Shares in Imagination Technologies Group (IMG) fell 60% this morning after the UK chipmaker reported Apple (APPL) would stop using its products in “15 months to two years’ time”.
Baillie Gifford is the largest shareholder of Imagination Technologies
Being the largest customer of Imagination Technologies, Apple paid license fees and royalty revenues to the chipmaker for its technology and intellectual property. The chipmaker has formed the basis of Graphics Processor Units in Apple’s phones, tablets, iPods, TVs and watches.
The chipmaker’s business is expected to take a hit as Apple said it is developing its own technology to reduce its future reliance on Imagination Technologies. Apple license fees and royalties, as disclosed in Imagination’s Annual Report, represented revenue of £60.7 million for the year ended April 30 2016 and are expected to be approximately £65 million for the year ending April 30 2017.
However, Imagination Technologies expects that it would be “extremely challenging” for Apple to design a new technology from basic without infringing its intellectual property rights, according to its statement.
“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.
"Apple’s notification has led Imagination to discuss with Apple potential alternative commercial arrangements for the current license and royalty agreement,” the statement read.
In early trading, shares of Imagination Technologies fell sharply as the market digested the news regarding its deal with Apple. At one point, the company’s shares were down more than 70%. Shares of the chipmaker are down 63.8% to 97p at midday.
Data compiled by Morningstar.co.uk revealed that Baillie Gifford & Company Limited is the largest shareholder of Imagination Technologies with 11.6% holdings. It is followed by M&G Investment funds and Standard Life Investments which owns 10.5% and 8.7% of the UK chipmaker. Apple owns 8% of Imagination Technologies.
Apple: What the Analysts Say
Brian Colello, senior equity analyst with Morningstar thinks Apple is still innovating with introductions of Apple Pay, Apple Watch, Apple TV, and AirPods, each of which could drive incremental revenue but, more important, help to retain iPhone users over time.
Apple’s iPhone and IOS operating system have consistently been rated at the head of the pack in terms of customer loyalty, engagement and security, which bodes well for long term customer retention.
“We suspect that Apple is trying to accelerate replacement cycles for the iPad, as it appears that the useful life of an iPad does not mirror that of a smartphone in the two- to four-year range, but rather approaches the life of a PC in the four- to six-year range,” said Colello.
Apple's iPad unit sales in 2016 were 43% lower than those in 2013, which analysts attribute not only to longer useful lives for iPads, but also to cannibalization from larger-screen iPhones. In light of aggressive low-end tablet competition from Amazon in particular, Colello thinks it is important that Apple keeps iPhone users within the iOS ecosystem as much as possible, rather than having users become device- and operating-system-agnostic, which in turn could limit Apple's pricing power on its crown jewel iPhones over time.
However, Apple’s recent decisions to maintain a premium pricing strategy may help fend off gross margin compression but could limit unit sales growth as devices may be unaffordable for many emerging-market customers, said Colello. Future US immigration and trade policy could have negative ramifications for Apple, which has significant overseas operations and manufacturing partnerships, Colello added. The stock is rated three stars by Morningstar analysts, meaning analysts believe the stock is trading on its fair value estimate.
