Imagination Technologies Group Regulatory News (IMG)

15 December 2015

Imagination Technologies Group plc

Challenging short-term period but medium-term business outlook remains strong

Imagination Technologies Group plc (LSE: IMG, "Imagination", "the Group"), a leading multimedia, processor and communications technology company, today announces results for the six months ended 31 October 2015.

Overview

· Short-term royalty revenues impacted by slowdown in semiconductor and smartphone markets, and ramp-down of customer's legacy chip as previously reported

· Medium-term outlook on royalty revenue substantially strengthened through new multi-year multi-core license agreement for PowerVR graphics

· Further significant design-wins achieved in key markets for mobile, automotive and TV

· The above new license agreement and design-wins are expected to result in additional multiple 100m's of unit shipments in FY18 and beyond

· Licensing closure timing and recognition rate in H1 does not reflect the strong pipeline and substantial growth in backlog

· Operating costs tightly managed resulting in significantly lower rate of cost growth than previously guided, while maintaining the necessary investment in key areas

· The Board currently expects adjusted operating profit for the financial year to 30 April 2016 to be below previous expectations

Financial highlights

· Group revenues of £71.1m (2014: £82.2m)

· Technology revenues of £62.7m (2014: £72.8m)

- Licensing revenues of £12.6m (2014: £16.0m)

o £3.0m deals closed 24hr outside half-year window (resulting in £1.5m of recognised revenues moving from H1 to H2)

- Royalty revenues of £49.8m (2014: £56.3m)

· Adjusted operating loss* of £7.3m (2014: profit £5.0m); reported operating loss of £20.8m (2014: £10.3m)

· Adjusted loss per share* 2.6p (2014: earnings 1.3p); reported loss per share 7.7p (2014: earnings 3.9p)

Business highlights

· Strong licensing pipeline and backlog

- 42 licenses signed (2014: 49) with over 22 existing and new partners

- Backlog of booked (but not recognised) orders up 50% over the same time last year

· Further increase in new committed SoCs with over 28 additional SoC design-wins which will contribute to future royalties

· New strategic multi-year agreement with tier-one mobile market partner

· Penetration of significant automotive market for both PowerVR and MIPS continues to develop strongly with multiple partners

· PowerVR deployed in all key over-the-top TV platforms

· Strong platform offering for emerging IoT opportunities

· Pure loss further reduced following the actions taken last year

Outlook

· The high backlog level and both the size and quality of the sales pipeline support H2 licensing revenue increasing from H1 and also being higher than H2 FY15

· Unit shipments are expected to recover in H2, although it remains difficult to provide precise guidance given dependence on timing of semiconductor industry recovery

· Careful direction of our investments will result in underlying operating cost growth of around 2%, significantly reduced from previously expected 5%-10%, resulting in a c.£5m reduction against our original plan for the financial year

Hossein Yassaie, Chief Executive, commented:

"Although our financial performance in the first half has been disappointing, reflecting a short-term slow-down in the overall semiconductor industry and softness in the mobile market, the fundamental medium-term demand drivers remain strong.

"Imagination has significantly strengthened its position in several key markets and in particular in mobile, automotive and TV/STB segments. The strategic license agreements secured with key players in these segments provide the backbone for significant acceleration in unit shipments with multiple 100's of million unit growth over the next 2-3 years.

"With growing revenues driven by the strong design-win base already established, continued demand for our existing and new technologies and ongoing discipline on operating costs mean that the operating margin is expected to significantly improve in the medium-term."

* Adjusted profit is used by management to measure the performance of the business year on year by excluding non-recurring items (items which typically do not occur every year), items relating to acquisitions and investments, non-cash based share incentive charges and amortization of intangible assets acquired from acquisitions. The reconciliation from reported results to adjusted results is set out in note 6.

About Imagination Technologies

Imagination is a global technology leader whose products touch the lives of billions of people across the globe. The company's broad range of silicon IP (intellectual property) includes the key processing blocks needed to create the SoCs (Systems on Chips) that power all mobile, consumer and embedded electronics. Its unique software IP, infrastructure technologies and system solutions enable its customers to get to market quickly with complete and highly differentiated SoC platforms. Imagination's licensees include many of the world's leading semiconductor manufacturers, network operators and OEMs / ODMs who are creating some of the world's most iconic products. See: www.imgtec.com.

