11th December 2008

Interim Results for the six months to 31 October 2008

Continued good progress despite the economic environment


Imagination Technologies Group plc (LSE: IMG), leading provider of System-on-Chip (SoC) Intellectual Property (IP), today announces results for the six months to 31 October 2008.

Business Highlights

Technology Business

Licensing
• Record order input for new licensing business
• Six major agreements involving over 10 silicon IP core licences
• Strategically and financially important deals with two major international OEMs, and four semiconductor companies: Samsung, NXP, Sigma Designs and SiRF
• Licences in key areas – Mobile Phone, Digital TV, Personal Media Player (PMP) / Entertainment & In-car
• Active pipeline of prospects

Royalties and Design Wins
• Partner chips shipped more than doubled to 41m units (H1 2007: 19m units and 47m for year)
• Strong mobile phone volume with over 100 mobile phone models
• Strong ramp-up in PMP segment
• Growing volumes in TV and Mobile Internet Device (MID)/Netbooks where already 30 models announced
• Global adoption of DAB-based standards beyond UK, well underway – DAB technology market share continuing at 80%
• Emerging market for Internet and connected audio technologies driving progress
• Strong position for graphics for in-car navigation and Personal Navigation Device (PND)
• 73 chip design wins (September 2007: 58); 28 in production

PURE Digital Business

• Maintained revenue despite economic environment
• Maintained leading position in UK
• Overseas sales growing significantly, compensate for UK slow-down
• Total UK DAB radio unit volume grew by 16% year-on-year to October 2008
• Christmas sell-through holding well on the back of strong ranging
• Very strong and diversifying roadmap underpins further progress
• Major new product category with Internet connectivity and portal support launched successfully

Financial Highlights
• Group revenue up 6% at £27.2m (2007: £25.6m)
• Technology revenues increased 10% to £15.5m
• Very strong licensing order input of over $40m
• Royalty revenue up 23%
• PURE Digital revenues increased by 2% to £11.7m (2007: £11.5m)
• Overseas revenue growth balancing UK slow-down
• Adjusted Group operating profit* of £0.7m (2007: £1.6m)
• Technology – adjusted operating profit* increased 94% to £2.0m (2007: £1.0m)
• PURE Digital – adjusted operating loss* £1.3m (2007: profit £0.6m); exchange rate impact
• Adjusted Group pre-tax profit* £0.8m (2007: £1.8m)
• Group pre-tax profit £0.1m (2007: £1.3m)
• Cash balance improved £1.9m to £9.1m at 31 October 2008 (£7.2m 30 April 2008)

* Adjusted before share-based remuneration expenses of £0.7m (2007: £0.5m)

Hossein Yassaie, Chief Executive, commented:
“”;The record level of new licensing business orders in the first half is a clear demonstration that our technologies are recognised as market-leading and in real demand. Our global blue chip partners value their relationship with us and our leading technology offerings.””;

“”;A combination of this level of license orders, the doubling of our partner chip volumes to over 40m units and the ongoing year-on-year increase in new SoC design wins are indicative of the progress we are making and a measure of the strength of our business.””;

“”;While the global economic slow-down has an impact on our rate of progress, based on our momentum in licensing and chip volume ramp up together with PURE’s leading position and scope of opportunities, we remain confident of continuing to make further progress in the current financial year.””;

“”;Our goal remains to achieve two hundred million annual unit shipments by our partners in the 2010 timeframe””;

ENQUIRIES:
Imagination Technologies Group plc
Tel (today): 020 7457 2020
Geoff Shingles, Chairman
Tel (thereafter): 01923 260 511
Hossein Yassaie, CEO
Trevor Selby, CFO

College Hill
Tel: 020 7457 2020
Adrian Duffield/Carl Franklin

About Imagination Technologies
Imagination Technologies Group plc (FTSE:IMG) a leader in semiconductor System on Chip Intellectual Property (SoC IP) creates and licenses market-leading embedded graphics, video, display and multi-threaded processors and multi-standard receiver technologies. These IP solutions are complemented by dynamic and extensive developer and middleware ecosystems. Target markets include mobile phone multimedia, handheld multimedia, home consumer entertainment, in-car and mobile computing. Its licensees include leading semiconductor and consumer electronics companies, as well as innovative leading edge start-up and fabless semiconductor companies. Imagination has corporate headquarters in the United Kingdom, with sales and R&D offices worldwide. See: www.imgtec.com.

