IQE has now released its final results for the year ended 2015.
Revenues increased when compared to last year as a £9.6M decline in Wireless revenue and a £398K fall in IR revenue was more than offset by a £3.5M growth in Photonic revenue, a £515K increase in CMOS++ revenue and the first licensing revenues, which came to £8M this year. Depreciation fell by £398K and other cost of sales were down £2.2M to give a gross profit £4.7M above that of last year. We then see a £2.5M positive swing relating to other income and expenses due to this year’s gain on the reduction of the estimated remaining balance of contingent consideration payable, and no onerous lease provisions that occurred last year, offset by a £1.1M increase in amortisation and a £4.8M growth in other selling and admin costs.
There were a raft of improvements from non-underlying costs, including a £5.9M reduction in impairments, a £6.7M fall in onerous lease provisions, a £4.6M decline in restructuring costs and a £5.2M profit on the disposal of property, plant and equipment relating to the contribution of equipment to the joint venture in Cardiff which was a non-cash item, partially offset by a £9.1M fall in the gain on the release of contingent consideration to give an operating profit some £14M above that of 2014. Finance costs were down modestly but there was a £4M positive swing to a tax rebate this year after last year included a tax charge on exceptional items that meant the profit for the year came in at £19.9M, a growth of £18.2M year on year.
When compared to the end point of last year, total assets increased by £13.8M, driven by an £8M financial asset, a £4.8M growth in intangible assets, a £2.9M increase in inventories and a £1.9M growth in deferred tax assets, partially offset by a £1.4M decline in property, plant and equipment, a £1.4M fall in receivables and a £940K decrease in cash. Total liabilities fell during the year as an £8.1M decline in bank borrowings, a £14.9M fall in the deferred consideration and a £1.4M decrease in onerous lease provisions was partially offset by a £43.7M increase in payables. The end result is a net tangible asset level of £61.2M, a growth of £21.1M year on year.
Before movements in working capital, cash profits increased by £9.1M to £23.3M. There was a modest cash outflow form working capital but there was a £1.7M negative swing to a tax payment which meant that the net cash from operations came in at £19.1M, a growth of £4.4M year on year. The group then spent £5M on development expenditure, £1.2M on other intangible assets and £3.8M on property, plant and equipment, which remains towards the lower end of the normal expected levels of maintenance capex, to give a free cash flow of £9.1M. This was used to pay back a net £10.8M of borrowings which meant that the cash outflow for the year was £1.1M and the cash level at the year-end was £4.6M.
The adjusted operating profit in the Wireless division was £7.2M, a decline of £8.7M year on year. The reduction in wireless revenues reflects the well-publicised slowdown in the smartphone market during the second half of the year which was exacerbated by inventory adjustments through the supply chain. Device and systems architectures continue to evolve, and several programmes have the potential to increase compound semiconductor content further. In addition, work is underway to address the requirements of 5G, which because of the higher frequencies is highly likely to require even more compound semiconductor content.
In the short term, the board expect this market for wireless materials to grow at a rate of about 5% and the group’s business is underpinned by a major contract win of $55M announced this January and recent market share gains following new product qualifications. They anticipate significant upside potential to this growth in the medium term due to innovation in smartphone hardware, including the adoption of advanced photonics sensors; the adoption of GaN on Silicon technology for base stations; the transition to 5G communications, which will require more advanced materials; and the adoption of compound semiconductors using cREO for other wireless communication chips.
The adjusted operating profit in the Photonics division was £4.3M, a growth of £2.5M when compared to last year. There are two technologies which are driving rapid growth in this market for the group. VCSEL is the key enabling technology behind a number of high growth photonics markets including data communications, data centres, sensing applications, gesture recognition, health, cosmetics, illuminating and heating applications with the group being the market leader for outsourced VCSEL materials. In addition, with its 6” wafer capability, IQE has been successful at enabling its customers to reduce significantly the unit cost of chips which is accelerating the adoption of this technology.
The other technology driving growth in this market is Indium Phosphide for fibre in the premises. The group’s roots lie in photonics and advanced laser technology for fibre optic communications. The continued development of this technology to achieve higher performance at lower costs, plus the growth in data traffic is finally leading to extension of the fibre optic network to the premises. By way of example, China has committed to delivering fibre to 100M premises, which alone represents an estimated materials market of $200M. The group is introducing advanced laser technologies to the marketplace during 2016 to address the specific needs of this marketplace, with differentiated IP, in order to secure a leading supply position to the world’s leading supply position to the world’s leading chip companies in this space. In light of these drivers, the board expect this market to continue to achieve strong double digit growth.
The adjusted operating profit in the Infra-red division was £1.2M, an increase of just 37K when compared to 2014. The group is a global leader in the supply of indium antimonide and gallium antimonide wafers for advanced infrared applications. They are technology leader with the launch of the industry’s first 150mm indium antimonide wafers, a major milestone in reducing the overall cost of chips to drive increasing adoption. This success was followed up with a number of significant contract wins for the division. In addition there has been significant work in developing these materials for consumer sensing applications which will drive much higher volumes of wafers in the future.
The board expect this market to growth at a rate of about 5-10% for the near future. There is an element of lumpiness in IR sales reflecting an element of product development revenues, but 2016 has started well, with a contract win of $3.7M.
The adjusted operating loss from the CMOS++ division was £1.7M, an increase of £509K year on year. The group has developed multiple routes to delivering this powerful new hybrid. They are involved in multiple programmes across the globe, which are developing the core technologies from which they expect highly significant revenue streams to emerge over the next three to five years.
