IQE (LSE:IQE) Q2 2026 Earnings Call

0:00 Hello everyone and thank you for joining us for IQE's entering results. I am proud to be able to present a really strong set of numbers which exceeded our expectations and reflects the new transformed IQE. It's been 133 days since we've announced the conclusion of the strategic review and the investment from Macom and other existing shareholders in April. I am very happy to say that it's been an incredibly busy period since then, defined by some key commercial milestones and the signing of long-term agreements. It's a fundamental change in how we operate as a business.

0:45 I've always been clear that one of the things I wanted to achieve was greater visibility of orders and revenues, and that's what these agreements are building towards. So as well as the multi-year agreements with Macom, we've also signed a multi-year Indian Phosphate Agreement with Tower Semiconductor, a $14 million production order with an AI and data center customer. And just last week, we've announced a purchase agreement with Quintessent for Quantum.Epitaxy. These agreements reflect both the increasing demand in the market, especially from AI and data centers, but also how our strength in financial and operational position is enabling us to take advantage of those opportunities to expand our order book and to build visibility for the future.

1:42 Let's take a closer look at the progress IQE has made in first half. This slide gives you a clearer sense of how we play into our high growth end markets. I will not go through every point on the slide, but what I want you to take away from this is two key points. First, we are operating in the biggest and most important markets in the world, and they're all growing rapidly. This is visible to anyone who's been looking at the global semiconductor ecosystem, in particular, the exponential growth of AI and data center related supply chains. Second, we have multiple routes into each of these segments.

2:29 Our range of technologies mean that we can provide different solutions for these high growth sectors and access a broader pool of potential customers. Let me now touch on a few examples to bring this to life. Firstly, looking at IQE in the AI and data center market. As we've previously highlighted, we are seeing high demand for our indium phosphate and gallium arsenide optical interconnect technologies. But layered on top of that are our gallium nitride on silicon micro-3D epitaxy for partners serving hyperscalers for high bandwidth, energy efficient data transfer in AI data centers, as well as gallium nitride on silicon power epitaxy meeting the need for high efficiency power supply units within data center infrastructure.

3:27 I would also like to bring your attention to aerospace RF pipeline with new product qualifications and design wins across terrestrials, satellites, including low earth orbit and defense radar platforms. But at the same time, we've expanded our Gallium Antimonide infrared customer base into new geographies around the world. We take the same approach across all of our markets. Our critical position in these supply chains and our apothecary expertise across a range of material systems is what makes IQE unique and the opportunities for us so compelling. In order to capitalize on the strength of our technology and the market tailwinds, it is vital that our business is operating as effectively as possible.

4:17 And this has always been a key priority for me. I am pleased to say that our focus on efficiency and operational excellence has already led to strong results with improvements in yields and production outputs across all of our sites. In order to build on the strong progress that we've made, Matt Skeen has been appointed as our new Chief Operating Officer. Matt has been with our business for over 35 years and has significant experience in manufacturing and engineering leadership, NT will help us to strengthen operational oversight and drive continuous improvement. A key element of how we've improved our model is related to the high volume of supply agreements that I spoke about earlier.

5:06 As this has provided a strong future order visibility and allowed us to better optimize utilization of all of our assets. That is why I'm pleased to say that in the second half we'll be converting some of our existing tooling to increase capacity to meet the strong demand for Indian phosphate. What you see here is a commercially driven model supported by our ability to scale to meet demand and an efficient approach to operations. All of which is flowing through to our bottom line. With that, I'd like to spend the next few slides walking through the financial performance of the half. I'm really pleased to say that we've delivered first-half revenue of 64.6 million, which is an increase of 43% year-on-year.

6:01 Wireless revenue was 26 million, up 40% year-on-year, reflecting market share gains and increased sales of wireless mobile connectivity solutions across newly qualified customer platforms. On the right hand side, you will see that photonics revenue increased 45% year on year to 38.5 million, driven by funding releases for certain US military and defense programs and continued growth in AI and data center related markets. Overall, I'm happy to see continued growth, not just year on year, but half on half as well. Looking at our key financial highlights, you will see that our strong revenue growth and improved margins flowed through to deliver 6 million of adjusted EBITDA.

