February 3, 2010 2:00 am

Arm cautious despite surge in smartphones

Warren East, chief executive of Arm Holdings, believes the semiconductor industry might be over-optimistic about prospects for growth in 2010, in spite of the UK-based chip designer beating analysts' expectations with strong fourth-quarter results.

Mr East forecast 13 per cent growth for Arm, with the rest of the industry expanding at a slower pace. This is in sharp contrast to many analysts' expectations that the industry will increase sales by 15-20 per cent this year.

The chip industry has begun to recover from a slump in 2009 as recession-hit consumers stopped spending on gadgets. Positive results from semiconductor companies such as Intel , Texas Instruments and Infineon , have boosted sentiment in the sector.

However, Mr East said that macro-economic factors could slow down growth this year, as the US and European countries moved to reduce their fiscal deficits.

"I can't understand how consumers will feel better off with that backdrop," Mr East said. The caution came in spite of a strong performance from Arm, which has defied the downturn, due to the popularity of smartphones such as Apple's iPhone.

Arm-designed chips are installed in more than 90 per cent of the mobile phones sold globally, and smartphones are particularly lucrative, containing up to six royalty-generating chips per handset.

Smartphone sales rose 30 per cent year-on-year in the fourth quarter to 53m phones, according to Strategy Analytics, a research company.

Although fourth-quarter revenues were down 10 per cent from last year at £85.2m, they were ahead of expectations and better than the 20 per cent declines seen by chip sector peers.

Full-year sales were up 2 per cent at £305m ($487m), but on a dollar basis, annual revenues fell 10 per cent. Full-year pre-tax profits were down 25 per cent to £47.3m, while earnings per share were down 9 per cent to 3.1p. The annual dividend was raised 10 per cent to 2.42p. Shares in Arm rose 5.5 per cent to 200½p.

In spite of an industry bloodbath, analysts noted that Arm beat expectations on every level, from sales to margins and cash generation, underscoring the strength of the business.

However, they added that Mr East's caution is sobering. Arm is heavily exposed to the mobile phone sector, which accounts for 62 per cent of revenues, they added. This position could come under threat, especially as Intel moves aggressively into the sector.

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