Imagination Technologies Group Regulatory News (IMG)

11 December 2013

Imagination Technologies Group plc

Continuing momentum in royalty growth, improving licensing environment and build-up of a comprehensive IP range

Imagination Technologies Group plc (LSE: IMG, "Imagination", "the Group"), a leading multimedia, communications and processor technology company, today announces results for the six months to 31 October 2013.

Financial highlights

· Group half-year revenues up 19% to £85.2m (2012: £71.4m)

o Good performance in Technology Business with revenues increased 24% to £70.8m (2012: £57.3m)

- Royalty revenues up 44% to £56.2m (2012: £39.1m)

- Licensing revenues of £14.4m (H1 2013: £17.8m, H2 2013: £11.3m)

o Pure revenues improved to £14.4m (2012: £14.1m)

· Adjusted pre-tax profit* of £13.2m (2012: £16.8m)

· Reported pre-tax profit of £2.2m (2012: £10.5m)

· Adjusted earnings per share* 3.8p (2012: 4.7p)

· Reported (loss) / earnings per share (0.4)p (2012: 3.0p)

· Cash balance of £11.6m after paying MIPS tax liability in June (30 April 2013: £76.6m)

* Adjusted results exclude non-recurring items, non-cash based share incentive charges and amortisation of intangible assets acquired from acquisitions. The reconciliation from reported results to adjusted results is set out in note 6.

Business highlights

Technology business

Volume shipment & royalties

· Total partner chips shipped of 640m. Non-MIPS shipments up 18% to 280m units (2012: 237m)

· Significant volume shipments in all mobile segments (performance, mainstream and entry smartphones), tablet/personal computing, networking & enterprise, industrial , TV/STB & automotive

o Smartphone market continues to grow strongly albeit with lower growth rates

o Average royalty rate reduced less than expected due to mix with overall revenue effect positive

· PowerVR Series6 graphics now shipping in volume across all key segments including mobile, TV and automotive

· Growing MIPS volume in developing 32-bit microcontroller and Internet of Things (IoT) markets, with MIPS 64-bit architecture well established in multiple markets

· Strong video processing IP unit shipments

Licensing & design wins

· Activity levels increased across all IP families

o 43 licenses including 18 for PowerVR GPU, 14 for MIPS CPU, eight for PowerVR VPU (including one for new Raptor camera vision IP) and three for Ensigma RPU

o Customer base continues to increase with several new partners in new areas added including Broadcom, GUC, Pluschip and Toshiba

o Many new and extended agreements with existing partners including Actions, Allwinner, Freescale, Ineda, LG, MediaTek, MicroChip, MobileEye and STMicroelectronics

o A number of on-going long-term subscription licenses with certain key partners

o Over 20 MIPS license deals signed since acquisition (completed on 7 February 2013)

· Increase in number of customers signing licenses for IP from multiple families

· Half-year licensing activity has resulted in over 30 new SoC design-wins which will contribute to future royalties

· Continued active and growing pipeline of prospects across all IP families

Pure business

· Continues to drive key markets

o Launch of Jongo wireless speaker products in key UK and US markets

o Continued refresh of DAB product line-up

· Strategic interest from key players in our wireless and multi-room speaker technologies

Hossein Yassaie, Chief Executive, commented:

"Our strategy to develop and exploit three main areas of IP - multimedia, processors and communications - has continued to make good progress.

"In a more established graphics and video market, our strong existing and important new partnerships coupled with our very strong offerings will help us to take advantage of the future growth potential in all the key segments and maintain our leading position.

"Our plans and roadmap for MIPS are receiving good initial traction from existing and potential new partners. All the indications are that the alternative that MIPS processors offer is respected and welcome, both for the technological benefits and the much needed industry balance they can help to bring about.

"There is a growing excitement around Ensigma communications technology and how this is a key enabler of the Internet of Things and the next revolution in home connectivity. Our MIPS processor and Ensigma connectivity cores in conjunction with our FlowCloud technology offer a very strong solution - centric platform for these emerging opportunities.

"There will continue to be fluctuations and changes in the markets in which we operate, but we are confident that our strong and comprehensive IP families, and the solution-centric platforms they are enabling, will allow us to take advantage of the numerous growth opportunities ahead."

About Imagination Technologies

Imagination Technologies - a global leader in multimedia, processor, communication and cloud technologies - creates and licenses market-leading processor solutions including graphics, video, vision, CPU and embedded processing, multi-standard communications, cross-platform V.VoIP and VoLTE, and cloud connectivity. These silicon and software intellectual property (IP) solutions for systems-on-chip (SoC) are complemented by an extensive portfolio of software, tools and ecosystems. Target markets include mobile phone, connected home consumer, mobile and tablet computing, in-car electronics, networking, telecoms, health, smart energy and connected sensors. Imagination's licensees include many of the world's leading semiconductor manufacturers, network operators and OEM/ODMs. Corporate headquarters are located in the United Kingdom, with sales and R&D offices worldwide. See: www.imgtec.com.

Overview

In the first half of the year Imagination has made good progress in its strategic developments with the three fundamental silicon IP families, PowerVR Multimedia, MIPS Processors, and Ensigma Communication. The three carefully developed IP families are central to the Group's overall strategy and they:

· offer a strong and comprehensive range of IP-level products that address each specific area very well and

· enable solution-centric platforms that can efficiently address all key existing and new markets.

