Imagination Tech Plummets Over 60% After Apple Delivers "Black Swan Moment"

Tyler Durden's picture

What a difference a year makes: not that long after Apple was considering the acquisition of Imagination Technologies, overnight the shares of the UK-based chip designer imploded, crashing as much as 69% after the company announced Apple - its largest customer which accounts for half of its revenue - will stop using its intellectual property in new products, setting the stage for a clash with its biggest customer. In a statement released on Monday, Apple informed Imagination Technologies that it will cease using its graphics technology for new products, including phones, tablets, and watches, in 15 months to 2 years.

Shares of Imagination Technologies fell as low as 76 pence for its biggest-ever intraday slump, and were down a shade over 60% in London trading.

Apple's decision means Imagination Technologies risks losing future royalty payments from Apple. However, Imagination Technologies said it believes Apple will struggle to avoid infringing its intellectual property rights. "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," Imagination Technologies said in the statement.

That may not comfort investors this morning, as the company's shares lost as much as two-thirds of their value in early trading. As quoted by Bloomberg, Neil Campling, head of technology research at Northern Trust Securities, said that "this is what we would describe as a black swan moment for the company and investors in Imagination," and added that "we view Imagination as now uninvestable."

The history between the two companies demonstrates just how reliant on the Apple "ecosystem" key vendors have become, and how damaging the loss of such a relationship can be. A brief rundown courtesy of Bloomberg:

The two companies are now in talks over future license and royalty agreements. Apple amounts to just over half of Imagination Technologies’ annual revenue. The British company received 60.7 million pounds ($76.1 million) in license fees and royalties from Apple in the year ended April 30, 2016, and expected to get 65 million pounds in such payments in the fiscal year ending this month, according to the statement. The U.K. company’s revenue for last fiscal year was 120 million pounds.

 

"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," said Oliver Knott, an analyst at N+1 Singer Ltd.

 

In early 2014, Imagination Technologies said it had extended its multi-use license agreement with Apple for its range of current and future graphics and video chips.

 

In March last year, Apple said it had held “some discussions” to acquire Imagination Technologies but didn’t have plans to make an offer at that time.

Ironically, Apple is Imagination Technologies’ fourth-largest shareholder, with an 8.1 percent stake as of Feb. 28, according to Bloomberg. That said, with case holdings of nearly a quarter trillion, it will hardly lose much sleep over today's collapse which it itself inspired.

Apple's decision has been prompted by a push to bring development of graphic processing units in house: The Cupertino company is currently designing a new chip for future Mac laptops that would take on more of the functionality currently handled by Intel Corp. processors. Apple already designs its own smartphone processors, obviating the need to turn to Qualcomm or another supplier for chipsets.

In Monday’s statement, Imagination Technologies said Apple "has asserted that it has been working on a separate, independent graphics design in order to control its products."

Meanwhile, Imagination is hoping that it will be able to sue Apple to recoup some losses.

In a forthright statement about the future relationship with its leading customer, Imagination Technologies said Apple has not presented any evidence it can avoid "violating" the U.K. company’s patents.

 

Any move by Apple to abruptly end its contract with Imagination Technologies could lead to a major dispute between the two companies. "Given our experience of patent litigation, which can often be quite tenuous, the case against Apple would be very strong in our view if it tried to go it alone without a commercial agreement," said Nick James, analyst at Numis Corp Plc.

Yet while suing Apple may be a losing proposition for most, Imagination's day may not yet be numbered. The UK tech company, with about 1,700 employees, spent last year restructuring its business, cutting jobs and divesting unwanted assets, and refocusing on graphics and multimedia, including the technology behind virtual reality headsets.

Imagination is also attempting to expand beyond the graphics processors it supplies for mobile devices. Like many companies, it’s adapting its technology for the emerging autonomous-vehicle market. For self-driving cars to work safely, a car must quickly interpret the data coming in from cameras and sensors. Imagination’s chips helps with those computations.

However, Roger Phillips, analyst at Investec Securities said: "The material financial impact from a loss of its largest customer could raise the risk of other customers not signing future licenses with Imagination until the situation with Apple is resolved."

It remains to be seen if Imagination's dramatic "Black swan" case study will be a warning for investors in other suppliers overly reliant on Apple for revenue.

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junction's picture

Boo hoo for those guys.

thesonandheir's picture

http://appleinsider.com/articles/16/10/13/apple-poaching-gpu-designer-im...

 

Following Apple's decision to not pursue an acquisition of mobile GPU developer Imagination Technologies, at least 25 staffers and management personnel have jumped ship to Apple over the past two years.

 



Among the departees now confirmed to be working at Apple from LinkedIn postings, notable high-level staff members are the ex-chief operating officer of Imagination Technologies John Metcalfe, Senior Design Manager Dave Roberts, Vice President of Hardware Engineering Johnathan Redshaw, and 17-year veteran of the company and Senior Software Engineering Manager Benjamin Bowman.

Metcalfe is now a senior director at Apple. Roberts is an engineering manager at Apple's iOS GPU software group, and Bowman is a GPU architect for the company. Redshaw is listed as a director at Apple, with no specific branch of the company declared.

