British technology champion ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) is due to announce its annual results next Tuesday (4 February).
At the time of writing, ARM’s shares are trading at 938p – up 8% from a year ago, but 15% down over the last month. Sentiment took a further hit this week when Apple reported a big miss on fourth-quarter iPhone sales expectations; ARM’s microchip designs dominate the processor technology in the smartphone market.
Also this week, it was announced that ARM’s chairman Sir John Buchanan is stepping down, due to a medical condition. This comes six months after the retirement of longstanding chief executive Warren East. The upcoming results will be the first annual set to be presented by East’s successor, Simon Segars.
The table below shows the analyst consensus forecasts for some of the key numbers to watch for.
| FY 2012 | Forecast FY 2013 | Forecast FY growth | |
|---|---|---|---|
| Revenue ($m) | 913 | 1,105 | 21% |
| Revenue (£m) | 577 | 703 | 22% |
| Profit before tax (£m) | 276 | 362 | 31% |
| Earnings per share (EPS) | 14.7p | 20.6p | 40% |
| Dividend per share | 4.5p | 5.4p | 20% |
ARM’s accounting currency is sterling, but management also gives revenue in US dollars. In the company’s third-quarter results released towards the end of October, the board said: “We expect group dollar revenues for the fourth quarter to be in-line with current market expectations of approximately $290m”. That would see full-year revenue bursting through the $1bn mark. The sterling number to look for is something over £700m.
Revenue growth in excess of 20% is impressive, but growth was running around five points higher at the nine-month stage. The same is true of profit before tax. ARM has a history of beating market expectations, so I wouldn’t be surprised to see profit exceed the £362m consensus. The EPS forecast growth rate is closer to the nine-month rate, but, again, I can see EPS coming in a bit higher than the 20.6p consensus.
The forecast dividend growth of 20% from 4.5p to 5.4p is the minimum I’d expect after 20% hikes for 2010 and 2011 and 29% for 2012.
ARM’s licensing-and-royalties business model makes for fantastic margins and cash generation. Operating margin had risen to over 49% at the nine-month stage, and some analysts are anticipating a break through 50%, so keep an eye on that number.
Net cash has also been rising inexorably, the most recent reported increase being from £613m at 30 June to £670m at 30 September. Again, this is a number shareholders can anticipate with relish.
As ARM covers most of its operational costs from the licence revenues of each new technology, the growing royalties largely flow down to the bottom line and keep the cash pile swelling. New licenses and advanced technology that enables a higher royalty percentage per chip are key to keeping the spectacular growth rolling, so shareholders should pay close attention to what management has to say about new technology, new markets and new customers.