Dominant mobile processor designer ARM Holdings (Nasdaq: ARMH) has not had a good year. Despite the overwhelming presence of its royalty-bearing chips in nearly every smartphone and tablet today, the company took a beating heading into the summer months.
I've also questioned ARM's monetization of its designs, selling my own shares in the process, but the bulls are back in force today after the British company reported earnings this morning. Shares have gained as much as 10% as of this writing -- how good were the figures?
Figures first
Total revenue climbed 12% to $213 million. That gave way to normalized earnings per share of $0.17 per American depository share. Those figures posted meaningful beats relative to the Street's expectations of $204 million in sales and $0.15 per share in profit.
Operating margin rose to 37.8% while gross margin came in at 95.1%. ARM's processor division royalty revenues grew 14% to $96.3 million, outpacing the broader semiconductor market. Processor licensing also gained by 15% to $67 million.
ARM inked 23 new licenses during the quarter, building its position in key target markets like microcontrollers and mobile devices. ARM is now up to a cumulative total of 893 licenses. ARM-based chip shipments totaled 2 billion, a slight sequential increase. The average royalty per chip stayed flat at $0.048 per unit.
The company also said that it's entering the second half of the year with a "record order backlog" with numerous opportunities ahead of it. Since ARM recognizes royalty revenue on chips the quarter after they're shipped, it typically has good visibility into the next quarter. The fourth quarter is a bit tougher to predict as macro uncertainties continue to weigh.
On the horizon
One of the biggest events for ARM on the horizon is the launch of Microsoft (Nasdaq: MSFT) Windows RT, the software giant's next-generation operating system that supports ARM-based chips. One of the flavors of Microsoft's own Surface tablet will feature an ARM-based Tegra 3 from NVIDIA (Nasdaq: NVDA). Microsoft has chosen three ARM chip makers that have tentatively paired up with different OEMs for launch devices this fall.
ARM and Taiwan Semiconductor Manufacturing (NYSE: TSM) also recently announced a partnership to collaborate on ARM chips using TSMC's FinFET process technology. That's a direct shot at Intel's (Nasdaq: INTC) leading 3-D tri-gate technology that it uses in its most recent 22-nanometer Ivy Bridge chip, and ARM and TSMC will be targeting 20-nanometer.
Still, TSMC is already struggling with 28-nanometer and causing supply constraints throughout the ARM ecosystem, and TSMC isn't expected to get its FinFET process into production until 2014. By that time, Intel will be on its second generation. According to ZDNet, the CEO of semiconductor analyst Future Horizons, Malcolm Penn, says that Intel is still at least three years ahead of TSMC.
Who is the weakest link?
It was a strong quarter, giving bulls some fuel to fend off the bears that have been in charge recently. That said, I still have some qualms with the current valuation that ARM fetches, despite its enviable gross margin and dominance in mobile devices.
Additionally, the reliance on third-party chip manufacturers is a risk factor in itself and is proving to be a liability right now as TSMC is definitely the weakest link in the supply chain at this point. Its 28-nanometer shortages are holding back semiconductor heavyweights like NVIDIA and Qualcomm, which in turn limits ARM's royalty revenue. If TSMC continues to struggle with even smaller processes, the rest of the ecosystem will suffer for it.
ARM continues to ride the mobile wave of smartphones and tablets, but I can't help but think it could be riding it more.
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