IQE plc

Good morning and welcome to IQE's full year 2025 results presentation. I will now hand over to Chief Executive Officer Jutta Meier. Please go ahead.

Thank you and welcome to IQE's full year 2025 results. I am so excited to be joining you today and would like to extend a warm welcome to those of you who have been following IQE for some time and the many of you who are new to our story. I am very conscious that it has been some time since you have heard much from IQE. That is because the strategic review meant that we were very limited as to what we could say to the market and also what some of our research analysts could write about us. I am very pleased that period is now behind us and you will have seen the news this morning about our fundraising transaction officially closing. It's important because of what this investment from Macom and other investors signifies. What it says about their confidence in IQE, our strategy, our market position, our leading technology, and the strength of IQE's customer relationships. It's also about their confidence in IQE's future. So this feels like the perfect time for me to take a step back and set out for you why IQE and why now. While what IQE does might seem quite niche and removed from your everyday, I want you to understand this is far from the case. This slide sets out some of the structural demand drivers that are shaping our industry and in turn directly creating opportunities for our business. The topics on this page are dominating the news headlines you read, the technology you use, and our global economies. I'll take each of these in turn, going round the wheel clockwise, starting with geopolitics. International governments recognize the rising importance of these technologies across all areas of life. And that is why we are seeing so much focus on efforts to establish sovereign supply chains for the semiconductors necessary to support economic and technological growth. IQE's manufacturing facilities in the USA, Europe and Taiwan means that we have global production capabilities and we are engaged with governments across all of these geographies. Moving on around the wheel, one of the key reasons why sovereignty has become such a focus in the importance of semiconductors to the most modern defense technology, especially at a time when spending in this area is growing, IQE has a long-standing expertise in supplying to aerospace and defense customers. It is also well established that the technology breakthroughs in sectors like aerospace and defense eventually feed into other commercial areas. One such area is the space sector, where developments previously made by defense customers are feeding into commercial uses for satellites, data centers and power generation in the form of space-based solar arrays, as well as areas as diverse as pharma, mining and tourism. Then onto the AI super cycle. We all understand the importance of the impact that AI is already having on the world. And this will continue to accelerate. This is not only fueling increasing demand for faster and more efficient semiconductors, but changing the way that the industry thinks about value. Compound semiconductors are critical for AI infrastructure and IQE's complete suite of materials underpin the AI ecosystem, which we will discuss further later. Consequence of this AI high-performance computing demand has also been that the packaging of chips, which we highlight at the top left of the slide, has now shifted from being seen as a supporting process to a core driver of performance. IQE plays an upstream but strategically important role in the semiconductor packaging ecosystem, particularly in advanced photonics, heterogeneous integration and AI optical interconnects. We've heard about compound semiconductors and the industry exploding around us. Now, what does that mean for IQE and how we're benefiting from that? When I'm introducing IQE to people, I like to say that we are the most important part of the global semiconductor supply chains that some people have never heard of. And we're working hard to change that. To start with the fundamentals of our business that I said we would talk about, IQE is the world's leading apotexy wafer supplier and has a number of unique strengths that set us apart. Our expertise and reputation in the market is built on our more than 35 years experience, having been in operations since 1988. That has allowed us to build the broadest product portfolio in the sector, serving a global customer base across the highest growth technology segments. I've spent over 25 years in the semiconductor industry, mainly in Silicon Valley, and I have to tell you, when I first got under the hood of IQE's technology, I was absolutely blown away. We operate in the most cutting-edge segments and the world's most important companies rely on us, from leading consumer brands to defense customers and AI innovators. Another key differentiator is our global footprint. We are the only pure-play epitaxy provider with manufacturing facilities on three continents, meaning we are able to offer our customers flexibility, scalability and supply security. We are pleased that following the completion of the strategic review, we have retained this multi-country capability with our sites in the UK, US and Taiwan. Each of our sites has its own technology focus and in all of our sites we have the capacity to scale production to meet rising customer demand without the need for significant further investment. Taken together, we have a unique platform to allow us to capture global opportunities across the market. To understand how we are placed to capture all these opportunities, I'd like to take a moment to zoom in on where we fit on the global semiconductor supply chain. As the world's only pure-play epitaxy foundry, IQE has a unique and critical position in the global value chain for semiconductors. I'm not going to get too technical at this point. I will leave that for another time for our CTO Rodney. But at the core of the process, we take the base substrates and use our epitaxy process to grow atomic layers on the substrate. Why do we do that? The compound semiconductors that we make through this process fulfill a need where silicon semis aren't fast, efficient, or powerful enough. These wafers then move through the value chain through foundries and design before ending up in a wide variety of end