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ARM Holdings lays to rest royalty revenue fears

Results were in line but with a few tech companies of late warning of slowing growth, this was enough to send the shares sharply higher

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ARM chips are used in most - if not all - smartphones

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The ARM Holdings (LON:ARM) growth story continues with the chip designer laying to rest fears about slowing growth in the semiconductor market.

Third quarter revenue in sterling terms rose 24% to £243.1mln from £195.5mln the year before, while in dollar terms it rose 17% to US$375.5mln.

Deutsche Bank had forecast sales of £244mln.

Processor licensing revenue in dollar terms was up 5% year-on-year while processor royalty revenue soared 37%.

It was the latter that particularly cheered the City, and sparked a surge in the share price to 1,057p, versus last night's close of 963p, before the price ebbed a little to 1,016p, up 5.5%.

The company said it enters the final quarter of the year with strong royalty momentum and a healthy licensing pipeline.

The statement soothed fears that slowing growth in China would throttle back ARM's growth but whatever else the Chinese are cutting back on, it does not appear to be new smartphones.

“Royalties were very strong,” said an impressed Julian Yates at Investec.

“Strong growth in royalties was driven by the increased adoption of ARM v8 based chips, which carry premium prices and higher royalty rates. The company is in a purple patch at the moment with a large number of v8 based end devices now coming to market. While we suspect some of the Q3 beat was driven by some Q4 ‘pull forward’ in terms of customer device releases, we think the company should still be able to deliver sequential Q4/Q3 royalty growth, but not as marked as in previous years,” Yates said.

The broker has a 'buy' recommendation on ARM with a price target of 1,200p.

Dollar revenues for the full year should be in line with market expectations, the company reassured investors.

In line with previous guidance, ARM expects licence revenue growth of 5-10% in the medium term, while royalty revenue is, as before, expected to outperform semi-conductor industry growth by 15 percentage points.

Underlying profit before tax jumped 27% to £128.4mln from £101.2mln in the third quarter of last year.

In the first nine months of the year, revenue in dollar terms was up 16% from a year earlier to US$1.08bn, while underlying profit before tax in sterling terms was up 27% to £372.7mln.

"Q3 has been another strong quarter for royalty revenue growth, driven by premium chip pricing and elevated royalty percentages from recently introduced ARMv8-A based chips. These new chips are now shipping in a wide range of devices including smartphones, enterprise equipment such as base stations and servers, and consumer electronics such as digital TVs,” revealed Simon Segars, chief executive of ARM.

“ARM technology is being deployed in an increasingly diverse range of products and markets, from the ubiquitous sensors that will form the Internet of Things, to energy-efficient smartphones, to high-performance servers. With the broadening adoption of ARM technology, we are continuing to invest in developing new products and revenue streams to support long-term growth and returns for shareholders,” he added.

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