Imagination Technologies Group plc: Interim profits and strong strategic progress

“We have continued to make significant progress in realising both our financial and strategic goals and have now achieved profitability in both our Technology and PURE businesses. We have also made excellent strategic progress with key new and existing partners. The full benefit and significance of these will become clear in the coming years.

“Our technologies continue to be valued and increasingly deployed by the leading players in important consumer markets. So far we have made inroads in some of our target markets, with further progress in these and other new markets yet to come. We are more confident than ever about the future prospects and are able to see our way, within approximately three years, to multiple hundred million annual unit shipments by our partners.

“Based on the active pipeline of licensing opportunities, the expected volume ramp-up in partner chip shipments and the strong position of PURE Digital, we are confident of further significant progress in the current financial year and beyond.”

Geoff Shingles, Chairman, commented: 

“This is a tremendous achievement for Hossein and his team to report continued strong progress and profitability across the Group.  They have really shown perseverance and commitment over the last few years.  Imagination is now well positioned to provide its key technologies to a wide variety of global consumer markets as well as continuing to develop its leading position with PURE Digital.”

Imagination Technologies

Imagination Technologies Group plc is an international leader in the creation and licensing of semiconductor System-on-Chip Intellectual Property (SoC IP) and in the development and manufacture of DAB digital radios.  The Group is headquartered in the United Kingdom, with sales and R&D offices worldwide.

Imagination's Technology Division (www.imgtec.com) creates market-leading embedded graphics, video and display acceleration, multi-threaded processing and multi-standard receiver technologies, complemented by dynamic and extensive developer support programmes. These SoC IP products are licensed to a wide range of semiconductor and consumer electronics companies around the world and is being used in the following markets: digital radio and audio; mobile phone multimedia; car navigation & driver information; personal navigation; ultra mobile PC (UMPC) and mobile internet device (MID); digital TV & set top box; and mobile TV.

Imagination's PURE Digital Division (www.pure.com) was established to develop consumer products to showcase the capabilities of Imagination's SoC IP.  As a fully integrated part of the Group, Pure has become the creator and manufacturer of the world’s most popular DAB digital radios and is the number one supplier of radios in the UK.

Operational and Financial Review

Imagination Technologies’ business has seen significant progress this half year in both financial and strategic terms. Both the Technology business and the PURE Digital business achieved growth and profitability.

Financial Review

Group revenues for the six months to 30 September 2007 were up 23% to £25.6m (2006: £20.8m), predominantly driven by strong growth in the Technology business.

Technology revenues, comprising licensing and royalties, increased by 39% to £14.1m (2006: £10.2m). Revenues for the Technology business are mainly US dollar based and the weaker dollar has impacted revenues; on a like for like dollar basis they increased by 52%. Licensing revenues were strongly ahead, up 60%, at £8.9m (2006: £5.6m); 77% on a US dollar basis. Historically, the timing of licensing business, which is a key factor in generating future royalty earnings, has been uneven.  However, there has now been a sequential increase in licensing revenue over the last four successive half year periods.
 
Royalty revenues were £5.2m, a 14% increase (2006: £4.6m); 23% on a US dollar basis. The volume of partner chips shipping incorporating Imagination IP, which generate the royalty revenue stream, increased from the actual figure of 13.3m for the first half of last year to 19.1m this year, an increase of 44%.

The 8% increase in PURE Digital business revenues to £11.5m (2006: £10.6m) was in line with the Group’s expectation. This business is seasonal with a significant dependence on the Christmas period.

Gross profit increased 44% to £17.0m (2006: £11.8m) with the overall gross margin improving to 66% (2006: 57%). This results from both the revenue mix moving towards the higher margin Technology business, which was 55% (2006: 49%) of Group revenues, and a general improvement in the underlying margins in both the Technology and the PURE Digital businesses.

Whilst the weaker dollar has impacted Technology revenues as indicated above, the effect on the Group’s reported profitability has largely been offset by purchasing components for the PURE Digital business in dollars. The weaker dollar has resulted in improved margins in that business.

Overall expenses have increased by 14% to £16.0m (2006: £14.0m). The increase in underlying expenses excluding the cost of share based incentives was 12%. R&D spend increased by 15% to £12.7m (2006: £11.0m); 13% excluding share based incentive costs. Investment has continued in the Group’s overseas engineering operations in India and China in which the Group will continue to grow its engineering capability on a cost effective basis.

