ARM Posts 38% Profit Rise But Gives Cautious Outlook
A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
LONDON -- ARM Holdings PLC Tuesday said second-quarter net profit rose 38% as it posted record license revenue, but the British chip designer was cautious about growth prospects for the rest of the year.
ARM said its net profit in the second quarter rose to £11.5 million ($17.9 million or &euro18.2 million), compared with £8.3 million a year earlier. First-half profit climbed 37% to £22.2 million.
ARM said pretax profit before exceptional items rose 33% to £16.2 million on the year. For the first half, pretax profit before items rose 35% to £31.9 million from £23.6 million.
Growth in revenue from licensing, which is considered a leading indicator of development activity in the chip industry, remained strong, the company said. License revenue rose to £49.3 million in the first half, up 52% from a year earlier.
But royalty revenues earned in the first half were £12.9 million on 205 million units shipped. Royalty revenues in the second quarter were £6.5 million on 95 million units shipped, up marginally from the previous quarter on 110 million units shipped, and similar to those reported in the previous three quarters.
Some analysts say ARM's relatively high valuation can only be justified if the company is generating a growing revenue stream from royalties, which are effectively pure profit and help boost ARM's operating margin.
But analysts who had identified potential potholes for the semiconductor technology company, welcomed the results. Sean Murphy of Nomura Securities said, "It's a great performance in nervous times."
ARM shares were 9.2% higher at 144.5 pence in midday trading in London.
But the company was cautious in its outlook. Chief Financial Officer Tim Score said that although the first signs of a rise in license revenues appeared in the second quarter, the company is not managing for an upturn any time this year as it is receiving mixed messages from its 99 partners. Mr. Score said, however, he is comfortable with full-year market consensus expectations of £65 million in pretax profit.
The company said sales in the second quarter rose an annual 20% to £43.2 million, up 2% on the first quarter. Second-quarter earnings per share were 1.1 pence a share, a 38% rise on the year.
The company increased its cash balance to £115.4 million from £107.3 million at the end of the first quarter.
During the quarter, ARM signed 27 licenses, raising its number of semiconductor partners to 99. Licenses were signed with 11 new partners in the quarter, with 91% of license revenues derived from existing partners in the first half.
ARM dropped out of the blue-chip Financial Time-Stock Exchange 100-Share Index in June and subsequently saw its share price fall dramatically from around 359 pence at the start of the year. The stock was also plagued by uncertainty surrounding its growth prospects.
But this set of results proves the bears wrong, said ABN Amro in a research note. ABN noted that ARM's claim that only around two thirds of the 150 major semiconductor players are partners provides significant potential for growth. But ABN added that it sees the sale of more developed products to existing customers as the company's the main growth driver.
ARM said that despite the challenging market conditions, key long-term indicators remain healthy. In the short-term, the company expects the second half will be consistent with its first-half results.
J.P. Morgan analyst Uche Orji said the outlook answers some of the question which had been raised over ARM's growth prospects in the wake of U.S. rival MIPS Technologies Inc.'s profit warning.
ARM's Mr. East said of the licenses sold during the second quarter, 16 were upgrades and derivatives of existing licenses which are higher priced than multi-use license. Mr. East said ARM's model of building on its existing partnerships "is like bricks in a wall. You can put more bricks on top but you need to build from the base."
The number of foundry partners rose to 42 in the second quarter from 25 in the first quarter. Mr. Score said the first of these partners has started to ship products which is important for its royalty revenues as it gets a higher price from this type of royalty.
Mr. Score said that unit shipments decreased from 110 million in the first quarter to 95 million in the second quarter as the first three months were boosted by shipments of Samsung Corp.'s smartcard products, but he noted the value of the shipments has increased slightly while the product mix has improved.
Both Mr. East and Mr. Score expressed confidence that the ARM 11 delivery program is on track to begin full deliveries in the fourth quarter. ARM 11, code-named Jaguar -- is said to be ideal for the new generation of multimedia smart phones but can be used in a variety of products in various end markets. Mr. Score said ARM 11 is expected "to license pretty widely in the fourth quarter and the start of the next year."
ARM's backlog was flat on the quarter reflecting a strong booking performance in the second quarter. Analysts also breathed a sigh of relief that deferred revenues, which had caused concern at the end of the first-quarter, rose sequentially to £17.4 million from £13.3 million. Deferred revenues are the portion of the backlog that has been invoiced to partners but can't yet be recognized in the profit and loss account.
ARM said the legal action brought against it by Nazomi Communications Inc. over U.S. patent infringement related to ARM's Jazelle technology, is more straightforward than its previous litigation with Picoturbo Inc. and therefore, the cost and occupation of management time is expected to be significantly less. |
