless communication (enabling the 
smartphone revolution), fibre optic communication (enabling the 
internet), and LEDs (the lighting revolution).  However, the compound 
semiconductor industry is far less mature than the silicon industry and 
is much smaller in scale.  As a result, compound semiconductor chips are 
more costly to produce. 
 
   It is widely agreed that the future of the semiconductor industry is to 
combine the advanced properties of compound semiconductors with the low 
cost of the silicon industry with a hybrid technology called "compound 
semiconductors on silicon".   In simple terms, this means using 
epitaxial IP to grow layers of compound semiconductors on a base silicon 
material.  This is a highly complex technology.  IQE has been a pioneer 
in this space over more than a decade, and through its many development 
programmes and collaborations it has built a powerful portfolio of IP 
including patents and trade secrets. 
 
   With a strong pedigree in high tech manufacturing, IQE is uniquely 
positioned to commercialise this IP over the coming years and decades. 
 
 
 
   Innovation through collaboration 
 
   Intellectual property relating to advanced materials is playing an 
increasingly important role in the evolution of the semiconductor 
industry.  It is widely accepted that advanced materials are needed to 
overcome the challenges and realise the opportunities facing the 
electronics industry.  This was evident from the level of  M&A activity 
in the CS space during 2016, including the formation of a JV by Qualcomm 
and TDK,  the acquisitions by II-VI Inc  of Epiworks and Anadigics, and 
the attempted acquisitions of GCS and Aixtron.  The multiples being paid 
in these deals reflect the increasing value being placed on compound 
semiconductor technology. 
 
   IQE has been at the forefront of advanced semiconductor technology for 
over a quarter of a century.  It has built a reputation within the CS 
industry for the breadth and depth of its materials technologies and 
capabilities.  This is now becoming increasingly recognised outside the 
CS industry, where IQE is becoming recognised as the 'go to' advanced 
materials innovator and provider.  Indeed, IQE is now engaged directly 
with a number of Tier 1 OEMs, bypassing the normal "materials - chip - 
OEM" model. 
 
   There are many examples in history which reflect that collaboration is a 
powerful tool in accelerating innovation.  The benefits are even greater 
when whole ecosystems "cluster" in the same location, breaking down the 
barriers created by geography and time zones.   Indeed, Silicon Valley 
in California is a prime example of how the benefit of clustering can 
propel an industry to a global platform. 
 
   It is the benefits of collaboration and clustering that underpin IQE's 
strategic rationale for the joint venture partnerships in the UK and 
Singapore, and its highly successful Open Innovation programme 
(openiqe.com) 
 
   The silicon supply chain is no stranger to the benefits of clustering. 
Indeed, there are 4 clusters within Europe which are centred around the 
development and commercialisation of Silicon technology.  These are 
strongholds of innovation and value creation, with over 800 companies 
and 150,000 employees. 
 
   IQE's vision is to be at the epicentre of the world's first compound 
semiconductor cluster, based in the UK.  There was significant progress 
during 2016, and momentum continues to build : 
 
 
   -- Cardiff University is investing c.GBP75m in the formation of the 
      Institute of Compound Semiconductors as part its GBP300m innovation 
      campus; 
 
   -- IQE and Cardiff University invested GBP24m in the formation of the 
      Compound Semiconductor Centre; 
 
   -- The UK government has committed GBP50m funding for a Compound 
      Semiconductor Catapult in Cardiff, which will leverage a further GBP100m 
      funding from Innovate UK and Industry; 
 
   -- The Cardiff City Region Deal has identified the emerging CS cluster in 
      Cardiff as one of its 5 headline goals. 
 
   -- EPSRC's GBP10m investment to create a CS Manufacturing Hub in Cardiff, 
      led by Cardiff University and partnered by UCL, the University of 
      Manchester and the University of Sheffield. 
 
 
   This level of investment is recognition of the increasing significance 
of compound semiconductor technology in the electronics industry, and 
the UK's ambitions to build on its existing academic and industrial 
strengths in to a world class end-to-end supply chain for compound 
semiconductor technologies in the UK. 
 
 
 
   Financial Review 
 
   In order to provide a fuller understanding of the Group's underlying 
performance, we have included a number of adjusted profit measures as 
supplementary information.  As detailed in note 4, the adjusted measures 
eliminate the impact of certain non-cash charges and non-recurring 
items. 
 
   Revenues of GBP132.7m were up 16% on 2015 (GBP114.0m).  Revenues from 
wafer sales were up 19% reflecting strong growth in each of IQE's 
primary markets : Photonics revenues were up 43%; wireless revenues up 
15% and InfraRed revenues up 19%.  Growth in underlying demand was 
accompanied by a currency tailwind, with the US dollar strengthening 11% 
against sterling in H2 primarily due to the Brexit vote in June. 
License revenue of GBP6.7m was better than expected, albeit down from 
GBP8.0m in the prior year, which as flagged benefited from a significant 
element of up front income. 
 
