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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Iqe Plc | LSE:IQE | London | Ordinary Share | GB0009619924 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.05 | 0.19% | 26.65 | 26.75 | 27.00 | 27.10 | 25.95 | 27.10 | 310,346 | 09:19:30 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Electronic Components, Nec | 167.49M | -74.54M | -0.0775 | -3.46 | 257.68M |
Hot Features
Premium
TIDMIQE
Record financial results reflect the adoption of IQE's VCSEL technology
in mass market applications and broadening IP portfolio sets the Group
for continuing diversification and growth.
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 2017.
Financial highlights
2016
GBP' Million (except EPS) 2017 *Restated Change
Revenue 154.5 132.7 16.4%
Wafers 152.6 126.0 21.1%
Licensing 1.9 6.7 (71.9%)
Adjusted(1) Operating Profit 26.4 22.1 19.2 %
Wafers 24.5 15.5 58.4%
Licensing 1.9 6.7 (71.9%)
Adjusted(1) Profit Before Tax 24.3 20.6 18.0 %
Adjusted(1) Fully Diluted EPS(2) 3.4p (*) 2.9p 16.3 %
Cash generated from operations 29.7 22.5 32.6 %
Capital investment(3) 34.8 19.1 82.5 %
Net funds / (debt) 45.6 (39.5)
1. Non-GAAP adjusted measures have been presented as detailed in note 4
2. Fully diluted EPS for 2016 restated from 3.0p to 2.9p as detailed in note
1
3. Capital Investment represents cash invested in tangible and intangible
assets, including assets acquired under finance lease of GBP6.6m (2016 :
GBPnil), and excludes consideration paid for acquisitions of GBPnil
(2016: GBP11.3m)
Strategic highlights
-- Continued revenue diversification with strong growth in high margin
product lines
-- Record financial results reflect the adoption of IQE's VCSEL
technology in mass market consumer applications in H2 of 2017
-- Photonics sales up 109% to GBP47.6m for the full year, with H2
2017 sales up more than 160% over prior year H2.
-- The strong ramp of VCSEL sales during H2 represents a unique
achievement in the industry, as IQE leveraged its expertise of
mass market wireless supply to the significantly more complex
VCSEL materials system.
-- Operational gearing of the business supports strong profit and cash
generation
-- Wafer sales up 21% to GBP152.6m, propelling adjusted operating
profit from wafer sales up 58% to GBP24.5m
-- Strong conversion of adjusted operating profit into operating cash
of 113% (PY:102%)
-- Excellent progress with our investments in capacity, and our growth and
diversification strategy
-- Capital investment increased to GBP34.8m to address near term and
forseeable growth opportunities (PY GBP19.1m)
-- Net funds of GBP45.6m (PY: Net debt GBP39.5m), reflects new equity
raised of GBP95m (gross) in November 2017 to fund ongoing capacity
expansion in 2018 to meet rising demand as VCSEL adoption broadens
-- New 'Mega Foundry' in Newport, South Wales in progress with plan
to house up to 100 tools, creating a facility with unparalleled
capacity and economies of scale in the industry. The first 5
tools are now in-situ and on track for production in H2 2018 as
expected, and a further 5 tools are scheduled for installation and
commission by end Q3. Preparation is underway to acquire at
least a further 10 tools within the next 12-18 months as demand
requires.
-- IQE's expanding portfolio of intellectual property, including over
180 patents, is enabling the group to differentiate itself in the
marketplace, and strengthen its business model by not only being
the global leader of choice in the supply of advanced
semiconductor wafers, but increasingly able to provide
comprehensive "advanced materials solutions" providing chip
designers with a new "toolkit" to develop chips which push the
boundaries of performance, enable higher levels of integration,
and reduce the barriers of cost.
-- Excellent progress with technology development including
demonstration of key enabling technology for high performance
wireless filters, cREO for integration of CS materials
technologies on silicon, and Quasi Photonic Crystals and
Nano-Imprint Lithography for a wide range of optical technologies
including DFB lasers, integrated 3D sensing solutions and silicon
photonics applications.
Business Highlights
-- Broadening Customer engagements across multiple business sectors
-- VCSEL ramp initially supplied under a number of multi-year
contracts. Market engagement has continued to broaden to multiple
Tier 1 OEM's, targeting mass market ramps over the next 12 to 18
months.
-- Qualifications in progress with IQE's GaN on Silicon technology
for base station and other high power RF applications, providing
route to accelerate wireless growth
-- Customer interactions broadening for InfraRed. Now working with
major OEM and device companies in developing InfraRed products for
mass market consumer applications.
-- Continued good progress by IQE's Joint Ventures in the UK and
Singapore. Significantly expanding external customer engagements
and improving financial performance reflect the achievement of key
milestones for these early-stage businesses.
Outlook
-- Continued growth in 2018 driven by expansion of existing business and
qualifications of new business streams
-- Photonics revenue expected to grow c.35% to 60% in 2018, based on
expansion of products currently in production and the completion
of ongoing qualifications . The introduction of new technologies
and additional market opportunities provide potential for yet
higher growth rates.
-- Wireless revenue expected to grow up to c.5% in 2018; SMI
inventories expected to replenish in 2018, with potential for
revenue expansion as GaN products make stronger contribution
-- InfraRed revenue expected to grow c. 5% to 15% in 2018, with
customer engagement broadening
-- Potential for strong growth in 2019 and beyond
-- Increasing VCSEL adoption for 3D sensing expected to accelerate
across multiple smartphone OEMs, introduction of world facing 3D
technology, and first deployment of LIDAR and several other high
volume sensing applications
-- Increasing deployment of InP for high speed FTTX and datacentre
applications
-- Increasing CS content in 5G communication systems and increasing
adoption of GaN for base stations and other high power RF
applications, including consumer driven opportunities
-- Increasing use of Infrared products in mass market consumer
applications
-- Revenues from both Power switching and non terrestrial solar
markets
-- Adoption of IQEs broad IP portfolio into multiple commercial
applications utilising cREO, NanoImprint Lithography (NIL) and
Quasi Photonic Crystal (QPC) technologies
-- Multiple qualifications in progress with DFB laser products.
-- Expected Compound Annual Growth Rates over the next 3 to 5 years, based
on current products, in the ranges of: Wireless up to 10%; Photonics
40-60%; and InfraRed of 5-15%. Potential for higher growth with new
product introductions.
Dr Drew Nelson, IQE Chief Executive, said:
"IQE delivered outstanding performance in 2017. Wafer revenues were up
21%, propelling adjusted operating profit from wafer sales up 58%. This
reflects the high operational gearing in our business, and a more
profitable sales mix.
"Photonics continues to be the star performer with 109% year on year
growth in sales, and H2 sales up more than 160% over prior year H2.
