July 27, 2010 9:30 am

Cautious Arm declines to revise guidance

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Arm, the UK’s largest technology company by market value, declined to raise its full-year outlook in spite of beating market expectations with its first-half results.

The chip designer’s shares closed 12.2p lower at 333.9p, having more than trebled over the past year.

Arm has benefited from the success of smartphones such as Apple’s iPhone. Its technology features in nine out of every 10 mobile handsets sold.

Semiconductors using the company’s designs are also used in car engines, washing machines and office equipment.

Warren East, chief executive, said: “Arm continued to gain share in the quarter with shipments of Arm-based chips growing faster than the industry in all target markets.”

But Arm said it expected full-year revenue in dollars to be in line with analyst expectations, citing uncertainty in consumers’ demand for gadgetry.

Revenue in the second quarter rose 54 per cent to £100m, more than 10 per cent higher than analysts’ consensus forecasts after an unexpected one-off royalty catch-up payment. Pre-tax profits rose from £6.4m to £29.6m.

First-half revenues rose 33 per cent to £192m, while pre-tax profits were up 85 per cent to £55.5m. The interim dividend is lifted 20 per cent to 1.16p.

Last week shares in Arm climbed more than 11 per cent to an eight-year peak after it signed a licensing agreement with Microsoft.

The deal is thought to signal Arm’s long-awaited breakthrough into netbooks, tablet computers and PCs. Previous efforts have been hampered by the relatively poor performance of Windows devices using Arm chips.

But analysts at Investec said the deal’s contribution to near-term revenues would be “minimal” and did not “in its own right mandate success”.

Arm said its order backlog at the end of June 2010 had risen 20 per cent from the end of the last quarter to its highest-ever level, while it said licensing deals with semiconductor industry leaders such as Freescale and TSMC would also boost market penetration.

Tim Score, chief financial officer, said uncertainty over the global economy meant the outlook was difficult to predict. “It’s possible that the usual seasonal uptick [in royalties] is of a slightly flatter trajectory, but still showing growth”.

Analysts at Citigroup said that Arm’s backlog growth “assures on long-term license growth”, which could lead to “small upgrades to consensus earnings” forecasts.


Lombard: Arm outstretched


With economic recovery still fragile, there are limits to how many smartphones and tablet PCs even early adopters wish to own. It’s hard, then, to see what more Arm Holdings could do to impress. It is winning market share in industries beyond its smartphone heartland. Its interim results outstripped expectations. Revenues and order backlogs are at record highs.

Yet investors keep pricing in a more optimistic outlook. The deal last week with Microsoft should address one of Arm’s weaknesses, namely the relatively poor performance of Windows mobile devices that use Arm chips. But it is probably of more importance to Microsoft than it is to Arm, which will bank the benefits only later. The shares – up 80 per cent in the past six months – are buoyed by rumours of a bid from Apple, even though the cost to both companies in terms of adverse reaction to such a deal from the rest of the industry, not to mention regulators, would far offset any advantages.

Analysts forecast Arm will record earnings per share of just more than 9p in the year to end-December 2011. That puts the shares on a prospective price-earnings ratio of 38 times, way ahead of the rest of the sector. More power to Arm’s elbow, as a UK technology champion. But while Arm is strong, it may not be as strong as its heady valuation suggests.

More lombard at www.ft.com/lombard


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