IQE plc

Good morning and welcome to IQE's full year results presentation and I hand over to Executive Chairman Mark Cubitt and CEO Jutta Meyer. Please go ahead.

Hi everyone. Welcome to the IQE FY24 results webcast. I'm Mark Cubitt, the Executive Chairman of IQE and I joined the Board in October 2024. For those of you who don't know me, I was the CFO of Maine-listed Wilson Microelectronics for eight years until it was sold to Cirrus Logic in August 2014. I've worked with Beaks Financial Cloud pre-listing and became the non-executive chairman of an IPO on AIM in 2017 and served in that position until December 2024 and remain as a non-exec director of Beaks. I'm also the non-exec chairman of Aimlisted Concurrent Technologies and have been for the last five years. I joined Concurrent in 2020 as the youngest director with the other directors having served for 30 plus years. I'm now Concurrent's oldest and longest serving director. Moving on to the strategic review. As we announced in November 2024, we are carrying out a strategic review of all the operations of IQE and appointed Lazard to work with the Board in this process. The focus of this review is to expand the previously announced proposal to IPO the Taiwan operations to include a full sale of the Taiwan operations. Both options continue to be considered. We are currently evaluating a range of proposals and you will understand we can't disclose details of these negotiations, but we will update the market at the appropriate time. To be clear, the objective of the strategic review is to make IQE debt-free with cash to invest in the refocused business. This will remove the burden of the current debt that is both expensive and acting as a drag on the business and share price. I'd now like to introduce you to Jutta. A number of you will have already met Jutta when she was CFO and I am delighted to announce Jutta has now been appointed as IQE's CEO. With over 25 years of industry experience in the semiconductor space, Jutta is a clear strategic thinker with strong financial discipline. Over the past six months, she has stabilised the business and has the trust of employees and customers. I have worked hand in hand with Jutta these last six months and what has become clear is in addition to her financial discipline, Jutta has a clear vision and passion for IQE. She brings international experience, a strong industry network, and she has my and the full board's trust and support. I'd now like to hand over to Jutta who can give her take on IQE and the financials. Jutta.

Thank you, Mark, and a big thank you for the trust that you and the board have placed in me. I'm truly excited to be leading this business as CEO. This is clearly a very important period for the business, but it's a very exciting one, and I'm very confident in the opportunities ahead. I'm looking forward to working closely with all of our employees, partners, and customers to take the business into this new chapter. In order to give context to the results I'm taking you through, I'd first like to talk through some of the external factors that have impacted the landscape that we're operating in. Looking at the macro and industry headwinds, the industry recovery has been slower than expected. We used the word patchy before to describe the recovery last time, and this is still the case. I was in Munich last week for the Global Semiconductor Alliance Conference, and it was clear from every conversation that AI is the only one area consistently showing growth. A reassuring sign as it remains a key addressable market for us. In terms of specific markets, we have seen continued softness in the wireless market driven by weak global smartphone sales and below forecast supply chain replenishment cycles. We continue to see a weaker demand for electric vehicles, largely due to the high entry prices and persistent concerns around charging infrastructure. The growing presence of Chinese EV offers at much lower price points increases the pressure for continued innovation to stay competitive. On a geopolitical basis, we are seeing a lot more fragmentations of supply chains impacting the market. Many companies are reshaping their supply chains, and this is an area where we can be well-placed given our global model. Uncertainty has continued, however, and this has obviously been accelerated and intensified by the US tariff policy. And I think it's fair to say that we will see more changes throughout the year. I've mentioned AI briefly already, but should go in a little more depth. I think the level of penetration is still only in the early stages. You're seeing refocused investments priorities across the industry, where there's a wide spread shift towards investing in the infrastructure and foundations that will enable the AI technology roadmap. This is the first phase, and the next phase will cover applications. And this is where IQE operates right now in the infrastructure as well as applications. And I think the opportunity that this presents are clear. Taken together, we can see that the macro environment is one that's changing quickly in ways that present both challenges and opportunities. In order to be able to adapt to this, it has