49% Jump in Royalty Revenue at Imagination Technologies Group plc (IMG)

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LONDON — Imagination Technologies Group plc (LON:IMG), the graphic processing-focused rival to ARM Holdings plc (ADR) (NASDAQ:ARMH), reported strong growth in the number of devices — mobile phones, tablets, and smart TVs — shipped containing the company’s chip designs. Units jumped from 325 million to 535 million last year.

This progress puts the company well on its way to its (once seemingly audacious) goal of having 1 billion items with its intellectual property ship in a single year by 2016.

As a result, royalty revenue increased 49% to 89.5 million pounds and total revenue was up 19% to 151.5 million pounds. However, heavy investment in staff, facilities, and research into new technologies resulted in a dramatic increase in operating expenses and pulled operating profit down 13%.

What’s a billion between friends?
The company’s shares tumbled in early May after management revealed license revenue was going to be weaker than expected this year.

ARM Holdings plc (LON:ARM)

Similar to ARM Holdings plc (ADR) (NASDAQ:ARMH), Imagination Technologies Group plc (LON:IMG) doesn’t physically build chips. Its research and development teams design the chips and then license those designs to partners like Apple Inc. (NASDAQ:AAPL), Samsung Electronics Co., Ltd. (KRX:005930), Laclede Group Inc (NYSE:LG), and Intel Corporation (NASDAQ:INTC) (Intel Corporation (NASDAQ:INTC) and Apple own 15% and 9% of Imagination, respectively) to use in their products. Then Imagination gets paid every time one of those products is sold (currently about 17 pence per).

So license revenue is a bit of a look-ahead indicator for future revenue and if Imagination Technologies Group plc (LON:IMG) is having trouble signing new license agreements, achieving that 1 billion target could be tricky. With a price-to-earnings multiple of 41, it would appear the market is looking for some serious growth so missing that target would be painful.

Management thinks the drop in license revenue is temporary and the result of the weaker global economy and some short-term industry trends, but they would say that, wouldn’t they?

New(ish) kid on the block
One reason to wonder if there is more to the drop in license revenue than management says is that ARM Holdings plc (ADR) (NASDAQ:ARMH), which is known mainly for central processing units as opposed to Imagination Technologies Group plc (LON:IMG)’s graphics processing units and dominates the mobile phone chip market, has been winning market share in the graphics market with its Mali chip.

While Apple Inc. (NASDAQ:AAPL)’s iPad uses Imagination Technologies Group plc (LON:IMG) chips, many cheaper Android tablets use the Mali chip which has given ARM a boost in the tablet game as more and more low-end tablets hit the market.

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