Just over a month ago, Imagination Technologies dropped the bombshell announcement that their largest customer, Apple, would be phasing out their use of Imagination’s GPU IP in their SoC GPU designs. Specifically, Apple expects that they will no longer be using Imagination’s IP for new products in 15 to 24 months. This put Imagination in a significant pinch, as Apple is a full half of the company’s overall revenue and 69% of their GPU revenue. As a result, Imagination stands to lose the bulk of their GPU revenue starting two years down the line.

At the time the company announced that they would be engaging with Apple to discuss “potential alternative commercial arrangements” to the companies’ current agreement, and now a month later, Imagination has published a further update on that. Discussions in the last month have not made what Imagination considers satisfactory progress, and as a result they are escalating the discussion to go through the dispute resolution clause of their current contract.

Just what this will entail is unknown since the contract isn’t public, but as Imagination so delicately puts it, they’re seeking to reach an agreement with Apple “through a more structured process.” It’s unknown what will happen if this process fails, but for the moment it does not appear that a further escalation is off the table. If nothing else, Imagination will have the option of taking Apple to court for patent and IP violations once the current agreement expires. Though the company is also making it clear that they’d rather not go that far; it’s hard to imagine Imagination wants to go toe-to-toe with the most valuable company in the world, especially once their revenue takes a significant hit.

Meanwhile in Imagination’s bombshell of the month, alongside today’s Apple update, the company is also announcing that they are going to be refocusing the company to focus entirely on the GPU business. To that end, the company is putting their remaining non-GPU businesses – the MIPS CPU business and the Ensigma communications business – on the market. Imagination is not listing an expected price for either business at this time – or if they have already lined up any suitors – but the company believes that given the improved fiscal performance of these two divisions, that they are in a good position to sell the two divisions.

MIPS and Ensigma have been two of Imagination’s major efforts to diversify the company away from their original core business of GPU IP. MIPS was acquired by Imagination for $60M $100M in 2012 – about 4.5 years ago – while Ensigma has been part of the company since the turn of the millennium. MIPS in particular has been a long-running architecture in the embedded space, and along with x86, is the other alternative CPU architecture supported by Google’s Android OS. So the news that the engineering team and product portfolio behind the #2 architecture in mobile and embedded are being sold is a major development. MIPS and Ensigma are now joining Imagination’s Pure business, which is also in the process of being sold off.

In announcing this latest sale, Imagination noted that they are doing this to strengthen their balance sheet. At the risk of reading too much into a short fiscal statement, this doesn’t sound like a move that they are making with gusto, but rather something they have to do to save the company. Selling these divisions means that the company’s efforts to diversify have failed, but given their situation, it appears that focusing on their core competency is their best bet. Still, it does risk certain efforts in the long-term, such as Imagination’s OmniShield virtualization security technology, since that was a synergy play between owning both CPU and GPU IP.

As for Imagination’s GPU business, the sale of MIPS and Ensigma means that Imagination will be transitioning to a pure-play GPU IP provider. The company continues to develop new IP here, including the recent Furian architecture, so they have products. The question that remains is how they will survive (and ideally thrive) a post-Apple world; even if the companies sign a new agreement, Imagination’s fate is going to be based on how well they can sell GPU IP to the remaining SoC vendors, particularly in the STB and Android mobile spaces. With all other businesses in the process of being sold, the fate of Imagination’s GPU business will determine the fate of Imagination itself.

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  • melgross - Thursday, May 04, 2017 - link

    I've seen this many times. There is this hope that by selling off areas that may be making a profit, which gives them value, the money they receive will give them time to fix their other problems. Rarely does it work, because their problems are systemic. I can't see it happening here, because Apple did so much of the work themselves, that the looks of that business impacts them even more severely. The 31% of their graphics revenue they will supposedly have left will require a greater expense.

    That's assuming that their other customers don't leave over the next year, or two, with the assumption that they will go under, and so need a different supplier. That almost killed Apple in early 1996, after a disaster in decision making of the CEO at the time. Companies unloaded their Macs in anticipation the company was going to go under.
    Reply
  • KAlmquist - Thursday, May 04, 2017 - link

    I expect you are right that selling MIPS and Ensigma won't be enough to save Imagination. It's probably good that they are being sold off, though, if they are sold to financially strong buyers. If they were to remain part of Imagination, the risk would be that these businesses would find themselves starved of R&D funds because of Imagination's financial difficulties. Reply
  • melgross - Saturday, May 06, 2017 - link

    It's too bad, because they have very good technology, even though Apple's needs appear to be different. Reply
  • Timoo - Thursday, May 11, 2017 - link

    That was my first thought too.
    I guess they should have invested in cheap sell-offs to the phone market while they had the chance; now every predator smells the wounds...
    Reply
  • lefty2 - Thursday, May 04, 2017 - link

    One thing the article doesn't mention, was the MIPs business ever profitable for Imagination? Reply
  • name99 - Thursday, May 04, 2017 - link

    We can see the numbers in the annual report:
    https://imagination-technologies-cloudfront-assets...
    page 15.

    MIPS made ~14M pounds profit in 2015, ~8M pounds in 2016.
    That compares with PowerVR at 82M in 2015, 58M in 2016. Ensigma is negative both years, -3M in 2015, -5M in 2016.
    So yeah, the serious money is in graphics but MIPS makes a small profit (and may not be worth the distraction).

    BTW for total douchebaggery, it's hard to get more extreme than this annual report. Check out page 10 which has "An Introduction to Andrew Heath". WTF? Who has such an inflated ego that, in addition to the normal annual reports stuff like CEO's review of the year, he feels he needs to include an interview with himself?

    As for his fine ability to read people. check out this quote from his interview:
    " have now met a large number of our key current and prospective customers. It is clear that we are highly regarded for both the quality of our IP and the capability of our team. They have been reassured by the actions we are taking. We are important to them and highly relevant to their future product strategies. They want us to be successful too."
    RIGHT...
    Reply
  • Timoo - Thursday, May 11, 2017 - link

    Interesting (page 14):

    " At 30 April 2016, the Group breached the requirement to keep net debt at or
    less than 3 times EBITDA (Earnings before interest, tax, depreciation and amortization). The breach has been waived by HSBC
    and a fee has been paid by the group for this waiver. The debt facility remains in place and HSBC remains supportive of the
    Group – practically, the bank has good security for the debts outstanding. However, due to the breach, the loans are classified
    as current liabilities at year end. Further information is given in the Group’s going concern and viability statements. "

    Meaning: They got a loan increase from HSBC, under certain conditions. They failed to meet the conditions, so now their loans turned into "bad credit"...
    They will have to Row Harder to keep afloat...
    Reply
  • vladx - Thursday, May 04, 2017 - link

    It's a good move from IMTech, their GPU division is much important than MIPS and Ensigma and has a much better chance of generating revenue from other SoC manufacturers like MediaTek, Rockchip and new players like LG and Sony. Reply
  • vladx - Thursday, May 04, 2017 - link

    Oh and Xiaomi too, knew I missed one. Reply
  • melgross - Thursday, May 04, 2017 - link

    I don't know. There are a number of companies out there with graphics IP, including ARM, whose graphics looks better that it used to. Easier to just license that from the same company you're already licensing the CPU IP from. A problem is that without Apple, and the reduced internal expenses Apple's own work on the IP allowed, will they have enough income to keep up with their competitors now, or will they fall behind? Reply

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