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DALSA Reports Second Quarter 2005 Financial Results

DALSA (TSX:DSA) today reported second quarter revenues of $44.1 million and net income of $2.0 million, or $0.11 earnings per share, diluted. The following table summarizes the key results for the second quarter of 2005 and compares them to the same quarter last year:

(In millions of dollars, except per share) amounts)

Q2, 2005 Q2, 2004 Increase/(Decrease)
Total Revenues $44.1 $39.8 10.6%
Total Net Income $2.0 $4.1 (51.2%)
Earnings Per Share (diluted) $0.11 $0.24 (54.2%)
Gross Margin 41.2% 41.5% (0.3) p.p.*
Order Backlog at June 30 th $58.4 $51.0 14.5%
Cash Flow From Operations ($3.2) $7.8 ($11.0)

* percentage points

"In the second quarter, we met our revenue goals through record shipments into the semiconductor inspection end market and by achieving higher than expected sales in the new DALSA Coreco division," commented Savvas Chamberlain, CEO of DALSA Corporation. "Our earnings, however, were below our expectations, mainly due to lower gross margins in the Semiconductor Business.

Although we expect growth to be lower than originally anticipated due to a few customer specific factors and softness in some end markets, our overall outlook for the rest of the year remains positive. We anticipate sequential and year-over-year revenue growth in the next two quarters and expect to end 2005 with a revenue growth rate of more than 10% over 2004. For the balance of the year, we will keep a close eye on our cost structure to ensure it is in line with revenues, and we are committed to running the Company to be cash flow positive."

The Digital Imaging Business posted revenue in the second quarter of $31.0 million, up 39% from the second quarter of 2004. Net income was $1.9 million in the second quarter, up $0.3 million or 19% compared to the same period last year. Despite the sequential and year-over-year increase in standard products sales and better than expected Application Specific Contract (ASC) revenue, further sales growth was limited by the delay in the launch of a customer's product in the professional photography and broadcast end market. Earnings in the Digital Imaging Business were in-line with management's expectations. Included in the net income in the quarter is a loss from the Company's Digital Cinema initiative of $1.1 million or $0.06 per share (see below for an update on the initiative).

Management expects Digital Imaging sales to continue to grow in 2005 relative to 2004, but not at the rate previously anticipated. Over the quarter, management saw the sentiment of some customers become somewhat cautious due to their concerns about the economy and higher oil prices. While the Company has retained its customers and markets share, the sentiment has caused some customers to delay orders or delay the introduction of some of their new products.

The Semiconductor Business posted revenue of $13.1 million in the second quarter, a 25% decrease from the same period last year. Net income was $0.1 million, down $2.4 million from the same quarter in 2004. The decrease in revenue is due to the generally slow rebound from the industry-wide semiconductor downturn and in particular lower shipments to two significant customers who are seeing continued softness in their end markets. The outlook for revenue for the second half of 2005 is to be slightly ahead of the level in the first half of this year. Net income in the business decreased primarily due to lower gross margins resulting from lower fab loading and unfavourable product mix. Net income was also lower due to an incremental $1.2 million spent on research and development associated with the launch of the new proprietary MEMS processes (see below for an update on the MEMS expansion). The R&D spending level is expected to return to its target range as MEMS products move into full production and revenues increase. Management is monitoring expenses closely to ensure that the division maintains a reasonable level of profitability until revenues pick up with the launch of various new MEMS products. Management remains very positive about the opportunities available to the Company with MEMS.

Overall gross margins in the quarter were 41.2%, approximately at the same level as the second quarter of 2004 and within the Company's target range of 40% to 45%. In the Digital Imaging Business margins were 50.1%, down slightly from the same period last year due to the less favourable sales mix. They are, however, expected to increase within their target range of 50% to 55% throughout the balance of the year due to higher margins from DALSA Coreco and increased volume of sales. In the Semiconductor Business, gross margins decreased by 8.8 percentage points compared to the same quarter last year due to lower capacity utilization and a reduction of sales of certain high margin products.

MEMS Expansion Update
The new MEMS facility is now substantially complete. The Company has delivered qualification samples to a number of new MEMS customers in the past few months. Initial response from qualification testing of these parts is extremely positive. In the next few months the Company's employees will focus on supporting the qualification process for customers, providing qualification samples to other customers and completing the certification of the proprietary MEMS processes in advance of the ramp in volume production of these products, which is anticipated in late 2005 and early in 2006.

Digital Cinema Update
Interest in the DALSA Origin camera has continued to grow in 2005 as users have viewed the product at the DALSA Digital Cinema Center, worked with it on test shoots and compared it to other offerings at industry events such as Cine Gear, an important industry equipment trade show held in June. However, during the recent field trials, potential clients identified an image artifact under certain shooting conditions. The Company's technical team identified the source of the artifact arising from an internal optical filter in the Origin camera. The team understands the problem and is close to a full solution, following which the cameras will be released for rental. Management expects that the Origin cameras will be deployed and generating rental revenue in the third quarter. The impact of the field trials and their results is a delay in the full launch of the Origin Camera portion of our Digital Cinema initiative.

This delay in the deployment of Origin camera rentals has not affected other operations at the Digital Cinema Center. Rental revenue from other equipment at the DALSA Digital Cinema Center, including high definition digital camera equipment, has continued to be earned through 2005. Furthermore, the use of the Origin camera in field trials has increased the interest level in the industry for the Origin, and the list of potential opportunities continues to grow. The current outlook for revenue for the year is $2 to $3 million, which is lower than our previous estimates.

"I continue to be very optimistic about our ongoing investment in new business development initiatives, despite the short term impact on profitability in 2005," added Dr. Chamberlain. "Digital Cinema, MEMS, and our newly formed CMOS Integrated Circuits (IC) Group are expected to contribute significantly to our goal of growing the Company profitably in the future at greater than 30% per year, on average, as we have demonstrated since DALSA went public in 1996. We are committed to our business model goal of producing 10% to 12% net earnings, relative to sales. However, we do anticipate that our investment in the new business development initiatives will impact net earnings by three to four percentage points in 2005."

Financial Goals
Management is updating its financial operating goals for 2005 to reflect lower than expected revenue growth in the second half of the year and the impact of the Company's ongoing investment in new business development initiatives on net earnings. The updated goals are $180.5 to $189 million in revenue (previously $215 to $234 million) with net income in the range of $12.5 to $14 million, or $0.68 to $0.76 per share, diluted (previously $23 to $25.5 million, or $1.24 to $1.38 per share, diluted). Management expects revenue to increase on a sequential and year-over-year basis for the third quarter of 2005 to between $46.5 and $50 million, and also for the fourth quarter to between $53 and $58 million.

For further detail, please refer to the Second 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_2005Q2_release.pdf.

Investor Conference Call
A conference call to discuss the results will be held today, Thursday, July 28, 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/072805/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 Access: 416-640-3405
Toll-Free Access: 1-866-459-0609

Instant Replay Access information:
Local Access: 402-220-2889
Toll-Free Access: 1-800-395-0359
Passcode: 7981083
Expiry Date: August 11, 2005

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 over 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

Published 2005-07-28

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