https://imagination-technologies-cloudfront-assets.s3.amazonaws.com/presentations/IMG-FY-results-2017.pdf
FY17 financial performance
· Group revenue from continuing operations up 19% to £145.2m (2016: £121.6m)
§ Licensing revenue up by 82% to £33.9m (2016: £18.6m)
§ Royalty revenue up 8% to £111.1m (2016: £102.7m)
· Adjusted operating profit* for continuing operations up by approximately three times to £29.2m (2016: £10.5m)
· Reported operating profit from continuing operations £7.8m (2016: loss £26.8m)
· Adjusted loss per share 0.9p (2016: loss 9.2p); reported loss per share was 10.1p (2016: loss 29.8p)
· Cash generated by operations was £11.0m - despite £13.7m outflow from loss making discontinued businesses
· Net debt at year-end was £28.4m (30 April 2016: £33.0m and 31 October 2016: £40.8m)
Operational highlights
· Restructuring completed as planned
· Refreshed strategy - focus on IP solutions with potential for real scale - being successfully implemented
· Continue to see good demand for licenses in all three businesses - PowerVR, MIPS and Ensigma
· Substantial improvement in trading performance in all three units
· Compelling products in FY18 roadmap - bodes well for competitiveness for each business unit
· Number of successful launches by PowerVR
Apple and current situation
· Apple Inc.'s ("Apple") unsubstantiated assertions that it had designed Imagination out and that royalties would cease in 2018 or early 2019, announced by the Group on 3 April 2017
· Dispute with Apple continues - no progress made. Options being reviewed
· MIPS and Ensigma marketed for sale (4 May 2017) to concentrate resources on PowerVR and strengthen the balance sheet; the sale process is progressing well
Formal Sale Process
· Following interest in the entire Group, decided to initiate a formal sale process on 22 June 2017
· Preliminary discussions continue with potential bidders
Peter Hill, Chairman, commented:
"The management team have done a tremendous job over the last year, turning the business around, returning it to profitability and with a clear strategy for growth. It is therefore highly regrettable that this progress has been so severely impacted by the stance taken by Apple."
Andrew Heath, Chief Executive, said:
"Last year was exceptionally challenging but operationally we delivered a strong set of results. Our restructuring programme was implemented as planned and our focus on our core IP businesses resulted in notable progress across all three of our businesses.
"We improved our financial performance across the business. We returned the business to profitability and saw good cash generation despite the outflow from the now discontinued businesses.
"However, Apple's unsubstantiated assertions and the resultant dispute have forced us to change our course, despite the clear progress we have been making.
"Initially we elected to sell the now much stronger MIPS and Ensigma businesses in order to strengthen our balance sheet and concentrate our resources on PowerVR. Additionally, we have received interest from a number of parties for the whole Group - reflecting the real quality and strategic value of our businesses and the associated IP. We therefore initiated a Formal Sale Process, which is on-going."
Enquiries
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Imagination Technologies Group plc
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Tel: 01923 260 511
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Andrew Heath, Chief Executive Officer
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Guy Millward, Chief Financial Officer
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Instinctif Partners
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Tel: 020 7457 2020
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Adrian Duffield/Kay Larsen/Chantal Woolcock
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* 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 2.
Chief Executive's Review
Introduction
FY17 has been another notably challenging year for the business, characterised by significant restructuring, the implementation of a refreshed strategy and a dispute with our largest customer, Apple.
We executed the restructuring programme that was announced early in 2016, to plan and returned the business to profitability and positive cashflow. The £27.5m of cost savings, identified in 2016, was delivered in full, with non-core activities either sold or discontinued.
We also announced and started the implementation of our revised strategy to build IP solutions of real scale with customers, across a wide range of markets, where we can provide leading, differentiated offerings and build defendable positions; delivering long-term value to shareholders in the process. Over the past year we have focused investment in our core IP businesses: PowerVR, MIPS and Ensigma.
This strategy has resonated well with customers. Investment has been increased in PowerVR with the addition of around 50 more engineers to address market opportunities. The launch of the mid-range PowerVR Series XE GPU has been the most successful launch to date in terms of the number of new design wins with multiple customers. The launch of the new Furian GPU architecture and the high-end Series 8XT cores also cements PowerVR's technology leadership.
Both MIPS and Ensigma made good progress towards profitability, with MIPS now almost breakeven. Ensigma produced a strong performance in license sales and MIPS continued to increase its presence in the automotive market, with a number of deals, as well as continued design wins in LTE modems.
