IQE Regulatory News (IQE)

28 Mar 2007 07:02

IQE PLC28 March 2007 28 March 2007 IQE plc Revenues and gross profits jump as global wireless position strengthened IQE plc (AIM: IQE, "the Group"), the leading global supplier of advanced waferproducts and wafer services to the semiconductor industry, has announced itsPreliminary Results for the year ended 31 December 2006. FINANCIAL HIGHLIGHTS • Revenues up 55.2% at £32.4m (2005: £20.9m) • Gross profit up £3.3m at £2.5m (2005: loss £0.8m) • EBITDA loss down 45.6% at £2.4m (2005: loss £4.5m) • Operating loss down 30.2% at £4.2m (2005: loss £6.1m) • Net cash outflow from operating activities £4.6m (2005: outflow £5.1m) • Closing year end cash £4.1m (2005: £6.2m) The results for 2005 have been restated for the adoption of FRS 20 whereapplicable. The financial highlights presented above exclude an exceptionalgain in 2006 of £0.3m (2005: gain £1.7m). OPERATIONAL HIGHLIGHTS • Two major acquisitions completed • IQE established as the leading supplier of wafers to the global wireless communications industry, offering a complete range of products for wireless communication devices • Wafer volumes up 67.8% at 250,000 units (2005: 149,000 units) • Excellent prospects for further significant increases in revenues in 2007 Dr Drew Nelson, IQE Chief Executive, commenting on the results said: "2006 has been an exciting year for IQE with the completion of two key strategicacquisitions that significantly increase our global presence and productoffering to the wireless communications industry. "Following the acquisitions, wireless communications products now account forover 75% of our revenues and the Group is now the largest independent wafersupplier to the global wireless market. Our products are key to both current andfuture generations of wireless communications devices including mobile phones,PDAs, GPS, Wifi, WiMAX and laptop PC components. "The mobile handset market continues to be the primary consumer of IQE'sproducts with the handset upgrades being the fastest growing part of the sector.These tend to be higher speed, feature-rich, high-end products that use moreGaAs materials for the added performance and functionality. "During the year we achieved a significant increase in revenues, bringing theGroup closer to achieving sustainable profitability in 2007. We believe thecontinuing growth in the end markets for our products, coupled with ourstrategic positioning in the wireless sector, place the Group in a good positionto continue to grow strongly." Contacts: IQE plc :Drew Nelson, President & Chief Executive Officer +44 (0)29 2083 9400Phillip Rasmussen, Chief Finance OfficerChris Meadows, Investor Relations Executive Noble +44 (0) 20 7763 2200John Llewellyn-Lloyd College Hill :Adrian Duffield/Ben Way +44 (0)20 7457 2020 NOTE TO EDITORS IQE is the leading global supplier of advanced semiconductor wafers, withproducts that cover the whole spectrum of wafer structures, supported by aninnovative outsourced foundry services portfolio that allows the Group toprovide a "one stop shop" for the wafer needs of the world's leadingsemiconductor manufacturers. IQE uses advanced crystal growth technology (epitaxy) to manufacture and supplybespoke semiconductor wafers ("epi-wafers") to the major chip manufacturingcompanies, who then use these wafers to make the chips which form the keycomponents of virtually all high technology systems. IQE is unique in being ableto supply wafers using all of the leading crystal growth technology platforms. IQE's products are found in many leading-edge consumer, communication, computingand industrial applications, including a complete range of wafer products forthe wireless industry, such as mobile handsets and wireless infrastructure,WiFi, WiMAX, base stations, GPS, and satellite communications; opticalcommunications, optical storage (CD, DVD), laser optical mouse, laser printers &photocopiers, thermal imagers, leading-edge medical products, barcode, highefficiency LEDs and a variety of advanced silicon based systems. The manufacturers of these chips are increasingly seeking to outsource waferproduction to specialist foundries such as IQE in order to reduce overall wafercosts and accelerate time to market. IQE also provides bespoke R&D services to deliver customised materials forspecific applications and offers specialist technical staff to manufacture tospecification either at its own facilities or on the customer's own sites. TheGroup is also able to