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This Might Be Bad News for This Apple Inc. Supplier

For months now, the investment community has been keenly aware of the fact that Imagination Technologies' (NASDAQOTH: IGNMF) days as the supplier of graphics processor intellectual property in Apple's (NASDAQ: AAPL) A-series applications processors were numbered.

Back in April, Imagination confessed to its shareholders that it had been informed by Apple that it "will no longer use [Imagination's] intellectual property in its new products in 15 months to two years [sic] time, and as such will not be eligible for royalty payments under the current license and royalty agreement."

Image source: Apple.

That statement, coupled with the fact that Imagination told its shareholders in its July earnings presentation that it expected to receive royalty payments from Apple over the following year, made it appear as though Apple would continue to use Imagination's graphics processor technology for one more iPhone.

However, Apple's claim during its Sept. 12 iPhone launch event that its new A11 Bionic chip includes an "Apple-designed GPU" seems to indicate that Imagination's technology isn't present in the new chip.

If it is true that Imagination is totally out of the A11 Bionic, then this means that the already devastating news that Imagination received and ultimately disclosed earlier this year is even worse than it first appeared.

Implications for Imagination

If Imagination were still due royalties from the A11 Bionic chip, then it would probably remain financially solvent for the next year or so, giving it a little more freedom to try to get the best deal possible as it pursues its previously disclosed sale of the company.

However, since Apple makes up roughly half of Imagination's revenue, having a large portion of that revenue disappear over the coming year is going to be painful.

To be clear: If Imagination has been designed out of the A11 Bionic chip, its revenue over the coming iPhone product cycle won't plunge to zero as it'll still derive revenue from the sales of the iPhone 6s, iPhone 7, iPhone SE, and the various iPad tablets currently available for sale.

But since a large portion of Apple's product mix in any product cycle tends to be of the latest devices (in this case, iPhone 8, iPhone 8 Plus, and iPhone X), Imagination's revenue from Apple would drop substantially and would, in a few short years, hit zero.

That's a tough situation for Imagination to be in.

Considering this, I'd expect Imagination to try to close any potential sale transaction as quickly as possible. Since any potential bidders would likely be aware of the urgency with which Imagination would need to pursue a deal, Imagination and its shareholders aren't likely to get as good of a deal as they would if Imagination had more time or additional options.

One more thing to consider

While Apple's claim about including an "Apple-designed GPU" in the A11 Bionic seems to indicate that Imagination won't be getting royalties from Apple's latest chip, this isn't a complete certainty. Independent industry analyst Daniel Matte, in a Sept. 13 post, said that "there are probably even people at Apple who don't really consider [the A11 Bionic GPU] to be fully custom."

"Personally, I don't consider it to be custom based on what I know, but I can't say more," Matte wrote.

If Matte's information is correct, then Imagination may indeed be entitled to royalty revenue from the A11 Bionic, giving the company some more breathing room to get a sale done that maximizes value for its shareholders.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.