IQE plc 1st Quarter 2000 Results

Dr Drew Nelson, Chairman & CEO commented……. "The Groups results are now beginning to show the fruits of our investments from the IPO as our new capacity starts to come on line, resulting in record revenues for the first quarter of 2000. We are continuing to increase our profitability despite significantly increased investment to further accelerate our capacity expansion plans in order to cope with growing customer demand for our products.

Our successful secondary offering and listing on the LSE, which we completed last week, will not only provide the funds for rapid expansion of our capacity but will also enable greater visibility for the Group and increased liquidity in our shares. We continue to look forward to the future with great confidence."

1ST QUARTER 2000 RESULTS

INTRODUCTION

The Groups products continue to be in very strong demand, driven by the increasing need to expand the Internet infrastructure via higher capacity and faster optical fibre data links and to provide increasingly sophisticated mobile communications systems. In addition, many other applications of compound semiconductor devices continue to grow rapidly.

As previously indicated, we are accelerating our capacity expansion programme to cope with the increasing demand for epitaxial wafers and our successful secondary offering will allow us to establish a much greater capacity for manufacturing wafers in a highly cost effective manner over the coming twelve months. Important milestones achieved during the quarter included establishing full production of 6" wafers on the first of the new generation multiwafer 6" MBE equipment in Bethlehem, and successfully developing a high quality HBT production technology for both AlGaAs and GaInP products on the new AIX 2600 multiwafer MOCVD reactors in Cardiff. These products are now in qualification with a significant number of customers around the world.

Results for Q1 2000.

Q1 sales reached their highest ever quarterly level of £6.351m, an increase of 40% over Q1-1999 (£4.535m) and up sequentially by 25.3% on Q4-1999 revenues (£5.068m). Turnover continued to be limited by testing and qualification, but benefited significantly from the increased revenue generated from our new multiwafer MBE (VG150) system which we were able to establish in full production of 6" wafers, which is fully qualified by our customers - the first in the industry. As previously indicated gross margin was impacted by continued testing and qualification and by increased investment costs associated with building our infrastructure and staffing ahead of further acceleration of our expansion plans. Nonetheless gross profit increased 29% to £2.039m compared with Q1-1999 (£1.576m), although gross margin was reduced to 32.1% from 34.8% for the same period last year. SG&A costs were reduced as a percentage of revenue to 16.8% from 18.8% for Q1-2000 compared with Q1-1999. Increased R&D costs associated with the successful HBT product development limited the pre-exceptional operating profit increase to £0.423m, still up by 12% from Q1-1999 (£0.378m). Net profits before taxes and exceptional costs rose to £0.373m, an increase of 70% compared with the same period last year (Q1-1999:£0.220m). Pre-exceptional post tax profits increased to £0.269m (Q1-1999:£0.190m) resulting in earnings of 1.98 pence per share for the quarter compared with 1.41 pence for the same quarter in 1999. Including exceptionals, post tax profits increased by 77% to £0.230m from £0.130m in Q1-1999.

Overview

The 1st quarter of 2000 saw several more major milestones achieved and continued strong demand for our products, particularly those used in optical fibre communication systems which provide increased capacity for Internet infrastructure systems and those used to support rapidly increasing growth in the mobile telephony marketplace.

We successfully established in full production our new multiwafer 6" MBE system (VG150) in Bethlehem with our three largest electronics customers, enabling us to substantially increase our Q1 revenues. As this is the first of a new generation of large capacity MBE systems, the risk associated with its operation has now been eliminated and we have established a commanding time lead over our competitors. We have several further large capacity MBE systems arriving over the next four months, to cope with customer demand and additional design improvements based on our experiences to date are being incorporated into the new systems, which will include full automation.

We have also been successful in establishing a powerful HBT technology for both the AlGaAs and GaInP products on the new generation AIX2600 MOCVD platform in Cardiff, and device results achieved to date are highly encouraging. These products for the mobile telephony and optical fibre communication systems are currently in qualification with a significant number of customers around the world. We will receive several more of these large capacity MOCVD systems over the next twelve months which will be used for a variety of products, including Vertical Cavity Surface Emitting Lasers (VCSELs) for which there is a rapidly growing market in local area optical fibre networks. IQE is currently the leading provider of these complex wafers to the industry.

The development of our large scale multiwafer 4" and 6" technology for both HBT and PHEMT is particularly relevant since the electronics part of the Compound Semiconductor Industry is moving rapidly to 6" wafer processing, with some customers now in production with 6" wafer technology. Almost all of the major companies in the sector have now announced their plans to move to 6" wafers, confirming the timeliness of our strategy to invest heavily in large scale 6" epitaxy equipment, which we announced last September.

Capital expenditure, including deposits on new equipment in the quarter was £4.154m, ahead of our original intentions and reflecting the significant acceleration in our capex plans which are aimed at bringing forward our capacity increase to cope with rising customer demands.

Trading Prospects

The markets for our products are continuing to grow rapidly, with demand especially strong in the materials for Internet infrastructure projects such as Dense Wavelength Division Multiplexing (DWDM) optical fibre systems for long haul and metro networks, short haul optical fibre links and mobile telephony systems. Almost all the major companies in the electronics sector have announced plans to move to 6" wafer processing, as anticipated by IQE last September, strongly supporting the rapid growth strategy adopted by the Group. In addition the installation at IQE s sites of the new generation reactors, which are also much more cost effective at producing 4" wafers compared to existing technology, has presented the Group with the opportunity to supply traditionally fully captive manufacturing facilities with a more cost effective alternative than fully re-equipping their plants with new generation reactors. This will encourage current "captive" manufacturers to reappraise their in-house strategy, faced with the prospect of having to replace a significant amount of their current manufacturing equipment.

As a result of this acceleration in our plans, we announced a primary fund raising of £37m (US $56m) and a move to the techMARK index of the LSE. This was highly successful, with the share subscription being four times oversubscribed in a very difficult and volatile market. The funds raised for the Group will be used to execute our ambitious expansion plan, which will give IQE a significant advantage over its competitors in providing a comprehensive and cost effective epitaxial wafer foundry service to the worldwide compound semiconductor industry.

Overall, the rapidly growing demand and ever increasing range and size of applications for compound semiconductor wafers, represents a unique opportunity for IQE to establish itself as the first choice supplier globally for outsource epi-wafer supply, particularly as we have the financial strength to execute our plans. We expect our revenues will grow strongly as new reactors capacity is brought on line during the next twelve months, and we continue to look forward to the future with great confidence.

Contact:
Drew Nelson, Chairman & CEO
IQE
Tel: (029) 20 839400
Or
Tom Hierl, Chief Technical Officer
IQE
Tel: (+1) 610 861 6930
Or
Tim Thompson / Nicola Cronk
Buchanan Communications
Tel: 020 7466 5000