IQE plc : Full Year Results
IQE plc
Robust wireless business and diversification strategy drives strong rises in revenues, profit and earnings
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 2013.
Financial highlights
Revenues up 44% to achieve new Group record of £126.8m (2012: £88.0m)
Includes £30.9m revenues from Kopin Wireless, acquired in January 2013
Adverse H2 currency impact as sterling appreciated 3% against US dollar
H2 wireless sales up 3% over H1 in constant currency
H2 photonic sales up 12% over H1 (in constant currency)
Adjusted* PBT up 51% to £13.0m from £8.6m (Reported PBT £5.2m)
Adjusted* fully diluted EPS up 43% to 2.00p from 1.40p (Reported fully diluted EPS 0.89p)
Cash inflow from operations before exceptional items* up 346% from £4.7m to £16.2m (Reported cash inflow from operations £12.8m)
Cash conversion before exceptional items** of 111% up from 51%
Net debt of £34.4m (opening net debt £15.5m) increased primarily due to £25m of debt to part fund the Kopin acquisition
* Adjustments to profits, cashflows and EPS reflect non-cash charges and exceptional items as detailed in note 3
** Conversion of adjusted operating profit into cash inflow from operations before exceptional items.
Operational highlights
Integration of Kopin Wireless, reflected in strong operational performance and major customer service awards
Reorganisation of business into market streams reflects confidence of strong growth in emerging markets and revenue diversification
Improved operational efficiency through benefit of synergies including sharing best practice, economies of scale
On track to secure elimination of duplicate overheads with consolidation of operations without any loss of capacity or technology, saving over £7m on an annualised basis
CPV commercialisation strategy strengthened by acquisition of Solar Junction Corp. (SJC) stake by strategic investor
Robust supply chain being established and qualification progressing well
Excellent progress on diversification strategy with new product developments and qualifications, including :
Major contract announced with Philips for VCSEL applications
New 150mm VCSEL product launched for high volume applications
Achievement of VCSEL speed performance and energy efficiency world records announced
Development of Silicon Photonics technology announced
World's first 150mm InSb product launched for infrared applications
Award winning 150mm GaN HEMT epi wafers on SiC launched for high power RF applications
Increasing engagement in Government sponsored technology programmes in USA, Europe and Asia
Dr Drew Nelson, IQE Chief Executive, said:
"IQE's core wireless division has again delivered a robust performance, with continued growth despite a significant downstream inventory correction in the major chip companies due to softness in the high end smartphone market. As a direct result of our customer risk mitigation strategy, which we have executed over the last 18 months and completed with the acquisition of Kopin Wireless, we are much less sensitive to market share shifts between the major chip supply companies.
"Concerns in the UK over the last year that silicon CMOS would significantly damage the Compound Semiconductor industry have proved unfounded and are not reflected in our financial performance nor in our customers' expectation of future long term demand drivers.
"Wireless remains an attractive market for us over the coming years with demand continuing to be driven by the proliferation of wireless applications and the need for sophisticated GaAs chips to deal with the explosive growth in data traffic. Beyond this, the next waves of innovation which will drive handset replacement cycles are likely to include lasers and sensors using compound semiconductor technology, for gaming, 3D image capture, gesture recognition, and sensing for a variety of applications including healthcare monitoring devices.
"Our business diversification strategy also gained strong traction, and we achieved a number of significant technical and commercial milestones during 2013 which reflect the strong progress made in our other key markets including photonic sensors and lasers, advanced solar (CPV), power semiconductors, infrared, LED and advanced electronics.
"Our integration remains firmly on track, and we expect to realise significant reductions in our financial overheads, whilst benefiting greatly from the operational and technical synergies we are delivering.
"IQE is at the forefront of the enabling technologies that are at the very heart of many of the twenty-first century trends and products. We are confident that the Group is well positioned for continued growth in earnings and cash flow in 2014 and beyond."
Contacts:
| IQE plc | +44 (0) 29 2083 9400 |
| Drew Nelson | |
| Phil Rasmussen | |
| Chris Meadows | |
| Canaccord Genuity | + 44 (0) 20 7523 8000 |
| Simon Bridges | |
| Cameron Duncan | |
| Peel Hunt | + 44 (0) 20 7418 8900 |
| Richard Kauffer | |
| Daniel Harris | |
| Insinctif | +44 (0) 20 7457 2020 |
| Adrian Duffield | |
| Kay Larsen |
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.
Strategy Overview and Industry Positioning
IQE has been at the forefront of the compound semiconductor industry for over 25 years, and has developed an unparalleled depth and breadth of technology with in its industry.
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 currently global leader in the supply of advanced wireless materials, and has aims to replicate this success in its other primary markets: photonics, infrared, advanced solar (CPV), LED, power switching and advanced electronics.
The Group has now established the platform for delivering this strategy :
· 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
These opportunities support both continued strong growth and the diversification of revenues over the coming years.
Execution of Strategy in 2013
Wireless Customer and Product Risk Mitigation Strategy
The Wireless chip market, to which IQE supplies the core wafer technology, is dominated by a relatively small number of large chip manufacturers. These in turn supply very large end market customers such as Apple and Samsung. Large supply contracts, major platform design wins and the demand for a fast and flexible supply chain mean that big shifts in market share between chip suppliers is commonplace.
IQE has undertaken a strategy to mitigate against being overly dependent on a limited number of chip manufacturers by establishing strong supply routes to all major chip companies, thereby ensuring IQE will always be part of the supply chain, regardless of who wins the large contracts.
The January 2013 acquisition of the epitaxial business of Kopin Inc, a NASDAQ listed competitor in the wireless market, marked the completion of this strategy. Kopin's major long standing customer is Skyworks Inc., the largest of the wireless chip and front end solution companies by a significant margin. This move followed the mid-2012 acquisition of RFMDs epitaxial division by IQE. RFMD is the second largest supplier into the wireless solutions market.
