Imagination Technologies considers legal action after Apple ditches iPhone chip firm

iPhone
Imagination's technology powers the iPhone's graphics chip Credit: EPA

Imagination Technologies has raised the prospect of a bitter legal battle with Apple after the US tech giant said it would ditch the company’s microchip designs.

Shares in the Hertfordshire-based company collapsed on Monday the loss of its key customer put Imagination’s future in doubt, with investors pondering a potential break-up.

Imagination revealed that Apple plans to stop licensing its graphics technology, which sits at the heart of the iPhone and iPad, within two years as it pushes ahead with plans to develop its own graphics chips.

The company, which relies on Apple for around half of its revenue, challenged the iPhone maker’s claims that it could do so without infringing Imagination’s patents.

“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,” Imagination said in a strongly-worded statement.

“This evidence has been requested by Imagination but Apple has declined to provide it. Imagination believes that it would be extremely challenging to design a brand new GPU [graphics processing unit] architecture from basics without infringing its intellectual property rights. Accordingly Imagination does not accept Apple’s assertions.”

Imagination’s shares plunged by 61.6pc to 103p on Monday, their lowest level since 2009, on the prospect of losing income from its biggest customer, which analysts said could force it to be broken up and sold. It said that business with Apple had accounted for £60.1m of revenue last year, more than half of all sales, and was expected to rise to £65m this year.

Apple has an 8pc stake in Imagination and held talks with the company over a takeover, but said last year it was no longer pursuing a deal. It has been investing heavily in its own research and development and has hired a number of key Imagination staff in recent months.

“I think eventually they will do a deal, the risk for both sides to lose is too great,” said Iain Connor, an intellectual property partner at Pinsent Masons. “The whole technology industry survives by cross licensing. This is basically a Mexican standoff. I suspect for both parties no deal carries more risk.”

Licensing its PowerVR technology to Apple has been a lucrative and reliable cash generator for Imagination in what has been a stormy few years.

Last year it sacked its long-time chief executive Sir Hossein Yassaie, sold off a number of divisions and cut hundreds of jobs in a restructuring designed to return the group to profitability.

Apple declined to comment. The iPhone maker has been seeking to bring its graphics technology in house amid the growing importance of the GPU to its devices. More powerful graphics units are seen as central to Apple’s ambitions to improve the iPhone’s camera as well as steps into augmented reality, with the company rumoured to be developing a Google Glass-style set of high-tech glasses. It plans to ditch Imagination in 15 months to two years, suggesting Apple will be using its own designs by the time the next-but-one iPhone is released in late 2018.

Imagination was a pioneer in smartphone graphics but has faced fierce competition from ARM Holdings and Qualcomm in selling to other handset makers. Shares have fallen sharply from their peak in 2012 but had recovered in recent months amid restructuring from its new chief executive Andrew Heath.

Analysts said much of the revenue from Apple trickled down directly into profits, so Imagination could struggle to be viable without its most important customer, and may have to be sold.

“Without them [Apple], the business model needs to be completely changed,” said Oliver Knott of N+1 Singer. “If they can’t sort out some kind of agreement you start putting a value on the intellectual property itself.”

 

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