ARM 3Q Royalties Impress But Outlook Cautious
By NIC FILDES Of DOW JONES NEWSWIRES
LONDON -- U.K. semiconductor technology company ARM Holdings PLC (ARMY) Tuesday reported a slight improvement in third-quarter pretax profit and revenues, but remained cautious on the prospects for a general market recovery.
Despite posting much stronger than expected licensing and royalty revenues, ARM's outlook for the fourth quarter suggested a slowdown in licensing revenues may be on the cards.
ARM, which designs semiconductor processors used to power devices such as mobile phones, reported pretax profit of GBP6.8 million, down 47% on the year but a gain of 4% on the second quarter. Analysts had expected a 55% annual drop.
Revenues fell 16% on the year to GBP31.7 million, a 1% rise from the second quarter. Analysts had forecast an 18% annual decline.
However, net profit rose 25% to GBP7 million on the year due to one-off share sales and foreign currency adjustments.
Net cash generation was GBP10.4 million during the third quarter leaving the company with a cash pile of around GBP150 million.
ARM Chief Executive Tim Score said that, rather than commit to paying a dividend, the company would start looking for investment opportunities when it has a clearer view of 2004.
Arbuthnot analyst Michael Blogg said the company is on track to meet full-year forecasts, and is showing signs that a recovery is starting.
At 0915 GMT, ARM shares were 2.4% higher at 115.25 pence after trading as high as 117 pence in early trade.
Analysts had expected significant license activity during the quarter and the company didn't disappoint. It said it signed 16 licenses for microprocessor cores, compared to 11 in the second quarter, and seven new partnership agreements.
License revenues were 3.1% higher on the quarter at GBP13.1 million. Royalty revenues of GBP11 million were boosted by record unit shipments of 188 million units, a 52% rise on the year.
Commerzbank's Steve Woolf said the very strong royalty revenue number will "give people a little heart", as the third quarter is traditionally weak in the semiconductor industry.
ARM CEO Score nine of the 16 licenses were for multiuse and seven were for per-use deals. He said he expects to sign "a handful" of new licenses in the fourth quarter, similar to average levels over the past year.
However, the company said it's still uncertain how quickly any recovery would take hold. It said - based on current levels of licensing activity and despite recent weakness in U.S. dollar exchange rates - it forecasts fourth quarter revenues to be similar to the third quarter.
Score said; "We think the fourth quarter will be at a similar level but there is possibly some upside to that." He added that a weak U.S. dollar exchange rate could impact fourth-quarter results so ARM has chosen to be cautious.
Commerzbank's Woolf said ARM is right to be cautious ahead of the fourth quarter, but maintained his sell rating on valuation grounds.
But Goldman Sachs, which rates the stock at underperform, said in a note the guidance suggests a slowdown in license revenues in the fourth quarter assuming royalty revenues will track higher quarter-on-quarter.
Credit Lyonnais analyst Howard Brookes, who rates the stock at sell, said it seems customers are still holding off on expensive licensing revenues. He added that evenue growth is highly dependent on uptake of its ARM11 technology which could have a limited market.
However, Arbuthnot's Blogg, who rates the stock at hold, expects a good fourth quarter driven by shipments of mobile phones and digital cameras.
ARM's Score said pricing hardened a little during the quarter but attributed this to a better mix in the company's sales, not a recovery in semiconductor prices.
Company Web site: arm.com |
