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ARM Eyes Computing

Posted on Wednesday, Feb 9th 2011

For an IP licensing company, ARM Holdings (NASDAQ:ARMH) is doing extremely well. ARM licenses its low-power chip design to over 230 chip manufacturers, and more than 90% of the mobile phone chips are based on its low-power design. With the design for Apple’s iPad under its belt, it has carved a niche for itself in tablets. As the line between mobile and personal computing blurs, ARM is eyeing the traditional computing industry as well. Meanwhile, rumors abound about its possibly being taken over by a large U.S. group.

Noel Randewich on Reuters says that such speculation is misguided:

“Tudor Brown who helped found the company, said part of ARM’s attraction to its customers — and part of the reason they consider it an industry standard — is its independence, an asset that could be lost if it was acquired.”

I agree. ARM has a strong ecosystem of licensees including Apple, Samsung, TI, and Qualcomm that would prevent such a takeover from happening.

Mary Watkins on FT.com says

“The most likely candidate would be Intel, which has the cash to make a purchase and could use a deal to squash its competition. But even a deal by Intel seems unlikely given it would likely face antitrust issues from regulators.”

Intel, the leading chip manufacturer in the computing industry, is definitely threatened. But to beat ARM, it needs to innovate rather than acquire ARM. Intel has some chips lined up targeting tablets and it has already come up with chips for smartphones. However, these have not been much of a success.

ARM, meanwhile, is gaining ground in the computing space as well. Microsoft recently announced that future generations of Windows operating system will support ARM-based chips and that it will roll out a new class of ARM-based energy-efficient chips made by Qualcomm, NVIDIA, and Texas Instruments. NVIDIA also licensed both the Cortex-A15 and next-generation ARM architecture for its desktops and servers. These announcements underscore the arrival of ARM in the computing market.

Financials
ARM early this month reported fourth quarter revenue of £113.9 million ($179.6 million), up 34%, and EPS of 2.90 pence, up 62%. Gross margin was 94.9% versus 94.3% in Q4 2009.

For the full fiscal year 2010, ARM’s annual revenue was £406.6 million ($631.3 million), up 33% and EPS was 9.34 pence, up 71%. Gross margin was 94.3% versus 92.2% in 2009. Over the past two decades, ARM has shipped about 20 billion ARM architecture based chips and aims to reach 100 billion by 2020. To hit that target, ARM is pushing for growth beyond smartphones and tablets and eyeing the chip market for televisions, household appliances, and cars as well as computers and servers. It also added 180 people to its team over the year.

During the quarter, ARM shipped 1.8 billion ARM-processor-based chips in everything from toys to televisions, cameras to cars. It signed 35 processor licenses for a range of applications including smartphones, mobile computers, servers, and smartcards. It also signed eight licenses for Mali, its advanced graphics processor.

ARM expects U.S. dollar revenues for the full year to be at least in line with the current expectations of about $695 million. ARM is trading around $29.44 with market cap of about $13 billion. Its 52-week range is $9.01 to $30.27. The stock price has increased more than 150% over the past year as investors realize its growth potential.

Chart forARM Holdings plc (ARMH)

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