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.