applications. Let's take a minute to discuss some of those end applications. I'm not going to go into each one of these in turn, but what should be clear when you have a look at this slide is that we are playing in the biggest and most important market segments in the world. All of this is underpinned by our market leading material systems, spanning across Indium Phosphide, Gallium Nitride, Gallium Arsenide, and Gallium Entaminide. Our compound semiconductor materials possess advanced properties that set them apart from incumbent silicon technology and that is increasingly important as we approach the limits of Moore's law. People often ask me who our competitors are and I always say that this is not a simple answer because no one else can do quite what we do. While some operators are doing some of what we do in single sites, no one else is able to work across such broad materials portfolio as IQE, especially when combined with our global footprint. To focus in on the end market that is getting the most attention at the moment, let's have a look at our offering across the AI and data center markets. Our exposure to AI extends across a number of key materials and capabilities, but at the core enables ultra-fast data communications, energy-efficient electronics, and advanced sensing capabilities. Looking at Indian phosphide in particular, this is a crucial enabler of the ultra-fast optical and wireless data communications that data centers rely on. In the last year we have seen market demand from these indian phosphide solutions significantly increase due to the exponential growth in AI. The fact that IQE has not just years but decades of experience making indian phosphide wafers to the highest standards gives us a unique advantage in the market and means we are best placed to work with customers to deliver a high quality supply. And the nature of the supply they're demanding is very much in the here and now. This is a live market opportunity. We also have the ability to flex assets and convert existing tooling to support Indian Phosphate growth. But this would need to be tied to concrete customer commitments. While Indian Phosphate might be the current buzzword, it is just one part of the broader ecosystem. You can see that our Gallium Nitride and Gallium Arsenide technologies are also hugely relevant here and it's another demonstration of the power of our diversified technology portfolio. Now I'd like to turn to a summary of our fiscal year 2025 results. The story of 2025 was one of accelerating momentum and improving market conditions in second half. Plainly speaking, the first half of the year wasn't where we wanted to be. Revenues were impacted by global macroeconomics uncertainty around tariffs, continued softness in the wireless handset market that led to customer inventory builds and delays to military defense funding. However, these issues eased in the second half of the year. By the end of the year, we saw significant improvements which have continued into 2026. Most notably, the wireless market improved by the fourth quarter, leading to depletion of these customer inventory build-ups and the release of budget for US defense projects. The rising global demand for AI compute and data center deployments also created opportunities for us and contributed to the improved second half performance. Again, we see this as a long-term trend that will benefit the business throughout 2026 and beyond, creating opportunities across Indian Phosphate and GAN in particular. Group revenue for the year was £97.3 million, comprised across our photonics and wireless business units. This is a legacy reporting structure that we are currently evaluating, as you'll appreciate that this does not fully capture the complexities of the business as we covered in the previous slides. In photonics, revenue rose 15% to 57.1 million. This was driven by continued growth in AI and data center-related markets that we've just discussed, as well as the funding releases for certain US military and defense programs. In wireless, revenue decreased by 40% to £40.1 million. This reflected the uncertain macroeconomic conditions in the first half of the year and softness in mobile handset demand with some end-customer requirements met from existing inventory. What I would highlight about last year's performance is that it shows the opportunities present in IQE's broad portfolio and the resilience it gives us in uncertain times, where softness in one market can be offset by strength in others. Our adjusted EBITDA results of £3.2 million was a direct reflection of the low utilization of our manufacturing footprint. However, our existing asset base has ample capacity to support significant production increases that will be needed to meet higher demand without requiring material capacity expansion. This will directly benefit not just our EBITDA performance but also future cash flows. The rise in adjusted operating cash flow from the year reflected a working capital inflow of £11.2 million. We ended the year with cash and cash equivalents of 15.7 million and an adjusted net debt of 31.5 million. It is important to stress, however, that after the year end, the 81 million pound fundraise from Macom and other key partners transforms our capital position. We will use the funds to fully repay our revolving credit facility with HSBC Bank, leaving us without bank debt. Following this, IQE will receive net cash inflows of £27.9 million. I will touch on the impact of this in more detail in a couple of slides. Even though our financial performance was not what we would have hoped for, we still made good strategic progress throughout the year in all four of our core markets. Connect is benefiting from the rise in demand from AI driven hyperscale data centers as well as the improvement in the mobile handset market that we saw in second half. Our leading position on Indian phosphide positions us well for the future as data centers demand continues to grow. In Sense, we have continued to develop our advanced sensing capabilities which have applications across end markets including consumer mobile and aerospace and defense. In power, we see rising demand for our GaN solutions, driven by data centers, aerospace and defense, and space applications. Finally, in display, we continue to develop our micro LED technology, which will be vital to future consumer technology, including AR, VR displays, and