6:52 On margins, we saw good improvement driven by better utilization of our manufacturing capacity alongside a more favorable product mix as photonics made up a greater proportion of sales. Our adjusted operating cash flow was impacted by a working capital outflow of 4 million, while our adjusted net cash position was 30.2 million for the period, following the conclusion of the group's strategic review and receipt of fundraising proceeds. Turning to the net cash bridge. This chart highlights how significant the transformation for IQE has been. The conclusion of the strategic review has meant that we have gone from being a heavily leveraged business at the year end to now being completely free of bank debt with a cash position of 41.6 million.

7:50 Overall, we have a fully funded balance sheet underpinned by a strong set of financials as we look ahead into the next phase of growth. What you've seen is that first half was a really impressive performance for IQE. This was thanks to both the strong demand across all of our core segments and the improvements we've made to the business. Following our July trading update where we've upgraded full year guidance, we have seen the strong momentum continue into the second half of the year, which is expected to support growth throughout the remainder of 2026 and beyond. As a result, we are very confident of reaching our upgraded guidance.

8:35 But in line with the way I'm running the business, this outlook reflects a prudent approach. While we are reiterating guidance today, we do also see potential for upside opportunities. Thanks to the rising demand for optical communications for data center and AI infrastructure, which is underpinned by our recently signed supply agreements. I would like to finish by talking about the future of the business and I'm pleased that we've announced our intention to apply for IQE to list on the LSE main market. This is a momentous milestone for the business that has long been an ambition for us and it's a testament to the transformation of the business following the conclusion of the strategic review.

9:22 This move would enable IQE to access a broader range of institutional capital, improve the liquidity of our shares, enhance our investor profile, and support our inclusion in the FTSE indices. We are targeting admission for first half 2027, but of course we'll update you on our progress in due course. To conclude, what does the strategy for the transformed IQE look like? There are three core elements I would like you to take away. Firstly, we are a business that is supplying the highest growth markets in the world with the broadest technology portfolio in the industry, which enables us to have multiple routes into each of these segments.

10:08 Secondly, we have a new level of commercial focus and strategic customer alignment that is delivering long-term agreements and a growing order book. resulting in the strongest demand visibility that IQE has had in recent memory. And thirdly, I've embedded a relentless focus on operational excellence and continuous improvement, allowing our business to run as efficiently as possible for the benefit of our customers. Combined with our transformed financial position, this strategy is driving increasing revenues and margins, providing IQE with a clear path to sustainable growth.

10:54 I am extremely excited about the future and the range of opportunities ahead. Thank you for your time, and I'd be happy to take any questions. Thank you. Ladies and gentlemen, if you would like to ask a question via the conference call, please press star one on your telephone keypad. We will pause for a brief moment. Thank you. We will take our first question from Robert Sanders of Deutsche Bank. Your line is open. Please go ahead.

11:31 Yeah, good morning. Thanks for taking my question. Hi there, everyone. I have a quick question around the if you could just sort of contrast the approach that you've inherited on where you used to have supplier managed inventory with large key accounts, which led to sort of relatively low visibility to the sort of long term agreements that you're now setting up. And is there any chance of receiving upfront prepayments to sort of help to de-risk yourself? Yes, thank you. And thanks, Rob. So the major difference here is really that we've moved completely from a sort of spot order approach to long term agreements. And I think that really is so important because it gives us visibility on the utilization of our assets It gives us visibility on how to better manage really any kind of supply into the sites and really enables us to plan for capacity expansion ahead of time. And absolutely, these kind of long-term agreements, if they do come with the need to increase our capacity, that will come with prepayments to really fund these expansions, which is really important for us because we will also not Is there a scenario where you could receive upfront prepayments, do you think, Jutta?