These deals consolidated IQE's market leadership, strengthened its technology portfolio, broadened its customer base, and are enabling it to access significant synergies, including enhanced economies of scale and cost reductions.
IQE is now the clear global leader in the provision of wafers to the wireless chip industry, with an estimated market share of between 50%-60%. The wireless market, which accounts for approximately 85% of the Group's sales, remains a key market for the Group.
Smartphone growth has recently demonstrated some softening, but this market still enjoys strong long term growth dynamics, with the proliferation of wireless communication, and the need for continual improvement in chip performance. Wireless chips are continually evolving to meet the challenge of exponential growth in data traffic, whilst bandwidth becomes increasingly more fragmented and trends to higher frequency.
In February 2013, Qualcomm announced at the Mobile World Congress in Barcelona that it would introduce a fully integrated RF Front end solution for 3G/4G and LTE markets called RF360, built from Silicon based CMOS.
This triggered widespread concern that the Compound Semiconductor (GaAs) content in the front end of mobile phones would be very significantly impacted by this development.
One year on, the CMOS threat has yet to materialise in any meaningful way, with Qualcomm now positioning the RF360 as a 'family' of CMOS chips that can be used in the RF Front end.
According to TriQuint, the price differential between CMOS Power Amplifiers (PAs) and GaAs PAs is inconsequential in a 3G/4G/LTE Front End module. Consequently, the only markets where penetration of CMOS PAs is viable is the low end 2G market. It is now widely predicted that GaAs will retain its leading position as the material of choice for PAs in 3G/4G and LTE, and in many other parts of the communications infrastructure.
In fact, rather than GaAs being challenged by Silicon, it is Silicon that now faces a much bigger threat in its core RF markets. Gallium Nitride (GaN) is fast becoming the material of choice for amplifiers, switches and other devices in base stations, and small cell architectures because of its far superior properties in handling power, temperature and radiation. One of IQE's core areas of expertise is in GaN, a part of the business which is now showing rapid growth for wireless applications.
Market Diversification Strategy
In 2013, IQE embarked on the re-organisation of the Group into business units dedicated to each of its primary markets: wireless, photonics, InfraRed, CPV (advanced solar), power switching, LEDs and advanced electronics. This has involved a number key hires, adding depth and breadth to the team.
The Group has made strong progress in its diversification strategy, delivering on a number of key milestones in 2013 including :
Qualification of CPV materials with SJC on IQE's high volume production platform. This included transfer of technology, qualification of wafers through SJC chip process, first qualifications with customers, and strong progress in qualifying a high capacity outsource supply chain through a major chip foundry in conjunction with IQE
Major contract announced with Philips for VCSEL applications across multiple end market applications
New 150mm VCSEL product launched for high volume, price sensitive applications
Achievement of VCSEL speed performance and energy efficiency world records announced
Development of Silicon Photonics technology announced
World's first 150mm InSb product launched for infrared applications
Award winning 150mm GaN HEMT epi wafers on SiC launched for high power RF applications
Current Trading and Outlook
The Group's global leadership in wireless, solid platform for expansion, and strong pipeline of high growth opportunities in other markets positions it well to continue its growth profile over the coming years.
The current financial year has started in line with expectations, including the destocking flagged by wireless customers during the last quarter of 2013. The outlook for 2014 remains very positive, with excellent prospects driven by the Group's diversification strategy, and the Board remains confident of achieving full year earnings expectations and strong cash flow.
Financial Review
The Group delivered record full year sales and profits which included the benefit of recent acquisitions. This was achieved despite a softening in the smartphone market and foreign currency headwinds during the second half of 2013 as sterling appreciated 3% against the US dollar.
The Group's underlying financial performance includes a number of adjusted profit measures that eliminate the impact of non-cash charges (largely relating to share based payments and acquisition accounting) and exceptional items as detailed in note 3.
Revenues grew 44% year on year from £88.0m to £126.8m driven by increased sales volumes. Kopin Wireless, which was acquired on 16 January 2013, contributed revenues of £30.9m.
Strong margins, cost reductions and acquisition synergies helped improve profitability in the second half of 2013. This enabled the Group to generate a full year adjusted fully diluted EPS of 2.00p, up 43% from 1.40p in 2012. Diluted EPS was 0.89p, down 19% from 1.10p in 2012.
Adjusted gross margin increased by 43% from £19.5m to £27.9m, largely driven by increased sales. Reported gross profit increased by 25% from £18.5m to £23.1m. As a percentage of sales, adjusted gross margins were broadly consistent year on year at 22%. Reported gross margins declined from 21% to 18% reflecting the increase in non-cash charges and exceptional items as detailed in note 3.
Adjusted selling, general and administration expenses (SG&A) increased by £3.1m (30%) from £10.3m to £13.4m, which largely reflects the SG&A costs of the acquired businesses. Reported SG&A increased by £4.1m (36%) from £11.5m to £15.6m.
Adjusted operating profit increased by 59% from £9.2m to £14.6m. Reported operating profit increased by 5% from £7.0m to £7.3m.
Group EBITDA was up 52% from £16.4m to £24.9m.
Other income and expense reflects a £3.0m non-cash profit arising from a reduction in the estimated remaining deferred consideration (to be settled via trade discount) in respect of a previous acquisition, less a £3.2m provision for the impairment of the investment in Solar Junction. See note 3 for further details.
Interest costs of £2.2m (2012: £0.9m) include £0.8m (2012: £0.3m) of non cash interest charges relating to the discounting of long term balances arising on acquisition.
