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Poor sales of premium smartphones and tablets eroded ARM's margins for the quarter, offsetting revenue growth

Even if you're in complete control of the market, you're still at the market's mercy if demand for your product sours.  That's an abridged summary of UK chip firm ARM Holdings Plc's (LON:ARM) record-setting, but "disappointing" earnings report [PDF].
I. High-End Blues
After wowing analysts with double-digit growth over the past several years, ARM CFO Timothy Score announced that ARM shipped an incredible 10 billion chips in 2013.  ARM CEO Simon Segars added that ARM has now shipped 50 billion chips worldwide over its history.
But ARM -- which does not directly manufacture or sell chips, but rather designs general cores that it licenses to chipmakers like Qualcomm Inc. (QCOM), Apple, Inc. (AAPL), and NVIDIA Corp. (NVDA) -- fell short of analyst hopes for the quarter.

ARM A7, etc.
Nearly every smartphone has one or more ARM processors in it, these days.

ARM's processor licensing revenue rose 26 percent to $107.2M USD, beating the analyst expectation of $94.7M USD.  But overall licensing royalties came in at just 7 percent growth at $146.4M USD.  The up-front fees that ARM gets from customers (licensing revenue) came in at $127.4M USD, less than the Thomson Reuters I/B/E/S average expectation of $137.9M USD.
A major factor in that miss was weak sales of ARM's licensable mobile GPU cores and lucrative A50 Series cores.  Both Apple and Samsung Electronics Comp., Ltd. (KRX:005935) (KRX:005930) -- the world's two biggest and most profitable smartphone makers reported lower than expected unit sales of its flagship phones last month.

iPhone 5S

Overall, ARM is seeing strong demand from new sources, such as the appliances market, but is seeing weakening demand in its most lucrative designs -- smartphone cores.  Although ARM is inside nearly every smartphone on the market today (with an estimated 95 percent market share), weak sales of high-end smartphones in the quarter led to smaller margins.
II. Still Growing
Still ARM isn't complaining.  Comments Mr. Score:

Overall royalties in 2014 we expect to grow at a similar rate to the last three years, broadly 19-20 percent.  We continue to benefit from the growth of digital electronics ... from smart consumer electronics such as phones, tablets and TVs, to energy efficient enterprise networking and serves to more embedded computing into things like smart sensors and wearable technology.
Simon Segars
ARM CEO Simon Segars [Image Source: Reuters]

CEO Simon Segars acknowledged that as the mobile industry struggled, so too did its chip-champion, ARM.  He commented to Bloomberg:

Royalty is the thing that people are expressing some concern about.  Growth in the fourth quarter was slower than it had been, but royalty growth in the semiconductor industry was only 1 percent.

ARM has committed to a 5-year forecast of 15-25 percent growth per year -- a pretty ambitious mark.  Sales may recover in Q2-Q3 when a legion of upcoming Android and Windows Phone devices sporting 64-bit ARM SoCs hit the market.
The chip designer is also pushing to try to gain ground in the traditional personal computing market and the server market.  Given archrival Intel Corp.'s (INTC) dominance in both those spaces, though, ARM can count on them for revenue.
Pretax profit for the quarter at ARM was £95.5M ($156M USD), while revenue was £189.9M ($306M USD).  Analysts surveyed by Thomson Reuters I/B/E/S had expected 4 percent higher earnings a £99.4M ($162M USD) on revenue of £183.7M (~$302M USD).  A survey of analysts by Bloomberg predicted revenue of $303M USD.

Sources: ARM [PDF], Bloomberg, Reuters

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ARM doesn't ship chips
By Phynaz on 2/5/2014 9:00:00 AM , Rating: 2
So how did they ship 10 billion of them. You'd think Mick would think before he posts.

You'd be wrong though.

