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ARM tops forecasts on boom in smartphones and tablets

By Paul Sandle

LONDON (Reuters) - British chip designer ARM Holdings beat first-quarter profit forecasts, driven by buoyant demand for smartphones and tablets that use its processor technology and the strength of the dollar.

Chief financial officer Tim Score predicted the success of customers like Apple and Samsung would help the firm to continue outperforming rivals, boosting its high-flying shares over 8 percent on Tuesday.

ARM licenses its processor blueprints to chip-makers like Qualcomm, and it receives a royalty on every chip shipped in devices ranging from Samsung's Galaxy S4 and Apple's iPhone 5 mobile phones to dishwashers and running machines.

The Cambridge-based company reported a 44 percent jump in first-quarter adjusted pretax profit to 89.4 million pounds ($136.3 million), ahead of analysts' average forecast of 77.6 million. Revenue rose 28 percent to 170.3 million pounds.

The results reflect the popularity of tablets, like Apple's iPad, and smartphones as holiday season gifts. ARM reports revenue a quarter in arrears, so its first-quarter numbers are based on chips shipped in the last three months of 2012.

"We benefited from the growth of smartphones, tablets, and smart TVs, as well as our customers gaining market share in embedded products, such as chips going into cars, industrial automation and consumer white goods," Score said.

Consumers are choosing tablets over traditional PCs, which are mainly powered by Intel processors. Apple alone contributes about 20 percent of ARM's processor royalties, analysts estimate.

Royalty revenue grew 33 percent year on year in the quarter, generated from 2.6 billion ARM-processor-based chips shipped in the quarter before. That compares with industry revenue growth of about 2 percent.

Even low-cost smart devices can contain multiple chips based on ARM technology, like its advanced Cortex-A series processors and Mali graphics, which carry a higher royalty rate than its older designs.

ARM also collects most of its revenue in the dollar, which has strengthened by nearly 7 percent against the pound since the start of 2013.

HIGH POINT

Score said ARM would again outperform the industry in the second quarter, and for the rest of the year, though to a lesser extent than in the first quarter.

Industry data pointed to a 10 percent decline in quarter-on-quarter revenues, reflecting the usual post-Christmas lull, he said. ARM had beaten the industry by about 15-20 percent in the last five or so years, and he expected that trend to continue.

The strong numbers will see chief executive Warren East depart on a high point. East steps down on July 1 after 12 years to be replaced by company insider Simon Segars.

Analysts had expected ARM to report full-year revenue of $1.06 billion before any upgrades following Tuesday's numbers.

Shares in the company were up 8.5 percent at 942.5 pence by 1045 GMT, although still short of the 12-year high of 985 pence reached last month.

Berenberg analyst Adnaan Ahmad, who has ARM as the only "buy" among 20 "sells" in the stocks he covers, said a higher proportion of revenue from royalties against licensing had helped ARM to boost margins to 50.5 percent from 44.5 percent.

The big question mark over ARM remained the valuation, he said. Its share trade at an industry-leading multiple of more than 40 times forecast earnings, against 19 times for the sector, according to Thomson Reuters data.

"The stock has (nearly) doubled in the last six months, so people are bullish generally but the buy side is wary on the valuation," Ahmad said.

($1 = 0.6560 British pounds)

(Editing by Kate Holton and Mark Potter)

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