Imagination Technologies Group plc, leading provider of System-on-Chip Intellectual Property (IP), today announces results for the six months to 30 September 2005

Operational and Financial Review

Overview

The first half has seen a significant increase in System on Chip (‘SoC’) volume shipments from our partners compared to the same period last year. The volume growth of over 500% to 3.2 million SoCs in the first half has been primarily driven by the production ramp-up of the first few chips in the mobile segment as well as the DAB market and 3D-based car navigation systems. Specifically the mobile volume growth has been driven by only three initial handsets in Japan and Korea . We expect this rapid progress to continue as volume from both existing chips and new chips builds in several market segments, in particular in the mobile phone market where we expect to see major handset shipments begin in the EU and US alongside Japan . Shipments in the TV market are also set to begin to ramp-up during the second half as our partner Sharp begins LCD TV shipment based on our TV platform technology.

The momentum behind new partner SoC design wins has continued, in all key market segments, with growth of over 50% in the number of committed partner SoCs which now totals 37. These design wins are the drivers for future partner SoC shipments and therefore further royalty growth.

We have concluded further licensing and customisation agreements with Intel, Sharp, Renesas, Philips, and Frontier Silicon, across a variety of market segments. Although the overall level of licensing business concluded in the first half of the year has been lower than expected the size and breadth of our prospect pipeline is very encouraging. The complex decision making process, the focus on existing projects, market timing and caution in the semiconductor market have all meant that many deals are still taking longer to close. 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 markets.

PURE Digital remains the number one supplier in the digital radio market with an increasingly comprehensive product range. It continues to make significant progress in developing the digital radio market whilst maintaining a significant market share. We expect a very strong Christmas period to contribute to significant growth in the second half compared to last year.

Financial Review

In the six months ended 30 September 2005, revenue was £12.8m which was slightly down on the £13.1m for the same period last year. This total comprised technology revenues of £5.5m (2004: £6.4m) and systems revenues of £7.3m (2004: £6.7m).

In the technology business, there has been strong growth in royalty revenue. The number of chips shipping incorporating our technology has increased significantly from 0.6 million for the first half last year to 3.2 million in the current first-half year leading to royalty revenues in the period increasing by over 200% to £1.5m. Based on the quality of our partners, the increasing number of chips our partners are designing using our IP and the large size of the target markets, we expect this momentum in royalty growth to continue for the foreseeable future.

Technology licensing revenues were £4.0m which was 31% down on the first half of last year. First half licensing revenue has historically tended to be lower than in second half and we do expect to see increased technology revenues coming through in the second half based on the number of discussions in progress.

Our systems business under the PURE brand remains the leading DAB radio company in the world. Revenues for the first half were 8% up on last year which was satisfactory considering the difficult retail climate in the first half.

Gross profit for the first half was £7.7m (2004: £8.3m). The gross margin percentage in both the technology business and the systems business was similar to the same period in the previous year with the lower overall margin of 60% (2004: 63%) reflecting the higher proportion of systems revenue.

The spend in R & D of £10.0m was 10% up on last year. 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. This spend is vital to ensure that our partners, a significant proportion of which are top 10 semiconductor companies, are able to fully exploit our IP and maximise our future royalty flows. On the business development front, we have invested in a new US sales activity for our technology business.

The loss before taxation of £4.8m (2004: £2.9m) reflects mainly the increased investment in R & D and sales activities. The tax charge of £0.1m was withholding tax on overseas earnings; an R & D tax credit no longer being available to be reclaimed as a cash refund.

The balance sheet has been strengthened by a placing of 15.0 million shares in July which raised £9.1m for additional working capital. Whilst royalties are building up, this was seen as a sensible measure to ensure that we can continue with the necessary investment in technology and partner support and provide sufficient working capital for PURE to exploit the profitable Christmas period. The cash balance at the end of September was £8.5m which compares with £7.7m at March 2005.

With effect of 1 April 2005, Imagination’s shareholding in Frontier Silicon has, under the transition to IFRS, been restated with the investment increasing from a cost of £0.6m to a fair value of £6.2m.

