ARM sales, profits up (again)

Royalties down

ARM Holdings, the designer of little chips which power most of the world's mobile phones, today reported 30 per cent sales growth and a 38 per cent increase in pre-tax profits (PBT) for Q1 ended March 31, 2002.

Sales were £42.1m (Q1 2001: £32.5m), 5 per cent higher than the previous quarter. PBT was £15.7m (Q1 2001: £11.4m), 13 per cent on Q4, 2001.

However, royalty income was down 6 per cent to £6.4m,, or 15 per cent of sales in Q1, compared with £6.8m or 17 per cent of revenues in Q4. Unit shipments from licensees were up from 96 million to 110 million, so the problem lies with "average royalty rates being impacted both by a change in product mix and by downward pressure on chip average selling prices".

The March quarter saw ARM's of semiconductor partners move up from 77 to 90. And ARM notes the increasing importance of non-CPU income, with "additional hardware platform, software application and peripherals licenses being signed".

Operating margins were up too - from 31.7 per cent Q4, 2001 to 35.3 per cent in Q1, 2002 (and 32.1 per cent in Q1 last year). Some of this is technical - ARM reveals an 0.9 per cent "uplift" from the introduction of new US GAAP rules regarding the amortization of goodwill. Also legal costs are greatly reduced, following the settlement of its patent dispute with picoTurbo late last year

The business also makes a useful turn on development systems sold to partners, posting record sales of £7.6m in the Q (Q4,2001: £5.8m). However, most of the increase is down to one big customer placing an order worth £1.6m.

ARM also makes a big turn on what it calls "service revenues" - consulting, support, maintenance and training. For the March qaurter it pulled in sales of £4.6m from this source, compared with Q4 revenues of £4.9m and Q1, 2001 sales of £4.2m.

It is very helpful of ARM to strip out these revenues for inspection. But it strikes us that, sales from development systems and from services should be accorded very different (i.e. much lower) forward earnings multiples than those arising from its royalty income.

ARM's sky-high valuation is predicated on its dominance of CPUs for mobile phones, and upon the sales potential of its designs in other sectors - cars, for example. Dev systems and consultancy fees are, by contrast, footling sums.

At close of play on Friday (April 12), ARM had a market capitalisation of £2.74bn, equating to a P-E multiple of 75.42. In early morning trading today shares fell 24.5p to 245.50p. ARM's results were in line with analyst expectations, but traders are citing concerns over the impact of deferred income upon the company, financial newswire AFX reports. ®

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