On-going R&D investment is crucial to ensure the business maintains its position at the forefront of developing technology for its target markets. Whilst the vast majority of R&D expenditure remains focussed on developing leading edge technologies, an increasing element is being spent on ensuring that Imagination supports its partners in using the Group’s technologies and in completing projects with those partners.

PURE Digital has also continued to invest in R&D. In addition to refreshing its DAB digital radio product range with improved functionality and eco-friendly characteristics, significant development effort has been focussed on a new category of Internet radio products and an associated Internet portal, both of which will be launched in the first half of 2008.

Sales and administrative expenses increased by 10% to £3.3m (2006: £3.0m); 8% excluding share-based incentive costs. As the Group grows, it has continued to invest in business infrastructure. The build up of the business development resources in Japan, US, Europe, Taiwan and Korea for the technology business has fed through into the increased licensing business, the Group has seen over the last two years. Similarly, Imagination has continued to build sales, support and logistics resources to enable PURE Digital to grow in a controlled manner as well as investing in the PURE brand.  

As a result of the strong gross profit growth, the Group has moved into profitability with an operating profit of £1.1m (2006: loss £2.2m). With the significant increase in revenues in this half, the Technology business is now profitable achieving an operating profit of £0.6m (2006: loss £2.6m). PURE Digital continues to be profitable with an operating profit of £0.5m (2006: £0.4m), although the bulk of PURE’s profitability comes through in the second half with the Christmas season.

The pre tax profit was £1.3m (2006: loss £2.1m). After a small tax charge, earnings per share for the period were 0.6p per share (2006: loss 1.1p).

Capital expenditure in the first half was £0.9m (2006: £0.8m) which was for capital equipment for engineers, infrastructure and patents. Working capital has increased by £3.6m from March as a result of an increase in debtors; the cashflow from these will come through in the second half. This build up of working capital resulted in a net cash outflow from operating activities of £1.0m (2006: £0.5m outflow). The cash balance at the end of September was £8.0m, compared to £9.6m at 31 March 2007.

As previously advised, the current financial year is being extended to a 13 month period and therefore the second half of this financial year will be a seven month period finishing on 30 April 2008.

Business Review

Technology Business Update
During the half year, the active pipeline of opportunities has led to the completion of both strategically important and financially significant licensing agreements. Imagination concluded six major new licensing agreements as well as a number of smaller extensions or upgrades from existing customers. The agreements concluded were across key markets including mobile phone, personal media player (PMP) devices, TV/Digital audio/visual (AV) and amusement. This continues to demonstrate both the competitive advantages across the range of Imagination’s technologies and their relevance for key market opportunities.

Specifically, Imagination secured a strategically important partnership with a major OEM who is deploying its new generation graphics and video cores in a number of key products. The Company also signed a further agreement with Texas Instruments (TI) for a second member of its POWERVR SGX family which will be deployed in a future OMAP platform. As a result, Imagination now has a partnership with TI across multiple generations of graphics technology which will see Imagination’s technologies being deployed in an even more significant and strategic manner at TI. TI’s leadership position in the wireless space makes this extensive partnership very significant. Imagination’s latest licence with NEC for key display technologies for the Digital AV market segment extends this important partnership into an additional new market area. This demonstrates the strength and relevance of the Company’s technologies for this segment and will accelerate its market position in this space.

Other important agreements during the half included those with SigmaTel and SI Electronics.  Additionally existing partners, including Renesas, Intel, NEC, who have been very active in further deployment of Imagination’s technologies, signed a number of smaller extension and upgrade options. In addition a number of other key OEMs who buy chips incorporating IP from Imagination’s licensing partners have obtained software licenses directly from the Company to better support their design processes.

Partner chip unit shipments continued to grow and reached 19.1m units (2006: 13.3m units) for the half-year period. The volume growth has been primarily driven by the production ramp-up across the mobile phone, digital radio and 3D-based car navigation systems with some initial contributions from PMP, TV and mobile TV segments. Imagination’s products form a critical component in the vast majority of high-end mobile phones utilising advanced graphics technology. The increasing number of new licences which Imagination has signed demonstrates the competitive advantage that its technology brings and reinforces the Company’s view of the eventual size of this market. The Company remains totally comfortable with its forecasts for 2010 and beyond although as can often happen in the early stage of a market development the speed of the ramp-up in production can be variable and has been a little slower than anticipated. However, Imagination expects this growth to accelerate in the second half and beyond as existing product volumes ramp-up, more products come to market and as Imagination’s target markets develop and expand.