In each of our technology areas we have real advantages, unique qualities and growing ecosystems that our customers value. Additionally we are seeing that emerging demand for a solution-centric IP model is a fundamental industry trend, which is driven by the overall supply-chain evolution over the years ahead. Our strategy has been designed to both take advantage of the disruptive nature of each of our technologies and also address the overall changing needs of the market we operate in. Our customers' positive feedback and growing interest in our activities is a strong indicator of the relevance of our strategy to the market we operate in and its future.

The Group's latest PowerVR Series6 graphics products are now shipping in key market segments with the new architecture delivering the significant performance benefits that we expected. While the architecture allows very high performance to be achieved with high levels of power efficiency, we have developed a broad range of cores and have had significant interest across the range, particularly in cores optimised for area and power efficiency. The strength of our low-end offerings from Series6 and Series6XT has fuelled significant design wins in low and mid-range application processors for smartphones and tablets, which will reach the market over the next 18 months.

This early success of PowerVR Series6 is leading to strong levels of interest in the next generation, PowerVR Series6XT, with customers starting to license this new technology which will be announced fully at CES 2014 in January.

The smartphone market continues to develop with a smaller number of larger players shaping the market. The lower end of the smartphone market continues to grow significantly with more modest growth levels at the higher end. The Group's technologies and partnerships create a strong position to take advantage of further developments and growth in all segments of this market. Additionally Imagination is well poised to take advantage of the next wave of innovation in the emerging wearables market.

The integration of MIPS has progressed very smoothly with our combined processor R&D team now completely focused on development of new cores. The business continues to make a positive financial contribution to the Group. Customer feedback on the Group's plans and roadmap has been very positive with over 20 license deals signed since the MIPS acquisition. Given the numerous opportunities we continue to believe that longer term MIPS has the potential to contribute significant additional value to the business.

The capabilities of our Ensigma communications technology are being recognised with six existing and active partners and many further potential customers also evaluating this disruptive technology. We expect both the number of licenses and also the volume of shipments relating to Ensigma to increase significantly during 2014. We expect the deployment of this technology to follow a similar trajectory to graphics in terms of migration to on-chip integration and volume potential.

At the beginning of August 2013 the Group acquired Posedge, a provider of networking and connectivity IP and SoC design services. This modest acquisition strongly complements our Ensigma connectivity IP as well as boosting our SoC design services and platform delivery capability. The Posedge development teams are primarily based in India complementing our existing operations there.

The Pure business continues to evolve with the launch of the Jongo range of wireless multi-room speakers in both the UK and the US. These products have been well received in the market and importantly we have seen strong interest in licensing the underlying technologies.

Investment in R&D remains critical to the success of the business. We continue to use a combination of organic growth and small scale acquisitions to develop the technology and capability to achieve our strategy. In the first half we have tightly controlled the rate of investment to ensure the operating cost base is effectively managed.

The Group's capital investment programme continues with the datacentre now complete and the second phase of the three phase Kings Langley redevelopment progressing well.

Financial Review

Revenue

Group revenues for the six months to 31 October 2013 increased by 19% to £85.2m (2012: £71.4m).

The strong growth from royalties and the improving licensing performance increased Technology revenues by 24% to £70.8m (2012: £57.3m).

Royalty revenues increased by 44% to £56.2m (2012: £39.1m) with a total unit shipment of 640m. Non-MIPS partners' chip shipments increased by 18% to 280m units (2012: 237m) with strong growth in lower-end handset shipments, complementing our continuing good growth in the mid and high-end smartphone segments.

As expected the average royalty rate in the non-MIPS categories marginally reduced due to a change in the mix with strong growth in lower-end handset shipments using our more mature technologies.

Improving demand for our technologies resulted in licensing revenue of £14.4m (H1 2013: £17.8m, H2 2013: £11.3m). This recovery reflects the strong and growing demand for our technology despite the continuing transitions in some market segments.

Pure saw a modest rise in revenue to £14.4m (2012: £14.1m). This was driven by growth from the launch of the Jongo product range offsetting tough conditions in the DAB market.

Profit and operating expenses

Driven by the strong progress in the high margin Technology business, Group gross profit was up 22% to £74.2m (2012: £60.6m), with overall gross margin up to 87% (2012: 85%).

Underlying Group operating expenses increased to £61.8m (2012: £43.8m). The majority of the increase reflects the acquisition of MIPS in February 2013. Excluding this there was a lower rate of underlying increase compared with the last financial year as a result of the increasing use of lower-cost locations. The headcount at 31 October 2013 was 1,571 (31 Oct 2012: 1,275).

Underlying operating expenses excluded the following items:

· Non-cash share-based incentives charge of £6.1m (2012: £6.0m)

· Amortisation of intangibles £4.1m (2012: £1.3m)

· Costs relating to acquisitions of £0.6m (2012: £0.8m)

· Loss on investments of £0.7m (2012: £1.7m gain)

· Release of contingent acquisition consideration of £0.6m (2012: £nil)

Earnings and taxation

Adjusted operating profit* for the Technology business was £15.5m (2012: £19.6m).

The difficult trading conditions coupled with significant strategic investment in the new range of products resulted in Pure recording an adjusted operating loss* of £3.1m (2012: loss £2.9m).