12:56 Absolutely. And I think the prepayments, if you listen into some of our players in the same ecosystem, a lot of the capacity expansion right now is funded by customer prepayments. And we will utilize the same approach. Is it going to be true prepayments are different. There's different methodologies as well. So it depends. But prepayments are definitely a mechanism for us to fund our growth.

13:23 Great. I have a follow up question just around Quintesson. I'm not that familiar with this area and how ready this company is to enter sort of mass production. Obviously, you've received a volume order. What sort of stage of maturity is this company at or this technology at in terms of actually scaling up in big volumes? Thank you. That's a great question actually for Quintessence themselves I would think, but we've been engaged with them for quite some time already and I think they are ready for volume production and I think the main thing really is that this is going to be the next wave of innovation for data center applications and to increase efficiencies and really again a huge step up for data center technologies in general. I am not, I don't have enough visibility or insight as to how ready they are truly for volume production.

14:15 Okay, thank you very much. I'll get back in the queue. Thanks. Thank you. Thank you. And we will now take our next question from Harvey Robinson of Panmure Liberum. Elijah Serpin, please go ahead.

14:28 Thank you. I think probably following on from Robert's question, just on LTAs. What would good look like in terms of more agreements? Obviously, you've been pretty successful so far. I mean, obviously, there's an expectation that you'll continue to sign LTAs. And related to that, obviously, CapEx is pretty light in the first half. Obviously, given where the business is, we all are aware of unutilized space within Newport. What would the conditions be in terms of customer agreements, customer visibility for you to start building out that capacity? Thanks, Harvey. First, on the LTAs. I think, as I've mentioned, the LTAs are extremely important and a cornerstone of our new strategy for the company to really get visibility and to really get clear insights of capacity requirements and capacity needs. So we are working closely with a lot of customers on additional agreements.

15:27 Some of these agreements will come with announcements, others will not. So we will try to add as much transparency on LTAs as we can. But I think that that's really important for us to note is that there is quite a bit in the pipeline right now that we are working on and we are quite excited about. And that secondly then goes to your next question on CapEx and that expansion. As I've mentioned, any kind of capacity expansion will have to come with customer commitments. and agreement so the LTAs are the foundation for the capacity expansion and only with that clarity and with that certainty of that demand will we add more tooling into for example the site in Newport and yes we do still have ample space clean room space to add capacity so this is a huge advantage for us because we can scale up rather quickly compared to others because we already have the infrastructure to house these reactors

16:27 Thank you. That's perfect. Thank you. Thank you. We have no further questions on the line. I will now hand over to Chloe for webcast questions. Thank you. I'll now run through the questions submitted through the webcast. The first one is, it's clear you're taking advantage of the broad portfolio capabilities IQE has to go beyond the Indian phosphide play on AI data center capability. But can you also talk to verticals beyond data center that are material, in particular defense and satcom? Remind us what you do in those domains and how you see the customer portfolio evolving. How much time do I have? I think it's extremely important to really point out IQE's diversified portfolio and I think our current structure of reporting doesn't really do it justice if you just look at wireless and photonics. This is really why we've added the additional dimensions in the presentation to highlight really our sort of Again, diverse footprint, not just on a geopolitical point of view, but also really on a portfolio manner.

17:38 In just AI data, I just want to point out again, data centers is one component of AI, but we are really playing into all spaces of AI from really the rack to the edge. And so data centers is just one component of where we are supporting AI. Onto aerospace and defense, I think it's extremely important to highlight that we've been a very substantial part of the overall military and defense ecosystem in the US already, especially with our infrared sensing technology based on our gallium and tymonite technologies. And we've been a very important partner of the prime companies that are playing in that space. for the communication infrastructure on for example our RF technology where we have radio frequency and power networks we are playing into the B.Sc. B.Sc. B.Sc.