   Adjusted gross profit increased from GBP32.4m to GBP36.4m largely driven 
by the increase in revenue. As a percentage of sales, adjusted gross 
margins  reduced  from 28% to 27% reflecting the impact of sales mix. 
In particular, high margin license income reduced from 2015 which 
included a significant element of upfront income.      Adjusted gross 
margins on wafer sales increased from 23% to 24% driven by increasing 
efficiencies.  Reported gross profit increased from GBP30.7m to GBP34.7m, 
with percentage margin reducing from 27% to 26%. 
 
   Other income increased from GBP0.8m to GBP2.3m.  This relates to gains 
on the reduction of the estimated remaining balance of contingent 
deferred consideration payable in respect of a previous acquisition. The 
balance under this contingent deferred consideration arrangement have 
now been settled in full.  These gains, which do not relate to 
underlying trade, have been excluded from the adjusted profit measure. 
 
 
   Adjusted selling, general and administration expenses (SG&A) increased 
from GBP13.5m to GBP14.2m, which primarily reflects the impact of 
currency movements.  Reported SG&A increased from GBP15.5m to GBP16.4m. 
 
   The profit on disposal of fixed assets of GBP5.2m in the prior year 
primarily reflected a gain of GBP4.8m on the establishment of the UK 
Joint Venture, in which the Group contributed equipment in return for a 
50% equity share in the JV.  There was a loss on disposal of fixed 
assets in the ordinary course of business of less than GBP0.1m (2015: 
profit GBP0.4m). 
 
   Adjusted operating profit increased by 17% from GBP18.9m to GBP22.1m, 
despite the reduction in high margin license income, reflecting the 
benefit of higher sales and operational efficiencies. Reported operating 
profit decreased from GBP21.2m to GBP20.7m, primarily reflecting that 
the prior year included a profit on disposal of fixed assets of GBP5.2m. 
 
 
   Interest costs increased from GBP1.4m to GBP1.5m, largely due to the 
impact of foreign exchange. 
 
   There was a net tax credit of GBP0.8m on underlying profits compared to 
GBP0.5m. In addition there was a GBP0.4m tax charge relating to 
exceptional items compared with a tax credit of GBP0.3m on exceptional 
items in 2015.  The Group has sufficient tax losses available to shield 
future tax payable of circa GBP39.9m. 
 
   Adjusted profit after tax increased by 19% from GBP18.1m to GBP21.4m, 
and reported profit after tax decreased GBP20.1m to GBP19.4m.  The 
adjusted fully diluted earnings per share was 3.00p, up 15% from 2.60p 
in the prior year. Reported diluted earnings per share was 2.71p, down 
from 2.90p in 2015.  The Board will not be recommending the payment of a 
dividend. 
 
   Cash inflow from operations increased 7% from GBP20.9m to GBP22.5m, 
representing a 102% conversion of adjusted operating profit into cash 
(2015: 111%). 
 
   Capital investment of GBP19.1m represents a GBP9.1m increase over the 
prior year to address growth opportunities, principally in photonics, 
GaN and cREO.   Investment in capital equipment was up GBP7.1m, and 
investment in intangibles was up GBP1.9m. 
 

   Balance sheet leverage was down 2% from GBP40.4m to GBP39.5m, as gearing 
reduced from 22% to 17%. Deferred consideration relating to previous 
acquisitions was reduced by GBP17.1m in the year and has now been 
settled in full.  Net debt increased by GBP16.3m from GBP23.2m to 
GBP39.5m, although c.GBP7m of this increase represents a presentational 
foreign currency impact. 
 
   Impact of foreign currency 
 
   IQE revenues are denominated in a range of currencies, but primarily 
they are billed in US dollars.   Therefore, given that revenues are 
reported in sterling there is a foreign currency translation benefit, 
particularly with the dramatic devaluation of sterling in the second 
half of 2016 following the Brexit referendum on 23rd June 2016.   This 
is estimated to account for approximately 10% of the Group's revenue 
growth (being the movement in the average exchange rate). 
 
   Similarly, IQE's costs are denominated in a range of currencies, but 
primarily billed in US dollars.  As a result, the impact of foreign 
currency movements on the Group's results presented in sterling is 
largely presentational because of this underlying natural hedge. 
 
   There is also a presentational effect on the Groups balance sheet, as 
both non-sterling assets and liabilities will be translated at the 
year-end spot rate.   This is estimated to account for an increase in 
asset and liabilities of approximately 17% (being the movement in the 
year end spot rates).   Therefore, although the balance sheet leverage 
has reduced by 2%, the underlying increase is approximately 19%. 
 
   Operating Review 
 
   Organisation 
 
   The Group has established six Business Units along market lines, to 
address its primary and emerging markets: 
 
 
   -- IQE Wireless 
 
   -- IQE Photonics 
 
   -- IQE InfraRed 
 
   -- IQE Solar 
 
   -- IQE Power 
 
   -- IQE CMOS++ 
 
 
   Each Business Unit has a clear product and customer focus, but continues 
to benefit from the production and technology synergies of the whole 
Group. The emerging markets of Solar and Power control are not yet 
significant enough to be separated in our segmental reporting. 
 
