Apple May Cut Imagination Tech Royalties By Two Thirds as it Winds Down Chip Deal

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Apple is likely to pay out just one third of its current royalty rate to Imagination Technologies as it begins winding down its supply deal with the chipmaker over the next two years, according to analysts at UBS financial services (via Reuters).

The prediction includes the expectation that British-based Imagination will become loss-making by 2019 without any Apple royalties to fall back on, and that the firm will have to work out a cost-cutting strategy if it is to survive.

imagination technologies logo
Earlier this month, shares in Imagination plunged after Apple informed the company that it plans to stop using its graphics technology in Apple consumer devices in up to two years' time.

The news delivered a huge blow to Imagination Technologies, which provides the PowerVR graphics architecture found in Apple's full range of iOS devices and receives a small royalty on every sale, amounting to up to half of the British firm's revenue.

Imagination said Apple had made the decision because the tech giant was developing its own independent graphics processing chips, which would reduce its reliance on the company.

Imagination is reportedly in talks with Apple over a new licensing deal, but UBS analysts forecast that Apple is likely to bring down the royalty rate, currently at around $0.30 per unit, to closer to $0.10, which is the rate Imagination currently charges customers such as MediaTek.

Valuing Imagination based on discounted cash flows, UBS estimated the company's Apple business is worth 75 pence per share. Without Apple, the stock tumbles to just 35 pence. That totals 110 pence, using a sum-of-the-parts valuation. Imagination has a market capitalization of $370 million – 2,000 times smaller than Apple's $741 billion valuation – while its stock currently trades at 103.19 pence.

Top Rated Comments

Kaibelf Avatar
49 months ago

Crazy how apple can just destroy a company. I think it's safe to assume they "made" them. Imagine this happening to Foxconn or another big supplier. Impact could cause a bigger ripple in the local economy.

Apple didn't "destroy" any company. The company was leaning far too heavily on one customer which (based on their press release not too long ago) they seemed to believe was going to last forever, and that they were entitled to have in perpetuity.

It's a bit more surprising that Imagination didn't parlay that long and lucrative relationship and expand their customer base more aggressively. It's no different than a town with a single industry pretending to be confused if the market shifts away from that industry, when they failed in the interim to plan for any diversification and the warning stories were abundant.
Score: 4 Votes (Like | Disagree)
acegreen Avatar
49 months ago

Apple wasn't necessarily paying a higher royalty rate. A higher amount? Yes. But that royalty rate could be a percentage of the device cost. X percent of iPhone yields a higher amount than x percent of a MediaTek component. Apple could actually be paying a much lower rate. Without knowing the terms, we can't say either way.

Did you even read the article, the rates are like RIGHT there.
Score: 1 Votes (Like | Disagree)
69Mustang Avatar
49 months ago

Did you even read the article, the rates are like RIGHT there?

I read the article. Apparently you didn't understand my comment. Apple paying $0.30 and another company paying $0.10 does not mean Apple pays a higher royalty rate. Hypothetical numbers here: Apple pays royalty rate of .125% of cost per unit = $0.30. MediaTek pays a royalty rate of 2% per cost of unit yielding $0.10. In that instance, Apple pays a much lower royalty rate that generates a higher payment.
If Apple just pays a flat $0.30 and MediaTek pays a flat $0.10, then Apple indeed pays a higher rate. Again, we don't know how the rates are calculated so we can't arbitrarily state Apple pays a higher royalty rate. Until we do, there's no definitive answer.
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Crazy how apple can just destroy a company. I think it's safe to assume they "made" them. Imagine this happening to Foxconn or another big supplier. Impact could cause a bigger ripple in the local economy.

I'm not sure if you're assessing blame or making an observation. Regardless, the old adage holds true in this instance: Don't put all your eggs in one basket. As Apple brings more functionality in house (rumored) there are several other companies in the same boat. If they're smart, they'll start trying to diversify their customer base post haste.
Score: 1 Votes (Like | Disagree)
solipsism Avatar
49 months ago

Apple didn't "destroy" any company. The company was leaning far too heavily on one customer which (based on their press release not too long ago) they seemed to believe was going to last forever, and that they were entitled to have in perpetuity.

It's a bit more surprising that Imagination didn't parlay that long and lucrative relationship and expand their customer base more aggressively. It's no different than a town with a single industry pretending to be confused if the market shifts away from that industry, when they failed in the interim to plan for any diversification and the warning stories were abundant.

Adding to that, let's keep in mind that Apple has been hiring people to work on GPU HW for years, has increasing shown interest in making their SoCs better tailored to their specific needs, and any loss ImgTech experiences will also affects Apple as they own 9.5% of the company.
Score: 1 Votes (Like | Disagree)

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