A few weeks ago two well known, respected and knowledgeable long-term shareholders Dave Sweeney and Ronak (Roninja) had a meeting with Imagination CEO Sir Hossein Yassaie. What follows is a written report by Ronak ,which I certainly found to be very interesting and also reassuring.
Thanks to both of them for publishing their report on Imagineers Blog:
Meeting
Dave Sweeney and I had asked for an audience with IMG and were delighted to have an entire afternoon in KL including meeting with the CEO. This visit left us very happy in fact Dave has changed his mind and will be coming to this year’s AGM!!!
First impressions of the new HQ - imagination House is an awesome new building with an excellent fit out from reception through to the office space and open plan central space that doubles as meeting space and staff canteen downstairs. HQ will have great grounds with a canalside setting which is great for the employees, customers, visiting guests and shareholders.
On arrival we caught an early glimpse of HY welcoming other visitors (believe for a press interview).
We received a warm welcome from the fabulous Susi Barrett and were taken for a lovely lunch in the canteen - staff are well catered for ;)
Over the next 24 months the KL campus will be complete - circa 1100 will be based here and it will be quite a fitting centre. IMG have 20 offices and are a global outfit - Australia / NZ to California so a 24 hour operation.
Alex Voica (PR) joined us in the meeting room. He is a great guy, relatively new on the scene (1.5years @IMG) but was extremely knowledgable both in our time prior to meeting HY as well as a tour of the upgraded demo room. We commended him on the great blog he has transformed communication which is hugely appreciated.
The key meeting was a 90 min Q and A with the CEO: details follow (please note neither of us took notes so this account reflects what we recall - and hopefully does not misrepresent).
Relationships with key customers remain robust and strong with the key licenses firmly in-tact.
We got the strong impression that the relationship with key partners (such as Apple) continues to be long term and wide ranging and this is expected to continue despite rumors to the contrary. Clearly we will get further visibility of what we are in as new products launch and potential new markets are entered. We were sensitive to Apple's strict NDA restrictions , hence we did not push the questioning here , the response that relationships were 'as strong' as in the past was good enough for us! :-)
Intel unit contribution will grow substantially from from low 10s millions, to high 10s of millions and ultimately to multiple 100s millions overtime. Clearly this is important to note as Intel may use in-house in certain SoCs there are multiple programmes which include our ip. Remember Baytrail whilst not featuring our graphics includes our video decode and still contribute a decent royalty rate. Although not disclosed I would think Intel will be going Rogue. As process nodes get smaller the power / performance equation is not going to change and IMG are in the right place. We were given the impression that IMG will partake in the Android tablet market supplied by Intel and not just be involved with smartphones, many had discounted an IMG GPU in Intel based tablets, we were told that was not the case.
Mediatek will reveal Rogue SoCs in the near future. Arm may have some lower-end slots but Imagination continues to have multiple design-wins in key slots and should continue to see strong volume. What we have seen so far in the mobile space is a mere fraction of what will be possible and what high end will be capable of as we move forward.
Amazon are viewed as a real fan of PowerVR and are keen to continue the relationship already established. The industry players have been changing so immediate resolution might not be forthcoming in the near term but regardless we would expect continued design-wins and volume at Amazon through partners.
License target for 2013/4 was reaffirmed circa £40m (incl. MIPS) is what I'm looking for.
Royalty unit guidance will going forward be combined to include MIPS. Progress to 1bn by 2016 for non-MIPS will still be mentioned but IMG are now a multi billion unit company in the making.
Negativity around IMG is sometimes being propagated by competitors: IMG do not fight dirty they have relations where it matters and the market is big enough for a few key players. Reading too much into articles does not reflect the business reality such as one company hiring a small team GPU engineers does not imply any changes to the business relationship. We bought up issues about our concerns on PR issues and we were satisfied that the CEO had taken these on board and that they were addressable. We were happy with his comments and also the fact that IMG was a delivery focused company and would not waste energy in entering into attacking competition.
