As a key enabler of the 'Internet of Things', Arm (ARM) continues to benefit from soaring demand for internet-connected devices and accelerating adoption of high-speed 4G wireless technology. The Cambridge-based group, which designs the microchips that power more than 95 per cent of the world's smartphones, benefited from buoyant sales of Apple's iPhone 6 and iPhone 6 Plus. The upshot was a 37 per cent rise in operating profit to £194m; but investors still sent the group's shares down 5 per cent.
The reason was a slowdown in second-quarter processor licensing sales, which rose just 3 per cent compared with compound annual growth of 29 per cent between 2010 and 2014. But management expects this business - which licenses out its blueprints to the likes of Apple and Samsung, then collects a royalty for every chip they ship - to return to 5-10 per cent annual growth over the next few years.
The main positive was a 43 per cent increase in first-half processor royalties to £213m. That partly reflected a 29 per cent increase in shipments of Arm-based chips to around 7.2bn. The group also signed 84 processor licences in the half, with a record 54 inked in the second quarter. Among them were two dozen licences for its new ARMv8-A and Mali processors. Management attributed the growth to strong demand in the mobile device and enterprise infrastructure markets, as well as mounting interest in embedding Arm's chips in devices such as sensors and smartcards.
Industry trends are working to Arm's advantage: Apple's iPhone sales jumped 35 per cent to 47.5m in the quarter to June, as Chinese consumers developed a taste for premium smartphones. That bodes well for royalty revenues this year. Management also expects to benefit from a wave of next-generation smartphones and tablets this year that use Arm's higher-margin ARMv8-A and Mali microchips.
Broker Investec expects pre-tax profit of £522m for the full year, giving EPS of 30.9p, rising to £602m and 35.6p in the year to December 2016 (from £413m and 24.1p in FY2014).
| ARM (ARM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,014p | MARKET VALUE: | £14.3bn | |
| TOUCH: | 1,014-1,016p | 12-MONTH HIGH: | 1,232p | LOW: 779p |
| DIVIDEND YIELD: | 0.8% | PE RATIO: | 48 | |
| NET ASSET VALUE: | 114p* | NETCASH: | £904m | |
| Half-year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 374 | 146 | 8.4 | 2.52 |
| 2015 | 456 | 198 | 11.5 | 3.15 |
| % change | +22 | +36 | +37 | +25 |
Ex-div: 3 Sep Payment: 5 Oct *Includes intangible assets of £650m, or 46p a share | ||||
