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DALSA Reports Fourth Quarter and Fiscal Year End 2005 Financial Results

Posted 1/26/2006

DALSA Corporation (TSX:DSA) today reported revenue of $41.8 million in the fourth quarter, 2005, and net income of $0.9 million or $0.05 per share, diluted. For the year ended December 31, 2005, total revenue was $166.7 million, with net income of $8.6 million or $0.47 per share, diluted. The following table summarizes the key results for fiscal 2005 and compares them to 2004:

(In millions of dollars,
except per share amounts)

Fiscal 2005 Fiscal 2004 Increase/
(Decrease)
Total Revenues $166.7 $168.6 (1.1%)
Total Net Income $8.6 $19.8 (56.3%)
Earnings Per Share (diluted) $0.47 $1.16 (59.5%)
Gross Margin 42.0% 44.4% (2.4 p.p.)*
Order Backlog at December 31 st $60.0 $51.0 17.6%
Cash Flow From Operations $19.0 $34.3 (44.7%)

* percentage points

"We are disappointed that our financial performance in the quarter was lower than expected, due primarily to a push out of orders by some customers," said Savvas Chamberlain, CEO of DALSA Corporation. "Despite this we were able to generate cash from operations and increase our backlog, which is a positive indicator for 2006. I am also pleased to report that some of the orders from flat panel display customers that were pushed out are now shipping."

"2006 will be an inflection point for the Company," Dr. Chamberlain added. "In our Digital Cinema business, for example, we expect to generate revenue from Origin camera rentals this year. Production cameras are now available for rental in our Los Angeles facility and we are working with several customers to schedule shooting dates for upcoming projects. In our Semiconductor Business, we are looking forward to the staggered launch of MEMS production throughout the year, which will increase orders and revenue through 2006. In our traditional Digital Imaging Business, we are anticipating a rebound in some of our end markets, particularly in flat panel display inspection, where our latest generation products are already gaining traction. Throughout 2006, our focus will be on increasing revenue, generating cash from operations, and returning to our traditional level of profitability."

In the fourth quarter, the Digital Imaging Business, which includes Digital Cinema, posted revenues of $29.8 million, down 6% from the fourth quarter of 2004. For the year, the Digital Imaging Business generated $116.6 million in revenue, a 13% increase over 2004. Net income was $1.4 million in the fourth quarter, down 68% compared to the same period last year. Net earnings for the year were $7.6 million, a 28% decrease from 2004. Digital Imaging revenues and earnings were lower in the quarter as several orders from flat panel display and professional photography customers were pushed out.

Application Specific Contracts (ASC) revenue, most of which is related to contracts for the semiconductor market, increased slightly to $2.4 million in the fourth quarter compared to the same quarter in 2004. Follow-on sales resulting from ASC contracts, which are included in standard product revenue, grew by 18% in 2005 over 2004.

The Semiconductor Business posted revenue of $12.0 million in the fourth quarter, a 26% decrease from the same period last year, but within management's expectations. Total revenue for the year was $50.1 million, down 23.9% from 2004. The Semiconductor Business incurred a net loss in the quarter of $0.5 million, compared to a net income of $1.9 million in the fourth quarter of 2004. Net income for the year was $1.0 million, down 89.1% from 2004. Although the fourth quarter revenue levels were within management's expectations, the overall decrease in revenues compared to 2004 is primarily due to lower shipments to certain key traditional CMOS wafer processing customers who have experienced disruptions or changes in their operations. The Company continues to pursue new growth opportunities to offset the decline in the older CMOS wafer processing business including the staggered launch of MEMS products in 2006. In the quarter, lower gross margin, higher R&D costs associated with the launch of the proprietary MEMS processes, and employee severance and termination benefit costs resulted in negative earnings. The R&D spending level is expected to return to the target range as MEMS products move into full production and revenues increase.