Adjusted pre tax profit increased by 51% from £8.6m to £13.0m. Reported pre tax profit decreased by 15% from £6.1m to £5.2m.
The income tax credit of £0.9m (2012: credit £0.5m) reflects UK R&D tax credits of £0.7m (2012: £0.5m), overseas tax charges of £0.6m (2012 : nil), and deferred tax credits of £0.8m (2012: nil). The deferred tax credit represents a £6.5m credit relating to the recognition of tax losses, less a £5.7m charge relating to the reduction in deferred consideration. The Group has sufficient tax losses available to shield future tax payable of up to £36.7m.
Adjusted profit after tax increased by 62% from £8.4m to £13.6m, which included a £1.4m contribution from the acquired business. Reported retained profit decreased by 8% from £6.6m to £6.1m.
Cash generated from operations increased £8.7m (up 212%) from £4.1m to £12.8m.
Capital expenditure reduced from £11.6m to £5.2m, reflecting the return to more normal levels of maintenance expenditure after the significant investment programme completed in 2012.
Investment in product development of £4.3m was broadly consistent with the prior year (£4.0m), and reflects ongoing development in new products to access new and emerging markets.
Details of the acquisition of Kopin Wireless are set out in note 7. The initial consideration for the acquisition of (£36.5m) is reflected in the cash generated from new equity issued and increased borrowings (£36.7m).
Net Debt at the year end was £34.4m (2012: £15.5m) ), reflecting £25m of debt to part fund the Kopin Wireless acquisition. The Board will not be recommending the payment of a dividend.
Post year end the Group sold its minority equity interest in Solar Junction Corporation. Details are provided in note 8.
Operating Review
Integration of wireless acquisitions
The acquisition of Kopin Wireless was completed during mid January 2013, and followed the acquisition of RFMD's epitaxial division in mid 2012. The performance of these acquired businesses during 2013 is testament to their seamless integration into the IQE Group. Operational delivery has been strong throughout, including high standards of customer feedback, the highest ever customer scorecards, and recognition of quality of service through major customer awards.
These acquired operations are now integral parts of IQE's Wireless Business unit. This smooth transition has been possible thanks to a high level of trust and co-operation between the sites, and has included sharing of best practice and technology.
Reshaping the Group to meet emerging markets
Wireless accounts for approximately 85% of IQE's sales and remains a key market for the Group. However, compound semiconductors lie at the heart of a wave of next generation technologies - opening new markets for the Group and offering strong growth and revenue diversification opportunities. This strategy is beginning to bear fruit, as evidenced by the Philips contract announced in the fourth quarter of 2013 for VCSEL applications.
As a result, IQE is organising into business units dedicated to each of its primary markets, and has commenced the branding of each of the divisions as follows:
IQE Wireless
IQE Photonics
IQE InfraRed
IQE Solar
IQE Power
IQE CMOS++
Each division has a clear product and customer focus, but continues to benefit from the production and technology synergies of the whole IQE Group.
Synergies
The acquisitions in 2012 and 2013 consolidated IQE's market place, strengthened its technology leadership, broadened its customer base and are enabling significant synergies, including enhanced economies of scale and cost reductions.
The Group has already seen the benefit of these synergies during 2013, and further efficiencies and cost reductions are evident in 2014. IQE's goal is to realise at least £7m of cost savings per annum, and this remains on track with savings forecast in H2 2014 of £3.5m.
Key Product Development Milestones
Advanced Solar (CPV)
IQE made significant progress during 2013 towards the production and commercialising of its Advanced Solar (CPV) technology. This included transferring technology to IQE from Solar Junction's R&D systems; qualifying CPV material with Solar Junction during the third quarter of 2013 through their full chip process, including accelerated reliability testing; achieving world record efficiencies from production platforms; first customer qualifications; and initial supply under IQE's exclusive Wafer Supply Agreement with SJC.
As a result, the Group has demonstrated its capability to deliver leading edge solar material from its high volume production platform. SJC is currently moving towards large scale commercial production, demonstrating high volume chip fabrication through a chip foundry partner and completing qualifications with systems companies. These moves are on track to complete over the coming months.
As announced on 24 March 2014, IQE's stake in SJC has been acquired by a new strategic investor with a strong interest in accelerating the deployment of CPV systems on a global basis. As a result of IQE's exclusive wafer supply agreement, the Group will be working closely with this investor to realise significant deployment over the coming months and years.
VCSEL
VCSEL is the key enabling technology behind a number of high growth photonics markets including data communications, data centres, sensing applications, gesture recognition, health, cosmetics, illumination and heating applications.
IQE has developed technology leadership, and is the market leader for outsourced VCSEL materials. Over the past year, the Group has demonstrated major new technical milestones at record speeds, efficiencies and temperatures. In addition, the 6" capability IQE demonstrated in 2014 is significant in reducing the unit cost of chips, and this is expected to further accelerate the adoption of this technology.
The Group secured a major high volume supply contract with Philips Electronics, announced on 24 October 2013.
Gallium Nitride (GaN)
Gallium nitride on Silicon (GaN on Si) is driving a technology shift in the multi-billion dollar power switching and LED markets.
IQE has achieved several major breakthroughs in this technology over the past 12 months, including the demonstration of high quality 150mm GaN on Si. As a result, IQE has secured a key role in President Obama's Clean Energy Manufacturing Innovation Institute as part of the US governments Manufacturing Innovation Initiatives (NNMI) to improve the competitive position of US manufacturing.
Gallium nitride on Silicon Carbide (GaN on SiC) is similarly driving a technology shift in a number of high power radio applications such as radar, CATV and base stations. In the second quarter of 2013, IQE launched a high quality 150mm GaN on SiC material. This large diameter material is enabling the supply chain to improve efficiency and reduce cost to accelerate the adoption of this material.
