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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