Arm shares hit by new revenue alert

Arm Holdings, the semiconductor designer, on Tuesday cut full-year revenue growth estimates for the second time this year, sending shares down more than 10 per cent.

The company, which designs chips used in devices such as mobile phones and Apple iPods, had already revised revenue growth estimates in July to 15-20 per cent, from a previous forecast of more than 20 per cent.

On Tuesday, Arm said revenue growth would be at the lower end of this range – about 15 per cent – due to weaker licence sales at both the core Arm business and the new Physical Intellectual Property division (PIPD).

Third-quarter sales at the company were £56.7m ($99m), short of the £60.5m analysts had forecast, while pre-tax profits fell from £13.3m to £12m.

Warren East, chief executive, said the shortfall was partly due to the fact that Arm had signed a number of licences for its new Cortex processors, from which it cannot immediately recognise revenues as these are still partially under development.

PIPD, formed through the $913m acquisition of US chip component group Artisan last year, has also been slower to pick up licences than the company initially hoped. Third-quarter licence sales at the division fell from $15.6m to $15.2m year on year.

Mr East said the semiconductor industry’s transition to 90-nanometer technology, expected to provide a boost for PIPD products, was not proceeding as fast as some commentators had expected.

This is the third time that PIPD has disappointed since Arm acquired the business less than a year ago, and raises further questions about the wisdom of the deal, which many investors regarded as overly expensive.

Mr East said he remained optimistic about the company’s prospects.

Group sales are expected to see a 10 per cent improvement in the fourth quarter, as more consumer gadgets are shipped in the pre-Christmas season.

At the same time, Small cost savings, a lower tax rate and a share buy-back programme are expected to keep the company’s earnings per share in line with expectations, despite the sales shortfall. Mr East added that the company’s expectations for 2006 remained unchanged.

Nine-month sales increased from £111.4m to £169.5m, while pre-tax profits climbed from £33.1m to £37.5m. Earnings per share in the nine-month period fell from 2.3p to 2p. Shares in Arm down which have lost about 14 per cent since August, fell more than 10 per cent to 104¾p on Tuesday.