Markets
IQE's markets are driven by the advanced properties of compound semiconductors:
wireless market - reflecting their superior wireless communication properties;
the photonics market - reflecting their ability to efficiently emit and detect light; and
electronics - reflecting that they operate at much higher speeds and with lower power consumption.
Wireless
The wireless communications market has grown rapidly in recent years reflecting the increasing adoption of wireless technology, coupled with the need for an increased compound semiconductor content to support greater sophistication of mobile devices.
The well reported softening in the smartphone market in 2013 dampened IQE's second half. New smartphone launches no longer attract the same 'feeding frenzy' seen in previous years, and replacement cycles have slowed.
Nevertheless, smartphones continue to evolve with the incorporation of sensors and laser projection. These range from biometric sensors, to gesture recognition, and full environment sensing as developed by Google in Project Tango. These sensing technologies are largely enabled by compound semiconductor photonics technology. The overall wireless market is expected to continue to grow due to the global roll out of 4G and LTE, the evolution of wifi, and the proliferation of new wireless devices including wearable technology and the 'internet of things'.
IQE's short term demand profiles can be affected by inventory build and depletion cycles at the wireless chip companies, and further downstream. These appear to have become more pronounced as the OEMs require greater inventories to ensure that customer demand is satisfied. This was a significant factor during 2013, as evidenced at the top 3 wireless chip companies, who reduced their inventory levels by 9% in aggregate between June 2013 and December 2013 (Source : Edison Research).
Nevertheless, smartphone shipments are expected to continue to grow in the coming years, and reach 1.7 billion units by 2017 (Source: IDC). This is driven by new features, apps, social networking, entertainment and location based services. To put this in perspective, 1.8 billion mobile handsets sold in 2013, of which over 1.0 billion were smartphones that carry significantly more compound semiconductor materials.
High-speed connectivity and added functionality drive the requirement for the advanced properties offered by compound semiconductor epiwafers. The global roll-out of wireless broadband networks such as 4G/LTE devices increasingly rely on higher levels of compound semiconductor content with 5G expected to demand a quantum leap in speed, power and efficiency.
The migration to new WiFi standards is another major driver for RF components. The new 802.11ac WiFi standard will operate at 5GHz rather than the 2.6GHz currently used. The higher frequency which will greatly increase the range and reliability of WiFi networks, will further raise the demand for compound semiconductor based RF devices.
Growth in the compound semiconductor content in smartphones will be driven by the need for more radio frequency functionality and greater complexity in wireless circuitry but will be partly mitigated by improved efficiencies and a drive towards reduced component footprints.
Photonics
Photonics represents applications which emit and detect light. IQE segments photonics into emitters and detectors, infrared, Solar (CPV), and Lighting
Emitters and detectors
This encompasses a wide range of applications including optical interconnects, laser projectors, cosmetic applications, gesture recognition and environmental sensing, industrial applications, Heat Assisted Magnetic Recording (HAMR), and a wide range of other sensing applications.
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, necessitating a switch from copper wires to optical communication. This mirrors the transformation that has already taken place in telecoms infrastructure.
Optical interconnects offer significantly higher-speed data transfers over much longer distances, and are much more efficient. Data centres early adopters, where optical technology offers higher performance and lower overall operating cost compared. This is one of the key markets targeted by Philips Electronics, who entered into a high volume supply agreement with IQE during the fourth quarter of 2013.
In addition, this technology is also set to replace existing cable standards such as USB and HDMI, as these traditional copper cables struggle to meet the increasing demands for data transfer.
Compound semiconductor technology that enables 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 recently demonstrated.
Laser projectors
Conventional projection technologies utilise 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 miniaturized and does not require focusing optics. This technology is called pico projection.
Early pico projector technologies utilise LEDs for the light source but the next generation of devices is incorporating miniature laser projection units.
Cosmetic applications
There are exciting new applications of compound semiconductor technology in the billion dollar cosmetics market. IQE is working with a number of customers to develop advanced laser technology for cosmetic applications such as laser hair removal, wrinkle treatment, skin rejuvenation, acne and psoriasis treatments to name just a few.
Gesture recognition and environmental 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 made their debut with the launch of Microsoft's Kinect gaming console.
The potential applications for this technology extend far become 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.
Industry is at an early stage of identifying and harnessing the full power that this technology offers, which extends far beyond just gesture recognition. For example, this is also the underlying hardware technology in Googles "Project Tango", which enables the device to sense its environment.
Industrial applications
VCSEL technology is well suited for adoption in a number of industrial applications. For example, localised heating in manufacturing, which can reduce energy consumption and operating costs by selectively heating rather than using large ovens, IQE is working on a number of customer development projects in this area.
Heat Assisted Magnetic Recording (HAMR)
As data traffic grows at an exponential rate, the demands on data storage is becoming an increasing issue. Innovative solutions to higher density of data storage are becoming an increasing priority. The use of VCSEL lasers to provide localised heating in magnetic storage systems (HAMR) provides a low cost solution to this problem. IQE is working on a number of customer development projects in this area.
Advanced Solar (CPV)
Solar cells utilising compound semiconductors (called CPV or Concentrated PhotoVoltaics) provide the most efficient solution by using multiple layers of finely tuned materials to absorb sunlight across a wider range of wavelengths. As a result the efficiency of this material is already in excess of 44%, with a roadmap to increase this to beyond 50%.
This compares with 12% to 18% efficiency from silicon solar panels, while thin film technology is typically around 10 to 15% efficient. There is very little scope to improve the efficiency of these technologies due to the fundamental properties of the materials used.
A further advantage of compound semiconductors is their tolerance of higher temperatures. This means the cost of CPV systems is also reduced by using lenses which intensify sunlight and thereby reduce the amount of semiconductor required.