The Group's adjusted pre-tax profit* was £13.2m (2012: £16.8m). The reported pre-tax profit was £2.2m (2012: £10.5m).

The net tax charge was £3.4m (2012: £2.4m). The tax charge comprised of a deferred tax charge of £3.9m (2012: £2.5m), overseas withholding tax charge of £1.7m (2012: £0.4m) and a deferred tax credit of £2.2m (2012: £0.5m). The deferred tax asset on the Group balance sheet to be utilised against future profits has reduced to £5.9m (2012: £12.6m).

The Group's adjusted earnings per share* was 3.8p (2012: 4.7p). The Group's reported (loss) / earnings per share was (0.4)p (2012: 3.0p).

Balance sheet

Goodwill at 31 October 2013 was £58.2m (30 April 2013: £55.0m). The increase of £3.2m relates to the goodwill arising on the acquisition of Posedge.

Other intangible assets was £61.2m (30 April 2013: £59.6m). The increase reflects the acquisition of Posedge partially offset by the amortisation charge.

Trade and other receivables increased to £66.8m (30 April 2013: £64.0m) in line with increases in royalty and licensing revenues.

Property, plant and equipment was £52.9m (30 April 2013: £45.9m) reflecting the capital expenditure of £9.2m (H1 2012: £11.6m). The primary element of this is the re-development of the Group's property facilities in Kings Langley. The datacentre was completed during the period with the second phase of the Kings Langley development in progress with completion due in May 2014. This is the third year of the four year re-development plan.

Corporation tax payable was £0.8m (30 April 2013:£56.3m). The reduction reflects the payment of the tax liability arising from the MIPS transactions pre-acquisition.

There was a net cash outflow for the period of £65.0m (2012: Outflow £11.7m) as a result of three main factors; £56.8m relating to the corporation tax charge due on the sale of MIPS patents immediately prior to our acquisition; £10.7m relating to capital expenditure and in particular the re-development of the Group's property facilities in Kings Langley, £7.5m relating to working capital movements. These factors led to cash resources of £11.6m at 31 October 2013 (30 April 2013: £76.6m).

* Adjusted results exclude non-recurring items, non-cash based share incentive charges and amortisation of intangible assets acquired from acquisitions. The reconciliation from reported results to adjusted results is set out in note 6.

Technology Business

During the first half of the current financial year the Technology business continued to make real progress in both licensing and volume ramp.

Licensing and Design-wins

The improving licensing activities led to a number of important licensing agreements or deal extensions involving approximately 22 customers and around 43 IP licenses. The revenue from licensing deal closure showed a significant sequential improvement over the previous half-year. Increasing numbers of customers signed licenses for IP from multiple families. There is a growing and general trend towards demand for IP sub-systems or solutions combining multiple IP cores, an aspect that our strategy is designed to fully support.

Among the key agreements, there were license deals with several new partners in new areas including Broadcom, GUC, Pluschip and Toshiba. There were also significant new and extended agreements with existing partners including Actions Semiconductor, Allwinner, Freescale, Ineda, LG, MicroChip, MobileEye, STMicroelectronics and continuation of a number of long-term subscription license arrangements with certain key partners.

The target markets for the deals closed across our partners include mobile phone and tablets/mobile computing with segments across performance, mainstream and entry categories, TV/STB (set top box), PMP (personal media player)/Camera, in-car navigation/dashboard, home connectivity and automation, digital radio, wearables and industrial/enterprise equipment.

Half-year licensing activity has resulted in a significant increase in new committed SoC's with over 30 new SoC design-wins added which will contribute to future royalties.

· Multimedia - The key technologies under this category are graphics, ray tracing, video and vision:-

o Graphics - The PowerVR graphics processor (GPU) family continues to lead the market in technological capability, roadmap strength and ecosystem and remains by far the most adopted and shipped technology of its kind. During the first half there were 18 PowerVR GPU licenses across all markets and segments including many low-end use cases.The PowerVR Series6 technology has seen further deployment in the market and is now shipping for use in automotive, DTV (digital TV) and mobile devices, delivering the latest features (e.g. OpenGL ES 3.0) and demonstrating the performance and power consumption advantages of this class-leading technology. We see continued interest in and licensing of the existing Series6 cores, and initial licensing of the new PowerVR Series6XT technology which will be delivered to customers during the second half of the current financial year.A further important emerging use case for modern programmable GPUs is GPU compute where the GPU is used as an offload engine in compute intensive applications to achieve more performance with less power consumption than the CPU alone. This approach will increasingly drive many next generation features including gesture recognition, computational photography, image processing and enhancement and new applications that can take advantage of massive computational capabilities of modern GPUs. PowerVR Series6 technology is designed to take the GPU compute capabilities to a new level. We expect this technology to fuel new innovations and demand for GPUs.The level of interest in our ray tracing IP is significant with a number of major partners evaluating this ground breaking technology. This technology will be available for licensing by end of the current financial year.

o Video - Our PowerVR video decode and encode processor (VPU) families, which support the latest and emerging formats, continue to see strong volume growth. We are seeing a growing industry trend in favour of licensing rather than internal development, particularly as the next generation of advanced video standards are coming to market. During the first half there were seven video core licences. In keeping with our strategy of providing leading-edge and market-driving technologies to our customers, during the first half we launched the new PowerVR Series5 video processors offering new video compression standard HEVC (H.265) with increased performance and precision as well as supporting the emerging ultraHD resolution displays of 4Kx2K pixels.

o Camera Vision Processing - Vision processing is needed to get the best image from a camera sensor. This is an area that is important both for market opportunity and technology synergy reasons. Specifically it is clear that the deployment of camera functionality is relevant to many product categories and market segments. Furthermore careful and tight integration of camera vision processing, video encode and GPU cores can be used to achieve very important optimisations. We have been carrying out research and development in this area for some time. We also acquired a small company, Nethra Imaging, over a year ago to complement and accelerate our work whilst also strengthening our patent portfolio in this area. We announced the first product, the Raptor architecture, in this family in November 2013. The technology has already been licensed to a lead partner during the first half of this year.