Imagination has visibility of very significant devices (currently at prototype or pre-production silicon stage) at key partners which will enter production later in this financial year and early into 2007/08. These include devices incorporating Imagination’s first generation product offerings as well as its most advanced technologies including POWERVR SGX, multi-standard mobile TV receiver solution using ENSIGMA UCC and META cores and multi-standard HD video decoder solutions. Among the target markets for these forthcoming devices are the mobile phone, UMPC/MID, PMP, mobile TV, car navigation/information and TV segments.

The volume ramp for shipping chips incorporating Imagination’s technologies, while significant and growing, is still at an early stage. For any given period this rate will depend on the rate of market adoption of new technologies and the timing and volume build up of OEM products targeting these markets. Imagination’s technologies, as integrated in its partner’s silicon chips, are continuously being designed into many end products.

Given the mainstream existing and/or developing markets that Imagination is targeting and the increasing relevance of its technologies to these markets it is clear that across mobile phone, PMP, digital radio, car navigation/information, TV, UMPC/MID, and mobile TV segments the total available market (TAM) will grow to over 2 billion units. The proportion of this total market size that is relevant to technologies offered by Imagination, i.e. serviceable available market (SAM) to the Company, in terms of units, is increasing dramatically and is set to exceed 800 million units by 2010.

Imagination believes it is well positioned to capture a significant portion of this available market based on the requirements of these markets, the ability of its technology offerings to provide highly competitive solutions to address these requirements and its strong partnerships with world leading semiconductor companies.

Imagination’s strategy is aimed to achieve 200 million+ chip volume per annum within three years with the prospect of significant further growth beyond. This view is further supported by its partners’ increasing commitment to the Company’s technology, both across multiple generations of each technology as well as across Imagination’s broadening technology offerings.

The momentum behind new partner SoC design wins has continued with the cumulative number of committed partner SoCs increasing to 58 at September 2007, compared with 45 a year ago. These design wins represent active devices which are either shipping or in design and are the drivers for future partner SoC shipments and therefore further royalty revenue growth. These committed devices are diversified across Imagination’s partners and key market segments: 21 for mobile phone; two in digital radio; three for PMP, 10 for car & personal navigation; four in UMPC/MID; seven in mobile TV; six for digital TV; and five for amusement and toys

A review of Imagination’s market segments is as follows:-

In the mobile phone market segment, over 70 handsets shipping today are based on Imagination’s technologies; many of which are market-leading models with new capabilities from the key OEMs. These now include handsets from Nokia, Sony Ericsson, Motorola, NEC, Fujitsu, Mitsubishi, Panasonic and Sharp. Imagination is seeing continued and accelerated demand for multimedia technologies in this market and expects to see strong continued progress and a healthy market share given the calibre of its partners. Imagination estimates that during 2007 its graphics is being deployed in over 70% of handsets that are equipped with hardware acceleration. As expected the deployment of hardware acceleration is rapidly increasing to a larger proportion of mobile phones as the demand increases providing us with a fast growing serviceable available market (SAM) as already highlighted. Imagination’s strong partnerships should enable us to continue to effectively exploit this opportunity as it grows.

In the DAB digital radio market Imagination’s digital radio/audio IP platform technology has maintained its position with around 70% share. This market is now expected to start making faster progress outside UK with the advent of the enhanced DAB standard known as DAB+ that is beginning to be adopted in other regions. Both from a technology licensing perspective as well as through PURE Digital, Imagination is well placed to continue to lead in this market.

This year Imagination has also seen its technology deployed in the PMP market as these products require improved interactivity and user interface capabilities and as a result require advanced graphics and video capabilities. Imagination has also secured a number of new partner SoCs that it expects will enable the Company to obtain a significant market share in this segment.

In the car navigation market, the vast majority of the new 3D-based navigation systems in Japan continue to use partner chips which deploy Imagination’s POWERVR technology. In addition to the long-standing relationship with Renesas which is progressing well, the new relationships Imagination has secured with other key players in this market such as NEC, Freescale and Centrality are set to result in significant market share in both traditional in-car navigation systems and in the next generation of Personal Navigation Devices (PNDs), which have become very popular in recent years.

