Losses mount at Imagination as new chief presses reset

Imagination designs microchips that allow smartphones, tablets and other computing devices to display graphics, make sense of information and connect to other devices. It licenses its blueprints to manufacturers such as Apple (AAPL), then charges a royalty each time they ship a device containing one of its chips. The challenges outlined already, combined with inventory build-up in China, shrunk licensing sales by 55 per cent to £17.1m. That would have been better but for a management decision to reverse £5.7m-worth of revenue as it cancelled one contract, and extended another. Moreover, lower chip shipments and a key customer selling fewer of Imagination's older chips drove royalty sales down 13 per cent to £103m.

Management reduced group headcount and slashed marketing, property and other expenses, generating £27.5m in annual cost savings from the 2017 financial year onward. It has also put Pure - the perennially unprofitable hardware division - on the auction block, and plans to sell or shutter other peripheral businesses. It will now focus investment on its core graphics and multimedia, processing and connectivity businesses, which together account for 86 per cent of continuing turnover.

Imagination's net debt swelled 21 per cent to £33m, but HSBC waived the breach of its banking covenants following a fee payment. Broker N+1 Singer expects the sale of Pure to fetch between £5m and £10m. It predicts adjusted pre-tax profit of £22.2m for the year to April 2017, giving EPS of 6.5p, rising to £34.8m and 9.9p in FY2018.