IQE Plc H1 2017 Results, September 2017 Drew Nelson, CEO Phil Rasmussen, CFO
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H1 2017 Overview Positioning for growth Continuing growth and diversity Wafer sales up 17%, delivering 32% in related operating profit License income 1m (H1 16 3.5m, included up front amounts) Strong cash generation and increased investment for growth VCSEL Ramp Sales up in all primary markets Accelerating growth in Photonics sales up 48% Record June VCSEL ramp for mass market Multiple growth drivers beyond VCSEL Investing for growth CS industry moving through inflection point IQE - broad IP portfolio for advanced semiconductor materials Depth and breadth of customer engagement Invested in H1 to pump prime VCSEL ramp New Foundry agreement - flexible and cost effective approach A scalable solution for significant expansion
H1 2017 Financial Summary million 30 June 2017 30 June 2016 Change Revenues Wafers Licensing Operating Profit Wafers Licensing 70.4 69.4 1.0 10.6 9.6 1.0 63.0 59.5 3.5 10.8 7.3 3.5 +12% +17% -71% -2% +32% -71% PBT 9.6 10.1-5% Fully Diluted EPS (pence) 1.35p 1.46p -8% Cash Generated from Ops 11.2 12.4-10% Capital Investment 15.4 7.6 102% Leverage 41.9 35.4 18%
Growth and diversification of revenues UP 9% UP 48% UP 19%
Delivering growth in operating profit 'm Wafers License Total H1 15 Wafers License Total H1 16 Wafers License Total H1 17 Revenue 53.2-53.2 59.5 3.5 63.0 69.4 1.0 70.4 Operating margin % 13% - 13% 12% 100% 17% 14% 100% 15% Operating profit* 6.7 6.7 7.3 3.5 10.8 9.6 1.0 10.6 Interest, tax & MI (0.6) (0.6) (0.8) Reported profit** 6.1 10.2 9.8 Adjusted FD EPS (p) 0.9 1.46 1.35 *Operating profit before exceptional items **Reported profit attributable to equity shareholders before exceptional items 12.0 10.0 8.0 6.0 4.0 2.0 - Operating profit * H1-15 H1-16 H1-17 Wafers Included up front amounts 12.6% 12.3% 13.8% License
Strong cash conversion 'm H1-15 H1-16 H1-17 Operating profit 6.7 10.8 10.6 Cash conversation rate 79% 120% 112% Operating cash generation 5.3 13.0 11.9 Capital investment (3.6) (7.6) (15.4) Net cash from trading 1.7 5.4 (3.5) Restructuring (0.8) (0.6) (0.7) Interest (0.8) (0.7) (1.1) Tax (0.2) (0.7) (0.9) Net cash flow* (0.1) 3.4 (6.2) *Net cash flow before, acquisitions and financing. 14m 12m 10m 8m 6m 4m 2m - Operating cash generation 120% 112% 79% H1-15 H1-16 H1-17
consensus consensus consensus consensus consensus consensus Financial Dashboard Sales Operating profit* FD EPS* 160m 140m 120m 100m 80m 60m 40m 20m - 0 0 0 112 114 133 70 FY14 FY15 FY16 FY17 30m 25m 20m 15m 10m 5m - 0 0 0 17.6 19.0 22.1 10.6 FY14 FY15 FY16 FY17 3.50p 3.00p 2.50p 2.00p 1.50p 1.00p 0.50p 0.00p 0 0 0 2.4 2.6 3.0 1.5 FY14 FY15 FY16 FY17 Cash from operations Leverage Gearing 35m 70m 40% 30m 25m 20m 15m 10m 5m - 19.6 22.6 24.3 11.9 FY14 FY15 FY16 FY17 0 60m 50m 40m 30m 20m 10m - H114 H115 H116 H117 35% 30% 25% 20% 15% 10% 5% 0% H114 H115 H116 H117 * before exceptional items
An Intro to Semiconductor Technology
Background: How silicon chips are made Chips Silicon Wafer (Semiconducting material) Chip Fabrication (Patterning, Etching, metalisation, packaging ) But, silicon is not the only semiconductor Device (eg smartphone)
Compound semis the fastest growing semiconductor technology We make advanced wafers Compound semi chips Silicon chips Which our customers use to make the highest performance chips Combining a range of semiconducting elements That have more advanced properties than Silicon Wafer Chip Device
How we make compound semiconductor wafers Epitaxy engineering advanced materials Atomically engineered films (up to >400 individual films) Leading edge crystal growth technology Bespoke to each application Extensive qualification requirements Large barriers to entry
The markets for Compound Semiconductors
Market size Evolution of semiconductor technology SILICON WAFER Single element simple properties Growth has been driven by miniaturisation (Moore s Law) and scale Reached the point of diminishing returns Finite performance Ultra Low Cost EPI FILMS CS SUBSTRATE Multiple elements engineer advanced properties Superior performancewireless, light, power, speed Superior performance Higher Cost EPI FILMS SILICON WAFER Hybrid Technology : CS on Si Superior Performance of CS Low cost of Si Internet For illustration - not to scale
