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ARM Crushes 4Q Earnings, Sees 22% Growth in 2013

ARM today announced their earnings for the fourth quarter of 2013 as well as the full year of 2013. ARM’s full name is ARM Holdings Plc. and is listed as ARMH on the NASDAQ and ARM on the London stock exchange. For the 4Q 2013, ARM reported earnings of £25 million on £189.1 million in revenue or £0.053 per share, an increase of 30% over the same period a year ago. Even though revenue only increased 15% from $252.8 to $302.9, and profit before tax increased 19%, it appears that ARM was able to hold on to more of their profits after taxes which resulted in the larger than expected profit.

For the year of 2013, ARM reported $1.117 billion in revenue, up 22% from $913.1 million in 2012. However, if you look at the same figures in pounds, ARM’s revenue actually went up 24% in 2013 going from £576.9 million to £714.6 million in 2013. Additionally, for the year, ARM’s earnings per share went up 40% over 2012 with the company reporting an EPS of £0.206 per share versus £0.147 in 2012. As a result, the company created £96 million in earnings for the company in 2013, which is still quite a bit for the company even though many of their licensees and competitors are much much larger.

All of this was made possible by ARM shipping 2.9 billion chips in the fourth quarter alone, an increase of 16% year on year. ARM shipped over 10 billion ARM-based chips in 2013 alone, which accounts for 1/5th of the total 50 billion chips shipped since 1993. In that year, ARM saw huge improvements in their technology licensing in terms of both processors and physical IP with processors seeing a 33% improvement over 2012 and physical IP seeing a 25% improvement. Their technology licensing division saw a total of 32% growth and $447 million in revenue, becoming a significantly larger share of the company’s revenue. Their technology royalty business saw growth of 18% in 2013 over 2012, however it still made up the majority of the company’s revenue with $558 million attributed to processors and physical IP royalties.

ARM’s operating margin was also up in 2013, going up to 49.1% from 45.6%, helped by the margin growth in Q4 2013 which reached 48.8%, up from 46.6%. And judging by the current momentum ARM is having, there is a good chance that this will continue, especially if ARM servers start to ship in volumes in 2014, which should theoretically improve ARM’s shipments even more than the growth of mobile which basically exploded in 2013. ARM has a lot of partners and many of their partners have done well, while some of their partners may have not done as well as some may have expected, other ARM partners were responsible for those shortcomings. As such, ARM benefited regardless of whom actually shipped more or less as long as the net was positive and they continued to license chips and pay royalties.

The only thing that could negatively impact ARM going into 2014 could be the rise of Intel and their SoCs. Since Intel’s Atom-based chips are x86-based less money goes to ARM for each smartphone or tablet. Admittedly, Intel’s design wins are very few and far between, but they still stand a chance in 2014 and it would be foolish to count them out. Yes, Intel does still end up shipping ARM chips in their modems, but the licensing fees for SoCs are far greater and more profitable for ARM, and if Intel can start to ship in volumes and take away business from ARM or ARM licensees, that alone could prove to be a downward pressure on ARM’s profitability. But realistically, I’m not entirely sure we’ll see it in 2014 and if we do, I don’t think it will be in a large enough volume to affect ARM’s profitability. It would have to be a continuing trend going into 2015 with gaining momentum for ARM to really be affected by Intel’s growth. As such, 2014 will likely be a pretty good year for ARM, especially with the growth of wearables and the Internet of Things, most of which run off ARM.

However, investors are still fairly uneasy about the apparent ‘slowdown’ in smartphones and tablets and the belief that if Samsung and Apple’s profitability are impacted then so should ARM’s. However, I believe that this perspective is a flawed one because I simply believe that Samsung and ARM are seeing more competition from others like Nokia and LG and at a lower cost, which doesn’t necessarily affect ARM as much. Too many in the industry consider Apple and Samsung to be bellwethers when in reality they’re simply industry leading titans that are also humongous targets for all of their competitors.