Does Apple’s Move Impact ARM?

Apple’s (AAPL) recent acquisition of low-power processor start-up PA Semi has caused a ripple in the semiconductor industry. Read my Forbes article on the acquisition in which I peek into Steve Jobs’ mind. I also say in the article that if Apple succeeds in developing a breakthrough, the industry will scramble towards vertical integration.

With the industry buzzing with analysis of this acquisition, one company has been constantly cropping up – ARM Holdings. In the iPhone, Samsung provides the processor chip, which is based on an architecture licensed from ARM. It is not the iPhone alone that brings in ARM’s revenues but the shift towards convergence devicesin the wake of the iPhone that has proved beneficial to ARM.

Almost all mobile phones contain ARM chips which is probably what Steve Jobs doesn’t like. He would like his gadgets to stand apart from other clones. Right now its user interface is what makes the iPhone stand out but it might not be long before its competitors catch up. However, if Apple can design a chip that can help it differentiate at the fundamental processor level, it would leap much ahead of its competitors.

Just one company developing its own processors might not spell trouble for ARM but it would definitely change its destiny if the industry scrambles towards vertical integration. But right now, such a scenario is quite some time away.

On the financial front, ARM Holdings (NASDAQ: ARMH) [changed from ARMHY] released its financial results for the first quarter. Dollar revenues were $134.3 million, up 4% y-o-y and about the same as last quarter. Normalized profit before tax [PBT] was £21.3 million or around $42 million. US GAAP fully diluted EPS was 0.70 pence. Gross margin was 88.8% in the quarter, compared to 89.4% in Q4 2007 and 89.5% in Q1 2007. The lower gross margin was mainly due to the higher revenue input from technology which includes payments to partners.

Segment-wise, Processor Division [PD] dollar revenue grew 11% y-o-y and 4% q-o-q to $91.1 million. It reported processor unit shipments of 889 million in the quarter, up 23% y-o-y and 7% q-o-q. Mobile device units account for 70% of this huge number. The overall average royalty per ARM microprocessor was 6.2 cents, up from 5.9 cents in Q4 2007.

Physical IP Division [PIPD] dollar revenue declined 17% y-o-y and grew 7% q-o-q to $20.9 million. Development Systems grew 5% y-o-y to $14.2 million, while Services revenue grew 2% y-o-y to $8.1 million.

Total dollar license revenues declined 12% y-o-y to $48.1 million, accounting for 36% of total revenue, and total dollar royalty revenues grew 20% y-o-y to $63.9 million, or 47% of total revenue.

ARM is currently trading around $6 with a market cap of around $7.6 billion. It hit a 52-week low of $4.78 on March 17. Though ARM, along with other European chip companies, looks very cheap, Credit Suisse semiconductor analyst Adrien Bommelaer warned against buying in the sector right now. The weakening dollar could continue to impact in the next few months.

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Comments

[DickM]

She writes a very good report -

I am still looking for a geek type perspective, zeroing in on the potential of this technology vis-a-vis Intel. Particularly, the uniqueness meaning patents. Because patents and patentability signify whether or not this technology has true potential and staying power.

If you k now of such perspective, would appreciate the reference. T

[InvestorsLive.com]

AAPL beautiful breakout chart

www.investorslive.com/blog/tag/breakouts /

[Dave Rensberger]

I seriously doubt that Apple is thinking along the lines of differentiating based on the core processor in its devices. Yes, there's potential to innovate and get more processing power/watt than the current crop of Intel, ARM, and PowerPC processors deliver, but 15 years of history would suggest that most of that innovation is likely to come from ARM and Intel themselves.

A CPU is just a CPU... differentiation comes from what you build around it. I think that Apple's recent transition from PowerPC to Intel chips validates that assertion. Their decision in the early 90's to try to "differentiate" their computers by using PowerPC turned out to be a mistake in retrospect.