6th April 2005

Imagination Technologies Trading Update

Imagination Technologies Group plc, the leading provider of System-on-Chip (SoC) Intellectual Property (IP), today announces its trading update for the year ended 31 March 2005. The Company will be announcing its preliminary results on Wednesday 25 May 2005.

1- Licensing Progress Update
During the second half period, from October 2004 to March 2005, we have concluded five new licensing agreements worth approximately $11m. Many of these agreements are of very significant strategic importance given the partners involved, including:

  • Freescale (formerly the semiconductor arm of Motorola Inc.) for PowerVR mobile graphics through ARM;
  • Texas Instruments’ major licence upgrade to a PowerVR MBX family licence that now extends to the PowerVR MBX Lite core and brings our lower-end PowerVR technology to high volume segments of the mobile handset market;
  • Intel which has very recently extended its agreement for PowerVR MBX and related IP to a family licence which enables wider deployment;
  • Frontier Silicon which has licensed our mobile TV IP platform as a lead partner.

We also have two other significant deals, which have reached advanced closure stage but missed the year-end deadline. In addition to these we also have several other very important agreements at advanced stages, which we would expect to close during the first half of 2005-6. Specifically we see strong potential in the following areas:-

  • PowerVR mobile graphics/video (MBX family and related cores) – among the potential agreements at an advanced stage are ongoing negotiations with a number of parties including another two top ten semiconductor companies. Conclusion of the latter two agreements would bring the number of top ten semiconductor companies licensing Imagination’s technology to eight;
  • A new family of next generation graphics/video technology, where we are close to securing lead partnerships which we would also expect to involve top ten semiconductor companies. We see real and significant interest in this new technology from many of our existing partners;
  • Mobile TV and TV – significant ongoing discussions with partners interested in our extensive TV technology and new mobile TV IP platforms. The mobile TV market is becoming increasingly important as the mobile phone market embraces this new technology. Our unique multi-standard capability offers significant benefits over the competition and is attracting serious interest from many parties.

With this in mind we expect to secure further significant penetration in the mobile phone, mobile TV and TV segments as well as new market areas. We are pleased that during the second half we have made such strong strategic progress in our licensing partnerships, but naturally there is some disappointment that the timing of the closure of some of the deals has meant that the overall value of the licensing business closed in the second half has been impacted.

2- Royalty Progress Update – Partner SoCs
Across mobile phone, TV, mobile TV, digital radio/audio, car navigation, and amusement market segments, we now have a total of 28 partner SoCs committed, up from 20 at the beginning of the financial year. At the half-year, we reported that the launch of mobile phone products based on our technology had been delayed due to partner project timing and in particular software integration. It is therefore pleasing to advise that we now have better visibility of a significant number of end product launches scheduled during the 2005/6 financial year and beyond. There are already handsets shipping in Japan (e.g., Fujitsu’s FOMA901), and PDAs (e.g., the Dell Axim X50v), which incorporate our mobile graphics/video technologies. These early products entered production late last calendar year and in the second half we have already seen encouraging chip volumes in these markets.

We now have 14 committed SoCs across our partners that incorporate our mobile technologies and are targeting the mobile phone and PDA markets. These include devices from Renesas, TI, Intel, Samsung, Philips and Freescale. Significantly, in addition to Renesas and Intel, who started product shipment during the second half, TI, Philips and Samsung were demonstrating mobile phone application processing devices incorporating our mobile graphics technology at the 3GSM World Congress in February 2005. Given that these partners between them have over 70% of the worldwide market for chips in the mobile sector we expect to see our technology achieve very high penetration in the growing segment of mobile devices needing hardware graphics/video acceleration. Estimates over the next four years suggest that this segment will approach 50% of the total mobile phone market, providing the potential for our mobile technology to reach volumes in hundreds of millions per annum. Although we are at the very beginning of this process we have already seen shipments of around 1.5m partner chips incorporating our mobile graphics/video in the second half following the launch of only two to three end-user devices.

We have maintained our 70% market share in DAB digital radio despite significant growth in this market and increased competition. Over 80 end-user products, including models from Sony, Philips, TEAC and Sharp, are now based on our technology as supplied by our partner Frontier Silicon. Through the same partnership we have also secured a lead position in the emerging T-DMB mobile TV market, which uses DAB as the underlying technology.

Although royalty ramp-up has been delayed due to later product launches, we have seen a growth of around 70% in royalty revenues compared to the first half with an overall growth year on year of around 30%. We expect to see accelerated growth in our royalty revenues as an increasing number of end-user products in the mobile phone, digital radio, TV, car navigation, and amusement market segments enter production during the 2005/6 financial year.

3- PURE Digital Update
PURE Digital has maintained its leadership of the DAB market through delivering both feature-rich, advanced products, which push boundaries, and mainstream products that have helped to drive market growth. Significantly we recently announced that PURE Digital had reached the 500,000 unit shipment milestone for digital radios.

PURE Digital’s revenues showed strong progress during the second half driven by a good Christmas and the launch of a broader range of products. Overall PURE Digital product margins for the year have improved but revenues for the year were slightly down compared to last year due to a slower first half and the expected increased competition from low-end products. We expect PURE Digital to continue its steady progress and its leadership in the DAB market as this segment continues to grow. PURE Digital has plans to launch other strategic products in support of Imagination’s IP.

4- Financial
Overall technology revenues will be similar to last year. This is primarily due to the timing delays in the closure of licensing business noted above but also due to the adverse impact of the dollar exchange rate. Within technology revenues, royalty revenues have increased by approximately 70% compared to the first half and 30% relative to last year, based on the increased number of chips shipping. We expect this trend to accelerate now as an increasing number of chips are coming to market.

Second half revenues for PURE Digital were nearly 50% up on the first half, based on a strong Christmas period and the launch of a broader range of products. Whilst overall PURE revenues for the year were slightly down on the previous year due to the general consumer slow down we reported in the first half, product margins have improved.

Short-term delays in licensing have impacted revenues, but it is critical that we continue to invest in our IP development programmes and the support of our growing partner base and therefore we have maintained our increasing spend on R&D and related partner support activities.

Overall group revenues will be slightly down on last year and combined with the continued R&D and partner support investment, the result will be a loss in the second half.

Working capital has been tightly controlled and as a result cash resources have been maintained at the September 2004 level of £7.5m.

5- Summary
Second half financial performance has been impacted due to the timing of deal closure, however the Company has made significant and strategically important progress during the period in i) securing very important long-term new and expanded partnerships, ii) delivering to and supporting the growing number of partners as they get close to product shipment, and iii) maintaining a cohesive development roadmap that underpins our business and our partners’ requirements. As a result, our IP is now playing an increasingly fundamental role in our partners’ product development plans.

The quality of our partners, the scale of partner SoC design wins and the significant role our technologies play in our partners’ roadmaps will increasingly accelerate volume growth and hence our royalty revenues. We expect an increased news flow in the coming year as more end-user products are launched and more partners commit to our current and future technologies.

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