   Wireless 
 
   Compound Semiconductors ("CS") are essential for high speed wireless 
communication, and have been an enabling technology for mass market 
applications such as smartphones and wifi.  IQE is the market leader 
with an estimated 55% share of this global market.   Wireless accounted 
for approximately 69% of IQE's sales in 2016. 
 
   Following the launch of the iPhone in 2007 this market enjoyed several 
years of double digit growth, as the launch of new handsets were usually 
met with a "feeding frenzy" of consumers eager to secure the latest 
model.  However, market growth cooled in 2013 as the innovation cycle 
struggled to keep up pace.   Indeed, according to industry analyst IDC, 
smartphone shipments in 2016 increased by 2.8% to 1.47 billion units 
(2015: 1.43 billion units).  This is broadly consistent with IQE's 
estimate that the market for its wireless materials has been growing at 
a "mid single digit" rate in recent years. 
 
   Nevertheless, the relentless increase in data traffic continues to drive 
the need for more sophisticated wireless chip solutions in order that 
handsets continue to meet consumer expectations.   This will continue to 
necessitate an increasing content of CS materials in handsets, and 
ongoing innovation in the underlying CS materials and chip technologies. 
These factors underpin wireless as a solid and sustainable market for 
IQE. 
 
   Beyond this, the outlook for the wireless materials market has strong 
potential to return to double digit growth due to a number of factors, 
including : 
 
 
   -- Innovation in smartphone hardware, including the adoptions of advanced 
      photonics sensors; 
 
   -- The adoption of GaN on Silicon technology for base stations 
 
   -- The transition to 5G communications, requiring more advanced CS materials 
 
   -- The adoption of compound semiconductors using cREO for other wireless 
      communication chips 
 
 
   Photonics 
 
   Photonics refers to devices which emit or detect light ie advanced laser 
and sensors.  Photonics chips enable a wide range of end markets in the 
communications, consumer, and industrial space.  This segment accounted 
for 17% of IQE's sales in 2016.  However, as IQE's most rapidly growing 
market, this is expected to represent an increasing proportion of IQE's 
sales going forward. 
 
   There are two critical technologies which are driving rapid growth in 
this market for IQE: 
 
 
   -- Vertical Cavity Surface Emitting Lasers ("VCSEL") -  the key enabling 
      technology behind a number of high growth markets including 3D sensing, 
      data communications, data centres, gesture recognition, health, cosmetics, 
      illumination and heating applications. IQE is the market leader for 
      outsourced VCSEL materials, which has been achieved by virtue of its 
      technology leadership.  This includes the demonstration of VCSELs with 
      record speeds, efficiencies and temperature performance.  In addition, 
      with its 6" wafer capability IQE has been successful at enabling its 
      customers to reduce significantly the unit cost of chips which is 
      accelerating the adoption of this technology. 
 
   -- Indium Phosphide ("InP") - this technology enables fibre to the premises 
      ("FTTX").  The continued development of this technology to achieve higher 
      performance at lower costs, plus the explosive growth in data traffic is 
      finally leading to the extension of the fibre optic network "to the 
      premises" - also know as "the last mile".    IQE has developed advanced 
      laser technologies with differentiated IP which underpins it high growth 
      expectations for this business. 
 
 
 
   Optical interconnects 
 
   Currently, wired data transmission in the home, the office and in data 
centres is largely undertaken using copper cables. However, data traffic 
is growing at an explosive rate due to technologies such as high 
definition imaging, video streaming, the Internet of Things (IoT) and 
cloud computing. This phenomenon is necessitating a switch from copper 
wires to optical communication. This is a natural evolution which 
mirrors the transformation that has already taken place in the telecoms 
infrastructure. 
 
   Optical interconnects offer significantly higher-speed data transfers 
over much longer distances than their copper counterparts, and are much 
more efficient. Data centres have become major consumers of electrical 
energy, rivalling traditional heavy industries in terms of the power 
requirements needed to keep large warehouses full of servers operating 
and cooled. It is therefore of little surprise that enterprises such as 
data centres are amongst the first adopters, where optical technology 
now offers both higher performance and lower overall operating cost 
compared with copper. 
 
   Compound semiconductor technology that enable optical interconnects 
include Vertical Cavity Surface Emitting Lasers (VCSELs). VCSELs are an 
advanced laser technology geared to mass production and low cost. IQE is 
the market and technology leader for VCSEL products, with world record 
data speeds in excess of 64 Gb/s already demonstrated. 
 
   3D sensing 
 
   There is little doubt that sensing technologies will represent a major 
growth area in the near term and extending into the future. 
 
   Initially, consumer devices are likely to be the early adopters of 3D 
sensing technologies. In fact, laser (VCSEL)/detector pairs are already 
being deployed to enable "environment awareness" features in a number of 
smartphone and wearable applications and "time-of-flight" laser 
technology is being adopted for high speed auto-focus functionality in 
camera applications. 
 