This substantial growth is largely being driven by VCSEL products for
mass market consumer applications that ramped through H2 of 2017. The
depth and breadth of customer engagements in Photonics provides a solid
platform for continuing strong growth with several new product launches
forecast over the next 12-18 months for multiple OEMs.
"We continue to expand capacity to meet forecast increases in demand, as
well as driving throughput and yield improvements to release latent
capacity and drive margin expansion in our existing business. Progress
on the new foundry has progressed exceptionally well, with the first 5
five tools already installed and with further expansion scheduled for Q3
and beyond. This is an incredible achievement given that the initial
building works only began in September 2017.
"Armed with an unparalleled breadth of IP and patent coverage, our
business model is evolving from being the global leading supplier of
advanced semiconductor wafers, to becoming a globally leading 'advanced
materials solutions' company where our unique innovative materials and
associated nanoscale fabrication technologies provide a route for our
customers to push the boundaries of chip performance, extend
semiconductor integration capabilities and thereby reduce the cost
barriers to broad consumer adoption."
"The Board looks forward to the future with a high degree of
anticipation and confidence"
The information contained within this announcement is deemed to
constitute inside information as stipulated under the Market Abuse
Regulations (EU) No. 596/2014. Upon the publication of this announcement,
this inside information is now considered to be in the public domain.
CONTACTS
IQE plc +44 (0) 29 2083 9400
Drew Nelson
Phil Rasmussen
Chris Meadows
Canaccord Genuity + 44 (0) 20 7523 8000
Simon Bridges
Henry Fitzgerald O'Connor
Richard Andrews
Peel Hunt +44 (0) 20 7418 8900
Edward Knight
Nick Prowting
NOTE TO EDITORS
IQE is the leading global supplier of advanced semiconductor wafers with
products that cover a diverse range of applications. The Group's
outsourced foundry services provide a 'one stop shop' for the wafer
needs of the world's leading semiconductor manufacturers.
IQE uses advanced epitaxial growth technology platforms to manufacture
and supply advanced semiconductor 'epi-wafers' to the major chip
manufacturing companies, who then use these wafers to make the chips
which form the key components of virtually all high technology systems.
IQE's products are found in many consumer, communication, computing,
mobility and industrial applications. IQE's epi-wafers enable a wide
range of wireless/RF, photonics, infrared, power, solar, advanced
electronics and sensor technologies.
IQE operates multiple manufacturing and R&D facilities across Europe,
Asia and the USA.
Overview
Since 1988, IQE has pioneered the development of compound semiconductor
(CS) materials technology. From its origins in fibre optic
communications, the group has progressively expanded its product range
and intellectual property (IP) portfolio across a broad range of
advanced semiconductor materials. In celebrating its 30(th) anniversary
in 2018, IQE can reflect on the unparalleled breadth and depth of its IP
portfolio, and its track record of delivering its complex atomically
engineered wafers consistently and repeatedly in mass market, with the
precision and quality needed by its customers to achieve high yielding
low cost chips. It is this pedigree that has enabled IQE to build its
market leadership and is positioning the group to exploit the inflection
that is now taking place in the market for CS materials.
The evolution of semiconductor technology
There is little doubt that semiconductor materials have significantly
changed the way we work, live and socialise. Silicon has been the
backbone of the electronics revolution since the early 1960s, largely by
virtue of the continuous miniaturisation of chips ("Moore's Law") which
has led to an exponential increase in performance and reduction in cost.
However, Moore's Law has reached the point of diminishing returns, which
is where epitaxy and compound semiconductors are playing an increasingly
important role.
Silicon is only one of several semiconducting elements. Indeed, many of
the other semiconducting elements have far superior properties to
silicon. Epitaxy is a nanotechnology which enables these elements to be
combined to produce materials which have far superior properties to
silicon. These advanced semiconductors are called Compound
Semiconductors (CS). Specifically, epitaxy is the atomic engineering of
highly uniform crystals of these elements at a nanoscale. These
advanced CS materials can then be converted into chips which in turn
exceed the performance capabilities of silicon chips, especially in
terms of their optical, radio-frequency and electronic properties.
For the last decade, compound semiconductors based on combinations of
gallium and arsenic (gallium arsenide or GaAs) have dominated some of
the critical communication components in smartphones thanks to their
high-speed wireless communication properties, thereby enabling the
smartphone revolution. Similarly, optical communication (enabling
internet connectivity), and LEDs (the lighting revolution) have only
been possible through atomically engineering elements such as gallium,
arsenic, indium, phosphorous, aluminium and nitrogen using epitaxy.
Whilst the silicon and compound semiconductor industries have evolved
independently, it is widely acknowledged that the future of the
semiconductor industry is to combine the advanced properties of compound
semiconductors with the low cost of silicon production to create a high
performance - low cost hybrid technology which has the best of both
worlds. This hybrid technology requires the adoption of highly complex
epitaxial techniques to produce layers of compound semiconductors on a
base silicon material. IQE has been a pioneer in this space over more
than a decade, and through many development programmes and
collaborations it has built a powerful portfolio of IP including patents
and trade secrets. With its strong pedigree in innovation and
high-volume manufacturing, IQE is uniquely positioned to develop and
commercialise its expertise.
The inflection in CS technology adoption has already begun, with 2017
marking the first year when laser technology was adopted in mass
consumer markets, following the mass adoption of power amplifiers (PAs)
for wireless communications using compound semiconductors, and Light
Emitting Diodes (LEDs), which are also wholly based on compound
semiconductor technology. The adoption of CS lasers in mass consumer
applications has been facilitated by the complex epi wafer technology
behind Vertical Cavity Surface Emitting Lasers (VCSELs), which has
enabled for the first time a CS laser at a cost point which enables mass
consumer adoption. IQE are the global leaders in VCSEL epi wafer
technology and production, having first established the technology over
25 years ago, and since developed it to mass production, building on
IQEs global leadership position in the production of power amplifier
wafers. It is this leadership which led to a more than doubling of our
Photonics revenues in 2017, and established IQE with an estimated market
share of over 90% for mass consumer VCSEL production. Combined with
continuing growth in our other markets, 2017 was a record year for the
Group in financial performance terms, and with significant investment in
new product development and the building of an ever more comprehensive
IP portfolio, the Group is poised for continuing strong growth as it
evolves its business model from being the leading global advanced
semiconductor wafer supplier to the leading global advanced materials
solution provider.
Financial Review
In addition to reporting GAAP profit measures, the Group also provides
additional non-GAAP profit measures. Full details of these adjusted
measures are provided in note 4. In addition, the prior year financial
results have been restated, as detailed in note 1.
Consolidated revenues were up 16% to GBP154.5m. Wafer sales, which
represented 99% (2016: 95%) of revenues, were up 21% (2016: up 19%)
reflecting continuing organic growth. License income, which represented
1% (2016: 5%) of revenues reduced from GBP6.7m to GBP1.9m as expected,
reflecting that 2016 included a significant portion of up front license
fees. Growth in underlying demand was accompanied by a currency
tailwind of c. 5% (2016: c. 11%). This similarly affects costs, which
are also largely denominated in foreign currency.