IMG do however intend to go on the PR offensive , correcting misnomers and cheats when and where they occur, they will pay particular attention to the results of benchmarking SOCs ensuring that they more accurately reflect IMG's superiority in power consumption ( MIPS and GPU) but perhaps more importantly the GPU performance /power consumption superiority of series6 v competitors which IMG are totally confident about, IMG still believe that its Rogue technology is materially ahead of competitions.
On the share price front, HY stressed the strong support of IMG's major institutional supporters for their long term business plan and managements total focus being to deliver shareholder return by continuing to create a valuable business and delivering sustainable results over the medium to long term. Short-term fluctuations and market variabilities should not be confused with the focus and overall plan that is being followed.
MIPS is viewed as a real credible alternative CPU architecture by the industry and we were given the impression over time MIPS will add many multiples to the $100m spent on the acquisition which was viewed as a good deal even after the Ceva "chess-match". Many stakeholders from semiconductor companies to industry drivers such as Google want MIPS to succeed as no one would want to be tied to a monopolistic CPU vendor scenario and natural unhealthy control that could give a specific player. Clearly Google appear to have been highly supportive of this acquisition. Having John Hennessey MIPS chief architect and now Stanford University President who is passionate about MIPS and believes in a level-playing field for processors, sitting on the Google board is certainly helpful. Hossein Yassaie and John Hennessy have met multiple times to share updates on MIPS future direction and other relevant topics. In fact Google was mentioned a number of times by the CEO in various contexts suggesting that the relationship between us is obviously very strong.
Technologically MIPS is a real credible offering, with an efficient "true RISC" architecture, in the three key metrics of perf, power and area. Additionally the 64-bit architecture it provides is mature and therefore architecturally better positioned than say ARM who have only recently moved to 64-bit. Of course IMG is addressing certain gaps in MIPS offerings and had embarked on delivery a strong roadmap for the future. HY reiterated the target of aiming to secure around 25% of addressable CPU IP license market design-ins within 5 years. There is real interest in MIPS and so much familiarity with the technology where it matters in senior engineering circles and management boards there is high optimism. Customers who would have continued their transition to ARM or exclusively would have stayed with ARM are now confident about the stability and future and roadmap of MIPS within IMG. Cavium for instance were going down the Arm route before there recent license. MIPS will take some time to really grow and contribute but will be very important revenue and value generator. HY suggested that the financial market has not yet fully understood/appreciated the strategic importance and real long-term value of MIPS but that is natural in this complex technological market and time will correct that.
Samsung mobile relationship is strong, as evidenced by use of Clovertrail+. Samsung LSI will continue to multi-source so IMG expect to be in more SoCs but clearly have ARM to compete with. Samsung LSI are probably only 30% of Samsung mobile. As TI move away I would expect share between Intel (us) and Qualcomm.
Series 6 / XT update was that we are in the licenses that matter but do not expect to go far in terms of breadth of license base at this stage, by this we mean the stated number of partners ( currently more than 10) is not likely to be 20 anytime soon.Seems like the industry is currently converging on a number of main players in the mobile SoC space - I would possibly read these as Apple, Mediatek, Intel as the main drivers of volume. LG have been first to market with Series 6 in TV with their H13 SoC. We can deduce there will be an M13 (???) SoC in development for use in handsets at some point, this could be very profitable and Dave had lost hope of a Smartphone SOC from LG , we were reassured that was not going to happen, Dave very pleased. The likes of Allwinner, Actions Semi and Rockchip are also considered as contributors and whether these are potential candidates for series 6/XT is something to look into / wait for.
TI and Renesas have been commented on in the recent analyst conference call so I can only currently see these as automotive and industrial players going forward.
With regards to benchmarks expect some new stuff in the power/performance space from IMG in the future. The Anandtech Adreno 330 article was discussed, clearly what this points to is competition hotting up but Rogue is imminent and will be a game changer. Qualcomm are a licensee and we should see the display ip and subsequently UCC feature in SoCs adding to volume. IMG have a very positive relationship with Qualcomm
UCC licensing is the next area to watch. Adding Toshiba as a licensee is evidence that Ensigma business is growing and HY expects unit volume to ramp in the near future and add to the diversifying revenue base.
