Shareholders of U.K.-based chip core designer ARM Holdings (NASDAQ:ARMHY) got a jolt yesterday when a wire service story projected that Q3 earnings and revenues today would be off by double-digit percentages.

It's been pulled, and for good reason. The company's Q3 numbers this morning show steady fulfillment of its promise to investors, but you actually have to read the thing and know something about ARM to see below the surface.

ARM designs microprocessor cores, licenses its intellectual property (IP) to 122 companies including the leading chip foundries, Intel (NASDAQ:INTC), and Nokia (NYSE:NOK); sells service and development systems to the licensees to help them develop products containing ARM IP; and earns small royalties when those products sell. (You can learn more in Tom Jacobs' column, World Tech Domination?)

ARM signed 16 new licenses, seven with new partners. Using ARM's British pound reporting currency, Q3 total revenues did fall 5% against last year and license revenues dropped by a 27% thud, but in a sign of an upturn, both inched up sequentially during the last two quarters. License revenues are 41% of total revenues. It's natural to see revenues from new licensees decline as total licensees grow, but we'll still want to see new ones as ARM develops new IP and more than compensating royalty revenues as licensees sell ARMed products.

All good there. Royalty revenues have been growing nicely for seven quarters and are up 77% year over year in Q3. The high-margin rewards for ARM research and development leading to licensees' wireless and other products now coming to market in ever larger numbers now comprise 35% of revenues. ARM reports 188 million ARMed units shipped in Q3 or 4% sequential growth from Q2's 180 million, but a whopping 52% over last year's 124 million. Per-unit royalties were slightly up sequentially to just under 10 cents.

In a bow to management's belt tightening, free cash flow has climbed year over year for the last four quarters. Using net cash from operations minus capital expenditures (lacking the full financial statement numbers for now), it's up 15% year over year for Q3 and 9% sequentially. At Q3's run rate, the stock is valued at 35 times free cash flow.

On the downside, service and development system revenues fell both sequentially and year over year, and management projects a Q4 flat with Q3.

As a foreign issuer whose shares are available in the U.S. as American Depositary Receipts (ADRs), ARM does not file quarterly reports with the SEC. But the company sets a terrific example for other companies with the quality of its comprehensive earnings press release, including the key cash flow statement numbers in narrative form. Read the release for greater detail on licensees, royalty rates, and more.

See what others are saying on our ARM discussion board .