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ARM rides high on royalties from v8 platform

ARM’s move up the electronics food chain, with its 64-bit architecture, is starting to pay off, as its third quarter results highlighted. The UK-based processor IP firm easily beat analyst expectations with a 27% year-on-year rise in Q3 profits, driven by strong sales f its ARMv8-A processor designs, which carry higher royalties than older platforms, and are leading the company’s charge into higher end equipment such as Cloud-RAN servers.

The company reported a 24% rise in revenue to £243.1m with earnings of £7.61 per share. In US dollars, in which ARM also reports, revenue was up 17% to $375.5m. Profits were £128.4m on a pre-tax basis. Net cash came in at £86.6m.

CEO Simon Segars said ARMv8-A was the major factor in the profit improvement, which came after several quarters when the markets had gone rather cool on the company, because of the pressures on its core smartphone market, and the risks attached to expanding into other areas. That expansion remains critical – both upwards into carrier and data center equipment, and downwards into the Internet of Things (IoT). For the former ARMv8 is essential, and was given a boost last week when Qualcomm announced its first server processor.

For now though, the smartphone is still the heart of the business because of ARM’s 90%-plus market share and v8, with its improved royalties, is finding more volumes in the traditional products, as they gain in performance at the high end, than in new areas like servers.

Segars said in his statement: “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. 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.”

CFO Chris Kennedy said recently that ARM would increase its investment in IoT and server platforms to try to accelerate its progress, and that spending would rise to £40m in 2017 before falling again from 2018. ARM is targeting $200m in additional sales from new categories by 2020 as the return on this investment.

For this quarter, royalties were the engine of growth, delivering a 35% increase in revenues to $203m. ARM expects its annual growth in royalty revenues to stay around the 17% range in the medium term as more advanced smartphones are developed and the 64-bit technology gains ground.

By contrast, licensing revenues were up only 2% to $145.1m – “at the lower end of our range”, said SEgars – and all of that growth came from new processor deals – there was a 14% fall in licences for physical IP, after a couple of quarters when these contracts, for chip manufacturers, had been on the rise.

The company said it expects full year revenue in dollars to be “in line with market expectations.”

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