Imagination Technologies Group plc -- Interim Results for the six months to 30 September 2006

Royalties and PURE Digital drive interims revenue up 63%

November 22, 2006 -- Imagination Technologies Group plc (LSE: IMG), leading provider of System-on-Chip (SoC) Intellectual Property (IP), today announces results for the six months to 30 September 2006.

Business Update

• Royalties
   
• 15m partner chips shipped in H1 - up 350% (2005: 3.2m)
• Over 40 mobile phone handsets now shipping including Nokia, Sony Ericsson, Panasonic, Sharp, NEC, Fujitsu, Mitsubishi, and Motorola with more in the pipeline
• Maintained 70% DAB market share with products from all key brands including Sony, PURE, Philips, Roberts
• Leading supplier of 3D graphics technology for in-car navigation - many design wins in Japan
• 45 partner chip design wins (2005: 37) and 17 in production
• Licensing
   
• Concluded number of financially significant and strategically important licensing agreements
• Seven new agreements including Intel, Texas Instrument, Renesas, Freescale, Centrality
• Key areas of Mobile Multimedia, Mobile Computing/PC, Personal/In-car navigation and Mobile TV
• Includes partnership with Intel in the new emerging Mobile Computing/PC segment
• Active pipeline of prospects
• PURE Digital
    
• Maintained strong year on year growth momentum
• Increased market share
• Christmas quarter and record revenues for the year expecte

Financials

• Group revenue up 63% at £20.8m (2005: £12.8m)
• Technology revenues increased 84% to £10.2m (2005: £5.5m)
• Royalty revenue up over 200% to £4.6m (2005: £1.5m)
• Licensing revenue up 38% to £5.6m (2005: £4.0m)
• PURE Digital revenues increased by 47% to £10.6m (2005: £7.3m)
• Gross Profit up 54% to £11.8m (2005: £7.7m)
• Continued investment with R & D spend up 10% to £11.0m
• Loss before tax reduced by 57% to £2.1m (2005: Loss £4.8m)
• Cash - balance of £5.5m as at 30 September 2006
• Intel Capital investment in October raised £5.3m – 2.8% of share capital

Geoff Shingles, Chairman , commented:

“During the first half, we have seen strong growth in both our Technology business and PURE Digital sales resulting in a record Group revenue level. We have seen good performance and momentum build-up in all key aspects of the business including chip volume growth, new design win rate and PURE Digital progress.

“The closure of a number of strategically important deals with key partners including Texas Instruments, Intel and Renesas during the half are particularly significant. The new extended partnership with Intel in mobile computing/PC and Intel’s investment are clear examples of the strength and value our partners see in our offerings and the relationship.

“We expect the significant volume ramp-up in partner chip shipments and the growth of royalty revenue to continue. In addition, the active pipeline of licensing opportunities gives us confidence that our technologies will increasingly be adopted by existing and new partners during the second half and beyond.

“PURE Digital is expected to continue its substantial progress with a strong second-half driven by extensive retail ranging and Christmas demands for its products.

”Overall, we are delighted by the progress made in the last six months and the strong position of the Group to maximise opportunities in the future.”

Operational and Financial Review

Overview

The first half has seen a significant increase in Group revenues driven by strong growth in both our Technology business and PURE Digital, our System business. The Technology business growth was driven by strong year-on-year royalty revenue growth as well as improved performance in closure of licensing deals. In particular we saw a record partner chip unit shipment of 15m compared to 3.2m same period last year. The royalty revenue for the period has increased by more than 200% and, as expected, reduction in the average per-unit royalty rate has been more than offset by the substantial volume increase. The volume growth has been primarily driven by the production ramp-up across mobile segment, the DAB market and 3D-based car navigation systems with some early contributions from mobile TV and TV segments. There are now over 40 phone handsets that are based on our technology and this number is growing every month.

The momentum behind new partner SoC design wins has continued with growth of the number of committed partner SoCs to 45 from 37 a year ago. These design wins are the drivers for future partner SoC shipments and therefore further royalty growth.

During this half we have concluded a number of strategically important licensing agreements in mobile multimedia and mobile computing/PC segments involving Texas Instruments, Renesas and Intel. Significantly we extended the partnership with Intel to include the important and emerging segment of mobile computing/PC. These deals, alongside a number of other licensing agreements, have resulted in a growth of close to 40% in licensing revenue.

The strong and growing pipeline of discussions and activities with key players for both existing and new technologies continues to demonstrate the serious interest in our offerings and the real relevance of our IP to important and growing markets. We are also seeing that the convergence trends are resulting in our partners’ increased interest in combining different IP cores to deliver multi-function and feature-rich products.

