Imagination Technologies Group plc: Results for the twelve months to 31 March 2005

May 27, 2005 -- Imagination Technologies Group plc, leading provider of System-on-Chip Intellectual Property (IP), today announces results for the twelve months to 31 March 2005.

Business Update

• Licensing - Imagination’s IP is increasingly central to partners’ roadmaps
  • 8 partnership agreements concluded in the year
    • 4 in mobile phone graphics/multimedia, 3 in TV, and 1 in mobile TV
  • Extensive partnerships include 6 of the top ten semiconductor companies
    • Multi-core and family licenses with Intel, TI and Renesas
    • Graphics IP licenses with Samsung, Freescale, and Philips
    • Expanding platform IP licensing partnerships with Sharp and Frontier Silicon
  • Since year end concluded new licensing partnership with Intel for new generation graphics and video processing IP family
• Royalties - 28 partner chips in development/production, up 40%
  • 7 devices in production, 10 in prototype, 11 in pre-silicon development
  • Solid base for future royalty growth
  • 2.5 million partners’ chips shipped in the year
  • First mobile devices from Intel and Renesas started shipping
    • End user products include NTT DoCoMo handsets from Fujitsu and Mitsubishi and Dell PDA
    • Many further handsets from several top OEMs in the pipe
  • TI, Philips and Samsung demonstrating and sampling customers with mobile phone chips
• 70% market share of DAB digital radio market - 80+ end user products shipping including Sony, Sharp and Philips
  • End-user set-top-box (STB) products using our IP now shipping and we expect digital TV devices to ship by leading manufacturer during first-half 2005/6.
  • Renesas car navigation chip leading the market
    • After-market products from Mitsubishi and Pioneer shipping
    • Expect top-brand cars to ship with factory-fit systems shortly
• PURE Digital – maintains leadership position in the DAB market

Financials

• Group revenue similar to last year’s at £30.6m reflecting timing of licensing closure and impact of exchange rates
  • Technology revenue of £14.1m – underlying growth of 9%
  • Royalty revenues increase to £1.3m (2004: £0.9m); second half growth of 70% compared to first half
  • PURE Digital retains market-leading position for DAB radios
    • Second half revenue up nearly 50% compared to first half reflecting good Christmas sales
• Gross profit increased to £17.6 m (2004: £17.1m), margins up to 58% (2004: 55%)
• Continued investment with £19.2m spend in R&D and capex of £2.5m
• Loss after tax, excluding goodwill amortisation, of £5.5m (2004: £2.2m)
• Cash reserves of £7.7m (2004: £6.5m)

 

Geoff Shingles, Chairman, commented:

“Despite some timing uncertainty in deal closure and in partners’ chip volume ramp-up, this year we made significant progress in securing further key partners and establishing the basis for substantial future market share. As a result we now have much broader and deeper relationships with many of the top players including Intel, TI, Renesas, Sharp and others, where our technology has become a critical component of their products and roadmaps. In addition to digital radio and in-car systems, end-user products including those from Fujitsu, Mitsubishi and Dell have begun shipping in mobile phone/PDA markets. We are supplying IP cores that will be used in the highest volume future consumer electronics products. These trends will continue and accelerate in the coming months increasingly demonstrating our migration to being a major player in the silicon IP business.”

25 May 2005

Operational and Financial Review

Overview

We have continued to make significant and strategic progress in many of the key areas of our activities, particularly in mobile phone, digital radio/audio, TV and mobile TV segments, during the financial year ending 31 March 2005. Although we have suffered from some delays on licence closure, the year has seen the continued adoption and licensing of our key technologies by many of the top players and industry leaders including Intel, TI, Freescale, Sharp and Frontier Silicon. We have also witnessed, though later than expected, the initial volume ramp-up of further partner devices particularly in the mobile phone/PDA space (e.g., Fujitsu and Mitsubishi NTT DoCoMo handsets in Japan, and a Dell PDA), during the latter months of the year.

The quality of committed partners, the strength of engagements, the market position secured and the rapidly growing end-equipment design wins are a strong testimony to the world-class nature and competitiveness of our offerings and a solid foundation for our future growth. PURE Digital has continued to lead the DAB market with innovative and market-driving products while this market has been transitioning to mainstream.

We have maintained a strong R&D focus so that we are able to address key market trends, service our growing world-class partner base, and deliver an industry-leading technology roadmap.

