Half-year Report

6 December 2016

Imagination Technologies Group plc

Business on track; restructuring nears completion

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 2016.

Highlights

· Total partner shipments in line with expectation, with revenues from continuing operations up 6% to £64.4m (H1 FY16: £60.8m), as a consequence of the strong US dollar

o Royalty revenue up 6% to £52.5m (H1 FY16: £49.6m)

- Total partner unit shipments 584m (H1 FY16: 584m)

o Licensing revenue up 7% £11.8m (H1 FY16: £11.0m)

- PowerVR licencing slow with deals moving to H2

- Ensigma revenue up 144% to £4.4m (H1 FY16: £1.8m) - significant deals signed with large customers

· Group returned to profitability

o Continuing operations adjusted EBIT* up 65% to £12.2m (H1 FY16: £7.4m)

o Continuing operations operating profit of £2.9m (H1 FY16: loss £5.5m)

o £27.5m annual cost savings delivered

· Restructuring nears completion - Pure and most of IMGsystems sold, IMGworks near disposal

· Net debt of £40.8m (April 2016: £33.0m, October 2015: £35.4m), H1 outflows reflecting one-off restructuring costs and £5.2m exchange loss on dollar denominated debt. Continuing operations generated £9.5m cash from operating activities

· Peter Hill will take over as non-executive Chairman on 1 February 2017 - see separate press announcement

Andrew Heath, Chief Executive, said:

"We have successfully executed the restructuring programme, initiated last February, on time and in line with our expectations. The £27.5m of cost savings, identified earlier in the year, have been delivered - this has enabled the business to return to profitability.

"Our Ensigma unit achieved strong licence sales as we have made good progress in agreeing deals with a number of major customers. The underlying trading performance of the Group for H1 is in line with our expectations and we additionally benefitted from the strong dollar.

"We are now in a much better position to exploit our leading technologies, across a range of increasing opportunities and execute our refreshed strategy.

"For our continuing operations, we remain on course to deliver an underlying trading performance for the year in line with our expectations and anticipate that we will continue to see an additional benefit from the strong US dollar."

* Adjusted EBIT 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 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 Group'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 multimedia, processor and connectivity technologies enable its customers get to market quickly with complete and highly differentiated semiconductors. 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

In the first half of the financial year, the Group continued the restructuring of the business, initiated last February, to enable the business to grow and trade profitably. The £27.5m cost reductions have been completed in line with the original expectations.

Pure was sold in September and the majority of IMGsystems has either been sold or closed down. IMGworks and the remaining part of IMGsystems are in the process of being sold. These transactions are near completion.

Continuing operations achieved revenues growth of 6% to £64.4m (H1 FY16: £60.8m) and adjusted EBIT* of £12.2m (H1 FY16: £7.4m).

The cost savings and improved revenues meant that the Group returned to profitability with an overall (including discontinued operations) adjusted EBIT* of £7.8m (H1 FY16: loss £7.2m), helped by foreign exchange gains.

Strategy

Following the detailed operating review at the start of this calendar year, the Group continued to reinforce and build on the current strengths in its three core businesses; graphics and multimedia (PowerVR), general purpose processing (MIPS) and connectivity (Ensigma).

Investment has been increased in PowerVR with the addition of 24 more engineers, and more will be added in the second half of the financial year to address market opportunities. Ensigma produced a strong performance in license sales and MIPS continued to increase its presence in the automotive market with a number of deals.

The Group's strategy is to build leading and disruptive IP solutions of real scale with customers, across a wide range of markets, where it can provide differentiated offerings and build defendable positions; delivering long-term value to shareholders.

The Group will continue to invest in MIPS and Ensigma and improve these businesses through partnership arrangements aimed at building the necessary ecosystems and reaching scale more quickly.

Outlook

Imagination continues to see good demand for licenses in all three core businesses. Royalty revenues for the full year remain in line with earlier expectations before the exchange gains. The improved revenues, lower cost base and operational cash generation mean the Board's expectations for the full year for the continuing operations remain unchanged.

Operational review

PowerVR

PowerVR's focus is on consolidating Imagination's position and retaining leadership in high-end mobile phones and regaining market share in the mid-range mobile market.

Opportunities exist to also grow the Group's position in automotive infotainment, digital TV/set top boxes and the rapidly emerging AR/VR market; as well as exploiting investments made in ray tracing and vision products.

