The long-term independent future of UK graphics chip designer Imagination Technologies (IMG) looks increasingly in doubt.

The Hertfordshire-based company is facing a potentially long and expensive battle with Apple, which has announced plans to cut intellectual property (IP) ties with Imagination.

Imagination designs graphics processing units (GPU), called PowerVR, that run the slick visuals on iPhones and iPads, such as games and video.

Apple plans to develop its own GPU chips in-house once the current licensing agreement with Imagination comes to end, potentially within 15 months to two years. That puts 45% of Imagination’s revenue and 60% of its profit at risk.

Big challenge for Apple

Imagination implies it will be nearly impossible for Apple to develop its own chips without infringing on the UK company’s IP rights.

Dispute resolution procedures under its existing licence agreement have been triggered, but analysts remain sceptical.

‘With Apple adopting strong arm tactics with all those it has disputes on IP resolution, we do not expect Imagination to arrive at an acceptable conclusion through such mechanisms,’ says Liberum analyst Janardan Menon.

Apple has fought IP battles with several chip technology companies including Qualcomm, Nokia and InterDigital.

Loss-making future?

Imagination plans to sell its MIPS and Ensigma operations to bolster its balance sheet and slash costs. MIPS is Imagination’s central processing unit (CPU) business which is essentially a brain that powers computers. Ensigma develops connectivity technology designs for Internet of Things (IoT) applications.

In the six months to 31 October 2016, MIPS and Ensigma suffered £7.8m of operating losses on combined revenue of approximately £21m. In contrast, PowerVR generated a £13.5m operating profit on £43.3m of licensing and royalty revenue.

Analysts think PowerVR will become loss making once Apple stops being a customer.

Liberum’s Menon has cut his share price target for Imagination from 325p to 95p, which is just below the current 103.53p trading price. He offers a bleak outlook even if some operations are sold leaving just the PowerVR business.

‘In the absence of significant cost cuts and assuming a high single digit revenue growth for the business, it will take another five to six years before the business turns profitable in our estimation,’ says Menon.

Takeover target?

One leftfield possibility is that Imagination is bought out by another chip technology business also in dispute with Apple in an attempt to strengthen its own hand.

Imagination’s graphics IP is world class and valuable but there are too many unknowns to guess at potential share price values, in our opinion. (SF)

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