The graphics chip designer warned that licensing activity has been “a little muted” since 1 November, and even though it said this was down to timing issues rather than any fundamental change in demand for its products, around one-tenth was wiped from the value of the company.
Imagination expects licensing revenue in the current financial year will be close to last year's level, albeit with the potential of single digit growth dependent on the exact closure timing of the remaining deals in the pipeline.
Robert Lamb at Jefferies predicted the trading update would lead to a five to 10 per cent reduction in consensus earnings estimates for the current and next financial years.
“Long-term operating margin guidance is being maintained, however, suggesting patient investors may be rewarded,” Lamb said.
Alexandra Jarvis at Peel Hunt has been quick on her feet, cutting her recommendation from ‘buy’ to ‘hold’ shortly after the trading update was released, and then moving back to ‘buy’ again after the shares took an early bath.
Echoing Jarvis’s view, she said “the medium to long-term investment case is unaffected by today’s miss”.
She also highlighted some positives in the update. In the traditional part of Imagination’s business – the bit that pre-dates the 2012 acquisition of MIPS Technologies – unit shipments are expected to be in line with previous guidance and similar to last year’s levels, while MIPS unit shipments are tipped by the company to rise by 5-10% year-on-year.
The non-MIPS guidance is “evidently supported by strong performance from Apple”, Jarvis asserts, while more favourable foreign exchange movements and a sustained average selling price of around 27-28 cents in non-MIPS royalties will partially offset the licensing miss.
Investec has its price target under review after what it termed a mixed update, but it sticking with its ‘hold’ rating.
The graphics processing unit side of the business is improving in the second half of the financial year, Investec notes, while the operating expenditure base growth is on plan.
“The shares have had a good run and in our view needed more than this to create further momentum. Longer term, we still see Imagination as a transitional stock, with the developed world smartphone boom over (ex-occasional iPhone fillip), positioning for the developing world smartphone boom uncertain, and the Internet of Tings opportunity still diffuse,” Investec’s Roger Phillips opined.