   3D sensing is an essential feature for devices that need detailed and 
accurate information about their environment for applications such as 
augmented reality. 
 
   Future applications for 3D sensing will extend into autonomous vehicles 
for sensing features in the environment in order to make safety 
judgements. 
 
   Gesture recognition 
 
   Closely related to 3D sensing, gesture recognition represents the 
ability of electronic devices to recognise hand and body gestures and 
movements in order to control any device. The advanced properties of 
compound semiconductor epiwafers are a key component in gesture 
recognition devices which are expected to appear in many new product 
launches over the coming years. 
 
   The potential applications for this technology extend far beyond gaming, 
from medical applications, disability aids, remote controls, to sign 
language recognition, and more. In fact, the use of this technology is 
only limited by human imagination, and has far reaching implications for 
how we will interface with technology in the near future. It is 
anticipated that many household appliances will be controlled by 
gesture. 
 
   Laser projection 
 
   Conventional projection technologies use incandescent or halogen lamps 
as their light sources. Such devices are power hungry, physically bulky, 
have relatively short lifetimes and require focusing optics which can 
limit the image quality and flexibility. 
 
   The emergence of lasers in each of the primary colours (red, green and 
blue) enables a low cost, high quality laser projection solution which 
can be miniaturised and does not require focusing optics. This 
technology is called pico-projection. 
 
   Solid state lighting (LEDs) 
 
   Light emitting diodes (LEDs) are a high performance, low cost, green 
alternative to incandescent light bulbs. 
 
   Global concerns about climate change and the Earth's dwindling natural 
resources continue to be a priority for governments worldwide. 
Significant new policies and legislation continue to be introduced in 
the direction of renewable and highly efficient energy devices. 
 
   Already, many governments have introduced wide-ranging legislation to 

progressively ban incandescent lighting. Alternative low energy, compact 
fluorescent lighting is unpopular because of perceptions of low quality 
lighting and on-going issues with heavy metal content including mercury. 
 
   In light of these drivers, we expect this market to continue to deliver 
strong double digit growth. 
 
   InfraRed 
 
   IQE is a global leader in the supply of indium antimonide and gallium 
antimonide wafers for advanced infrared applications. We are the 
technology leader with the launch of the industry's first 150mm indium 
antimonide wafers, a major milestone in reducing the overall cost of 
chips to drive increasing adoption. This success was followed up with a 
number of significant contract wins for the division. In addition, there 
has been significant work in developing these materials for consumer 
sensing applications, which will drive much higher volumes of wafers in 
the future. 
 
   We expect this market to growth at a rate of approximately 5-10% for the 
near future. 
 
   Advanced Solar (CPV) 
 
   Technologies which convert sunlight into electricity are also called 
PhotoVoltaics (or "PV").  The prevalent solar technology  is based on 
silicon material, which typically achieves a conversion of between 
15%-18% of the suns energy into electricity.  IQE has been at the centre 
of developing solar materials using compound semiconductors, which can 
deliver much higher levels of efficiency.  This technology, which is 
also known as Concentrating Photovoltaics, or "CPV", can already deliver 
efficiencies in excess of 44%, and has a route map to much higher levels 
of efficiency.   Although this offers a lower overall cost of energy 
generation in sunny territories, the challenge in mass adoption is in 
reducing the end system install costs, which has been hampered by global 
macroeconomics as the cost of oil has plummeted. 
 
   The terrestrial market remains an exciting market opportunity, but as a 
result of the shifting macroeconomics, focus has shifted to the space 
market, where these advanced materials are used to power satellites 
where the higher efficiency has a dramatic cost benefit on payload. 
Product qualifications are underway with leading satellite manufacturers, 
paving the way for commercial revenues. 
 
   Power 
 
   Gallium Nitride on Silicon (GaN on Si) is driving a technology shift in 
the multi-billion dollar power switching and LED markets.  IQE has 
continued to push the technology boundaries and is making rapid progress 
both technically and in developing commercial relationships in the 
supply chain. The power switching market alone is approximately 3-4 
times the size of the current market for wireless PA chip market, and 
represented a major growth market for IQE.   IQE's patented technology, 
cREO, provides a significant competitive advantage in this space. 
 
   CMOS++ 
 
   Future semiconductor technology architectures are moving strongly toward 
hybrid integrated chips using a combination of traditional CMOS based 
chips with Compound Semiconductor chips, all built on a silicon base 
wafer. This provides the market with the significant technical 
advantages of Compound Semiconductors at the cost point of silicon, and 
allows the CS industry to utilise the huge investments already made into 
large scale Silicon chip manufacturing. As a result, this greatly 
increases the available market for Compound Semiconductors. IQE has 
developed multiple routes to delivering this powerful new hybrid, and 
the addition of cREO and other IP provides a unique solutions to 
achieving the end goal. IQE is involved in multiple programmes across 
the globe, which are developing the core technologies from which we 
expect highly significant revenue streams to emerge over the next 3-5 
years. 
 