CPV has now reached price parity with fossil fuels and other alternative energy sources in high sunlight regions ("high DNI regions") and is considered to be at an inflection point, with industry analysts forecasting significant adoption of this technology. Specifically, in forecasts published in late 2013, industry analyst IHS has estimated that the addressable market for this technology will reach approximately 5GW in the next 2-3 years. To put this in context, 1 GW represents approximately $150m of revenue for IQE, at a margin consistent with our existing business.
The key milestone for adoption in volume production is the demonstration of a robust supply chain. IQE has now qualified a demonstrated high volume capability, and is closely supporting its main customer Solar Junction Corporation to finalise a complementary high volume chip fabrication capability. IQE expects this to be completed over the coming months.
Infrared
IQE is the clear market leader in advanced gallium antimonide and indium antimonide substrates for use in a range of infrared and heat sensing applications.
The sensitivity of current heat sensors enable a monochrome image so that applications such as night vision devices can only see in tones of green and black, whereas the new antimonide materials allow greater sensitivity so that different shades and colours can be distinguished, effectively producing full colour night vision images.
The improved sensitivity is useful for search and rescue operations and the full colour night vision capability has major military potential in terms of enabling effective identification of personnel and equipment in low or zero visibility conditions.
IQE is actively engaged in a number of collaborative programmes along with leading industry players and government agencies in the development and supply of infrared materials based on antimonide (Sb) materials.
Solid State Lighting (LEDs)
Global concerns about climate change and the Earth's dwindling natural resources continues 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 continents have introduced wide-ranging legislation to progressively ban incandescent lighting with 2012 being a key milestone for eradicating the form of lighting altogether. Alternative low energy lighting is unpopular because of perceptions of low quality lighting and on-going issues with heavy metal content including mercury.
Solid state lighting is widely viewed as the only credible solution to replace the incandescent light bulb. Efficient energy consumption will remain a key driver in the development and adoption of this technology, but the critical success factor is reducing cost and improving the ambience of these units.
High quality gallium nitride on silicon (GaN on Si) provides the route map to achieving this, which will revolutionise residential and commercial lighting around the planet over the coming years.
Power electronics
Gallium nitride (GaN) is a compound semiconductor that offers a diverse range of RF, photonic and electronic properties.
The material can cope with high voltages, high temperature, and high power which makes it an ideal candidate for power control systems used, for example, in alternative energy sources such as solar, wind and wave power, and also the adoption of electrically driven transportation.
It is estimated that more than 10% of all electricity is ultimately lost due to conversion inefficiencies, as energy is switched from generation, to grid, and through to consumption. The scale of this loss exceeds the world's entire supply of renewable energy generation.
The transformers that we use for our electronic devices, such as laptop power supplies, provide a vivid example of this phenomenon by the virtue of the heat energy they generate as electricity is lost.
GaN offers performance and efficiency which are orders of magnitude better than the silicon technology which dominates power switching technology today. This technology has the potential to eliminate up to 90% the energy lost through switching.
Advanced Technologies
IQE has developed a powerful range of advanced, engineered wafers such as germanium-on-insulator (GeOI), germanium-on-silicon (GeOSi) and silicon-on-sapphire (SOS), which offer a high performance and low cost solution for next generation microprocessors, ultra-high speed/high density flash memory and MEMS devices such as motion sensors.
IQE has established a powerful position in these advanced technologies, working with some of the biggest names in the industry, which is reflected in a number of joint patents awarded in conjunction with Intel for the production of compound semiconductor materials on silicon substrates.
The Group believes that the intellectual property that it is developing in this field has the potential to revolutionise the semi-conductor world, and in doing so create significant long term value to IQE stakeholders.
Dr Drew Nelson OBE
President & Chief Executive Officer
26 March 2014
Consolidated income statement for the year ended 31 December 2013
| Note | 2013 £'000 | 2012 £'000 | |
| Revenue | 2 | 126,774 | 87,961 |
| Cost of sales | (103,669) | (69,491) | |
| Gross profit | 23,105 | 18,470 | |
| Other income and expense | 3 | (179) | - |
| Selling, general and administrative expenses | (15,580) | (11,456) | |
| Operating profit | 2 | 7,346 | 7,014 |
| Finance costs | (2,154) | (886) | |
| Adjusted Profit before tax | 3 | 13,010 | 8,585 |
| Adjustments | 3 | (7,818) | (2,457) |
| Profit before tax | 5,192 | 6,128 | |
| Tax | 934 | 503 | |
| Profit for the year | 6,126 | 6,631 | |
| Profit attributable to: | |||
| Equity shareholders | 5,955 | 6,631 | |
| Non-controlling interest | 171 | - | |
| 6,126 | 6,631 | ||
| Adjusted basic earnings per share | 4 | 2.09p | 1.47p |