Overview

The three IP families, PowerVR multimedia, MIPS processors, and Ensigma communications underpin the business and are central to the Group's overall strategy. They:

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

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

Imagination has continued to both innovate in its three fundamental silicon IP families and the IP platforms they enable and also exploit the market opportunities in both existing and emerging segments.

The development of the business in the key end markets continues to progress. However, during H1 we have seen a significant slowdown in the semiconductor market. This has been driven by weaker smartphone sales, a contraction of the PC market and the general slowdown and build-up of inventory in China. As a result industry analysts have further reduced their expectations for 2015 semiconductor industry growth. At the start of CY15 the 2015 growth forecast for the industry by different analysts was estimated to be in the range of 3.5%-8.0%. In July this range was reduced by most analysts to between 2.2% and 3.5%; only a quarter later these estimates reduced further to a range between 0% and -0.8% for the full year.

In the mobile segment, further strategic license agreements, particularly a new multi-year licensing agreement with a tier-one mobile market partner, provide the backbone for acceleration in unit volumes over the next two to three years. Based on already secured agreements we now expect to see the addition of multiple 100's of millions to annual unit shipments over this period.

In the TV/set-top box market, where over-the-top streaming and interactive content services are the emerging trends, our technology has now been deployed in three key devices for delivery of such services.

In automotive our long-standing relationships with some of the key customers are driving volume growth of both PowerVR graphics and MIPS processors with significant further acceleration expected from CY2017. We estimate that our PowerVR technology will have a market share of well over 60% in this growing and long-term market. MIPS processors also power the leading vision-based ADAS solution in the market which represents a significant growing opportunity.

We have also seen further significant design wins in networking, where MIPS has held a strong position for many years.

The momentum in the Pure business continues to build with the focus on the more advanced DAB markets such as UK, Germany and Norway as well as the in-car innovation opportunities.

We continue to invest in Research and Development to drive the future growth of the business, but have managed the rate of investment carefully resulting in much lower rates of cost growth than seen during the heavy investment phase of the last few years. The Group's capital investment programme continued with the final phase of the three-phase Kings Langley redevelopment now finished. The value of assets created by this programme over the last four years is now in excess of £65m.

Financial Review

Revenue

Group revenue for the period ending 31 October 2015 was £71.1m (2014: £82.2m).

Licensing revenue was £12.6m (2014: £16.0m). It should be noted that £3.0m of deals closed 24hr outside the half-year window (resulting in £1.5m of recognised revenues moving from H1 to H2).

Royalty revenue was £49.8m (2014: £56.3m). Partners' chip shipments (excluding MIPS) were 231m (2014: 248m) units. MIPS' partner shipments were 353m units (2014: 400m). The average royalty rate, excluding MIPS, reduced slightly due to the sales mix.

Following the refocus of Pure last year, it has been trading in a reduced number of territories and across a tighter product set. As a result revenue was lower at £8.4m (2014: £9.4m).

The average dollar rate was relatively steady during the period and was favourable compared with H1 last year.

Profit and operating expenses

Group gross profit was £63.5m (2014: £73.9m) with overall gross margin reducing slightly to 89% (2014: 90%).

Underlying Group operating expenses continue to be tightly controlled growing at 2% to £70.6m (2014: £69.2m)

Underlying expenses are those incurred in calculating adjusted operating profit* and exclude:

· non-cash share-based incentives charge of £5.4m (2014: £6.3m);

· amortization of intangibles from acquisitions of £4.6m (2014: £4.6m);

· impairment of investments of £4.9m (2014: £3.3m);

· acquisition related costs of £0.4m (2014: £0.7m);

· Group restructuring costs of £0.1m (2014: £nil); and

· a credit relating to the release of a customer contract obligation of £nil (2014: £0.8m);

Details of how the adjusting operating items listed above are apportioned between Research and Development expenses (£63.1m; 2014 £62.3m) and Sales and Administrative expenses (£23.0m; 2014 £20.7m) are contained in note 6.

Adjusted operating loss* for the Technology business was £4.9m (2014: profit £7.8m). The adjusted net operating margin for the Technology business was negative 8% (2014: positive 11%).

Pure reported a lower adjusted operating loss of £2.4m (2014: loss £2.8m). This reflects the benefit from the cost reduction activities undertaken in FY14 and FY15 offsetting the reduction in gross margin from the lower revenue.