The Group is seeing continuing success of PowerVR in mobile GPUs. Its architecture is deeply embedded in the market leader's devices, who continue to use PowerVR's GPU technology in their latest products.

The Group's Series 8XE has been a notably successful product launch. It is being actively designed-in by licensees, and as such Imagination expects a number of new devices based on PowerVR Series8XE to ship in 2017, including devices from customers, who have not previously shipped with PowerVR, targeting the STB/DTV, automotive infotainment and mobile segments.

There will be major new devices shipping from established customers too, notably the Mediatek Helio X30. Imagination expects some of these devices to intersect with Google's Daydream VR specification and enable further mass market untethered VR headsets.

The mature PowerVR technology offerings will be refreshed in 2017 with new offerings in the mid-range XE family and in the high-end with the debut of 8XT, which is a significant advance in the PowerVR architecture.

The collaboration announced with OTOY is further testimony of the potential of accelerated ray tracing to disrupt the GPU market. The Group's ray tracing technology is under evaluation by tier1 players in the gaming market and Imagination is continuing to develop its ecosystem with notable games publishers and middleware/engine providers.

Imagination has also seen the first shipments of its video technology in high performance H.265 4K60 422 prosumer devices. The Group also expects to ship its advanced ISP technology aimed at the prosumer market in Q3 and that these new offerings will drive further the PowerVR licensing pipeline

MIPS

MIPS has been refocused on the embedded processor markets, where the Group is strong. It has seen design wins in networking, routers and DTV/STB. Good progress is also being made in mobile LTE modems, as the Group targets its differentiated technology to customers' needs.

The strength of Imagination's differentiated technology was demonstrated by Mobileye's selection of MIPS I6500 for its latest EyeQ5 product and Denso's announcement to collaborate on joint research on hardware multi-threading for next-generation in-vehicle electronic systems.

Ensigma

Ensigma is now focused on IP licensing for connectivity. The complete end-to-end Wi-Fi and Bluetooth solutions offered by Ensigma have resulted in the strong licensing in the first half, up £2.1m.

Notable deals have been secured with major industry players in mobile computing, unmanned systems and IoT, including a significant win with a tier1 provider which is an important validation of the strength of the Ensigma offering.

Financial review

The segmental analysis showing the component parts of the Group's business now includes allocations of centrally managed costs that apply to each business. The remaining costs shown as central costs related to the directors and other corporate costs which do not specifically relate to any of the businesses. IMGworks is shown as a discontinued operation following the announcement that it is to be sold, made at the July 2016 results.

Revenue

Licensing revenue from continuing operations increased 7% to £11.8m (H1 FY16: £11.0m), although H1 FY16 revenue includes £2.4m of license revenue that was subsequently reversed in H2 FY16, following decisive action taken to renegotiate two contracts and improve the commercial outcome for the group.

PowerVR license revenue of £5.1m (H1 FY16: £6.7m) was slow with deals moving to H2. £1.7m of H1 FY16 revenue reversed was in PowerVR.

MIPS license revenue was £3.1m (H1 FY15: £3.4m), H1 FY16 revenue included £0.3m of license revenue that was reversed in H2 FY16.

Ensigma license revenue grew 260% to £3.6m (H1 FY16: £1.0m) with significant deals signed with large customers giving the business the opportunity to achieve royalty progress for the first time in recent years.

Royalty revenues from continuing operations rose 6% to £52.5m (2015: £49.6m) with both PowerVR and MIPS showing year-on-year increases helped by favourable exchange rates.

MIPS' partner shipments were 388m (2015: 353m) with volumes up in most major customers, PowerVR partner shipments were 191m (2015: 226m), driven by the predicted fall in volume at our largest customer. Ensigma volumes were 4.7m (2015: 5m).

Average royalty rates were in line with last year in PowerVR and Ensigma and down slightly in MIPS.

The average sterling/dollar rate during the first half of the year increased by 14%, resulting in a similar gain in revenue.

Profitability

The £27.5m of cost savings identified earlier in the year have been delivered in full.

Following completion of the restructuring and the sale of the discontinued operations, headcount for the Group will be around 1,200 (down from 1,700, including discontinued operations, in February 2016). However, the Group continues to recruit into the core businesses.

PowerVR achieved adjusted EBIT* of £16.3m (2015: £16.7m), an operating margin of 38%.

Both MIPS and Ensigma significantly improved their profitability, Ensigma covered its engineering cost for the first time, although both businesses made adjusted losses*.

