U.K. Chip Designer ARM Effortlessly Beats Forecasts

LONDON -- Chip designer ARM Holdings (ARMHY) delivered third-quarter results this morning that comfortably exceeded expecations.

The company, which dominates the market for mobile-phone chips, posted third-quarter, pretax profit of 8.8 million and sales of 26.4 million. This topped analysts' expecations for profit of about 7 million and sales in line with the second-quarter result of about 23 million. The positive results were boosted by higher royalty revenue, and the company said the outlook for the rest of the year remains "strong."

Despite increasing competition, ARM dominates the market for third-generation mobile phones, which will offer data as well as voice services. In the 3G arena, there is a huge battle among Microsoft (MSFT), Palm (PALM) and a consortium called Symbian -- made up of Nokia (NOK), Ericsson (ERICY), Motorola (MOT), Matsushita(MC) and Psion to establish their operating system as the standard for these new mobile phones. Regardless of who wins, ARM has the intellectual rights to the chip that will power these devices.

In addition, the company today announced that it is now able to support Java on handheld devices that run off a battery. That ARM has seemingly cracked this problem is significant, according to analysts, because Java promises to be the development language of choice in the key multimedia market.

ARM shares opened up 24p at 710 this morning on the London Stock Exchange after the announcement.

ARM Chairman and CEO Robin Saxby also said the company is announcing two important product innovations. The first is an ARM architecture extension that will provide developers of wireless communications products, set-top boxes and other Internet devices with a more efficient microprocessor solution. The second new ARM product addresses the market's need for advanced processing, including audio/video solutions.

Looking further into the results, in the three months prior to Sept. 30, ARM reported a pretax profit of 8.8 million compared to 4.4 million last year and 8.3 million in the second quarter. Revenue of 26.4 million was up from 15.7 million last year and from 23.1 million in the second quarter of this year. Of third-quarter revenue, 39% was from license revenue, 28% from royalty revenue and 14% from the sale of development systems. ARM's earnings per share were 0.7p, up from 0.3p last year.

As expected, operating margins fell to about 30% in the third quarter, compared with the 32% seen in the second quarter. This was the result of 7.5 million in spending on research and development in the third quarter, up from 5.8 million in the second quarter. R&D spending accounted for 28% of revenue.

Unit shipments totalled 107 million in the second quarter compared with 33 million last year. The company estimates that shipments by its partners for networking applications such as ADSL modem products accounted for about 12 million units.

ARM also announced board changes. COO Jamie Urquhart was appointed chief strategy officer. Warren East, previously vice president of business operations, was promoted into Urquhart's old role and will be appointed to the board. Pete Magowan, previously vice president of worldwide sales, was also appointed to the main board as executive of sales and marketing.

In the nine months ending on Sept. 30, ARM's pretax profit was 25.3 million, up from 11.4 million on sales of 70.9 million, up from 43.2 million. Earnings per share were 2p, up from 0.7p.

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