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.

Ladies and gentlemen, if you wish to ask an audio question, please press star one on your telephone keypad to answer your question. That's star one for audio. And if you wish, you can also submit questions by using the web, by using the Q&A box underneath the presentation window. Thank you. We'll pause for just a moment to give everybody a chance to signal. Ladies and gentlemen, once again, please use star one to ask your question. Okay, we do have one question coming in this time. It's Oliver Tipping of Peel Hunt. Please go ahead. Your line is open.

Brilliant. Thank you very much. Can you guys hear me?

Yes, please. Your line is open, sir.

Brilliant. Okay, cool. So I just wanted to check what the growth was in GAN revenue. Obviously, that's a key strategic focus. And I wanted to see if you could sort of expand upon the the low Earth orbit satellite opportunity, and also if you're seeing any signs of growth or acceleration in the 5G infrastructure. So really just pulling out what's GAN and what's gas from the sort of total wireless balance and then the opportunities there.

Thank you for the question. We don't really disclose the relevant technology details in that. It's just really the opportunity definitely is going to be in GAN and we are expanding and we have been able to expand our GAN capacity significantly with the qualification of the new reactors in Newport. So you will definitely see more of that really taking up and picking up speed as we progress into 2025 and 2026.

okay understood and then i guess just touching on um your sort of pipeline uh going forward into through 2025 and into 2026 um i appreciate that it's probably slightly weaker on the mobile side um but in terms of your new uh sort of partnerships with people are all of those moving uh in the direction you would like are they moving at the pace you'd expect them to so are there any sort of positive or negative surprises from the sort of string of recent announcements you guys have had

So the pipeline is extremely strong. So we never had actually a stronger pipeline than we are having today, really. And obviously, you touched on GAN and GAF's opportunities within a display. We were heavily involved in that in the micro LED space. We're also heavily engaged with the power applications. And that has also been something that we've communicated and publicized with our R&S in the past. So you will definitely see that. So it's really a very strong, diverse pipeline that we are able to work with. And we are able to see the revenue coming in really based on that, especially starting in the second half of this year.

Okay, brilliant. And then it was interesting to see sort of the sale of Taiwan brought up as a priority alongside the IPO. Is it simply the benefits of sort of the timing benefits? So you might get You don't get the benefits of the ongoing sort of equity stake, but you do get the full cash realized much quicker. And therefore, you can then sort of restructure the business, get rid of the debt as you want. So is that now your preference of the full sale of Taiwan?

Yes. I mean, that's what we've said. We are prioritizing the sale of Taiwan because it gives us more money and it gives us quicker money.

OK, brilliant. Thank you very much.

Thank you much for your question, sir. Ladies and gentlemen, once again, as a reminder, if you have any audio questions, please press star one at this time. We'll now take questions from John Karidis of Deutsche Bank. Please go ahead. Your line is open.

Thank you. Good morning. Utah, would it be possible, please, to give us a little bit more visibility about CapEx prospects that both PNE CapEx, but also R&D. And you're thinking around that, not just for 25, but beyond as well, please.

Thank you, John, for the question. CapEx is going to be really tight, obviously not just to our strategic review and the resolutions of that, but really to our customer engagements. In the past, we've made investments without really having a clear view on utilization and customer engagements to utilize these assets, which we will now sort of engage with and connect to with future investments. So any kind of future investments that you see, significant investments, will be tied to specific programs and customer engagements, potentially even with co-funding or other opportunities to really find additional opportunities resources to enable that growth.

Thank you. And I see from your RNS that the base case scenario is low double digit capex in 2025. I assume that the comparable number there is the 11.4 that you inferred in 2025. Can you give us a little bit of visibility of what that low double digit millions of pounds consists of, please.

It's mainly related to our GAN expansion, GAN capacity expansion, and some, obviously, maintenance and sustaining CapEx investments, but really the majority of that is still tied to the GAN power expansion.

That's great. Thank you very much, Jutta, and all the best at the helm. Thank you, John.

Thank you. Yes, thank you. As we have no further audio questions at this stage, I'd like to turn the call over to the management team for any webcast questions. Thank you.

Thank you very much. We do have a few questions on the webcast. The first that's come in is about microLED. Can you add more detail about the prospects for your microLED products?

Yes. Micro LED really are really important in key applications such as AR and VR. And we are really keen on participating in that. However, there's obviously a long, very long incubation period. And we are, while we are working closely with the customers and our deactivity to enable that, we are seeing sort of these revenue, significant revenue streams coming in at a later stage. we are seeing global OEMs coming to us to IQE to develop really their micro-LED technology. And we are actively sampling and qualifying ahead of technology validation and ahead really of the product ramp. So while you are seeing that incubation period really being there and the revenue really being at a lower level, you definitely will see that pick up and will become a part of that success story in the future.

