Semiconductor designer Imagination Technologies (IMG) is in the dog house after a messy first-half period of forecast misses, plagued profits, weak licence wins and slowing unit shipments.


While licencing revenue has bounced from an even worse second half last year (to end April), at £14.4 million the numbers still look weak in comparison to the £38 million to £43 million range guided for the full 12 month period.


Royalties make the figures look more worrying, with units shipments of 280 million down on last year's second half 298 million rate prompting a cut to the full-year steer from 650 million to a 580 million-to-630 million range.


This means that revenue is £85 million versus a rough £93 million expected by the market, while there's a double-digit miss on adjusted pre-tax profit of £13 million. Analysts had £14.6 million pencilled in.


Unsurprisingly, investors are not taking too kindly to the numbers, nor do they fancy Imagination's chances of turning things around fast enough to avoid a second-half struggle. So what started out as a 12%-odd share price slump in early trading has escalated fast into an 18%-plus collapse, to 203.4p, a four-year nadir.

IMAGINATION TECHNOLOGIES - Comparison Line Chart (Rebased to first)

The problem facing Imagination is one of transition, an apparently painfully slow one. Several licencees have pulled out of smartphones this year (such as ST Microelectronics, Renesas, Texas Instruments) and replacement agreements, such as Broadcom and Intel, have still to develop. Even Ensigma, further along the product path, has yet to build into meaningful scale, and probably won't until at least 2015. In the meantime, Mediatek's new dual-sourcing strategy (using both Imagination and ARM (ARM) designs) is an extra-pressing concern considering Imagination used to be sole supplier.


While the shares have collapsed from 552p highs as recently as March, forecasts have been slashed to leave the rating still looking full against immediate prospects. On Investec estimates, the price/earnings (PE) multiple for this year stands at 18.3, and even 33%-odd earnings growth pencilled in for next year still implies a PE of 13.7. Importantly, market mood is firmly fixed in pessimism mode.

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Issue Date: 11 Dec 2013