Apple Inc (NASDAQ: AAPL) informed Imagination Technologies Group (LON: IMG) about its decision to end its licensing agreement. As a result, the shares of the British company were impacted negatively on Monday.
The stock price of Imagination plummeted more than 60% to GBX 103.00 on the London Stock Exchange on Monday.
The Cupertino-based technology giant is using Imagination’s graphics technology on its iPhones, iPads, iPods, TVs, and watches under a licensing agreement. The British company generates almost 50% of its revenue from Apple, its largest customer.
A huge financial impact on Imagination
Apple paid a total of £60.7 million in licensing fees and royalties to Imagination for the year ended April 2016. The iPhone maker is expected to pay around £65 million to the British company this year.
Analysts at Investec told Reuters, “The biggest risk to Imagination’s business model was realized this morning. The loss of this revenue stream will have a material impact on the financials of the company.”
Apple is developing its own graphics design
In a statement, Imagination said Apple plans to stop using its technology in “15 months to two years.”
The iPhone maker told the British company that it is “working on a separate, independent graphics design in order to control its products and will be reducing its future reliance on Imagination’s technology.”
Imagination also stated that Apple “has not presented any evidence to substantiate its assertion” that it will no longer need its technology” without violating its patents, intellectual property, and confidential information.
Furthermore, British company believes that it “would be extremely challenging” for Apple to design a brand new GPU architecture from basics without infringing its intellectual property rights. Imagination requested Apple to provide proof of its assertion, but has declined. It is discussing alternative commercial arrangements with Apple.
Analysts at Morgan Stanley noted that it is not the first time Apple severed relationships with suppliers. However, they think that there is a difference with Imagination because it “holds significant patents around graphics core, in particular, those which allow lower power use.”
During the Goldman Sachs Technology and Internet Conference in San Francisco earlier this year, Apple CFO Luca Maestri said the tech giant boosted its in-house development of some fundamental technologies.
“It’s very important for us because we can push the envelope on innovation, we can better control timing, cost, quality. We look at that as a great strategic investment,” said Maestri at the conference.
Last year, the iPhone maker spent over $10 billion on research and development compared with $8.07 billion in 2015 and $6.04 billion in 2014.
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