Market conditions finally catch up with ARM.
LONDON (ShareCast) - ARM Holdings's so-called pipeline turned into a sump today as it warned that third-quarter profits would halve on the previous quarter and revenues would sink by about a third. The company sees no upturn ahead.
The semiconductor maker said a further deterioration in market conditions would result in "the deferment of investment decisions by its partners and therefore a slowdown in licensing activity". The company was also hurt by the weakening of the US dollar, however, it had already factored this in when making projections a few months ago - so no excuse there.
Revenues for the three months to September 30 are now expected to be about £33m. ARM said that foreign exchange impact on reported revenues is expected to amount to £2m. Pre-tax profit for the period is expected to be about £8m, half that of the previous quarter.
ARM had said at the end of July: "In the shorter term, although our reported results are impacted by a weakening US dollar, the visibility provided by our sales pipeline and backlog of contracted business give us confidence that growth in the remainder of the year will be consistent with that achieved in the first half."
The word pipeline, which used to warrant astronomical valuations on companies in the glory days of the tech boom, should now be synonymous with profit warning - given the number of times companies have been unable to deliver what their pipelines have offered.
For the second quarter, ARM posted a pre-tax profit of £16.2m, compared with £12.2m in the period last year and £15.7m in the previous quarter. Sales rose to £43.2m from £36m the year before and £42.1m in the previous three months.
At the time of its second-quarter figures, investment bank ABN Amro was incredibly bullish on the stock, despite obvious deterioration in the company's markets, although it did admit that one of its group members, Hoare Govett, is ARM's broker.
ABN said its valuation was based on long-term growth of 10% to 15% and it believed that it would grow significantly faster than this. Therefore, it said, even on a fundamental basis there was plenty of upside.
It finished its note with a bit of fighting talk, saying "we reiterate our buy recommendation and see the bears retreating ...". It will be interesting to read its response today. ARM's share price has tumbled from 144.25p at the time of its second-quarter figures to a low of 61.5p after a drop of 64.75p, or 51%, this morning.
ARM said today that it continues to generate cash and cash balances were likely to increase to about £121.7m at the period end, compared with £115.4m at end June. It said market conditions have deteriorated further in the third quarter, and warned that it sees no significant upturn until next year.
Back in the old pipeline, ARM said: "Whilst [the] sales pipeline and backlog of signed contracts give reasonable visibility the persistent difficult market conditions mean that the timing of the closure of licensing deals is unpredictable." A minor admission, at least, that pipelines didn't lead directly to profits.
It said that although the fourth quarter is usually stronger than the third, it does not anticipate any significant upturn in business activity before next year.
The company releases third-quarter results on October 15. |
