ARM Holdings Delivers Growth, but Is It Enough?

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Chip designer ARM Holdings (NAS: ARMH) just reported first-quarter earnings overnight, and the figures came out ahead of Street expectations. Yet shares are down 8% as of this writing. Why the long face?

Revenue in the quarter rose 13% to $209.4 million, which led to earnings per ADS of $0.16. Both of those figures looked healthy relative to the consensus estimates of $201.2 million and $0.14 per ADS profit, respectively.

ARM inked 22 processor licenses across its target markets. The company saw 1.1 billion ARM-based chips shipped for smartphones and tablets, while 800 million chips were shipped for consumer and embedded devices. That adds up to about 1.9 billion royalty-bearing units for ARM, and the company saw an average royalty rate of approximately $0.048.


One of the reasons I sold my own ARM shares was a concern over ARM's ability to monetize its royalty bearing designs, and now that consideration is sticking out like a sore thumb to me. A year ago, ARM saw 1.15 billion chips shipped in smartphones and tablets, and 700 million in various other embedded devices.

Metric

Q1 2011

Q1 2012

ARM-based chips shipped for mobile devices1.15 billion1.1 billion
ARM-based chips shipped for consumer and embedded devices700 million800 million
Total royalty units1.85 billion1.9 billion
Average royalty$0.048$0.048

Source: ARM investor relations.

That means that the number of ARM-based chips destined for smartphones and tablets has decreased slightly from a year ago, at a time when smartphone and tablet growth continues to grow.

With ARM's forward-looking guidance, the company expects industry shipments to resume growth in the second half of the year.

Within that expectation, ARM expects its full-year revenue to be on par with the market's expectations. Analysts are looking for 2012 revenue of about $885 million, while the company's own guidance calls for roughly $860 million. Using ARM's guidance implies full-year sales growth of just under 10%.

In the meantime, chip titan Intel (NAS: INTC) is still aiming to break ARM's mobile grip with its Medfield Atom chip, recently seeing the first Atom-powered smartphone go on sale in India. Dominant mobile-chip maker Qualcomm (NAS: QCOM) continues to see its growth driven by its ARM-based chip business, which includes its popular Snapdragon processors.

ARM has a lot of opportunity ahead of it, and should continue to grow. The main concerns are its lofty valuation and monetization difficulties.

It seems that ARM may not be the best way to play the next trillion-dollar revolution, despite its important role in the mobile supply chain. However, one of ARM's licensees has a lot of growth opportunities with its ARM-based processors. This company also has exposure to China's emerging market growth. Get the free report now.

At the time this article was published Fool contributorEvan Niuholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Intel and Qualcomm.Motley Fool newsletter serviceshave recommended buying shares of Intel. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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