ARM broadens its reach

The UK chip designer says it is pushing for more new business from existing large customers, as well as cultivating long-term opportunities with start-ups

UK chip designer ARM Holdings is not worried about its ongoing revenues from licences and royalties, despite the concerns of nervous investors, and says it is forging ahead with new programmes to reach into the ranks of smaller semiconductor start-ups, increase its repeat business from existing customers and diversify its end markets.

ARM pleased investors with increases in second-quarter earnings and revenues on Tuesday, and appeared to regain its status as one of the few high-tech companies virtually untouched by the tech spending slowdown, its shares rising more than 9p to about 141p by mid-afternoon. The results followed a sequential decrease in royalties for the first quarter, which sent nervous investors scurrying for cover and shaved 10 percent off the company's stock price in April.

ARM chief financial officer Tim Score said that one of the most important projects for long-term growth is building business from existing customers and extending ARM's business to companies that might not have previously been able to afford the technology.

Eighty percent of licence revenues came from existing partners in 2001, and the proportion has increased to 91 percent for the first half of 2002.

"There is a limited number of big semiconductor companies in the world, and we have licensed to a good proportion of them," Score said. "When big semiconductor companies like Intel, TI and others take a licence to one product, they make a strategic decision to buy into our roadmap. The vast majority of (our) momentum is based on relicensing new products to our existing customers. "

Score said the company intends to continue rolling its technology out to smaller manufacturers with per-use licences, which carry much lower start-up fees but can only be used for a single product.

"If your ambition is to become a global standard, as ours is, you have to make your technology available to all," said Score. "Some of (these start-ups) are going to be very successful, and we want them to be successful using ARM technology."

ARM is also continuing to broaden its licensee base away from the slowing mobile phone market into higher-growth areas such as digital cameras, printers, consumer entertainment devices and storage. "As time goes on we are becoming less and less dependent on wireless, because our technology is appropriate for a broad range of end markets," Score said.

In April, ARM reported that its first-quarter royalties had fallen by 6 percent to £6.4m, due to a "change in product mix and... downward pressure on chip average selling prices", according to the official statement.

For the second quarter, royalties increased marginally to £6.5m, a similar level to the previous four quarters. However, ARM noted that "although royalty revenues have not grown over that period, this performance has been achieved against a backdrop of a decline in total global semiconductor sales of some 30 percent in the same period."

Overall revenues for the first half were up 25 percent to £85.3m, compared to £68.5m for the first half of 2001. Licensing revenues for the half were up 52 percent to £49.2m. Pre-tax profits were up 35 percent to £31.9m, compared to £23.6m for the first half of last year.

For the quarter, revenues were up 20 percent to £43.2m from the same quarter last year. ARM signed 27 new licences in the quarter, with the number of its semiconductor partners increasing to 99.

ARM's earnings have remained bouyant largely because its licensing revenues are essentially tied to companies research and development efforts, an area in which companies are loath to cut back even in a tough times. "These companies who are hurting, they're licensing our technology for products to go into the market in the next two or three years. Even in a downturn, the last thing they would want to reduce activity on is spending on their future," said Score.

He added that ARM's position as a de facto standard in embedded devices means that moving to the technology can be seen as a business efficiency, rather than an extra expense. ARM cores are used in about 75 percent of the world's mobile phones, and are becoming the standard in Pocket PC and Palm OS handheld computers.

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