| Basic earnings per share | 4 | 0.93p | 1.16p |
| Adjusted diluted earnings per share | 4 | 2.00p | 1.40p |
| Diluted earnings per share | 4 | 0.89p | 1.10p |
EBITDA (Earnings before interest, taxes, depreciation, amortisation, share based payments and exceptional items.) is calculated as follows:
| 2013 £'000 | 2012 £'000 | |||
| Profit attributable to equity shareholders | 6,126 | 6,631 | ||
| Taxes | (934) | (503) | ||
| Share based payments | 1,415 | 1,360 | ||
| Exceptional items (note 3) | 5,065 | 570 | ||
| Net finance costs | 2,154 | 886 | ||
| Depreciation of tangible fixed assets | 8,503 | 5,998 | ||
| Amortisation of intangible fixed assets | 2,591 | 1,495 | ||
| EBITDA | 24,920 | 16,437 | ||
Consolidated statement of comprehensive incomefor the year ended 31 December 2013
| 2013 £'000 | 2012 £'000 | |||
| Profit for the year | 6,126 | 6,631 | ||
| Currency translation differences on foreign currency net investments | (3,294) | (2,497) | ||
| Total comprehensive income for the year | 2,832 | 4,134 | ||
| Total comprehensive income attributable to: | ||||
| Equity shareholders | 2,779 | 4,134 | ||
| Non-controlling interest | 53 | - | ||
| 2,832 | 4,134 | |||
Consolidated statement of changes in equity
| Share capital | Share premium | Retained earnings | Exchange rate reserve | Other reserves | Non-controlling interests | Total equity | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Balance at 1 January 2012 | 5,251 | 22,122 | 36,118 | 5,272 | 3,987 | - | 72,750 |
| Comprehensive income | |||||||
| Profit for the year | - | - | 6,631 | - | - | - | 6,631 |
| Foreign exchange | - | - | - | (2,497) | - | - | (2,497) |
| Total comprehensive income | - | - | 6,631 | (2,497) | - | - | 4,134 |
| Transactions with owners | |||||||
| Share based payments | - | - | - | - | 1,360 | - | 1,360 |
| Issues of ordinary shares | 631 | 11,323 | - | - | - | 11,954 | |
| Total transactions with owners | 631 | 11,323 | - | - | 1,360 | - | 13,314 |
| Balance at 31 December 2012 | 5,882 | 33,445 | 42,749 | 2,775 | 5,347 | - | 90,198 |
| Comprehensive income | |||||||
| Profit for the year | - | - | 5,955 | - | - | 171 | 6,126 |
| Foreign exchange | - | - | - | (3,176) | - | (118) | (3,294) |
| Total comprehensive income | - | - | 5,955 | (3,176) | - | 53 | 2,832 |
| Transactions with owners | |||||||
| Acquisition of Kopin wireless | 1,700 | 1,700 | |||||
| Share based payments | - | - | - | - | 1,415 | - | 1,415 |
| Issues of ordinary shares | 593 | 15,513 | - | - | - | - | 16,106 |
| Total transactions with owners | 593 | 15,513 | - | - | 1,415 | 1,700 | 19,221 |
| Balance at 31 December 2013 | 6,475 | 48,958 | 48,704 | (401) | 6,762 | 1,753 | 112,251 |
Consolidated balance sheet as at 31 December 2013
| Note | 2013 £'000 | 2012 £'000 | |
| Non-current assets: | |||
| Intangible assets | 75,859 | 54,165 | |
| Property, plant and equipment | 71,840 | 62,320 | |
| Investments | - | 3,205 | |
| Deferred tax asset | 16,040 | 14,549 | |
| Total non-current assets | 163,739 | 134,239 | |
| Current assets: | |||
| Inventories | 17,702 | 18,351 | |
| Trade and other receivables | 22,907 | 19,186 | |
| Cash and cash equivalents | 3,258 | 2,773 | |
| Total current assets | 43,867 | 40,310 | |
| Total assets | 207,606 | 174,549 | |
| Current liabilities: | |||
| Borrowings | (4,804) | (2,428) | |
| Trade and other payables | (31,114) | (31,709) | |
| Total current liabilities | (35,918) | (34,137) | |
| Non-current liabilities: | |||
| Borrowings | (32,805) | (15,828) | |
| Other payables | (26,632) | (34,386) | |
| Total non-current liabilities | (59,437) | (50,214) | |
| Total liabilities | (95,355) | (84,351) | |
| Net assets | 112,251 | 90,198 | |
| Equity attributable to the shareholders of the parent: | |||
| Share capital | 6,475 | 5,882 | |
| Share premium | 48,958 | 33,445 | |
| Retained earnings | 48,704 | 42,749 | |
| Other reserves | 6,361 | 8,122 | |
| 110,498 | 90,198 | ||
| Non-controlling interest | 1,753 | - | |
| Total equity | 112,251 | 90,198 |
Consolidated cash flow statement for the year ended 31 December 2013
| Note | 2013 £'000 | 2012 £'000 | |
| Cash flows from operating activities: | |||
| Adjusted cash inflow from operations | 16,173 | 4,679 | |
| Cash impact of adjustments | 3 | (3,411) | (570) |
| Cash inflow from operations | 5 | 12,762 | 4,109 |
| Net interest paid | (1,546) | (616) | |
| Income tax (paid) / received | (686) | 1,284 | |
| Net cash generated from operating activities | 10,530 | 4,777 | |
| Cash flows from investing activities: | |||
| Acquisition deferred consideration | - | (7,043) | |
| Acquisition of Kopin | (36,533) | - | |
| Investment in Solar Junction Corporation | - | (3,205) | |
| Capitalised development expenditure | (4,346) | (4,042) | |
| Investment in other intangible fixed assets | (556) | (307) | |
| Purchase of property, plant and equipment | (5,196) | (11,562) | |
| Net cash used in investing activities | (46,631) | (26,159) | |
| Cash flows from financing activities: | |||
| Issues of ordinary share capital (net of issue costs) | 16,106 | 11,445 | |
| Repayment of borrowings | (4,437) | (1,383) | |
| Increase in borrowings | 25,000 | 10,877 | |
| Net cash generated from financing activities | 36,669 | 20,939 | |
| Net Increase/(decrease) in cash and cash equivalents | 568 | (443) | |
| Cash and cash equivalents at 1 January | 2,773 | 3,233 | |
| Exchange gains on cash and cash equivalents | (83) | (17) | |
| Cash and cash equivalents at 31 December | 3,258 | 2,773 |
NOTES TO THE RESULTS
1. Basis of preparation
These results have been prepared under the historical cost convention and in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and interpretations in issue at 31 December 2013.