Exchange gains on revenue from continuing operations were approximately £9m spread over the businesses. Exchange losses included in operating expenses were approximately £4m, these were concentrated in MIPS and corporate costs where asset retranslations are shown.

Operating profit from continuing operations was £2.9m (H1 FY16 loss £5.5m).

Losses fell in discontinued operations as cost reductions made last year came through and businesses were sold before the period end. Losses on the disposal of Pure and parts of the IMGsystems business were £0.9m; the acquirer of Pure also has an option to buy one of the Group's King Langley properties.

Finance expenses of £5.5m (H1 FY16: £0.3m) included £4.6m of exchange losses on retranslating loans, leases and hedging contracts at the weaker sterling exchange rates at the end of October 2016.

Tax charges in continuing operations reflect withholding taxes paid on customer receipts. The Group expects to use up losses in coming periods as the business' profitability improves.

The Group's loss after tax improved to £10.1m (2015: £20.8m).

Cash and debt

Continuing operations generated £9.5m in cash but overall operations absorbed £1.0m after loss-making discontinued operations and the payment of restructuring costs outflows.

The net debt at the year-end increased to £40.8m (2015: £35.4m), £5.2m of the £5.4m increase was due to retranslation of the US dollar denominated debt at current exchange rates.

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

During the year, discontinued operations absorbed £10.5m of the group's net operating cash flows, paid £0.0m in respect of investing activities and paid £0.0m in respect of financing activities. The disposal of Pure generated a £2.6m cash receipt.

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 2016 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 2016, 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 2016.

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 2016, 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:

• Clarification of Acceptable Methods of Depreciation and Amortization - Amendments to IAS 16 and IAS 38

• Equity Method in Separate Financial Statements - Amendments to IAS27

• Annual Improvements to IFRSs - 2012-2014 Cycle

• 2016 Disclosure Initiative - Amendments to IAS 1

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:

• Recognition of Deferred Tax Assets for Unrealised Losses - Amendments to IAS 12 (effective for periods commencing after 1 January 2017)

• Disclosure Initiative - Amendments to IAS 7 (effective for periods commencing after 1 January 2017)

• IFRS 15 Revenue from Contracts with Customers (effective for periods commencing after 1 January 2018)

• IFRS 9 Financial Instruments (effective for periods commencing after 1 January 2018)

• IFRS 16 Leases (effective for periods commencing after 1 January 2019)

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 2016, 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 2016.

6. Operating segments

The Group determines and presents operating segments based on the way that financial information is presented to the Board of Directors, which is the Group's chief operating decision maker. During the prior year, the Group sub divided the Technology segment into five smaller segments or business units (BUs) - PowerVR, MIPS, Ensgima, IMGworks and IMG Systems. Whilst these BUs are similar in that they all develop technologies for licensing to semi-conductor companies for incorporation into silicon devices, they offer different technologies and in the case of IMGworks a design service and are managed separately. The Pure business unit remained a separate business unit, the same as it was in previous years. The costs of the corporate functions of the Group are, where possible, and using the most appropriate basis, allocated to each business unit. There is no inter-segment trading and no significant seasonality in the Group's operations although there is typically an increase in revenues in the period leading up to Christmas.

Information regarding the operations of each reportable segment is included below. Performance is measured based on adjusted EBIT as shown in the second table for each of the three reporting periods shown.

Note that during the prior year, the Group decided to offer for sale, the business and assets of the Pure and IMG Systems BUs. During the current year the Group decided to offer for sale the business and assets of the IMG Works BU - therefore the performance of these three BUs are included below as Discontinued operations.

Six months ended 31 October 2016

Acquisition related costs relate largely to the historic acquisitions of Posedge and Kisel and include elements of deferred acquisition consideration which are required to be accounted for as compensation. The credit as at 31 October 2016 relates to the release of accrued contingent compensation which did not crystallise in the period.

The onerous contracts provision in April 2016 largely relates to three legacy IMGworks contracts being performed for customers. An onerous contract is one where the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. These provisions have been trued up during the current period leading to a futher £566,000 charge.

The £975,000 impairment of tangible fixed assets at October 2016 relates to Concept House. This property was reclassified as an investment property during the year ended April 2016 (when an impairment of £6,458,000 was made). In the current period it has been reclassified as an asset held for resale, and impaired down to its likely sales price.

Year ended 30 April 2016 (restated)

Six months ended 31 October 2015 (restated)

Total group 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.