   Current Trading and Outlook 
 
   The Group's technology and market leadership, and its strong pipeline of 
high growth opportunities positions it well to continue its growth 
profile over the coming years. 
 
   The current financial year has started well and trading is in line with 
expectations.  The outlook for the full year remains very positive, with 
good upside potential.   The Board remains confident that the Group is 
on track to achieve expectations for the full year, and anticipates that 
the Group will continue to benefit from strong cash flows. 
 
   Dr Drew Nelson OBE 
 
   President & Chief Executive Officer 
 
   21 March 2017 
 
 
 
 
Consolidated income statement for the year ended 31 
 December 2016                                          2016      2015 
                                                      GBP'000   GBP'000 
Revenue                                                132,707   114,024 
Cost of sales                                         (97,979)  (83,372) 
Gross profit                                            34,728    30,652 
Other income and expenses                                2,340       779 
Selling, general and administrative expenses          (16,356)  (15,452) 
(Loss) / profit on disposal of property, plant and 
 equipment                                                (47)     5,187 
Operating profit                                        20,665    21,166 
Finance costs                                          (1,633)   (1,790) 
Adjusted profit before tax                              20,630    17,574 
Adjustments                                            (1,598)     1,802 
Profit before tax                                       19,032    19,376 
Taxation                                                   408       773 
Profit for the year                                     19,440    20,149 
 
Profit attributable to: 
Equity shareholders                                     19,276    19,864 
Non-controlling interest                                   164       285 
                                                        19,440    20,149 
 
Adjusted basic earnings per share                        3.17p     2.68p 
Basic earnings per share                                 2.87p     3.00p 
 
Adjusted diluted earnings per share                      3.00p     2.60p 
Diluted earnings per share                               2.71p     2.90p 
 
 
 
 
Consolidated statement of comprehensive income for 
 the year ended 31 December 2016                        2016     2015 
                                                       GBP'000  GBP'000 
Profit for the year                                     19,440   20,149 
Currency translation differences on foreign currency 
 net investments*                                       24,347    3,165 
Total comprehensive income for the year                 43,787   23,314 
*This may be subsequently reclassified to profit or 
 loss 
 
Total comprehensive income attributable to: 
Equity shareholders                                     43,063   23,000 
Non-controlling interest                                   724      314 
                                                        43,787   23,314 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet as at 31 December 2016          2016      2015 
                                                         GBP'000   GBP'000 
Non-current assets: 
Intangible assets                                         103,972    86,843 
Property, plant and equipment                              85,001    65,154 
Deferred tax assets                                        18,181    14,210 
Financial Assets                                            8,000     8,000 
Total non-current assets                                  215,154   174,207 
Current assets: 
Inventories                                                28,498    21,215 
Trade and other receivables                                30,868    23,050 
Cash and cash equivalents                                   4,957     4,644 
Total current assets                                       64,323    48,909 
Total assets                                              279,477   223,116 
Current liabilities: 
Borrowings                                                (7,652)   (3,241) 
Trade and other payables                                 (36,939)  (43,693) 
Provisions for other liabilities and charges              (1,421)   (1,116) 
Total current liabilities                                (46,012)  (48,050) 
Non-current liabilities: 
Borrowings                                               (36,854)  (24,626) 
Other payables                                                  -     (484) 
Provisions for other liabilities and charges              (2,167)   (2,922) 
Total non-current liabilities                            (39,021)  (28,032) 
Total liabilities                                        (85,033)  (76,082) 
Net assets                                                194,444   147,034 
 
Equity attributable to the shareholders of the parent: 
Share capital                                               6,755     6,655 
Share premium                                              51,081    49,600 
Retained earnings                                          89,476    70,200 
Other reserves                                             43,975    18,146 
                                                          191,287   144,601 
Non-controlling interest                                    3,157     2,433 
Total equity                                              194,444   147,034 
 
 
 
 
 
 
 
 
Consolidated statement of changes in equity for the 
 year ended 31 December 2016 
 
                                            Exchange 
                 Share    Share   Retained    rate                    Non-controlling   Total 
                capital  premium  earnings  reserve   Other reserves     interests     equity 
                GBP'000  GBP'000  GBP'000   GBP'000      GBP'000          GBP'000      GBP'000 
 
Balance at 1 
 January 2016     6,655   49,600    70,200     7,925          10,221            2,433  147,034 
 
Comprehensive 
 income 
Profit for the 
 year                 -        -    19,276                         -              164   19,440 
Foreign 

 exchange             -        -         -    23,787               -              560   24,347 
Total 
 comprehensive 
 income               -        -    19,276    23,787               -              724   43,787 
 
Transactions 
 with owners 
Share based 
 payments             -        -         -         -           2,042                -    2,042 
Issues of 
 ordinary 
 shares             100    1,481         -         -               -                -    1,581 
Total 
 transactions 
 with owners        100    1,481         -         -           2,042                -    3,623 
 
