Arm Holdings trounced market expectations as strong sales of smartphones and tablet computers containing the UK company’s microchip designs led to a sharp rise in fourth-quarter profit.
The company, whose chip designs are used in Apple’s iPhone and iPad, said on Tuesday that pre-tax profit rose 45 per cent to £69m in the fourth quarter, while revenues rose 21 per cent to $137.8m. About 2.2bn Arm-based chips were sold in the fourth quarter.
The numbers left analysts scrambling to upgrade their price targets for the Cambridge-based company. Coupled with news that the company raised its final dividend by 20 per cent to 3.48p per share, the figures sent the stock up 2 per cent to close at 609½p.
Arm’s results follow forecast-beating results from Apple last week. The launch of Apple’s iPhone 4s model has been particularly beneficial for Arm, because it uses a processor design from the company that analysts believe brings in almost double the royalties per unit than previous models.
Warren East, Arm’s chief executive, said sales had also been boosted by new manufacturers choosing to license the company’s low-powered chip technology.
The company signed 25 new licences in the fourth quarter. Arm’s low-power chip designs have traditionally been used for small portable devices such as mobile phones, but are now moving into many other sectors.
Hewlett-Packard, for example, recently said it was looking to use Arm-based chips in servers, the first time the UK company has moved into this segment of the mainstream computing market.
Arm-based chips are also starting to be used in parts of telephone network infrastructure, and Microsoft is adapting its Windows operating system, which is used on a majority of PCs, so it can run on Arm-based machines.
Mr East said he expected more new licensing deals for servers this year and the company’s first revenues from server chips in 2013.
“Although our view of the timeline has not changed, our confidence in this business has increased. Twelve months ago there were many more unknowns,” he said.
The strong results contrast with Intel, which warned in December that revenues would be reduced because of slow global sales of PCs and disruptions in the hard disc drive market.
Intel is fighting back against Arm with its own Medfield chips, designed to be used in mobile phones. Motorola and Lenovo have both recently announced plans to use Intel chips in their handsets.
“It was disappointing to see the announcements,” admitted Mr East. “In the short term it will not have an effect, but don’t think that I am complacent about it.”
Despite overall uncertainty in the semiconductor market, Arm said it was confident of “at least” meeting market expectations for dollar revenues of $860m for 2012. This would imply just under 10 per cent growth while the rest of the semiconductor sector is expected to grow just 2.2 per cent, according to Gartner, the technology research group.
Arm trades at an eye-watering premium to the rest of the technology sector, at about 40 times next year’s earnings estimates, while the rest of the peer group is in the mid-teens. But the strong annual results show that it is not overpriced. Even the Arm sceptics were on Tuesday moving their forecast numbers upwards. In the long term, Intel remains a threat. Apple could, some day, switch from Arm to Intel and this would be a blow. But it seems a distant threat for now. For the next two or three years there seems little to stop Arm from continuing to quietly, confidently, beat expectations.