Analysts have warned that UK chip designer Imagination Technologies may not be able to survive without Apple, which brings in more than half of the company’s revenues.
Apple’s decision to ditch Imagination is a huge blow for the company — a UK tech icon that turned over more than £120 million in the year leading up to April 2016.
On the day of the announcement, the Hertfordshire-based company, which employs roughly 1,700 people, saw its market value drop by more than 75%.
Less than a day after the breakup, which is already poised to get messy, analysts are speculating whether Imagination can exist without Apple.
“In the worst case, survival, let alone value, is in question,” wrote Jefferies equity analyst Ken Rumph in a note to investors on Tuesday. Rumph added that the breakup is likely to dent Imagination’s profits by £65 million a year.
Apple, which owns a 9.5% stake in Imagination, has been using Imagination’s graphics processing unit (GPUs) chip designs in its iPhones, iPads, and iPods since 2008 under a licensing agreement that’s worth tens of millions of pounds to Imagination every year.
But the duo are set to go their separate ways within the next two years after Imagination announced on Monday that Apple intends to start designing its own GPUs. “Apple is of a view that it will no longer use the Group’s intellectual property in its new products in 15 months to two years time, and as such will not be eligible for royalty payments under the current licence and royalty agreement,” Imagination said in a statement.
Some analysts are speculating that Apple could swoop in on Imagination now that its valuation has fallen off a cliff and acquire it for half the amount that it would have paid a week ago.
“A Byzantine analysis would have Apple intent on taking over Imagination,” wrote Rumph, adding that Apple might still want to get its hands on Imagination’s PowerVR technology. Rumph added that Apple could be “using the warning of cessation to depress its prey’s valuation (and emphasise its dependence on Apple) before pouncing.”
However, acquiring Imagination after sinking the company’s stock would attract criticism and a lot of bad PR for Apple, which would be especially unwelcome now that the EU is scrutinising the company’s every move in Europe.
Neil Campling, analyst at Northern Trust, is reported to have said: “It is undoubtedly a black swan moment for Imagination.”
He added: “To replace lost Apple revenues will need many design wins at other OEMs (original equipment manufacturers) 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.”
The fact that Apple has taken the decision to start designing its own GPUs should not surprise investors.
Last March, Apple admitted that it had held talks with Imagination about acquiring its business. But Apple pulled out of the acquisition and went on to hire a number of Imagination’s key people instead.
The biggest hire is John Metcalfe, whose LinkedIn profile says he’s been working as a senior director at Apple since last July. He was Imagination Technology’s COO for a decade before that, and was nearly a 20-year veteran of the company. In October 2015, Apple hired Imagination’s VP of hardware engineering to be a director based in the United Kingdom.
Apple has started designing more of its own chips over the last few years, including the iPhone’s A-class chip and the W1 chip found in its AirPod headphones.
“Anywhere where Apple can trim cost and squeeze suppliers, they have a track record of doing so,” said Geoff Blaber, analyst at CCS Insight, in The Financial Times. “But the GPU is so strategic long-term that there’s something else at play here.”
Why Apple wants to make its own GPUs
“Apple already designs its own (industry leading) SoCs and sees controlling the chip technology as a core competitive advantage,” wrote Evans. “And GPUs are becoming more and more central: Apple is pushing into ‘computational photography’ with the iPhone 7+ camera, GPUs are central to running machine learning locally (since it turns out this uses the same kinds of maths), and, further out, Apple is (probably) working on augmented reality glasses, which will need to do all sorts of computer vision and image processing to work well — they will need to read the world and place objects within it.
“So, GPUs matter a lot and controlling the hardware yourself is a key advantage. Not clear why Apple didn’t just buy it (and it still might). There’s a broader question, though – without Apple as anchor customer, what happens to the state of mobile GPUs from Imagination for everyone else – for Android? Benchmarks of the latest high-end Android, the Samsung Galaxy S8, show it’s still a year or two behind Apple — this won’t help.”
Imagination’s GPUs have been used in iPhones, iPods, and iPads.
IP wars are set to take place
Imagination said it doesn’t know how Apple will make devices in the future without violating intellectual property laws.
“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,” the company said. “This evidence has been requested by Imagination but Apple has declined to provide it.”
“Further, Imagination believes that it would be extremely challenging to design a brand new GPU architecture from basics without infringing its intellectual property rights, accordingly Imagination does not accept Apple’s assertions.”
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