N+1 Singer moves recommendation to sell, citing revenue uncertainty and net debt position
Companies: Imagination Technologies Group
UK iPhone chip designer Imagination Technologies' shares collapsed on Monday morning, falling 69%, after announcing that Apple has told the company it will end a deal to use its products in 15 months to 2 years.
The decision by Apple, which contributes to about half of IMG's revenues, means the loss of significant royalty payments.
In an update to investors, Imagination said Apple was now going to design its own technology in order to control its products, but questioned how it would do this without infringing patents held by Imagination:
"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.
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."
Imagination's Graphics Processor Units ("GPUs") are in Apple's phones, tablets, iPods, TVs and watches, and the royalties that the firm receives from Apple products contributes about half of its revenues per year.
Last year, the Apple contract was worth £60m to Imagination and is forecast to pay £65m this year. According to the Financial Times, Apple owns 8% of IMG and held talks about buying the firm in the past.
Broker N+1 Singer moved its recommendation to sell, citing the uncertainty around its largest revenue stream and current net debt position:
"Apple is Imagination’s biggest customer, expected to generate c.£65m of revenue in FY’17, the majority of which drops to profit....
If the group is unsuccessful in challenging Apple’s position, we would expect the group to need to make significant operational changes to align the cost base to the new revenue profile."
As the market opened on Monday, shares in IMG plunged from 180p to 88p, knocking more than £500m from its £765m market cap.
