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Imagination Technologies Group plc - Interim Results for the six months to 31 October 2010Adjusted pre-tax profit* jumps 131% to £10.1m; driven by doubling of chip unit volume and strong licensing December 14, 2010 -- Imagination Technologies Group plc (LSE: IMG, “Imagination”, “the Group”), a leading multimedia, communications and embedded processor technology company, today announces results for the six months to 31 October 2010. Click here to view the full financial results Financial highlights
* Adjusted before share-based remuneration expenses, acquisition costs and profit and loss on investments Business highlights
Licensing
Acquisitions
PURE business
Hossein Yassaie, Chief Executive, commented: “The continued strong volume ramp of devices, using our technologies, and active licensing engagements have again resulted in record half-year revenues and profits. “Our technologies have been and continue to be instrumental in many of the key recent market trends and are powering many scene-setting end-user products with well over 400m devices across numerous categories having shipped to date. “Despite some short-term slow-down driven by the consumer spending and timing of some new products, PURE continues to effectively showcase and drive some of our key technologies and is expected to see improvement over medium term. “Whilst acknowledging the tight consumer market condition, we remain confident of our continued good progress in the current financial year given the active and growing pipeline of prospects for licensing, growth in design wins and the momentum in our chip volume ramp up, together with PURE’s leading position and product line-up.” The Group has also has signed a definitive agreement to acquire Caustic Graphics Inc. (‘Caustic’), a developer of innovative and state-of-the-art real-time interactive ray tracing graphics technology for a cash consideration of $27m (c.£17.1m) – see separate announcement. About Imagination Technologies Imagination Technologies Group plc (LSE: IMG) – a global leader in multimedia, communication and embedded processing silicon technologies – creates and licenses market-leading processor cores for graphics, video, multi-threaded embedded processing/DSP and multi-standard communications applications. These silicon intellectual property (IP) solutions for systems-on-chip (SoC) are complemented by strong array of software tools and drivers as well as extensive developer and middleware ecosystems. Financial and Business Review The half-year saw good financial and strategic progress for the Technology business, with very strong chip volume and royalty growth and a period of strong licensing engagements. The Group successfully closed a number of important licensing deals as well as securing several new partners. This resulted in a significant jump in operating profit for the Technology business. The PURE business, in the short-term, has been subject to the uncertain outlook for consumer spending. Revenues saw a modest year on year decline for the first half. However it is expected to return to growth as the environment improves. The acquisitions announced on 17 November 2010 of HelloSoft and today of Caustic in the areas of connectivity and graphics respectively will in due course enable the Group to offer stronger product lines in key areas whilst also opening up new channels to the key markets. In terms of HelloSoft, the delivery of media (audio, video, voice and graphics) to connected devices is increasingly becoming a key aspect of many modern service providers whether targeting mobile, home or enterprise markets. The acquisition of Caustic provides Imagination with access to unique and patented technology which enables real-time ray traced and cinema quality 3D graphics to be implemented in a novel and highly cost-effective manner. The capability can be efficiently added to Group’s highly successful POWERVR Graphics Processing Units (GPUs). Financial Review Group revenues for the six months to 31 October 2010 increased by 16% to £44.1m (2009: £38.2m). The strong growth from both licensing and royalties increased Technology revenues by 48% to £30.3m (2009: £20.4m); 39% on a US dollar basis. The high level of licensing activity resulted in licensing revenues increasing by 24% to £11.6m (2009: £9.3m); 16% on a US dollar basis. As previously announced, PURE has been impacted by the tougher economic conditions with revenues at £13.8m (2009: £17.8m). This slow down has affected both UK and international revenues. Driven by the strong progress in the very high margin Technology business, Group gross profit rose 35% to £34.1m (2009: £25.2m) with overall gross margin up to 77% (2009: 66%). Underlying Group expenses increased by 14% to £23.3m (2009: £20.4m). Underlying expenses excluded an exchange loss of £0.8m (2009: loss £0.4m), £0.3m of HelloSoft acquisition costs, a non-cash share-based incentives charge of £2.0m (2009: £1.0m) and the prior year gain on investments of £0.5m. The Group has continued to invest in supporting its growing customer base and developing next generation technologies. Adjusted operating profit for the Technology business increased 186% to £11.4m (2009: £4.0m), before share-based incentive costs of £1.6m (2009: £0.8m), acquisition costs of £0.3m (2009: nil) and the prior year gain on investment of £0.5m. Impacted by the reduction of revenues, the PURE business had an adjusted loss of £1.4m (2009: profit £0.4m), before share-based incentive costs of £0.4m (2009: £0.2m). The Group’s adjusted pre-tax profit was up 131% to £10.1m (2009: £4.4m), before acquisition costs of £0.3m (2009: nil), share-based incentive costs of £2.0m (2009: £1.0m) and the prior year gain on investment of £0.5m. The reported pre-tax profit doubled to £7.7m (2009: £3.9m). The net tax credit was £3.9m (2009: credit £2.2m); this comprised a credit of £4.3m (2009: credit £2.4m) offset by a charge of £0.4m (2009: charge £0.2m). The tax credit includes £1.3m (2009: nil) received in cash in respect of an R & D tax credit. The Group has increased its recognised tax losses held as deferred tax asset on the balance sheet to £14.0m (£11.0m at 30 April 2010). The Group’s adjusted earnings per share rose by 104% to 5.7p (2009: 2.8p), excludingshare-based incentive costs, acquisition costs and the prior year gain on investment. Reported earnings per share has risen to 4.8p (2009: 2.6p). There was a net cash inflow from operating activities of £8.0m (2009: £3.9m). The cash outflow on capital expenditure increased to £2.2m (2009: £0.7m) with the majority invested in expanding facilities and new equipment for the engineering teams. As a result of the net cash inflow, the cash balance at the end of October improved £5.6m to £35.0m (£29.4m at 30 April 2010). Since the end of the half-year, the Group has acquired its facilities in Kings Langley in order to be able to redevelop the site provide the much-needed additional space in line with Group’s growth and operational needs. HelloSoft is being acquired for a maximum consideration of up to $47.1m (approximately £29.8m), of which $20.2m (£12.8m) is an upfront cash payment and up to $26.9m (£17.0m) is based on revenue and profit performance over the next three years. Today, the Group has announced that it has agreed to acquire Caustic, a developer of innovative and state-of-the-art real-time interactive ray tracing graphics technology, for a cash consideration of $27.0m (approximately £17.1m). Technology Business The Technology business continued to make real progress in its three key metrics:-
Other important developments:-
Licensing The continuing active pipeline of opportunities led to a number of strategically and/or financially significant licensing agreements or deal extensions including eight major licensing agreements and a number of smaller deals and upgrades. Among the major agreements, there were new partner deals with Netlogic, Fujitsu, General Plus as well as significant extensions or continuations with Intel, Apple, and Renesas. The Group also signed software licenses and upgrades with a number of existing partners including Sirf/CSR, MediaTek, Samsung and Trident as well as important software licensing and development agreements with a number of key OEMs deploying partner chips with Imagination IP. The major license agreements involved 14 IP core licenses. The target markets for these include Mobile Phone, Digital TV/STB/Thin-clients, PMP, Mobile Computing/Tablets and in-car Navigation/Dashboard. Significantly, the Group has seen continuing momentum in design-wins for its POWERVR graphics technology, which has so far achieved over 50 licenses, including many partners that are working on designs using the multi-processing (MP) core variants of the SGX543MP and SGX544MP family. The next generation technology codenamed “Rogue” which has already secured multiple tier one partners. Additionally we are seeing a steady diversification of design wins and growing interest across our other key IP cores including:
Also user generated content, video conferencing and telepresence, which require video encode and constitute new areas set to grow significantly making such a capability a standard feature of many connected devices. Already well over 30% of our annual unit shipment devices with our IP include our video cores.
These features combined with our ENSIGMA technology offer a highly efficient connected processor. Many of our IP cores integrate META processing cores already. Over 40% of the annual volume of our IP shipments deploy META technology and we expect this trend to continue upwards. The emergence of open source operating systems including Android and the inevitable trend of internet connectivity will further drive deployment of higher-end META processors in application processors in a variety of markets. Partner chip shipments and royalties Partner chip unit shipments grew strongly and almost doubled to 107m units (2009: 54m units). Growth was driven by increasing sales of mobile phone, PMP, TVs, tablets/MIDs/netbooks, digital radio and car navigation/dashboard. SoC design wins and pipeline SoC design wins are the driver for future partner chip shipments and royalty revenue growth. Strong continuing momentum saw new partner SoC design wins increase to 98 (net of obsolescence) compared with 85 as at October 2009. Of these, 42 are shipping or beginning to ship, with the balance of 56 still in design. The latter will be the driver for significant further royalty revenue growth. These committed devices are continuing to diversify across Imagination’s partners and key market segments:
Acquisitions HelloSoft has been one of the world's leading providers of V.VoIP (Video & Voice over Internet Protocol) and wireless LAN technologies and has been supplying both software and semiconductor connectivity intellectual property to semiconductor manufacturers, and software intellectual property to major ODMs/OEMs and also to tier 1 service providers/operators who offer VoIP and Video over IP services. Delivery of media (audio, video, voice and graphics) to connected devices is increasingly becoming a key aspect of many modern service providers whether targeting mobile, home or enterprise markets. Among the key technological changes in this area are:
Driven by the above industry dynamics, Imagination expects the revenue streams for HelloSoft’s products, which provide leading edge solutions to enable such changes, to build progressively as markets emerge and grow.
Caustic Graphics Ray tracing is a technique for rendering three-dimensional graphics with complex and more natural lighting models to achieve cinema quality 3D and a level of near photographic realism that is impractical with traditional 3D graphics techniques. To date ray tracing has been used in specialised application such as special effects and computer animated movies, industrial design, mechanical and architectural modelling to create life-like and photorealistic imagery.