· CPU and Processor cores

Following the complete integration of MIPS, the organisation is performing well. Since the acquisition 22 licenses have closed for MIPS cores involving existing and new customers.

Development of the next generation MIPS 'Warrior' family of processor cores and the drive to strengthen and build on the MIPS ecosystem continue as planned.

As announced on 16 November 2013, significant progress has been made with MIPS including the first licensee for a multi-core P5600, the first MIPS Series5 'Warrior P-class' CPU. The P5600 core delivers industry-leading 32-bit performance together with class-leading low power characteristics in a silicon footprint up to 30% smaller than comparable CPU cores. It incorporates key features needed for today's leading-edge processors, including 128-bit SIMD, hardware virtualization, next-generation security features, advanced addressing and more.

Imagination is further increasing the MIPS presence in key segments by fostering already broad MIPS support, and by exploiting open operating systems and emerging trends toward architecture neutrality and portability. Recent milestones in the MIPS ecosystem included: Android 4.4 'KitKat', including the new Chrome-based WebView and Android Run Time (ART), that is up and running on MIPS CPUs, as a result of full Google native support for MIPS in Android. Android app compatibility is already upwards of 93% on MIPS and is growing across the Top 100 paid and Top 100 free apps; new technologies such as multiple binaries, LLVM (low level virtual machine), and HTML5 are poised to end CPU-specific portability issues.

Of particular note is the wearable device market which is an exciting opportunity for MIPS processor cores given its efficient architecture and we have seen important progress in this area.

The recent launch of Microchip's range topping PIC32MZ reinforces that MIPS processors are a key player in the microcontroller market where they are recognized as faster, more capable and with better code density (the ratio of software instructions to memory size) than competitive microcontrollers running at the same frequency. The competitively priced PIC32MZ features advanced encryption, decryption, and authentication capabilities based on the microAptiv architecture and will help enable secure and efficient high volume IoT devices.

Multiple MIPS Android set-top boxes including the Broadcom-based Cycle Century, and MIPS Android smart watches such as the Ingenic-based GEAK Watch and Z-Watch, are now shipping in volume in China. Google's new Portable Native Client (PNaCl) for Chrome browser lets developers compile their code once to run on a range of supported architectures including MIPS, resulting in native-level performance for HTML5 apps.

Imagination is directing significant investment towards the open source Linux community, including increased optimizations for Debian, Gentoo, Arch Linux, Buildroot and others. Expanded partnerships around MIPS with key ecosystem partners such as Mentor Graphics and Synopsys signal Imagination's commitment to growing all aspects of the ecosystem.

Our internal analysis and feedback from MIPS customers clearly point to the competitive strength of our technology with respect to both performance and power consumption per unit area of silicon relative to competition. These advantages are very real and stem from the very well designed and true-RISC nature of the MIPS architecture. The inherent 64-bit support in the original underlying MIPS architecture is an example of the high degree of architectural elegance and future-proof thinking. Other features such as the multi-threading capabilities of MIPS, historically an area of strength for our Meta and PowerVR processor technologies, constitute a strong basis for technical integration and leverage.

The CPU and processor market is a significant and growing space and one where the opportunities are increasingly receptive to our offerings. The more open nature of modern operating systems combined with the significant existing successes of MIPS in several segments offer a very encouraging array of opportunities, which we are aiming to target and build over the next few years.

The feedback from the customer base and the market also suggests that, with the stability and long-term commitment that Imagination brings to MIPS, the opportunity for MIPS to become a significant alternative in this market is very real indeed. The industry welcomes the much needed balance that such a viable alternative brings to the environment. Whilst the progress on MIPS is very encouraging it should be noted that this is a long-term strategy to offer real choice in the CPU and processor IP market.

The MIPS family of processors combined with our Ensigma communications technology offer a highly efficient 'connected processor' which we believe is uniquely well positioned for many connected devices and the emerging IoT and Machine-to-Machine (M2M) applications.

· Communications

The Ensigma communication technology is an important and growing part of our business. The technology has already been adopted by six partners including tier one partners Qualcomm, STMicroelectronics and Toshiba.

o Connectivity and broadcast - Our Ensigma programmable radio processing unit (RPU) family supporting both multi-standard broadcast receivers and Wi-Fi/Bluetooth connectivity is becoming increasingly relevant to mainstream markets and has been designed into a growing number of chips and products. In particular home connectivity in support of streaming and automation as well as the emerging IoT markets offer major opportunities for our offerings here. We secured three further licenses for Ensigma technology during the first half. The design wins for this technology are steadily accelerating making this technology a sizable and growing part of our business. Ensigma RPUs support worldwide TV and radio reception as well as important connectivity standards such as Wi-Fi, all running on the same silicon engine in software. This technology is increasingly essential for delivery of cloud and broadcast content to home and also within the enterprise. Already we have partner devices in volume shipment using this technology for digital radio and Wi-Fi connectivity and we expect several new partner devices targeting multi-standard/global TV markets to begin shipment during 2014

o V.VoIP - our family of video and voice over IP (V.VoIP) products, including platform agnostic SDKs, constitute an important element in our IP offering with relevance to both the arrival of 4G/Long Term Evolution (LTE) networks which require VoIP over LTE (VoLTE) and general internet-based communication.