never been more important for us to be operational agile and financially disciplined, which allows us to focus on strategy and growth markets. In response to this environment, my focus has been on extracting value from assets, reducing costs, and focusing on core operations to drive profitable growth. A key part of this has been initiating the strategic review, as Markus already touched on, which will enable us to prioritize further investment into the growth sectors of GaN power and display. In the more immediate term, we have looked to implement new customer and supplier engagement models in order to provide security amongst an uncertain market. Additionally, our dynamic supply chain management is ensuring that we have the inventory and raw materials that we need via a dual-source strategy. My previous experience means that I've seen what good delivery looks like in other businesses, and my time as CFO has helped me understand what needs to be done at IQE to drive this. This is why the organizational changes I've made have been focused on creating efficient and aligned organizations that fit for purpose, with a skilled executive team that shares my vision and passion for the company. These include our new Chief Technology and Operating Officer, Rodney Pelzelm, who you might remember from our CMD, our Chief Revenue Officer, Mark Furlong, and our Head of People and General Counsel, Tom Dale. As you'll all be familiar with, keeping a tight rein on costs and looking for efficiencies where possible without compromising on our ability to deliver for customers has been important for the past few years, and this has continued. I'll touch on this in some more detail later, but over the past year, we have reduced total headcount costs by 10% without compromising operational delivery. In my experience, companies are not short on good ideas, but what separates the great from the good companies is the ability to deliver on those good ideas. I've seen this in other companies throughout my career, and that is why I have set up a transformation office, a more structured and rigorous approach to program delivery. And we're already starting to see benefits from that. where I've seen successful existing projects, I've made it clear to the teams that I want them to carry on with the great work that they're already doing. A great example of that is our digital transformation program that is enhancing manufacturing efficiencies across the business. At the same time, we have been making those strategic and operational changes, we have also continued to deliver progress across the business and all of our end markets, and I'd like to highlight a few of these key achievements. Across our Connect and Send segments, we have a good balance of retaining the stable base that Joel has heard us talk about before, alongside exploring new opportunities for next-generation technologies. Some exciting examples of that include the launch of our quantum laser foundry service for data centers and to continue development of our next generation 3D sensing pixels, which achieved key qualification milestones this year. Our diversification strategy into power and display is also continuing to develop well. Just after the year end, we were able to announce the launch of our joint development agreement with XFAB to establish a development platform for GaN power in Europe, a significant step forward for our GaN strategy at a time where the ecosystem is developing. Our diversification into micro LED is also continuing as the ecosystem for technology continues to form. It is a long incubation period for the technology, but this is why we are doing so much R&D work to make sure that IQE is on the cutting edge and has exposure to the growth opportunities of this market. We remain confident that our strategy is the right one, and these are just some of the examples of how we are delivering against it. We're not letting up on any of these segments and our execution is underpinned by the structural and organizational changes we've made that I spoke about earlier. Now, how does all translate into our financials? We've achieved revenue of 118 million in the year. roughly flat year on year. However, the adjusted EBITDA basis saw a significant improvement from 4.3 to 8.2 million, reflecting the decisive cost actions we've taken and efficiencies in the business. Adjusted LBIT improved slightly from 20.2 to 18.3 million. Adjusted operating cash flow was down from 15.7 to 6.1 million, which reflects a significant improvement of cash flow from operations that was more than offset by an increase in working capital, reflecting the inventory built to support 2025 deliveries, and which I will go into in more detail in a couple of slides. Looking on segmental revenue basis, wireless performed strongly with revenue up 25% to 67.3 million. This is reflected in our increased penetration into the Asian market and the Android ecosystem, as well as an increase in GAN sales to support 5G infrastructure. In photonics, revenue was down 16% to 49.9 million, which largely reflected softness in the 3D sensing and pixels. This was, however, partially offset by a strong performance in the aerospace and security