Earnings and taxation

The Group's adjusted operating loss* was £7.3m (2014: profit £5.0m). The reported operating loss was £20.8m (2014: £10.3m).

There was a net tax credit of £1.8m (2014: £0.4m). The deferred tax asset on the Group balance sheet to be utilized against future UK profits is £7.2m (2014: £5.4m).

The Group's adjusted loss per share was 2.6p (2014: earnings 1.3p). The Group's reported loss per share is 7.7p (2014: 3.9p).

Balance sheet

Goodwill at 31 October 2015 was £59.8m (30 April 2015: £59.8m).

The investment balance reduced to £17.7m (30 April 2015: £19.9m), primarily reflecting the movement in share prices of the publicly traded investments held on the balance sheet.

Property, plant and equipment was £76.4m (30 April 2015: £69.0m) reflecting the capital expenditure incurred during the period of £10.7m (H1 2014: £4.3m) less depreciation of £3.3m (H1 2014: £3.2m). The primary element of the capital expenditure is the final stage of the redevelopment of the Group's property facilities in Kings Langley.

Trade and other receivables were £74.8m (30 April 2015: £81.8m). The reduction reflects the timing of the closure of various license deals.

Trade and other payables were £44.5m (30 April 2015: £40.6m).

Corporation tax payable was £0.6m (30 April 2015: £0.5m).

Interest bearing loans and borrowings were £43.3m (30 April 2015: £29.9m). The increase is primarily due to the capital expenditure incurred in H1.

The deferred tax liability was £14.0m (30 April 2015: £15.0m).

Cash generated from operations before movements in working capital was an outflow of £3.1m (31 October 2014: inflow £8.2m).

The cash balance as at 31 October 2015 increased to £7.9m (30 April 2015: £2.7m) as outflows relating to capital expenditure were offset by an increased draw down of the Revolving Credit Facility. At the period end Group net debt was £35.4m (30 April 2015: £27.2m).

As a prudent measure, the Group extended its banking facilities during the period. The Revolving Credit Facility was increased from £20m to £35m and the thresholds on the leverage covenant were increased.

* Adjusted profit is used by management to measure the performance of the business year on year by excluding non-recurring items (items which typically do not occur every year), items relating to acquisitions and investments, non-cash based share incentive charges, and amortization of intangible assets acquired from acquisitions. The reconciliation from reported results to adjusted results is set out in note 6.

Technology Business

Licensing

· 42 licenses including 21 for PowerVR multimedia, 19 for MIPS CPU, one for Ensigma communications and one for VoIP, with two missing the deadline by 24 hours

· Agreements signed with partners including Argo, Eta Devices, HiSilicon, Ikanos, MediaTek, Microchip Technology, Mobileye, PEZY computing, Realtek, Redpine Signals, Renesas, SiFlower, Socionext, Soft Machines, Sunplus, Telepath, Vitesse

· Licenses signed for new IP across all key IP families (including PowerVR Series7 GPU, MIPS Warrior CPU and Ensigma RPU / NPU)

· Significant and strategically important licensing deal with high volume / tier-one mobile player for PowerVR graphics

Partner chip shipments and SoC design-wins

· H1 partner chip unit shipments of 589m (2014: 648m)

· Non-MIPS shipments of 231m (2014: 248m) reflecting the ramp-down of a legacy customer chip and general softness in the smartphone and semiconductor markets

· MIPS shipments of 353m units (2014: 400m) reflecting the general softness in the semiconductor market

· Licensing activity in H1 resulted in over 28 new committed SoC design-wins added which will contribute to future royalties

Technology products update

PowerVR Multimedia

The key technologies under this category are graphics (including raytracing), video, imaging and vision:-

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 half-year there were 14 PowerVR GPU licenses across all markets and segments.

At SIGGRAPH 2015 Imagination unveiled a Vulkan demo on Android with Google. The Vulkan API from Khronos is a lightweight, close-to-the-metal interface which will allow applications to exploit high-efficiency access to graphics and compute on modern GPUs. This ground-up design, previously referred to as the Next Generation OpenGL Initiative, provides applications direct control over GPU acceleration for maximized performance and predictability. This new API also enables better application performance for our PowerVR GPU family through better support for the PowerVR technical approach (tile based deferred rendering). We consider Vulkan a significant recognition of the approach we have innovated through the history of PowerVR GPUs. 