Imagination Technologies has licensed high-performance GPU designs, known as PowerVR graphics series, for use in Apple's A-series system on a chip (SoC) dating back to the original iPhone in 2007. The hires may herald an internal project to develop an Apple-designed GPU for use in future iOS projects, rather than rely on third parties for the technology.

Apple issued a statement in March admitting it had "some discussions" with Imagination involving an Apple buyout, but that it did not "plan to make an offer for the company at this time." Apple owns a 10 percent stake in the company.

Following the breakdown in talks, Chinese state-owned company Tsinghua took a 3 percent stake in Imagination as of May 4. Layoffs have wracked the company since.

Editor's note: A previous version of this story said Apple hired 25 employees away from Imagination late last year. Imagination later clarified the personnel moves took place over a two-year period.

JackT's picture

Beautifully played. Apple bankrupts Imagination and then buys all patents (and employees) at a discount.

AVmaster's picture

Like jack said...

 

Imagination will now be bankrupt and open for buyout (by apple) in a few years...

 

GG The End...

Racer's picture

That what you get with mega corporations ruling the 'market'

DeadFred's picture

How long do we wait for the anti-trust suits?

spastic_colon's picture

"The material financial impact from a loss of its largest customer could raise the risk of other customers not signing future licenses with Imagination until the situation with Apple is resolved."

 

Yet this may also remove the barriers that apple likely systemattically imposed that prevented other customers from using imagine's tech.

DavidC's picture

I don't own any crApple devices or shares, I have no interest in virtual reality and I don't want a driverless car.

I really hope crApple stumbles at some point investing in something that nobody really wants - or was that the watch thingy they released? Even Google had a stumble with its glasses.

DavidC

Theremustbeanotherway's picture

Typical the IP was stolen via the back door.  No chance of the anti trust action in the wings?  Not even as leverage to ensure that Apple brings in its billions offshore on which it pays a friendly rate of corporation tax? 

Buck Johnson's picture

That hurt didn't it, lololololol.

 

RagaMuffin's picture

Its a bitch when da bitch that brung ya dumps ya      ;-)

Iconoclast's picture

For sure, it'd be rude not to, markets never go down, they always recover, it's the new abnormal. :/sarc

Greenspazm's picture

They weren't gay enough.

esum's picture

Nowwebuyitceaper....ornot

south40_dreams's picture

Time to print some more Apple bucks.

yogibear's picture

Federal Reserve talking about sending every household 1 million dollars.

Zimbabwe American style.

amanfromMars's picture

It remains to be seen if Imagination's dramatic "Black swan" case study will be a warning for investors in other suppliers overly reliant on Apple for revenue.

 

The flip side of that coin is the danger that Apple may be in whenever it is realised they be dependent upon third party proprietary intellectual property and viable creative imagination to survive and prosper.

bentaxle's picture

Well, for a tech company they made a loss last year, so they're doing something right.

xetes's picture

History repeats itself. Ask IBM and Motorola? how things worked out when Apple dropped them overnight when they switched to Intel...

HenryKissingerChurchill's picture

apple can also buy a big chunk of the company for peanuts within the next two days,

or just buy the patents from the carcass after it dies in a few weeks...

you know ... that "buy when there is blood" thing.

RayKu's picture

Which is the likely purpose. Imagination probably tried to sweat out a better deal, and Apple responded by pulling out the sledge hammer.

theprofromdover's picture

They'll have to be quick.

THis is exactly the kind of situation the venture capital sharks love. The would be very happy to tryand old Apple to ransom.

They are probably flying into UK right now.

spastic_colon's picture

nothing to do with brexit i'm sure........

Grandad Grumps's picture

Imagination is tiny company compared to Apple. It is likely that they will be forced to accept a crappy settlement from Apple.

Cardinal Fang's picture

So in my fathers lifetime, we went from ice delivered off a horse drawn cart to putting a man on the moon in 50 years. (If you believe that sort of thing)

And now, technological progress is measured in future graphics processing to bring a better delivery of cat videos and HD porn.

Just fuckin shoot me.

Abbie Normal's picture

Men landing on the moon (or driving around in lunar buggies on soundstages) loses its appeal too quickly.  That's why the Apollo missions were cut short after less than five years.  Maybe if they re-used those soundstages to shoot cat videos or HD porn, that would be the new distraction -- pussycats & porn on the moon.

PrivetHedge's picture

Ready for the new double-back screenless iPhone line..

silverer's picture

Entitlement mentality at work. Patent holders have to realize if they don't get up off their ass and do the work, and somebody else does, it always presents an element of risk to their income, but not their intellectual property. So go out and license it to someone else, or build your own phone that uses your technology.

SimmerDown's picture

"In a forthright statement about the future relationship with its leading customer, Imagination Technologies said Apple has not presented any evidence it can avoid "violating" the U.K. company’s patents."

What a rediculous statement. It implies that Imagination Technologies technology is the only possible solution to doing whatever its chips do. It's incumbent on Imagination Tech to prove Apple is infringing once they come out with their own tech. Apple doesn't have to present evidence before that.