· Flow Cloud Technologies

This technology is an emerging one with considerable synergy and significant potential for Imagination. Given our strong silicon IP offerings in the key areas of processing and connectivity, we have been taking steps to ensure these technologies are complemented by relevant software technologies that can enable their easy and quick deployment in the emerging IoT markets. The FlowCloud Platform technology, which has been in development for over two and a half years, has been designed to speed-up the deployment of cloud-managed connected devices in diverse markets including home automation, healthcare monitoring, energy management, security and monitoring, connected/intelligent toys, industrial and agricultural monitoring/control and many more. The technology aims to offer a ready-made ('shrink-wrapped') software platform, running on our silicon IP solutions and covering the server and client ends of such systems. FlowCloud is an application independent software platform that ensures all essential baseline services such as authentication, security, update/maintenance are available to the developers, alongside APIs for functions such as control, streaming, and payment services.

Partner chip shipments and royalties

Partner chip unit shipments grew strongly to 640m units. Non-MIPS shipments up 18% to 280m (2012: 237m). The strong shipment was driven by continuing momentum from a number of our customers across several market segments. The volume growth has been across the expected key segments, including: mobile phone, computing/tablets, mobile multimedia/gaming, networking and industrial, microcontroller and IoT, and home consumer. We have seen accelerated growth in TV/STB segments during the period.

Pure business

Pure's focus has been and continues to be proactively helping to drive certain important developing and emerging markets that are strategic to our business:-

· Digital radio:- Pure's product line drove the market from the early days and set the much needed agenda to help develop this new market. This continues today in the form of supporting and driving the adoption of digital radio internationally. We now expect some of these markets, including UK, to begin migration towards a switch-over plan supported by governments whilst others such as Germany to develop further in digital radio penetration. As a result we expect the global markets for digital radio to grow substantially over the next few years with our technology playing a key part and securing a major share.

· Wireless home audio:- As a first step in helping to drive home connectivity and automation, Pure has been focussed on wireless audio streaming. These systems use many of Imagination's underlying IP including MIPS processors, Ensigma connectivity processors and FlowCloud technology and are paving the way for the connected home revolution. There are now significant developing partnerships which include tier one players that have been impressed and encourage by Pure's products and technologies. The Caskeid stereo and multi-room wireless technology which powers Pure's new Jongo family of wireless speakers delivers industry leading performance and in particular synchronisation capabilities that uniquely match wired systems.

· Home automation:- A longer term goal is to contribute to the emergence and development of the home automation opportunities through the use of Imagination's processing, connectivity and Flow cloud technologies.

Several key products were launched in line with the Group's strategic objectives. During this period, Pure introduced its Jongo multiroom speaker range to the market including the Jongo S3 rechargeable, portable wireless speaker, the Jongo T2, T4 and T6 wireless speakers and the Jongo A2 wireless hi-fi adapter. In addition to Jongo, Pure launched three digital radios with Bluetooth including the Evoke F4 internet radio and the Evoke D2 and D4 which come in Bluetooth and non-Bluetooth versions. Other products of note include the Contour i1Air which offers Airplay connectivity as well as charging for Apple products with both lightning and 30 pin connectors. The Pure Connect music service was switched on in a number of territories including North America where ranging has been secured for Jongo in Walmart and Best Buy outlets.

Outlook

We expect to see continued shipment growth from our partners during the rest of the financial year although at a slightly slower rate than previously seen. Our current estimate for partner chip shipments in FY14 is now a range of 580-630m units (excluding MIPS), with total shipments expected to be around 1.3bn. This takes into account the general slower growth trend in the higher-end smartphone shipments and also market share considerations in the low-end. We have a number of existing and new partners in multimedia, e.g. Intel and Broadcom, ramping up over the second half and beyond with new products using our technologies. We expect these to be significant drivers of volume shipments but the exact timings of these are not yet clear. We will be able to provide a better picture after the end of the current quarter as part of our next IMS. Additionally we have secured multiple design wins in the smartphone and tablet markets including in the lower-end which will help to drive volume next financial year.

We have seen an improving environment for licensing compared to the second half of last financial year when we reported a slow-down driven by transitions in the industry and softness in certain regions such as Japan and EU. We now have an active and growing licensing pipeline, with strong interest from and engagements with existing and new customers across all of our technologies, and have clearly observed a noticeable improvement during the first half. We continue to see the previously stated range of £38m-£43m as our target for the overall licensing for the current financial year, although this can be impacted by the overall rate of improvement in the environment and the usual timing regarding partners' design start activities.

