By Lisa Fleisher
LONDON--British semiconductor designer ARM Holdings PLC reported
a sharp rise in third-quarter profit, but the results disappointed
investors expecting a more robust rebound in revenue linked to
smartphone sales.
The Cambridge, England-based company reported healthy demand for
high-tech chips for mobile phones and a pickup in chips for
so-called smart objects. But ARM, which designs technology found in
chips in more than 95% of all smartphones, has had to weather an
uncertain period in the smartphone industry. Growth in higher-end
smartphones has been slowing, while inexpensive smartphones have
begun to proliferate in emerging markets. That's weighed on shares
for much of this year.
ARM said Tuesday that demand in that core business has continued
to grow. Third-quarter revenue from royalties, which ARM earns when
chips based on its technology are shipped, rose 11% over the same
period a year earlier.
But investors had expected a stronger rebound from a sluggish
first half. Shares closed down more than 5% after falling as much
as 8.7% during the day.
Net profit for the three months to Sept. 30 increased to GBP64.8
million ($104.8 million) from GBP48.5 million a year earlier on a
6% rise in revenue to GBP195.5 million.
"The revenue was a little bit weaker than what we were looking
for, but in the general scheme of things it wasn't a massive miss,"
said Nick James, an analyst at Numis. "The big question is, well,
where do we go from here?"
ARM said one encouraging sign was the strong sales of Apple
Inc.'s iPhones, which Apple said Monday rose 16% in the third
quarter compared with the same period last year, helped by the
rollout of iPhone 6.
"When you see things like the iPhone 6 selling well, that is a
good, healthy sign overall for smartphones and for ARM's
royalties," ARM Chief Financial Officer Tim Score said. The revenue
based on those sales won't show up in ARM results until the first
quarter of 2015, he said.
"The underlying story there is that all smartphones are being
brought to the market with more and more ARM technology within
them," Mr. Score said.
In the first half of the year, ARM reported a slowdown in the
growth of revenue generated by sales of smartphones using its
technology. It attributed that to a decline in new sales while
companies tried to sell off their inventory of older-model
phones.
ARM said the number of chips shipped based on its technology
rose to 3 billion, up 19% from a year earlier. About a third of
those are in connected objects, such as health monitors, light
bulbs or other products that are increasingly collecting and
transmitting data about the use of the products.
The chips in those devices generally cost less and provide ARM
with less royalty revenue per chip shipped. The company said it
expects the number of chips shipped for those products to outpace
more advanced chips for such products as phones.
Last month, ARM said it had begun to promote a more
sophisticated chip design that would allow manufacturers to give
products more advanced functions, such as flashier displays or more
advanced audio. The company also introduced a few new products,
including an operating system used on chips, to try to speed up the
development and use of "smart" products.
Write to Lisa Fleisher at lisa.fleisher@wsj.com
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