Apple Drops Imagination Technologies

It’s been a rocky start to the week for Imagination Technologies (LSE:IMG), who announced on Monday (April 3) that its biggest customer, Apple (NASDAQ:AAPL) will be dropping its graphics technology.
In an announcement, Imagination states that Apple will begin phasing out its processing design over the next 15 months to 2 years.  According to the release, Apple accounted for £60.7 million of Imagination’s revenue for the year ended April 30, 2016. Revenue for the year ended April 30, 2017 is estimated at £65 million.
The news no doubt comes as a massive blow to Imagination Technologies: not only has Apple accounted for more than half of Imagination’s revenues, it has been using Imagination’s chip technology in its iPhones, iPads, and iPods ever since a 2008 licensing agreement. Now, Apple has told Imagination it will begin developing its own graphics chips.
“Apple has used Imagination’s technology and intellectual property for many years,” Imagination’s statement reads. “It has formed the basis of Graphics Processor Units (“GPUs”) in Apple’s phones, tablets, iPods, TVs and watches.”

That said, the company doesn’t believe Apple will be able to develop its own designs without “violating Imagination’s patents,” which include intellectual property and confidential information.
“This evidence has been requested by Imagination but Apple has declined to provide it,” the announcement continues. “Further, Imagination believes that it would be extremely challenging to design a brand new GPU architecture from basics without infringing its intellectual property rights, accordingly Imagination does not accept Apple’s assertions.”
However, some analysts are of the view that the risk of Imagination’s business model has come to a head.
“The loss of this revenue stream will have a material impact on the financials of the company,” Reuters quoted analysts at Investec as saying.
Similarly, Alex Webb from Bloomberg Technologies said in a Bloomberg TV interview that Imagination Technologies has been in a “certain amount of tribulation” over the last couple of years–particularly with its CEO leaving in 2016.
He also spoke about what some of Imagination’s competitors–or chip makers–may do to ensure they aren’t met with a similar fate. For example, Webb said that Qualcomm (NASDAQ:QCOM) drives revenue by licensing its technology.
“The implication from the statement from Imagination is that they think Apple will need to license some of that technology,” he said. “It might be lower revenue but is higher margin than simply selling it yourself.”
That said, Webb added it’s clear by Imagination’s stock performance that investors are not optimistic about that being a possibility for the company.
With that in mind, shares of Imagination Technologies tumbled nearly nearly 70 percent to 85p, marking the company’s lowest levels since the 2009 financial crisis. The Financial Times further states it’s the company’s worst daily sell-off since it began listing in 1994. That said, at the close on the LME on Monday, shares of Imagination made a slight recovery, but were still down 61.6 percent over a one-day trading period.
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Securities Disclosure: I, Jocelyn Aspa, hold no direct investment interest in any company mentioned in this article.