RE: ARM doesn't ship chips
By amanojaku on 2/5/2014 10:50:37 AM , Rating: 2
Sure, you're correct, but was that really necessary?
But ARM -- which does not directly manufacture or sell chips, but rather designs general cores that it licenses to chipmakers like Qualcomm Inc., Apple, Inc., and NVIDIA Corp.
And even ARM said it this way:
ARM’s Partners reported that they had shipped 2.9 b illion ARM-based chips, a record number despite slo wer growth of
chips for premium smartphones. This takes  our cumulative shipments  since 1993 to more than 50 billion chips, with ove r
10 billion reported as shipped in 2013 alone.

5 year forecast
By purerice on 2/5/14, Rating: -1
RE: 5 year forecast
By The Von Matrices on 2/5/2014 1:00:25 AM , Rating: 5
Your extrapolation is unreasonable.

The increase in ARM performance is not due to a superior architecture. ARM performance has advanced so rapidly in the last 5 years because smartphone manufacturers pushed ARM cores from being 2 full silicon process generations behind Intel in 2009 (iPhone was at 90nm, Intel was at 45nm) to being on similar size processes today.

Modern CPU designs are extremely efficient regardless of the instruction set. CPU designers know what they are doing and can highly optimize architectures for the target market. Intel has proven that it can design an x86 chip (Atom) with the same performance, TDP, and die area as an ARM chip.

Designing a chip is a balance of TDP, die size (cost), and performance. You're predicting a massive improvement in all three, and the only way to do that is through smaller silicon processes. Therefore, to sustain that performance gain of the past five years, the ARM manufactures would have to be 2 full process generations ahead of Intel in 5 years. Today, Samsung spends about the same amount of R&D money as Intel (~$10B/year)and maintains the same silicon processes. Unless Samsung increases its R&D budget to hundreds of billions of dollars per year, it's unreasonable to expect the company to surpass Intel by two generations over five years.

Intel is under more pressure than ever to design highly efficient microprocessors. But to call the company in a decline by extrapolating ARM growth is untenable.

RE: 5 year forecast
By BSMonitor on 2/5/2014 10:48:40 AM , Rating: 2
With Intel's ARM license, they could almost save money by cutting R&D and just producing chips for ARM's designs. As for AMD... at least they have GPUs.

You understand Intel earns in revenue in 1 quarter more than ARM has in its entire existence, right? That Intel's gross margins are exponentially higher than ARM??

Maybe the market is saying, "You F'cked up your pricing." 10 Billion chips and they earned barely 100M?

RE: 5 year forecast
By amanojaku on 2/5/2014 12:00:46 PM , Rating: 2
No, no, no. Please read the article and sources before commenting. This prevents you from saying stupid things like:
You understand Intel earns in revenue in 1 quarter more than ARM has in its entire existence, right? That Intel's gross margins are exponentially higher than ARM??

Maybe the market is saying, "You F'cked up your pricing." 10 Billion chips and they earned barely 100M?
ARM's profit for 2013 was £290.6M (about $450M USD ) and £205.2M (about $315M USD ) in 2012. There are multiple costs involved in order to manufacture ARM's processors; the $100M is just one of them. It made over $1.1B USD in revenue in 2013, but it also has high R&D and operating costs. After taxes and such, ARM retained 40% of it's revenue.

Intel, on the other hand had $52.7B in revenue, but it only had a profit of $9.6B. In absolute terms, $9.6B is a respectable amount of money, but in relative terms it's only 18% of Intel's revenue. ARM is making less, but it's far more efficient. Given some more growth, and it could easily challenge Intel's dominance, both in the processor and business management space.

Consider, too, that ARM's profit has been increasing year-over-year, while Intel's has been decreasing since 2010. ARM isn't a dire threat YET.

RE: 5 year forecast
By BSMonitor on 2/5/14, Rating: 0
"Paying an extra $500 for a computer in this environment -- same piece of hardware -- paying $500 more to get a logo on it? I think that's a more challenging proposition for the average person than it used to be." -- Steve Ballmer

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