ARM Forecasts Improved Second Half on Smartphone Market

ARM Holdings Plc, the chip designer whose products power Apple Inc.’s iPhone and iPad, said royalty growth will accelerate in the second half as the smartphone market recovers. The shares rose the most in more than a year.

Royalties, the fees ARM collects when customers use its technology in semiconductors, will return to “normal” growth levels, which in previous years has been 15 percent or more, Chief Financial Officer Tim Score said on a call with reporters.

A higher growth rate would represent a turnaround from five consecutive quarters of slower progress as the pool of new customers for high-end smartphones dried up and the industry shifted to lower-cost models. Customers are now set to replace older handsets with faster, fourth-generation smartphones that run on ARM’s designs, Score said.

“The prognosis for the second half looks good,” Score said. “We’re going to see rollouts of new technology, 4G, LTE, which is going to increasingly incorporate the latest generation of ARM technology.”

ARM shares rose 5.7 percent, the biggest gain since April 2013, to 881 pence in London trading, paring the decline to 20 percent this year.

Second-quarter royalty sales were little changed compared with a year earlier at $135.5 million, the Cambridge, England-based company said. That compares with 23 percent growth in the same period in 2013.

Android Devices

Total revenue rose 9 percent to 187.1 million pounds, or $309.6 million as reported in dollars. That beat the 183.9 million-pound estimate by analysts in a Bloomberg survey.

License revenue, the upfront fee customers pay to get access to ARM’s technology and an indicator of future royalty sales, grew 42 percent to $146.1 million. The company said its designs are in a number of new Android-based devices, showcased at Google Inc.’s developer conference last month, which featured smartwatches, cars and a smart-TV service.

ARM’s growth had slowed as the pool of new customers for high-end smartphones shrinks and the industry looks for new ways to expand. The company, which supplies the chip designs for more than 95 percent of mobile phones, has said future increases in revenue will come from connected devices such as wireless-enabled cars and thermostats, as well as technology for servers.

Smartphone growth is increasingly being driven by emerging markets and demand for low-cost devices, research firm IDC said in an April report. China is the largest smartphone market, accounting for 40 percent of the devices that were shipped in the first quarter, IDC said. Smartphone shipments will grow 19.3 percent to 1.2 billion units this year, a slowdown from the 39.2 percent increase last year, IDC said.

(Updates with closing share price in fifth paragraph.)
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