Business Update Overview

Technology Business Update

The key elements and drivers for our technology business are:-

• Partner SoC volume shipments which drive today’s royalties
• New SoC design wins which result in deployment of our IP in silicon products and drive royalties in 1.5 to 2 years
• Licensing our IP to existing or new partners which drives market penetration of our IP through new partner SoCs

The progress during the first half and outlook for each of these elements is as follows:-

Partner SoC Volume Shipment and Target Markets

We started the first half with seven partner SoCs in production or shipping across four key markets; one in digital radio (Frontier), three in mobile multimedia (Renesas and Intel), two in car navigation (Renesas) and one in STB/TV (Frontier) segments. It is these devices that enabled a dramatic increase in the volume of SoCs shipped to over 3.2m units during the first half. Approximately 60% of the volume was in mobile multimedia (phone and PDA) segment and the rest were mainly in digital radio and car navigation.

Currently the number of partner devices in production or shipping has risen to 11 which includes two new devices in mobile phone segment (Texas Instrument and Renesas), one T-DMB mobile TV device (Frontier) and the first Sharp TV SoC for LCD TV’s. These devices target major markets and we expect to see significant continued growth in volume during the second half of 2005/6 and beyond.

In the mobile phone segment only three handsets based on our PowerVR graphics (two in Japan and one in Korea ) were shipping during the first half. The number of announced handsets using our PowerVR technology has now risen to over 10. These include six new DoCoMo FOMA 902 handsets from NEC, Fujitsu, Mitsubishi, Panasonic, Sony Ericsson, and Sharp that have started/are starting shipment this quarter using OMAP2 or SH-Mobile application processors as well as the new Motorola MS550, based on SH-Mobile and now shipping in Korea.

We expect further handset launches over the next few months including those from major European and US OEMs targeting western markets. The mobile phone market is fast approaching 1 billion units per year and we believe that over time 40-50% of this market is a very relevant target for our multimedia technologies. Given that our existing semiconductor partners include six of the top 10, we have the potential to benefit from a significant portion of this market.

In the digital radio market we continue to have over a 70% market share via our partnership with Frontier Silicon whose Chorus device has been selected by many manufacturers including top brands such as Sony, Philips, Sharp and PURE digital. Currently over 100 shipping end-user products are using our technology. We expect the UK DAB market to exceed two million units in 2005 and reach close to six million by 2008.

In the car navigation market the vast majority of the new 3D-based navigation systems in Japan use the Renesas NaviCore family of chips which deploy our PowerVR technology. In Japan this market is now transitioning from an “after market” to “factory-fit” which is helping the ramp-up of volume. The forecast for the car navigation market in 2005 is for around 4 million units in the Japanese market, which tends to demand advanced technologies first. As a result half of the Japanese markets is now 3D-based. The 2005 forecast for the rest of world car navigation market is six million which generally follows Japanese trends. Over time the car navigation system is expected to become a standard feature of every car leading to significant volume.

In the set-top and TV market our TV technologies were originally deployed by Frontier Silicon targeting the set-top market with their Logie device which shipped in a number of Freeview boxes. We also have a partnership with Sharp which has licensed our TV platform for use in its LCD TV products. Sharp is the leader in LCD TV market with a market share of around 50% in Japan and 30% worldwide in this segment. We can now report that the first SoC developed through this partnership has just entered production and we expect LCD TVs using our technology to start shipment in the very near future. The worldwide market for LCD TV in 2005 is expected to reach 17 million. Key players including Samsung and Sharp have forecast that the LCD TV market will exceed 100 million units by 2010.

New SoC Design Wins

Across the mobile phone, TV, mobile TV, digital radio/audio, car navigation, and amusement market segments, we now have a total of 37 partner SoCs committed by partners, up from 24 at the same time last year. Eleven of these are now in production and shipping, although with four starting production very recently there was little or no contribution to first half.

The target markets for the 37 committed partner SoCs are: 20 in mobile phone/PDA, seven in STB and TV, two in digital radio, three for car navigation, two in amusement and three for mobile TV segments. These devices constitute a very strong basis for both our participation in the relevant markets and continued future growth of royalty revenue as volume ramps up and more devices enter into production. We expect the number of shipping devices to increase from 11 to around 14 by end of 2005/6 with particular increase in mobile and TV focussed devices.