Financial Review

In the year ended 31 March 2005, group revenues were £30.6m, a small decrease on last year (2004: £31.2m). This total comprised technology revenues of £14.1m (2004: £14.0m) and systems revenues of £16.5m (2004: £17.2m).

Overall technology revenues were similar to last year primarily due to timing delays in the closure of licensing business as well as the adverse impact of the dollar exchange rate. After adjusting for exchange rate movements there was underlying revenue growth of 9%. Within technology revenues, royalty revenues for the year increased to £1.3m (2004: £0.9m) based on the shipment of 2.5 million chips incorporating our technology. The second half showed royalty revenue growth of over 70% compared to the first half. We expect this trend to accelerate now as an increasing number of chips are coming to market.

Second half revenues for PURE Digital were nearly 50% up on the first half and increased to £9.8m, based on a strong Christmas period and the launch of a broader range of products. However the tighter market conditions in the first half meant that revenue for the year as a whole was slightly lower than last year.

Gross profit for the year was £17.6m representing a 58% margin on revenues. These show an increase on the corresponding figures for last year of £17.1m and 55%, primarily due to stronger margins on systems revenues resulting from a more favourable exchange rate on product purchases.

Research and development expenses increased by 20% to £19.2m (2004: £16.1m). This higher investment is critical to ensure that our IP development programmes stay on track and that we are able to support our growing customer base. Sales and administrative costs excluding goodwill amortisation of £4.9m (2004: £4.1m) included a bad debt reserve of £0.4m in respect of a smaller licensee. Excluding this one off cost, sales and administrative costs were 11% higher.

The loss after tax, excluding goodwill amortisation, was £5.5m which compares to a loss of £2.2m for last year, reflecting this year’s increased investment in research and development. After goodwill amortisation, the post tax loss was £6.5m (2004: £3.3m). We again benefited from a Research and Development tax credit in the year of £1.1m (2004: £0.8m) which when netted off against tax incurred on overseas earnings resulted in a tax credit of £0.8m (2004: £0.6m) for the year.

The cash spend of £2.5m on capital included £0.8m in respect of a new engineering facility. In the second half, there was a marked decrease in working capital and as a result cash resources at March’05 of £7.7m (March’04: £6.5m) were marginally ahead of the balance at September’04. There was an operating cash outflow of £5.5m (2004: £3.1m) in the year.

The placing of 8.5m shares in June 2004 raised a net amount of £7.0m in order to provide additional working capital and, importantly, demonstrate a strengthened financial position to existing and prospective partners.

Business Update Overview

Technology Business Update

Licensing Progress Update

For the year to 31 March 2005 we concluded eight new licensing agreements with four in the mobile segment, three in TV/Consumer and one in mobile TV. Of these three were concluded in the first half and five during the second half. Many of these agreements are of very significant strategic importance given the partners and markets involved, and include:-

• Freescale (formerly the semiconductor arm of Motorola Inc.) for PowerVR mobile graphics through ARM;
• Texas Instruments’ major licence upgrade to a PowerVR MBX family licence which now extends to the PowerVR MBX Lite core and will bring our entry-level PowerVR technology to high volume segments of the mobile handset market;
• Intel which has very recently extended its agreement for PowerVR MBX and related IP to a family licence which enables wider deployment;
• Frontier Silicon, which has licensed our mobile TV IP platform as a lead partner;
• Sharp’s major licence upgrade across many IP cores as the partnership widens and deepens.

Additionally since the year-end we have concluded an important agreement with Intel involving our new generation graphics and video technology codenamed Eurasia and certain video codec IP.

We continue to have a very active pipeline of negotiations and opportunities in all our key markets, with a number of these at an advanced stage, which we expect to close in the current financial year. Specifically we see strong potential in the following areas:-

• PowerVR mobile graphics/video (MBX family and related cores) - among the potential agreements at an advanced stage are ongoing negotiations with a number of parties including another two top-ten semiconductor companies. Conclusion of the latter two agreements would bring the number of top ten semiconductor companies licensing Imagination’s technology to eight;
• A new family of next generation graphics/video technology (codenamed Eurasia), where we have already secured the number one semiconductor supplier, Intel, as a lead partner. We see real and significant interest in this new technology from many of our existing partners and expect to secure others in the near future;
• For our Ensigma communication and Metagence processor technologies we see mobile TV and TV segments being the key drivers and we are having significant discussions with partners in these segments. The mobile TV market is becoming increasingly important as the cellphone market embraces this new technology. Our unique multi-standard capability offers significant benefits over the competition and is attracting serious interest from many parties.

