Arm Holdings benefits from smartphone boom

Increased demand for smartphones and tablets has boosted full-year revenues and pre-tax profits at Arm Holdings, the Cambridge-based chip maker whose designs feature in the Apple iPhone.

Warren East, Arm chief executive, said the group’s designs were being used in an increasing number of electronic products, and that growth in licensing and royalties was behind increases in the group’s full-year turnover and pre-tax profit.

The chip designer also said it signed a record 35 processor licences during the final three months of 2010.

In January Microsoft said that it would use chips based on Arm’s designs to power the next generation of its Windows operating system, while Nvidia recently signed a licensing deal to use Arm designs for computing markets.

Such high-profile deals, together with rumours that Arm could be a takeover target, have fed into the share price, pushing the stock to 10-year highs.

Mr Warren dismissed talk of a possible takeover by a rival such as Intel, and said he was not concerned by the high valuation on the stock.

“We are keeping our nerve and sticking to our knitting,” he said.

Arm’s low-energy chips are found in more than 90 per cent of the mobile phones sold globally, and the group has benefited from demand for smartphones, which use more of the group’s chips per device than a basic handset. Arm also expects its chips to increasingly feature in devices such as smart meters and servers.

The chip designer said it was well positioned to further gain market share in 2011 and expected that dollar revenues for the full-year “to be at least in line with market expectations”.

For the full-year to December 31, pre-tax profits rose from £47.3m to £110m on an IFRS basis.

Sales rose from £305m to £406.6m and earnings per share more than doubled from 3.11p to 6.36. A final dividend of 1.74p was proposed, up 20 per cent, bringing the total pay-out to 2.9p (2.42p).

Arm shares, which have almost trebled over the past year, on Tuesday rose 33½p, or 6.5 per cent, to close at 549½p.

FT Comment

Mr East is playing the long game. Arm has made its mark over the past few years by selling energy efficient chips for mobiles. But what once seemed like catering to a niche market now looks like a clever move. Not only are phones getting smarter but the launch of the iPad is pushing Arm towards the higher margin PC market dominated by Intel. Arm is also dipping into the server sector, betting that a push towards “cloud computing” will drive demand for its energy-efficient chips. Arm shares are trading at a steep 54 times prospective earnings for 2011. But if Arm can achieve its vision of selling 100bn cumulative chips by 2020, the valuation may not look so silly.

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