ARM Holdings (ARM) reported third-quarter results that were modestly ahead of our expectations and reflected a strong rise in royalty rates per mobile processor, as ARM is beginning to see the effects of licensing out more-advanced mobile intellectual property to chipmakers and smartphone original equipment manufacturers.
We see ARM maintaining its market share lead in mobile internet
We are maintaining our wide moat rating and fair value estimate of £10.10 per share. With shares trading in three-star territory, ARM appears fairly valued, and we would seek a wider margin of safety before investing.
Revenue in the September quarter was £243.1 million, up 24% from the year-ago quarter. Processor royalties were the bright spot, up 37% from the year-ago quarter in U.S. dollar terms, more than 95% of revenue is in U.S. dollars.
Chip shipments that included ARM’s IP rose 20% from the same quarter a year ago, but more importantly, the implied price per chip of $0.052 was up 10% sequentially and the highest quarterly price ARM has achieved this decade. The firm’s license agreements for processors based on ARM’s v8-A instruction set and Mali graphics IP are bearing fruit, as processor unit sales that include this higher-priced IP are ahead of the company’s expectations.
Meanwhile, up-front licensing revenue rose 5% from the year-ago quarter in U.S. dollar terms. Adjusted operating margins held up well at 51.7%. We have no problem with the 25% rise in operating expenses from a year ago, as we are encouraged by management’s plans to increase hiring in order to fund research and development.
ARM expects revenue for all of 2015 to be in line with market expectations, which are currently £958 million, and we see ARM beating this top-line figure as well. All in all, ARM is continuing to drive innovation in mobile and non-mobile chip applications alike.
We see ARM maintaining its market share lead in mobile internet protocol, while reaching its market share goals as outlined at an analyst day in September in more-advanced server and networking processors by the end of the decade.