Date: Thursday 13 Sep 2012
Mobile devices chip specialist Imagination Technologies saw its share price clobbered on Thursday morning after a trading update which raised doubts about the group's confidence in hitting full-year targets.
The chip designer, which has ridden the wave of popularity for hand-held communications devices, said that the momentum it enjoyed in the last financial year has carried forward into the current one.
The statement spoke of strong growth in unit shipment volumes, with the key segments of mobile phone, computing/tablets, mobile multimedia/gaming and home consumer all seeing rising demand.
Royalty revenue has been strong and in line with expectations, but as Imagination's intellectual property (IP) gets used more widely in cheaper smartphones, so the average royalty rate gets steadily diluted.
One smartphone which could never qualify as cheap is Apple's iPhone, a new version of which was released on Wednesday to much fanfare but somewhat less than the usual fawning, bowing and salivating Apple is used to from a media which has been locked in to using Apple products since the eighties.
Industry observers are worried that new converts to the Apple cult might have held off from entering Apple's walled garden until after the release of the iPhone 5, which might have had a knock-on effect for mobile technology firms such as Imagination.
"A new A6 chip is included in the new phone, offering twice the processing and graphics power at lower energy consumption. The specifics of the chip are not detailed, but speculation suggests a move to a dual-core ARM (Buy, TP 800p) Cortex A15 processor and remaining with the most up-to-date Imagination GPU [graphics processing unit]," Investec Securities reports.
"An aggressive release schedule will see the phone sold in 100 counties by the end of the year, a significant pick up on last time. Whilst Imagination will feel the effect of people having held back ahead of the release in H1 [first half], some new volume will come through and the H2 outlook will be excellent," the broker predicts, in a note which reiterated Investec's "buy" recommendation.
Moving back to Imagination's trading statement, the company said licensing activity since the beginning of May has remained "steady" but remains subject to the usual uncertainty over the timing of product releases, not to mention the continuing uncertain macro-economic environment.
The group's DAB (digital audio broadcasting) unit, Pure, has not taken off as the group would have hoped. Performance in the UK has seen a small improvement, but there is better news overseas, where Pure has seen "steady growth".
"Despite the current slow-down in consumer spending, Pure continues to effectively showcase and help to drive key strategic connectivity technologies. We expect to see a financial improvement in this division over the medium term, driven by international markets and new product opportunities," the company said.
The outlook statement concluded with the assertion that the board remains confident it is on track for "continued progress", which, as some observers have noted, is not the same as "on track to hit full-year targets".
Lorne Daniel at finnCap was one such observer who detected an element of vagueness in the forward looking statements. She said she remains cautious about the stock's progress on the ground of "competition and macro environment" as she reiterated her "sell" recommendation.
Broker Numis also seemed underwhelmed by the updated and downgraded the stock to "hold".
Investec is keeping the faith, however, after an interim management statement which it said was "exactly in line with expectations".
It is not unduly worried by the well-flagged and slight decrease in the average royalty rate "due to lower-value Asia-Pac shipments" and was comforted by Chief Executive Hossein Yassaie's assertion that the company's goal of around 1bn annual unit shipments by 2016 remains a realistic objective.
"The licensing pipeline is robust and, following a weak 2H12 for licence revenue (following a stellar 1H12), we would expect a good sequential into 1H13, although this could well be a year-on-year decline," Investec said.
"Whilst there are clear upside and downside risks to Imagination’s ecosystem in the longer-term, we see near-term momentum as continuing to be positive," Investec concluded, as it reiterated its 695p price target.
The share price of Imagination was the worst performing FTSE 250 stock in the morning session, down 34.5p to 575.5p.
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