REG-IQE plc : Response to ShadowFall report <Origin Href="QuoteRef">IQE.L</Origin>

IqeAnnouncement

05/02/2018 07:05

  
5 February 2018
   
IQE plc
("IQE" or the "Company")
   
Response to ShadowFall report
   
IQE plc (AIM: IQE) notes the report published by ShadowFall Capital & Research LLP ("ShadowFall"), which was disseminated to the public on 2 February 2018.
  
The allegations contained within the report are without merit and provide a misleading analysis of the Company's financial position. The central thesis of this report is a fundamental misrepresentation of the profit and cash generation of IQE, especially with respect to the Company's joint venture agreements. 
  
IQE would like to directly address the key themes in the report, correct any misinformation that might arise from the report's inaccuracies and assure shareholders that IQE holds itself to the highest standards of corporate governance, transparency and integrity.
  
It is also important to note that ShadowFall states that it holds a short position in IQE and so will duly profit from any near-term reduction in IQE's share price, caused by the allegations in the report. ShadowFall made no attempt to review its report with IQE prior to its publication. 
  
The purpose of IQE's joint ventures
The joint ventures in Singapore and Cardiff form an important part of IQE's strategy to be at the leading edge of compound semiconductor innovation, through collaboration with leading universities and supply chain partners. 
   
These joint ventures have independent third-party shareholders and are governed by standalone boards, separate management teams and joint venture agreements that establish governance procedures and decision making. As a member of the joint ventures, IQE participates in these boards, but does not have control. These joint ventures are independently audited. 
  
The creation of the joint venture in Cardiff was the first cornerstone entity in the development of a globally recognised UK compound semiconductor cluster (CS Connected), which is seeking to create and sustain over 2,000 high skilled, well paid manufacturing jobs for the local and UK economy. This is already making a significant impact in the local economy, including saving 500 jobs in Newport Wafer Fab Ltd, which had been scheduled for closure by its previous owner, the creation of a UK Government funded Compound Semiconductor Applications Catapult, and a number of major technology development programmes between Cardiff University, the joint venture, IQE and a number of major OEMs in South Wales. 
  
Transactions with joint ventures
IQE's trade with these joint ventures is clearly reported in the notes to its annual reports and financial statements. The nature of this trade is IQE sub-contracting certain external customer contracts through these joint ventures. By acting as an anchor customer, IQE is providing the joint ventures with initial business to limit their start up losses in their early years of operation. 
   
By agreement with its joint venture partners, these transactions are undertaken at cost, and hence this does not impact IQE's cost of production or increase its profits. The joint ventures have subsequently been successful with new business wins, some of which have been contracted directly with new customers in 2017 with no direct involvement of IQE. 
  
License income from IQE intellectual property
License income from joint ventures has been reported in detail by the Company in regulatory announcements and in its annual reports and financial statements. In these reports, IQE has made it clear that license income from joint ventures was front-loaded, reflecting the creation of their initial capability to serve commercial contracts. As noted in its most recent trading update, IQE's license income from joint ventures will be less than 2 million in 2017. 
   
Profit & loss of joint ventures 
The only profits that IQE has earned from the joint ventures is a book profit on the initial contribution on fixed assets in the setup of the Cardiff joint venture, and through the licensing of its intellectual property to both joint ventures.
   
In the case of the Cardiff joint venture (CSC), the consideration for intellectual property licensing has been a combination of cash and receivable long-term loans. Both sources of consideration have been clearly stated in IQE's annual reports and financial statements. The revenue that the joint venture generates from IQE meets the cash cost of the joint venture's operation, at no financial gain or loss to IQE. The EBITDA loss of the joint venture in 2016 was 0.7 million, representing the cost of its own management, business development, and administration. The joint venture also has non-cash charges for amortisation of its intellectual property license and a depreciation of assets which gives a net loss of 4.4 million. This has been detailed in IQE's annual reports & financial statements. The ShadowFall report implies that IQE has used the joint venture to "hide" costs of IQE's own business, which is inaccurate.
  
In the case of the Singapore joint venture (CSDC), to support this business through its start up years, IQE has licensed intellectual property and leased surplus Molecular Beam Epitaxy ("MBE") capacity to the joint venture on a contingent basis, namely these charges only become payable by the joint venture to IQE to the extent that the joint venture generates surplus cash in each year. As required by International Financial Reporting Standards ("IFRS"), the joint venture fully reflects these costs in its own accounts, whereas IQE only accounts for this as income when it has been received in cash. Excluding these contingent charges, the Singapore joint venture generated cash of approximately 2 million from its operations in 2016, and hence paid approximately 2 million of license income to IQE in that year. 
  
Asset valuation
In order to reduce overall set up costs, IQE contributed certain fixed assets to the Cardiff joint venture in return for its equity stake. This was undertaken at market value, as determined by an independent professional valuer mutually agreed by the joint venture partners. Cardiff University match funded this value in cash in return for its equity stake in the joint venture. Similarly, the valuation of the intellectual property was validated by an independent accounting firm in a report to the joint venture board.
   
EBITDA and free cash generation
The difference between IQE's EBITDA and its free cash generation can be readily identified from IQE's annual reports and financial statements, namely (a) investment in R&D and capital expenditure and (b) an acquisition in 2012 which was paid for through an earnout, as detailed below.
   
In 2012, IQE acquired the MBE epi-wafer manufacturing unit of RF Micro Devices ("RFMD"), with the acquisition consideration being settled through a trade discount on sales by IQE to RFMD for a fixed period of 4 years. In accordance with IFRS, this discount was classified as part of working capital. This was described in the Company's annual reports and financial statements and detailed in the notes to the cash flow statement. Had the Company financed this acquisition through debt or equity finance, the payment to acquire this business would have been excluded from the calculation of the free cash generation. As previously reported, this discount period ended in 2016. IQE now fully owns the acquired facility in North Carolina (original cost $110 million) and RFMD (now Qorvo) remains a key customer for IQE. 
  
Outlook
As stated in the Company's pre-close statement on 20 December 2017, the Company re-iterates that it expects full year revenue to be ahead of market expectations, and to be not less than 150 million for the year ending 31 December 2017. Wafer sales are on track to deliver strong double-digit growth in 2017 and to continue to diversify, while annual growth in Photonics is also expected to achieve triple-digit growth. The Company remains confident in its outlook for 2018 and beyond. The Group is scheduled to report its full year results for 2017 on 20 March 2018, and will provide forward looking guidance at that time.
   
Contacts:
                     
 IQE plc 
Drew Nelson 
Phil Rasmussen 
Chris Meadows

     
 +44 (0) 29 2083 9400 
 Canaccord Genuity
Simon Bridges
Henry Fitzgerald-O'Connor
Richard Andrews

     
 + 44 (0) 20 7523 8000 
 Peel Hunt 
Edward Knight
 Nick Prowting

   
 +44 (0) 20 7418 8900 
 FTI Consulting
Matt Dixon
Rob Mindell
Harry Staight

     
 +44 (0) 20 3727 1000

  
   


This announcement is distributed by Nasdaq Corporate Solutions on behalf of Nasdaq Corporate Solutions clients.
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: IQE plc via Globenewswire