Last updated: October 25, 2011 12:25 pm

High demand helps Arm beat forecasts

Arm Holdings, the UK chip designer, beat analysts’ expectations by more than doubling profits in the third quarter, in spite of an overall slowdown in the semiconductor industry.

The Cambridge-based company, whose semiconductor designs are used by most of the world’s mobile phone makers, including Apple, is continuing to sign up new customers. Warren East, chief executive, said these included computer manufacturers who were adopting Arm designs as they began to move to making products for the tablet and smartphone markets.

Computer makers traditionally used chips from US rival Intel, but are migrating to Arm as they make smaller devices that require less power. Arm’s appeal will be boosted further next year when Microsoft brings out a new version of its Windows operating system designed to work around the UK company’s architecture.

The company sold licences to 14 new clients in the third quarter, helping its turnover to rise 19 per cent to £120.2m.

Arm has two main streams of income: from licences, which give a customer the right to use its chip designs; and royalties paid on every chip made using its technology. Licence revenue growth remained strong, rising 38 per cent to £46m.

However, royalty revenues – which accrue one-quarter in arrears – had been hit by the Japanese earthquake in March, which disrupted energy provision and supply chains in Japan and caused a slowdown in the country’s semiconductor industry in the second quarter. Royalty revenues, Arm’s biggest income stream, rose 15 per cent to £59.9m, lower than consensus expectations.

Profit before tax rose 119 per cent to £43m, although the increase amounted to 44 per cent when adjusted for one-off items. Earnings per share rose from 1.09p to 2.29p.

The group said its order backlog remained at historically high levels as it entered the fourth quarter, and forecast full-year revenue of about $763m – an increase of 21 per cent.

Shares in Arm Holdings rose 2.5 per cent to 590p on the news.

FT Comment

Arm has enjoyed an extraordinary period of growth thanks to the launch of its new range of Cortex processors, which are in smartphones as well as a range of products from washing machines to cars. Demand from non-mobile customers gets less media attention, but is growing at 50 per cent year-on-year. Mr Warren has hinted that Arm’s low-power chip designs will be used in computer servers by 2013, opening up another new market. Over the past few years Arm has gone from a little-known UK company to a serious challenger to Intel, the world’s biggest chip manufacturer. However, investors may have become a little over-excited. Arm shares trade at about 38 times next year’s earnings, far ahead of the rest of the tech sector which has a forward multiple in the high teens. Sustaining this will require exceptional growth. This will become harder as the semiconductor industry slows, while Intel is pushing into Arm’s home territory of mobile phone chips, with a recent tie-up with Google’s Android. After a more than 50 per cent rise in share price in the past year, some caution may be needed.

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