IQE plc Unaudited 2Q Interim Results: Record Sales and Profits

Dr Drew Nelson, Chairman & CEO commented : "The Group continues to make significant progress. New production capacity is now being delivered to both our US and UK sites and sales continue to increase as demand for our products continues at a high level. We have made a number of key appointments to enable the Group to effectively manage the large increase in capacity and production output anticipated over the coming quarters. In addition, our successful secondary offering has provided the funds to help us achieve our ambitious goals. We continue to look forward to the future with confidence."

INTRODUCTION

The Group s products continue to be in very strong demand, driven by the continuing communications needs 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.

There were several key achievements during the first half of 2000. As previously indicated, we are in the process of accelerating our capacity expansion programme to cope with the increasing demand for epitaxial wafers. Our successful secondary offering, which raised £43million, will allow us to establish a much greater capacity for manufacturing wafers in a highly cost effective manner over the coming twelve months. As part of the offering process, our shares were listed on the LSE techMARK index. Important operational milestones achieved during the first half included establishing full production of 6" wafers on the first of the new generation multiwafer 6" MBE equipment in Bethlehem, development of high quality HBT technology for both AlGaAs and GaInP products on the new AIX 2600 multiwafer MOCVD platform in Cardiff, and the delivery of additional large scale multiwafer MBE and MOCVD systems which are expected to help boost output from Q4 onwards.

Overview

The 1st half of 2000 saw several 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. In addition, increasing demand for both Vertical Cavity Surface Emitting Lasers (VCSELs) and red lasers for DVD applications has led to the negotiation of important new contracts, which are expected to be concluded soon.

We successfully established in full production our new multiwafer 6" MBE system (VG150) in Bethlehem with three large electronics customers, helping us to substantially increase our first half revenues. We have also taken delivery of two more large capacity MBE systems, albeit several weeks later than originally anticipated due to supplier delays. These are currently undergoing acceptance trials prior to supplying samples for customer qualifications, and are expected to contribute to revenue from Q4 onwards. The new systems include additional design improvements based on our experiences to date, together with full automation. An additional two systems are due for delivery in Q3.

We have also been successful in establishing powerful HBT technologies 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 cycles with a significant number of customers. We have received another Aixtron 2600 system during Q2, with an additional two planned for delivery in Q3. Again these are expected to be contributing to increased revenue from Q4 onwards. In addition to HBT wafer supply, these new systems will be used for both Vertical Cavity Surface Emitting Lasers (VCSELs) for which there is a rapidly growing market in local area optical fibre networks and visible wavelength lasers for DVD and other optical storage systems. IQE is currently the leading provider of these complex wafers to the compound semiconductor industry.

Our secondary offering, completed in May, was very successful, with the share subscription being four times oversubscribed in a difficult and volatile market, raising £43million for investment in new production capacity. The Group also took the opportunity to list its shares on the LSE (techMARK Index) in addition to its existing EASDAQ listing. The funds raised for the Group will be used to execute our 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 world-wide compound semiconductor industry.

Following a Group wide review, we have also finalised on a number of organisational changes in order to ensure the Group is well positioned to execute its ambitious growth plans and we have successfully concluded on a number of important appointments to help strengthen the Group infrastructure. A new MD for the UK operations has been recruited, together with the appointment of COO, Scott Massie, as President for the US operation. The US team has also been strengthened by the recruitment of a new Director of Manufacturing and a new Director of North America Sales. It was also determined that the CFO position needed to be located in the UK. Due to personal circumstances, Mr Al Pastino who recently joined the Group to become CFO, has relinquished that role, since he found he would be unable to spend the necessary time in Europe. A new CFO, to be located in the UK is now under recruitment, with Mr Pastino acting as a consultant to the US operation.

Capital expenditure, including deposits on new equipment in the quarter was £5.886m, 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.

Interim Results for First Half 2000.

First half sales reached their highest ever level of £13.208m, an increase of 41% over first half in 1999 (£9.348m), despite continued capacity constraints ahead of new production systems coming on stream later this year. Turnover 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 36% to £4.380m compared with first half-1999 (£3.232m), although gross margin was reduced to 33% from 35% for the same period last year. SG&A costs were static as a percentage of revenue at 19% for first half-2000 compared with first half-1999, as a result of strong spending on infrastructure to prepare the Group for increasing output later this year and in 2001. R&D spending associated with new product development was also accelerated, rising by 81% to £1.123m compared with £0.621m for the same period in 1999. The increased R&D and SG&A spending limited the operating profit to £0.786m (1999: £0.901m). Net profits before taxes and exceptional costs rose to £0.911m, an increase of 46% compared with the same period last year (1999:£0.623m). Pre-exceptional post tax profits increased to £0.674m (1999:£0.645m). Post tax profits including exceptionals increased by 141% to £0.552m (1999: £0.229m), resulting in earnings of 3.7 pence per share compared with 1.7 pence per share for first half 1999.

Results for Q2 2000

Sales for the second quarter were also a record for the Group, rising by 42% to £6.857m compared with £4.813m for the same quarter in 1999. Gross margin was 34%, similar to the equivalent period last year, resulting in a gross profit of £2.341m (1999: £1.656m), up 41%. R&D costs, at 8.4% of turnover was up 109% compared to the same period last year, reflecting increased expenditure on developing new products on the large scale production platforms. This together with significantly increased SG&A costs in building the Group infrastructure, limited operating profits to £0.279m compared with £0.491m for Q2-1999. Net profit excluding exceptionals increased to £0.538m (Q2-1999 : £0.403m), an increase of 33%. EPS was 2.1 pence per share.

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. In the optoelectronic marketplace, our telecom products have penetrated some of the largest volume customers in the industry and our VCSEL product demand is growing very strongly. In addition we will be dedicating at least one of our new MOCVD reactors exclusively to red lasers for DVD applications, for which we are currently in negotiations for a significant contract. In the electronics sector almost all the major companies have announced plans to move to 6" wafer processing over the coming 12 months, 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. We anticipate that 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. In addition we have secured some important orders for products to be produced on our existing smaller scale reactors, which are currently being gradually converted for these new products.

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. At present our revenues and consequently our results during the current financial year are strongly dependent on a small number of large platform reactors, and therefore susceptible to the timely delivery, run up and qualification of our new reactor capacity. However, as this new capacity is brought on line during the next twelve months we expect our revenues will grow strongly, and we continue to look forward to the future with a high degree of confidence.

PROPOSED SUB-DIVISION OF SHARE CAPITAL

Notice has been published and sent to all shareholders covening an Extraordinary Meeting of the Company to be held at the offices of Eversheds, Senator House, 85 Queen Victoria Street, London, EC4V 4JL at 10 am on 8 September 2000. The ordinary resolution to be proposed at the EGM is that each ordinary share of 10 pence in the Capital of the Company is sub-divided into 10 ordinary shares of 1 pence each. The Board of Directors believe that such a sub-division will enhance the marketability of the shares, increase share liquidity and reduce share price volatility. If the sub-division is approved at the EGM then the record date will be 8 September 2000 with dealings in the new shares commencing on 11 September 2000. The shareholders circular is also available at the Company s registered office, Pascal Close, Cypress Drive, St Mellons, Cardiff, CF3 0EG.

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