ARM beats market with 31% jump in Q1 pre-tax profit as demand strong across portfolio
Chip designer ARM Holdings plc (ARM.L; ARMHY), the Cambridge high tech Cluster's largest quoted company, today reported that first quarter 2006 revenues were up 17% to £64.6m and pre-tax profits jumped 31% to £24.7m from the same period in 2005.
The result just beat the average of stock brokers' expectations and the group's share price got a 3.00p boost to 135.5p, near the top of its 12 month range and valuing ARM at £1.87 billion. Many see it as a good growth stock.
CEO Warren East (pictured) said the result "further underpins our confidence that ARM will achieve another strong performance in 2006 in line with current market expectations."
"We have seen encouraging activity in both licensing and royalties this quarter," he said. "Interest in our new Cortex family of processors continues to grow with a further license signed in Q1 and a number of licensing discussions in progress. Our first license agreement for the most advanced (45nm) process technology has further strengthened our position as a leading provider of physical IP. We continued to extend our market penetration across the span of digital products with royalty units increasing 47% compared to the same period last year."
The ARM business model involves the designing and licensing of IP rather than the manufacturing and selling of semiconductor chips. It licences IP to most of the world's leading semiconductor and systems companies - which it calls Partners - who us its designs to make microprocessors, peripherals and system on-chip designs, paying ARM a license fee for the original IP and a royalty on every chip or wafer produced.
Chief Financial Officer Tim Score said the revenue and profit growth had yielded strong cash flow. "With royalty revenues continuing to grow as a proportion of total revenues, operating margin and cash flow are expected to increase, leaving us well-placed both to invest in the innovative technology that drives future growth in licensing revenue and to continue the return of cash to shareholders through share buybacks and dividends."
Margins up
Total license revenues increased to £25.2m (£24.7m in1Q2005), representing 39% of group revenues, Royalty revenues were £28.1m (£20.9m), 44% of group revenues, sales of development systems were £7.9m (£5.8m), 12% of group revenue ands service revenues were £3.4m (£3.6m), 5% of revenues..
First quarter gross margins were 89.0% compared to 88.5%, thanks to the higher proportion of total revenues made up by royalties.
Total operating expenses are £42.8m compared to £37.2m in Q1 2005, of which research and development costs were £15.1m, representing 23% of revenues, compared to £14.7m or 27% of revenues in Q1 2005.
By end March '06 ARM employed 1,371 people full time spread around the world, an increase of 47, 20 of whom were given a job at its Bangalore Design Centre.
In Q1 2006, the Company purchased 5.15m shares at a cost of £7.0m. Chief Financial Officer Tim Score said the buyback program would resume after the announcement of the results and the promising cash position made it likely that it would be at a higher rate than in Q1.
Order backlog boosted in Q2
At the end of Q1, the group's order backlog was at similar levels to Q4. But due to licensing activity early in Q2, including an additional license being signed for its new Cortex-A8 product, the backlog was now higher than at the beginning of the year.
Fifteen licenses for microprocessors were signed in Q1, bringing the cumulative number of licenses to 413.
During Q4 '05, ARM 'partners' shipped 572 million units (it reports royalties one quarter in arrears), up 47% on the comparable period a year previously. The company said mobile and non-mobile segments accounted for 63% and 37% respectively of total units shipped, compared to 67% and 33% previously. Non-mobile growth of 68% continues to outpace the growth of mobile shipments due mainly to increased shipments of applications such as hard disk drives, home networking devices, printers, smartcards and microcontrollers.
In Q1, ARM signed a further nine licenses for Physical IP, bringing the total number of licenses to 219. One was a long-term technology agreement on the leading edge 65nm and 45nm processes with Taiwan Semiconductor Manufacturing Co. (TSMC). Mr East said the deal was a significant milestone, being the first announcement of a foundry planning to offer ARM Physical IP for the 45nm processor node. It secures the relationship with TSMC until at least 2010.
ARM is also starting to see some synergies with Kiel, the developer of software tools for the microcontroller market it acquired in October. In Q1, it introduced the first product combining Keil technology with its existing tools technology. The ARM RealView Microcontroller Development Kit was launched to facilitate the migration of microcontroller development from 8-bit to ARM technology-based 32-bit microcontrollers. In the quarter, there were approximately 10,000 downloads of the free trial version of the product, "giving us confidence that incremental sales will accrue in future quarters", Mr East said.
19th April 2006
