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ARM Holdings plc
Sandbagging?

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By stkhawk
January 31, 2005

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Sandbagging?

I just finished listening to ARM's conference call. Like most shareholders, it was very discouraging to see the stock price retreat after the earnings announcement. As a consequence, I was anticipating I would hear about some underlying bad news but quite honestly, I had difficulty finding it.

Apparently, the press and certain analysts seized on the general comment that ARM management was expecting the overall semiconductor industry growth rate to be flat(er) in 2005. However, the comments by ARM management that they expected their growth rate in 2005, in BOTH the ARM and Artisan businesses, to be at least 20% in dollar terms was apparently ignored. The "at least 20%" comment was emphasized several times during the conference call.

Another possible concern might have been with the reported Artisan revenues of approximately $15M, but upon closer inspection, it appears Artisan management decided not to focus on revenue recognition in the final quarter of Artisan's existence, but instead decided to let about $10M dollars of revenue slip into future backlog. ARM management indicated Artisan's backlog was significantly higher than in either the previous two quarters and was at record levels. The ARM CFO also indicated the Artisan revenue assumption starting out, under ARM's stewardship, would be $25M next quarter.

So in my opinion, it appears we have significant sandbagging that took place in order to help ensure the next couple of quarters show strong results as the Artisan business is integrated into the overall ARM business. In other words, SEE--, we made the right decision to acquire Artisan for about a $1B dollars.

There is no doubt in my mind that ARM management is feeling the pressure to prove that the Artisan acquisition was a good decision. Unfortunately, all ARM shareholders have had to suffer in terms of stock price every since this acquisition was announced. This has been especially frustrating, as ARM's fundamental business has continued to steadily improve over the past couple of quarters. This fundamental business, ARM cores, is the basis on which most shareholders invested in the company. Hopefully, this will be the last quarter that ARM shareholders have to live with the negative consequences in the share price due to the Artisan acquisition.

I think the final analyst question posed in the conference call properly frames a lot the shareholders sentiments in regards to underlying demand of the Artisan business.

Q: So then you really ended up with a substantial backlog, if you lop off the $10M that you didn't recognize that would have been, or maybe $12M, that would have been a normal recognition if the company hadn't been acquired? Is that reasonable?

A: That's a very reasonable assumption, and that's why we are saying the backlog is at record levels.

Q: So I guess it really gets down to investors believing whether you guys are telling us the truth or not?

A: Well, Yep, - We are.


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