Financial and Business Review
The first half saw continued financial and strategic progress for the Technology business with significant new licensing business closed and a substantial ramp up in partner chip volumes. The PURE Digital business, despite the much tighter environment, was able to maintain its UK market position and successfully start to engage overseas markets.

Financial Review
Group revenues for the six months to 31 October 2008 were £27.2m, 6% up on the first half revenues of last financial year of £25.6m. With the change in the financial year end, prior year comparisons are made with the first half of last financial year which was the six months to 30 September 2007.

Technology revenues, comprising licensing and royalties, increased by 10% to £15.5m (2007: £14.1m). Licensing revenues at £9.0m were, on a sterling basis, similar to last year, and on a US dollar basis showed an underlying 12% reduction. However this recognition of revenue does not reflect the very strong order input during the first half of over $40m. Whilst an element of this has been recognised as revenue during the first half of the current financial year, the vast majority has been carried forward as backlog and will underpin licensing revenues over the next few years.

Royalty revenues were £6.5m, a 23% increase (2007: £5.2m); on a US dollar basis the increase was 4%. The volume of partner chips shipping incorporating Imagination’s IP, which generate the royalty revenue stream, more than doubled to 41m (2007: 19m) as a larger number of partners’ chips start to ship. The reduced royalty rate per chip has resulted from the mix currently weighted towards low-end chips incorporating single IP cores together with legacy revenue sharing arrangements with ARM for our MBX IP core in some accounts. However, we see this reduction as a transitional phase before richer royalty flows come on stream from SoCs incorporating both newer IP cores such as POWERVR SGX and multiple IP cores, and the phasing out of the revenue sharing.

PURE Digital revenues showed a slight increase at £11.7m (2007: £11.5m). As stated before, PURE volume in the early part of the year was impacted by retailers minimising stock holdings. However, we have seen a progressive improvement throughout the half particularly towards the end as retailers started to build volume ready for the Christmas period.

Gross profit increased 8% to £18.4m (2007: £17.0m) with the overall gross margin improving to 68% (2007: 66%). This has improved as a result of the combination of the revenue mix continuing to move towards the higher margin Technology business and the actual Technology margin strengthening, more than offsetting lower gross margins in PURE caused by the strengthening of the US dollar.

The Group has, across the year as a whole, a natural US dollar currency hedge with receipts from the Technology business being largely offset by purchases of components for the PURE Digital business in dollars. However in the first half, as a result of lower PURE procurement and increasing US dollar receipts, the Group has increased its US dollar holdings resulting in an exchange gain of £1.0m (2007: loss £0.2m). The US dollar balance will reduce as we make supplier payments for PURE Digital Christmas procurement.

Overall expenses have increased by 15% to £18.4m (2007: £16.0m). R&D spend increased by 19% to £15.1m (2007: £12.7m). Overall sales and administrative expenses increased only marginally by 3% to £3.4m (2007: £3.3m) as a result of the gain on exchange noted above. These expenses include a non-cash charge of £0.7m for share-based incentives (2007: £0.6m).

Adjusted operating profit for the Technology business, before share-based incentive costs, increased 94% to £2.0m (2007: £1.0m). Whilst the US dollar movement has benefited the Technology business, it has adversely impacted margins in the PURE Digital business which had an adjusted operating loss of £1.3m (2007: profit £0.6m).

Adjusted Group pre-tax profit was £0.8m (2007: £1.8m). The reported pre-tax profit was £0.1m (2007: £1.3m).

Working capital has been tightly controlled with a reduction of £1.3m since April 2008. This has directly fed through to generate a net cash inflow from operating activities of £1.6m for the half (2007: £1.0m outflow). Capital expenditure in the first half was £1.2m (2007: £0.9m). As a result of the net cash inflow, together with the benefit of the strengthening US dollar, the cash balance at the end of October improved £1.9m to £9.1m (£7.2m at 30 April 2008).

