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Higher operating costs weigh on Imagination Tech

By Paul Sandle

LONDON (Reuters) - Profit growth at Imagination Technologies has been dampened by higher research costs, overshadowing a 90 percent jump in shipments of chips containing its graphics technology used in products like Apple's iPad.

Shares in the British company reversed early gains and were trading 4 percent lower as analysts said the operating expenses had weighed on earnings.

Imagination, which counts both Apple and Intel as shareholders, said the rise in operating expenses to 43.8 million pounds in the first half from 31.4 million a year ago was down to increasing research costs and recruiting more staff.

It said it expected the rate of operating expense growth to slow in the second half and in the next year.

Analysts at UBS said the higher expenses had offset a solid revenue performance.

"While Imagination highlights that the speed of increase (in operating expenses) is short term and in response to a growing customer base, it poses a significant headwind to the profit growth expected," they said on Wednesday.

Imagination, whose shares were trading at 429 pence by 6:41 a.m. ET, posted adjusted pretax profit of 16.8 million pounds ($27 million) on revenue of 71.4 million, up 27 percent and beating analysts' expectations of 68 million.

Some 237 million chips containing its technology were shipped in the six months through October, it said, putting the group on track to reach 500 million chips for the full year and 1 billion annually by 2016.

KEY MARKETS

Imagination licenses its technology to customers like Apple for the iPhone and MediaTek for lower-end smartphones.

Chief Executive Hossein Yassaie said on average 1.5 million smartphones, tablets and other devices were rolling off production lines carrying the company's graphics and video technology every day.

"Overall we are hitting the key markets from high end to low end," he said in an interview.

Some analysts have fretted that Imagination faces growing competition from chipmakers like Qualcomm, Broadcom and Intel using their own graphics technology, and from a more aggressive push into graphics by ARM Holdings.

Yassaie responded to concerns that Intel was increasingly favoring its own graphics technology rather than licensing it from Imagination, speculation that analysts say was triggered by some leaked Intel slides in the United States.

"We have very strong current and ongoing relationship with Intel and we expect significant volume ramp-up with them over years to come," he said.

Imagination also wants to grow its microprocessor business and is battling U.S. mobile chipmaker CEVA to buy the operating business of MIPS Technologies.

CEVA said on Tuesday it would pay $90 million for MIPS' microprocessor operating business, trumping Imagination's offer for a second time.

Yassaie had no update on Imagination's next move but said the group would continue its processor drive with or without MIPS. "Right now we are in process of working through the acquisition," he said. ($1 = 0.6210 British pounds)

(editing by Kate Holton)

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