In support of the PowerVR Wizard family of ray tracing IP cores, we have created a ray tracing reference chip to enable our partners to fully explore and evaluate the benefits that this disruptive technology can bring. The reference system was delivered back from manufacturing towards the end of H1 and was demonstrated for the first time recently at our executive event in Japan and received very positive initial feedback. In recognition of Imagination's disruptive PowerVR Wizard Ray Tracing technology the design team won UBM Canon's ACE Award for Design Team of the Year 2015.

Video and Vision Processing - Our PowerVR video decode and encode processor families, which support the latest and emerging formats, continue to lead the market for video IP. The growing applications needing video encode such as smart cameras, security systems and drones are creating new opportunities. Vision processing is needed to develop the best image from a camera sensor and is a key growth area with smart cameras and computer vision being increasingly used in areas such as automotive, retail, security and traffic management. We are seeing notable adoption of this technology which includes ELVEES who has licensed a broad portfolio of Imagination's IP and platforms, including our integrated PowerVR Vision IP Platform that combines PowerVR GPU, video and vision cores, saving power and bandwidth for today's camera applications. During H1 there were seven video and vision processing core licenses signed.

MIPS Processors

MIPS continues to strengthen its offerings and ecosystem and is increasingly being recognised as a real and strong alternative in the embedded processor and CPU IP market The interest level in and licensing of the Warrior range of cores, which were introduced after the acquisition, as well as the previous generation Aptiv range, continue to be strong and developing. During H1 we concluded 19 licenses globally for MIPS cores across existing and new customers for applications ranging from embedded control and IoT through networking and application processing to high-end computing and super-computing.

The number of Warrior based chips entering production continues to grow and now reaches across the whole family from deeply embedded to high performance.

We have announced compelling new additions to our MIPS Warrior CPU product line, as our growing portfolio and unique roadmap gain momentum. The broadening range of highly efficient MIPS CPUs enables an increasing number of licensees to choose solutions ideally matched to their differentiated feature set, performance and business goals. Recent additions to the MIPS family include the embedded 32-bit M-class M6200 and M6250 CPUs and high-end P-class P6600 64-bit CPU.

The growing interest in and demand for MIPS CPUs is the driver behind Imagination creating solutions that meet a wider range of customer requirements. Imagination will continue to deliver more new IP cores as customers work closely with the MIPS team to create solutions that meet their exacting needs and expectations, enabling them to deliver differentiated solutions.

We recently announced a deal with PEZY Computing K.K. focused on development of next-generation efficient high performance computing (HPC) systems. Through the collaboration, PEZY, a Japan-based processor company, will integrate Imagination's highly efficient 64-bit MIPS Warrior CPUs into its next-generation PEZY-SC2 many-core processors for supercomputers and other high-performance applications. The deal sees MIPS displacing another leading 64-bit CPU architecture, used in the previous generation of PEZY products.

The relationship with our long-standing partner Ikanos, now being acquired by Qualcomm, continued with a significant and comprehensive license during the half for several MIPS cores including the 64-bit Warrior processor. Other significant partner progress included Baikal whose T1 processor targets telecommunications, industrial automation and embedded systems with a high-performance, efficient MIPS CPU. MIPS 64-bit CPUs are also the heart of Cavium's new OCTEON® III processors announced in the half.

The latest version of our Codescape toolset makes the significant step of simplifying integration and debugging of systems that combine MIPS CPUs with other CPU architectures, making it easier than ever for customers to choose MIPS, as well as delivering a state of the art toolset. 

Our strategy to deliver CPU and GPU cores supporting our OmniShield security technology continues to attract industry attention with partners directly engaged with Imagination and also with the Open Security working group in the prpl Foundation.

The strong MIPS roadmap executed to date, the investment in internal and third party supporting tools, and the growing momentum in the ecosystem are recognised and supported by many in the industry. For example, the MIPS CPU architecture is fully supported by Google's new Brillo OS for the IoT. We are now at a stage that more new and existing tier-one partners consider MIPS offerings as both technically strong and strategically important to their plans.

Our innovative MIPSfpga programme continues to revolutionise the way CPU core design is taught and was recognised with the award for Educational Support at the 2015 Elektra European Electronics Industry Awards.