Business Review

Technology Business
The Technology business continued to see significant progress in its three key metrics:
• new licensing deals that generate short term revenue and are the underlying driver behind royalty generation
• growth of SoC design wins, which is a good measure of technology adoption
• partner chip volume ramp-up which drives royalty revenues

As a core technology provider, this progress is a direct result of our long-term R&D effort being targeted to ensure that our technology has significant competitive advantage and is strongly aligned with emerging market trends.

Licensing
During the half year, the active pipeline of opportunities has led to the completion of strategically important and financially significant licensing agreements. Imagination concluded six major new licensing agreements as well as a number of smaller extensions and upgrades with record order input of over $40m.

The key agreements concluded involved two leading global OEMs in the consumer space and four semiconductor companies. The agreement with one of these OEMs involved a multi-year, multi-use license agreement giving it access to Imagination’s wide range of current and future graphics and video IP cores. As a result, it is expected that Imagination’s IP cores will feature in a number of new SoCs to be used in this company’s future products. The agreement with the second OEM, a major international consumer electronics company, for a high-performance forthcoming member of Imagination’s POWERVR SGX graphics processor family, will extend the reach of this technology into another high-volume consumer device segment.

Other significant agreements closed during the period were with semiconductor companies; Samsung for mobile, consumer and navigation markets, NXP for digital consumer markets including HDTV and STB, SiRF for consumer navigation systems and Sigma Designs for multimedia consumer devices.

A notable feature is the trend towards very strategic and in-depth engagements with our partners which have resulted in the licensing of a broader range of technologies as well as their application across wider markets by partners. In addition we have seen further major progress in our relationships with top OEMs which have, in certain cases, extended beyond the more common software licenses into deep and long-term engagement on full IP delivery.

Partner Chip Shipments and Royalties
Partner chip unit shipments more than doubled to 41m units (2007: 19m units) which is close to the 47m achieved for the whole of last year. The volume growth has been primarily driven by the production ramp-up across mobile phone, PMP, and 3D-enabled car navigation systems. There have also been initial, and now growing, contributions from the TV and MID/Netbook segments and continuing shipment in digital radio market.

An important dynamic and strategic aspect of our business is that the deployment of our technology is often allied to key technology changes in markets (e.g. the move to 3D graphics in mobile phones) where this transition is significant and often involves unit growth in the range of 50% to 150% per year.

With our technology implicitly tied in to these fundamental market changes, our chip volume is therefore not overly dependent on the fluctuation in overall market sizes. For example we, along with industry analysts, expect the adoption of graphics in mobile phone market to double every year and that such a technology transition will only be marginally affected by a recession driven slow down in overall mobile phone market shipments.

We still remain comfortable with the target of achieving 200 million partner chip shipments in the 2010 timeframe. However as can often happen in the early stages of a market development, the rate of product introduction and the speed of production ramp-up can be variable, as has been shown in the last two six-month periods.

New SoC Design Wins
The momentum behind new partner SoC design wins has continued with the cumulative number of committed partner SoCs increasing to 73 at October 2008, compared with 58 as at September 2007. Of these design wins 28 are shipping, with the balance of 45 still in design. They are the drivers for future partner SoC shipments and further royalty revenue growth.

These committed devices are diversified across Imagination’s partners and key market segments: 29 for Mobile Phone Multimedia devices; 10 for Handheld Multimedia (PMP, mobile entertainment/gaming, mobile TV), 14 for Home Consumer devices (TVs, STBs, DVDs, digital radio & audio, connected audio, and home entertainment devices); 11 for In-car (Navigation, Dashboard, PNDs); and five in Mobile Computing (MID/UMPC/Netbook) and four for amusement and toys.

During the period we continued to see further adoption of our technologies in many of our key markets including TV/STB, where User Interface requirements are becoming increasingly important, Mobile Multimedia, In-car and Mobile Phone. We now have over 30 partner SoCs deploying our new generation graphics, POWERVR SGX, with five having just entered initial production stages. In addition our video (over 20 SoCs), processor/DSP (over 20 SoCs) and communication technologies (over 10 SoCs) are being increasingly deployed by our partners.