The growth in wafer sales was largely driven by Photonics, where sales
were up 109% to GBP47.6m. This was primarily driven by the adoption of
IQE's VCSEL technology in a mass market consumer application which
ramped strongly in H2. Indeed, Photonics sales in H2 were up more than
160% over H2 2016. InfraRed sales also enjoyed double digit growth,
with sales up 14% to GBP12.0m. Wireless sales were broadly flat at
GBP91.6m (2016: GBP91.3m), affected by a GBP3m managed reduction of SMI
inventories to focus capacity on the ramp in Photonics. The SMI
inventories are expected to replenish in 2018. Finally, CMOS++ sales
were flat at GBP1.4m (2016: GBP1.4m).
As a consequence of these growth rates, wafer sales continued to
diversify, with Wireless accounting for 60% (2016: 72%), Photonics 31%
(2016: 18%), InfraRed 8% (2016: 8%), and CMOS++ 1% (2016:1 %).
Gross profit increased from GBP34.2m to GBP38.6m. Excluding license
income, which has a 100% margin, the gross margin on wafer sales
increased from 21.8% to 24.1%. Adjusted gross margin, which excludes
the charge for share based payments, increased from GBP36.4m to GBP43.6m,
reflecting an improvement in the adjusted gross margin on wafer sales
from 23.6% to 27.4%. This improvement in margins primarily reflects the
benefit of a favourable sales mix with a greater proportion of higher
margin Photonics sales in 2017 over 2016.
As expected, other income reduced from GBP2.3m in 2016 to GBPnil. The
gain in 2016 related to the release of the remaining balance of
contingent deferred consideration relating to a previous acquisition.
This gain did not relate to underlying trade and hence was excluded from
adjusted earnings in 2016.
Selling, general and administrative ("SG&A") expenses increased from
GBP16.6m to GBP21.6m. Adjusted SG&A, which excludes charges for share
based payment, the amortisation of acquired intangibles, and non-cash
rent increased from GBP14.2m to GBP17.3m. In addition to investing for
growth, the increase includes the impact of inflation, foreign exchange,
and an increase in amortisation.
Operating profit decreased from GBP19.8m to GBP17.0m, reflecting the
adjustments noted above, whilst adjusted operating profit increased from
GBP22.1m to GBP26.4m. The increase in adjusted profits reflect a 58%
increase in wafer related profits from GBP15.5m to GBP24.5m partially
offset by the GBP4.8m reduction in license income.
The segmental analysis in note 3, reflects the adjusted operating
margins for the primary segments (before central corporate support
costs): Wireless c.15%, Photonics 38% and InfraRed 27%. In the
current environment we believe that these represent sustainable margins,
and hence provide the opportunity for future margin expansion through
continuing diversification of revenues. Central corporate support costs
are expected to grow approximately 5-10% reflecting a combination of
inflation and business growth.
Finance costs increased from GBP1.5m to GBP2.1m. Adjusted finance costs,
which exclude imputed interest associated with the discounting,
increased from GBP1.5m to GBP2.0m. This underlying increase in cash
interest reflects an increase in borrowings to finance capacity
expansion and the impact of foreign exchange. The borrowings were
repaid in full prior to year end from the proceeds of the equity fund
raising.
The charge for taxation increased from GBP0.3m to GBP0.4m. Adjusted
tax, which excludes the tax affect associated with the non-GAAP
adjustments, was a credit of GBP0.5m (2016: credit GBP0.1m), reflecting
the benefit of deferred tax asset recognised less taxes paid relating to
2017. The cash payment of taxes increased from GBP0.8m to GBP5.8m due
to the settlement of US taxes relating to prior years as detailed in
note 1. Cash taxes are expected to remain at approximately GBP1m to
GBP2m for the near future, whilst the effective rate is expected to be
approximately 15% to 20% reflecting the deferred tax charge associated
with the utilisation of tax losses.
Cash invested decreased from GBP30.3m in 2016 to GBP28.2m in 2017. The
reduction reflects that in 2016 the group made the final payment of
deferred consideration (GBP11.3m) in respect of the Kopin acquisition.
Excluding this, the group increased its investment from GBP19.1m to
GBP28.2m, namely: capital expenditure up GBP0.3m to GBP11.3m; investment
in product development up GBP8.2m to GBP14.5m; and investment in
intangible assets up GBP0.6m to GBP2.4m.
The capital expenditure of GBP11.3m reflects cash paid directly to
equipment suppliers. In addition, the group financed GBP6.6m of capital
expenditure via finance lease where the bank settled the purchase cost
directly with the equipment suppliers. This finance lease was settled
prior to the year end (and title to the equipment passed to the group),
and hence the cash flow is classified as part of the repayment of
borrowings. Aggregating these amounts, the total cash invested in
equipment was GBP17.9m.
The group increased its investment in product development from GBP6.3m
to GBP14.5m. IQE is developing products to address a wide range of end
market applications within its business segments. Although there are
"families" of products such as VCSEL's, EEL's, and HBT's, each product
is developed bespoke to the customers individual specification. IQE does
not produce any commodity or "off the shelf" products. The year on year
increase in investment, was largely due to the development of the VCSEL
technology which ramped into mass market through H2.
The investment in intangible assets includes the purchase of patents
from third parties, the cost of patenting internally generated IP, and
software. The year on year increase includes the purchase of a
portfolio of 54 patents relating to Quasi Photonics Crystals reported in
December 2017.
In November 2017, the group issued 67.9 million new ordinary shares,
raising gross proceeds of approximately GBP95 million. This fund raise
was primarily to finance a capacity expansion programme to deliver the
scale needed to capture multiple high growth market opportunities, and
in particular the continuing increase in demand for VCSELs. In
addition, the fund raising is enabling the acceleration of product
development. Part of the proceeds from the share issue was applied to
repay outstanding borrowings in order to save interest charges.
Operational Review
Organisation
The Group has established six market facing Business Units along market
lines, to address it primary markets: IQE Wireless, IQE Photonics, IQE
InfraRed, and IQE CMOS++, and its emerging market : IQE Solar and IQE
Power.
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 are in pre-production and
hence are not yet significant enough to be separated in our segmental
reporting.
Wireless
Compound Semiconductors play an essential role in high speed wireless
communication and have been an enabling technology for mass market
applications such as smartphones and WiFi. IQE is market leader with an
estimated 55%-60% share of this global market. Wireless accounted for
approximately 60% of IQE's wafer sales in 2017 (2016: 72%)
Following the launch of the iPhone in 2007 this market enjoyed several
years of double digit organic 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 has cooled since 2013 as the
innovation cycle struggled to keep apace. In fact, according to industry
analyst IDC, overall smartphone shipments during the year remained flat
at 1.47 billion units (2016: 1.47 billion units). This represents a core
and stable part of IQE's business.
