Imagination Technologies Plunges; Revenue Fall, Loss Worse Than Forecast

The London chip designer says it reorganized loan terms with HSBC as it swings to an $81 million loss.
By James Skinner ,

London-listed chip designer Imagination Technologies (IGNMF)   on Tuesday posted a worse-than-expected revenue decline as the Apple (AAPL) - Get Report supplier and one-time bid target reported its largest full-year loss to date.

The group also announced that it had breached, and then rejigged, an HSBC debt covenant which had required the company to keep net debt below three times Ebitda.

Imagination shares fell by more than 8%  to 169.0 pence ($2.21) in the London morning as the figures pointed to slowing smart phone growth and increased supply chain competition. 

Seeking to allay concerns, Chief Executive Andrew Heath said he sees "a bright future for Imagination. The market for our IP remains large."

Group revenue from continuing operations came in at £120 million in the year ended March, compared with consensus expectations for revenue of £137.1 million. The weakness in the top line was driven largely by a softer smart phone market and increased competition from Chinese manufacturers during the period.

Imagination recorded a full-year loss of £61.5 million, which is equivalent to 29.8 pence per share and many times steeper than the 4.9 pence loss recorded in 2015. The group warned investors about the likelihood of a full-year loss in May after it renegotiated contracts and took write-downs. 

Imagination said it is on track to deliver £27.5 million of cost savings in  the 2017 fiscal year, which could help to ease the pressure on the bottom line as it becomes a pure-play intellectual property licensing business.

Management also said the sale of Pure Digital, its radio business, is on track to be completed in time for the benefit to be recognized in its 2017 results. The company also confirmed it would sell its IMG Works chip design business, although it did not comment on what it could be worth.

Imagination rose to prominence after inking a deal with Apple to provide graphics processors for the group's i-Phones in 2007. Apple remains its largest customer, leaving it vulnerable to a smart phone market slowdown.

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The group has been the subject of intense speculation in recent months after Apple,  which is also Imagination's fifth-largest shareholder, revealed that it had held talks about acquiring the Kings Langley, England based company.

Apple said it wouldn't make a bid back in February but speculation resurfaced about the prospect of a takeout in May after the U.K. group revealed that a Chinese backed technology company, Tsinghua Unigroup, had taken a 3% stake in the business.

Imagination shares are up 34% since the start of the year.

Analysts at Jefferies said that after a challenging 2016, "licensing should normalize given one-off headwinds in 2016 and revenue already contracted". They reiterated their buy recommendation for the shares, along with their price target of 199.0 pence, which implies upside of 17% from current levels.

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