In Advanced Solar, there is technology known as Concentrating Photovoltaics or CPV that can already deliver efficiencies of over 44% and has a route map to much higher levels of efficiency. Although this offers a lower overall cost of energy generation in sunny territories, the challenge in mass adoption is in reducing the end system install costs, which has been hampered by global macroeconomics as the cost of oil has fallen.
The terrestrial market remains an exciting market opportunity, but as a result of the shifting macroeconomics, focus has shifted to the space market, where these advanced materials are used to power satellites where the higher efficiency has a dramatic cost benefit on payload. Product qualification is underway with a leading satellite manufacturer, paving the way for increasing production revenues in 2017 from this sector of the market.
In the Power market, the group has continued to push the technology boundaries and is making rapid progress both technically and in developing commercial relationships in the supply chain. The power switching market alone is about three to four times the size of the current market for wireless PA chip market, and represented a major growth market for the group. Qualifications with multiple end users are underway, in addition to continued technology development, enabled by cREO and other in house IP.
This year the group made its first profit license income from sales to joint ventures which brought in £8M this year. The license income was earned from licenses to joint ventures, of which the group controls 50% of the share capital. The license revenue earned by the group reflects only its share of the gross income and is stated after the elimination of unrealised gains. The license fees this year were primarily upfront fees but there is also a recurring element. The group is also exploring further opportunities to license IP to third parties. By its nature this income is inherently lumpy and in Q1 2016 the group has earned further upfront license income with joint ventures of about £2M.
In July the group established a joint venture with Cardiff University to develop and commercialise compound semiconductor technologies in Europe. To establish the joint venture, the group contributed equipment with a market value of £12M which was matched by a £12M cash contribution from the University. This created a non-cash gain of £4.8M reflecting the group’s share of the difference between the book value and market value of the equipment contributed.
In March the group entered into a joint venture agreement with WIN Semiconductors and Nangyang Technological University to create the Compound Semiconductor Development Centre in Singapore. This is a centre in Asia for the development and commercialisation of advanced semiconductor products.
It is worth noting that the group still has sufficient tax losses available to shield future tax payable of about £37.5M.
Going forward, the board expect a return to growth in Wireless, accelerated growth in Photonics, increasing contributions from Power and Solar, and continuing leverage of the IP through licensing, new product development and introductions. They have had a good start to 2016 and are trading in line with expectations. The board believe that they remain on track to achieve their expectations for the full year.
At the year-end, net debt stands at £23.2M compared to £31.3M at the end of last year. At the current share price the shares have a PE ratio of 10 which falls to just 7.8 on next year’s forecast. The board are not recommending the payment of a final dividend.
Overall then, this has been a decent year for the group. Profits were up, boosted by the gain on property contributed to the joint venture in Cardiff, although underlying profits were up too as the license revenue started to come through. Net assets also increased and operating cash flow grew with a decent amount of free cash being generated, boosted by the license income. The Wireless division is still the most profitable business, but profits more than halved this year due to the slowdown in the smartphone market. The photonics division is the second most important, an in contrast to the Wireless division, profits here more than doubled. IR profits were flat but losses in the CMOS++ division grew.
The Cardiff joint venture seems to be a good move – the group has managed to stump up some equipment whilst Cardiff uni contributes hard cash and the license sales to the joint venture has been a useful addition to revenues this year. Going forward, revenue from licenses is expected to reduce but revenues from wireless products are expected to resume growth and photonics revenue is expected to continue growing. The debt is falling here, although it still remains towards the top end of what I am comfortable with and despite the clear risks, the forward PE of 7.8 looks a bit cheap to me and I have made a small initial purchase here.
On the 19th April the group announced that it had received record volume purchase orders worth just over $3M, to be delivered over the next year, for its indium antimonide and gallium antimonide substrate materials. The orders are from three long term customers if the IR business and are for various specifications of material including large diameter products that are used to fabricate state of the art IR detector products.
On the 23rd June the group announced that at the AGM, resolution 2 to receive the remuneration report only received a paltry 31% of votes in favour and was therefore not passed. They have also announced that the senior independent director, David Grant, has been appointed chairman of the remuneration committee to ensure executive remuneration is aligned with shareholder objectives and in accordance with good market practice. In addition, non-executive chairman Dr. Ainsworth and non-exec Professor Gibson will be standing down after spending more than nine years on the board.
This is rather embarrassing but at least they seem to be addressing the problem.
On the 20th July the group released a trading update covering the first half of the year. They expect to deliver a significant increase in revenues and profits compared with the first half of 2015 and they continue to reduce their balance sheet leverage.
Sales in the period are expected to be at least 15% higher than in H1 2015 with the group seeing an increasing diversification of revenues. Photonics continues to grow rapidly and is expected to deliver a double digit rate of growth. It is expected that the photonics market will continue its rapid growth over the coming years as Vertical Cavity Lasers and Indium Phosphide Lasers are increasingly adopted for a wide range of applications including consumer products, fibre optic communications, data centres and industrial processes. License income from joint ventures is expected to be about £3.5M with both businesses making good progress. Wireless and IR sales are expected to show a slight increase.
The depreciation of sterling against the US dollar following the Brexit vote occurred shortly before the end of the period so the impact on trading was limited. The impact on the balance sheet, however, was more pronounced with an increase in both assets and liabilities. Despite this, the group has continued to reduce leverage and deferred consideration will be completely eliminated by September. Other than the impact of currency fluctuations, the board do not see any material impact from the Brexit vote on their business and they remain on track to achieve full year excpectations.