Markets
A review of progress in Imagination’s target markets is as follows:
Mobile Phone Multimedia – Over 100 handsets have so far incorporated Imagination’s technologies; many of which are market leading models with new capabilities from the key OEMs, including Nokia, Samsung, Sony Ericsson, Motorola, NEC, Fujitsu, Mitsubishi and Sharp. We are seeing continued and accelerated adoption of multimedia technologies in this market with the vast majority of graphics enabled handsets utilising Imagination technology.

The deployment of hardware acceleration is rapidly increasing to a larger proportion of mobile phones. This is providing Imagination with a fast growing serviceable available market, despite some shrinkage in the overall phone market. With its strong partnerships, Imagination is well positioned to continue to exploit this opportunity effectively as it grows.

Following Apple’s deployment of graphics in its iPhone and iPod Touch, and the huge success of these devices, there is now a major drive by all OEMs to migrate to technology that provides an improved user interface and Internet browsing capabilities. This is accelerating the deployment of graphics and multimedia technologies not only in the handset markets but in all mobile and even consumer electronics categories.

Handheld Multimedia (PMPs, Mobile entertainment/gaming & Mobile TV) – this segment is Imagination’s second largest in volume terms after the mobile phone segment. Imagination has seen its technology deployed by a leading player in the PMP market where products increasingly require advanced graphics and video capabilities to improve interactivity and user interface capabilities. Combined with other partner SoCs in design, Imagination expects to obtain a growing market share in this important segment.

In the mobile TV market, Imagination’s current generation technology is already shipping in some of the early T-DMB mobile TV markets in Asia. Further progress in the mobile TV market requires other world markets such as the North American and European regions to embrace such services. Using Imagination’s multi-standard UCC receiver technology our partners in this market are now able to offer very small, high-performance and cost-efficient solutions across multiple regions. As a result Imagination expects that this will ultimately result in securing a sizable market share in this segment as this market emerges and achieves volume.
Home Consumer Entertainment (Digital radio, Connected audio, TV, STB, DVD, Home entertainment) – The digital radio market continues to be an important target for Imagination’s multi-standard receiver and processor/DSP technologies. Imagination has played and continues to play a leading role in providing key technologies for this market and has seen its digital radio technology deployment share reaching 80%. The main trend is now the adoption of digital radio formats, many based on the DAB standard or its variants, in an increasing number of overseas markets. This process has gained momentum in recent months and is set to transition this opportunity into a global one.

The penetration of Internet connectivity and WiFi is enabling new opportunities in the form of Internet and WiFi based radio and audio streaming. These connected audio trends are strongly supported by our radio/connected audio technology platform which has been developed to support global broadcast as well as Internet connectivity. This combination is expected to be a key driver in the next generation of radio and connected audio devices. Both from a technology licensing perspective as well as through PURE Digital, Imagination is well placed to continue to lead in this market.

Imagination’s continued commitment to the TV segment has started to bear fruit both in terms of securing new license agreements as well as starting to contribute to the volume of SoCs shipping. The Intel CE3100 chip has begun making contribution to this segment. Also the partnership with NEC is expected to result in Imagination IP being deployed in TVs from a major global brand from early 2009. Other more recent partnerships with NXP and Sigma Designs will in due course further develop progress in this segment.

In-car – 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 more recent relationships with other key players in this market such as NEC, Freescale and SiRF are expected to significantly increase our market share in both traditional in-car navigation systems and next generation Personal Navigation Devices (PNDs). The attention that the traditional mobile phone application processor semiconductor companies, such as TI, and also Intel through its Intel Atom technology are paying to these markets has increased the routes through which our technologies may potentially be deployed in this market.

Mobile Computing (MID, UMPC, Netbook devices) – Imagination’s partnership with Intel in the personal computing/UMPC and MID segment has progressed to plan with shipment of the Intel GMA500 which is using our POWERVR SGX and VXD video cores. This solution has already secured many OEM design wins with over 30 products shipping or announced. The partnership with Intel is very strong with several significant projects underway.

PURE Digital
During the first half PURE Digital revenues only marginally increased. This was a direct consequence of macro economic factors and the associated retail slow-down. We have seen a progressive improvement throughout the half particularly towards the end as retailers started to build volume ready for the Christmas period. Additionally, despite the economic environment, the total UK DAB radio unit volume grew by 16% year-on-year to October 08. The introduction of lower price radios and the onset of the recession meant the increase in value of the UK DAB market was less then 5%.

