IMG Imagination Technologies Group

By Stu Woo 

LONDON--A small but critical Apple Inc. supplier here is raising the prospect of a patent fight with the smartphone giant after Apple said it would stop using its technology to process graphics in its iPhones and other devices.

Shares in Imagination Technologies Group PLC fell as much as 70% in London trading after it disclosed that Apple--its biggest customer--would stop using Imagination technology in the graphics processing units in its devices within 15 months to two years.

Graphics processing units, or GPUs, are computer chips that power videos and other animations on smartphones, computers and other gadgets. Based in the English village of Kings Langley, outside London, Imagination runs its business based on intellectual property, designing and selling basic blueprints for GPUs, but not manufacturing the chips itself.

Imagination said Monday that Apple told the company it was working on a "separate, independent" design. Imagination said it believed it would be "extremely challenging" to design a brand-new GPU architecture "without infringing its intellectual property rights."

Imagination licenses its technology to Apple, which pays it royalties. Imagination said it was in talks with Apple about an alternative licensing and royalty arrangement.

An Apple spokeswoman declined to comment. An Imagination spokesman said the company was at the beginning of a process with Apple.

Imagination is a relatively small part of the global smartphone supply chain, but its technology has been a key component of Apple products for years, including its phones, tablets, iPods and watches. Apple last year said it held discussions with Imagination about acquiring the chip supplier but didn't plan on making an offer.

The chip designer had a market value of about GBP760 million, or about $950 million, when markets closed Friday, before the Apple disclosure. The news Monday reduced its market capitalization to less than GBP300 million as of Monday afternoon in London.

"The biggest risk to Imagination's business model was realized this morning," said Roger Phillips, an analyst for Investec Bank. He had forecast Apple would account for 50% to 60% of Imagination's revenue this year and said other customers might not sign deals with Imagination until it resolves its situation with Apple.

The blow to Imagination has been the second shock to Britain's semiconductor industry, which is small but has an outsize global influence, in less than a year. In July, Japanese technology giant SoftBank Group Corp. agreed to acquire Cambridge, England-based ARM Holdings PLC, which designs the basic blueprints for more than 95% of the world's smartphone chips.

Apple, the world's most valuable company, is in a legal tussle over intellectual property with another chip supplier. Apple in January sued Qualcomm Inc., saying it disagreed with what Qualcomm charged in royalties. Qualcomm has called Apple's claims baseless.

Write to Stu Woo at Stu.Woo@wsj.com

(END) Dow Jones Newswires

April 03, 2017 10:50 ET (14:50 GMT)

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