leverage its global purchasing volumes to reduce the costof raw materials. In this way IQE's outsourced services, provide compellingbenefits in terms of flexibility and predictability of cost, therebysignificantly reducing operating risk. IQE employs around 320 people and operates six manufacturing facilities locatedin Cardiff (two) and Milton Keynes in the UK; in Bethlehem, Pennsylvania andSomerset, New Jersey in the USA; and Singapore. The Group also has nine salesoffices located in major economic centres worldwide. PRELIMINARY RESULTS 2006 1. OVERVIEW IQE has firmly established itself as the leading supplier of advanced waferproducts and wafer foundry services to the worldwide semiconductor industry.The Group has a global presence comprising six manufacturing sites worldwide andsales locations in all the major economic regions of the world. Customers include many of the world's largest chip manufacturers who use IQE'swafers to produce advanced chips and integrated circuits for a diverse range ofcurrent and next generation technology applications including all forms ofwireless and satellite communication systems, (including mobile phones, PDAs,GPS, Wifi, WiMAX, laptops and networks), optical communications, optical storage(DVD, CD), industrial, office and medical lasers, imaging systems and solarpower generation. 2. STRATEGY IQE has continued to strengthen its leading position within the rapidly growingwireless communication sector by the acquisition of two companies during thelatter part of 2006. IQE RF in the USA was acquired on 19 August 2006 and MBETechnology in Singapore was acquired on 29 December 2006. The acquisitions in USA and Singapore enhance the Group's strategic positioningin the wireless communications sector, delivering a number of strategicadvantages. These include: • providing customers with a complete range of wireless products forboth current and future generations of high speed mobile internet and wirelesscommunications systems; • providing customers with multi site capabilities in the primarymanufacturing platforms (MBE and MOCVD); • broadening the Group's customer base, and providing greater access tothe Far East markets; • delivering benefits from economies of scale including purchasingpower and research and development efficiencies; • promoting the sharing of best practices and innovation to deliverimproved operating and cost efficiencies; and • providing capacity to meet the expected growth in demand in thewireless communications sector. The Group also continues to make progress in the electronics and opto-electronicmarkets by developing and nurturing strategic partnerships with the key playersin these markets. 3. RESULTS The results include IQE RF LLC which was acquired in August 2006. MBETechnology Pte Ltd was acquired on 29 December 2006 and its trading will beconsolidated from the beginning of 2007 Revenues were £32.4m (2005: £20.9m) including sales from IQE RF of £5.5m (2005:£nil) representing a year on year increase of 55.2%. The average exchange ratefor 2006 was unchanged at USD 1.82/GBP (2005: USD 1.82/GBP). The Group achieved a gross profit of £2.5m (2005: gross loss £0.8m beforeexceptional gain of £1.7m). The improvement in gross margin was driven byincreased revenues and improved efficiencies together with gross margin of £1.2m(2005: £nil) generated by IQE RF since its acquisition. The exceptional gain in2005 of £1.7m related to the write back of a trade accrual which the Directorsno longer considered was required. The Group invested £0.6m (2005: £0.5m) in research and development which wasexpensed during the year and primarily reflects cross-qualification of productsand processes between existing and acquired businesses. SG and A costs, comprising distribution and other administrative expenses, were£5.9m (2005: £4.8m) before an exceptional gain of £0.3m (2005: £nil) includingSG and A costs at IQE RF of £0.3m (2005: £nil). In total, SG and A costsrepresented 18.3% of sales (2005: 23.0%). Goodwill amortisation of £0.2m (2005: £nil) related to IQE RF. The goodwill of£5.9m (2005: £nil) resulting from the acquisition of MBE Technology will beamortised from the beginning of 2007. The EBITDA loss was down 45.6% to £2.4m (2005: EBITDA loss £4.5m) beforeexceptional gains. Pre-tax loss was £4.2m, (2005: loss £4.3m) equivalent to aloss per share of 1.21 pence (2005: loss 1.36 pence). Cash management continues to be a priority for the Group. Working capital,excluding that acquired