Balance at 31 
 December 
 2016             6,755   51,081    89,476    31,712          12,263            3,157  194,444 
 
                                            Exchange 
                  Share    Share  Retained      rate                  Non-controlling    Total 
                capital  premium  earnings   reserve  Other reserves        interests   equity 
                GBP'000  GBP'000   GBP'000   GBP'000         GBP'000          GBP'000  GBP'000 
 
Balance at 1 
 January 2015     6,603   49,108    50,336     4,789           8,220            2,119  121,175 
 
Comprehensive 
 income 
Profit for the 
 year                 -        -    19,864         -               -              285   20,149 
Foreign 
 exchange             -        -         -     3,136               -               29    3,165 
Total 
 comprehensive 
 income               -        -    19,864     3,136               -              314   23,314 
 
Transactions 
 with owners 
Share based 
 payments             -        -         -         -           2,001                -    2,001 
Issues of 
 ordinary 
 shares              52      492         -         -               -                -      544 
Total 
 transactions 
 with owners         52      492         -         -           2,001                -    2,545 
 
Balance at 31 
 December 
 2015             6,655   49,600    70,200     7,925          10,221            2,433  147,034 
 
 
 
 
 
 
 
 
Consolidated cash flow statement for year ended 31 
 December 2016                                             2016      2015 
                                                         GBP'000   GBP'000 
Cash flows from operating activities: 
Adjusted cash inflow from operations                       24,281    22,575 
Cash impact of adjustments                                (1,818)   (1,604) 
Cash inflow from operations                                22,463    20,971 
Net interest paid                                         (1,489)   (1,403) 
Income tax paid                                             (839)     (459) 
Net cash generated from operating activities               20,135    19,109 
Cash flows from investing activities: 
Acquisition deferred consideration Kopin Wireless        (11,250)         - 
Capitalised development expenditure                       (6,310)   (4,979) 
Investment in other intangible fixed assets               (1,794)   (1,198) 
Purchase of property, plant and equipment                (10,956)   (3,825) 
Net cash used in investing activities                    (30,310)  (10,002) 
Cash flows from financing activities: 
Issues of ordinary share capital                              578       544 
Repayment of borrowings                                   (3,341)  (15,109) 
Increase in borrowings                                     12,623     4,349 
Net cash generated from/(used in) financing activities      9,860  (10,216) 
Net decrease in cash and cash equivalents                   (315)   (1,109) 
Cash and cash equivalents at 1 January                      4,644     5,584 
Exchange gains on cash and cash equivalents                   628       169 
Cash and cash equivalents at 31 December                    4,957     4,644 
 
 
 
 
 
   NOTES TO THE RESULTS 
 
   GENERAL INFORMATION 
 
   The company is a public limited company, admitted to trading on AIM, a 
market operated by The London Stock Exchange plc and incorporated and 
domiciled in England and Wales. The address of its registered office is 
Pascal Close, St Mellons, Cardiff, CF3 0LW. 
 
   1          BASIS OF PREPARATION 
 
   All figures are taken from the 2016 audited annual accounts which were 
approved by the directors on 21(st) March 2017, unless denoted as 
'unaudited'. Comparative figures in the results for the year ended 31 
December 2015 have been taken from the 2015 audited annual accounts. 
 
   This financial information has been prepared in accordance with the 
Companies Act 2006 applicable to companies reporting under International 
Financial Reporting Standards ("IFRS") as adopted by the European Union 
and IFRIC interpretations. The application of these standards and 
interpretations necessitates the use of estimates and judgements. This 
financial information is also prepared on a going concern basis under 
the historical cost convention except where fair value measurement is 
required by IFRS. 
 
   Certain statements in this announcement constitute forward-looking 
statements. Any statement in this announcement that is not a statement 
of historical fact including, without limitation, those regarding the 
Company's future expectations, operations, financial performance, 
financial condition and business is a forward-looking statement. Such 
forward-looking statements are subject to risks and uncertainties that 
may cause actual results to differ materially. These risks and 
uncertainties include, among other factors, changing economic, financial, 
business or other market conditions. These and other factors could 
adversely affect the outcome and financial effects of the plans and 
events described in this announcement and the Company undertakes no 
obligation to update its view of such risks and uncertainties or to 
update the forward-looking statements contained herein. Nothing in this 
announcement should be construed as a profit forecast. 
 
   These results will be announced to all shareholders on the London Stock 
Exchange and published on the Group's website on 21(st) March 2017. 
Copies will be available to members of the public upon application to 
the Finance Director at Pascal Close, Cardiff, CF3 0LW. 
 
   2          ACCOUNTING POLICIES 
 
   The accounting policies adopted are set out in the annual financial 
statements for the year ended 31 December 2016, as described in those 
financial statements. 
 
