ARM’s position as the darling of the UK technology industry (not to mention its biggest listing), and alternative entry to investing in Apple, has long been cemented.
That said, even by ARM’s standards the last few months have been fairly extraordinary. The company’s shares dropped to around £805 after its last earnings call in October; on February 11 they popped over £1060. With growth that strong, the business looks likely to break eve further past the £1100 mark that for so long has looked like the limit: it hit that mark twice in 2013 but has as yet failed to make any real leeway past it.
It isn’t hard to see why the markets were impressed, as ARM Holdings Plc managed to hit the consensus estimate for its earnings per share, and beat it on revenue. That meant an 18% increase in revenue, up to £226 million.
Even more promisingly, its CEO Tim Score noted that even more royalty growth is on the horizon: ‘The outlook for royalty revenues this year is very encouraging, most of the benefit we are going to see from the higher royalty rates is out in the future.’ Much of that is to do with the new chipsets that are expected to be incorporated into a wide range of smartphones later in the year, with a record number of new licences signed last quarter that will lead to greater revenues down the line.
It would be unfair to say that ARM is reliant on Apple – some 95% of smartphones use ARM components – but the increase in royalties and general positivity surrounding the business has been driven by the staggering performance of the iPhone 6 and 6 Plus. A company so publically linked to Apple cannot help but get a boost when its partner is breaking new records on a quarterly basis.
But to really see how far ARM has come it is worth taking a look at the probing questions that the business was facing late last year. The drop in its share price after its previous earnings call was for many seen as a sign of doom for ARM, which needed to diversify away from the mobile market and improve its business model.
The problem wasn’t just with ARM, as several of its competitors – Microchip Technology Incorporated, Intel and Texas Instruments among them – were struggling in the face of a perceived imminent slowdown in business. Those fears were provoked by Steve Sanghi of Microchip Technology, who attributed his own business’s poor performance to ‘another industry correction’.
That earnings call also saw ARM announce a disparity between its processor shipment and license/royalty revenue, a development that many analysts saw as a sign that ARM’s key business relationships may be starting to slow down.
ARM’s latest earnings call dispelled most of those doubters, and a swathe of new technologies – web enabled appliances, streetlights and thermostats that could pave the way for the much-discussed ‘internet of things’ – could help lessen its reliance on the mobile market. For now, though, its belief that smartphone growth has not yet peaked looks like a good one.
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