ARM muscles past forecasts but shares hit by Apple worries

ARM Holdings posted a strong set of full year results and said it was confident of meeting forecasts for 2016 as demand for its microchip technology continues to grow.

Despite the profit warning from smaller peer Imagination Technologies earlier this week, ARM's fourth quarter saw a 19% increase in revenue to £269.1m, ahead of consensus forecasts, helping to lift profits 17% to £138.7m.

For the full year this meant revenue rose 22% to £968.3m, beating consensus forecasts of £962m, with profit before tax up 24% to £511m and earnings per share up 25% to 30.2p.

A 25% increase in the final dividend to 5.63p per share, means the total payment is also up 25% to 8.78p, while management also plans to continue its small share buyback programme.

Licence revenues in the fourth quarter were down 2% in dollar terms, with order backlog for licences up 10% sequentially from the signing of 11 new licences for products in development.

Royalty revenue was up 31% in the final quarter, representing 53% of group revenue, as demand for its products in the mobile sector continued to boom.

"During the year ARMv8-A surpassed 50% share of smartphone shipments, Mali became the industry's highest-shipping GPU architecture, and our Partners increased their shipments into enterprise infrastructure and embedded markets," said chief executive Simon Segars.

On outlook, the company said it expects group dollar revenues for the full year to be "broadly in line with market expectations", as it enters 2016 with a "robust opportunity pipeline for licensing".

Chips based its ARMv8-A technology are expected to continue to gain share in mobile and enterprise markets, and the higher royalty rate earned on these products helps to underpin growth in royalty revenues.

"Demand for our technology is increasing, and during the quarter we signed multiple licences for the next generation of high-performance and secure ARM processors," Segars added.

"Our increased investments in both 2015 and 2016 will help us meet demand by extending the capabilities of our technology and the ecosystem, and will support long-term growth and returns for shareholders."

For 2016 £1.1bn of revenue is the consensus forecast, with earnings before interest and tax of £561m and earnings per share or 34.3p.

Analyst Mike van Dulken at Accendo Markets said profits were a fraction ahead of consensus and growing faster than revenues.

"What’s not to like? Maybe management’s confidence in the semi-conductor industry is being questioned after Apple’s warning on China stress and rival Imagination Technology’s profits warning earlier this week," he suggested.

"Perhaps global recessionary fears are too much to discount given a mature and slowing high-end smartphone market starting to eat into margins and hopes too high that connected devices can ride to the rescue. The tech sector as a whole has also suffered since early February as investors caution about a murky US economic picture and divergent monetary policy, and sentiment having worsened sharply this week."

Steve Clayton at Hargreaves Lansdown agreed that ARM is "a gem", a world leader in a fast-growing field, and gaining market share in a wide swathe of end markets, while newer designs carry higher royalties that will drive revenues strongly forward.

"Mobile computing will grow for years to come, and the spread of ARM cores into new product categories only increases the growth opportunity. So although ARMis not obviously cheap per se, the growth opportunities ahead of it look compelling and with net cash of £900m, it has the wherewithal to chase after them."

On a technical analysis note, van Dulken said bears will be eyeing 16-month lows around 810p should the global sell-off persist.

By 0930 GMT on Wednesday, shares in ARM were down 3.7% at 905p, having earlier touched as low as 886.5p.