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ARM Sees Shift to Cheaper Smartphones Boosting Chip Royalty

ARM Holdings Plc, the U.K. chip designer whose products power Apple Inc.’s iPhones, predicts a shift in demand toward lower-priced smartphones will help boost royalty revenue.

“There is a shift advantage for ARM as mid-range and entry smartphones drive smartphone growth. We’ve got that dynamic going into next year,” Chief Financial Officer Tim Score said at a conference in Barcelona yesterday. “Those phones generate much more royalty for ARM because they use more silicon.”

ARM has had five consecutive years of revenue growth as its designs for chips that control graphics and processing were used in increasingly popular smartphones and tablets. Royalty payments took the spotlight last quarter as they missed analysts’ estimates. ARM shares have fallen almost 9 percent since the earnings report on Oct. 22.

“As ARM technology becomes more sophisticated, the royalty percentage goes up,” Score said. “On average, it’s going to very gradually go up.”

Global smartphone shipments surged 40 percent last quarter, slowing from 53 percent growth for the previous three-month period, according to researcher IDC. The average selling prices of the devices fell by 13 percent to $317 from a year earlier, because of demand for more affordable handsets.

In spite of concerns about slowing growth, especially in China, Score said ARM can continue expanding its customer base and outperforming the semiconductor market in the next five years, driven by cheaper handsets, enterprise networking and micro-controllers.

ARM shares fell less than 1 percent to 953.50 pence at 9:16 a.m. in London.

New Chief

Chief Executive Officer Simon Segars, who succeeded Warren East in July, is confronting a shift in the industry’s growth to low-end smartphones and new entrant Intel Corp., which has begun designing its own chips for mobile phones. ARM, based in Cambridge, England, is also seeking to boost its market share in servers as companies from Facebook Inc. to Google Inc. look for lower-power machines to drive their data centers.

It’s “possible to identify such a market and build a chip specifically for that market, whether it is to handle only storage or only video loading, for example. We can make the chip much more efficient,” Score said at the annual Technology, Media and Telecoms Conference organized by Morgan Stanley.

“Everyone knows Intel has a very strong ecosystem around servers, we’re not kidding ourselves,” Score said. “For that reason we see it as further out.”

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