in IQE RF and MBE Technology, increased during the yearby £2.9m (2005: increase £0.8m) and the increase was primarily driven by theincrease in revenues. The operating cash outflow was £4.6m (2005: outflow£5.1m). Capital expenditure of £1.4m (2005: £0.9m) included the purchase of anadditional reactor at IQE Inc which cost £0.8m (2005: £nil) and was part of alarge outsource contract previously agreed. The Group acquired IQE RF and MBE Technology during the year. The totalpurchase price of the two companies was £16.7m (2005: £nil) including cashacquired in MBE Technology of £1.0m (2005: £nil). The Group made two shareissues to provide funds for the two acquisitions and these, together with otherminor share issues, raised £15.9m (2005: £0.1m) net of costs. Part of the purchase price of the companies included deferred payments of £5.5m(2005: £nil) which fall due to be repaid by January 2009. Loan and leaserepayments during the year totalled £1.8m (2005: £0.9m), resulting in a netincrease in total borrowings at the year end to £10.0m (2005: £5.4m). Grosscash on hand exiting 2006 was £4.1m (2005: £6.2m) and net debt was £5.9m (2005:net funds £0.9m). The Group also has access to overdraft facilities from its UKand Singapore bankers of £3.0m for working capital purposes 4. MARKETS AND OPERATIONS Wireless communications IQE manufactures leading-edge, high efficiency and low power consumption wafersfor Radio Frequency (RF) components used in a wide range of wirelesscommunications devices and systems including mobile handsets, PDAs, WiFi, WiMAX,base stations, satellite communications and personal computers. IQE's wireless communications products comprise high frequency switch components(pHEMTs), power amplifiers (HBTs) and advanced integrated components (BiFETs)for next generation devices. All of these key components can be manufactured atmultiple sites using a choice of Molecular Beam Epitaxy (MBE) or Metal OrganicChemical Vapour Deposition (MOCVD) tools. The mobile handset market is the key driver for IQE's wireless business whichmakes up over 75% of the Group's revenues. A recent industry study has foundthat the upgrade mobile phone market is expected to significantly outstrip the "first-time" handset market during 2007. The study also highlighted that theupgrade market was most likely to be dominated by the high speed, feature-rich,high-end mobile phones that use a higher proportion of GaAs products forincreased performance and functionality. The multi-site production strategy, where identical wafers can be produced on atleast two different locations, offers customers the key benefits of higherproduct yield (less product variation), higher capacity, lower costs anddisaster scenario mitigation. Since the acquisition of the facilities in USA and Singapore, there has been asignificant degree of reallocation and qualification of production facilities tooptimise equipment utilisation and to release resources and capacity. This hasenabled the Group to focus on new products such as BiFETs (integrated switch/power amplifier) where IQE has a significant technological lead. This is arelatively new product offering that is creating very strong interest withvolumes ramping up rapidly due to the significant increases in functionalitythat the BiFET brings to the HBT power amplifier, especially for high speedcommunication systems by integrating additional control components into a singledevice. All of the wireless businesses are performing well and, as volumes ramp upthrough 2007, spare capacity throughout the Group will be increasingly utilised. Optoelectronics IQE manufactures advanced materials with electronic and optical propertiesranging from infra-red, through the visible range and into ultra-violet. Thesematerials are used in a wide range of components from lighting and displays toaudio, video and data storage as well as office, industrial and automotiveapplications and high efficiency solar cells. IQE's optoelectronic materials, which account for approximately 20% of theGroup's revenues, provide the enabling technology for a wide range ofapplications including optical "laser" mouse devices, laser printing and copyingmachines, CD, DVD and HD-DVD readers and writers, and optical-fibrecommunications systems. Optoelectronic materials can be manufactured at multiplesites across a choice of production platforms. Increasing demand for high-efficiency solar cells provide great opportunitiesfor optical and photovoltaic materials