Ahead of the iPhone 6 launch, I was very bullish on what the next generation product could mean for semiconductor IP vendor, Imagination Technologies (NASDAQOTH:IGNMF), which provides the graphics processor to Apple (NASDAQ: AAPL) for its iPhone and iPad products. My thesis essentially came down to the following:
- Apple was likely to use a higher-end graphics processor from Imagination than it had in its A7 chip.
- Apple share gains largely meant share gains for Imagination at the high end of the mobile processor market.
While the second part of this thesis looks as though it'll come true as Apple gains share with both the iPhone 6 and 6 Plus, the first part doesn't appear to have played out.
Sorry, it's a 4-core PowerVR Series 6XT
I have long speculated that Apple would move to a 6-core PowerVR Series 6 or 6XT design for its A8 chip. Given that Apple was moving to TSMC's (NYSE: TSM) 20-nanometer manufacturing process, it seemed likely that the company could pack in a much larger graphics processor than it had previously been able to.
Indeed, when Apple first announced the iPhone 6, it claimed that the performance of the iPhone 6 would be "up to 50% faster" than the graphics processor found inside of the iPhone 5s.
AnandTech's Ryan Smith did some digging and revealed that the graphics processor inside of the iPhone 6 needed to be a Series 6XT rather than a Series 6. This led Ryan to believe that it would either be a GX6450 or a GX6650 inside of the A8 chip.
Upon learning this, I revisited Imagination's original press release, which claimed that the Series 6XT cores offered "up to a 50% performance increase on the latest industry standard benchmarks compared to equivalent configurations of previous generation cores. [emphasis mine]"
It then hit me that this is where Apple's 50% improvement claim came from, and when it did, I immediately fired off a tweet to AnandTech's Ryan Smith with my findings. He agreed.
What does this mean for Imagination?
I am inclined to believe that Imagination receives a slightly higher royalty for the Series 6XT IP than it does for the Series 6 IP, which could lead to a slight boost in Imagination's blended royalty rate.
However, the real value I would imagine (no pun intended) here is that Apple is likely to gain significant share at the high end, which means that Qualcomm/ARM GPU powered Galaxy Notes and HTC Ones get replaced with Imagination GPU powered iPhone 6 and 6 Plus phones.
I'm also pretty bullish on Apple's ability to gain share in the mid-range and low-end with its iPhone 5c and 5s phones now that they move down the stack. Those are obviously powered by Imagination, which means that the share gain story for the company could extend beyond the end.
Also keep in mind that we still don't really know if Apple will end up providing an A8X system-on-chip for its upcoming iPad refreshes. Since the iPads have to drive higher display resolutions, there's a chance that Apple goes with a 6-core Series 6XT GPU for the iPads.
The iPad line has much lower volume than the iPhone, but any increases in per-chip royalties is sure to be welcome news to Imagination shareholders.
Foolish bottom line
While it's a disappointment that Apple didn't go with a bigger GPU for the A8 chip found in the iPhone 6 and 6 Plus (muting a potential royalty rate growth story), the initial success of the iPhone 6/6 Plus in pre-order keeps me optimistic that Imagination still stands to gain overall graphics IP share as Apple continues to gain share.
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.