Apple supplier Imagination Technologies has slumped more than 10% after issuing a disappointing trading update.
The graphic chips designer is down 27.25p at 231p after it cut its outlook for licensing revenues this year, saying activity had been “a little muted” since November but put this down to timing rather than any fundamental change in demand for its products.
It had expected licensing to grow 10% in the year to the end of April but is now forecasting a single digit increase:
Given the licences signed so far...and the pipeline of opportunities scheduled to close this quarter, we currently expect licensing reveneue to be close to last year’s level with the potential of single digit growth dependent on exact closure timing of the remaining deals.
Analysts were disappointed but mostly remained upbeat about the longer term prospects. Robert Lamb at Jefferies said:
Today’s interim management statement is more cautious in its licensing revenue guidance for 2015 than previously communicated. We believe this could drive around 5%-10% cuts to consensus earnings before interest and tax/earnings per share for both 2015 and 2016, weighing on the stock in early trading today. Long-term operating margin guidance is being maintained however, suggesting patient investors may be rewarded.
After a conference call with management, he added:
Semis IP licensing can be lumpy and we believe the caution in today’s statement reflects this. The company are keen to stress this is a push-out leading to a timing issue on revenue recognition for a number of deals in the pipeline. On the conference call management reiterated that, despite the current delays, it still expects 10% mid-term licensing growth.
We believe this morning’s 10%-15% price decline creates a buying opportunity for longer term investors. The product portfolio at Imagination is well positioned for 2017 (Series7/8 GPU, Tier 1 MIPS, Connectivity). We introduce our 2017 estimates and retain our buy rating, raising our price target to 275p.
Investec’s Roger Phillips said:
The third quarter update is mixed, with a miss on licence offsetting currency upgrades and slight upside through a MIPS volume beat. Otherwise, the GPU side of the business is improving in the second half as expected and operating expenses base growth is to plan. Overall we see little headline change to forecasts. The shares have had a good run and from here will probably mark time at best, with little additional momentum created by this statement. Longer term, the transition between trends continues. We place our target price under review, but retain our hold.
Liberum said:
Good growth in royalties and helpful currency move offset by softer licensing revenue. MIPS had a record quarter in the fourth quarter and MIPS royalty guidance has been increased to 5-10% growth from flat previously. Core graphics royalties had a strong end to 2014 due to the iPhone 6 ramp and 2015 royalties are tracking in-line with expectations.
However, licensing is softer than expected. Now guiding licensing revenue to 0%-5% growth this year versus 10% previously. Management believe they could still hit 10% growth but view it as prudent to trim guidance.
Overall, we don’t expect to change our adjusted earnings before interest and tax estimate for 2015 of £22m. However, consensus may be trimmed marginally (£22.5 to around £22m). Would use any potential weakness as buying opportunity.