sector, and we expect demand in that market to remain high for the foreseeable future. And just to note, this is the last time we'll refer to our CMOS segment in this way, which is no longer being reported separately and will be integrated into our other segments. Looking at cash flow capex and net debt. We had an adjusted operating cash flow for the year of 6.1 million and a net operating cash flow of 1.3 million. As you know, in March we received the net proceeds from the closing of our convertible loan note fundraising, which totaled 18 million. This meant that at the end of Q1 2025, cash and cash equivalents stood 20.6 million in addition to an undrawn facility of 4.5 million. This net debt bridge gives you a sense of the movement in our net debt position over the year. The healthy adjusted cash flow from operation figure here highlights the strong operational performance in the year. But as you can see, we faced a significant impact from the cash impact of adjustments, the repayment of lease liabilities and interest payments. All a reflection of our leverage position. which shows why our net debt position is where it is. Despite this, fundamentals of the balance sheet have been improved with the Pennsylvania sale and the cost actions we have taken over the year. We're also still investing in our future with our GAN capabilities and equipment, keeping a strong focus on our core strategic objectives. While you can see that our balance sheet is currently constrained, that's exactly why we're conducting the strategic review to strengthen our financial position, enable future investments and unlock the full potential of the business. As I've spoken about already, we're already taking action to address costs and improve the balance sheet. And I'll just run through some of what we've done here. As you'll know, in March, we received the net proceeds from the closing of our convertible loan note, which significantly strengthened our near-term financial position and reflects the support we have from our shareholders. I've touched on the restructuring of our ELT earlier, which I'm confident is now an efficient team that is well set to achieve our goals. And we've also reduced the wider headcount costs by over 10%. We've also continued to focus on optimizing our procedures and processes to get the most of our assets, including through restructuring of manufacturing shift patterns, consolidating capacity and selling access tools. I'm very pleased with the work that we have done to put the business in a sounder financial footing, which has helped deliver the improved EBITDA performance this year, This is an ongoing process and we will continue to prioritize strong cost management moving forward to improve margin and cash flows. On to current trading and outlook. We are continuing to see global markets impacted by the microeconomic uncertainty and as a result, some end customer demand is being fulfilled with existing inventory. This was visible in Q1 trading, but is expected to correct in second half 2025. We have a strong customer pipeline and we expect that it will continue to grow in the second half, thanks to new product and customer engagements. The industry is already seeing significant demand for the infrastructure to support the profileration of AI, such as data centers and ultra low latency connectivity products. and we are well placed to be able to support the technology revolution. We also expect that markets including aerospace and security and optical communications will continue to deliver growth in second half, offsetting anticipated softness in the global wireless market. Clearly, the whole market is navigating the current uncertainty around the implementation of US trade policy. While tariffs are currently having no direct impact on IQE, we are closely monitoring developments and continue to explore options with both suppliers and customers to mitigate any potential risk. Revenue and adjusted EBITDA for the full year are expected to be within the range of analysts' forecasts for fiscal year 2025. with weighing towards second half consistent with the destocking seen in Q1 and typical industry seasonality. These forecasts, to point out, assume the inclusion of IQE Taiwan revenues pending the outcome of a strategic review. In summary, this year has seen us deliver a solid financial performance against a market that has remained challenging and uncertain. We have a revitalized team in place executing well on our strategy and we are already seeing the benefits of our focus on operational efficiency, asset optimization and cost management. I am confident in the opportunities in the market for iQE and the ability of our people to deliver on that strategy. The strategic review will be key to enabling this, unlocking the potential value of the business and allowing us to move forward without debt and with the financial resources in place to invest in our diversification and growth strategy. We very much look forward to updating you on the progress of this as soon as we're able to. This is a pivotal moment in our history, and I'm very excited to be leading IQE at this time. Thank you for your time. And Marc and I will now take questions.