Ensigma Communications

Ensigma radio connectivity processors (RPUs) and network processors (NPUs) are vital to servicing the growing demand for communications (connectivity and broadcast) IP cores in key markets including IoT, wearable, mobile, wireless and digital home, automotive and enterprise solutions.

Our focus continues to be offering an end-to-end solution, including certifications such as Wi-Fi CERTIFIED™ ac certification and Bluetooth Smart qualification, for this market as more and more partners encounter the need for integration of these functionalities. To drive this we have announced complete Ensigma connectivity IP system solutions including Wi-Fi/Bluetooth software, media access control (MAC) layer, baseband, analog front end (AFE) and RF, through a range of flexible licensing and support models.

Although only one major agreement was signed, the customer engagements for Ensigma technology are growing. Specifically we concluded commercial and technical terms on four other significant Ensigma engagements during H1. One of these missed the H1 end deadline by 24 hours and the signatures for another two have now been achieved. A further three are in active negotiations. Customers are also beginning to ship new Ensigma devices in markets including the IoT, personal transportation, entertainment and more. These devices will drive further volume growth.

Imagination has joined the 5G Innovation Centre (5GIC) at the University of Surrey to collaborate with leading companies both in the UK and globally in exploring, developing and defining underlying technologies that will power the next-generation 5G mobile communications network. Imagination will invest significant resources into 5GIC over the next five years, including both people and IP platforms, to help 5GIC develop technologies that will be highly scalable and easily deployable by the widest possible semiconductor, electronic goods and service provider community.

We recently announced a collaboration with TSMC to develop a series of advanced IP subsystems for the Internet of Things (IoT) to accelerate time to market and simplify the design process for mutual customers. The IoT IP subsystems in development include small, highly-integrated connected solutions for simple sensors which combine an entry-level M-class MIPS CPU with an ultra-low power Ensigma Whisper RPU for low-power Wi-Fi, Bluetooth Smart and 6LowPan, as well as OmniShield multi-domain hardware enforced security, and on-chip RAM and flash.

Complementary supportive technologies

FlowCloud technologies - As part of our market engagement and enablement of the emerging IoT opportunities, our FlowCloud software technologies can help to enable and accelerate easy and quick deployment of our processor and communications IP in these markets. FlowCloud, in conjunction with the Creator family of microcomputer and development systems as well as third party boards and modules, is enabling a diverse range of applications in the IoT space. Early projects in the areas of agriculture, health and energy are underway with partners. We are also working on industry initiatives that are gaining traction in the key areas of security and interoperability. We are seeing increased interest and licensing for our Flow technology. For example Pioneer has licensed Imagination's FlowRadio platform for its in-car app program.

VoIP - our family of video and voice over IP (VoIP) products, including platform agnostic SDKs, constitute an important element in our IP offering for internet-based communication including some of the key emerging IoT devices needing voice communication and the arrival of 4G / Long Term Evolution (LTE) networks which require VoIP over LTE (VoLTE). We are seeing serious and significant opportunities with Mobile Virtual Network Operators (MVNO's) who wish to use our VoIP solutions. The rising importance and relevance of voice in connected IoT devices is creating new opportunities for this technology in conjunction with our processor and connectivity platforms. This half we announced that Imagination's ClearCall™ VoIP application is now available for Cavium's OCTEON® III multi-core processors.

Caskeid - With the growth of smartphones and tablets and the migration to streaming content, the demand for wireless streaming of audio is set to grow. Caskeid is Imagination's targeted solution combining our patented low delay and low latency audio distribution technology with our processor and connectivity IP cores. The Caskeid audio platform is designed to address the growing demand for wireless audio including home music distribution and multi-channel applications such as home cinema. Through the effort initiated by Pure we are engaged with licensing partners including significant players and expect to see strong deployment of this technology in 2016.