With this in mind we expect to secure further significant penetration in the mobile phone, mobile TV and TV segments as well as new market areas. We are pleased that during the second half we have made such strong strategic progress in our licensing partnerships, but naturally there is some disappointment that the timing of the closure of some of the deals has meant that the overall value of the licensing business closed in the second half has been impacted.

Royalty Progress Update - Partner SoCs

Across mobile phone, TV, mobile TV, digital radio/audio, car navigation, and amusement market segments, we now have a total of 28 partner SoCs committed, up from 20 at the beginning of the financial year. Of these seven are now in production and shipping. Specifically the number of shipping devices at the beginning of financial year 2004/5 was three rising to five during the early part of the second half. The final two devices have only just entered into production and should begin to contribute to royalty generation from the first half FY2005.

The target markets for the 28 committed partner SoCs are, 14 in mobile phone/PDA, six in STB and TV, two in digital radio, two for car navigation, two in amusement and one for mobile TV segments. These devices constitute a very strong basis for growing future royalty revenue as volume ramps up and more devices enter into production. We expect the number of shipping devices to increase from seven to around 12 by the end of 2005/6 with particular increase in mobile and TV focussed devices.

We have maintained the growth trend and our market share in DAB. Additionally, despite some delays in the launch of handsets based on our IP and based only on a small number of shipping devices, we saw significant shipment during the last three months of the year in this segment from our lead partners. As a result the total number of partner chips exceeded 2.5m units, more than doubling the previous year’s figure.

We expect an exponential growth in volume as more and more of our partners’ products are released to manufacturing and also as the volume for each ramps up over time.

PURE Digital Update

During last year, PURE Digital maintained its leadership of the DAB market through delivering feature-rich advanced products such as: the Bug - the first pause/rewind/record DAB radio; Legato - a CD and MP3 integrated DAB system; and SONUS-1^XT - with advanced voice feedback. These products, which push boundaries with new features such as EPG, and mainstream products like the refreshed EVOKE-1^XT and the lower cost Élan range, have significantly helped to drive market growth. We recently announced that PURE Digital had exceeded the 500,000-unit shipment milestone for digital radios.

PURE Digital’s revenues showed strong progress during the second half, driven by a good Christmas and the launch of a broader range of products. Overall PURE Digital product margins for the year have improved but revenues for the year were slightly down compared to last year due to a slower first half and the expected increased competition from lower-end products. We expect PURE Digital to continue its steady progress and its leadership in the DAB market as this segment continues to grow. PURE Digital has plans to launch other strategic products in support of Imagination’s IP.

Market Segment Update

We have very strong, industry-leading IP offerings in a number of key market segments and in particular in mobile phone/PDA, digital radio, TV, Mobile TV, and car navigation markets. Year-to-date we have been able to make significant progress in many of these areas and in particular:-

Mobile Phone and PDAs

The mobile market transition for both device and network capabilities are well underway. The device capabilities that are very relevant to our PowerVR technology are graphics, video and display. These capabilities will increasingly become essential requirements for all but the most basic handsets. The market can in general terms be segmented into three categories, namely, basic phones, mainstream feature phones (including camera phones) and Smartphones/PDAs (includes multimedia rich phones for entertainment).

We expect the products with hardware graphics and video to be implemented first in Smartphones/PDAs (including dedicated entertainment/gaming handsets) handsets and to propagate over time into a growing share of feature phone segment as well. The total mobile market in 2004 was over 660m units with Smartphones/PDAs devices accounting for around 10%. The overall market is expected to reach 900 million by 2008 with over 55% of this total comprising the two segments of the Smartphone/PDAs and the feature phone forming a legitimate target for various levels of hardware graphics and video acceleration. In support of these estimates, Nokia, the largest mobile phone manufacturer, recently revealed at the E3 (Electronic Entertainment Expo in US) plans for their advanced multimedia and gaming platform and announced that they expect the 2008 Smartphone market alone to be 250m units. The power consumption constraints and advanced features will encourage migration away from using power hungry software only solutions with high central processor clock speeds towards those using more battery-life friendly hardware acceleration as provided by our PowerVR technology.

We now have 14 committed SoCs across our partners that incorporate our mobile technologies and are targeting the mobile phone and PDA markets. These include devices from Renesas, TI, Intel, Samsung, Philips and Freescale. Significantly, in addition to Renesas and Intel, who started product shipment during the second half, TI, Philips and Samsung were demonstrating mobile phone application processing devices incorporating our mobile graphics technology at the 3GSM World Congress in February 2005.