This good work has been overtaken by events following Apple informing us that they expected that the chips in their products launched at some point in 2018 or early 2019 would not require them to pay Imagination royalties. So far Apple has not shared any information to enable us to verify their statement. Imagination has invoked a contractual dispute resolution procedure under the license agreement. Imagination does not accept Apple's position and reserves all of its rights.
The potential impact on revenues if Apple does not pay us royalties on its new products has led the board to consider sale options. In May 2017 we announced that we were looking to sell both our MIPS and Ensigma businesses, to strengthen our balance sheet and concentrate our resources on PowerVR.
Following interest received in both MIPS and Ensigma, and subsequently the whole Group, the Board announced in June the initiation of a formal sale process for the Group and that the company was engaged in preliminary discussions with potential bidders.
Imagination has made excellent progress in executing the restructuring programme and refreshed strategy; returning the business to profitability in the process over the past fourteen months. It is regrettable that, after much hard work and on the verge of realising our strategy for the business, that we are now in a position where we have initiated a sale of the Group. We believe that in the face of the dispute with Apple, this is the best way to deliver value to our shareholders and ensure Imagination can to continue to grow and succeed in the future.
Performance in FY17
We successfully executed the restructuring programme that was announced early last year, on-time and in line with our expectations. The main areas impacted were non-core activities and central overheads including marketing and property. The core IP engineering activities have been protected.
To enable the required level of investment in our core businesses, we divested or closed non-core, cash-consuming business lines. The Pure radio business, as well as Hellosoft, was sold in 2016. IMGWorks, the SoC design business, was sold in May 2017, with the FlowRadio transaction completing in June this calendar year. The remaining elements of IMGSystems were discontinued. In total over 500 employees (almost a third of the total) have left the Group since the restructuring was announced. The majority of these people continue in their roles under new ownership at Pure International, Meeami Technologies, 7digital and Sondrel.
Following the detailed operating review in the first half of 2016, the Group continued to reinforce and invest in its three core businesses; graphics and multimedia (PowerVR), general purpose processing (MIPS) and connectivity (Ensigma). This strategy has resonated well with customers and investors alike.
PowerVR
PowerVR has focused on consolidating its market position and retaining technology leadership. In 2017 we launched new offerings in the mid-range XE family and in the high-end with the debut of our new Furian architecture and Series 8XT GPU cores, which represents a significant advance in the PowerVR architecture. We expect these technologies to further enable mass market untethered AR/VR devices and new classes of mobile devices such as convertibles, creating future growth opportunity for PowerVR.
The Group's Series 8XE has been a notably successful product launch, both with existing and new PowerVR customers. Its competitiveness in the mobile segment was proven with a multi-year subscription deal for series 8XE with Spreadtrum, a major Chinese fabless semi. Consequently, we are very confident in gaining significant share in the mid-tier mobile market through this and the successful design wins already achieved with MediaTek.
We have also seen strong traction for 8XE in the DTV/STB market with design wins at strategically important customers including Realtek, Marvell, Mstar, and Sigma. Further automotive business was secured with long-term customers Renesas and TI.
With the launch of the new high-end Furian architecture and a refreshed Series 8XT offering, we fully expect to retain our technology leadership in low power, high performance graphics. The market leader continues to use PowerVR GPU technology in their latest products and we have a good pipeline of opportunities which, if successfully closed, will help close the shortfall in royalties that might be created by the loss in Apple revenues.. A new device has begun shipping from MediaTek in 2017, the Helio X30, using a Series 7XT core, which is being used in a range of devices from phones to Chromebooks.
PowerVR continues to retain a large share of the automotive infotainment market and this position is pulling PowerVR into ADAS applications. Denso of Japan is a recent licensee for 8XT. Opportunities also exist to grow our position in the emerging AR/VR market; as well as exploiting investments made in vision products. We have a roadmap in smart vision and expect these new offerings will further drive the PowerVR licensing pipeline. In particular we are seeing significant interest in our latest vision hardware accelerated (VHA) offering.
Our ray tracing technology is of interest in the gaming market and PowerVR is continuing to develop its ecosystem with notable games publishers and middleware/engine providers
MIPS
The MIPS business has been focused on the embedded processor market, in particular those market segments where we have strong positions today and where we can exploit our differentiation capabilities to build long-term, defendable positions into the future. We continue to enjoy design wins in our traditional markets such as networking, routers and DTV/STB. MIPS has seen continued support from long term customers at Qualcomm, Broadcom and Cavium.
Beyond this good progress is also being made in new markets, as the Group targets its differentiated technology, particularly multi-threading and hardware virtualization, in meeting customers' needs.
