Time to Bet the Farm on ARM?

This just in: Smartphones and tablets are crazy popular nowadays.

That popularity helped ARM Holdings (NAS: ARMH) boost its third-quarter profit by more than twofold year-over-year. The British chip designer put up a 22% jump in total revenue, tallying up to $192.3 million, with year-to-date sales of $568 million, which represents a 26% rise. Adjusted gross margin continues to hover near a mouth-watering 95%.

The bottom line exploded by 113% to $50.4 million, which turns out to nearly $0.11 per American depository share, or ADS, while each ADS represents three ordinary foreign shares. This demonstration of operating leverage is exactly why I'm a shareholder. By spreading out its fixed costs, the company turned a 22% increase in revenue into a 113% jump in profit. By the same rationale, operating margins also showed a healthy expansion from 18.6% last year to 34%.

Adoption of ARM technology continues to accelerate, with the company adding 28 processor licenses during the quarter, including 14 new customers, some of which are large semiconductor companies just now jumping on the ARM bandwagon. Roughly a billion ARM-based chips were shipped destined for mobile phones and mobile computers, showing a 10% increase. Consumer and embedded digital device growth is surging, with ARM-based chip shipments for that segment rising 50% to 900 million.

Licensing revenue within the key processor division rose 41%, and each license signed generates recurring royalty revenue for years to come.

The company's designs are found in popular mobile processors from tech giants like Apple (NAS: AAPL) , NVIDIA (NAS: NVDA) , and Qualcomm (NAS: QCOM) . Even Microsoft (NAS: MSFT) is incorporating ARM support into Windows 8, despite as much as Intel (NAS: INTC) would like to extend Wintel into the mobile era. Meanwhile, rival MIPS Technologies (NAS: MIPS) shareholders are storming the exits as that company's top and bottom lines call in sick.

This was a very solid quarter, which makes me a happy shareholder. Despite a relatively soft semiconductor market, ARM continues to execute flawlessly. ARM CEO Warren East characterized end market demand as requiring smarter, low-power chips, while the non-mobile market continues to look promising. The company's blueprints are making their ways into digital TVs, microcontrollers, and networking applications.

Some investors may be disappointed that full-year guidance is "only" in line with market expectations of $763 million in revenue, but this stock is one of the best ways for long-term Fools like me to get objective exposure to explosive mobile device growth without having to pick a specific chip maker.

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At the time thisarticle was published Fool contributor Evan Niu owns shares of Apple and ARM Holdings, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Qualcomm, Intel, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Intel, Microsoft, and NVIDIA. They have also recommended creating a bull call spread position in Microsoft, writing puts in NVIDIA, creating a diagonal call position in Intel, and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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