19:01 Thank you. The second question is, please could you remind us how comfortable you feel about the 2026 outlook given the noise around supply shortage? Supply shortage is an extremely important point for us where we have to keep an eye on that. Everybody is quite aware of the fact that there is substrate supply concerns as well as rare earth bottlenecks that are highlighted in each of the calls that you are seeing in the industry. What we are doing here is really ensuring that we are working with the suppliers in each of these segments to mitigate some of the risk and the exposures that we have. But also really the second half outlook already reflects these risks that we are seeing to ensure that we are monitoring that very closely and not over committing to a number that we won't be able to hit.

20:08 How much capex will be needed to convert your machines to meet indium phosphide demand? That's a really good question, but it really depends on the reactor itself. So it's hard to pinpoint the exact amount there, but it's definitely insignificant compared to the cost of a new reactor. The main investment really is mainly the downtime of the tool because you actually take it off for production for a time and that obviously is opportunity costs that are lost. But I think it's still a worthwhile investment. But even with that minimal investment, we are still not converting tools without customer commitments and secure demand on these tools. Where are you with the appointment of a new CFO?

20:57 Very good question. It's an ongoing process. We are really making good progress on that and we will update you in due course. Can you enlighten us on the margin improvements made in H1 and do you have any targets going forward? The main improvements that we've seen in H1 were really driven by our operational efficiencies and with the utilization of the existing assets. I think that is a key thing that we are able to achieve the revenue expansion really with the existing assets. Also additional efforts were driven by yield improvements and activities around really truly re-establishing operational excellence in all of our areas and so we are seeing the results of these efforts that have been put into place over the last 18 months.

21:51 Are there any hopes that IQE can still attract CHIPS funding in the US? That's a really good question. The activities with governments have not just been limited to the US. We are working actively across all regions to ensure that we are taking advantage of programs that have been offered and also potentially looking into funding opportunities for very discreet projects. And there also, we will keep you posted, but I think it's an ongoing activity that we are constantly in touch with the various organizations with. Is there room for IQE to benefit from divestments, i.e. the sale of the factory in Taiwan?

22:37 Is the sale of part of the business still in scope? To take a step back, when we introduced the thought of selling Taiwan, that was driven of the necessity looking at our balance sheet and really the need to fund the existing debt structure. Luckily, we are now in a very transformed situation. There is no need to sell anything right now to Taiwan. We have an extremely healthy balance sheet right now and actually the diverse footprint as such the inclusion of Taiwan enables us really to play into geopolitical situations that we can deliver into all existing markets.

23:23 and really offset some of the constraints that others would be seeing without such a diverse geopolitical footprint. So no, we are not looking into selling anything at the moment and not in the foreseeable future either. What progress, if any, can you report on the Ultra RAM project last reported in the 16th of June 2025 R&S announcement? The Ultra RAMP program is something that showcases our rich R&D pipeline. We are still progressing with that and we will keep you on any kind of volume production in due course. But I think the main thing really is that we keep investing into R&D opportunities and so that we can really take advantage of the next wave of innovation coming our way.

24:24 I noticed at the back end of your release today, as part of the going concern statement, you talk about at least 30% growth in both 2026 and 2027. You are not guiding to 2027 today and the analysts have extrapolated H2 expectations growth into 2027. We understand the prudence. What is the thinking around timing of revising the outlook? Is it more LTAs or is it when you have to? It's a combination of things. I think really the visibility for us with LTAs are really important to have that in place and more of the really the demand security. We also need to work through some of the bottlenecks that I've just described with the indian phosphide, especially indian phosphide substrate constraints that we have.

25:11 So combination of these factors will lead us then to update the market when we can. Could you comment on the competitive environment? Is there any change there? It feels like in some areas you are gaining market share. That's certainly the goal. Gaining market share, the flexibility or the mobility right now that we are seeing in the AI space in the ecosystem, it is something that we are working very closely with all different partners on. And that certainly could result in an additional market share and we'll update the market as soon as we can give you more insights on that. Can you please shed some light on possible revenues and progress related to GaN power and micro LED?

