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23 March 2016

IQE's Photonics sales growth of 28% outweighs further Wireless sales drop of 11%

For full-year 2015, epiwafer foundry and substrate maker IQE plc of Cardiff, Wales, UK has reported revenue of £114m, up 2% on 2014's £112m.

Growth was tempered by Wireless sales falling by a further 11%, from 2014's £89.1m to £79.5m. This reflects the slowdown in the smartphone market in second-half 2015, exacerbated by inventory adjustments through the supply chain.

However, further diversification of revenues was driven by significant growth in non-wireless sales, from 20% of total revenue in 2014 to about 30% in 2015.

In particular, Photonics sales rose strongly, by 28% from £12.5m to £16m, driven by increasing adoption for a wide range of applications including data centers, consumer applications, industrial processes, and fibre-to-the-premises (FTTx). Revenues in other markets were broadly flat year-on-year at £10.5m, including InfraRed revenue falling slightly from £9.3m to £8.9m, while CMOS++ revenue rose from £1.1m to £1.7m.

Total segment revenue has therefore fallen from £112m to £106m. However, this was supplemented by a new revenue stream comprising the first Licensing income of £8m (a combination of upfront and recurring income), earned from licenses to IQE's joint ventures (JVs).

"The group had another strong financial performance in 2015, with continued growth in revenues, profits and cash generation," says chief executive Dr Drew Nelson.

Adjusted gross margin remained stable at about 28%. Adjusted selling, general and administration expenses (SG&A) was cut from £13.9m to £13.5m, including the benefit of improved efficiencies.

While adjusted operating profit rose by 8% from £17.6m to £19m, earnings before interest, tax, depreciation and amortisation (EBITDA) almost doubled from £16m to £29m. Adjusted diluted earnings per share (EPS) has risen from 2.42p to 2.6p.

Cash inflow from operations rose by 41% from £14.9m to £21m. "Our strong cash generation has enabled us to continue to invest in new technologies whilst de-leveraging our balance sheet," says Nelson.

Capital expenditure (CapEx) has been increased from £9.4m to £10m. Investment in new product development was maintained at about £5m, while investment in other intangibles was slightly lower at £1.2m (down from £1.3m). Investment in property, plant & equipment rose by £0.6m from £3.2m to £3.8m (which remains towards the lower end of the normal expected levels of maintenance CapEx).  

"Our balance sheet leverage peaked in January 2013 at about £94m on the back of acquisitions, but we have significantly reduced this to about £40m by the end of 2015 [down by 22% from £51.9m in 2014 to £40.3m in 2015, as gearing reduced from 30% to 22%]" says Nelson. This reflects that deferred consideration relating to previous acquisitions fell by £3.5m from £20.6m to £17.1m, and that net debt has been cut by 26% (£8.1m) from £31.3m to £23.2m.

Going forward, IQE expects further diversification of revenues, driven by a photonics market outlook and strong pipeline that supports continuing double-digit growth. In addition, upfront license income from JVs should be about £2m in Q1/2016. 

IQE notes that it has a growing portfolio of epitaxial IP, including more than 100 patents and a rich pool of trade secrets for the design and manufacture of advanced semiconductors. In particular, direct engagement with multiple tier-1 OEMs reflects the increasing importance of epitaxial IP as a key enabling technology within electronic systems. Market dynamics also reflect the increasing focus on advanced semiconductor materials technologies (with a US-based competitor being acquired for 3.5x revenues).

Also during 2015, joint ventures were established in the UK and Singapore for the development and commercialization of advanced semiconductor technologies. The significance of the technology also recognised by the UK government with a £50m commitment this January to fund a Compound Semiconductor Applications Catapult in Cardiff.

"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," says Nelson. "This strategy underpins our strong financial performance," he adds.

IQE says that the outlook for wireless remains attractive, with recent gains in market share, contract wins, and new product qualifications for base-station applications. In the short term, IQE expects the Wireless materials market to grow at a rate of about 5%.

The firm it sees continued progress in other markets. Activity in the power semiconductor market continues to intensify. IQE has secured a strong IP position with cREO (Rare Earth Oxide) technology (licenced exclusively from Translucent Inc). Qualifications with multiple end-users are underway, in addition to continued technology development, enabled by cREO and other in-house IP.

Advanced solar is making good progress in space applications, mitigating slow progress in the terrestrial market (which has been hampered by macroeconomics). Overall, the outlook remains positive, says IQE. Product qualification is underway with a leading satellite manufacturer, paving the way for increasing production revenues in 2017 from this sector of the market.

IQE says that its InfraRed business maintains its market leadership position, announcing on 26 January a $3.7m contract with a leading global substrate maker that underpins its strong outlook for 2016. IQE expect the Infrared market to growth at a rate of 5-10% for the near future.

"Moving forward, we envisage a return to growth in Wireless, accelerating growth in Photonics, increasing contributions from Power and Solar, and continuing leverage of our powerful IP position through licensing, new product development and introductions," says Nelson.

"We have had a good start to 2016, and are trading in line with our expectations," he notes. "The outlook remains positive, which underpins the board's confidence that we remain on track to achieve our expectations for the full year." 

See related items:

IQE's Infrared business wins $3.7m order for InP materials

IQE's wireless business unit renews major contract with tier-1 customer

IQE and Cardiff University to help spearhead £50m UK Compound Semiconductor Applications Catapult

IQE on track to achieve full-year revenue growth

IQE's non-wireless business rises year-on-year from 21% to 24% of revenue

IQE inks exclusive licence and option agreement to acquire Translucent's cREO technology

IQE's first-half 2015 revenue grows year-on-year

IQE and Cardiff University establish JV to develop and commercialize compound semiconductor technologies in Europe

IQE second-half 2014 revenue up 15% on first-half

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