The strength of MIPS's differentiated technology has been demonstrated through a number of important design wins over the past year. In the autonomous systems market, Mobileye selected the MIPS I6500 for its latest EyeQ5 product and Denso also became a licensee for next-generation, in-vehicle electronic systems. We are building on our success in automotive with the launch of a new MIPS core, I6500-F, which includes support for FuSa (Functional Safety) features, which is in high demand in this and broader AI segments.
MIPS also saw strong performance in Asia, with design wins with both current and new customers in China including Beken, Synochip, Loongson, and Actions and continued support from key customers such as ALi, Novatek and MediaTek in Taiwan. MediaTek is a key customer for MIPS I-class in the LTE modern segment and expects to begin mass production of devices with MIPS based modems during this summer. We have also seen strong licensing in Russia with a new deal with MRI. The success of our I-class cores proves our case that MIPS' fundamental differentiations, such as multi-threading and virtualization, are in demand in several markets.
Security is becoming an ever-increasing priority for customers. Our recent partnership with Barco Silex on Trusted Element technology and our security offering for Root of Trust systems and Omnishield gives us a very competitive security solution.
MIPS has an exciting refreshed product line and roadmap, which will allow it to better differentiate its offering in the market as well as prove competitive to customers.
Ensigma
Ensigma is now focused on IP licensing for connectivity, offering a broader range of complete end-to-end solutions for customers, which differentiates it in the market. The growth of IoT applications drove strong licensing growth in 2017, which enabled Ensigma to more than double revenue over the previous year. Significant license deals included a large American multinational semiconductor company and we also saw strong growth in the Wi-Fi market in China with a number of important design wins.
The Ensigma product roadmap is particularly focused on high performance, low power applications that are well matched to the requirements of large numbers of connected devices. Our superiority in low power wireless has been confirmed with tests on customer silicon showing that we are 2x better in power efficiency than competitors.
Apple Dispute
Apple informed us at the end of March that it will no longer use the Group's intellectual property in its new products in 15 months to two years' time, and as such Imagination will not be eligible for royalty payments under the current license and royalty agreement.
Apple has used Imagination's technology and intellectual property for many years. It has formed the basis of Graphics Processor Units ("GPUs") in Apple's phones, tablets, iPods, TVs and watches. Apple has asserted that it has been working on a separate, independent graphics design in order to control its products and will be reducing its future reliance on Imagination's technology. Apple has not presented any evidence to substantiate its assertion that it will no longer require our technology, without violating our patents, intellectual property and confidential information. This evidence has been requested of Apple, but they have declined to provide it.
We believe that it would be extremely challenging to design a brand new GPU architecture from basics without infringing our intellectual property rights, accordingly we have not accepted Apple's assertions. We initiated the dispute resolution procedure under the license agreement with a view to reaching an agreement through a more structured process.
To be clear Apple made an unsubstantiated claim, which obliged us to inform the markets, leading to a significant decrease in our share price. The claim has led us to invoke a contractual dispute resolution procedure and has created significant uncertainty with respect to our business, including our employees. We do not believe this to be acceptable business practice nor in line with Apple's own ethics statements regarding suppliers.
At the time of writing this report, we remain in dispute. Imagination has reserved all its rights in respect of Apple's unauthorised use of Imagination's confidential information and Imagination's intellectual property rights.
Customers and colleagues
Imagination has great technology that is very meaningful and relevant to many customers. We are grateful to them for their support through the changes we are going through. We are also fortunate to have very capable people across our engineering and business staff. The company has them to thank for the continued development and delivery of our strategy and roadmap during what have been very disruptive conditions.
In a complex, geographically diverse and fast moving business it is critical that we retain and attract the skills and capabilities needed in sufficient numbers to deliver our objectives and maintain an entrepreneurial and dynamic culture. We have done this by continuing to provide an exciting place to work, investing in leading and disruptive technology, supported by a revised, competitive compensation and benefits strategy. A new internal communications programme has also increased the frequency and quality of communications with our staff and further improved engagement.
I want to publically thank colleagues for the support they have shown to the business and given to me personally over the past year. The swift return to profitability in the business has been helped by the engagement and support we enjoy with our people, and which they carry forward in their interactions with our customers every day.
Outlook
Imagination continues to see good demand for licenses in all three of our core businesses. There are exciting developments and compelling products in our FY18 roadmaps which bodes well for the competitiveness of each of the business units going forward.
The Group continues to see good demand for licensing for its IP and expects to see further progress in license revenue in FY18, subject to uncertainty caused by the initiation of the formal sale process. Royalty unit shipments are expected to benefit from recent design wins. We fully expect to receive royalties from our largest customer over the next year.
I am confident that with the right investment our businesses and people will continue to flourish.
Andrew Heath
Chief Executive