Given the partners we have already secured, we are truly well positioned to benefit from these trends as they progress. Our partners between them have over 70% of the worldwide market for chips in the mobile sector and we expect to see our technology achieve very high penetration in the growing segment of mobile devices needing hardware graphics/video acceleration. Estimates over the next four years suggest that this segment will approach 50% of the total mobile phone market, providing the potential for our mobile technology to reach volumes in hundreds of millions per annum.

Although we are at the very beginning of this process we have already seen shipments of around 1.5m partner chips incorporating our mobile graphics/video in the second half following the launch of only three end-user devices. At the half-year, we reported that the launch of mobile phone products based on our technology had been delayed due to partner project timing and, in particular, software integration. It is therefore pleasing to advise that we now have better visibility of a significant number of end product launches scheduled during the 2005/6 financial year and beyond. There are already NTT DoCoMo enabled handsets shipping in Japan (e.g., Fujitsu’s F901iC & Mitsubishi D901i), and PDAs (e.g., the Dell Axim X50v), which incorporate our mobile graphics/video technologies. Additionally we have visibility of over ten handset manufacturers who are actively developing mobile phones based on our partners’ chips that in turn use our technology. Some of these, particularly in Japan and Korea, are targeting shipment before Christmas 2005.

Digital Radio/Audio

We have maintained our 70% market share in DAB digital radio technology despite significant growth in this market and increased competition. Over 80 end-user products, including models from Sony, Philips, TEAC and Sharp, are now based on our technology as supplied by our licensing partner Frontier Silicon. Through the same partnership we have also secured a lead position in the emerging T-DMB mobile TV market, which uses DAB as the underlying technology.

In September this year, Frontier Silicon announced that its Chorus device, based on our META technology, has shipped in over 1m DAB-based products, equating to over 70% of the installed base. The Chorus chip is now being deployed in automotive design wins through a module specifically targeted for this environment. To date most of the DAB volume has been in the UK, which is expected to continue its growth from 1.2m units during the 2004/5 financial year to around 1.8m units in 2005/6 and reaching 5-6m units by 2008. This will bring the cumulative UK market volume to 13m by the end of 2008, and household penetration to 28% in the same timeframe. Other regions are between one to three years behind the UK although already this year we have seen real progress in Denmark, Benelux and Singapore. We expect to see further growth of this market overseas as other countries begin to roll out DAB. Frontier Silicon already have solutions in place for these emerging DAB markets.

The emergence of the mobile TV standard T-DMB, which is based on the DAB standard, also means that our DAB technology and devices based on it have further significant potential. (See section on Mobile TV.)

TV Segment (Digital and Flat Panel Transitions)

Three major transitions in the TV market are creating significant opportunities: the mainstream transition from analogue to digital, the arrival of high-definition (HD) TV and, very importantly, the migration to flat panel displays. In addition the arrival of digital transmission around the world has introduced yet more broadcast standards to be supported covering terrestrial, satellite and cable options. Our strategy has been to target our technologies at these changes and hence maximise the benefits that we can bring to partners interested in exploiting these trends. Specifically we have three benefits that make our offering in this segment unique and effective for our partners. One is our multi-standard UCC (Universal Communications Coprocessor) technology that allows the same semi-programmable engine to perform both analogue (NTSC, PAL, & SECAM) and the many digital demodulation (receiver) functions. The second is de-interlacing and image-enhancement technologies that are highly innovative and essential for effective support of flat panel screens. And finally, and very importantly, the uniquely comprehensive and end-to-end TV IP that fully supports the latest trends. In addition to our extensive PowerVR video technologies and multi-standard UCC, our multi-threaded META processor is able to service all general-purpose and audio requirements of modern TVs in a very efficient manner.

The total worldwide TV market is over 160 million units per annum and whilst the vast majority are still old fashioned analogue CRT TVs, the proportion of digital (with analogue legacy support) and flat panel TVs is increasing rapidly. The flat panel TV volume in 2004 was over 8.1m units and is expected to reach 15m in 2005 and 50m units by 2008. Digital TV shipments are expected to rise from 17m in 2004 to almost 80m in 2008. Industry analysts indicate that total shipments of digital TVs and digital STBs were 49 million units in 2004 and are expected to total 181m by 2010.

We have three active partners in this segment. A total of six partner devices are committed, with Frontier Silicon’s Logie in production, four at prototype silicon stage and one other in pre-silicon development phase. Currently Frontier Silicon’s Logie is the only shipping device and is used in two Freeview boxes under the Goodmans and Matsui brands. More STB and iDTV design wins are in the pipeline and we expect other TV products including flat panel iDTVs based on our technologies to begin shipment by end of first half FY2005.