Despite the lack of growth in smartphone sales, the relentless increase
in data traffic continues to drive the need for more sophisticated
wireless chip solutions in handsets. This is driving the market towards
5G communication, which IQE sees as a significant upside potential for
its wireless business as this transition will require much more complex
material technologies.
Infrastructure applications such as base stations, radar and CATV are a
small but rapidly growing part of IQE's wireless segment. This is
becoming an increasing important part of IQE's business as the superior
performance of this CS technology continues to replace the incumbent
silicon LDMOS technology. Indeed, in partnership with MACOM
Technologies Inc., IQE has developed a high performance low cost
solution (GaN on Silicon) to accelerate the displacement of LDMOS.
Indeed, MACOM is in the process of qualifying this technology downstream
and concluded a high volume chip fabrication partnership in late 2017,
in anticipation of a production ramp on completion of these
qualifications.
The fastest growing segment of the wireless chip market over the past
few years has been for high performance filters. Although the primary
materials technology for filters (aluminium nitride, or AlN) is made
from compound semiconductor elements, the wafers have been fabricated
using a less sophisticated process called sputtering, reflecting that
producing a more sophisticated single crystal epitaxial solution has
been a significant IP challenge. IQE overcame these hurdles in late
2017, and prototyped the key technologies for the realisation of much
higher cystalline quality AlN wafers. We are now engaged with multiple
customers who see this advance as a potentially disruptive solution.
Wireless continues to be a significant and stable business for the group
and is expected to grow at a rate of upto 5% in the near term.
Furthermore, this division has several exciting developments which
provide routes for a return to double digit growth, including:
-- Innovation in smartphone hardware, including the adoption 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 high quality CS materials solutions enabled by cREO for
wireless filters.
Photonics
Photonics refers to devices that emit or detect light, such as advanced
laser and sensors. They enable a wide range of end markets in the
communications, consumer, and industrial space. This segment accounted
for 31% of IQE's wafer sales in 2017, up from 18% in 2016. This is
IQE's most rapidly growing segment.
There are two critical technologies in this segment:
-- Vertical Cavity Surface Emitting Lasers ("VCSELs") - 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 further
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
leading to the extension of the fibre optic network "to the premises" -
also known as "the last mile". IQE has developed advanced laser
technologies with differentiated IP which underpins our high growth
expectations for this business.
Photonics sales increased by 109% year-on-year, with H2 sales up more
than 160% over prior year H2. This reflects a strong ramp of VCSEL's
into a mass market consumer application through the second half of 2018.
This was a unique achievement within the industry, as IQE leveraged its
expertise of mass market supply to rapidly ramp the supply of this
complex photonics material into unprecedented volumes. The supply of
materials into this ramp was delivered under multiple multi-year
contracts.
There is little doubt that sensing technologies, from facial recognition,
to gesture recognition and LIDAR, will represent a major growth area in
the near term and extending into the future. Some analysts have
referred to this as the start of a "super cycle". Indeed, this is
reflected in the breadth of product development programmes in which IQE
is engaged, and which now span multiple Tier 1 OEM's (directly and via
chip customers) who are targeting mass market ramps in 3D sensing
applications over the next 12 to 18 months.
However, VCSELs have many more applications beyond sensing, including
fibre optics for data centres, industrial heating, and machine vision to
name a few. IQE has built a strong technical lead in this market, which
combined with its unparalleled track record for mass market delivery,
positions IQE well for continuing strong growth.
Whilst VCSEL has been the star of the show, our InP business continues
to perform well. This market is being driven by the need for higher
speed, higher capacity fibre optic systems to address continuing growth
in data traffic. As a result, more sophisticated materials solutions
are becoming critical to achieve higher levels of performance. To
address this evolving market, IQE has developed novel technologies which
enable higher performance with lower cost of manufacture. This includes
an innovative solution for Distributed Feedback Lasers (DFB's) for high
speed FTTX chips. We are engaged in qualifications with several
customers for this technology, which are expected to ramp into
production in over the next 6-12 months.
The Photonics business is expected to grow at a rate of 35%-60% in the
near term based on products currently in production. The introduction
of new technologies provide potential for higher growth rates, and
therefore we will highlight new technologies as these reach commercial
adoption.
InfraRed
IQE is a global leader in the supply of indium antimonide and gallium
antimonide wafers for advanced infrared technology, primarily "see in
the dark" defence 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 has enabled the business to secure several contract wins
and drive sales growth. We expect this business to continue to grow
between 5%-15% with its current product range.
Beyond defence, the InfraRed division has been successful in broadening
is customer engagements into product development for mass market
consumer applications. Indeed, we are now engaged with major OEM and
device companies in developing InfraRed products for consumer
applications including sensing. This provides potential for higher
growth rates, and therefore we will highlight new technologies as these
reach commercial adoption.
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.
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, therefore we will highlight new
technologies as these reach commercial adoption.
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 wireless PA chip market, and represents a
major growth opportunity for IQE. IQE's patented technology, cREO,
provides a significant competitive advantage in this space. We will
highlight new technologies as these reach commercial adoption.
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 investment 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 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.
Competitive advantage
IQE has built a strong leadership position in the market for CS
materials. This leadership has been built around an unparalleled
breadth of IP, in contrast to IQE's competitors who operate within the
constraints of their narrow IP portfolios and inferior research and
development capabilities. Uniquely, this makes IQE a "one stop shop"
for CS materials, at a time when the market is increasingly seeking
multiple material solutions to meet expanding and diverse end markets.
This represents a powerful competitive advantage for IQE in a market
where qualification barriers are high, and microscopic variations in
wafer crystals can have dramatic adverse operational and financial
implications downstream.
The operational and financial risks associated with variations between
wafers creates the second layer of IQE's defensive moat. To provide
context, every epitaxial tool has to be individually qualified in order
to be released for production in any supply chain. This is because the
complexity of the technology creates an inherent risk of microscopic
variations between wafers in the same production run, as well as from
run-to-run. These variations can have dramatic and costly implications
downstream. Whilst there is a significant IP barrier in being able to
produce these materials, there is an equally challenging IP barrier of
controlling variations to be able to repeatedly and reliably produce
high quality materials in high volume which enable high yields down
stream. Accordingly, customers are "sticky", which reflects why IQE had
to use M&A to consolidate the wireless supply chain. Moreover, in
simple terms, IQE has shipped more wafers in mass production that any
other epi foundry, giving it an unparalleled pedigree in the mass
market.
Finally, as the largest outsource epi foundry IQE has created a
competitive advantage through specialism and scale. Achieving low cost
chip production necessitates high quality wafers, because wafer defects
translate into lost capacity and low yields for chip makers. As a
materials specialist, IQE has developed the IP to make materials of the
highest quality, and it has the accolades and market share to prove it.
