IQE plc

Good morning, everyone. I'm delighted to be here with our CFO, Yuta Nair, to talk you through ITV first half results. I would like to start off with a top-line summary of the business and market dynamics that influenced the period before handing over to Yuta to talk through the financials, and then I will walk you through some of our strategic priorities looking forward. Let's start with the market update. The fiscal year 2023 results. We spoke about the recovery we saw in the second half. This trend had continued in the first half of 2024, and the industry has seen more variability than expected across regions and market segments, which has led to the pace of growth being more moderate than some forecast. This is what our peers across the industries have seen as certain sectors recover at different pace and economic headwinds impacting consumer demand in some key end market. This is demonstrated by our set of results with a strong performance in wireless while the photonic market has been flat. Overall, we are confident that the industry recovery will continue but expect its pace to be impacted by the variability throughout the second half of this year. I'm pleased to report that IQE delivered a consistent performance in the first half of 2024. We saw headline revenue growth of 27% year-on-year to £66 million sterling, with adjusted EBITDA of £6.6 million sterling, which saw the business deliver a swing of 12.3 pounds sterling from a loss to a positive on a year-on-year basis. This is reflected by our growing presence in the Android ecosystem for wireless, which we will come to talk about as part of our segment breakdown later. Let me now hand over to Yuta to run you through the detailed financials for the first half.

Thank you, Americo. Good morning, everyone. And thank you for joining us on our first half 2024 results webcast. I'd like to first provide some details on the segmental revenue. Wireless division performed well. The 73% year-over-year increase is driven by market recovery and supported by design wins that reflect our increasing strategic penetration into the Android ecosystem. The photonics division is indicative of the variable pace and patchiness of recovery in the market, as Americo touched on earlier. While VIX's demand for data centers was strong, other areas have failed to demonstrate the same level of recovery, resulting in overall revenue being down slightly year on year. The CMOS division reflects our intentional strategic rebalancing of our portfolio as we focus on higher growth markets. As a result of this, we are deprioritizing the division and will no longer be reporting separately on it from next year. Now let me go through the financial highlights. Revenue, the first half revenue of 66 million is up 14 million, or 27%. and is in line with our provided market guidance and reflects the continuation of recovery decided by America earlier. On a constant currency basis, which takes into account that the majority of our revenue is earned in US dollars, revenue is up 53%, a 1.6 million exchange rate tailwind. Onto adjusted EBITDA. The significant year-over-year improvements in profitability reflected in the 12.3 million increase of adjusted earnings before interest, tax, depreciation, and amortization, from an adjusted loss of 5.7 to an adjusted EBITDA of 6.6 million, is driven by a combination of factors. First of all, we see a higher utilization and improved optimization of the group's manufacturing capacity compared to the first half in 2023 due to increased customer demand and inventory management. Secondly, we see a favorable impact of structural cost improvements both in operations as well as SG&A and support functions. This adjusted EBITDA excludes the impact of certain restructuring costs Costs associated with executive director changes and share-based payment costs. On to Elbit. Non-cash depreciation and amortization charges of $13.8 million lead to an adjusted loss before interest and tax of $7.2 million. An improvement of $10.2 million compared to first half 2023. The resulting operating cash flow number seems counterintuitive to the results reflected in the other metrics. Let me therefore take you through the details of the various components in the next slide to better paint the picture. We started the year with a net debt balance of 2.2 million. Cash flow for operations of 10.2 million is 15.6 million favorable to prior year, which reflected a 5.4 million outflow. And this is reflecting a combination of improved sales volumes and the favorable impact of previously implemented cost mitigation actions. This is partially offset by working capital outflow of 8.4 million, which is adverse to prior year, in which we saw a 9.7 million inflow. The working capital outflow reflects a combination of factors. As the market recovers, our working capital requirements have also increased to reflect higher trading volumes and the significant increase in trade and other receivable linked to manufactured customer wafers that have either not yet been shipped or are held in supplier-managed inventory. The $4.4 million cash impact of adjusted items mainly reflect certain restructuring costs related to the Pennsylvania site closure, while the proceeds of the actual site sale are still outstanding. Other factors include costs associated with executive director changes and share-based payment costs. We close the year with a net debt balance of 17 million. Cash and cash equivalent balance for the half year is 7.8 million. Now let me cover our cost initiatives. Since I joined, we have looked to implement tighter cost control initiatives and ensure improved operational efficiency and fiscal responsibility. We talked through a number of these priorities at the full year, but I'm pleased to say that we've made further progress in first half. This has included delivering on our headcount and non-labor cost reduction program initiated in fiscal year 23. On top of this, we are confident that we will complete the sale of the decommissioned Pennsylvania site in second half 2024. Looking ahead, these priorities remain in place as we continue to navigate the full market recovery and improve the margin. And with that, I will now turn back to Americal to take us through our strategic priorities and the outlook.