Mobile TV

Another emerging market is that of mobile TV where new standards, such as DVB-H, T-DMB, ISDB-Tss, have been ratified that support these services in different regions. These technologies will be very relevant to mobile handsets and potential volumes are similarly large. Various research organisations have suggested market sizes of between 85m to 130m units by 2010. Nokia has forecast an even more aggressive figure of 300m units by the year 2010 for DVB-H alone.

Through our original partnership with Frontier Silicon we are already engaged in products targeting T-DMB as this standard is based on DAB and can benefit from existing devices and broadcast infrastructure.

Our technology for mobile TV reception is unique in that it is designed to be multi-standard and flexible so that the same solution can support multiple standards used in a region and/or even support different geographical standards similar to tri-band mobile phones.

We believe this feature is very important for the simple reason that global operators and multi-band capabilities have been a key trend in the mobile phone market. Our mobile TV platform combines the programmability of UCC Mobile and suitably selected processing cores from our META and MTX range of processors to deliver highly flexible solutions with low power. We have been developing our multi-standard mobile TV receiver platform targeting DVB-H and T-DMB initially and will extend to ISDB-Tss in a second phase. This technology is now at the stage of lead partner engagement and we are seeing significant interest. In March 2005, we licensed the technology to Frontier Silicon as a lead partner.

Trial services for T-DMB (Korea and certain EU countries including Germany), DVB-H (US and EU - including UK, Finland, Germany, France, Spain and Australia), and ISDB-Tss (Japan) have begun and we expect full-blown services to be in place and products in support of these markets to start shipment from the mid 2006 onwards.

The Chorus chip and its follow-on are also well placed to target the emerging mobile TV standard (T-DMB) in Korea, a DAB related broadcast standard. As implied above there are also indications that other countries including some European countries that have DAB infrastructure may opt for T-DMB to accelerate the mobile TV roll out.

The low power consumption video decoders from our PowerVR team extend our offering beyond the receiver functionality and address the multimedia requirements of devices targeting these markets.

Car Navigation

The total market for worldwide car navigation systems in 2004 was around 8m units rising to 20m units by 2008. The use of high performance 3D graphics in next generation car navigation is fast becoming mandatory. Our partner Renesas, a market leader in this segment, has had great success with its PowerVR MBX-based devices (including SH7770) and has secured many design wins and significant market share. Two OEMs, Mitsubishi and Pioneer, have announced their products and have been shipping high-end after-market systems based on this device since summer 2004.

Going forward we expect other products to be announced by major manufacturers including systems targeted for factory-fit by car manufacturers in Japan. We expect the success of Renesas in Japan, and the global nature of the automotive industry, to result in the use of their devices by manufacturers in the rest of the world, specifically in the US and Europe. Other semiconductor companies operating in this market are also interested in our technologies and we expect this to lead to new licensing agreements in due course.

Amusement

We have ongoing relationships with key players in the amusement market. Among these are Aristocrat and IGT who use our graphics technology and we also have development programmes in place with Sammy Sega and Renesas. Currently our technology is being used in Aristocrat and IGT’s advanced machines. We expect the result of our work with Sega Sammy and Renesas to lead to further progress in this market during this year.

Outlook and the Future

The Group has made significant and strategically important progress during the year in securing very important long-term new and expanded partnerships which now include six of the top ten semiconductor companies. We have continued to invest to ensure we support the growing number of partners as they start to ship product and maintain a cohesive development roadmap that underpins our business objectives and our partners’ requirements. Our IP is now playing an increasingly fundamental role in our partners’ product development plans.

Financial performance in the year was impacted by delays on the closure of licensing deals. However we have a very active pipeline of negotiations and opportunities, particularly for current and new generation mobile graphics, TV and mobile TV segments and a number of these are at an advanced stage. Already since year-end we have concluded a major agreement with Intel regarding our new generation graphics and video technology.

The quality of our partners, the scale of partner SoC design wins and the significant role our technologies play in our partners’ roadmaps will increasingly accelerate volume growth, particularly in the mobile phone market, and hence our royalty revenues. Associated with this, we also expect an increased news flow in the coming year as more end-user products are launched and more partners commit to our current and future technologies although the closure of new deals will be subject to the usual timing uncertainties.

Hossein Yassaie
Chief Executive
25 May 2005

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