Back in April, Imagination Technologies (NASDAQOTH: IGNMF), the longtime supplier of graphics intellectual property in Apple's (AAPL 2.21%) custom-designed A-series processors, announced to investors that Apple no longer planned to use its intellectual property.
As Imagination derives about half of its revenue from Apple (and substantially more than half of its PowerVR graphics revenue), this sent Imagination's stock plunging.
Image source: Apple.
Imagination has, understandably, been publicly "unhappy" about this development, which ultimately led the company putting itself up for sale.
What's particularly interesting, though, is that while Imagination informed its investors about Apple's plans to stop using Imagination's intellectual property back in April of this year, Apple reportedly informed Imagination of its plans much earlier than that.
How much earlier?
According to Bloomberg, which received a statement directly from Apple, Apple "first informed Imagination in late 2015 that it would no longer be buying the U.K. company's latest technology."
Then, last year, it reportedly "told Imagination that it was further diminishing the relationship by initiating a clause in its contract that allows Apple to pay a lower royalty rate for using a smaller amount of intellectual property."
Then, finally, Bloomberg reports, "by February of this year, Apple said that it told Imagination it was ending the relationship altogether and would no longer be making any royalty payments as early as 2018."
"We valued our past relationship [with Imagination] and wanted to give them as much notice as possible to adapt their future plans," Apple said in a statement to Bloomberg.
Why didn't Imagination disclose this?
Perhaps the most disappointing part of this whole ordeal is the fact that Imagination didn't inform the public about the plans that Apple communicated to it sooner.
I suspect that Imagination genuinely believed (as it still seems to) that Apple's assertion that it won't be using any more of Imagination's intellectual property was "unsubstantiated" (Imagination's wording). In fact, even now, Imagination maintains that it doesn't "accept Apple's position" on the matter.
Now, that's all well and good -- Imagination has every right to not accept Apple's decision (though putting itself for sale seems to be a pretty clear sign that it has "accepted" that decision), but it really should've given the public some warning given how large a part of Imagination's business sales to Apple ultimately are.
The lesson for investors
There's an important lesson to be learned from what happened to Imagination and its stock: Companies that derive a large portion of their revenue and profits from a small set of customers inherently carry quite a lot of risk.
Not only do such companies' financial health depend on the financial performance of their major customers, but those major customers could ultimately choose to switch suppliers.
In this case, Apple has chosen to go with a different graphics technology supplier -- itself -- and because Imagination's graphics business was so critically dependent on Apple, Imagination's time as a stand-alone entity is likely to soon come to an end.
