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Ask, and ARM Holdings Delivers

Evan Niu (TMFNewCow)
January 31, 2012

Sometimes all you have to do is ask.

When I previewed ARM Holdings' (Nasdaq: ARMH  ) incoming fourth-quarter results yesterday, I had said to "look forward to some upbeat results tomorrow morning." Upbeat results are exactly what ARM delivered overnight.

How upbeat?
The chip-architecture designer from across the pond has put up fourth-quarter and full-year fiscal 2011 results. Total revenue in the quarter rose 21% to $217 million, beating the Street's consensus of $193.4 million. The bottom line told a similar story, with earnings per share of $0.17 topping the expected $0.14.

Looking at the full year, revenue put up a 24% increase to $785 million, and operating margin expanded from 40.4% to 45.1% compared with 2010. Profit before tax also jumped 37%.

CEO Warren East said, "In Q4 and throughout 2011 ARM has seen strong licensing growth, driven by market-leading semiconductor companies increasing their commitment to ARM technology, and more new customers choosing ARM technology for the first time."

During the quarter, ARM inked 25 processor licenses, many of which are destined for smart TVs and tablets, along with the requisite smartphone wins. Shipment of ARM-based chips continues to grow, with 1.2 billion chips shipped in the quarter for smartphones and tablets, a 10% rise, while consumer and embedded devices grew 40% to 1 billion chip shipments.

ARM highlighted its overwhelming presence at the Consumer Electronics Show earlier this month, vis-a-vis partners like NVIDIA, Qualcomm, and Texas Instruments. These chipmakers have demonstrated prototypes of tablets and laptops running Microsoft Windows 8 on ARM within the past few months, which gives ARM chips an entry into Intel (Nasdaq: INTC  ) territory.

ARM licensee Marvell Technology recently announced that its Armada 1500 processor will be running the next generation of Google TVs, a switch from the first generation's x86 chips.

Meanwhile, Intel is prepping an invasion of its own, with its Medfield Atom chips and its partnerships with Motorola Mobility and Lenovo. For now, mobile is still ARM turf.

Battleground Android
(Nasdaq: GOOG  ) Android will be a processor warzone for ARM, Intel, and smaller MIPS Technologies (Nasdaq: MIPS  ) . Since Android apps automatically run in a virtual machine, making them indifferent to processor architecture, Intel and MIPS have openings to try to get their feet in the door.

MIPS was showing off an Android 4.0 tablet at CES with its chips inside, but Intel is the real potential threat here. The first-party Android apps are already compatible with x86 architecture, but third-party apps are somewhat of a different story. If an app doesn't tap into native ARM features, it would run fine on Intel chips. It's the apps that do use native ARM functions that present an obstacle for Chipzilla.

Intel thinks that roughly three-quarters of Android apps will be a breeze, but the remaining quarter that use native ARM code will be a hurdle. Some of these apps can be addressed with a process called binary translation, leading Intel to estimate roughly 90% app compatibility once Medfield launches. It's a rough solution that isn't as smooth as running entirely native code, so we'll have to see how the market receives it.

Android will be a major mobile battleground for these chip designers in the foreseeable future.

Royalties? Check.
Last year saw 7.8 billion royalty-bearing chips shipped, a 28% rise over the 6.1 billion units shipped in 2010. The increased volume was partially offset by a slightly lower average royalty per unit, whic