Imagination Technologies has gone from potential takeover target by Apple to being warned by the tech giant that its technology will be dropped from future devices.
The UK company, which derives around half of its business from its licensing to Apple, indicated that it believes that Apple does not have the capabilities to create its own phone chips without infringing on Imagination's patents.
Here's what analysts are saying...
Black swan moment
Neil Campling, analyst at Northern Trust:
"It is undoubtedly a black swan moment for Imagination. There is no way they could have seen that coming. Apple is around 50 per cent of revenues. And with this dispute comes the additional overhang that Apple will seek to sell their shareholding.
"To replace lost Apple revenues will need many design wins at other OEMs (original equipment maunfacturers) but that would take time and any near term beat from the Apple supercycle over the next 12 months will be overshadowed by this looming overhang. And, if Apple believes there is essentially a work around made possible, then other smartphone designers will be evaluating the same."
Sell from buy rating
Apple is Imagination’s biggest customer, expected to generate around £65m of revenue in full-year 2017, the majority of which drops to profit. Imagination believes that it would be extremely challenging for Apple to design a brand new GPU architecture, without infringing on its intellectual property. 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. Given the uncertainty around its largest revenue stream, and current net debt position, we move to Sell.
ETX Capital senior market analyst Neil Wilson suggested the reaction - a 70 per cent crash in its share price - is a kneejerk one to the bad news. "Apple is only half of revenues I understand, so perhaps the selloff today is overdone," he said.
"Sounds like Imagination thinks Apple can’t just walk away like this so will be interesting to see if we get any comeback from Apple on what its plans are. Sounds like Imagination is prepared to launch legal action if Apple does walk away."
It makes sense (for Apple)
Neil Shah, analyst at counterpoint research tweeted that Apple moving to make its own chips makes sense.
"Apple developing its own GPUs make perfect sense as many verticals / applications will be more graphic intensive.
"Many verticals such as automobiles, AR, VR are going to be super graphics oriented - hence move from CPU to GPU. See NVIDIA's growth. Apple building its own GPUs though from scratch will be challenging unless they have acquired IP in some form or mastered reverse engineering. Apple doing its own GPUs also points in direction of future Apple categories - AR, VR, Auto dashboards/HUDs, Gaming Hubs, etc. This leaves Imagination Technologies in a vulnerable spot, as it lost CPU/MCU war to ARM, GPU to NVIDIA (now Apple), Modem to Qualcomm."
The biggest risk to Imagination has been realised
"The biggest risk to Imagination’s business model was realised this morning, with the notification by Apple of its view that it will no longer use Imagination’s IP in its new products in fifteen months to two years’ time. Apple is Imagination’s largest customer and we had forecast it to account for around 60 per cent of Power VR volumes this year and around 50-60 per cent of group sales. This represents a major setback to our investment case and we place our forecasts, target price and recommendation under review.
"Going forwards, the loss of this revenue stream will have a material impact on the financials of the company - while we would expect there will be some areas where cost reductions will be possible, Imagination will still need to invest in its IP roadmap to support its other customers.
"Imagination has stated that Apple has presented no evidence that it will not be infringing IMG’s intellectual property when it moves to its own in-house offering. We see a risk of future legal battles ahead. Imagination has also stated it is discussing with Apple potential alternative commercial arrangements to its licence and royalty agreement, so there might be scope for a compromise deal at some stage. The material financial impact from a loss of its largest customer could raise the risk of other customers not signing future licences with Imagination until the situation with Apple is resolved."