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

Licensing and Customisation Progress Update

For the half-year to 30 September 2005 , we concluded five new licensing/customisation agreements across the mobile, TV, Digital radio and car navigation segments.

Intel was the first lead partner to license PowerVR SGX, our new generation of programmable multimedia technology. This technology sets the benchmark for the programmable graphics and video solutions and provides scalability across mobile, consumer, and computing segments. We are seeing very strong interest from existing and new partners for this technology and expect it to secure strong market penetration. The half year also saw extension of our relationship with Sharp which is focussed on the TV segments. Additionally Renesas and Philips licensed further technologies for car navigation and mobile segments respectively. Our extended license agreement with Frontier Silicon was in the digital radio area.

A number of factors impacted the level of progress in new license closure during the first half, which is historically weaker than second half for industry seasonal and holiday reasons. Among the key influencing factors were the fact that a number of existing partners were focussed on ramp-up of the first generation devices or further SoC designs using already licensed IMG IP, certain new partners’ internal complex decision making processes appeared to need more time for conclusions, and finally market timing in new areas. However a healthy pipeline of engagements and discussions, with increased level of activities and seriousness since September, with respect to both our existing and new technologies is helping to drive future licensing business. Additionally as we said at the end of last financial year, we have now completed the establishment of a small but effective marketing and sales team in US which is beginning to bear fruit with new opportunities.

The key areas that we are seeing strong and active engagements are mobile multimedia (graphics/video), TV, mobile TV, car navigation, and digital radio/audio markets.

PURE Digital Update

During the first half, PURE Digital has maintained its leadership of the DAB market through a strategy that has aimed to address three key goals. 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. In this regard it has launched new or enhanced products with features such as pause/rewind/record, digital storage (SD Card), MP3 integration, USB upgradeability and an EPG (Electronic Programme Guide). EVOKE-3 for example brings together all such advanced features in an elegant and iconic design with industry-leading sound quality. Secondly, it has diversified the 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 product, DMX-50, integrates many advanced features as well as CD, MP3 and digital storage making it an industry leading step in this segment. Thirdly PURE has also ensured it enables quality low-cost products for mainstream markets so that its brand can secure maximum shelf space and reach most consumers.

As a result of these PURE Digital now has over 25% market share in UK and has been able to increase its volume shipment accordingly as the digital radio market becomes mainstream. European shipments have been steadily increasing and now account for around 10% of PURE Digital’s business and we expect these to grow further as the digital radio markets in these regions develop. In the UK , all major stores and retailer including John Lewis, Argos , Dixons, Comet, and Tesco now sell PURE Digital products. Additionally PURE Digital’s range was selected by M&S as it enters the consumer electronics markets with quality products. The Christmas orders have been and continue to be at record levels and initial sell-through figures from the channel are very encouraging. We therefore expect a strong Charismas quarter well ahead of previous years.

Outlook and the Future

It is now clear that our strategy is beginning to show the first signs of its true potential to deliver very significant royalty revenues. The first half SoC volume growth, while dramatic in comparison to previous periods, is just the beginning of a trend. This trend will continue as in the short-term more end-user products, based on announced partner chips, come to the market and also as in the medium term more SoCs from our partners enter production driving further OEM design wins. We expect to see continued SoC volume growth in mobile phone, digital radio, car navigation and TV markets.

The shipments in the mobile segment are expected to grow very significantly during the second half and beyond as many handsets already announced in Japan and Korea ramp up in volume. In due course these will be further enhanced by product shipments from major OEM’s for the western markets. For the TV segment our partnership with Sharp Corporation has seen the first SoC enter production which will in the near future lead to LCD TV shipments using our TV technologies.

With respect to securing new licensing business, we have an active and growing pipeline of potential partners with many serious discussions at an advanced stage. We are therefore confident that our technologies for mobile multimedia, TV, mobile TV, digital radio/audio and car navigation are in demand by many key industry players. However whilst we are starting to get better visibility of the timing of royalty volumes as more SOCs enter production, it remains difficult to predict the timing of licensing deals accurately.

The directors anticipate a much improved second half performance compared to the first half with significant growth in licensing, royalty and PURE revenue streams.

Hossein Yassaie
Chief Executive
24 November 2005

Financial Tables

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