From FT Lex column Aug 19th
One by one the London Stock Exchange's high-flying young technology companies - Baltimore Technologies, Autonomy, Bookham - have crashed to earth. Chip designer ARM Holdings has lost altitude too, down 70 per cent from its peak. But unlike the others, ARM is proving its business model in the toughest of markets.
Last quarter ARM reported revenues up 56 per cent year-on-year and 11 per cent on the first quarter. Second-quarter royalty revenues were down 23 per cent from the first quarter, as the number of ARM-based devices shipped fell from 123m to 98m. But licensing revenues grew 33 per cent, as partners signed up to use ARM designs - and that bodes well for future royalties.
Given that most of ARM's royalties come from communications chips, an early rebound is unlikely. If the semiconductor market continues to deteriorate, manufacturers must eventually cut spending on research and development, including licensing. But only in the last resort. Traditionally, semiconductor companies maintain R&D spending through the cycle.
Other chip designers - MIPS and ARC - have stumbled. But this need not mean ARM will too. ARM is far better established, claims reasonable visibility, and has a substantial backlog of licence revenues. More broadly, it benefits from industry-wide pressure to reduce costs through greater standardisation of chip design. At 65 times forward earnings, ARM is vulnerable to any disappointment. But with 88 per cent gross margins, it is a promising way to play an eventual upturn in the semiconductor market. |