Whilst PURE’s UK revenues have seen some impact due to the downturn, the overseas markets such as Switzerland, Denmark, Norway and Malta have compensated for this. Switzerland has been particularly strong following the recent selection of DAB+ as the digital radio broadcast standard for the country. The advent of the DAB+ standard has helped to accelerate the digital radio adoption process; this enhanced standard has now been adopted or is in the process of being adopted by many other countries including Australia and Germany. Australia primed for the biggest ever DAB launch on 1 May 2009.

Germany is expected to roll out DAB+ in 2009 with volume ramp up in 2010. France has selected a European variant of the Korean T-DMB standard known as DMB Audio which will also be rolled out during 2009 with volume ramp-up in 2010. It is now quite clear that the transition from analogue to digital radio has begun in a global sense. Both Imagination, as the technology provider, and PURE Digital, as the leading radio manufacturer, are set to take advantage of these trends.
As a result of the growing contribution of overseas business to PURE, which is now around 15%, PURE’s overall revenue for the half year has been maintained at similar levels to last year despite the onset of recession. The profitability of the division was impacted by the exchange rate fluctuations with the US dollar.

The launch of PURE’s well received Flow ‘connected radio’ family and the associated Internet portal, thelounge.com, have opened up further significant opportunities in both DAB and non-DAB countries as such products take advantage of WiFi and Internet connectivity. The EVOKE Flow, the first connected radio which supports DAB, Internet and legacy FM capabilities, has won over 15 awards including the prestigious What Hi-Fi Sound & Vision Radio Product of the Year 2008.

In time for the peak Christmas season, PURE launched a range of new products including: EVOKE-2S, PURE’s best sounding radio so far; the luxurious EVOKE Mio range of leather and suede effect radios; and AVANTI Flow, a high quality next-generation digital audio system with iPod connectivity.

As a result of its continuing strong product line up and planned delivery of new technologies, PURE has maintained strong product ranging at key retailers in the UK and has been able to develop key overseas relationships in support of its strategy to develop overseas business. These trends will see PURE playing a key role in the UK as well as other regions as the inevitable digital wave sweeps the radio industry and as the new connected products become a major consumer product category.

Outlook
The ongoing requirements of Imagination’s existing partners, combined with growing interest from new customers, gives the Board considerable confidence that Imagination’s technologies will continue to be adopted in the future. Whilst the timing and level of licensing revenues may be difficult to forecast accurately, and the overall global economic uncertainty may have some impact on purchasing decision-making, Imagination is continuing to see an active pipeline of licensing opportunities. The significant order input during the first half forms a strong basis for further progress.

The Group expects continued 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 opportunities that Imagination targets are either very large markets undergoing a technology transition or are moderate to fast developing segments. These provide a strong year-on-year growth opportunity which, given the quality of our partnerships, can be effectively exploited.

With digital radio technology becoming a standard feature in most home audio and music systems in the UK, and, critically, in a growing number of other geographic markets, Imagination is confident that PURE will be able to maintain its progress and continue to grow through innovative and leading products, particularly over the medium term. PURE’s new product line-up, combined with strong retailer ranging, positions PURE as effectively as possible for the remainder of the peak Christmas selling season and beyond. PURE’s readiness in terms of leading products and strong local presence with respect to the developing overseas markets should maximise its ability to take advantage of these opportunities.

PURE’s investment in developing its own Internet portal, thelounge.com, to support its Flow range is enabling PURE to develop this important new ‘connected radio’ market, both in the UK and, significantly, in non-DAB territories, with award winning products which are proving popular with consumers.

We are continuing to invest in a controlled and targeted manner to be fully able to exploit the strong market positions for both the Technology business and the PURE Digital business. Based on an active licensing pipeline, expected chip volume ramp up and royalty growth, and PURE taking advantage of its strong product line-up, the upcoming peak season and new sales territories, the Group remains well placed. Whilst the macro economic volatility and its influence on consumer spending may continue to have some short term impact on our development, the Board remains confident that the Group’s good progress will continue.

Hossein Yassaie
Chief Executive
11 December 2008

View the full financial interim statement.


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