Imagination’s partnership with Intel in the personal computing/UMPC and MID segment has progressed well, with further significant additional projects committed during the year. Imagination still expects to see initial product shipments in this segment towards the latter part of its 07/08 financial year.    

With Imagination’s current generation technology already shipping in some of the early Far-Eastern T-DMB mobile TV markets, the shipment of devices featuring its new multi-standard mobile TV technology should see Imagination’s technology deployed in a widening range of geographic markets as these develop. Imagination’s partners deploying this multi-standard mobile TV technology supporting DVB-H and T-DMB are now at a stage that they are able to demonstrate leadership performance and extremely small footprint solutions to the key OEM’s worldwide. As a result Imagination expect that this will ultimately result in securing a sizable market share in this segment as this market emerges and achieves volume.

Imagination’s continued commitment to the TV segment is starting to bear fruit and will make a contribution to overall volume and royalty ramp-up in the current year.  Given the further designs win the Company has secured during the first half, Imagination expects to be able to build volume in this market next year and beyond.           

PURE Digital Update

PURE Digital maintained its leadership of the DAB market and has continued to implement its effective strategy for this market to:

• take advantage of the digital nature of DAB in order to deliver products which provide advanced and novel features,
• diversify its product range within the digital radio to all the key market segments, and
• deliver quality low-cost products to both secure its growing shelf space and also to drive the DAB market forward.

As part of the above, PURE Digital has launched a range of new products in preparation for the Christmas period including its eco-friendly range, EcoPlusTM, that reduce both stand-by and operational power consumption and deploy environmentally friendly components and packaging. This initiative has been extremely well received by all the key retailers.

PURE Digital also launched its new Evoke-1S range which incorporates many advanced features such as IntellitextTM for better data access. This model raises the bar in the market by utilising advanced OLED (Organic Light Emitting Diode) graphical display technology in order to provide a crystal clear display for reading from any angle. Products are now available with PURE Digital’s ChargePAKTM technology which now offers effective battery operation for up to 24 hours.  Additionally PURE Digital has just announced Highway, its first in-car DAB solution. This is self install, easily integrating into existing car audio systems without the need for audio wiring, and also supports iPod connectivity allowing both digital radio and digital music playback in the car. Among initiatives to broaden into new market segments, PURE Digital has launched its successful Chronos product equipped with iPod docking and the new £49 Siesta clock radio as the entry level product to its successful clock radio range.

Other countries are also beginning to embrace digital radio. Ireland has adopted the DAB standard and this market is now developing. The advent of the enhanced DAB standard, DAB+, is also accelerating this process with many other countries including Australia and Germany now adopting this enhanced DAB standard.  PURE Digital already has advanced developments in support of DAB+ and is well positioned to take advantage of this deployment in due course. France appears to be leaning toward T-DMB which is a technology Imagination already supports and can be supported by PURE Digital when required.

PURE Digital is actively developing products for emerging markets which complement its existing activities. These developments are strongly linked in with Imagination’s overall technology strategy and are targeted to both support and enhance its technology offerings in these areas. A key area is internet connectivity which is a main focus for both Imagination as a whole as well as PURE Digital. The Company is developing the necessary internet portal technologies to enable future PURE Digital devices to receive new user friendly services including Internet radio, music download and access to interactive and on-demand services such as Podcast and ‘Listen Again’.

As a result of its continuing strong product line up and extensive ranging with retailers, PURE Digital looks set for a very strong Christmas quarter with existing shipments and backlog for this period already ahead of the first half revenue figure. As a result PURE Digital looks well placed for another record financial year.

Outlook

Following consecutive growth over the last four half year periods, the first-half of 2007/08 again saw a significant licensing revenue growth. This is clear indication of the market relevance and competitive advantage of Imagination’s technologies. The new significant partnerships in the half combined with the expansion of the existing ones are not only strong testimonies to the strength of the Company’s offerings but they also underpin future chip volume ramp-up and royalty revenue growth.