The preliminary results were approved by the Board of Directors and the Audit Committee on 25 March 2014. These results do not constitute statutory accounts within the meaning of the Companies Act 2006. All figures are taken from the 2013 audited annual accounts unless denoted as 'unaudited'. Comparative figures in the results for the year ended 31 December 2012 have been taken from the 2012 audited annual accounts.
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 26 March 2014. Copies will be available to members of the public upon application to the Finance Director at Pascal Close, Cardiff, CF3 0LW.
2. Segmental analysis
The Group considers its three key market areas of wireless, photonics and electronics to be its primary reporting segments, based on the reports reviewed by the board of directors that are used to make strategic decisions.
| Revenues by business segment : | 2013 £'000 | 2012 £'000 |
| Wireless | 107,219 | 68,962 |
| Photonics | 18,685 | 18,049 |
| Electronics | 870 | 950 |
| Total revenue | 126,774 | 87,961 |
| Operating profit/(loss) by business segment : | ||
| Wireless | 9,859 | 5,610 |
| Photonics | (2,454) | 1,940 |
| Electronics | (59) | (536) |
| Total operating profit | 7,346 | 7,014 |
3. Adjusted profit measures
The Group's results are reported after a number of non-cash charges (largely relating to share based payments and acquisition accounting), and exceptional items. Therefore, we have provided additional information to aid an understanding of the Group's underlying performance.
| 2013 £'000 | 2012 £'000 | ||||
| Acquisition related inventory fair value adjustment* | 1,475 | - | |||
| Restructuring and reorganisation* | 2,415 | - | |||
| Share based payments | 944 | 989 | |||
| Adjustments to gross profit | 4,834 | 989 | |||
| Release of contingent deferred consideration* | (3,026) | - | |||
| Impairment of investment in Solar Junction* | 3,205 | - | |||
| Restructuring and reorganisation* | 996 | - | |||
| Transaction costs* | - | 570 | |||
| Amortisation of acquired intangibles | 730 | 258 | |||
| Share based payments | 471 | 371 | |||
| Adjustments to operating profit | 7,210 | 2,188 | |||
| Discounting of long term acquisition related balances | 608 | 269 | |||
| Adjustments to profit before tax | 7,818 | 2,457 | |||
| Deferred tax on the above | (330) | (687) | |||
| Adjustments to profit after tax | 7,488 | 1,770 | |||
| * Exceptional items adjusted in the calculation of EBITDA | |||||
| Represented by : | |||||
| Cash impact | 3,411 | 570 | |||
| Non-cash impact | 4,077 | 1,200 | |||
| 7,488 | 1,770 | ||||
In fair valuing the assets of the acquired Kopin Wireless business, the inventories were recorded in the Group's accounts at their fair value. Therefore, the reported gross margin reflects a reduced profit on the sale (post acquisition) of the inventories acquired. The £1.5m adjustment above eliminates this fair value uplift so that the adjusted gross margin reflects the normal trading profit.
As previously highlighted, the group is restructuring and reorganisation its operations. During 2013, the Group incurred costs of £3.4m in connection with these programmes, which included redundancy costs, requalification costs and the duplication of overheads to support the transition of customers between production facilities.
The Group also generated a non-cash profit of £3.0m arising from a reduction in the estimated remaining deferred consideration (to be settled via trade discount) in respect of a previous acquisition. This has been classified as other income in the consolidated income statement.
Subsequent to the year end the Group disposed of its equity investment in Solar Junction Corporation. The consideration is deferred and contingent upon certain aspects of Solar Junction's future business development. Given the uncertainty in establishing IQE's potential share of this consideration, no accrual has been made for any future receipts and the £3.2m carrying value of the investment has been fully provided for at 31 December 2013, and classified within other income and expenses in the consolidated income statement.
The 2012 transaction costs of £0.6m related to one-off costs relating to the acquisition of Kopin Wireless in January 2013
The other items relate to non-cash items relating to acquisition accounting and share based payments.
The deferred tax credit of £0.3m (2012 : £0.7m) reflects the net deferred tax impact associated with these items. As noted in the Financial Review, the remaining underlying deferred tax credit of £0.8m relates to a credit of £6.5m relating to the recognition of tax losses, less a £5.7m charge relating to the reduction in deferred consideration.
The cash impact of these items during 2013 was £3.4m relating to the restructuring and reorganisation costs (2012: £0.6m relating to the transaction costs).
These adjusted and GAAP measures can be summarised as follows :
| 2013 £'000 | 2012 £'000 | |||||||
| Adjusted gross margin | 27,939 | 19,459 | ||||||
| Reported gross margin | 23,105 | 18,470 | ||||||
| Adjusted sales, general and administrative expenses | (13,383) | (10,257) | ||||||
| Reported sales, general and administrative expenses | (15,580) | (11,456) | ||||||
| Adjusted operating profit | 14,556 | 9,202 | ||||||
| Reported operating profit | 7,346 | 7,014 | ||||||
| Adjusted profit before tax | 13,010 | 8,585 | ||||||
| Reported profit before tax | 5,192 | 6,128 | ||||||
| Adjusted profit after tax | 13,614 | 8,401 | ||||||
| Reported profit after tax | 6,126 | 6,631 | ||||||
4. 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 '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.