over the coming years. Currently, theGroup is making very good progress in developing high efficiency terrestrialsolar cell materials, and is expecting to be in limited pilot production by theend of 2007. Electronics IQE manufactures enhanced properties for silicon based components to improveproduct efficiencies and increase operating frequencies whilst maintaining lowpower consumptions for existing silicon based chip technologies. IQE offers silicon-based epitaxial services to wafer fabrication plantsworldwide, which account for approximately 5% of the Group's revenues. It haswon a number of key outsourcing contracts to provide its core products andepi-wafer services and has established a strong position in strained silicon,which it is further developing as a strained silicon on insulator product (sSOI)which is likely to be a key offering for next generation silicon basedelectronic devices. The significance of this is that increased customer demand for higherperformance electronic devices is prompting chip manufacturers to turn tomaterials solutions to push the limits of standard silicon and epitaxy basedprocesses are the key to enhancing the performance of silicon. The businessunit is rapidly filling capacity, and focussing on adding the higher valueproducts as the production demand for these continues to increase. Substrates IQE also manufactures high-end substrate materials for advanced applicationssuch as infra-red detectors and thermal imaging devices. Some of the substratesare used by other parts of the Group, particularly for optoelectronic products,but the majority of its substrate output is for external customers. 5. CURRENT TRADING OUTLOOK Two major acquisitions and strong market conditions have helped secure IQE'sposition as the leading global player in advanced wafer outsourcing. The primarygrowth driver remains the rapidly increasing demand for wireless mobilecommunications components around the world and the increasingly diverse use ofwireless technologies to satisfy the insatiable demand for higher speed mobilecommunication systems. IQE's strategy has been to develop and acquire a complete range of technologiesand products for this sector and to ensure that customers have cost effectiveaccess to capacity, technology, and dual site manufacturing to help grow theirown businesses. A recent industry study highlighting the rapid growth in demand for high-endmobile handsets that use more GaAs materials for the added performance andfunctionality endorses the Board's strategy to focus on the wireless sector. Also announced today was IQE's success in securing new R&D contracts wortharound $2.4m to add to the current contracts worth over $2.5m, ensuring theGroup stays at the forefront of advanced wafer supply. In common with the rest of the wireless industry, trading for the first twomonths of 2007 has remained flat but orders and production upgrades have pickedup strongly during the last few weeks. The market conditions for IQE's productofferings, coupled with the Group's strong position in the marketplace, providea solid foundation for future growth. The Board remains confident about IQE'sprospects. IQE PLC PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2006 CONSOLIDATED PROFIT AND LOSS ACCOUNT Restated Restated 6 months 6 months 12 months 12 months to to to to 31 Dec 31 Dec 31 Dec 31 Dec 2006 2005 2006 2005 Note3 Note3(All figures GBP000s) Note Unaudited Unaudited Unaudited Unaudited Turnover from Continuing Operations 12,356 11,225 26,948 20,890Turnover from Acquisitions 5,474 0 5,474 0Turnover 17,830 11,225 32,421 20,890Cost of Sales (Including Exceptional Gain) 2/3 (16,657) (9,682) (29,936) (19,905)Gross Profit 1,173 1,543 2,485 985 Gross Profit/(Loss) before Exceptional Gain 1,173 (194) 2,485 (752)Exceptional Gain 2 0 1,737 0 1,737Gross Profit 1,173 1,543 2,485 985Gross Profit % before Exceptional Gain 6.6 (1.7) 7.7 (3.6) Operating Expenses : Distribution Expenses (818) (668) (1,518) (1,538) Administrative Expenses (Including Exceptional Gain) (2,880) (2,094) (4,944) (3,774)Operating Loss from Continuing Operations (3,076) (1,219) (4,526) (4,327)Operating Profit from Acquisitions 550 0 550 0 Operating Loss before Exceptional Gain (2,526) (2,956) (4,231) (6,064)Exceptional Gain 2 0 1,737 255 1,737Operating Loss (2,526) (1,219) (3,976) (4,327)Operating Loss % before Exceptional Gain (14.2) (26.3) (13.1) (29.0) Interest (Paid)/Received (144) (21) (264) 35 Retained Loss for the Period (2,670) (1,240) (4,241) (4,292) Basic Loss Pence per Share 4 (0.69) (0.39) (1.21) (1.36)Diluted Loss Pence per Share 4 (0.69) (0.39) (1.21) (1.36) Administrative Expenses comprise : Research/Development (511) (285) (616) (500) Goodwill Amortisation and Impairment (166) 0 (166) 0 Other Administrative Expenses (Including Exceptional Items) 2/3 (2,204) (1,809) (4,162) (3,274)Administrative Expenses (2,880) (2,094) (4,944) (3,774) Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA)has been calculated as follows : Loss for the Period (2,670) (1,240) (4,241) (4,292) Interest Paid/(Received) 144 21 264 (35) Depreciation of Fixed Assets 935 492 1,617 1,559 Reversal of Impairment of Fixed Assets 0 (1,737) 0 (1,737) Goodwill Amortisation 166 0 166 0EBITDA (1,425) (2,463) (2,194) (4,505) The comparative figures for 2005 have been restated for the adoption of FRS20"Share Based Payment" see Note 3 IQE PLC PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2006 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES AND RECONCILIATION OF MOVEMENT IN 6 months to Restated Restated SHAREHOLDERS' FUNDS 31 Dec 2006 6 months to 12 months to 12 months to 31 31 Dec 2005 31 Dec 2006 Dec 2005 Note3 Note3 (All figures GBP000s) Unaudited Unaudited Unaudited Unaudited CONSOLIDATED STATEMENT OF TOTAL RECOGNISEDGAINS AND LOSSES Loss for the Period (2,670) (1,240) (4,241) (4,292) Currency Translation Differences on Foreign Currency Net Investments (603) 214 (916) 348 Total Recognised Losses Relating to the Period (3,272) (1,026) (5,157) (3,944) RECONCILIATION OF MOVEMENT IN GROUPSHAREHOLDERS' FUNDS Brought Forward Balance 10,660 13,136 12,322 15,891 Share Option Costs Credited to Reserves 330 168 501 309 Shares Issued net of Issue Costs 15,868 44 15,920 66 Foreign Exchange Translation Differences (604) 214 (917) 347 Loss Attributable to Members of the Group (2,670) (1,240) (4,241) (4,292) Closing Balance 23,585 12,322 23,585 12,322 The comparative figures for 2005 have been restated for the adoption of FRS20"Share Based Payment" see Note 3 IQE PLC PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2006 Restated As At As AtCONSOLIDATED BALANCE SHEET 31 Dec 2006 31 Dec 2005 Note3(All figures GBP000s) Unaudited Unaudited Fixed Assets : Intangible Fixed Assets 10,903 0 Tangible Fixed Assets 11,861 8,816 Fixed Assets 22,765 8,816 Current Assets : Stocks 8,580 4,312 Debtors 6,480 3,404 Cash at Bank and in Hand 4,071 6,245 Total Current Assets 19,131 13,961 Creditors - Amounts Falling Due within One Year (10,916) (6,355)Net Current Assets 8,215 7,606 Total Assets less Current Liabilities 30,979 16,422 Creditors - Amounts Falling Due after More than One Year : Deferred Income (160) (199) Long Term Borrowings (7,234) (3,646) Total Creditors - Amounts Falling Due after More than (7,394) (3,845) One Year Provision for Liabilities and Charges 0 (255) Net Assets 23,585 12,322 Capital and Reserves : Called-up Share Capital 4,299 3,163 Share Premium 172,031 157,263 Shares to be Issued 223 209 Investment in Own Shares (12) (13) Merger Reserve (605) (605) Profit and Loss Account (151,835) (147,593) Exchange Rate Reserve (1,375) (460) Other Reserves 859 358 Total Equity Shareholders' Funds 23,585 12,322 The comparative figures for 2005 have been restated for the adoption of FRS20"Share Based Payment" see Note 3 Approved by the Directors of IQE plc on 27 March 2007 IQE PLC PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2006 Restated Restated 6 months 6 months 12 months 12 months to to to toCONSOLIDATED CASH FLOW STATEMENT 31 Dec 31 Dec 31 Dec 31 Dec 2006 2005 2006 2005 Note3 Note3(All figures GBP000s) Unaudited Unaudited Unaudited Unaudited Net Cash Outflow from Operating Activities (1,206) (1,945) (4,640) (5,062) Returns on Investment and Servicing of Finance : Interest (Paid)/Received (144) (21) (264) 35 Capital Expenditure : Payments to Acquire Fixed Assets (453) (570) (1,430) (859) Proceeds from Sale of Fixed Assets 91 0 251 0 Acquisitions : Payments to Acquire Subsidiaries (11,227) 0 (11,227) 0 Cash Acquired upon Acquisition of Subsidiaries 1,023 0 1,023 0 Net Cash Outflow before Management of LiquidResources and Financing (11,916) (2,536) (16,288) (5,886) Management of Liquid Resources (980) 70 3,621 4,207 (12,896) (2,466) (12,667) (1,679)Financing : Issues of Ordinary Share Capital 15,868 44 15,920 66 Loans (Repaid)/Received (1,076) 2,859 (1,806) 2,743 Leases Repaid 0 (50) 0 (601) Net Cash Inflow from Financing 14,792 2,853 14,114 2,208 