we are seeing good engagements with key customers. All of this is very encouraging and gives me confidence that we have the right strategy playing into the most exciting markets in global technology. We've spoken a lot already about the external factors that impacted performance during the year. And I think it's important to focus on what actions we have taken and continue to take in order to put IQE in the best position possible to succeed. Since I joined the business, my top priority has been in ensuring that the business operates in as an efficient and fiscally responsible way as possible. This was especially important throughout the strategic review and during more difficult market conditions during the first half. But this is something that I'm committed to maintaining moving forwards as well. On an operational level, we have undertaken a program of portfolio optimization that is centered on ensuring that we are getting the most value out of our assets, focusing on our core customers and technologies to ensure we are most effectively utilizing our capacity. We have also implemented operational improvements across all of our sites that have made our manufacturing processes more efficient and high yielding. We also completed the exit from our silicon site in South Wales in the second half of the year as part of our site optimization program. All of these measures have helped to make IQE a more efficient and effective business, and we will continue to find areas for improvement on an ongoing basis to benefit the business moving forward. After the end of the 2025 reporting year in April, We are very pleased to announce the conclusion of our strategic review with a strategic investment from Macom and other existing shareholders. When we set out with the strategic review, the aim was to reduce debt, strengthen the balance sheet and create the capacity to invest. We achieved that objective. We are now incredibly well positioned to invest for profitable growth, service our customers, and maximize value for the shareholders. The £81 million of proceeds consists of £45 million from Macom in the form of £30 million cash and £15 million of convertible loan notes, with the remainder coming from existing shareholders. These proceeds will be used to pay off our existing revolving credit facility with HSBC, to redeem the existing loan notes and to strengthen our balance sheet. As discussed on the previous slide, this will clear our bank debt and results in cash after receipt of funds and repayment of RCF of around £27.9 million. As I mentioned earlier, we are also very pleased that this has enabled us to retain our global footprint, which gives us a competitive advantage and enables us to continue to serve our international customer base. We have also signed long-term strategic agreements with Macom, which will provide security, revenue visibility and stability for IQE and further strengthens our relationship with a Tier 1 well-established customer. As we announced at the time, following the conclusion of the strategic review, Mark Cubitt has returned to the role of non-executive chair and Hamesh Suniyara stepped down from the board as representative of Lombard ODA who do not intend to appoint an alternate representative. IQE's board has also approved the appointment nominations of Robert Dennehy, MACOM's chief operating officer, and David O'Carroll, MACOM's vice president, as non-executive directors, subject to completion of customary nomad due diligence. We also intend to appoint a permanent CFO in due course. This is an incredibly exciting development for the business, which transforms our capital structure and puts us in a much stronger financial position to take advantage of the global opportunities I have spoken about. Looking to the current financial year, I'm pleased to say that the positive momentum from second half 2025 has continued. Trading in Q1 2026 was in line with management expectations reflecting strong demand across all of our core segments. In particular, we are seeing accelerated demand for Indian phosphide photonic products related to AI compute and data center deployments, as well as Vixel and wireless products supporting the consumer smartphone industry. Alongside ongoing strength in aerospace and defense industries, this growth trajectory is expected to continue throughout 2026. We have strong order book visibility going into the second half and we expect full year revenue growth for 2026 exceeding 20% year on year. This is expected to result in high single digit to low double digit adjusted EBITDA position. So why IQE? Why now? Well, IQE is in a very different position today with the strategic review completed and all the work we have done to transform the company to this point. The period of uncertainty is behind us and we now have the financial firepower to maximize the opportunities ahead of us. Our strategic importance in the semiconductor supply chain and our leading technology capabilities mean that we are well positioned to take advantage of the increasing demand in our end markets. And this is all now being recognized and acknowledged by players across the industry. And I'm pleased by the levels of customer support we have had for the transaction. As I've emphasized throughout this presentation, hyperscale AI and data centers represent a massive opportunity for us across our materials portfolio, but especially in relation to Indian phosphate. We have been a leader in this technology for many years, and this means that we are in prime position to meet the demand for our vital optical photonics products now. We remain focused on two things. Firstly, delivering against our core fundamentals that I've outlined earlier. And secondly, ensuring that we continue to provide our customers with industry-leading technology and service. I would like to close by thanking all of my colleagues at IQE for their hard work over the year. And I'm excited for what I know we can achieve together this year. With that, I'd like to invite any questions from the webcast.

Thank you. If you wish to ask a question over the phone, please signal by pressing star 1 on your telephone keypad. If you wish to cancel your request, please press star 2. You may also submit your questions via the webcast. Again, it is star one to ask a question over the phone. Our first question is from John Kouridis from Deutsche Bank. Please go ahead.