ARM shares fall on royalty fears

The UK chip maker posts another strong set of earnings, but investors show concern at a drop in royalty revenues

Investors fear UK chip maker ARM Holdings may not be able to keep up its spotless track record, as its revenues from lucrative royalties declined for its first quarter ended 31 March. By mid-morning on Monday the company's shares dropped 10 percent on the London Stock Exchange, sliding 27p to 243p.

ARM has emerged as one of the UK's few high-tech survivors, remaining in the FTSE 100 as others dropped out one by one, continuing to deliver strong quarterly revenues and escaping without a profit warning. The company licenses designs for microprocessor cores used in portable devices like mobile phones and handheld computers, and its revenues come from sales of development equipment, licence fees and royalties on each ARM-powered device sold. Its customers include Intel and the major mobile phone makers, with Palm planning to switch to an ARM base during this year.

As the high-tech slump has progressed, ARM's manufacturer partners have continued to invest in equipment in order to remain competitive. But ARM said royalty revenues, which are considered key to the company's long-term success, had fallen by 6 percent to £6.4m, or 15 percent of total revenues, even though unit shipments increased. The drop was due to a "change in product mix and... downward pressure on chip average selling prices, ARM said.

ARM's royalties have a significant impact on its bottom line, partly because they are essentially pure profit. However, they depend on manufacturers' shipments of devices and on the type of ARM technology they choose to use in the devices.

Overall revenues rose to £42.1m, 30 percent up from the first quarter last year and 5 percent up on the preceding quarter. Licence income rose to £23.6m, or 56 percent of revenues, from £22.7m or 57 percent of revenues in the fourth quarter. ARM signed licence agreements with 13 new semiconductor partners. Development system sales rose 31 percent from the fourth quarter to £7.6m.

"The demand for ARM as the leading RISC architecture, and the broadening range of our product portfolio, (have) enabled us to report another strong set of results in what remains a challenging market," said Sir Robin Saxby, ARM executive chairman, in a statement.

The company said medium-term visibility wasn't affected by the "difficult market conditions".

In related news, ARM announced late last week that it will collaborate with Imagination Technologies, which designs graphics chip cores, and Superscape, a 3D software firm, on an integrated 3D graphics platform for mobile phones and handheld computers. Superscape and Imagination already work with ARM on graphics-related projects, but the new venture aims to create a more integrated system.

3D content will be based on Swerve, a software project designed by ARM and Superscape, and rendered by Imagination's PowerVR MBX core, designed to work with ARM cores.

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