From what we’ve seen over the past couple months, Apple is planning to steadily bring all of its chip design processes in-house. With regards to the same, the first nail in the coffin was in the form of Imagination Technologies earlier this month. The latter stated that Apple was looking to develop its own graphics chips, thus, ending its royalty-based IP partnership with them over the next two years.
Now, the analysts over at UBS have compiled a report predicting the financial impact of Cupertino’s decision upon Imagination. The report suggests that Apple will cut down the current royalty rates down to just one-third of what it has been paying the company over the years to use their graphics technology. These new rates will be applicable on each iPhone and iPad produced until the supply deal between the two finally comes to an end in 2019, reports Reuters.
In the analyst note, it has been estimated that Apple will lower its current royalty rate of 30 cents per device down to about 10 cents per device. The lowered rate is the same that Imagination, the British chipmaker is known to charge other technology giants such as Mediatek. It means Apple could be looking to reduce some of its spends by innovating its own graphics chip design for an improved performance. At that moment of time, Imagination released the following statement:
Apple has asserted that it has been working on a separate, independent graphics design in order to control its products and will be reducing its future reliance on Imagination’s technology.
Further, UBS predicts that the British chipmaker will become a loss-making business by the time its deal with Cupertino comes to an end in the fiscal year 2019. Imagination Technologies should either start signing new partners or work out a fresh deal with Apple to retain its financial stability. The report adds that the company may soon need to resort to cost-cutting exercises due to lack of Apple’s royalties to flood its coffers and fall back upon.
UBS analysts predicted that Imagination would become loss-making by fiscal 2019 without any Apple royalty contributions and that the British chip designer will have to consider potential cost-cutting moves to redress the balance.
Earlier this month, Apple note to Imagination Technologies came as a significant shock for the British chipmaker because Cupertino makes up for close to half or two-thirds of their overall revenue. Their revenue from Apple’s use of its PowerVR graphics chips in the iPhone and other products amounted to £60.7 million for the year ended April 2016. The Cupertino giant’s license fees and royalties are expected to amount to £65 million for this fiscal year and this will be one of the final hefty checks for Imagination.
Finally, UBS analysts’ have now calculated the overall valuation of the chipmaker based on the assumption that Apple has discounted its royalty rates. They predict that the Cupertino giant’s business is worth 75 pence per share for Imagination. And without them, the company’s stock will spiral down and reach about 35 cents per share. This means its total share price is 110 pence, using sum-of-parts valuation, which is rather close to the current value of the stock in the market — 102.50 pence per share. This reaffirms the state of the company on the stock market.
In addition to Imagination Technologies, reports of Apple looking to distance itself from another one of its chip suppliers have also surfaced on the interwebs. Anglo-German chipmaker Dialog Semiconductor produces power management integrated chips (PIMC) for the Cupertino giant, who is most likely developing an in-house replacement for these chips as well. More than 70 percent of the company’s 2016 sales come from Apple.