Imagination: graphic warning
Rise of 82% in licensing revenue bodes well for upcoming sale
Relying on the patronage of the world’s biggest company is a high-wire act. Selling graphics chip designs to Apple made Imagination Technologies one of the UK’s biggest tech companies. Apple’s decision to terminate the relationship has more than halved the value of the shares and forced the sale of the company. A return to profit will counteract neither but it could mean a better deal for shareholders.
Full-year results published on Tuesday validate Imagination’s decision to focus on its core businesses following a lossmaking acquisition spree. Revenues beat expectations, increasing nearly a fifth to £145m and pre-tax profits of £2.4m have supplanted last year’s losses.
None of this changes the company’s central problem of losing a customer responsible for half of all revenue. Imagination has no cash as a cushion against Apple’s decision to replace its chip designs in iPhones and iPads with in-house technology. A formal dispute process is going nowhere. Imagination, worth more than £1.5bn five years ago, now has a market value just under £430m.
Still, licensing revenue rose 82 per cent on the previous year — proof of demand from other customers. That bodes well for the upcoming sale. But comparisons with UK chip designer Arm’s sale to Japan’s SoftBank for £24bn — an enterprise value of 20 times the company’s sales — are overly ambitious. Similarly sized Ceva, which has not been taken over, is a more realistic comparison. It trades at around 10 times EV to sales. Take out the half of sales dependent on Apple, and that would price Imagination at around £2.40 per share. It is currently trading at about £1.50.
It all depends who bids. Mooted names include Intel, whose Mobil Eye car sensor subsidiary uses Imagination’s technology, Chinese company Tsinghua Unigroup and Qualcomm (which is itself in dispute with Apple). More bids should mean a higher price. Shareholders cannot expect the £6 per share high of 2012. But £2 or more looks plausible.