   The financial information does not constitute statutory accounts within 
the meaning of sections 434(3) and 435(3) of the Companies Act 2006 or 
contain sufficient information to comply with the disclosure 
requirements of International Financial Reporting Standards (IFRS). 
 
   The Company's auditors, PricewaterhouseCoopers LLP, have given an 
unqualified report on the consolidated financial statements for the year 
ended 31 December 2016. The auditor's report did not include reference 
to any matters to which the auditors drew attention without qualifying 
their report and did not contain any statement under section 498 of the 
Companies Act 2006. 
 
   The consolidated financial statements will be filed with the Registrar 
of Companies, subject to their approval by the Company's shareholders at 
the Company's Annual General Meeting. 
 
 
 
   3              Segmental analysis 
 
 
 
 
                                                           2016     2015 
                                                          GBP'000  GBP'000 
Revenue 
Wireless                                                   91,291   79,482 
Photonics                                                  22,792   15,985 
Infra Red                                                  10,560    8,878 
CMOS++                                                      1,406    1,655 
Total Segment Revenue                                     126,049  106,000 
License income from sales to joint ventures                 6,658    8,024 
Total Revenue                                             132,707  114,024 
 
Adjusted operating profit 
Wireless                                                    7,950    7,147 
Photonics                                                   6,888    4,320 
Infra Red                                                   2,227    1,181 
CMOS++                                                    (1,604)  (1,695) 
Segment adjusted operating profit                          15,461   10,953 
 
Profit from license income from sales to joint ventures     6,658    8,024 
Adjusted operating profit                                  22,119   18,977 
 
Gain on disposal of fixed assets (note 4)                       -    5,187 
Non-cash accounting charges (note 4)                      (3,560)  (3,596) 
Net reduction in contingent deferred consideration 
 (note 4)                                                   2,340      779 
Restructuring and reorganisation (note 4)                   (378)    (568) 
Finance Costs                                             (1,489)  (1,403) 
Profit before tax                                          19,032   19,376 
 
 
 
 
 
   4              Adjusted profit measures 
 
   The Group's results are reported after a number of imputed non-cash 
charges and non-recurring items.  Therefore, we have provided additional 
information to aid an understanding of the Group's performance. 
 
 
 
 
                                                        2016     2015 
                                                       GBP'000  GBP'000 
Gain on disposal of fixed assets                             -    5,187 
Non-cash accounting charges                            (3,560)  (3,596) 
Gain on release of contingent deferred consideration     2,340      779 
Restructuring and reorganisation                         (378)    (568) 
Total before tax                                       (1,598)    1,802 
Deferred tax on adjustments                              (402)      281 
Total after tax                                        (2,000)    2,083 
 
 
   The non-cash accounting charges of GBP3.6m (2015: GBP3.6m) reflect a 
charge for share based payments of GBP2.0m (2015 GBP2.0m), the 

amortisation of acquired intangibles GBP1.4m (2015 GBP1.2m) and the 
unwind of the discounting of long term balances GBP0.2m (2015 GBP0.4m). 
 
   The Group generated a non-cash profit of GBP2.3m (2015 GBP0.8m) arising 
from a reduction in the estimated remaining deferred consideration 
(settled via trade discount) in respect of a previous acquisition. The 
deferred consideration has now been fully settled. This has been 
classified within other income and expenses in the consolidated income 
statement. 
 
   The restructuring and reorganisation costs of GBP0.4m (2015: GBP0.6m) 
reflects some one-off costs relating to staff, facility and asset write 
downs associated with the restructuring of the Groups manufacturing 
operations. 
 
   The deferred tax charge of GBP0.4m (2015: GBP0.3m credit) reflects the 
net deferred tax impact associated with these adjustments. 
 
   The gain on disposal of fixed assets in 2015 related to a non-cash 
exceptional gain of GBP4.8m relating to IQE's contribution to the 
creation of a joint venture Compound Semiconductor Centre Limited. In 
addition, other unrelated disposals of fixed assets in 2015 realised a 
net gain of GBP0.4m. 
 
   Certain items noted above are accounting estimates based on judgements, 
accordingly, the actual amounts may differ from these estimates. The 
adjustments above are classified GBP1.7m (2015: GBP1.8m) within gross 
margin, and GBP2.1m (2015: GBP2.0m) within selling, general and 
administrative expenses. 
 
