ARM jumps after third-quarter beat and upbeat outlook - UPDATE

Shares in chip designer ARM Holdings surged on Tuesday morning after the company beat forecasts in the third quarter and gave a confident outlook for the rest of the year.

Shares in chip designer ARM Holdings surged on Tuesday morning after the company beat forecasts in the third quarter and gave a confident outlook for the rest of the year.

The semiconductor intellectual property group said that total revenue in the three months to September 30th rose 20% in sterling terms from £120.2m to £144.6m, ahead of the consensus estimate of £140m.

By 10:57 in London, shares were up an impressive 5.21% at 625.50p.

Licensing revenues rose 17%, while royalties surged 30%, compared with last year.

Adjusted pre-tax profit jumped 22% from £55.7m to £68.1m - this was adjusted for acquisition-related and share-based payment costs, and disposal and impairment of investments. Meanwhile, earnings per share improved from 3.05p to 3.71p, surpassing 3.60p forecast.

Gross margins excluding a share-based payments charge of £0.5m, were 94.6, down from 95.1% the preceding quarter. Meanwhile, operating expenditure came in at £72.3m, ahead of the guided range of £68-70m.

Analysts at Investec said today: "[Gross margins] were 70 basis points below our forecast and opex a touch higher (due to FX and derivative accounting) which slightly leased the Q3 profit beat but should not take away from the clear positives in this statement."

The broker maintained its 'buy' rating on the stock today, saying that ARM is a "stand-out tech play".

Chief Executive Officer Warren East said: "ARM has delivered another quarter of strong revenue and earnings growth. As we move into an ever more connected world of mobile computing, cloud-based networks and the Internet-of-Things, ARM is seeing increased demand for its high performance and low power technology.

"This demand is helping to drive ARM's licensing revenues and this quarter we saw market leaders license ARM's advanced processor technology for next generation super smartphones, tablets, and mobile and embedded computing applications."

Meanwhile, he said that ARM's royalty revenues outpaced the industry with continued market share gains in key end markets including digital TVs and microcontrollers.

Net cash at the end of the period was £477.9m, down from £495.9m at June 30th.

Upbeat outlook for Q4

Going into the final three months of the year, the company said that it enters the fourth quarter with a record order backlog and a robust opportunity pipeline.

"This combination points to another strong quarter for licensing revenue in Q4.

"ARM's Q4 royalty revenue is generated from third quarter chip shipments. Data from our customers suggests a moderate sequential increase in ARM's royalty revenue in Q4. We therefore expect group dollar revenues for the fourth quarter to be in-line with current market expectations."

Investec said that the outlook is in line with consensus forecasts "but we would see modest upside risk".

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