OP TIMIZING MULTIMEDIA S IGMA T EL® S IGMA T EL® 1601 S. Mo Pac Expressway, Suite 100 Austin, TX 78746 Sigmatel , Inc. 2005 Annual Report to Stockholders 512-381-3700 [email protected] CORPORATE PROFILE SigmaTel enables a true multimedia experience. Founded in 1993, SigmaTel designs, develops, and markets analog intensive, mixed-signal semi- conductor solutions for a wide range of digital multimedia products in the con- sumer electronics and computing markets. SigmaTel provides its customers complete, system-level solutions that include highly-integrated semiconductors, customizable firmware, reference designs, software development tools, and applications support. [ CAPITALIZING ON MARKET OPPORTUNITIES ] ENGLAND* CHINA* *USA *JAPAN KOREA* *TAIWAN *SINGAPORE TO OUR STOCKHOLDERS: Fiscal 2005 was a year of accomplishments and transi- increased performance, longer battery life and greater tion. Our strategy to improve our competitive stance has multimedia functionality we can provide, along with the been a multi-level approach based on new products, future roadmap that includes the integration of new tech- enhancing product features, strengthening intellectual nologies such as Bluetooth, WiFi, ultra wide band, GPS property, and aggressive pricing. We are focused on and others. It is essential for SigmaTel to provide the execution and integration across all product lines and highest level of innovation and performance in the mar- are confident that our strategic investments in 2005 have ket for the best value. The integration of our MPEG4 ASP positioned us to drive future growth. and H.264 video capabilities with the high performance of our audio solutions will drive product performance We reported revenue growth of 67% for the fiscal year to the next level and provide greater potential for new 2005 compared to 2004. Gross margin for the full year market opportunities. was 54.1%, above the long-term corporate target of 52.5%. We were able to offset most of the aggressive Our Integrated Components Group has made great pricing programs for our portable audio SoCs through strides this past year and we expect these efforts to reductions in manufacturing costs. 2005 net income of provide significant growth. Collaborating with several $35.9 million was impacted by our continued investment leading companies, Sony, Intel, Microsoft and Dolby, to in research and development, our international expan- name a few, on the development forefront of high defini- sion, costs associated with acquisitions, including $11.6 tion audio, provides us with new avenues for product million of in-process research and development, an development with industry leaders. For the Imaging effective tax rate of 40.6% and $7.3 million in litigation Systems Group, we are also encouraged by customer expense. As of the end of 2005, SigmaTel reported cash, reception of the STDC3000 targeted at the color laser cash equivalents and short-term investments of $118.9 printer market and multi-function printers. In the short million and no long-term debt. In January of 2006, our time that this technology has been a part of SigmaTel, we directors authorized the repurchase of up to $30 million have been able to make in-roads, increasing market of our outstanding common stock in the open market presence and building confidence with current and pro- and subject to market conditions. spective customers. In the second half of 2005, we acquired Protocom In addition to these product and technology advances, Corporation, Oasis Semiconductor, Inc. and certain we have also focused on building our intellectual prop- assets, intellectual property and engineering resources erty portfolio to provide further protection of our solutions from D&M Holdings, Inc., and Apogee Technology, Inc. and our customers’ end products. We believe that the With these strategic investments as well as extensive addition of the Moon-Hwang patent in combination with internal development, I am confident that we are well other SigmaTel MP3 related patents and along with mar- positioned to achieve the diversification of revenue nec- ket leading technology will provide us with additional essary for long-term growth, as well as transitioning strength to build market share. SigmaTel from an MP3 company into a leading mixed- signal multimedia solutions provider. We also built the Our focus for 2006 and beyond is to execute and corporate infrastructure internationally to be more strengthen our competitive edge as a diversified mixed- responsive to our customers, leveraging those relation- signal multimedia semiconductor company. We believe ships and providing the market presence and technical that SigmaTel is well positioned to maximize its growth support necessary to expand our product lines. We