 
 
 
 
 
                                                        2016      2015 
                                                      GBP'000   GBP'000 
 
Adjusted gross margin                                   36,415    32,439 
Reported gross margin                                   34,728    30,652 
 
Adjusted sales, general and administrative expenses   (14,249)  (13,462) 
Reported sales, general and administrative expenses   (16,356)  (15,452) 
 
Adjusted operating profit                               22,119    18,977 
Reported operating profit                               20,665    21,166 
 
Adjusted profit before tax                              20,630    17,574 
Reported profit before tax                              19,032    19,376 
 
Adjusted profit after tax                               21,440    18,066 
Reported profit after tax                               19,440    20,149 
 
 
   Earnings before interest, tax, depreciation and amortisation (EBITDA) 
has been calculated as follows: 
 
 
 
 
                                                         2016     2015 
                                                        GBP'000  GBP'000 
Profit attributable to equity shareholders               19,276   19,864 
Non-controlling interest                                    164      285 
Tax                                                       (408)    (773) 
Share based payments                                      2,042    2,001 
Finance costs                                             1,633    1,790 
Depreciation of tangible fixed assets                     5,561    6,192 
Amortisation of intangible fixed assets                   5,377    5,040 
Loss/(profit) on disposal of fixed assets                    47  (5,187) 
Impairment of assets*                                         -      453 
Gain on release of contingent deferred consideration*   (2,340)    (779) 
Restructuring and re-organisation costs*                    378      115 
EBITDA                                                   31,730   29,001 
 
 
   * Exceptional items impacting EBITDA include the following items: 
impairment of assets, wireless business unit re-organisation costs, and 
the release of contingent deferred consideration. 
 
 
 
   5              EARNINGS PER SHARE 
 
   Basic earnings per share is calculated by dividing the profit 
attributable to ordinary shareholders by the weighted average number of 
ordinary shares in issue during the year. 
 
   Diluted earnings per share is calculated by dividing the profit 
attributable to ordinary shareholders by the weighted average number of 
shares and the dilutive effect of 'in the money' share options in issue. 
Share options are classified as 'in the money' if their exercise price 
is lower than the average share price for the year. As required by IAS 
33, this calculation assumes that the proceeds receivable from the 
exercise of 'in the money' options would be used to purchase shares in 
the open market in order to reduce the number of new shares that would 
need to be issued. 
 
   The directors also present an adjusted earnings per share measure which 
eliminates certain non-cash items in order to provide a more meaningful 
underlying profit measure.  The adjustments are detailed in note 4. 
 
 
 
 
                                                         2016         2015 
                                                        GBP'000      GBP'000 
Profit attributable to ordinary shareholders               19,276       19,864 
Adjustments to profit after tax (note 4)                    2,000      (2,083) 
Adjusted profit attributable to ordinary 
 shareholders                                              21,276       17,781 
 
 
 
                                                             2016         2015 
                                                           Number       Number 
Weighted average number of ordinary shares            671,532,674  662,633,162 
Dilutive share options                                 38,548,084   21,247,935 
Adjusted weighted average number of ordinary shares   710,080,758  683,881,097 
 
Adjusted basic earnings per share                           3.17p        2.68p 
Basic earnings per share                                    2.87p        3.00p 
 
Adjusted diluted earnings per share                         3.00p        2.60p 
Diluted earnings per share                                  2.71p        2.90p 
 
 
 
 
 
   6              CASH GENERATED FROM OPERATIONS 
 
 
 
 
                                                         2016     2015 
                                                        GBP'000  GBP'000 
Profit before tax                                        19,032   19,376 
Finance costs                                             1,633    1,790 
Depreciation of property, plant and equipment             5,561    6,192 
Amortisation of intangible assets                         5,377    5,040 
Loss/(profit) on disposal of fixed assets                    47  (5,187) 
Non cash element of joint venture transactions                -    (714) 
Impairment of assets                                          -      453 
Gain on release of contingent deferred consideration    (2,340)    (779) 
Contingent deferred consideration (settled through 
 contractual discounts)                                 (3,959)  (4,837) 
Share based payments                                      2,042    2,001 
Cash inflow from operations before changes in working 
 capital                                                 27,393   23,335 
 
Increase in inventories                                 (4,206)  (2,813) 
Decrease in trade and other receivables                   1,437    2,739 
Decrease in trade and other payables                    (2,161)  (2,290) 
Cash inflow from operations                              22,463   20,971 
 
 
   7              ANALYSIS OF NET DEBT 
 
 
 
 
                                        At 1                Other     At 31 
                                      January     Cash    non-cash   December 
                                        2016      flow    movements    2016 
                                      GBP'000   GBP'000    GBP'000   GBP'000 
Bank borrowings due after one year    (24,626)  (12,623)        395  (36,854) 
Bank borrowings due within one year    (3,162)     3,252    (7,742)   (7,652) 
Finance leases due after one year            -         -          -         - 
Finance leases due within one year        (79)        89       (10)         - 
Total borrowings                      (27,867)   (9,282)    (7,357)  (44,506) 
Cash and cash equivalents                4,644     (315)        628     4,957 
Net debt                              (23,223)   (9,597)    (6,729)  (39,549) 
 
 
 
   This announcement is distributed by Nasdaq Corporate Solutions on behalf 
of Nasdaq Corporate Solutions clients. 
 
   The issuer of this announcement warrants that they are solely 
responsible for the content, accuracy and originality of the information 
contained therein. 
 
   Source: IQE plc via Globenewswire 
 
 
  http://www.iqep.com 
 

(END) Dow Jones Newswires

March 21, 2017 03:01 ET (07:01 GMT)

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