PURE Digital has continued its strong progress and remains the number one supplier in the digital radio market with an increasingly comprehensive product range. It continues to make good progress in developing the digital radio market whilst growing its already significant market share. We are confident of a very strong Christmas period and expect it to contribute to significant growth in the second half of the year.

Financial Review

In the six months ended 30 September 2006, Group revenue was up 63% to £20.8m (2005: £12.8m) as both the Technology and the PURE Digital businesses grew strongly.

Technology revenues, comprising royalties and licensing, increased by 84% to £10.2m (2005: £5.5m). Royalty revenues were £4.6m, up over 200% growth (2005: £1.3m). The volume of partner chips shipping incorporating our IP, which generate our royalty revenue stream, started to build during last financial year. We have seen this trend continue strongly with 15.0 million chips shipped in the first half. This shows sequential growth on the 3.2 million and 8.7 million chips shipped in the first and second halves of last financial year respectively.

Licensing revenues were £5.6m (2005: 4.0m) an improvement on both the first and second halves of last financial year; 38% up on the first half of last year and 11% ahead of the second half.

Our PURE Digital business revenues were up 47% to £10.6m (2005: £7.3m) due to a combination of a broadened product range and the very strong ranging across retailers. This business is seasonal with a significant dependence on the Christmas period.

Gross profit increased 54% to £11.8m (2004: £7.7m). Whilst the overall gross margin of 57% (2005: 60%) was slightly lower than last year. We expect to maintain gross margins in both business streams at their current levels.

The R & D spend of £11.0m (2005: £10.0m) was up 10%. The vast majority of this spend is in developing leading edge technologies, often in conjunction with a lead partner; completing existing projects with partners; and ensuring we support our partners in using our technologies. We will continue to need to invest in R & D as the business develops and we are setting up overseas engineering operations in India and China to grow our engineering capability cost effectively.

Sales and administrative expenses increased by 13% to £3.0m (2005: £2.6m) as we have continued to invest in our business development infrastructure. We have expanded our sales infrastructure for our technology business and now have sales activities in Japan, US, Taiwan and Korea. For PURE Digital, we continue to promote our PURE brand through targeted marketing expenditure. We have also moved the PURE Digital business into a separate and larger building to ensure that it has the capacity to continue to grow in the future.

As a result of the strong revenue and margin growth in the half, the loss before taxation has reduced by 57% to £2.1m (2005: loss £4.8m). Loss per share, after a small tax charge, was 1.1p (2005: loss 2.5p).

We have tightly controlled cash flow, with the reduction in cash in the first half limited to £0.9m. This was primarily achieved through a £1.0m cash benefit from a reduction in working capital since March. We have allowed an increase in stock in September to ensure that PURE Digital can achieve the all important Christmas delivery schedules for retailers. The cash balance at the end of September was £5.5m which compares with £6.4m at March 2006. In October, we concluded a cash placing with Intel Capital for 6 million shares which raised an additional £5.3m.

Business Update Overview

Technology Business Update

The key drivers for our technology business are:-

1. Partner SoC volume shipments which drive today’s royalties
2. New SoC design wins which result in deployment of our IP in silicon products and drive royalties in 18 months to 2.5 years
3. Licensing our IP to existing or new partners which drives market penetration of our IP through new partner SoCs

Partner SoC Volume Shipment and Target Markets

We started the first half with thirteen partner SoCs in production or shipping across five markets; one in digital radio, six in mobile multimedia, one in mobile computing, two in car navigation, two in STB/TV and one in Mobile TV segment. It is these devices that enabled a dramatic increase in the volume of SoCs shipped, to over 15m units during the first half. Currently the number of partner devices in production or shipping has risen to 17 which includes three new devices in the mobile phone segment and one in the amusement segment. These 17 devices target major markets and we expect to see continued momentum in volume during the second half of 2006/7 and beyond.

In the mobile multimedia segment, the number of announced handsets and mobile devices using our PowerVR technology has now risen to over 40. These include handsets from Nokia, Sony Ericsson, NEC, Fujitsu, Mitsubishi, Panasonic, Sharp and Motorola. We expect further handset design wins and/or launches over the current financial year including major handset suppliers in key markets. The global mobile phone market is forecast to exceed 1 billion units per year by 2008. We believe that more than 50% of this market will, over time, prove to be a relevant target for our mobile graphics and multimedia technologies. We have both the technology and partnerships to benefit significantly as this market develops.