As the materials specialist with the largest scale it has inherent
economies of scale, a feature which IQE is about to intensify with its
new foundry which will house up to 100 tools. This is why the outsource
model is prevalent in the more mature silicon industry, why the wireless
market shifted from a horizontal to vertical model, and why the winner
in the initial mass market ramp of VCSELs adopted an outsource strategy.
However, we are not resting on our laurels. IQE's expanding portfolio of
intellectual property, including over 180 patents, is enabling the group
to differentiate itself in the marketplace, and strengthen its business
model by not only being the global leader of choice in the supply of
advanced semiconductor wafers, but increasingly able to provide
comprehensive "advanced materials solutions" providing chip designers
with a new "toolkit" to develop chips which push the boundaries of
performance, enable higher levels of integration, and reduce the
barriers of cost.
A couple of examples illustrate the power of this strategy:
-- Wireless "Front End Modules" - The Front End Module (FEM) refers to the
communications module in a smartphone. It is the FEM that performs all
of the wireless communications. The FEM is made up of many individual
chips, which can essentially be grouped into Filters (for filtering out
undesired wireless frequencies), Switches (for high speed, high
efficiency switches), and Power Amplifiers (for high efficiency
amplification of wireless signals). Each of these three types of chips
are made from different semiconductor materials technology. The sweet
spot for IQE has historically been the Power Amplifier, but it has also
developed the technologies for Switches (SOI) and for Filters (AlN).
Armed with its patented cREO technology, IQE has a clear route to
combining these three material systems on a single wafer, which paves the
way for the complete integration of the FEM on a single chip. This would
be highly disruptive. A FEM solution on a single chip would be more
efficient, with a smaller footprint at a dramatically lower cost of
production
-- 3D sensing solutions - tear downs of the first 3D sensing solutions show
a combination of advanced technologies in a complex module: a VCSEL
light source, optical components, and silicon sensing components. Again,
IQE has the underlying materials technologies for these components, and
the benefit of several patents including Quasi Photonic Crystals and
Nanoimprint Lithography for wafer level optics and diffractive optical
elements. So again, with its advanced technology, IQE has a route to
integrating many of these technologies on a single wafer. This would be
highly disruptive as it would result in a 3D sensing solution on a single
chip which would again be more efficient, with a smaller footprint at a
dramatically lower cost of production.
Historically, the group's IP was centred around trade secrets, so we
inevitably monetised this IP through wafer sales. However, we've made
no secret of our strategy to build an increasingly diverse IP portfolio
including technologies which we could protect through patent. Naturally,
over time this will lead to the commercialisation of our IP through new
channels, including licensing. Initially realising license income
through JV's, we see many opportunities to expand our model to third
party license streams over the next few years, and in due course for
this to represent a significant part of our business.
Our progress in executing this strategy is clear. From only a handful
of patents 10 years ago, we have successfully built a portfolio of
advanced materials IP which sets us apart in our industry. Today, we
have the benefit of over 180 patents, which we will continue to develop
and expand both organically and inorganically. Indeed, we have created
a virtuous circle with the critical mass for this model to be
self-fulfilling and sustaining. We attract the best talent in our
industry, which, combined with the best routes to commercialisation
attracts the best technology development partners, and so the cycle
continues. Add to this the progress being made by our JV's, and the
power of the CS Cluster (below) that is gathering momentum, and you
begin to see how we are bringing our vision to life.
Capacity expansion
In November 2017, IQE announced the placing of 67.9 million new ordinary
shares, raising gross proceeds of approximately GBP95 million. The fund
raise was primarily to finance a capacity expansion programme to deliver
the scale needed to capture multiple high growth market opportunities.
Of immediate significance is the ramp in demand for VCSELs. In
addition, the fund raising is enabling the acceleration of product
development.
At the heart of the capacity expansion is the creation of a new foundry
in Newport, South Wales. This 'Mega Foundry' will house up to 100
tools, creating a facility with unparalleled capacity and economies of
scale in the industry. The first 5 tools are now in-situ and on track
for production in H2 2018, a further 5 tools are scheduled for delivery
in Q3. Preparation is underway to call off a further 10 tools within
the next 12-18 months.
The establishment of the new foundry is being supported by the Cardiff
City Region City Deal, which is funding the construction of the
infrastructure. IQE is leasing the building under an 11 year lease,
which has a 3 year rent free period and an option to purchase. This
support has enabled IQE to focus its own investment on adding new tools,
which requires upfront investment in both opex and capex. The lead time
to get new tools into production is approximately 9-12 months, from
which time a fully utilised tool making VCSELs has a payback of c. 1
year.
Future Strategy ; Innovation through collaboration and building a
highly defensible business model through IP leadership
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.
Technology leadership through IP has always been at the heart of IQE's
strategy. Indeed, as a pioneer of CS technology over the past 30 years,
IQE has built an enviable global reputation in the industry for the
breadth and depth of its materials technologies and capabilities. It is
clear from IQE's many engagements with leading universities, start-ups,
leading chip makers and established global electronics giants, that IQE
has succeeded in establishing itself as the 'go to' place for advanced
materials, supporting its customers from research and development
through to high-volume manufacturing. The growing strength of IQE's
IP is reflected in how its relationships within the supply chain have
evolved. Historically, IQE was only engaged by the chip makers, whereas
it now regularly engages directly with a number of Tier 1 OEMs.
It is well understood 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 ventures in the UK and Singapore, and
its highly successful Open Innovation Programme (openiqe.com). Moreover,
IQE has been at the heart of creating the CS Cluster in South Wales,
which is the first of its kind globally. This new cluster is
accelerating research into novel technologies, product development and
innovation. The CS cluster, which is branded as CSconnected, follows
considerable high-level thinking across government, industry and
academia, as well as significant private and public sector investment to
establish top-class facilities and infrastructure to support activities
along the technology development chain from blue-sky research to
high-volume production.
The journey started in 2015, when Cardiff University announced an
investment of around GBP75 million in the Institute of Compound
Semiconductors (ICS). The announcement was followed by a joint venture
between IQE Plc and Cardiff University to form the Compound
Semiconductor Centre (CSC), allowing businesses and academics to
demonstrate production-ready CS materials reducing time-to-market and
cost. The facilities at the CSC are being complemented by new materials
research, fabrication and testing at the ICS.
2016 saw the announcement by Innovate UK of a GBP50 million investment
to establish the Compound Semiconductor Applications Catapult (CSAC),
located in South East Wales; a world-class, open-access R&D facility to
support businesses across the UK in exploiting novel CS technologies in
key application areas.
In addition to IQE, other organisations in the region include Newport
Wafer Fab (an open access chip foundry), and SPTS (Orbotech) who design,
manufacture and support a range of wafer processing tools for the
semiconductor and microelectronics industries. Downstream capabilities
include Microsemi's Advanced Packaging business, delivering novel
solutions for miniaturised electronic circuits with wireless
connectivity.