As detailed in note 3, the directors also present an adjusted earnings per share measure which eliminates certain non-cash and exceptional items in order to provide a more meaningful underlying profit measure.
| 2013 £'000 | 2012 £'000 | |
| Profit attributable to ordinary shareholders | 5,955 | 6,631 |
| Adjustments to profit after tax (note 3) | 7,488 | 1,770 |
| Adjusted profit attributable to ordinary shareholders | 13,443 | 8,401 |
| 2013 Number | 2012 Number | |
| Weighted average number of ordinary shares | 642,239,979 | 571,972,538 |
| Dilutive share options | 30,127,305 | 29,715,163 |
| Adjusted weighted average number of ordinary shares | 672,367,284 | 601,687,701 |
| Adjusted basic earnings per share | 2.09p | 1.47p |
| Basic earnings per share | 0.93p | 1.16p |
| Adjusted diluted earnings per share | 2.00p | 1.40p |
| Diluted earnings per share | 0.89p | 1.10p |
5. Cash generated from operations
| The Group | 2013 £'000 | 2012 £'000 | |
| Profit before tax | 5,192 | 6,128 | |
| Finance costs | 2,154 | 886 | |
| Depreciation of property, plant and equipment | 8,503 | 5,998 | |
| Amortisation of intangible assets | 2,591 | 1,495 | |
| Acquisition related inventory fair value adjustments | 1,475 | - | |
| Other income and expense | 179 | - | |
| Contingent deferred consideration (settled through contractual discounts) | (14,191) | (8,379) | |
| Share based payments | 1,415 | 1,360 | |
| Cash inflow from operations before changes in working capital | 7,318 | 7,488 | |
| Decrease/(increase) in inventories | 6,405 | (3,030) | |
| Decrease/(increase) in trade and other receivables | 2,308 | (5,924) | |
| (Decrease)/Increase in trade and other payables | (3,269) | 5,575 | |
| Cash inflow from operations | 12,762 | 4,109 | |
6. Analysis of net debt
| At 1 January 2013 £'000 | Cash flow £'000 | Other non-cash movements £'000 | At 31 December 2013 £'000 | |
| Bank borrowings due after one year | (14,094) | (22,433) | 4,625 | (31,902) |
| Bank borrowings due within one year | (1,687) | 1,093 | (3,408) | (4,002) |
| Finance leases due after one year | (1,734) | - | 831 | (903) |
| Finance leases due within one year | (741) | 777 | (838) | (802) |
| Total borrowings | (18,256) | (20,563) | 1,210 | (37,609) |
| Cash and cash equivalents | 2,773 | 568 | (83) | 3,258 |
| Net debt | (15,483) | (19,995) | 1,127 | (34,351) |
Cash and cash equivalents at 31 December 2013 comprised balances held in instant access bank accounts.
Non-cash movements include new finance leases and foreign exchange movements on US dollar denominated borrowings.
7. Business combination
On 15 January 2013, IQE plc completed the acquisition of Kopin Wireless, the compound semiconductor epiwafer manufacturing business of Kopin Corporation ("Kopin"), a NASDAQ listed entity.
The consideration for the acquisition was $75m, of which $60m was paid in cash on completion, and $15m falls payable in January 2016. The deferred consideration is secured over the US assets acquired.
The assets acquired were the trade and assets of Kopin Wireless a US domiciled business, which operates from a long leasehold premises located in Massachusetts USA; and its 90% equity stake in its Taiwanese subsidiary (KTC), which operates from a freehold premises in Hsinchu Taiwan.
The upfront consideration of $60m was financed by $40m of acquisition finance provided by HSBC. The balance was financed from the proceeds of a placing of 56,900,961 new ordinary shares at 29p.
The fair value of the assets acquired is summarised as follows:
| Fair value | |||
| £'000 | |||
| Intangible assets | 3,144 | ||
| Property plant and equipment | 14,853 | ||
| Working capital (including cash acquired) | 11,122 | ||
| Deferred tax asset | 625 | ||
| Total identifiable net asset | 29,744 | ||
| Non-controlling interest | (1,700) | ||
| Goodwill | 18,206 | ||
| Total | 46,250 | ||
| Consideration on completion | 37,500 | ||
| Deferred cash consideration | 8,750 | ||
| Total consideration | 46,250 |
The fair value of the intangible assets represents the estimated fair value of the qualifications for customer contracts. The fair value has been determined based on the Multi Period Excess Earnings Method (MEEM).
The fair value of the property plant and equipment has been estimated based on a market valuation or depreciated replacement cost basis as appropriate.
Inventory has been recognised at fair value which for raw materials this is the lower of cost at net realisable value and for finished goods is selling price less costs to sell and a sales margin.
Deferred tax has been recognised in respect of temporary timing differences between the accounting and tax treatments for the assets and liabilities recognised.
The Non-controlling interest has been valued on a proportionate share of the net assets of IQE Taiwan formally Kopin Taiwan Corporation.
Goodwill reflects items not separately recognisable under IFRS, and largely relates to the financial and operational synergies of the enlarged Group including improved economies of scale and equipment utilisation. The goodwill on acquisition is $29.1m of which $27.1m is expected to be tax deductible.
The fair value of the consideration has been calculated by discounting the $15m deferred consideration as it is payable on the 16 January 2016. The discount rate adopted was 2.3%. The discount rate has been determined based on a three year liability with similar characteristics.
Post-acquisition the acquired business contributed £30.9m of revenue and £1.4m of profit after tax to the consolidated income statement. If the transaction had completed at the beginning of the financial period the acquired business would have contributed £31.9m of revenue and £1.4m of profit after tax to the consolidated income statement.
8. Post balance sheet event
Post year end the Group sold its minority equity interest in Solar Junction Corporation. The acquirer is a strategic investor with strong interests in accelerating the large scale adoption and commercialisation of Solar Junction's technology. IQE's long term wafer supply agreement will be unaffected by this transaction.
The consideration is deferred and contingent upon certain aspects of Solar Junction's future business development. Given the uncertainty in establishing IQE's potential share of this consideration, no accrual has been made for any future receipts and the £3.2m carrying value of the investment has been fully provided for at 31 December 2013.
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
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