Foolish Forecast: ARM Holdings

Investors are feeling optimistic as we approach the release date for ARM Holdings' (Nasdaq: ARMHY  ) Q4 and full-year 2005 earnings, due out tomorrow. The company's stock closed out last week by hitting an intraday 52-week high of $7.43 before relapsing a bit. Will tomorrow send it still higher?

Wall Street Wisdom:

  • General consensus. Wall Street thinks it will. Of the 16 analysts who follow ARM, 10 rate the stock a "buy," versus only one who terms it a "sell."
  • Revenues. Analysts think ARM had a simply stellar fourth quarter, predicting that reported revenues will rise by 42.1% to $108.7 million.
  • Earnings. Profits per American Depositary Receipt (ADR), each of which represents three shares of ARM common stock over in London, are expected to hit $0.06 for the quarter.

Margin watch:
ARM's gross margin has slipped noticeably in the wake of its late-2004 acquisition of chip designer Artisan, a move that helped to reverse a trend of generally improving operating and net margins. A couple of one-time charges for legal settlements and research-and-development write-offs related to the Artisan buy in the December 2004 quarter also weighed on the firm's rolling net margins over the past year. Tomorrow, however, those should fall off the other end of the TTM conveyor belt -- and perhaps help Artisan to boost its net.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

91.9

92.1

92.3

91.1

89.9

89.0

Op.

21.5

24.7

26.3

26.2

21.5

25.0

Net

13.3

15.9

18.3

17.6

17.1

15.8

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
Perhaps the most important thing to look for tomorrow, however, is an improvement in the firm's accounts-receivable picture. In the past quarters ending in June and September, ARM increased sales by 57% and 44%, respectively. A/R outpaced sales growth in both of those quarters; it rose by 96% and 153%, respectively. Those are bad numbers, and they're headed in the wrong direction. Tomorrow, let's hope to see the sales increase as expected, but keep our fingers cross that A/R numbers fall.

Fool contributorRich Smithdoes not own shares of ARM Holdings, but it is a recommendation ofMotley Fool Stock Advisor. (Incidentally, its stock price has risen by 32% since being recommended in November 2003). You can see what else Tom and David Gardner have been recommending, and it won't cost you a penny -- a 30-day free trial toStock Advisoris yours for the taking.


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