Increase in Cash 1,897 387 1,447 530 IQE PLC PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2006 RECONCILIATION OF OPERATING LOSS Restated RestatedTO NET CASH OUTFLOW FROM 6 months to 12 months toOPERATING ACTIVITIES 6 months to 31 Dec 2005 12 months to 31 Dec 2005 31 Dec 2006 Note3 31 Dec 2006 Note3(All figures GBP000s) Unaudited Unaudited Unaudited Unaudited Operating Loss (2,526) (1,219) (3,976) (4,327) Depreciation of Fixed Assets 935 492 1,617 1,559Reversal of Impairment of Fixed Assets 0 (1,737) 0 (1,737)Amortisation of Goodwill 166 0 166 0Loss/(Gain) on Sale of Fixed Assets 24 1 (38) 1Movement in Stocks (256) (121) (1,536) (880)Movement in Debtors (361) (16) (1,930) (800)Movement in Creditors 502 506 595 921Government Grants Released (19) (19) (39) (409)Government Grants Received 0 0 0 300Non-Cash Share Option Costs 330 168 501 309 Net Cash Outflow from Operating Activities (1,206) (1,945) (4,640) (5,062) IQE PLC PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2006 Restated RestatedRECONCILIATION OF NET CASH FLOW 6 months to 6 months to 12 months to 12 months toTO MOVEMENT IN NET (DEBT)/FUNDS 31 Dec 2006 31 Dec 2005 31 Dec 2006 31 Dec 2005(All figures GBP000s) Unaudited Unaudited Unaudited Unaudited Increase in Cash 1,897 387 1,447 530 Management of Liquid Resources 980 (70) (3,621) (4,207)New Loans 0 (3,000) 0 (3,000)Loans Repaid 1,077 141 1,807 257Leases Repaid 0 50 0 601 Change in Net Funds/(Debt) Resulting from Cash Flows 3,954 (2,492) (367) (5,819) Loans Acquired as a Result of Deferred Acquisition Considerations (5,456) 0 (5,456) 0Loans/Leases Acquired upon Acquisition of Subsidiaries (1,087) 0 (1,087) 0Movement in Net (Debt)/Funds (2,589) (2,492) (6,910) (5,819) Opening Net (Debt)/Funds (3,426) 3,387 860 6,763Exchange Differences 97 (35) 132 (84) Net (Debt)/Funds (5,918) 860 (5,918) 860 RestatedANALYSIS OF NET (DEBT)/FUNDS As At As At 31 Dec 2006 31 Dec 2005(All figures GBP000s) Unaudited Unaudited Cash at Bank and in Hand 3,085 1,638Cash at Bank Accessible between One and Seven Days 986 4,607 Total Cash at Bank and in Hand 4,071 6,245 Loans Due after more than One Year (7,226) (3,646)Loans Due within One Year (2,731) (1,739)Finance Leases Due after more than One Year (8) 0Finance Leases Due within One Year (24) 0 Total Borrowings (9,989) (5,385) Net (Debt)/Funds (5,918) 860 NOTES TO THE PRELIMINARY ANNOUNCEMENT 1 ACCOUNTING POLICIES Basis of preparation The preliminary financial information has been prepared on the basis of thematerial accounting policies set out in the 2005 Annual Report and Accounts asamended for the adoption of FRS 20 "Share Based Payment" (see Note 3 below).The preliminary financial information was approved by the Board of Directors andAudit Committee on 27 March 2007. The preliminary information set out above does not constitute statutory accountswithin the meaning of the Companies Act 1985. Comparative figures in thefinancial statements for the year ended 31 December 2005, other than as adjustedfor the adoption of FRS 20, have been taken from the Group's audited statutoryaccounts on which PricewaterhouseCoopers LLP expressed an unqualified opinion.The results for the six months to 31 December 2006, 30 June 2006 and 31December 2005 are unaudited. The preliminary results statement will be announced to all shareholders on theLondon Stock Exchange and published on the Group's website on 28 March 2007.Copies will be available to members of the public upon application to theCompany Secretary at Pascal Close, Cypress Drive, St Mellons, Cardiff CF3 0EG. Accounting convention The financial information is prepared under the historical cost convention andin accordance with applicable UK accounting standards, which have been appliedon a consistent basis during the period under review except as detailed in Note3. Basis of consolidation The financial information consolidates the financial statements of the Companyand all of its subsidiaries. The acquisition of IQE RF LLC on 18 August 2006 and MBE Technology Pte Ltd on 29December 2006 have been accounted for under acquisition accounting, wherebythese companies became part of the Group on their respective dates ofacquisition. Goodwill Goodwill is calculated as the excess of the fair value of the acquisitionconsideration over the fair value of the acquired entity's assets andliabilities. Goodwill arising on acquisition of subsidiaries is capitalisedand amortised on a straight line basis over the Directors' estimated