The Company's order backlog was $60.0 million at the end of the year, up 18% from the end of 2004, and up 4% from the third quarter of 2005. Management views this increase as a positive sign for the outlook on revenue for 2006, as the backlog traditionally decreases through the end of the year. The backlog for Digital Imaging standard products increased mainly due to orders received for delivery in the first quarter of 2006 for cameras for flat panel display inspection equipment. In the Semiconductor Business, management expects the staggered launch of MEMS production to increase orders and revenue through 2006.

Overall gross margin in the quarter was 42.7%, down 3.2 percentage points from the fourth quarter of last year and 0.7 percentage points from the third quarter of 2005. In the Digital Imaging Business, gross margin was 51.6%, a decrease of 2.7 percentage points, year-over-year. The decrease is mainly due to lower sales levels, a decrease in average selling prices, and a write-down of raw material purchased in foreign currencies to current exchange rates, which had an after tax impact of two cents per share, diluted. Despite these factors, the Company was able to maintain gross margin for the Digital Imaging Business within its target range of 50% to 55% due to the introduction of new higher margin products and through the implementation of improvements in the Company's operations. Gross margin in the Semiconductor Business was 22.2%, which is lower than the Company's goal of 25% to 35%. The decrease is due to lower capacity utilization and a reduction of sales of certain high margin products. Management has identified and is implementing cost reduction initiatives which, in addition to selected price increases and the staggered launch of MEMS production through 2006, are expected to return the gross margin percentage to the business model range.

Cash provided from operating activities was $4.7 million in the quarter compared to $9.8 million in the same period of 2004. Management's goal is to continue to be cash flow positive from operations throughout 2006 and believes that cash on hand, existing bank facilities, and cash flow from operating activities will be sufficient to fund currently anticipated working capital, planned capital spending and debt service requirements in 2006.

For further detail, please refer to the Fourth Quarter 2005 Financial Statements, accompanying notes, and Management's Discussion and Analysis at the DALSA website. The address is http://www.dalsa.com/investor/2005/DSA_2005Q4_release.pdf

Investor Conference Call
A conference call to discuss the Company's Fourth Quarter financial results will be held this afternoon at 5:00pm ET. The conference call, followed by the question and answer period, will be broadcast live and open to anyone interested in listening at http://events.onlinebroadcasting.com/dalsa/012606/index.php. The phone numbers for those who wish to participate in the question and answer period are as follows:

Live Conference Access Information:
Local / International Number: 416-850-9150
North American Toll-Free Number: 1-866-809-4939

Instant Replay Access information:
Local Dial-In Number: 402-220-7735
Toll-Free Dial-In Number: 1-800-766-3735
Passcode: 4254668
Expiry: February 9, 2006

About DALSA Corporation
DALSA is an international high performance semiconductor and electronics company that designs, develops, manufactures, and markets digital imaging products and solutions, in addition to providing semiconductor products and services. DALSA's core competencies are in specialized integrated circuit and electronics technology, software, and highly engineered semiconductor wafer processing. Products and services include image sensor components; electronic digital cameras; vision processors; image processing software; and semiconductor wafer foundry services for use in MEMS, high-voltage semiconductors, image sensors and mixed-signal CMOS chips. DALSA is listed on the Toronto Stock Exchange under the symbol "DSA". The Company has its corporate offices in Waterloo, ON and approximately 1000 employees world-wide.

This press release contains forward looking statements based on assumptions, uncertainties and management's best estimates of future events. Actual results may differ materially from those currently anticipated. Investors are cautioned that such forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from those expressed or implied by such forward looking statements are detailed from time to time in DALSA's periodic reports filed with the Ontario Securities Commission and other regulatory authorities. DALSA has no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

For more information, please contact:

Patrick Myles
Director, Corporate Communications
DALSA Corporation
Tel: (519) 886-6001 Ext. 2177
Fax: (519) 886-3972
E-mail: Investor@dalsa.com
Internet: www.dalsa.com

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