An employee enters the ARM Holdings Plc headquarters in Cambridge, U.K., on Wednesday, March 16, 2011. ARM Holdings Plc's stock has rallied so fast that the designer of chips that help power Apple Inc.'s iPhone is now the most expensive takeover target in the semiconductor industry since 2006. Photographer: Chris Ratcliffe/Bloomberg

Arm Holdings has benefited from the increasing focus on the internet of things, with sales and profits increasing in the first half of 2015 as it looked to diversify from its traditional strength in smartphones.

The Cambridge-based group signed a record 54 processor licences in the second quarter of this year, with its chips set to be used in products ranging from biometric sensors for mobile payments to automotive engine controls.

Arm, one of the UK’s only large global technology companies, sells licences for blueprints for its chips to manufacturers which pay royalties on each unit shipped. Its components are used in more than 95 per cent of smartphones, with the rise of mobile devices powering its growth in recent years.

Simon Segars, chief executive, told the Financial Times it had been a “very good second quarter for us”. He added: “We believe that the internet of things is going to be a technology trend that benefits Arm and benefits our licensees in general.”

Analysts were optimistic that he was correct.

“The whole history of Arm is about producing chips that operate on low power,” said Richard Holway, chairman of TechMarketView, the research group. “That puts it in a great position as devices get smaller and form part of the internet of things.”

Edison, the research group, said: “The increasing diversity of Arm’s business should add further robustness to the company’s growth profile.”

Arm reported that revenues in the three months to June 2015 were up 15 per cent year on year to $351m, slightly higher than analysts’ expectations. Pre-tax profits were up 32 per cent to $123.9m in the quarter.

However, the company also reported that revenues from licensing, which represents 42 per cent of total sales, had increased just 3 per cent to $151m — a disappointment for a company that had recently seen double-digit growth in that area.

Though Arm signed a record number of licence agreements in the second quarter, much of the financial benefit from these deals will come in later years, once its chips are used in new products.

The company blamed “group order backlog” — revenues it is unable to recognise until products using Arm chips go into production — but expected to return to licensing revenue growth of 5-10 per cent “in the medium term”.

Arm said revenues from royalties, representing 49 per cent of group revenues, were up 30 per cent year on year to $175.9m in the second quarter of 2015.

The company had warned in a trading update in April that results could be affected by a “sequential decrease in industry-wide revenues”. But on Wednesday it was more optimistic, saying its future results remain on course.

Arm said that “assuming macroeconomic uncertainty does not further impact consumer spending we expect overall group dollar revenues for full year 2015 to be in line with current market expectations”.

The company raised its interim dividend to 3.15p a share compared with a 2.52p interim dividend in 2014.

Some analysts have expressed concerns about whether the company will continue to increase revenues from royalties as it is hit by the slowdown in the high-end smartphone market.

Last year, Arm refreshed its range of chips for smartphones and is banking on continued strong growth in this sector, predicting that half of all new smartphones sold this year will contain its latest chips.

Arm has been boosted by record sales of Apple’s iPhone 6 and iPhone 6 Plus. But after the US group reported third-quarter results that were below market expectations on Tuesday, investors wiped $38bn off Apple’s value. That had a knock-on effect on Arm’s share price, which had fallen 6 per cent by late Wednesday.

Augusten Eden, an analyst at Accendo Markets, said, however, that Arm had a broad footprint across the mobile sector. “Arm does indeed design chips for Apple’s products, but it’s ridiculous to assume that Arm relies on Apple,” he said

Over the past year, Arm has also benefited from consumers upgrading from 3G mobiles to 4G devices. These contain Arm-designed components that allow the group to make more money per device.

The company has also become a key supplier to most large electronics manufacturers while pursuing other areas for growth, such as cars and servers.


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