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OPINION

Just my imagination

Just my imagination
April 4, 2017
Just my imagination

However, those nasty tech titans from California's Santa Clara Valley have made clear that the golden-delicious relationship was just in Imagination's imagination. Within two years they will stop using Imagination's technology to run the graphics processors in Apple products. And readers will have seen the resultant mayhem - Imagination's share price slumping 72 per cent to 76p when the company announced the glum news on Monday.

City analysts labelled this a 'black swan' moment for Imagination, but that's not strictly true. Black swans simply aren't predictable. They are, to use the famous phrase of Donald Rumsfeld, US defence secretary to George Bush junior, "unknown unknowns - the ones we don't know we don't know".

Yet what hit Imagination was very knowable. The relationship between Imagination and Apple - and the risks therein for the British company - is well known. True, it is a closely guarded secret how much of Imagination's revenue - £124m in the latest 12 months - comes from Apple, but the assumption is that it's over half. And the company's annual report pretty well spells out that, without licence fees and royalties from Apple, there may be no Imagination - "there are no parties with whom the group has contractual or other arrangements which are essential to the business of the group", it says with stuttering grammar, "except the contract with Apple".

So, if Imagination's fragility was well known, why wasn't it priced in to the stock better? Not because the company's bosses seemed to be managing the risk satisfactorily. In the latest annual report they signalled 'customer concentration' as a principal risk. Yet their account of how they manage this existential threat reads more like a wish list to make it vanish than a plan to minimise it. For example, the managers will "develop relationships with a wider number of customers spread across different sectors and jurisdictions". That's a fine aim, but it tells us nothing about how the objective will be fulfilled. Then again, it does not do to be too critical. In some circumstances all anyone can ever do - be they business chiefs, investors, or whatever - is try their best and hope.

Besides, it's not as though you heard Bearbull warning of the dangers inherent in Imagination's set-up. True, you wouldn't have done because the previous time I cast a glance Imagination's way - more than 10 years ago - it was still a youngish hopeful that could yet emulate the achievements of a similar intellectual property (IP) technology company, Arm.

That did not - and won't - happen. Imagination has spent most of the past 10 years - much like it spent even the 10 years before that - flattering to deceive. Since 2005 its revenues have quadrupled to £120m-plus, but they have never been followed by consistent generation of profits or cash. In the 10 years to April 2016 the aggregate of pre-tax profits is the princely sum of £8.2m, derived from just over £1bn of revenue. Simultaneously, aggregate free cash flow is minus £64m and not since 2011-12 has the group generated positive free cash. A business that performs in such a mediocre way for so long may be beyond redemption.

And that thought may be particularly relevant to Imagination as time - and particularly technology - catches up with it. Once Imagination's IP may really have been cutting-edge stuff that few competitors could match. But quite likely it is becoming commoditised, like so much else in the computers industry.

Partly, this may explain Apple's intention to run its graphics processors on technology it has developed internally. It has less need of outsiders to develop a component that has become generic and it keeps the lines of business communication simpler to do it itself. Meanwhile, those bits of graphics processing technology that remain truly innovative - turning 2D into 3D and even into holograms - requires the size of research budget that a big fish, such as Apple, can afford, but a minnow, such as Imagination, can't.

Whatever the facts, there is little doubt that Apple no longer needs Imagination and has told it in the most brutal way. Sure, you do wonder if it wouldn't have been simpler for the US company - market cap £602bn - to have bought Imagination - market cap less than 0.1 per cent of Apple's even before its price collapsed. Probably that can't happen now. So the best - and most likely - possibility is that the two companies will make a grudging arrangement to manage the two years until the end.

Assuming that, then Imagination's share price will make some sort of recovery. So are the shares worth buying because, as usual, the market has desperately overdone it and there will be life - of sorts - after Apple? The thought is a temptation, but it's next to impossible to quantify Imagination's value now. In other words, if I were to buy, it would be - in the words of Norman Whitfield's and Barrett Strong's great song - "just my imagination running away with me".