Thank you. Thank you, Jutta. Before we get into some of the details of our strategic priorities, let me remind you of our priorities as such. It's all about driving growth through diversification into high-value power market and micro-LED displays while maintaining our strong position in wireless and photonics. So we have made great progress in the first half of this year. For GaN power, we have increased capacity that is enabling qualification ramp-up for tier 1 OEM for 650-volt product. We have a strong roadmap in Ghana Power, ranging from 200 volts device up to 1250, expanding our market opportunities to serve from the data center market to the EV market, including on-board charging type of products. In micro-LED display, we continue to demonstrate our capability, which is driving increased sampling with new and existing customers with our full spectrum of RGB technology. We have a highly differentiated 8-inch product portfolio addressing a range of display and end market from small to large device form factors with a key driver being ARVR platform, which is providing a new platform qualification opportunities for RGB. Across wireless, we maintain our market share with our existing customers while expanding into new design wins for Android smartphones and Wi-Fi 7 end markets. And for photonics, we are well positioned to capture the demand from the trends associated with Gen AI, which I'm going to provide more details in a moment. As we announced at our capitalist market, the core part of our diversification strategy is expanding into gun power market. So we have made progress addressing that strategic imperative. Leveraging our gun innovation, which began laying the groundwork to deliver. Firstly, we have successfully invested, as you know, in program capacity across multiple sites. This is very important to cope with the supply security necessary in our industry. This has enabled us to deploy capacity to accelerate our R&D program across a range of voltage required by key growth markets for consumer electronics and industrial use cases. One of the trends we are seeing from across the industry is is more investment moving into compound manufacturing, and GAN in particular, including investment from large silicon foundries, IDMs, and OEMs. The RIT is not alone, and I'm very pleased to see that what we have announced at the CMD is being followed by multiple large players in the industry. The power demand for Gen AI requires new technology, And we see this as a reflection point for the industry. It is said that Gen AI data centers may require up to 10x the power budget. And I don't think it's realistic to expect to create 10x power generation. So therefore, there is a call for a new innovation pipeline of technologies to address this challenge. IQE is focused on engaging with a set of new customers to enable this transition as the industry prepares to scale up to meet the anticipated demand for generic workloads. Following our successful internal development in collaboration with key partners, we are already sampling with a number of customers with very positive feedback reflecting our strong capabilities and our highly differentiated product portfolio. All of this gives us confidence in our exposure to where we see the growth opportunities in those key end markets, including automotive, communication infrastructure, and data center that powered the Gen AI revolution. I would like to focus more on the AI market, a little bit more than that. To recap on what we have said previously, Gen AI represents a significant growth opportunity for IQE technologies. Our technology portfolio is already present across the whole AI ecosystem, from the palm of your hand to a network that transports the data through data centers themselves. Turning first to Edge AI. We expect Edge AI to be a significant driver for growth in the near future, as the industry deploys AI models in smartphones and other IoT-type devices. The latest upgrade cycle of AI-enabled devices will require advanced sensing capabilities, our 3D sensing technology delivering much richer, more immersive user experience, as well as wireless connectivity and efficient power management through GAN. All three are key parts of IQE portfolio. Now let's look at the data centers. where GNI will drive tremendous demand on increased power and data traffic. As I said earlier, adding more power may not solve the problem. Therefore, we believe GaN power is a critical technology to help cope with such an increase in demand. To help deliver the full potential of GNI, there's a need for new technology to deliver faster data transfer at a much lower rate of power consumption This is an area that we are particularly excited about in relation to our quantum dot laser product portfolio, which is able to deliver faster data transfer with a much lower energy footprint while being more cost-effective for our customers. In this technology, we are engaging a number of key players to take it to the marketplace. Now let's look at Indian Phosphate. We continue to see solid demand for this technology across the ecosystem, particularly for ultra-low latency, high bandwidth data center applications. Our Indian phosphide technology has also unlocked new opportunities in consumer sensing. Our laser and detector materials are being used to develop new intelligent health and wellness product. Underpinning all this, though, is Our belief that our GAN power portfolio is a viable and sustainable solution to cover the power demand requires for general infrastructure from edge to the core of the network. So I have to talk about the market dynamic and our strategy for growth. Now I would like to take a moment to explain how our proposed IPO of IQE Taiwan will enable us to accelerate the implementation of our strategy. As announced in July, we intend to list IQE Taiwan on the Taiwan Stock Exchange, setting a minority holding in the business while retaining control. Minimum is 30%, and we anticipate to selling in the range of 30% to 40%. This will enable us to leverage a strategic value of this asset and accelerate the investment in our growth, accelerate our R&D effort, expand our capacity, and provide additional cash resources to the company while we continue to offer a secure and resilient supply chain for our global customers. This IPO process is a two-stage process with the initial phase of listings expected to be complete in the first half of 2025. As we announced, we have appointed Taishin Securities as lead underwriter to take us through the process. I know that everyone would want to know, want us to comment on the valuation of the business. but we are not in the position to provide this level of detail at this stage. However, we are really encouraged by the evaluation of our peer group on the Taiwan Stock Exchange, who, as a group, are looking at valuation greater than 30x. I was in Taiwan a few weeks ago and have been really encouraged by the initial feedback so far from potential strategic investors, and I look forward to updating you in due course. To conclude, I want to recap on our outlook for the rest of the year. Year-on-year growth is expected in revenue and adjusted EBITDA, but due to the pace of the industry recovery, both measures are anticipated to remain at the lower end of the analyst forecast for 2024. The proposed IPO of Taiwan, IQE, is an exciting opportunity, enabling us to accelerate the implementation of our strategy. We remain committed to our diversification strategy for growth as we see the role of compound semiconductors becoming even more critical and the sector attract more investment as we reach an inflection point driven by the demand of Gen-AI. It is also important to note that compound semis are critical to our digital infrastructure as a whole, and that IQE is poised to enable an intelligent, connected, and low-carbon world. I would like to finish by thanking everyone in IQE for their hard work during the first half, and with that, I'll hand it over to the operator for questions. Thank you so much for your time.