A British Company Leading The World

Published in Company Comment on 26 July 2011

ARM shows how it's done, with forecast-busting results once again.

So the UK is an economic has-been, falling behind the world in tough economic times, and we should sell all our shares and buy gold? Or invest in China?

Think again.

One company at least, ARM Holdings (LSE: ARM), is a world leader in its class. The more desirable mobile phones and tablet computers might come in the form of iPhones and iPads from Apple (NASDAQ: AAPL.US), or Android from Google (NASDAQ: GOOG.US), but it's ARM's processor designs that power them.

In fact, ARM processors are used by all of today's competing smartphone and tablet makers, so whichever comes out tops in the ongoing battle for next generation supremacy, and whichever falls by the wayside, ARM wins.

Strong interim results

The latest figures, released on Tuesday, showed yet another boost. Underlying pre-tax profit for the second quarter, ending June 30, was up a stonking 25% to £54.2m -- blowing away the analysts' consensus forecast of £45.3m.

That comes from revenues of £118m, an 18% increase on last year.

For the half, overall revenues grew 22% to £234m, with underlying pre-tax profit coming in 29% ahead at £105m.

Earnings per share came in at 3p for the quarter and 5.7p for the half (up 27% and 30% respectively)

And for those keeping an eye on the stuff that makes the world go round, ARM generated net cash for the quarter of £46m (up from £30m), and £108m for the half (up from £74m).

Where's the cash coming from?

Where did all this lovely money come from? Here's what chief executive Warren East, said about it...

"In the first half of 2011, we have seen strong license revenues driven by an increase in design activity around ARM technology across a broad range of end applications. Major semiconductor vendors and consumer electronics companies are making long-term commitments to using ARM technology in their future product developments, underpinning growth in ARM's long-term royalty revenues."

What we're seeing is both strong income from royalties, and good revenues from licensing deals. And it is those licences that underpin future royalties, so that's good for both the shorter and longer term outlook for the company.

ARM tells us that its full-year expectations remain unchanged, but we must not be too complacent -- over the longer term, not everything is guaranteed to be rosy.

Always be cautious

Although the public can't get enough of Apple's products, Nokia is struggling, as is Blackberry maker Research In Motion (NASDAQ: RIMM.US), so though ARM designs will be powering the next generation of winners, there could well be some short-term revenues lost from the also-rans.

Sluggish consumer demand, at least in economically hit Western markets, is not to be ignored either, and the rapid pace at which the fashionable young things cast off last year's phone and get the latest model, is unlikely to continue at its past pace. But that, again, will be relatively short term.

And the far-off giant that is Intel (NASDAQ: INTC.US) is not a slumbering one, and its all-seeing eye is being drawn ever closer to the mobile computing market. So although ARM is currently in a position that looks hard to dislodge, Intel will have competing designs that will have to be reckoned with.

A nice ride so far

However, those cautions aside, ARM has rewarded its shareholders remarkably well in recent years, and the shares are up more than 7-fold since the beginning of 2009.

Whether the current share price is a good value way to get into those rewards is another question, mind, and I don't think they're a bargain right now, being on a prospective P/E of around 50.

When forecast-beating results like these cause the price to fall a couple of percent, it makes me feel things are perhaps looking a bit peaky. I think we do have a good long-term earner here -- I just doubt that now is the best time to be getting in.

Woods and trees

One thing these results do reinforce is that it's not just the general economic climate that matters when looking to invest in good companies, and it is a mistake to make "shares good" or "shares bad" generalisations -- we just need to peer a bit more deeply into the economic woods to identify the strong trees.

Where do you think ARM shares are likely to go next? Please do share your thoughts, below.

More from Alan Oscroft:

> The Motley Fool owns shares in Google.

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