In the digital radio market we have maintained our technology leadership position and continue to have over 70% market share via our partnership with Frontier Silicon, whose original Chorus 1 device as well as the new Chorus 2 SoC have been selected by many manufacturers including Sony, Philips, Sharp, Roberts and PURE Digital. Currently well over 100 shipping DAB products are using our technology. We still expect the total UK DAB market shipment to exceed 2.5 million units in 2006 and reach close to 6 million by 2008. We also expect our enabling of other technologies, such as internet radio, and the arrival of extensions to the DAB standard to, in due course, further expand our worldwide market opportunities in this space.

In the car navigation market, most of the new in-car 3D-enabled navigation systems in Japan use the Renesas NaviCore family of chips which deploy our PowerVR technology. This market now encompasses both the ‘after-market’ and ‘factory-fit’ which is driving increased volume. The 2006 market size for car navigation was around 4.8 million units for the Japanese market alone, which tends to demand advanced technologies first. Already 30% of shipping end-user products in this market has migrated to 3D-based solutions and the trend is continuing with most of the new designs adopting 3D technology. The worldwide in-car navigation market, which generally takes its lead from Japanese trends, is currently just over 10 million units however a car navigation system is expected to become a standard feature in every car, leading to bigger volumes for this market.

In the recent years the lower cost ‘Personal’ navigation systems (portable SatNavs) have become popular creating a large ‘after-market’ worldwide. Technologically this market lags the more expensive and more integrated ‘In-car’ systems but is expected to follow the same trends in due course and adopt advanced 3D graphics and an enhanced user interface. The ’Personal’ navigation system market is now over 10m annually and growing. We expect future generations of this category of products will begin to use solutions incorporating our technology. Additionally the trend towards virtual dashboards using LCD technology and synthesized 3D-graphics is accelerating within the car industry and will further grow our opportunities in this market. With a number of additional licensees during the past 6-12 months, we now have four active partners in this segment targeting both In-car and Personal categories of products.

We have seen initial volume from the early mobile TV roll out in Korea and China. These solutions use our first generation technology targeting the T-DMB standard. The Samsung T-DMB mobile-TV products, the SPH-B2300 in Korea and Samsung SGH-P900 for EU, were among the first mobile TV enabled handsets and are powered by our mobile TV receiver technology through the Frontier Silicon relationship. Additionally there is also a trend in the market to integrate mobile TV functionality with personal or in-car navigation systems. Two recent examples of these that use our technology are the Hyundai Techno HDT-8800ND and Mando MWN-7000D, which are starting shipment in Korea. We expect this trend to be followed in other geographical markets which also allows us to offer both graphics and mobile TV solutions for such converged products. The scalability and flexibility of our software-defined radio technology based on our UCC and META IP has enabled us to adapt these technologies for all key mobile TV standards in addition to the digital radio and TV segments. We now offer a unique multi-standard mobile TV IP platform that can support all the key worldwide standards including DVB-H, T-DMB and ‘One Seg’ ISDB-Tss. We already have two partners in this space, Frontier Silicon and Mavrix Technology (a US start-up), and further agreements are in negotiation.

The TV market is an established market which is undergoing a number of concurrent changes including transition to digital, arrival of High Definition (HD) and migration to flat panel technology. Our aim is to take advantage of these changes to develop our business and market share. We have worked with lead partners including Frontier Silicon and Sharp and in the latter have seen initial model shipments in Japanese market. We are now attracting more interest from other key players who find the combination of our multi-standard demodulation technology (UCC); multi-standard multi-stream video decoders (PowerVR MSVDX); efficient META multi-threading processor and our advanced image quality enhancement technology to be very attractive. The nature of this market where major TV suppliers all have their own extensive customisation, combined with the complexity of next generation TVs, has however meant that the volume ramp up and solution delivery in this segment takes longer than other segments. The worldwide market for LCD TV in 2005 reached 17 million. The forecasts from key industry players suggest that the LCD TV market will exceed 100 million units by 2010. In addition to the relationships above, certain of our IP cores, including graphics, are also being designed in by our other semiconductor partners targeting the TV market. We expect further progress in existing activities and also the securing of new partners in this market as our technology base matures and broadens.

New SoC Design Wins

During the half we have seen continued growth in the number of committed partner SoCs deploying our technologies. Across the mobile phone, digital radio/audio, mobile computing/PC, car navigation, mobile TV, TV, and amusement market segments, we now have a total of around 45 SoCs committed by partners, up from 37 at the same time last year. Seventeen of these are now in production and shipping, although some only recently reached this stage and have not yet contributed materially to royalty revenues. The growth in partner SoC design wins underlines our medium to long-term royalty revenue stream as these new design wins progress through development to product shipment and volume ramp-up.

The target markets for the 45 committed partner SoCs are: 19 in mobile multimedia, two in digital radio, three in mobile computing/PC (including one existing device in PDA market), seven for car navigation/information, four for mobile TV segments, seven for TV, and three in amusement/toys.

