What Apple Inc.'s Custom Graphics Processor Means for This Small-Cap Supplier

By MarketsFool.com

Highly respected microprocessor analyst David Kanter recently posted an article on his website, Real World Tech, detailing an interesting discovery. He says Apple (NASDAQ: AAPL) has finally managed to design its own graphics processing unit (GPU) for integration into its A-series chips used inside both its iPhone and iPad series of products.

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Image source: Apple.

Perhaps more surprisingly, Kanter says that Apple launched its first custom graphics processor design inside the A8 chip that powered the iPhone 6-series smartphones. The company has presumably iterated upon that original design with the graphics processors found inside Apple's A9 and A10 Fusion chips released in subsequent years.

Before building its own graphics processor, Apple relied on designs produced by graphics specialist and longtime Apple supplier Imagination Technologies (NASDAQOTH: IGNMF). Let's take a closer look at what Apple's custom graphics processor means for Imagination Technologies, if anything.

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Imagination Technologies still in the loop

Kanter begins with an explanation of the three major components of a typical GPU:

According to Kanter, although much of Apple's graphics processor design is custom, there's still quite a bit of technology inside the design that comes from Imagination.

Here's Kanter with more details:

What's interesting is that Imagination Technologies didn't report anything unusual from a licensing or royalty payment perspective as Apple transitioned from the A7 chip to the A8 chip. Indeed, during Imagination's fiscal year ended on April 30, 2015, the company reported royalty revenue growth of 9%. The company said unit shipments from non-MIPS processors -- in other words, Imagination's PowerVR graphics -- were flat year over year while the average royalty rate in non-MIPS processors went up because of "a better mix."

If Apple's move to more customized GPU technology led to a significant reduction in per-unit royalty payments to Imagination Technologies, then the company's average non-MIPS royalty rate should have gone down rather than move up 9%. Apple is a large enough customer of Imagination's that a significant content reduction in Apple's devices would lead to a large drop in non-MIPS royalty revenue.

Investment takeaway

The conclusion, at least for now, is that even though Apple has built up significant graphics technology expertise in-house, it still relies on valuable intellectual property that Imagination Technologies developed.

Since Imagination's PowerVR licensing and royalty performance have apparently been unaffected by Apple's move to a custom graphics processor, it might be reasonable to expect Imagination Technologies to continue to collect royalty payments for the foreseeable future, even as Apple continues to advance its own graphics processor designs.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on 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.