26:05 GaN power, I think we've highlighted that a few years back as the major opportunity within the GaN program itself. I think from a technology perspective, GaN power has shifted to the right, but we are now seeing really significant pickup on that opportunity. MicroLD as part of also the GaN, overall GaN technology application footprint is really gaining more momentum on that and really is surpassing, almost surpassing the GaN power application with various solutions really that we are supporting in the MicroLD space. So I think there is various applications that we are supporting, so it's great to see that pick up and really that momentum in that space. Are you seeing an ability to increase pricing power?

26:55 As you can imagine, our balance sheet in the past has not been truly the best starting point for any negotiations when it comes to customer engagements. However, with our new strategy around LTAs, customer engagement, really the main thing is that we have a strategic partnership with the customers. And a price increase with that is one of the levers that we are pulling, but really the strategic importance of a long term relationship overtakes more of the short term pricing increases. However, I do believe that we are in a much better position really to demand higher pricing, especially for our bespoke solutions. And we will definitely take advantage of that going forward.

27:46 What is the company's strategy in respect to Indian phosphide substrates? We are Indian phosphide substrates, as I've mentioned, and also, as you can see from other publications, when you look at the results from various players in the industry, Indian phosphide substrates are becoming some of the bottlenecks around significant volume increases. Therefore, we are working closely with everybody in the industry and with all partners to ensure that we are locking in volume allocations to secure our demand that we are currently seeing with our customers. However, this is an ongoing activity that we are monitoring very, very closely because this is something that we are seeing as a bottleneck and also as a risk.

28:33 So this is a high item in our list of reviewing that. Do you have a view about what margins should be for IQE in the long term? That's a really good question and we will update our outlook and our sort of targets in any strategy we said that we will provide in 2027. I think it's really important to have the dust settle a bit on our new transformed company and as such we are reviewing our strategy right now putting together a five-year plan and we will then update the market with our newly formed segment reporting as well as then also setting more long-term targets on margins, revenue and growth.

29:32 Thank you very much, Jutta. I think we're going to close the questions there. Thank you. We'll take our next follow-up question from Robert Sanders of Deutsche Bank. Your line is open. Please go ahead.

30:05 Yeah, thanks. Just one quick follow-up question on 6-inch versus 4-inch. It sounds like you have quite a strong capability to convert egg-strong G4 tools to 6-inch for indium phosphide. However, it sounds like the industry is struggling with 6-inch line yields as opposed to epi yields. So if that situation drags on, would you be more happy because four inch substrates are more available? Or would you be kind of unhappy because six inches where you have more of a kind of competitive edge? Thanks. So thanks, Rob. So first of all, just clarify, we are converting technology. So we are converting tools from gallium arsenide, for example, to indium phosphate. That doesn't necessarily come with a dimension conversion.

30:51 So that can still be within four inch, especially since four inch is still the very dominant substrate in the market. Right now, if I look at the overall four inch, the distribution of the indium phosphate substrates right now, three inch Jutta Meier, Mark Furlong, Rodney Pelzel, Amy Barlow, Tom Dale, Howard Williams B.Sc. but it's still something that the maturity needs to be and and also the yield with that obviously needs to improve as you've pointed out so overall we are able to support three four inch and and then going into six inch as well but i think really from a market pull right now we are not seeing truly the the really the demand on six inch yet

31:47 Got it. Can you just contrast the tightness of substrates across those three diameters? That'd be great and then I'll leave you alone. Thanks a lot. It's very, I think that that's very difficult for us to assess right now. I think mainly the, when you look at maturity, which is usually where the volume plays, three inch definitely would be there. But I think four inch is where the market is going to. But it's difficult to say, okay, where exactly the pinch points are. It also depends on really on the on the actual substrate itself, because there's different types of substrates too. So it's multiple dimensions that come into play when you look at the constraints, market constraints of substrates.

32:26 Perfect, thanks a lot Yuzhe. Thank you. Thank you. With no further questions on the line, I'll now hand it back to the management team for closing remarks. Thank you so much. I'm really excited about the future and the range of opportunities ahead. IQE today is well funded with growing revenues and margins and a clear path to sustainable growth. Thanks again for your time today.