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ARM heads: Our cores still have legs ... as shares tumble amid 'peak smartphone' fears

Chip shipments up 19% in Q3, but revenues missed

British chip design firm ARM Holdings painted a rosy picture of its future growth on Tuesday, but it missed analysts' revenue expectations for the third quarter of its fiscal 2014, reigniting old fears that slowing smartphone growth will hurt the firm's long-term profitability – even though it's looking just fine in the near term.

Total revenues for the three months ending on September 30 were £195.5m ($320m), a 6 per cent hike from the same period a year ago but still not enough to keep The City's moneymen happy.

Similarly, ARM's income and earnings per share were each up 16 per cent from the year-ago period, with pre-tax profit of £79.2m and EPS of 5.92 pence.

"Our continued strong licensing performance reflects the intent of existing and new customers to base more of their future products on ARM technology," ARM CEO Simon Segars said in a canned statement announcing the results.

But investors were skeptical, and their doubts sent ARM's shares sinking on the news – down nearly 5 per cent, as of this writing.

The problem? While ARM's revenues from intellectual property licensing are climbing steadily, its licensees just aren't shipping enough chips – for which ARM collects a royalty on each – to keep shareholders happy.

Licensing revenues were up 16 per cent in Q3, to $142.5, which you'd think would be hard to complain about. But royalty revenues for the quarter were up 9 per cent, year-on-year, to $150.2. Again, the analysts would have liked to see more. Also, ARM's non-processor royalty revenue was actually down 3 per cent, to £14.7m.

ARM-compatible chips power all manner of devices – from automotive systems to smart cards – and virtually all of the world's smartphones. But some industry watchers worry that "peak smartphone" may be on the horizon and that ARM won't be able to diversify into enough new markets to make up for the slowing growth.

Gartner thinks otherwise. In figures presented along with ARM's third-quarter earnings, the analyst outfit predicted modest growth in smartphones, with 1.1 billion devices shipped in 2013, versus 1.9 billion devices projected to ship in 2018. But any softness there would be more than offset by ARM's growth into the Internet of Things (IoT) market, the firm said, with demand for microcontrollers and embedded connectivity devices due to explode into double-digit growth.

ARM, too, sees a positive outlook through the end of the year and beyond. Its Q3 chip shipments were actually up 19 per cent, year-on-year, for around 3 billion ARM processors shipped.

But its average royalty per chip dipped 9 per cent, to 4.5 cents per chip. This is because the processors that go into microcontrollers and smartcards, a fast-growing area of ARM's business, are typically cheaper than the ones that go into fancy smartphones, which aren't growing as quickly.

ARM's challenge is to make up for the lower prices of its low-end chips with higher-volume sales, and it says it's well positioned to do so. The company said on Tuesday that it expects its fourth-quarter revenues to be in line with the moneymen's expectations. ®

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