High-volume manufacturing is also certainly on the agenda for the
cluster; in September 2017, IQE, Welsh and UK Governments and the
Cardiff Capital Region City Deal ratified the development of the
Compound Semiconductor Foundry in an historic signing ceremony.
The signing followed an agreement in May by the Cardiff Capital Region
(CCR) Regional Cabinet to contribute GBP37.9 million from the CCR City
Deal's Wider Investment Fund towards the establishment of a
state-of-the-art foundry for high-end production of compound
semiconductors. The CCR City Deal seeks to position the region as the
global leader in CS-enabled applications, which was initiated by a GBP12
million investment from the Welsh Government.
In addition, Cardiff University was awarded GBP10 million by the
Engineering and Physical Sciences Research Council (EPSRC) to lead the
EPSRC Manufacturing Hub in Future Compound Semiconductors that will
combine and connect the UK research excellence in compound
semiconductors, with translational facilities at the new CSAC Catapult
to provide a pathway from research through to device and application
testing and qualification.
A number of projects are already underway within the CSconnected cluster,
such as improving VCSEL manufacturing efficiencies, nanoimprint
lithography for laser diodes and enabling miniaturised atomic clocks
using VCSEL pump sources, with both the latter projects worth over
GBP1m.
The collaborative environment fosters strong working relationships to
encourage sharing of knowledge and ideas. The organisations involved are
enthusiastic about the future. CSconnected is open for business.
In addition to generating new IP through collaborative partnership, IQE
continues to build on its already broad IP portfolio in areas such as
cREO, whilst also acquiring strategic IP such as the purchase and
assignment of a portfolio of patents relating to Quasi Photonic Crystal
technologies from the Taiwan based Luxtaltek Corporation announced in
December 2017
Current Trading and Outlook
The Group's technology and market leadership, and its strong pipeline of
high growth opportunities position it uniquely to capitalize on its
high-growth potential over the coming years.
After a significant ramp in production during the second-half of 2017,
the current financial year has started in line with expectations. The
outlook for the full year and beyond is for continuing strong growth.
The Board anticipates that the Group will increasingly benefit from the
wealth of opportunities it has created during the past few years, and
leverage the breadth and depth of its high level customer engagement.
The powerful IP portfolio that has been established provides a unique
platform for the evolution of the Group's business model to being a
leading global advanced semiconductor materials solution provider, and
the Board looks forward to the future with great anticipation and
confidence.
Guidance
IQE provides the following guidance for the 2018 financial year, and a
over a 3-5 year horizon:
2018 3-5 year
Wafer revenue growth rates Wireless: 0-5% Wireless CAGR: 0-10%
(constant currency) Photonics: 35-60% Photonics : 40-60%
InfraRed: 5-15% InfraRed: 5-15%
Adjusted Operating Margins Wireless: 15%
(Key wafer segments) Photonics: 38% Target Group Margin 25%+
InfraRed: 27%
Central costs growth 5-10% CAGR: 3-10%
License income from JV GBP0-GBP2m pa GBP0-GBP2m pa
Tax Rate Effective tax rate 15% Effective tax rate 20%
Cash tax GBP1-2m Cash tax GBP1-2m
H1:H2 seasonality is currently expected to be 40:60 for FY18, and is
heavily influenced by the timing of OEM new product launches.
Dr Drew Nelson OBE, DSc, FREng, FLSW
President & Chief Executive Officer
20 March 2018
Consolidated income statement for the year ended 31
December 2017 Restated
2017 2016
GBP'000 GBP'000
Revenue 154,480 132,707
Cost of sales (115,857) (98,538)
Gross profit 38,623 34,169
Other income and expenses - 2,340
Selling, general and administrative expenses (21,582) (16,636)
Loss on disposal of property, plant and equipment (22) (47)
Operating profit 17,019 19,826
Finance costs (2,099) (1,463)
Adjusted profit before tax 24,340 20,630
Adjustments (9,420) (2,267)
Profit before tax 14,920 18,363
Taxation (435) (340)
Profit for the year 14,485 18,023
Profit attributable to:
Equity shareholders 14,385 17,859
Non-controlling interest 100 164
14,485 18,023
Adjusted basic earnings per share 3.59p 3.06p
Basic earnings per share 2.09p 2.66p
Adjusted diluted earnings per share 3.36p 2.89p
Diluted earnings per share 1.95p 2.52p
Consolidated statement of comprehensive income for
the year ended 31 December 2017 2017 2016
GBP'000 GBP'000
Profit for the year 14,485 18,023
Currency translation differences on foreign currency
net investments* (10,944) 23,619
Total comprehensive income for the year 3,541 41,642
*This may be subsequently reclassified to profit or
loss
Total comprehensive income attributable to:
Equity shareholders 3,469 40,918
Non-controlling interest 72 724
3,541 41,642
Consolidated Balance Sheet as at 31 December 2017 Restated
2017 2016
GBP'000 GBP'000
Non-current assets:
Intangible assets 108,513 103,972
Fixed asset investments 75 -
Property, plant and equipment 90,800 85,001
Deferred tax assets 17,768 18,181
Financial Assets 7,680 6,889
Total non-current assets 224,836 214,043
Current assets:
Inventories 33,707 28,498
Trade and other receivables 32,240 30,868
Cash and cash equivalents 45,612 4,957
Total current assets 111,559 64,323
Total assets 336,395 278,366
Current liabilities:
Borrowings - (7,652)
Trade and other payables (43,172) (36,916)
Current tax liabilities (210) (5,533)
Provisions for other liabilities and charges (1,534) (1,421)
Total current liabilities (44,916) (51,522)
Non-current liabilities:
Borrowings - (36,854)
Provisions for other liabilities and charges (666) (2,167)
Total non-current liabilities (666) (39,021)
Total liabilities (45,582) (90,543)
Net assets 290,813 187,823
Equity attributable to the shareholders of the parent:
Share capital 7,560 6,755
Share premium 145,927 51,081
Retained earnings 97,967 83,582
Other reserves 36,130 43,248
287,584 184,666
Non-controlling interest 3,229 3,157
Total equity 290,813 187,823
Consolidated statement of changes in equity for the
year ended 31 December 2017
Exchange
Share Share Retained rate Other Non-controlling Total
capital premium earnings reserve reserves interests equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1
January 2017 6,755 51,081 83,582 30,985 12,263 3,157 187,823
Comprehensive
income
Profit for the
year - - 14,385 - 100 14,485
Foreign
exchange - - - (10,916) - (28) (10,944)
Total
comprehensive
income - - 14,385 (10,916) - 72 3,541
Transactions
with owners
Share based
payments - - - - 3,854 - 3,854
Tax credit
relating to
share option
scheme - - - - 683 - 683
Issues of
ordinary
shares 805 94,846 - - (739) - 94,912
Total
transactions
with owners 805 94,846 - - 3,798 - 99,449
Balance at 31
December
2017 7,560 145,927 97,967 20,069 16,061 3,229 290,813
Exchange
Share Share Retained rate Other Non-controlling Total
capital premium earnings reserve reserves interests equity
Restated GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1
January 2016 6,655 49,600 65,723 7,925 10,221 2,433 142,557
Comprehensive
income
Profit for the
year - - 17,859 - 164 18,023
Foreign
exchange - - - 23,060 - 560 23,620
Total
comprehensive
income - - 17,859 23,060 - 724 41,643