Pure business

Pure's activities continued to be focused on core areas that are of direct strategic significance or financial relevance for the Group. These include key markets or ecosystems that are highly relevant to one or more of our three fundamental IP areas. The current focus areas are:-

· The DAB product line-up where Pure is a market leader and supporting / driving the adoption of digital radio internationally and in automotive

· Strategic engagement in support of key players interested in our wireless and multi-room speaker technologies. These systems use much of Imagination's underlying IP including MIPS processors, Ensigma communications and FlowCloud technology and are paving the way for the connected home revolution. This is an on-going activity with significant potential for the Group

· Helping to build development boards and systems in support of our IP offerings and Platform solutions. The launch of the well-received Creator Ci20 and Ci40 development systems and our ongoing work in developing the IoT ecosystem are examples of where we see a growing contribution from Pure

Several key products were launched during H1 in line with the Group's strategic objectives. The Pure business continues to develop its range of digital radio products with the launch of new bedside radio, Siesta Rise, internet radio with Bluetooth and Spotify Connect, Evoke F3 and a range of three tabletop entertainment systems. Following the announcement of the Pop designer range with Mini Moderns, Pure held a prestigious launch at the Sanderson hotel to introduce its latest collaboration with British fabric and wallpaper brand Sanderson.

As part of Pure's tighter focus, and to further improve financial performance whilst maximising reach, we are exploring opportunities with a number of third parties to use a licensing model for the Pure brand and products in certain categories. We have successfully trialed such an approach in two limited scenarios.

Current trading and outlook

As with previous years, we expect to see a stronger H2 than H1 for licensing revenue. While the year started relatively slowly for licensing, the strength and quality of the sales pipeline, together with the size of the backlog gives us confidence that H2 licensing revenue will be higher than H2 FY15.

Unit shipments are also expected to increase in H2, despite the impact of a customer-specific issue and the general market softness previously communicated. It is difficult to provide precise guidance at this stage, given the uncertainty on the timing of the recovery in the semiconductor market.

The key markets for Pure are showing good year-on-year progress and this is expected to result in further improvement of the profitability of the division.

Recognising the challenges we are facing, we have chosen to actively control the investments that we make in order to minimize the growth in operating costs. This process is ongoing and will result in a lower level of operating cost growth for the full year. This is now expected to be around 2% which is significantly lower than the previous guidance of 5%-10%, and has resulted in a c.£5m reduction against our original plan for the current financial year. We will continue to monitor the industry situation and will take further actions as necessary.

Given these challenges and the uncertainty, the Board currently expects adjusted operating profit for the year to be below its previous expectations.

With the significant license deals signed over the last 12 months, the medium and longer-term outlook for the business remains strong.

Sir Hossein Yassaie

Chief Executive

15 December 2015

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 2015 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 2015, 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 2015.

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 2015, 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.

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

• Annual Improvements to IFRSs - 2010-2012 Cycle (IASB effective date 1 July 2014)

• Annual Improvements to IFRSs - 2011-2013 Cycle (IASB effective date 1 July 2014)

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:

• Clarification of Acceptable Methods of Depreciation and Amortization - Amendments to IAS 16 and IAS 38 (IASB effective date 1 January 2016)

• Equity Method in Separate Financial Statements - Amendments to IAS 27 (IASB effective date 1 January 2016)

• Annual Improvements to IFRSs - 2012-2014 Cycle (IASB effective date 1 January 2016)

• Disclosure Initiative - Amendments to IAS 1(IASB effective date 1 January 2016)

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 2015, 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 both the short and medium term. The Board regularly reviews forecasts, including forecasts adjusted for significantly worse economic conditions than currently expected, and as a prudent measure has recently agreed with HSBC, temporary increases to both its revolving credit facility and leverage covenants. The Board 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 2015.

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 organized 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 an individual customer representing more than 10% of the Group's total revenue for the period has the value of approximately £29,406,000 (2014: two customers with revenues of £24,408,000 and £12,972,000). The customer's country of domicile is USA, and the revenues are included in the Technology division (2014: both USA domiciled and within the Technology division).

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 amortization of intangible assets acquired from acquisitions.

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 credit in the period of £1,851,000 (2014: £397,000 credit).

The tax credit for the interim period includes a current tax charge of £1,135,000 (2014: £955,000 charge) which largely relates to foreign withholding tax suffered; and a deferred tax credit of £2,986,000 (2014: £1,352,000 credit) relating to the creation of additional UK deferred tax assets and the release of the deferred tax liability created when acquiring the intangible assets of MIPS Technologies Inc in 2013.

