Apple playing hardball with Imagination but strong Results to help sale process

Imagination Technologies (LON: IMG) has been under severe pressure since Apple's announcement a few months ago that it was summarily dumping IMG's Graphic Processing Units (GPU's) from the technology stack within Apple's range of devices.

Shares fell over 60% after Apple's bombshell and although there has been a recovery, they still languish 45% below their previous levels.

Today's Final Results show a robust performance with the group swinging back to an operating profit of £7.8m on a reported basis, versus a £26.8m loss in 2016. Revenues rose 19% to £145m primarily driven by an impressive 82% rise in Licensing Revenue from £19m to £34m.

Finally, net debt has fallen from £40m last October down to £28m as operating cash flows of £11m were clearly prioritised to getting the Balance Sheet in a healthier state.

Management has previously opened up a sales process for two of its primary products (MIPS and Ensigma) as well as for the entire Group, and this M&A premium has clearly driven the recent partial share price recovery.

Management will want to put a fine polish on the business if it is to pursue a sale and today's results certainly appear to be consistent with that.

N+1 Singer recently moved to a Hold recommendation citing IMG now as a special situation, which is entirely correct.

There are three big sources of uncertainty now for the valuation of Imagination to shareholders:

• The amount a third party is willing to pay for Imagination's IPinfrastructure
• Whether Imagination can get a fair value for its other fixed assets including its infrastructure
• The net present value of any legal case brought against Apple

Apple Management will have thought very carefully before taking the action they took back in April. Its lawyers will have pored over the detail, Apple's legal position and all ramifications.

For Apple to take such an aggressive course may well be hubris, or it could be confidence that Apple has a strong case with regard to the use of any IP owned by Imagination. Either way, the legal uncertainty will surely drag on for years, so the third unkown in the above list won't be clarified any time soon.