Ever since Apple launched the original iPhone, it’s worked closely with Imagination Technologies. Even after Apple began building its own GPU architecture, it relied on Imagination for other building blocks of its total solution. Apple, however, appears to be bringing that relationship to an end, and Imagination Technologies’ stock has cratered as a result.
On Friday, Imagination Technologies was trading at 268.75 pence sterling. As of this writing, it’s trading at ~102 pence sterling. That’s a cataclysmic drop for the company, and it’s driven by a letter IT posted earlier today. It reads, in part:
Imagination Technologies Group… has been notified by Apple Inc. (“Apple”), its largest customer, that 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 license and royalty agreement…
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.
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.
Apple’s notification has led Imagination to discuss with Apple potential alternative commercial arrangements for the current license and royalty agreement.
As recently as last year, Apple was reportedly in talks to purchase Imagination Technologies, but those deals fell through. Instead, Apple hired a number of Imagination’s former employees and engineers, which may be part of why IT is taking a rather aggressive stance with its claims that it would be difficult for Apple to develop a non-infringing part. Part of what makes the situation muddy is that Apple may have already built its own custom GPU. Apple’s payments to Imagination Technologies totaled £60.7 through the year that ended in April 2016, and Apple is expected to pay roughly £65 million ($81 million USD) through April of 2017. That’s roughly half of Imagination Technologies’ revenue, which explains why the stock has taken such a beating.
Imagination Technologies’ statements about taking Apple to court aren’t an empty threat, but court proceedings aren’t a substitute for ongoing license revenue. Even if IT won a court case against Apple, the appeals and counter-suits could drag on for years. The judicial system isn’t designed to settle these kinds of disputes quickly, and IT isn’t in great shape right now. The company fired 350 people last year and announced it would seek to reduce operating costs after a slump in iPhone sales slugged its bottom line. To-date, Imagination Technologies has tried to protect its PowerVR, MIPS, and Ensigma product divisions from cuts, but that may no longer be possible. PowerVR has provided the bulk of its earnings for years, so we wouldn’t be surprised to see the other segments jettisoned first.