potential and deliver the results that both customers and opened offices in China, Taiwan, Japan, Korea and stockholders deserve. Singapore and have already benefited from closer prox- imity to our customers. Sincerely, The introduction of several key products over the last six months in addition to our newly acquired products provide us with excellent platforms for the development of current and future products. We are very excited about the capabilities of the 3600 technology and the oppor- Ron Edgerton tunities that our FM tuner provides. Customers, both Chairman, President and Chief Executive Officer new and old, are quite positive on the prospects of the 1 Portable provide 7.1 audio systems with features like Multimedia: improved voice quality for VoIP and voice recogni- tion, and digital microphone interfaces. In addition, SigmaTel enables the these audio solutions support our integration strat- multimedia experi- egy and continue driving audio standards like Sony ence for consumers Sound Reality™, Dolby® Home Theater and Intel worldwide. Our solu- Audio Studio™. tions empower manu- The DDX digital amplifier technology is a natural facturers to create extension of this SigmaTel product family. DDX solu- portable multimedia tions convert digital audio directly into power with- products that extend beyond the audio-centric MP3 out the need of a digital-to-analog converter (DAC). player. With the STMP3600 System on Chip (SoC), The integration of SigmaTel’s HD audio codecs and SigmaTel offers over 70 hours of audio playback the DDX technology will deliver customers a more from a single AA battery and integrated capabilities powerful and robust high definition audio solution optimized to display and play portable multimedia. with greater electrical efficiency, smaller form factor The world class software development platform for and lower overall system costs. STMP3600 provides customers the ability to cus- tomize their multimedia devices and user experi- ence to extend their brand into new markets. Multi-Function Peripherals (MFP) Our West Coast Imaging Center (formerly Protocom) The Imaging Systems Group (formerly Oasis broadens SigmaTel’s technology portfolio. The sys- Semiconductor) further extends SigmaTel’s leader- tem architecture is designed to enable video encod- ship in multimedia imaging technologies, particularly ing and decoding for devices such as digital video in the MFP, color laser printers and digital photo cameras, personal media players (PMPs), video frame markets. MFPs are complex products capa- conferencing, digital still cameras and enclosure ble of performing multiple tasks such as text print- boxes. This imaging technology offers avenues ing, photo-printing, copying, scanning and faxing for future growth to expand our portable multi- within a single device. These system controller solu- media roadmap. tions for the MFP and color laser printer markets provide substantially all of the electronic processing Wireless connectivity rounds out SigmaTel’s porta- functionality required for these devices to operate, ble multimedia strategy. The STFM1000 FM tuner including image capture and processing, motor solution marks SigmaTel’s entry into wireless com- control, print engine control, and connectivity with munications. The optimized radio architecture pro- PCs and other peripherals. Our mixed-signal design vides customers with an FM solution that interfaces expertise allows the company to increase integration directly with SigmaTel’s current portable audio solu- and lower overall system cost for manufacturers in tions. Our FM tuner delivers a complete solution for these markets. adding FM reception to MP3 players and other applications when coupled with the STMP3600 and In addition, we have been able to leverage our STMP3500 series. imaging expertise to deliver a digital photo frame solution. This image processor can easily transfer photos over a USB 2.0 high-speed interface from Consumer and PC Audio personal computers and store and display the pho- The high performance audio experience once tos from memory cards, digital cameras and USB reserved for the commercial movie theater can now drives. The consumer can also customize the photo be provided to consumers in the comfort of their display into a personal slideshow. home by enabling our customers to bring high definition (HD) audio to the PC and home theater systems. Our HD audio codecs ensure that PCs and home theater systems are enabled with superior audio fidelity. As we continue to evolve our audio solutions with leading edge technology, we can Products 2 SigmaTel achieves worldwide adoption of its highly-integrated, analog-intensive, mixed- signal ICs; more than 100 million audio SoCs and 175 million audio [ codecs shipped to date.