Based on our partners’ activities in deploying the IP that they have already licensed from us, and also the ongoing active pipeline of new licensing discussion, we expect the number of partner SoC design wins to continue its steady growth in the current year.

Licensing and Customisation Progress

For the half-year to 30 September 2006, we concluded seven new licensing/customisation agreements across the mobile multimedia, mobile computing/PC, digital radio/audio and mobile TV segments. The agreements in mobile multimedia and mobile computing/PC technologies involving Texas Instrument, Intel and Renesas were of strategic importance. We also secured additional licenses for PowerVR MBX or related video cores with Freescale and Centrality. We now have eight partners who have licensed PowerVR MBX and four who have licensed PowerVR SGX family members. Additionally, Mavrix Technology has licensed our mobile TV solution, with a significant agreement with another partner in this space expected shortly.

Overall, the growing customer engagements and serious discussions over the past six months have significantly strengthened our opportunity pipeline across all our product areas. This has involved both existing and new technologies and is helping to drive future licensing business.

We have continued to ensure that we have sufficient regional presence in key markets where our major customers or potential customers operate. In addition to our Japan, US and Taiwan offices we have also established a presence in Korea to service the growing interest in our technologies from all key regions.

 

Pure Digital

PURE Digital maintained its leadership of the DAB market and has in fact grown its market share through a strategy with three main components. Firstly, it has continued to deliver products which provide advanced and novel features, taking advantage of the digital nature of DAB and the emergence of digital audio. As a result it now has products with features such as pause/rewind/record, digital storage (SD Card), MP3 integration, USB upgradeability, EPG (Electronic Programme Guide) and teletext-style capabilities (Intellitext TM).

As the second aspect of its strategy, PURE has continued to diversify its product range beyond portable/kitchen radios enabling other traditional consumer audio segments with DAB while increasing usability and other advanced features. Specifically PURE’s new micro system range DMX and Legato integrate many advanced features as well as CD, MP3 and digital storage making them an industry-leading step in this segment. Another very successful segment that PURE has now secured the top position in has been the clock/radio segment where PURE’s Chronos has achieved the best selling position.

Finally to ensure its brand can secure maximum shelf space and reach the majority of consumers, while at the same time driving the DAB market forward, PURE has enabled quality low-cost products for mainstream markets. The PURE ONE, at £49, has been an outstanding success attracting very strong demand and has achieved the goal of strengthening the brand and growing market share.

As a result, PURE Digital sales have grown by approximately 50% compared to same period last year. PURE Digital now has over 30% market share in the overall digital radio market in UK and in the case of the portable radio segment its share has reached 40%. In the UK, all major stores and retailers including John Lewis, M&S, Argos, Dixons, Comet, and Tesco now sell PURE Digital products.

Given the strong product line-up and the extensive ranging with all key retailers, we expect PURE Digital to demonstrate strong performance during the second half as it takes advantage of the key Christmas selling period.

For the medium to long-term PURE Digital has a strong roadmap designed to maintain its position in the DAB market as well as driving other related consumer markets using the advanced technologies from the Group.

 

Outlook and the Future

The first half has seen strong growth in both our Technology and PURE Digital businesses. Overall we expect these trends to continue for the second half.

The momentum in partner chip volume to 15m units and the growth of associated royalty revenues by more than 200% continue to demonstrate the inherent strength and the potential scalability of our business. We expect the royalty revenue growth to continue as the unit shipment volume increase. As expected the volume growth will involve some gradual per-unit average royalty reduction as we move towards very high volume but the growth in the unit shipment will outpace any such erosion.

In developing our licensing business to date, we have been able to secure strong positions in key markets, with successful and on-going partnerships with the leading players in place. In particular, our partnership with Intel should further drive our progress in mobile computing/PC segment as the benefits of our efficient and low power technologies are highly relevant to this evolving market.

We have market-leading technologies, with clear competitive advantages, for the mobile TV and TV segments which beyond our lead partnerships are attracting a growing customer base which we expect to help further development of these business segments.

The requirements from existing partners and the growing interest from new customers for our technologies give us confidence that our technologies will continue to be adopted by existing and new partners. Whilst we expect a continuing active year for licensing opportunities, as in the past timing and the associated level of revenues are difficult to forecast accurately.

We are confident that PURE Digital will maintain its strong progress in the digital radio/audio market as its innovative and leading products continue to be selected by retailers and digital radio technology becomes a de facto feature in most home audio and music systems. Given the strong product range and extensive product ranging by all key retailers we expect the second half to be a strong and record revenue period for PURE Digital.

Hossein Yassaie
Chief Executive
22 November 2006

Interim Results for the six months to 30 September 2006