The ongoing requirements of Imagination’s existing partners, combined with growing interest from new customers gives the Company considerable confidence that its technologies will continue to be adopted in the future. Whilst the timing and level of licensing revenues may be difficult to forecast accurately, Imagination expects to see an active second-half for licensing opportunities and further progress.
The Company expects significant chip volume growth for the next few years as its technology deployment continues across key market segments, given the increasing number of end-user products coming to market and the expected rapid growth in the emerging markets which its technologies are targeting. This is driven by the fact that the markets Imagination targets will shortly have addressable market opportunities in the 10’s or 100’s of million of units each, with this growth set to continue.
The total available market (TAM) size across the segments Imagination is targeting is set to exceed 2 billion by 2010. The serviceable available market (SAM) across all the segments all the markets available to Imagination through the word-class partnerships that it has established and the relevance of its technologies, is very significant indeed and is estimated to exceed 800 million units.  These facts justify Imagination’s aim of reaching 200 million+ annual volume by 2010. 
With digital radio technology becoming a de facto feature in most home audio and music systems in the UK, and in due course in other geographic markets, Imagination is confident that PURE Digital will be able to maintain its strong progress through innovative and leading products.  For the second half, the product and retailer ranging plans are firmly in place and PURE Digital has a very strong order book that it is fulfilling at this time. Imagination also expects PURE to continue to launch new innovative and market-changing products during this year which will further drive its growth plans as well as deployment of Imagination’s key technologies.

The first half saw significant progress in financial performance with both Imagination’s Technology and PURE Digital businesses delivering growth and profitability. Overall the Company expects these trends to continue as its licensing pipeline remains active, volume ramp and royalty growth continues and PURE Digital takes advantage of its strong order book and product ranging for Christmas.

Hossein Yassaie
Chief Executive
27 November 2007

Interim Results for the six months to 30 September 2007

CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE

CONSOLIDATED BALANCE SHEET

CONSOLIDATED CASH FLOW STATEMENT

NOTES:

1. The same accounting policies and methods of computation have been applied in preparing this interim financial information as used in the most recent set of annual financial statements.

2. The summarised profit and loss account for the half year to 30 September 2007 comprises the consolidated results of Imagination Technologies Group plc, Imagination Technologies Ltd and its subsidiaries.

3 .This half-yearly financial information has been prepared in accordance with IAS 34 “Interim Financial Reporting” as adopted by the EU. 

Segmented Reporting

The Group operates as two business segments: the Technology business, comprising licensing and royalty revenues, and the PURE Digital business. The segment information in respect of these businesses is presented below.

Primary reporting format – business segments

Secondary reporting format – geographical segments

Revenue is segmented by geographical area of sales as follows:

4. All revenue originated from United Kingdom and Europe.
The operating profit and net assets of the Group materially relate to the United Kingdom and Europe.

5. The tax charge in the period represents tax deducted at source on overseas earnings not recoverable in the period. No corporation tax charge has arisen due to accumulated tax losses being in excess of the profit earned during the period.

6. The basic earnings per share for the financial periods reported have been calculated on the weighted average number of shares in issue as shown in the table below. The diluted earnings per share has been calculated on the weighted average number of shares potentially in issue. There were no potentially dilutive ordinary shares in issue at 30 September 2006.

7. Reconciliation of Movements in Shareholders' Funds

8. Related Parties

The nature of related parties as disclosed in the consolidated financial statements for the Group as at and for the year ended 31 March 2007 has not changed. Further there have been no significant related party transactions in the six month period ended 30 September 2007.

9. Risks and Uncertainties

Other than as highlighted within this interim management report, there has been no change to the principal risks for the Group during the six month period ended 30 September 2007. These risks are outlined in the Annual Report for the Group for the year ended 31 March 2007.

10. The financial information contained in this interim report does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The figures for the half year to 30 September 2007 and half year to 30 September 2006 are unaudited. The consolidated statutory accounts of Imagination Technologies Group plc for the year ended 31 March 2007 prepared in accordance with IFRS have been filed with the Registrar of Companies. The auditors' report on those accounts was unqualified and did not contain any statement under Section 237 (2) or (3) of the Companies Act 1985.

Responsibility statement of the directors in respect of the half-yearly financial report
This Interim Management report is the responsibility of, and has been approved by the directors of Imagination Technologies Group plc.  Accordingly, the directors confirm that to the best of their knowledge:
• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;
• the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.
By order of the Board

Geoff Shingles
Chairman

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