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ARM’s Q3 2012 results show processor company on course for another profitable year


A few months ago, MarketLine published a Case Study examining the strategy and performance of UK-based processor designer ARM Holdings. It noted that over 2001-2010 period, the company had never failed to return a profit. Judging by its latest results, this performance looks set to continue to 2012. The reasons for its success are instructive: a combination of solid product design advantages, and a clever business model.

There are two approaches when it comes to designing the processors that are ubiquitous in modern electronic devices. CISC (Complex Instruction Set Computing) designs, such as the Intel Pentium, are capable of performing a large number of different instructions, including many subtle variations, when executing their software. RISC (Reduced Instruction Set Computing) designs, such as ARM processors, offer the programmer a much smaller range of operations.

This might seem of academic interest only. However, RISC processors have one big advantage over CISC chips: they use much less electrical power. This makes them the obvious choice for devices which use battery power and must have slim, light-weight cases with no room for the fans and heatsinks of a typical desktop PC.

RISC chips are found in phones, tablets, netbooks, and other mobile computing devices. And ARM has been a major beneficiary of this. Processors with ARM designs are found in more than 90% of smart phones and feature phones, including the iPhone. Mobile computing devices including phones accounted for 57% of all the 7.9 billion ARM-design chips shipped in 2011, the rest were destined for embedded, enterprise, and home applications.

ARM does not manufacture processors itself. Its business model is to confine itself to the design stage, and then generate revenue from two main streams: fees from licensing its designs to manufacturers, and royalties from each processor chip that ships. Over the past ten years, royalties have become increasingly important to ARM, accounting for almost half its 2011 revenues. One advantage of this model is that ARM does not need to find the capital to set up chip fabrication facilities.

The latest results show that ARM’s strong performance is continuing. Year-to-date (Q1-Q3) 2012 revenues were £412.7 million ($650.3 million), up 17% on the same period in 2011. Profit before tax was £161.6 million ($286.2 million), a rise of 22%.

The company’s analysis of the results reveals several factors in the Q3 2012 period that contributed to performance, or will do so going forward.

Firstly, more customers adopted ARM design chips. In the processor segment, 29 license agreements signed for end-use in products ranging from hearing aids to smartphones. Higher-end applications using ARM v8 and Cortex A15 designs maintained growth. There were also license agreements for Mali graphics processors.

Also, chip shipments increased. In Q3 2012 alone, 2.2 billion ARM-design chips were shipped, leading to a 27% increase year-on-year in royalty revenues.

Our Case Study noted that ARM is diversifying its end-markets, and this seems to be continuing. The latest results show that non-mobile devices currently account for 50% of ARM chips, compared to 59% in 2011. This should protect its revenues if the mobile computing market begins to approach saturation.

What seems unlikely to change, though, is the company’s commitment to an unusual business model that is clearly serving it well.

Access our ARM Case Study here…

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