Imagination Tech builds 'platform for growth' as opex jumps - UPDATE

Processor technology group Imagination Technologies on Wednesday revealed a decline in annual profits due to a sharp increase in operating expenses (opex), though management sounded a confident note saying that a number of substantial investments have built a 'strong platform for growth'.In a call with Sharecast, Chief Financial Officer Richard Smith said that the period ended April 30th was an "important year in terms of strategic development".The company made the $100m acquisition of MIPS Technologies in February, which strengthens its presence in the processor and central processing unit intellectual property market. Although only being with the company for a quarter, the integration has gone very well and its performance has so far been ahead of earlier expectations, Smith explained. He said that MIPS "adds another very strong string to our bow".Royalty strength offsets fall in LicensingGroup revenue rose 19% from £127.5m to £151.5m last year, £8.2m of which came from MIPS since its acquisition. The company's partners shipped 700m units during the year, comprising 535m from Imagination (325m the year before) and 165m from MIPS, driven by "substantial" growth in the second half. Smith said that management was "so confident" in its target of shipping 1.0bn units (excluding MIPS) by 2016. For the current year, guidance is for shipments of over 650m units (excluding MIPS).This helped drive a 28% jump in Technology revenue to £125.7m, as strong growth in Royalties offset a fall in Licensing. Imagination hailed its presence in the smartphone chip market and said that a 50% market share is a "reasonable and realistic goal". The firm also said it had good exposure in the tablet market and is experiencing an accelerated position in newer areas like smart TVs.As for the fall in Licensing sales, the company had already warned in a pre-close trading update that it had seen delays in closing some licensing deals in the second half. Smith explained that a number of its partners are changing focus - such as Texas Instruments, which is widely known to moving away from smartphones - but are moving into other exciting areas which have potential. Meanwhile, sales in the smaller digital radio business Pure fell by 12% to £25.8m as the division continued to be affected by the tough environment in the UK and some export markets. However, Imagination said it expects to see a significant improvement in demand over the medium term. Losses in this division widened during the year but Smith said that some of these relate to greater investment to build for future growth. Profits fall as opex jumpsUnderlying opex increased as expected by 31% to £91.5m in the year to April 30th which Imagination said was down to the strengthening of key parts of the group in response to a growing customer base and technology development, as well as the integration of acquired businesses. This held back adjusted profit before tax to £34.3m, down 7.0% on £36.8m the year before. Reported profits came in at just £12.2m, down from £28.5m previously.However, despite the fall in the bottom line, growth in the very high-margin Technology business helped group gross margins increase from 84% to 86%.The company reiterated its guidance of underlying opex growth returning to more normal levels of 18-20% this year.Shares price volatile in morning tradeAfter a near-8.0% slump in the shares in early trading on Wednesday, the stock had rebounded strongly and was trading up 1.38% at 309.4p by mid-morning.Peel Hunt reiterated its 'buy' rating and 630p target price for Imagination, saying that profits and growth in Royalty revenue both came in ahead of expectations."Profit growth will kick in again this year, following heavy investment and acquisitions last year, and we see forecast upside in FY2014 from Royalties and Licensing," said analyst Alexandra Jarvis."IMG is well exposed to many of the key technology trends and over the next few years will diversify beyond graphics and into new classes of device. In our view, the shares are undervalued, particularly given the model's long-term margin potential," she said.