Semiconductor designer Imagination Technologies (IMG) seems to be in the recovery ward after a spectacular fall from grace that Icarus would be proud of. Yet today's full year figures to end April offer promise for the future thanks largely to an impressive beat on licencing revenues that implies a pretty strong second half. For the record, Imagination chalked-up £38.3 million on licences compared to the £35.1 million anticipated by analysts at broker Investec.

That was enough to spark a near 6% share price jump to 246.9p. That's quite a rally since hitting lows of 161p in December, and one we hinted at in February.

The bone of contention is on royalties, hit by slower demand from Apple (AAPL:NDQ) ahead of the iPhone 6 launch in September, and probably pressure from low-cost smartphones flooding the market. In his Imagination is not alone, royalties were the cause of some analysts to get sniffy about first quarter figures from ARM Holdings (ARM) back in April.

IMAGINATION TECHNOLOGIES - Comparison Line Chart (Rebased to first)

It can be argued that royalties are today's cashflow, licencing is tomorrow's. That's a simplification but it's a reasonable rule of thumb.

There's also a seemingly terminal decline from PURE, Imagination's digital wireless radios and hi-fi arm (see picture). Revenues down from £25.8 million to £23.2 million and while management argue the value of PURE and its prospects it's worth noting that revenues from the business peaked at £33.6 million in the year to April 2010.


Yet overall there is promise within these results even if it remains early days. And analysts remain cautious about the pace and scale of growth in the immediate future. This is perhaps unsurprising given the trio of hefty downgrades to estimates in the last 15-months.

'We expect material consensus upgrades today (+10%),' says Investec, yet worries remain. 'Our residual concern is guidance for a rise in core royalty unit shipments in the second half 2015, considering these have fallen for three consecutive halves,' the broker points out.

Imagination’s full year 2015 should benefit from PowerVR GPU (graphics chips) royalties from the iPhone 6 and we should see the ramp up of that in the first half,' says finnCap's Lorne Daniel. 'However, the group continues to gamble heavily on MIPS processor adoption in mobile and Internet of Things, sending it up against both ARM and Intel (INTC:NDQ) with substantially greater research and development budgets, our main concern.'

Issue Date: 24 Jun 2014