Imagination Tech shares plunge as Apple breaks link

Imagination Technologies Group Plc shares plunged as much as 69% after the UK chip designer said Apple will stop using its intellectual property in new products, setting the stage for a clash with its biggest customer.

The iPhone maker informed Imagination Technologies it will cease using its graphics technology for new products, including phones, tablets, and watches, in 15 months to two years.

“This is what we would describe as a black swan moment for the company and investors in Imagination,” said Neil Campling, head of technology research at Northern Trust Securities, in a research note. “We view Imagination as now uninvestable.”

The move means Imagination Technologies risks losing future royalty payments from Apple, which considered acquiring the UK supplier as recently as last year. However, Imagination Technologies said it believes Apple will struggle to avoid infringing its intellectual property rights.

“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,” said Imagination.

The companies are in talks over license and royalty agreements. Apple amounts to just over half of Imagination Technologies’ annual revenue. The British company received £60.7m in license fees and royalties from Apple in the year to the end of April last year, and expected to get £65m in such payments in the fiscal year ending this month. The UK company’s revenue for last fiscal year was £120m.

“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,” said Oliver Knott, an analyst at N+1 Singer.

In early 2014, Imagination Technologies said it had extended its multi-use license agreement with Apple for its range of current and future graphics and video chips. In March last year, Apple said it had held “some discussions” to acquire Imagination Technologies but did not have plans to make an offer at that time.

Bloomberg