The CS industry is going through an Inflection Point Healthcare, Robotics & Autonomous systems Heathcare, medical diagnostics & treatment Robotics Self drive vehicles Machine awareness Advanced Sensor Technology Communications & Big data Mobile and infrastructure Data storage Internet of Things Wearables & TeleHealthcare Sensing and biophotonics Defense and Aerospace Satellite power Communications UAVs Infra Red Imaging Food Security Energy efficiency Clean energy (CPV solar) Solid State Lighting (LED) Power switching Base Stations Factories of the Future
H1 Actuals H2 Consensus Consensus The evolution of IQE to has been geared to this Inflection Sales m 160 EBITDA m 40 140 120 100 80 SALES & EBITDA 35 30 25 20 15 10 60 5 40 20 0 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 17* 0-5 -10-15 * Reflects Consensus Sales and EBITDA for FY17 Building the Platform Preparing for inflection
Based around an IP portfolio to capture the changing markets An unparalleled portfolio of compound semiconductor materials IP Trade secrets, and 100+ patents Pedigree built over more than 20 years, collaborating with the brightest and best from leading Universities to Blue Chips IP environment very fragmented, IQE competes with different players in each market InP Sb IR III-V on Si RF GaN GaAs creo TM GaN Power Breadth of IQE s IP is a strong differentiator and is highly attractive to our customers We have created a virtuous circle with critical mass and momentum. This is reflected in our strong market share and technology leadership in our markets Global #1 >50% market share Technology Leader Leading outsourcer Global #1 >80% market share Technology Leader Strong partners Technology Leader Strong IP position Technology Leader Strong IP position
And supported by a flexible, low cost and scalable approach to expansion Cardiff City Deal to fund infrastructure of new foundry 11 year lease 3 year rent free Option to purchase Part of the expanding CS cluster in the South West (> 300m investment) IQE to fund tools First 5 tools on order Capacity for up to 100 new tools 25m asset finance facility
IQE s Outlook its market engagement
Basecase Outlook : Continuing the trend in growth and diversity Growth ~ low to mid single digit Growth approx10% Strong double digit growth
Diverse range of growth drivers to accelerate beyond the basecase Near term Mid term Longer term VCSEL for 3D sensing, datacomms, consumer, & industrial DFB full service wafers for FTTX (NanoImprintLitho..NIL) GaN for RF Applications Wireless Filters (creo) and next generation wireless GaN for Power Switching and Lighting High efficiency, low cost solar power generation Mass market advanced InfraRed Broader adoption of Hybrid CS-on-Si for multi markets
Near Term Drivers to Accelerate Growth
VCSEL The era of low cost Laser Technology VCSEL s are High performance Low cost Lasers that are transforming : Sensing Communications Consumer Industrial
VCSEL The Applications VCSEL chip 3D Sensing LIDAR VCSEL Data centres epiwafer Industrial Heating Cosmetic Printing Magnetic storage
VCSEL The Advantages & IQE s Positioning Manufacturability, on-wafer fabrication and test, LED like low cost Mass production already transitioned to 4 (IQE Global leadership) Qualified on 6 GaAs, leverages existing wireless fabs and economies of scale (IQE First to market) Price point enables new markets for lasers, a new platform (IQE leadership) High direct modulation speed Datacom applications (IQE in production) Low power consumption Power efficiency (datacentre) and mobile platforms (IQE in production) Highly reliable Array fabrication on wafer High power applications, 3D sensing (IQE in production) Beam properties Ease of packaging at low cost high volume consumer applications
