Last updated: July 26, 2011 12:42 pm

Arm strengthened by licensing deals

Arm Holdings, the UK chip designer, has enjoyed a 25 per cent increase in pre-tax profits in the second quarter, as semiconductor companies flocked to sign licences for the Cambridge-based group’s technology.

Confidence in Arm’s chip designs has been rising, since Microsoft announced earlier this year that it was re-engineering its Windows operating system so that it would run on devices using Arm chips. Google also recently announced it would make its Chrome operating system run on Arm technology.

Chips designed by Arm already feature in more than 90 per cent of the world’s mobile phones, and in Apple’s iPad tablet computers. Intel has traditionally dominated the market for chips used in computers, but the Microsoft and Google announcements show that Arm technology is making inroads into the sector.

“Now that Microsoft is re-engineering its Windows software, all the white-box computer manufacturers in Taiwan will be looking at Arm-based chips for their devices,” said Adrien Bommelaer, analyst at Matrix Capital Partners.

Arm-based microprocessors for computers are likely to cost less than half the roughly $70 that Intel charges, he said, making them appealing for hardware manufacturers operating on wafer-thin margins.

“We have been talking about a strong pipeline for some time, and this is now coming through,” said Warren East, Arm chief executive.

Arm reported pre-tax profits of £54.2m in the three months to the end of June, exceeding a consensus forecast of £45.3m. Revenues rose 18 per cent to £117.8m, as the company signed 29 licence deals, of which half were for chips likely to be used in high-end phones and tablet computers. Earnings per share were up 28 per cent at 2.98p.

The chip designer is also benefiting from a trend to include more sophisticated semiconductors in everything from domestic appliances, toys and industrial machines.

“We are building an installed base of licences over time, which is seeing the Arm technology getting designed into broader and broader addressable markets,” said Tim Score, finance director.

The company raised some concerns about consumer spending, however, saying that growth could be constrained in the second half.

“There is more negative noise out there. Normally, in the fourth quarter we see about a £10m uptick in royalty revenues. But in the context of the macroeconomic uncertainty, that uplift might be muted,” Mr East said.

Lee Simpson, an analyst at Jefferies, said Arm could withstand a downturn in the smartphone market better than Wolfson Microelectronics, the audio chipmaker that lowered its sales forecast on Monday.

“Arm is diversified across a wider base than some other chip companies,” Mr Simpson said, adding that it was likely to retain its dominance in smartphones, despite an expected challenge from Intel.

However, he said the current share price – which has risen strongly over the past two years – was probably excessive.

Earnings per share for the first half rose 12 per cent to 3.51p. The shares, which have gained 75 per cent over the past year, fell 20.5p, or 3.3 per cent, to 595p in afternoon trading.

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