ARM beats expectations with profits surge

5 February 2013
By Sofia Mitra-Thakur
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Consumers are increasingly using the internet on mobile devices

Consumers are increasingly using the internet on mobile devices

British chip designer ARM topped expectations for quarterly profit growth as it rode the wave of soaring sales of smartphones and tablets, most of which contain its technology.

Shares in the Cambridge-based group, up 51 per cent in the last 12 months, rose to a 12-year high as analysts said its positive outlook would trigger upgrades to their earnings forecasts of between 5 and 6 per cent for 2013.

ARM Holdings, which posted a higher-than-expected 16 per cent rise in pretax profit, licenses its technology to chip makers and receives a royalty on each chip shipped in devices from the likes of Apple and Samsung.

Consumers around the world are increasingly accessing the Internet on mobile devices rather than on PCs - a trend which is playing to ARM's strengths.

"Five years ago an ARM processor could be found in just over a quarter of devices that you could use to browse the Internet," chief financial officer Tim Score said.

"Last year ... three quarters of Internet-connected screens and devices used an ARM processor in the main chip."

The newest smartphones and tablets typically contain multiple ARM-based processors and increasingly ARM graphics as well, helping lift the company's quarterly royalties 19 per cent to $136.8 million, strongly outperforming the market.

The company recognises royalties a quarter in arrears, so the royalty income was on the basis of 2.5 billion chips shipped in the third quarter of the year.

Licensing revenue rose 28 per cent to $100.6 million, with 15 licences of a total 36 signed for ARM's most recently introduced Cortex-A processors designed for mobile computing, servers and enterprise computing.

Shipments of Cortex-A technology, which commands a higher royalty than earlier designs, doubled in the year, the company said, helping the average royalty rate per chip rise to 4.8 cents from 4.5 cents a year ago.

Analyst Lee Simpson at brokerage Jefferies said demand for ARM's latest technology was a highlight in a statement that would drive 5 to 6 per cent upgrades to earnings forecasts.

"It underlines that Cortex A is motoring," Simpson said. 

"Licensing still remains strong, so interest in the leading edge is still there. 

"Opex (operating expenses or the group's costs) has gone up a little bit, but you are still getting the earnings. Nothing feels broken at this point."

Julian Yates at Investec said ARM had proved yet again it was the standout play in the technology sector.

"The upside beat on the licence performance should be enough to help the stock consolidate following its very strong run," he said.

Shares in ARM, which have outperformed the European tech sector by 20 per cent in the last 12 months, were trading 4 per cent higher at 928 pence by 0958 GMT, topping the FTSE 100 leader board at that time.

ARM said it expected to continue to outperform the wider semiconductor market in 2013 and would at least meet analyst forecasts for 2013 revenue.

Score said these had stood at $1.03 billion.

The group reported a quarterly pretax profit of £80 million on revenue of £164.2 million, equating to earnings per share of 4.08 pence.

Analysts were expecting pretax of £75.6 million on revenue of £152.2 million.

ARM said it would raise its final dividend by 35 per cent to 2.83 pence a share, resulting in a total payout of 4.5 pence for the year, up from 3.48p.

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