Thank you, Jutta. Is there any update on IQE receiving CHIPS Act grants for the Greenberg facility?

We're extremely, we are very active with the CHIPS office. So obviously things have slowed down significantly with the new administration. However, even now in my visits to Washington, it was really clear that there is strong support across the aisle to really support just because that will really be the main conduit to restore manufacturing of semiconductors into the US again. So it really still matches with the administration's guidance. And what we've seen so far is that it's going to be a timing, obviously maybe a delay, but we're really very confident that we can still get this over the line.

Is there significant room for 3D sensing solutions to be much more widespread than is currently seen?

3D sensing is an extremely important application within the overall AI infrastructure. So 3D sensing will be very important for any kind of edge AI applications. So that will be pixel lasers and detectors really helping with that. And so we do believe that there are significant market opportunities for us really in that area. and just AI in general. AI is real present across the whole AI ecosystem from really the palm of our hands to networks that transport data to the data centers and back to the edge again. So I think it's a great opportunity for us and not just limited to the 3D sensing.

Can you provide a general commentary on the use of indium phosphide in AI data centers and the extent to which IQE has exposure to this market?

That's actually really a good follow-up to the comment I just made, really. Indian phosphide will be very important on the HAI applications, so it'll provide accurate and advanced sensing, but Indian phosphide will also be really important in the overall ecosystem, providing ultra-low latency and high bandwidth connectivity applications.

What does the board believe the largest revenue growth segment will be over the next five years? it's all AI related.

I think, and again, this is really from the experience that I've had with conversations in various areas, is that we are seeing the overall semiconductor market being, I wouldn't call it, almost stagnant. The growth really has been driven by AI, AI across the site. So it's really something that we are that we are going to participate in as well. And that's really across all segments that we are playing in, as mentioned. So it's not just limited to, obviously one of the main application is going to be power and that's supported by GAN. But as mentioned, it's really also going to be indium phosphide, Vixel and GAN. So it's across all segments that we will be able to participate in that growth. Thanks Jutta.

Jutta, what do you think the company will look like in 12 months time?

That's a really good question. And it all hinges really on the strategic review. There is a great future ahead of IQE. There's plenty of opportunities and we will unlock those opportunities with the completion of the strategic review, which will render us debt-free and really gives us the funding to invest in our growth diversification strategy.

Has major growth in customer demand been delayed regarding GAN?

GAN in general has seen a shift to the right. It's an overall market application delay that we are seeing across the major players. However, it's not a question of, it's more a question of when we actually see that picking up rather than an if. So we are closely monitoring this and also very much still focusing on our growth strategy in GAN and ready for the expansion of that market.

What revenue is attributable to IQE Taiwan? While selling may support the balance sheet, does this not weaken the company long-term?

We don't disclose revenues specifically by subsidiaries, but the majority of the wireless revenues are Taiwan. There's choices that you have to make. What we've made very clear is we... We want the group, and I have a very strong view, that cyclical technology businesses shouldn't be relying on debt, and certainly not short-term debt. So the priority and the focus is to move the debt and to have cash to invest in what we see as the more opportunities, the growth opportunities, AI, GAN, micro-LED. And that's a choice we have to make. In an ideal world, if we have lots of cash, would we be selling our Taiwan operations at this time? I don't think we would, but we have to make choices and that's the choices that, you know, that's the point of the strategic review is to effectively sort the balance sheet issues that we've got and put us back in the position where we can grow the business and not have a drag on the share price and the business that's currently coming from the concerns on the level of debt.

So can the board allay fears that there might be another fundraise in the next 12 months?

Well, the whole point of the strategic review is to allay that fear.

What has happened to the company's previous revenue targets of getting to three times revenue in five years?

When those targets were set, since then, the market has changed significantly. We've seen a delay in the recovery that we kept pointing out, and we've also seen a delay of the GAN overall market shifting to the right. However, Now, as I'm taking on the responsibility of the company, we are completely reviewing our strategic intent and with that also our revenue forecast. And as such, really the strategic review will determine also our outlook for the future and our prospects thereof.

Have relationships with key customers been reset under Jutta?

I'm in constant communication with the customers. So if you want to call it reset, yes, they have been reset. really be establishing relationships and some I have had for a long time already so it's just really invigorating that relationship and ensuring that there's trust and really that partnership that is so imperative for a successful collaboration is the company committed to being listed on the UK a market and staying independent I mean our focus is

the discussion at the board.

Thank you, Mark. I'll now hand back to the operator to close off the call. Thank you for joining the IQE full year results webcast. This concludes the presentation for today.