DFB - full service wafers for FTTX DFB laser = Distributed Feed Back Laser Critical for fibre optic communications Fibre to the premises (FTTX) Data Centre Core network DFB wafers : Base + grating + overgrowth IQE historically provided Base epi only Overgrowth Grating We have developed a disruptive technology for grating: NIL Nano Imprint Lithography High perform (flexible), high throughput and low cost Multiple qualifications for full service wafers (2-3x value add) Base XX X X X X X X X X X X X X X X X X X X X X X X X X XXX Grating viewed by Scanning Electron Microscope
GaN for RF Applications Gallium Nitride (GaN) has multiple, rapidly growing RF application areas IQE has world leading technology for both GaN on Silicon Carbide (SiC) and GaN on Silicon Strong engagement with most major industry players Strong growth Military Base Stations RF Energy Radar
Mid Term Drivers to Accelerate Growth
Wireless filters (creo) $15.0b Mobile Device RF TAM ~15% CAGR Typical 2G Typical 3G Regional LTE Global LTE $12.5b $10.0b $7.5b $5.0b $2.5b $0.0b 2013 2014 2015 2016 2017 Filter Content $0.25 $1.25 $4.00 $7.25 Switching / Tuning $0.00 $0.25 $1.50 $2.25 Power Amplifiers $0.30 $1.25 $2.00 $3.25 Other $0.00 $0.00 $0.50 $0.50 Potential routes to access using creo TM technology Total RF content $0.55 $2.75 $8.00 $13.25 +
Markets & Industry Challenges for Next Generation Wireless Parameter Limiter Reason IQE Potential Solution IQE Capab ility Power Added Efficiency (PAE) Offset voltage Fundamental to current materials solutions Alternate collector Dilute nitride base PA Cutoff frequency Fundamental limit of GaAs HBT InP-based HBT GaAs-based PHEMT Frequency Filter Frequency Fundamental requirement for thin piezo-electric layers Novel epi-solution (AlN) Device Size Chip Size Fundamental limit of feature size Novel integrated device stack Proprietary and Confidential
Output Power (VA) Compound semiconductors for Power, RF and Lighting 10M SiC Power inverters High Power 1M 100K EV/HEV GaN High Speed 10K 1K Silicon Power Inverters 100 Micro Inverters PC (DC-DC) 10 10 100 1K 10K 100K 1M 10M Operating frequency (Hz) Data Centre
Applications for IQE Solar Technology High efficiency solar cells 44% efficiency (Silicon ~18%) Power Generation Markets Satellites LEO s Drones Terrestrial
Mass market advanced InfraRed The Infrared (IR) business unit specialises in the manufacture of compound semiconductor substrates and epitaxial wafers that are used in longer wavelength infrared imaging, sensing and emitter product applications Medical Security Defense Environmental Non Invasive Glucose Monitoring Border Control Infrared Homing/Seeking
Longer Term Drivers to Accelerate Growth
Broader adoption of Hybrid CS-on-Si for multi markets Founded in the 1980 s IQE is one of the pioneers of compound semiconductors materials technology. IQE has been at the cutting edge of the industry for several decades working with the brightest and best IQE has built a powerful portfolio of IP geared to combining different material systems This is ultimately geared to combining compound semiconductor with Silicon for the highest levels of performance at the lowest cost crystalline Rare Earth Oxide (creo ) provides a powerful and flexible technology which provides a clear route to meet this ambition The transition will happen application by application, increasing IQE s addressable markets for many years to come. creo Approach creo interface layer Standard III-V epi Epitaxial layers Epitaxial layers
Summary The CS Industry is moving through an Inflection Point IQE has geared its strategy and evolution to capture this opportunity At the heart of its strategy IQE s IP portfolio is a key differentiator This is supported by a flexible and cost effective route to scaling the business This has translated into market leadership for IQE, with a sound Basecase for continuing growth However, the breadth and depth of IQE s engagement in a broad range of near, mid and long term opportunities provide strong upside to the Basecase The start of the VCSEL ramp in H1 provides a key milestone on this journey
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