Caustic/Ray Tracing looks peerless and clearly disruptive but is still a few years out. Target markets range from TV, tablet to console and eventually mobile. IMG appear unchallenged in this space and whilst there are no visible rivals IMG need to capitalise. Licensable ip is what IMG are working towards and we can expect news in that direction as we go into 2014.
On the Pure front investment in the flow cloud offerings and the wifi speakers have been developed to not only generate a future new revenue stream for IMG but also path-find licensable IP. Pure is a core part of IMG and should be viewed as such. UK digital switch off will generate further forward visibility. In-car such as the link with Halfords should help. There could be many opportunities opened for licensing. There appears genuine optimism about PURE , the 7digital connection was discussed and referred to as the 'warehouse' of a music catalogue sitting behind the PURE cloud platform , IMG own 18% of 7digital and have Richard Smith as a non -exec director ( not as a finance director as some have reported).
Many observers would not have failed to noticed Sir HY being very vocal in publicising the need for UK PLC to take engineering and the technology industry more seriously. Areas such as the NHS could be transformed by better partnerships with UK technology industry. HY was heavily involved in the ESCO report. He is known at senior government levels and the rationale he transmits can only be beneficial for the future for IMG, the industry, and UK job prospects.
Toumaz has huge potential and the frontier acquisition should have more immediate benefit whilst the healthcare business gets going over the medium to long term. HY visited the California hospital where the sensing plasters were successfully trialled.
After the meeting we walked across to Pure and were delighted to be introduced to Andy Davies (Pure) and Pete Downton (director of Flow and Cloud services). We were given a brief presentation during which it was mentioned that the major music labels in particular Universal are more than happy dealing with IMG as being an IP company they can rely on a long term close relationship as Music rights are tied to the DNA of IP , All the appropriate 'players' are on board the offering from PURE
We were given a demo of the current Jongo range as well as a new product. The flow technology ecosystem and software has had heavy investment and it works! This is available for licensing. Pure is actively entering the Sonus market which was a $500 million turnover market last year far larger than the current DAB market. Pure are very confident about their sound quality , build and price point ( lower than Sonus).
The feedback from major retailers here in the UK and more importantly in the US has been extremely positive, and although advertising expenses will be restricted , the PoS ( point of sales) structure will be very positive. PURE expect a very strong International launch of the new multi room products ( including a very strong presence in the top US consumer electronic retail stores and backed with the FlowCloud platform, the PURE connect App a very strong licensing proposition that is creating a lot of interest with major OEM's).
Pure also has at least 3 new wireless multi-room speaker including possible SoundBar products in the pipeline in addition to the present offerings and we saw them and listened to a couple of them. Onkyo /Dolby have been involved in the new products.these products are likely to be launched at IFA in September and have been very well received by retailers, the look AND sound (demo on Dark side of the moon) was...SPLENDID :-)
Ultimately this market is viewed as rapidly growing but, clearly selling the speakers will be the acid test! Potentially this could be a game change for Pure from a revenue perspective and hopefully lead onto medium term profitability.remember its not just about the 'physical' products its about the licensing potential , imagine if Sony Panasonic Etc etc license the multi room technology ( incredibly difficult apparently) utilise the PURE CONNECT App , backed by Pure's flow and Cloud , that's one very very serious global proposition.
On reflection we should emphasise that all the IMG staff seem totally motivated to deliver and are very impressive individually and collectively
Finally thanks to Susi for hosting us, to Sir HY for his time and also the staff we met were all so very accommodating and we could read the enthusiasm they have for our company - as fundamentals improve eventually so will the SP - those FTSE 100 ambitions remain a firm goal! Equally, our enthusiasm and faith fully was restored, optimism has increased that they can deliver the investor returns and once again total respect to HY and all IMG's excellent committed staff.
p.s. Sir HY was at Windsor to meet Her Majesty and was officially “Knighted” on Friday 19th July and we are genuinely delighted for him and his family, a truly deserved honour
END
