21st Oct 2014 08:06
LONDON (Alliance News) - ARM Holdings PLC Tuesday said it expects to meet market expectations of around USD350 million in revenue for its fourth quarter, as growing royalty revenues helped boost pretax profit in its third quarter.
The chip maker posted a pretax profit of GBP79.2 million for the quarter to end-September, up from GBP68.3 million a year before, as revenue rose to GBP195.5 million from GBP184.0 million.
This brings its total pretax profit for the first nine months of the year to GBP225.1 million, up from GBP150.4 million a year earlier, as revenue rose to GBP569.3 million from GBP525.5 million, and exceptional costs of GBP41.8 million did not recur.
Royalty dollar revenues were up 9% in the quarter, representing around 47% of its total revenue. Average royalty revenue per chip was USD4.5 cents, down from USD4.9 cents a year before, as its lower cost microcontrollers and smartcards grew faster than its higher value chips into smart phones and tablets.
ARM said that its third quarter royalty revenue showed "improving industry trends", as in previous quarters royalties had been hampered by inventory management in the consumer electronics industry. It expects royalty revenue growth to continue to accelerate in the fourth quarter.
Licence dollar revenues rose 16% in the quarter, representing around 45% of total revenue. The company said its order backlog at the end of the quarter was down slightly, but it expects that its licensing opportunity pipeline will lead to higher level of backlog by the end of the year.
ARM signed 43 processor licences in the quarter across mobile computing, enterprise infrastructure and embedded devices, taking its total signed in the year to 110.
It signed 22 licences for its Cortex-M class of processors to be used in emerging technologies such as wearable devices, the 'internet of things' trend, microcontrollers, smart sensors and low-power wireless communication chips. It signed four licences for its Mali multimedia processors into smartphones and mobile computing.
The company said it enters its final quarter with a "robust opportunity pipeline" suggesting strong licence revenues for its fourth quarter and an increase in its order backlog, as market data is underpinning its short-term outlook for royalty revenues.
Operating expenses were GBP86.8 million in the quarter, up from GBP85.6 million a year before, although reduced from GBP87.7 million in its second quarter. It expects its operating expenses in the fourth quarter to jump to between GBP92 million and GBP94 million as it continues investment in its research and development teams and its business infrastructure.
"Quarter three has seen accelerating royalty revenue growth and strong demand for our processors and physical IP. We have seen encouraging license momentum and design activity throughout our customer base, with more Partners choosing to deploy ARMv8-A architecture in multiple end markets," said Chief Executive Simon Segars in a statement.
Shares in ARM are trading down 0.7% at 846.00 pence Tuesday morning, having risen to 885.00 pence earlier in the day.
Accendo Markets analyst Michael van Dulken cited a positive read-across from Apple Inc's strong fourth quarter results Monday, which were boosted by strong iPhone sales and optimism for the holiday season. The positive iPhone sales will flow through to ARM in the first quarter of next year, helping to buoy confidence, he said.
Liberum however remains cautious on ARM, reiterating its Sell rating because it expects "royalty growth to be weaker than current market expectations, despite the on-going strength in licensing."
Liberum said that whilst licensing trends are continuing, growth is in "highly fragmented markets" that are smaller compared to smart-phones and tablets. As a result, the broker does not believe licensing strength will convert into royalties as it has in the past. It continues to expect other product segments to fail to compensate for the slow-down in smart phones and tablets, and its longer-term royalty forecasts are below consensus.
By Hana Stewart-Smith; [email protected]; @HanaSSAllNews
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