A rate of 20% has been used to estimate the expected reversal of deferred tax balances. In the Summer 2015 Budget, the Chancellor announced a reduction in the UK corporation tax rate to 19% in 2017 and 18% in 2020. This was substantively enacted at the balance sheet date and therefore has been reflected in reporting deferred taxes relating to balance sheet assets and liabilities for the period ended 31 October 2015.

8. Earnings per share

Adjusted earnings per share

9. Financial Instruments

Offsetting

As at 31 October 2015 the outstanding currency contracts amounted to £24,034,000 (2014: £25,160,000). The fair value of these outstanding currency contracts was a £126,000 net asset (2014: £494,000 net liability). The movement in fair value since 30 April 2015 of £309,000 has been recognized within finance expense 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 categorized as Level 1.

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

7digital - the valuation is based on the quoted share price for 7digital Group plc on AIM. This investment is categorized as Level 1.

Ineda - the valuation is based on the latest purchase price per funding round. This investment is categorized as Level 3.

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

Onkyo - the valuation is based on the quoted share price for Onkyo Corporation on Tokyo stock exchange. This investment is categorized as Level 1.

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

Atomos - the valuation is based on the purchase price of the investment. This investment is categorized 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 categorized:

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 Ineda exercised a right to settle trade receivables totaling £837,000 in equity rather than in cash. As this was at a lower rate than Ineda's most recent funding round, the shares were subsequently revalued to the funding round valuation, generating a gain of £993,000 in the statement of comprehensive income. At the balance sheet date there was a further increase in the value of the investment due to foreign exchange movements resulting in a carrying value at 31 October 2015 of £6,875,000. The £18,000 increase has been recognized as a change in fair value of available for sale investments in the statement of comprehensive income.

During the period the Group received £25,000 shares in 7digital in lieu of non-executive director services. The total number of shares has been marked to market using the quoted share price at 31 October 2015, resulting in an impairment of £1,503,000 in the income statement.

The valuation of Toumaz has been marked to market using the quoted share price at 31 October 2015. The decline in the share price generated an impairment of £3,352,000 which has been recorded in the income statement. As a result of the impairment, there was a transfer from available for sale reserves to the Income statement of £305,000.

The valuation of Onkyo is based on the quoted market prices and the movement is recognized in the consolidated statement of comprehensive income.

The group exercised a warrant to purchase additional shares in Netspeed. This was completed in June 2015. The shares were purchased at the same rate as the Group's initial shareholding therefore no subsequent revaluation based on funding rounds was required. At the balance sheet date there was a £1,000 reduction in the value of the investment due to foreign exchange movements. This has been recognized in the statement of comprehensive income.

The valuation of Orca and Blu Wireless Technology 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 2015 are not materially different to these valuations.

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.

Long term borrowings

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

10. 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 2015 has not changed. Further there have been no significant related party transactions in the six month period ended 31 October 2015.

11. Approval

The Condensed Consolidated Half Year Financial Report was approved by the Board on 14 December 2015.

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

Bert NordbergChairman

15 December 2015

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 2015 which comprises condensed consolidated income statement, condensed consolidated balance sheet, condensed consolidated statement of comprehensive income, condensed consolidated statement of changes in equity, condensed consolidated cash flow statement 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 Conduct Authority ("the UK FCA"). 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 note 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 2015 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.

John Bennett

Senior Statutory Auditor

for and on behalf of KPMG LLP

Statutory Auditor

Chartered Accountants

15 Canada Square

London E14 5GL

15 December 2015

Notice to Shareholders

Adoption of Financial Reporting Standard (FRS) 101: Reduced Disclosure Framework

Following the publication of FRS 100 Application of Financial Reporting Requirements by the Financial Reporting Council, Imagination Technologies Group plc is required to change its accounting framework for its company financial statements, which is currently UK GAAP, for its financial year commencing 1 May 2015. The Board considers that it is in the best interests of the Group for Imagination Technologies Group plc to adopt FRS 101 Reduced Disclosure Framework. No disclosures in the current UK GAAP financial statements would be omitted on adoption of FRS 101. A shareholder or shareholders holding in aggregate 5% or more of the total allotted shares in Imagination Technologies Group plc may serve objections to the use of the disclosure exemptions on Imagination Technologies Group plc, in writing, to its registered office (Imagination House, Home Park Estate, Kings Langley, Hertfordshire, WD4 8LZ) no later than 31 January 2016.