The smartphone market is now forecast by industry analysts to be around 0.95bn units in 2013, growing to 1.5bn by 2016. Given our strong existing and growing partnerships across both of the important established platforms, iOS and Android, as previously stated we believe a graphics market share of around half of the total smartphone market remains a reasonable and realistic goal.

Progress with MIPS has been encouraging and we remain confident in the significant potential of this business. This is a long-term strategic investment which we expect to create substantial value over a five year period.

We expect to see accelerated progress in the licensing and deployment of our Ensigma communications and MIPS processor technologies in the home connectivity and the emerging IoT.

Pure continues to showcase our technologies effectively and drive some of our key technologies. Pure is an integral part of the Group's strategy and focuses on targeting emerging consumer markets that can benefit from a driver and pathfinder approach. This has been successfully executed in digital radio in the UK with the focus having moved to international development. Our strategy is leading to complementary areas involving home connectivity supporting wireless streaming and automation for new product categories which is attracting real interest from strategic partners.

The investments we have made over the last two years have provided us with the required structures for growth. We now expect our growth in operating expenses to be lower than previously anticipated and trend around 15% annual growth which would equate to £135m - £137m for this financial year.

Fundamentally our multimedia (graphics and video) business is very strong with the camera vision element offering new and significant opportunities. MIPS is meeting our expectations with next generation technology well-underway with growing customer endorsement and interest, whilst our Ensigma connectivity activities are now moving from investment to mass market exploitation. Additionally the comprehensive and complementary range of IP cores across these key areas is increasingly enabling us to offer "solution-centric IP platforms" in support of the new industry trends.

As a result the Board remains confident that the Group is on track to deliver continued progress during the current financial year and beyond.

Sir Hossein Yassaie

11 December 2013

Condensed Consolidated Income Statement

Condensed Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Financial Position

Condensed Consolidated Statement of Changes in Equity

Condensed Consolidated Statement of Cash Flows

Notes to the Condensed Consolidated Half Year Financial Report

1. Reporting entity

Imagination Technologies Group plc (the 'Company') is a company incorporated and domiciled in the United Kingdom. The Condensed Consolidated Half Year Financial Report of the Company as at and for the six months ended 31 October 2013 comprise the Company and its subsidiaries (together referred to as the 'Group').

The Consolidated Financial Statements of the Group as at and for the year ended 30 April 2013, are available upon request from the Company's registered office at Imagination House, Home Park Estate, Kings Langley, Hertfordshire WD4 8LZ. An electronic version is available from the Investors section of the Group website at www.imgtec.com.

2. Statement of compliance

This Condensed Consolidated Half Year Financial Report has been prepared in accordance with IAS 34: Interim Financial Reporting as endorsed and adopted for use in the European Union and the Disclosure and Transparency Rules (DTR). Selected explanatory notes are included to explain events and transactions that are material to an understanding of the changes in financial position and performance of the Group since the last annual Consolidated Financial Statements as at and for the year ended 30 April 2013.

This Condensed Consolidated Half Year Financial Report does not include all of the information required for full annual Financial Statements prepared in accordance with International Financial Reporting Standards.

3. Significant accounting policies

This Condensed Consolidated Half Year Financial Report has been prepared on the basis of accounting policies and presentation consistent with those applied in the Consolidated Financial Statements for the year ended 30 April 2013, except as noted below, and has been reviewed in accordance with 'International Standard on Review Engagements (UK and Ireland) 2410: Review of Interim Financial Information Performed by the Independent Auditor of the Entity', issued by the Auditing Practices Board for use in the UK.

Please refer to note 7 regarding a new accounting policy in respect of recognition of tax incentives for R&D. These have been recognized within operating profit under IAS 21.

The following additional accounting standards, amendments, and interpretations have been adopted in the period:

· Presentation of Items of Other Comprehensive Income - Amendments to IAS 1 (effective for annual periods being on or after 1 July 2012)

· Annual improvements to IFRS - 2009 - 2011 Cycle (effective for annual periods beginning on or after 1 January 2013)

· IFRS 13 Fair Value Measurement (effective for annual periods beginning on or after 1 January 2013)

· IAS 27 Separate Financial Statements (effective for annual periods beginning on or after 1 January 2013)

· Amendments to IFRS 7: Disclosures - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2013)

Adopted IFRS not yet applied

The following accounting standards, amendments and interpretations had been issued but they are not yet effective for the Group and have not been early adopted. Their adoption is not expected to have a material effect on the financial statements unless otherwise indicated:

· Amendments to IAS 32: Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2014)

· IFRS 10 Consolidated Financial Statements (effective for annual periods beginning on or after 1 January 2014)

· IFRS 12 Disclosure of Interests in Other Entities (effective for annual periods beginning on or after 1 January 2014)

· Amendments to IAS 36: Recoverable amount disclosures for non-financial assets (effective for annual periods beginning on or after 1 January 2014)

· IFRS 9 Financial Instruments (not yet endorsed by the EU)

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the EU.

4. Risks and uncertainties

The Board continuously assesses and monitors the key risks of the business. Despite the current uncertainty in the global economy, the key risks that could affect the Group's medium term performance, and the factors which mitigate these risks, have not significantly changed from those set out in the Group's Annual Report for 2013, a copy of which is available from our website www.imgtec.com. The Financial and Business Review includes consideration of uncertainties affecting the Group in the remaining six months of the year. The Board has reviewed forecasts, including forecasts adjusted for significantly worse economic conditions, and remains satisfied with the Group's funding and liquidity position. On the basis of its forecasts, both base case and stressed, and available facilities, the Board has concluded that the going concern basis of preparation continues to be appropriate.

5. Estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing this Condensed Consolidated Half Year Financial Report, the nature of the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation were the same as those that were applied to the Consolidated Financial Statements as at and for the year ended 30 April 2013.

6. Operating segments

The Group determines and presents operating segments based on the information that is provided internally to the Board of Directors, which is the Group's chief operating decision maker.

The Group is organised into two operating divisions which offer different services to different industries and are managed separately: the Technology business and the Pure business. The costs of the corporate head office and other costs which are not controlled by the operating divisions are allocated to these divisions. These divisions are the operating segments that are reported to the chief operating decision maker and are the Group's reportable segments. There is no inter-segment trading and no significant seasonality in the Group's operations although there is an increase in trading in the period leading up to Christmas.

Principal activities are as follows:

Technology business- the development of embedded graphics, video, display and multi-threaded processor and multi-standard broadcast receiver and connectivity technologies for licensing to semiconductor companies for incorporation into silicon devices.

Pure business - the development and marketing of consumer products to showcase the technologies of the Technology business and to develop new and emerging markets for such technologies.

Information regarding the operations of each reportable segment is included on the facing page. Performance is measured based on operating profit and adjusted operating profit.

Revenue is reported by geographical area of sales as follows:

The basis for attributing external customers to individual countries is the customer's country of domicile.

Revenue from the largest customer of the Group in the year, which is included in revenue for the Technology division, represents approximately £25,214,000 of the Group's total revenues. This customer's country of domicile is USA. No other individual customer represents over 10% of the Group's revenue.

In the past all revenue originated materially from the United Kingdom, however in the current period, 17% (£14,666,000) of the group's revenues have originated from the United States, with the remainder originating materially from the United Kingdom.

The operating profit, net assets and capital expenditure of the Group materially relate to the United Kingdom.

Adjusted profit

Adjusted profit is used by management to measure the performance of the business year on year by excluding non-recurring items, non-cash based share incentive charges and amortisation of intangible assets acquired from acquisitions.

The net loss on investments of £673,000 (2012: gain of £1,745,000) related to a reduction in the share price of Toumaz at 31 October 2013, compared to the price at 30 April 2013.

The contingent acquisition consideration release of £558,000 (2012: £nil) related to contingent consideration potentially due to the former shareholders of Nethra Imaging Inc, acquired by the Group in June 2012, which has not crystallised.

7. Taxation

Income tax expense is recognised based on management's best estimate of the weighted average annual income tax rate expected for the full financial year applied to the pre-tax income of the interim period.

There was a net tax charge in the period of £3,379,000 (2012: tax charge £2,438,000).

The tax charge for the interim period includes a charge of £2,982,000 in relation to a reduction in the value of deferred tax assets recognised in respect of share incentive arrangements. £1,741,000 of the reduction is attributable to a change in estimate of the available tax relief due to the fall in the company's share price since 30 April 2013, and £1,241,000 is attributable to a reduction in the applicable tax rate at which relief will be available, as a result of the introduction of the patent box rate of 10%. A blended tax rate has been used due to the phasing in of the patent box rate over the next 5 years.

The charges above are offset in part by a lower tax charge on profits of the interim period due to the introduction of the patent box rate. The effect is estimated at a reduction of £650,000 in the tax charge for the interim period.

In addition to the introduction of the patent box rate, changes have also been made to the tax incentives for R&D. In the prior period enhanced tax relief was available for qualifying R&D expenditure, resulting in a reduced tax charge. In the current period a payable taxable credit has been introduced. Having considered the nature of this credit, the directors concluded it is not an item of income tax. The gross pre-tax amount of the credit for the period is £2,070,000 and has been accounted for within operating profit.

8. Earnings per share

* The 2012 Weighted average number of shares potentially in issue has been recalculated to reflect the appropriate treatment of the shares held by the Employee Benefit Trust. This has had no impact on the 2012 Basic or Diluted Earnings per share figures.

Adjusted earnings per share

The 2012 Adjusted basic and adjusted diluted earnings per share figures have been restated for two reasons. The weighted average number of shares in issue has been reduced by 3.5m shares to reflect the appropriate treatment of the shares held by the Employee Benefit Trust. Also the approach to calculating the taxation charge which is included in the adjusted earnings per share calculation has changed. The tax effect of the income statement items which are stripped out of statutory operating profit to derive adjusted operating profit (see note 6) has been assessed, and the statutory tax charge as disclosed in the income statement has been adjusted accordingly to provide a more relevant adjusted earnings per share calculation. The April 2013 figures remain the same.

9. Financial Instruments

Offsetting

As at 31 October 2013 the outstanding currency contracts amounted to £33,798,000 (2012: £12,426,000). The fair value of these outstanding currency contracts was a £2,023,000 net asset (2012: £31,000 net liability). The movement in fair value since 30 April 2013 of £1,032,000 has been recognized within finance income in the period.

Fair values of financial instruments

Fair value is defined as the amount at which a financial instrument could be exchanged in an arm's length transaction between two informed and willing parties and is calculated by reference to market rates discounted to current value.