PURE Business Within the UK the market environment further tightened post the World Cup. Industry data shows that during the July to September 2010 quarter the UK’s general consumer electronics sales were down 13.5%. Combined with similar recession driven softening in international market, historical overstocking in some markets, and the timing of certain new product introductions, this lead to PURE showing a 22% revenue reduction for the period. However, since October there are more positive signs on initial UK Christmas sell through. Also in the very recent weeks, all major export markets have returned to growth, which is encouraging. The later than planned new product introductions will provide a stronger springboard for 2011 sales. With respect to overseas, it is clear that the transition from analogue to digital radio is underway on a global scale but the pace of progress depends on each region. Specifically, Italy is now transmitting DAB+ to around 50% of population and the coverage is growing. PURE have over 10 models shipping to Italian standard which requires L-band support and is currently the only approved manufacturer. Switzerland and Australia are fully committed to DAB+ and are showing first growth since the beginning of the year. Germany already has regional DAB+ broadcast and a major decision on national multiplex is due this month. German and French decision timing will be a key driver for taking the international DAB market to a new level. Many other markets, including Hong Kong, Sweden and Netherlands, are also looking positive for DAB. Outside the DAB market, US shipments of connected PURE radios have now started. Despite the tougher environment, in the UK and other markets, PURE retained its market-share leadership position in key product categories. Among the significant developments were the doubling of the FLOW family of connected products, the launch of FlowSongs enabling music purchase and streaming directly from the radio, launch of the iPhone App for the Lounge, extension of the range of audiophile quality iPod docks, a radio created with designer Orla Kiely, launch of ‘Twilight’ which combines the radio and lamp categories in an innovative ‘dawn simulator’ lifestyle product and finally the launch of the first connected radio using integrated DAB/Wi-Fi chip based on Imagination’s own technology. The last six months have seen a number of awards for PURE with top accolades in two leading UK Hi-Fi magazine annual as well as plaudits from consumer and international press. PURE has won ‘What Hi-Fi? Sound and Vision’ magazine’s prestigious ‘Radio Product of the Year’ for the seventh time in nine years. PURE’s AVANTI Flow won the title in October 2010 for the second year in a row and was also awarded ‘Best Internet Radio’. PURE’s ONE Elite took the prize for ‘Best Desktop DAB up to £100’. In the 2010 Hi-Fi Choice Awards PURE’s Sensia took two top accolades, winning both ‘Best Radio Tuner’ and the coveted ‘Best Innovation’ title. Additionally, AVANTI Flow and EVOKE-3 have been awarded “Best Buy” status from the highly respected and stringent “Which?” magazine, while Sensia has been awarded Best Digital Radio for the second year in a row by SmartHouse in Australia. The Group’s investment in developing the internet and web services portal, thelounge.com, in support of its connected radio and multimedia platform with its first deployment in the form of the PURE Flow range, is enabling the next generation of the ’cloud-based‘ products and services. These connected technologies and services are considered of significant strategic importance to Imagination as a whole; not only in the delivery of internet-based multimedia content but also for other connected services such as automation, security and remote health care. Over time we will be offering our Flow technology in its own right, bringing our portal, connectivity and processor IP together to address the many emerging connected application beyond the radio market, It is important to note that PURE, in its own right, is making very valuable contributions to the development of fundamental intellectual property that are critical for key aspects of the Group’s future strategies. Outlook and way forward Building on the momentum achieved in the first half and continued strong demand for its technologies, the Group is confident it will exceed the 200m partner chip shipment target for the full year and that it will also see continued growth in licensing revenues. PURE continues to showcase effectively and drive some of our key technologies. The business is expected to see improvements for the second half and over the medium term, despite some short-term slow-down. It is clear that our technologies in multimedia, connectivity/broadcast and embedded processing offer both significant advantages to our partners and provide a strong and highly scalable base for our growth. Despite the significant progress we have made to date, the exploitation of many of our key technologies is still at an early stage in many markets. For example, the worldwide embedded graphics market alone has the potential to reach multi billion annual units over the next five or so years. Similarly the rapidly developing internet connectivity and cloud-based services trends will ultimately require almost all home consumer devices such as TVs, STBs and other home appliances to incorporate both connectivity and advanced user interfaces. The recent acquisitions, which were announced after the end of the half year, are designed to complement our technologies and markets whilst also providing us with further capabilities and tools to launch disruptive technologies. We always look very carefully for market discontinuities or disruptive technologies to help us in developing and growing our business. These acquisitions are part of this process. We remain on course to achieve further significant growth as existing markets develop and new markets and applications emerge where our technology can make a significant difference to the consumer experience. It has been a feature of our strategy to both ride and drive key trends with new technologies. PURE is an integral part of the Group’s strategy and focuses on targeting emerging consumer markets that can benefit from a concerted drive and pathfinder approach. This has been successfully executed on digital radio in the UK with the focus now moving to international development. Connected devices and the opportunities they offer are another key area where PURE’s efforts are directed, with a starting point that bridges the broadcast and internet arena and enables optimal delivery of both mass and individual targeted content. Our strategy will ultimately also lead to complementary areas involving home connectivity and the provision of useful remote services. Despite the volatile macro economy, the Group remains well placed for further solid growth based on its active licensing pipeline, expected chip volume ramp and royalty growth, as well as the potential for PURE to exploit its strong product line-up and develop its new sales territories.
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