usefuleconomic life of the goodwill. This is individually assessed for eachacquisition but does not exceed ten years. Turnover Turnover represents amounts receivable for goods and services provided in thenormal course of business net of value added tax and other sales related taxes.Turnover is recognised on transfer of substantial risks and rewards. Tangible fixed assets Tangible fixed assets are stated at cost less accumulated depreciation andprovision for impairment. Cost comprises all costs that are directlyattributable to bringing the asset into working condition for its intended use,as defined by Financial Reporting Standard Number 15. Depreciation has beencalculated so as to write down the cost of assets to their residual values overthe following estimated useful economic lives. No depreciation is provided on land or assets yet to be brought into use. Freehold buildings 25 yearsShort leasehold improvements 5/27 yearsPlant and machinery 5/15 yearsFixtures and fittings 4/5 years Stocks Stocks are stated at the lower of cost and net realisable value. Research and development Research and development expenditure is fully written off when incurred. NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued) Foreign currencies Transactions in foreign currencies during the period are recorded at the ratesruling at the dates of the transactions. Monetary assets and liabilities inforeign currencies are translated into sterling at the rates ruling at thebalance sheet date. All exchange differences are taken to the profit and lossaccount. The balance sheets of the overseas subsidiaries are translated intosterling at the closing rates of exchange for the period, while the profit andloss accounts are translated into sterling at the average rates of exchange forthe period. The resulting translation differences are taken directly toreserves. Pension costs The Group operates defined contribution pension schemes. Contributions arecharged to the profit and loss account as they become payable in accordance withthe rules of the schemes. Government grants Government grants receivable in connection with expenditure on tangible fixedassets are accounted for as deferred income, which is credited to the profit andloss account by instalments over the expected useful economic life of therelated assets on a basis consistent with the depreciation policy. Revenuegrants for the reimbursement of costs incurred are deducted from the costs towhich they related, in the period in which the costs are incurred. Taxation Current tax, including UK corporation tax and foreign tax, is provided atamounts expected to be paid (or recovered) using the tax rates and laws thathave been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised in respect of all timing differences that haveoriginated but not reversed at the balance sheet date where transactions orevents that result in an obligation to pay more tax in the future or a right topay less tax in the future have occurred at the balance sheet date. Timingdifferences are differences between the Group's taxable profits and its resultsas stated in the financial statements that arise from the inclusion of gains andlosses in tax assessments in periods different from those in which they arerecognised in the financial statements. A net deferred tax asset is regarded as recoverable and therefore recognisedonly when, on the basis of all available evidence, it can be regarded as morelikely than not that there will be suitable taxable profits from which thefuture reversal of the underlying timing differences can be deducted. Deferred tax is measured at the average tax rates that are expected to apply inthe periods in which the timing differences are expected to reverse, based ontax rates and laws that have been enacted or substantively enacted by thebalance sheet date. Deferred tax is measured on a non-discounted basis. Leases Assets held under finance leases and hire purchase contracts are capitalised attheir fair value on inception of the leases and depreciated over the shorter ofthe period of the lease and the estimated useful economic lives of the assets.The finance charges are allocated over the period of the lease in proportion tothe capital amount outstanding and are charged to the profit and loss account.Operating lease rentals are charged to the profit and loss account in equalamounts over the lease term. Provision is made at the balance sheet date forthe present value of future rentals under operating