Shares in Imagination Technologies (IMG) sank more than 8 per cent after the microchip designer slashed its full-year forecasts. It lowered its licensing-sales estimate by about 7 per cent to £35m-40m, and its expected chip shipments, excluding those of its MIPS processors, by over 10 per cent to 520-550m. This was the third warning in 12 months from the company, which licenses out its graphics chip and processor designs to companies such as Apple and Samsung, then collects royalties for every chip shipped.
Imagination blamed the continued slowdown in the growth of the top-end smartphone market, along with a decline in its share of the low end - it has been battling with larger rivals such as Arm (ARM), Qualcomm and Intel. It did make some gains, though. Its average royalty rate is ahead of expectations, and management believes licensing sales will improve this year. They also hope that recent design wins and product launches will help it reclaim market share in the second half of 2015.
Another key development was that, for the first time, one of Imagination's 'Tier 1' clients signed on to use its latest MIPS technology. The company also assuaged investors' fears about its spiralling expenses. Management now expects underlying operating costs to be as much as 7 per cent below previous guidance, at £127m-131m.
Numis Securities says…
Hold. Imagination's severe market share loss has been caused by increased uptake of low-end graphics processors, where Arm has an advantage. Although management remains convinced that the company can regain share, given its advantage in graphics, there is clearly a risk that it will be wrong-footed again. More positively, operational spending is finally being reined in. We believe Imagination should address it more aggressively, in both its Pure and Technology divisions. We maintain our price target of 200p, and expect adjusted operating profits of £21m and EPS of 5.8p this year.
Liberum Capital says…
Buy. Despite the deluge of negative commentary following the statement, licensing revenues in the second half of this year are still expected to grow more than 150 per cent. That should convert into future royalty revenue. We also believe the market under-appreciates the potential value in MIPS, and the addition of a new Tier 1 licensee could mark the beginning of its resurgence. With the downgrades out of the way, we are increasingly bullish and believe there is significant long-term value in Imagination. Our price target stands at 250p, but we cut our full-year EPS target by 10 per cent to 6.9p.