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 83,582 30,985 12,263 3,157 187,823
Consolidated cash flow statement for year ended 31
December 2017 2017 2016
GBP'000 GBP'000
Cash flows from operating activities:
Adjusted cash inflow from operations 31,089 24,281
Cash impact of adjustments (note 4) (1,372) (1,818)
Cash inflow from operations 29,717 22,463
Net interest paid (2,125) (1,489)
Income tax paid (5,844) (839)
Net cash generated from operating activities 21,748 20,135
Cash flows from investing activities:
Acquisition deferred consideration Kopin Wireless - (11,250)
Capitalised development expenditure (14,511) (6,310)
Investment in other intangible fixed assets (2,419) (1,794)
Purchase of property, plant and equipment (11,260) (10,956)
Net cash used in investing activities (28,190) (30,310)
Cash flows from financing activities:
Issues of ordinary share capital 94,912 578
Repayment of borrowings (75,430) (3,341)
Increase in borrowings 27,864 12,623
Net cash generated from/(used in) financing activities 47,346 9,860
Net decrease in cash and cash equivalents 40,904 (315)
Cash and cash equivalents at 1 January 4,957 4,644
Exchange gains on cash and cash equivalents (249) 628
Cash and cash equivalents at 31 December 45,612 4,957
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 2017 audited annual accounts which were
approved by the directors on 20(st) March 2017, unless denoted as
'unaudited'. Comparative figures in the results for the year ended 31
December 2016 have been taken from the 2016 audited annual accounts,
except for the following restated amounts:
a) Taxation
In October 2017, the Group identified historical tax liabilities dating
back to 2013 in a US subsidiary. The historical tax liabilities,
interest and penalties have been quantified at GBP4,671,000 and the
liability was settled in full in 2017 with the relevant US tax
authority. The comparative information in the financial statements has
been restated to reflect the tax liability as follows:
-- The brought forward retained earnings at 1 January 2016 in the
consolidated balance sheet and consolidated statement of changes in
equity have been restated by GBP3,196,000 to reflect the historic tax
liability relating to 2013, 2014 and 2015;
-- Total comprehensive income for the year ended 31 December 2016 has been
reduced by GBP1,475,000 historic tax liability of GBP748,000 relating to
2016 and an exchange loss on the outstanding balance of GBP727,000;
-- Current liabilities in the consolidated balance sheet as at 31 December
2016 has been restated to include a current tax liability of GBP4,671,000
to reflect the cumulative historic tax liability.
The impact of the prior year restatement has been to reduce profit for
the year in 2016 by GBP748,000, reduce brought forward reserves by
GBP3,196,000 and reduce net assets by GBP4,671,000. The prior year
restatement has no impact on the prior year cash flow as the tax
liability was settled in 2017.
b) Financial assets
The Group classifies its preference share financial assets as debt
instruments. Debt instruments are initially recognised at fair value and
subsequently measured at amortised cost.
The debt instruments recognised in the balance sheet were originally
recognised at cost, which was deemed to be a proxy for fair value.
However, this did not discount the carrying value to reflect the
forecast repayment profile of the debt.
The initial fair value of the debt instruments has been restated to
reflect the impact of discounting on the debt cash flows. The fair value
of the instrument at initial recognition has been recalculated by
discounting the cash flows using a rate of 5.5%. This rate was
determined by reference to comparable market transactions.
The impact of this restatement on the comparative information in the
financial statements has been as follows:
-- Brought forward retained earnings at 1 January 2016 in the consolidated
balance sheet and consolidated statement of changes in equity has been
restated by GBP1,281,000 to reflect the restated initial fair value of
the instruments on initial recognition in 2015;
-- The interest charge in the consolidated income statement for the year
ended 31 December 2016 has been restated to include a credit of
GBP170,000 to reflect the non-cash unwind of the discounting associated
with the initial fair value recognition of the instrument.
The impact of the prior year restatement in the 2016 comparative
financial information has been to reduce brought forward reserves by
GBP1,281,000, increase profit for the year by GBP170,000 for the
non-cash unwind of discount and reduce net assets by GBP1,111,000. The
prior year restatement has no impact on cash flow.
c) Social security costs associated with outstanding share options
In 2016 the social security costs associated with outstanding share
options was unrecorded and therefore the comparative information in the
financial statement has been restated as follows:
-- Profit for the year in the consolidated income statement has been
restated by GBP839,000 to reflect the social security costs associated
with outstanding share options;
-- Other taxation and social security within trade and other payables has
been restated by GBP839,000 to reflect the social security liability
associated with outstanding share options.
The impact of the prior year restatement in the 2016 comparative
financial information has been to reduce profit for the year by
GBP839,000, increase trade and other payables by GBP839,000 and reduce
net assets by GBP839,000.
d) Segmental analysis disclosure
In the reported results for the 6 months ended 30 June 2017, as part of
the groups ongoing improvements to the disclosures in its financial
reports the group separately disclosed central corporate costs, which
has previously been allocated by segment. The segmental analysis
disclosure for 2016 has similarly been updated in this annual report.
Central corporate costs include all head office and other corporate
related support functions.
Restatement of the 2016 disclosure has no impact on profit for the year,
net assets or cash flow.
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 20(st) March 2017.
Copies will be available to members of the public upon application to
the Company Secretary 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 2017, 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, KPMG LLP, have given an unqualified report on
the consolidated financial statements for the year ended 31 December
2017. 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
Restated
2017 2016
GBP'000 GBP'000
Revenue
Wireless 91,628 91,291
Photonics 47,641 22,792
Infra Red 11,955 10,560
CMOS++ 1,382 1,406
Total Segment Revenue 152,606 126,049
License income from sales to joint ventures 1,874 6,658
Total Revenue 154,480 132,707
Adjusted operating profit
Wireless 13,718 13,040
Photonics 18,198 9,254
Infra Red 3,259 2,651
CMOS++ (1,677) (1,576)
Central corporate costs (9,013) (7,908)
Segment adjusted operating profit 24,485 15,461
Profit from license income from sales to joint ventures 1,874 6,658
Adjusted operating profit 26,359 22,119
Non-cash accounting charges (note 4) (9,340) (4,255)
Net reduction in contingent deferred consideration
(note 4) - 2,340
Restructuring and reorganisation (note 4) - (378)
Operating profit 17,019 19,826
Finance Costs (2,099) (1,463)
Profit before tax 14,920 18,363
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.
