Superb Prospects for Imagination Technologies

Higher sales levels and a relatively fixed cost structure should translate to terrific profitability in the years ahead for Imagination Technologies

Brian Colello, CPA 14 December, 2011 | 10:12AM
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Imagination Technologies (IMG) is a leading provider of intellectual property used in graphics processing in semiconductors. While the company's IP customers sell chips to a wide variety of end markets, much of Imagination's fortunes will be tied to the booming smartphone and tablet end markets.

IMG this week reported interim fiscal 2012 results that were slightly ahead of our expectations, and we expect to raise our fair value estimate by about 10%. Revenue for the six-month period ended October was £56 million, up 28% from the same period a year ago. As expected, Imagination saw tremendous revenue growth from its graphics intellectual property (IP) business, with revenue from this segment up 41% sequentially.

We continue to expect that Imagination will see robust revenue growth in the years ahead, thanks to several tailwinds. Not only are more and more consumers buying high-end smartphones instead of basic handsets, but also Imagination's key customers are gaining share in the smartphone space and the firm has limited exposure to fading smartphone makers such as Nokia (NOK) and Research in Motion (RIMM). Finally, we believe that these higher sales levels will translate to terrific profitability in the years ahead because the company has a relatively fixed cost structure.

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Brian Colello, CPA  is a senior stock analyst with Morningstar.

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