leases on vacatedproperties. Financial instruments The only derivative instruments utilised by the Group are forward exchangecontracts. The Group does not enter into speculative derivative contracts.Forward exchange contracts are used for hedging purposes to alter the riskprofile of an existing underlying exposure of the Group in line with the Group'srisk management policies. Share based payment The Group operates a share option scheme. The fair value of the employeeservices received in exchange for the grant of the options is recognised as anexpense. The total amount to be expensed over the vesting period is determinedby reference to the fair value of the options granted, which is calculated usingthe Black-Scholes option pricing model. NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued) Restated Restated 6 months to 6 months to 12 months to 12 months to 31 Dec 2006 31 Dec 2005 31 Dec 2006 31 Dec 20052 EXCEPTIONAL GAINS Unaudited Unaudited Unaudited Unaudited GBP000s GBP000s GBP000s GBP000s Note3 Note3 Exceptional gains comprise : Credited in cost of sales : Trade accrual 0 (1,737) 0 (1,737) Credited in other administrative costs : Onerous lease provisions 0 0 (255) 0 Exceptional gains 0 (1,737) (255) (1,737) The exceptional credit of £255,000 relates to the onerous lease provision inrespect of a vacant property at IQE (Europe) Limited which has been released tothe profit and loss account as the Group is no longer the tenant. Theexceptional credit in 2005 of £1,737,000 relates to the release of a tradeaccrual which the Directors considered to be no longer required. 3 SHARE BASED PAYMENT The Group has adopted FRS 20 "Share Based Payment" during 2006. The adoptionof this standard represents a change in accounting policy, and the comparativefigures for the six months ended 31 December 2005 and the full year ended 31December 2005 have been restated accordingly. The adoption of FRS 20 has resulted in an increase in employee costs of £330,000during the six months ended 31 December 2006 (six months ended 31 December 2005:£168,000). The impact for the full year is an increase in employee costs of£501,000 (2005: £309,000) The charges recognised under FRS 20 represent the fair value of share optionsawarded by the Group since 7 November 2002 over the estimated vesting periods ofthe respective options. The options have been valued using the Black-Scholesoption-pricing model. Full details of the key assumptions used in this modelwill be included in the Annual Report. Restated Restated 6 months to 6 months to 12 months to 12 months to 31 Dec 2006 31 Dec 2005 31 Dec 2006 31 Dec 20054 LOSS PER SHARE Unaudited Unaudited Unaudited Unaudited Note3 Note3 Loss for the Period GBP000s (2,670) (1,240) (4,241) (4,292) Weighted Average Number of Ordinary 384,932,499 315,976,014 350,729,318 315,976,014 Shares Diluted Share Options 8,593,469 3,580,904 8,593,469 6,919,658 Adjusted Weighted Average Number of 393,525,968 319,556,918 359,322,787 322,895,672 Ordinary Shares Basic Loss Pence per Share (0.69) (0.39) (1.21) (1.36) Diluted Loss Pence per Share (0.69) (0.39) (1.21) (1.36) Basic loss per share is calculated by dividing the loss attributable to ordinaryshareholders by the weighted average number of ordinary shares during theperiod. Diluted loss per share is calculated by adjusting the weighted averagenumber of ordinary shares in issue on the assumption of conversion of alldilutive potential ordinary shares. NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued) FRS 22 requires the presentation of diluted Loss Pence per Share when a companycould be called upon to issue shares that would decrease net profit or increasenet loss per share. For a loss-making company with outstanding share options andwarrants, net loss per share would only be increased by the exercise of the outof the money options and warrants. Since it seems inappropriate to assume thatoption holders would act irrationally, no adjustment has been made to dilutedLoss Pence per Share for out of the money share options and warrants. 5 CONTINGENT LIABILITY The Group received a claim in 2005 for approximately £1 million in respect ofnational insurance contributions in relation to share options that were issuedin 1999. Having sought legal opinion, the Board remains robust in its opinionthat the Group has meritorious defences to this claim. Accordingly, noprovision has been made in the Preliminary Results. 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