IQE Share News (IQE)

* 2017 adjusted pretax profit up 18 pct to 24.3 mln stg

* Unadjusted profit affected by 7 mln stg U.S. tax hit

* Wafer sales up 21 pct, but cash flow turns negative(Adds CEO, analyst comments, shares, context on short-sellers)

By Justin George Varghese and Alasdair Pal

March 20 (Reuters) - Semiconductor component manufacturerIQE Plc, whose technology is used in Apple Inc'siPhone, posted a rise in 2017 adjusted pretax profit onTuesday on strong wafer sales, though a change in U.S. taxpolicy hit unadjusted earnings.

Cardiff-based IQE produces around 80 percent of the globalsupply of outsourced 'epi-wafers', a type of advanced materialused in products from laser hair removal to the 3D-sensingcamera in the latest iPhone X.

However IQE, which has operations in the United States, washit by tax losses in the country thanks to reforms signed byU.S. President Donald Trump late last year, forcing the firm totake a 7 million pound ($9.8 million) tax charge in 2017.

Sales of wafers, which make up most of IQE's revenue, rose21 percent to 152.6 million pounds last year, while the grossmargin on wafer sales climbed to 24.1 percent from 21.8 percentin 2016.

The company said revenue from its photonics business doubledto 47.6 million pounds, and it expected growth of 35-60 percentin the business this year.

IQE, which forecast "continuing strong growth" overall in2018, said adjusted pretax profit rose 18 percent to 24.3million pounds last year.

SHORT-SELLERS

IQE has been facing criticism from Muddy Waters andShadowFall Capital & Research - so-called short-sellers whoposition themselves to gain when share prices fall - overloss-making joint ventures with universities in Cardiff andSingapore they say has boosted IQE's profits.

Paul Morland, an analyst at broker Canaccord Genuity, notedlicensing payments from these joint ventures to IQE fell to 1.9million pounds last year from 6.7 million in 2016,"significantly increasing the quality of earnings".

CEO Drew Nelson told Reuters the joint venture with CardiffUniversity was on track to break even in 2018, while theSingapore one was already profitable after fees paid to IQE.

IQE's free cashflow, another issue raised by short-sellersin February, turned negative, recording an outflow of 6.5million pounds from an inflow of 1.1 million in 2016.

"Their argument would be they are investing in future growthbut it is another year where they haven't generated any cash,"said ShadowFall founder Matthew Earl.

Short positions in IQE disclosed with the UK regulator hit12.4 percent on Jan. 23, among the highest for any UK company,before falling to 8.2 percent on Tuesday.

IQE shares, which have risen more than six-fold sincemid-2016 as investors bet the company would benefit from itswork for Apple, were down 4 percent at 1244 GMT.

($1 = 0.7123 pounds)(Reporting By Justin George Varghese in BENGALURU and AlasdairPal in LONDON; Editing by Gopakumar Warrier and Mark Potter)