23rd Apr 2014 11:59
LONDON (Alliance News) - Shares in ARM Holdings PLC Wednesday slid despite posting increases in pretax profit in the first quarter to end-March, as growth slowed in its royalty revenues and average royalty per chip continued to be hit by the slumping high end smart phone market.
ARM Holdings said that recent indications from the semiconductor industry and its customers suggested the second-half of the year would see improvement, and assuming this happens, reiterated confidence it would meet market expectations for dollar revenues in 2014.
The semiconductor company posted pretax profit of GBP97.1 million for the quarter to end-March, up from GBP89.4 million a year before, as revenue rose to GBP186.7 million from GBP170.3 million in the previous year.
Gross margins were 95.6% compared to 95.4% in the fourth quarter of 2013.
ARM said it had made an encouraging start to 2014 as it saw continued strong licensing performance, and noted that its pipeline of licensing opportunities remained healthy for the second quarter and remainder of the year.
Licensing revenues were up to USD129.9 million from USD94.9 million, as ARM signed 26 processor licences across various markets, including 11 licences for its Cortex-M processors for micro controllers, smart sensors, internet-of-things and wearable technology.
Despite seeing strong licensing revenues, it continued to weather the slump in high-end smart-phone and tablet markets, which utilise higher value chips compared to products such as the emerging internet-of-things and wearable technology markets.
As a result of the continuing shift in product mix away from higher value products towards the lower cost chips used in micro-controllers, smart cards, touch screen controllers and wireless connectivity chips, average royalty per chip declined slightly.
Average royalty per chip was 4.7 cents, down slightly from 4.8 cents a year ago.
Technology royalty revenues for the quarter were USD144.5 million, up from USD140.0 million. In sterling terms, technology royalty revenues declined to GBP86.8 million from GBP91.2 million. USD5 million in processor royalty revenue was deducted during the quarter due to a customer over-reporting the amount of ARM products used in its inventory.
ARM said that its royalty revenues had been hit by an inventory correction in mobile and consumer electronics, meaning that its royalty revenue growth compared to the overall industry was lower than it had seen in recent periods.
Broker Liberum posited that whilst management had cited the inventory correction, the underlying factor was the ongoing slowdown in the smartphone and tablet markets.
Liberum analyst Janardan Menon said that ARM's royalties are likely to continue to grow at a level behind market expectations over the next five years as a result of this slump. Processor royalties were 5% below Liberum's forecast, and taking these factors into account, the analyst said that ARM's guidance of 19% royalties growth in 2014 was too optimistic.
ARM did not disclose the name of the customer.
The company said its order backlog at the end of the first quarter was down around 5% from the previous quarter. It expects its order backlog for the end of the year to be at a similar level.
Major ARM customer and smart-phone giant Apple Inc will announce its second quarter earnings after market close Wednesday, at around 14000 Pacific Time.
At the time of reporting its first quarter results, Apple's second quarter sales outlook had failed to meet analyst expectations, lending weight to concerns about a slump in the top end smart phone market.
Shares in ARM were trading down 2.7% at 956.50 pence, the sixth biggest faller on the FTSE 100 Wednesday afternoon.
By Hana Stewart-Smith; [email protected]; @HanaSSAllNews
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