Restated
2017 2016
Adjusted Adjusted Reported Adjusted Adjusted Reported
(All figures GBP'000s) Results Items Results Results Items Results
Revenue 154,480 - 154,480 132,707 - 132,707
Cost of sales (110,840) (5,017) (115,857) (96,292) (2,246) (98,538)
Gross profit 43,640 (5,017) 38,623 36,415 (2,246) 34,169
Other income - - - - 2,340 2,340
SG&A (17,259) (4,323) (21,582) (14,249) (2,387) (16,636)
Loss on disposal of PPE (22) - (22) (47) - (47)
Operating profit 26,359 (9,340) 17,019 22,119 (2,293) 19,826
Finance costs (2,019) (80) (2,099) (1,489) 26 (1,463)
Profit before tax 24,340 (9,420) 14,920 20,630 (2,267) 18,363
Income tax income 483 (918) (435) 62 (402) (340)
Profit for the period 24,823 (10,338) 14,485 20,692 (2,669) 18,023
The comparative financial information for the year ended 31 December
2016 has been restated. Details of the restatement are set out in note
1.
The adjusted items are analysed as follows, which shows the pre-tax
amounts and their related tax effects :
Pre tax Tax 2017 Pre tax Tax 2016
(All figures GBP'000s) Adjustment impact Adjustment Adjustment impact Adjustment
Change in US tax rate - (7,003) (7,003) - - -
Share based payments (7,526) 5,439 (2,087) (2,881) - (2,881)
Amortisation of
acquired intangibles (1,429) 563 (866) (1,374) 444 (930)
Gain on release of
deferred
consideration - - - 2,340 (980) 1,360
Non-cash rent charge (385) 69 (316) - - -
Discounting (80) 14 (66) 25 2 27
Restructuring - - - (378) 132 (246)
Total (9,420) (918) (10,338) (2,268) (402) (2,670)
The nature of these items is as follows :
-- Change in US tax rate - This refers to a deferred tax charge of GBP7,003k
(2016: GBPnil) relating to the impact of the change in US Federal tax
rates from 35% to 21% and the associated reduction in value of the
Group's US deferred tax asset.
-- Share based payments - The charge recorded in accordance with IFRS 2
'Share based payment', of which GBP5,017k (2016: GBP1,920k) has been
classified within cost of sales in gross profit,and GBP2,509k (2016:
GBP961k) has been classified as selling, general and administrative
expenses in operating profit.
-- Amortisation of acquired intangibles - The amortisation of customer
contract intangible assets which arose in respect of the fair value
exercise in previous acquisitions. The charge of GBP1,429k (2016:
GBP1,374k) has been classified as selling, general and administrative
expenses within operating profit.
-- Gain on release of deferred consideration - The gain in 2016 related to
the release of the balance of a provision for deferred consideration.
This gain was classified as other income in operating profit. The
deferred consideration was settled in full in 2016.
-- Non-cash rent charge - The charge associated with rent free periods on
leased property of GBP385k (2016: GBPnil) (New foundry in Newport) has
been classified as selling, general and administrative expenses within
operating profit.
-- Discounting - This relates to the discounting of long term financial
assets of GBP235k (2016: GBPnil) and the unwinding of discounting of long
term balances of GBP155k (2016: GBP26k), and has been classified as
finance costs within profit before tax.
-- Restructuring - the costs relating to restructuring and reorganisation
activities which were concluded in 2016. An amount of GBP326k was
classified as cost of sales in gross profit, and GBP52k was classified as
selling, general and administrative expenses within operating profit
These adjustments were non-cash, other than the restructuring charge in
2016. The cash impact of adjustments in the consolidated cash flow
statement represent the rental cost associated with an onerous property
lease provision.
Adjusted EBITDA (Adjusted Earnings Before Interest, Tax, Depreciation
and Amortisation) has been calculated as follows:
Restated
2017 2016
GBP'000 GBP'000
Profit attributable to equity shareholders 14,385 17,859
Non controlling interest 100 164
Tax 435 340
Share based payments 7,526 2,881
Finance costs 2,099 1,463
Depreciation of tangible fixed assets 5,637 5,561
Amortisation of intangible fixed assets 6,388 5,377
Loss on disposal of fixed assets 22 47
Non cash property lease charge (rent free period)* 385 -
Gain on release of contingent deferred consideration* - (2,340)
Restructuring and re-organisation costs* - 378
Adjusted EBITDA 36,977 31,730
* Exceptional items impacting Adjusted EBITDA include the following
items: non cash property lease charges associated with rent free periods,
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.
Restated
2017 2016
GBP'000 GBP'000
Profit attributable to ordinary shareholders 14,385 17,859
Adjustments to profit after tax (note 4) 10,338 2,669
Adjusted profit attributable to ordinary
shareholders 24,723 20,528
2017 2016
Number Number
Weighted average number of ordinary shares 689,537,776 671,532,674
Dilutive share options 47,142,160 38,548,084
Adjusted weighted average number of ordinary shares 736,679,936 710,080,758
Adjusted basic earnings per share 3.59p 3.06p
Basic earnings per share 2.09p 2.66p
Adjusted diluted earnings per share 3.36p 2.89p
Diluted earnings per share 1.95p 2.52p
6 CASH GENERATED FROM OPERATIONS
Restated
2017 2016
GBP'000 GBP'000
Profit before tax 14,920 18,363
Finance costs 2,099 1,463
Depreciation of property, plant and equipment 5,637 5,561
Amortisation of intangible assets 6,388 5,377
Loss on disposal of fixed assets 22 47
Non cash imputed rent charge 385 -
Gain on release of contingent deferred consideration - (2,340)
Contingent deferred consideration (settled through
contractual discounts) - (3,959)
Share based payments 7,526 2,881
Cash inflow from operations before changes in working
capital 36,977 27,393
Increase in inventories (6,391) (4,206)
(Increase)/decrease in trade and other receivables (6,762) 1,437
Increase/(decrease) in trade and other payables 5,893 (2,161)
Cash inflow from operations 29,717 22,463
7 ANALYSIS OF NET DEBT
At 1 Other At 31
January Cash non-cash December
2017 flow movements 2017
GBP'000 GBP'000 GBP'000 GBP'000
Bank borrowings due after one year (36,854) 40,277 (3,423) -
Bank borrowings due within one year (7,652) 7,289 363 -
Total borrowings (44,506) 47,566 (3,060) -
Cash and cash equivalents 4,957 40,904 (249) 45,612
Net debt (39,549) 88,470 (3,309) 45,612
Other non-cash movements includes an amount of GBP6.6 million in respect
of assets purchased under finance lease. These lease were settled in
full prior to the year end.
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 20, 2018 03:00 ET (07:00 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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