Arm’s 64-bit chips go mainstream

ARM Holdings

Arm’s 64-bit chips go mainstream

ARM Holdings (LSE:ARM) has seen its new 64 bit processor designs enter the recently launched iPhone 5S and the new iPads.  We expect that this will help push the rest of the mobile device industry towards this platform. 

Apple is not known for being shy and retiring when it comes to new products.  The US tech giant reported that the A7 chip in the iPhone 5S is “up to twice” as fast as the previous A6 chip.  The announcement lifted investor sentiment towards ARM Holdings as well as being cheered by tech enthusiasts.

Third quarter results for ARM however were mixed even as top-line revenue and profits beat forecasts. 

ARM beat revenue forecasts in the third quarter with a 26% revenue uplift.  This compares to 25% revenue growth in the first half and 16% in the whole of calendar 2012. 

Profits forecasts also came in ahead of expectations with a 38% jump in earnings per share.  Earnings per share in the first three quarters of 2013 are up 44%.

However, ARM disappointed investors in terms of royalty revenue growth at 13% to US$137m.  This figure generated 48% of total revenue and relates to products shipped in Q2 as royalties are recognized one quarter in arrears.

The weakness in royalties was driven by a slowdown in high-end Smartphone sales as customers opted for lower-end devices.  Investors are concerned that Smartphone sales will continue to weaken as consumers opt for cheaper feature phones.  This would mean lower revenue for ARM as cheaper mobiles use older chip designs which are less profitable.

In our view, the shift towards the 64-bit platform will more than offset this in terms of royalty income.  This is a step change for the group, in our view, and will increase the range of applications that mobile devices can undertake.

As far as the licensing part of the business, ARM saw a record 48 deals in Q3 which grew licensing revenue by 48% to US$123m. This generated 43% of group revenue and was principally driven by US$106m in revenue from the Processor Division.

As a highly rated growth stock ARM is vulnerable to changing investor sentiment and any quarterly weakness.  Third quarter results saw the shares fall back but they have also had a good run since the launch of the iPhone 5S.

Fourth quarter revenue guidance was also in-line with market expectations at approximately US$290m.  This would be an increase of 10% on Q4 2012 and a marginal improvement on Q3 revenue of US$286.7m.

This report was produced by Senior Research Analyst, Andrew Latto.