Graphics chip technology firm Imagination Technologies Group PLC (LON:IMG) has been dealt a body blow by its biggest customer, Apple Inc (NASDAQ:AAPL).
The iPhone and iPad maker has served notice to Imagination that it expects to stop using the UK company’s intellectual property (IP) in new Apple products in 15 months to two years’ time.
Imagination received £60.7mln in licence fees and royalties from Apple in the year ended April 30, 2016, and expects to get £65mln in payments in the fiscal year that closes at the end of this month, according to the statement. The UK company’s revenue for last fiscal year was £120mln.
Having achieved a turnaround of sorts at the half-year stage, Apple's move could well pitch the company back into the red in the next fiscal year.
Analysis
Unless this is some sort of bargaining ploy by Apple, the loss of the Apple contract will be a cataclysmic blow to the company, as it means it will not receive royalty payments from the top-selling consumer gizmos.
Apple has used Imagination's technology and intellectual property for many years in phones, tablets, iPods, televisions and watches.
It now appears that Apple has been working on its own independent graphics design. By developing its own graphics technology the US company, which takes control freakery to Soviet lengths, would be able to reduce its reliance on an outside company’s technology.
With its massive cash mountain the possibility also exists that Apple’s own graphics IP would be better than Imagination’s and, being proprietary, would give the US company’s products a competitive advantage.
Imagination is clearly sceptical that Apple would be able to develop competing technology that does not infringe on patents held by the UK company.
“Apple has not presented any evidence to substantiate its assertion that it will no longer require Imagination's technology, without violating Imagination's patents, intellectual property and confidential information. This evidence has been requested by Imagination but Apple has declined to provide it,” Imagination’s stock market statement said.
“Further, Imagination believes that it would be extremely challenging to design a brand new GPU [graphics processing unit] architecture from basics without infringing its intellectual property rights, accordingly Imagination does not accept Apple's assertions,” the statement continued.
"Imagination is unconvinced that it would be possible to develop an entirely new graphics processor unit without infringing on the group’s intellectual property. With Apple refusing to share its current designs, a legal battle could be brewing," suggested Nicholas Hyett, and equity analyst at Hargreaves Lansdown.
Nevertheless, Apple clearly holds the whip-hand in this arrangement and Imagination said it is discussing potential alternative commercial arrangements for the current licence and royalty agreement.
Shares in Imagination fell two-thirds to 89p on the news, reducing the company’s market value to just £223mln.
That’s just small change to a company like Apple, which might very well decide it would be cheaper to buy the company rather than get involved in prolonged legal wrangling. It has certainly considered it in the past - round about this time last year, in fact.
"We had some discussions with Imagination, but we do not plan to make an offer for the company at this time," Apple said in a statement on 21 March of last year.
A spokesperson for Imagination said that Apple currently has around an 8.2% stake in Imagination.
The argument against any consumer electronics company buying Imagination has always been that the UK technology company would lose most of its other customers, as they would be loath to pay royalties to a direct competitor.
At just £223mln, which is probably less than Apple pays its tax advisors, the gamble may be worth taking.
Imagination Technologies hit hard as Apple announces plans to dum... https://t.co/l7ADjQI4Rq #cloud #bigdata #iot pic.twitter.com/zSqw2QRPRm
— Jay Wyatt (@jay_wyatt) April 3, 2017
Imagination Technologies flagship technology is its PowerVR line of GPUs, which Apple has used in its mobile A-series system-on-chip designs since the iPhone 4 and fourth-generation iPod Touch.
Shares in another UK-listed Apple supplier, Laird PLC (LON:LRD), were off 2.2% this morning in a flat market. Laird's technology protects electronics from electromagnetic interference and heat.
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