Fair Value Hierarchy

The Group measures the fair value of available for sale investments using the following hierarchy that reflects the significance of the inputs used in making the measurement:

Level 1: Quoted market price (unadjusted) in an active market for an identical financial instrument.

Level 2: Valuation techniques based on observable inputs, such as market prices for similar financial instruments.

Level 3: Valuation techniques using unobservable inputs which can have a significant effect on the instrument's valuation.

The Group has applied the above hierarchy to its investments as follows:

Toumaz - the valuation is based on the quoted share price for Toumaz Holdings on AIM. This investment is categorised as Level 1.

UBC - the valuation is based on the quoted share price for UBC Media Group on AIM. This investment is categorised as Level 1.

GreenPlug - the valuation of the equity holding in GreenPlug is based on management's best estimate based on information made available to them. This investment is categorised as Level 3.

Orca - the valuation is based on the purchase price of the investment. This investment is categorised as Level 3.

7 Digital - the valuation is based on the purchase price of the investment which was acquired during the year. This investment is categorised as Level 3.

Ineda - the valuation is based on the purchase price of the investment. This investment is categorised as Level 3.

Blu Wireless Technology - the valuation is based on the purchase price of the investment. This investment is categorised as Level 3.

The following table analyses investments, measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised:

The following table shows a reconciliation from opening balances to the closing balances for fair value measurements in Level 3 of the fair value hierarchy:

During the period the Group increased its holding in Orca by acquiring 2,360,439 shares for £484,000 in a funding round. By reference to this funding round the Group's holding in Orca was valued at £648,000 and the gain of £67,000 has been recognised in the Statement of Comprehensive Income. At the balance sheet date a £26,000 decrease in the value of the investment due to foreign exchange movements resulted in a carrying value of £1,105,000. The £26,000 decrease has been recognized as a change in fair value of available for sale investments in the Statement of Comprehensive Income.

The Group also increased its holding in Blu-Wireless by acquiring 928,985 shares for £125,000 in a funding round. By reference to this funding round the Group's holding in Orca was valued at £175,000 and the gain of £50,000 has been recognised in the Statement of Comprehensive Income.

At the balance sheet date a £118,000 decrease in the value of the Greenplug investment, £152,000 decrease in the value of the 7 Digital investment and £123,000 decrease in the value of the Ineda investment, due to foreign exchange movement, has been recognized as a change in fair value of available for sale investments in the Statement of Comprehensive Income.

Although the Group believes that its estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measurements of fair value.

With respect to fair value measurements in Level 3 of the fair value hierarchy, the valuation of GreenPlug is Management's best estimate as at the balance sheet date based on information available to them. Due to delays in the commercial exploitation of the technology a provision for impairment of £1,000,000 was recognised in the income statement in the previous year and the current valuation is considered to represent the fair value as at 31 October 2013.

The valuation of Orca, Blu Wireless Technology, 7 Digital and Ineda is based on the purchase price of the investment at the most recent funding rounds and any changes in the intervening period to 31 October 2013 are not materially different to these valuations.

Loan Note

Convertible loan notes are recognised at fair value as they are convertible to shares in Ineda. The value of the shares issued are expected to be equal to the face value of the convertible loan note.

Long term borrowings

The fair value approximates to book value as this instrument is at a variable interest rate.

10. Acquisitions

On 2 August 2013, the Group acquired 100% of the share capital of Posedge Inc, a company based in the US. Posedge, founded in 2006, licenses networking, connectivity and System on Chip ('SoC') IP & undertakes SoC design services. Imagination acquired Posedge for its complementary technology and resource, enabling Imagination to accelerate and extend its existing plans.

Details of the fair value of the net assets acquired for Posedge are set out below:

The deferred and contingent consideration is payable on the first, second and third anniversaries of the acquisition. The maximum payment has been recorded as a liability as this represents the fair value at the date of acquisition. The contingent consideration is payable based upon revenue targets being achieved, and certain employees remaining in the employment of the Imagination Group.

The goodwill of £3,256,000 represents the benefits the Group expects to gain from future technology and future customers as well as the value represented by the assembled workforce.

The intangible assets acquired of £5,366,000 represent the fair value placed on Posedge's technology and customer base.

The revenue attributable to the Group from the date of acquisition to 31 October 2013 is £337,000, and the loss after tax was £560,000.

The revenue and loss after tax for the period 1 May to the date of acquisition were £354,000 and £500,000 respectively.

Acquisition related transaction costs of £229,000 were incurred during the period. These are included in acquisition related costs in the Consolidated Income Statement.

11. Related Parties

The nature of related parties as disclosed in the Consolidated Financial Statements for the Group as at and for the year ended 30 April 2013 has not changed. Further there have been no significant related party transactions in the six month period ended 31 October 2013.

12. Approval

The Condensed Consolidated Half Year Financial Report was approved by the Board on 10 December 2013.

Responsibility statement of the directors in respect of the half-yearly financial report

This Half Year 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

10 December 2013

Independent Review Report to Imagination Technologies Group plc

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 October 2013 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Changes in Equity, and the Condensed Consolidated Statement of Cash Flows- and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Services Authority ("the UK FSA"). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in notes 2 and 3, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 October 2013 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.

Tudor Aw (Senior Statutory Auditor)

for and on behalf of KPMG Audit Plc, Statutory Auditor

Chartered Accountants

15 Canada Square

London

E14 5GL

10 December 2013