Rising royalties
There can't be a better barometer of the health of the mobile device sector than ARM, the reason being it gets a small royalty every time a device containing one of its designs (which is nearly all of the mobile variety) is shipped.
This morning ARM reported its Q1 earnings, and they were pretty healthy. Dollar revenue was up 19 percent which, in combination with much improved operating margin, yielded a sterling profit before tax jump of 57 percent - compared to the same quarter a year ago - to £37.6 million.
ARM's revenue is essentially comprised of licenses - the one-off, up-front fee a company pays to be able to use one of ARM's designs - and royalties, which are incremental and dependent on devices sold. While dollar licensing revenue only increased seven percent year on year, royalty revenue jumped by a third and now comprises two thirds of all ARM's revenue.
"ARM has continued to focus on execution and has seen positive progress against each of our growth drivers in the first quarter," said CEO Warren East. "Leading semiconductor and OEM companies are increasingly adopting ARM technology, creating healthy demand for our latest products.
"Shipments of ARM-based chips reported in Q1 increased more than 50% compared with a year ago, driven by strong growth from smarter mobile devices, digital TVs, disk drives and microcontrollers, and leading to record royalty revenues. Combined with on-going financial discipline, this has given rise to year-on-year earnings growth of 49% and record levels of net cash generation."
Among the other highlights of ARM's Q1 was the licensing of its next-gen Eagle core to a second "major semiconductor company", over 80 percent growth in ARM designs in digital TVs, disk drives and microcontrollers, and a fifty percent increase in ARM-based mobile devices.
The outlook, however, was quite conservative, noting that the consumer demand could be adversely affected by the the macroeconomic environment - i.e. the austerity measures that are going to be unavoidable after the general election to deal with our national debt. For this reason ARM expects revenues for the full year to be in line with current market expectations and its share price is currently fractionally down on the day.
