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Smartphone royalties help ARM beat expectations

By Paul Sandle

LONDON (Reuters) - British chip designer ARM beat quarterly profit forecasts on Tuesday, helped by the adoption of its most powerful processor technology in smartphones and tablet computers from the likes of Apple and Samsung.

The Cambridge-based firm said on Tuesday its third-quarter pretax profit jumped 22 percent to 68.1 million pounds ($109 million) on revenue 20 percent higher at 144.6 million pounds.

"ARM is sensitive to some strong growth areas, like smartphones and tablets, and those of course are the parts of the industry that are growing much faster than the average," Chief Financial Officer Tim Score told reporters.

Apple, one of ARM's biggest customers, is expected to unveil a smaller version of its iPad tablet computer later on Tuesday.

Analysts had expected ARM to report quarterly pretax profit of 67.4 million pounds on revenue of 140 million pounds.

Score said the beat was largely due to a 25 percent rise in royalties to $121.1 million, about $6 million ahead of expectations and far outstripping the 4 percent growth in industry revenues.

ARM's energy-efficient technology powers most tablets and the vast majority of smartphones, which consumers are increasingly using to access the internet rather than PCs.

Sales of ARM's more expensive Cortex-A designs, which can handle the demands of multiple applications running on smartphones and tablets, were particularly strong, Score said.

Cortex-A accounted for nine percent of shipments, up from five percent a year ago, but it accounted for 35 percent of royalties, the company said. The technology helped average royalty rates per chip rise to 4.9 cents from 4.4 cents.

Licensing demand for Cortex technology was also strong, with sevens Cortex-A licenses signed in the quarter, helping total licensing revenue rise 15 percent, the company said.

ROYALTIES ACCELERATING

Shares in ARM rose 5.5 percent to 627 pence by 1015 GMT (0615 EDT), topping the FTSE 100 leader board and reaching the highest levels since January.

Analysts at Morgan Stanley, who have an overweight rating on the stock, said ARM was seeing royalty revenues accelerate when the rest of the industry was slowing down.

They said ARM's guidance for fourth-quarter dollar revenues to meet analysts' forecasts may leave something in the bag.

"Overall guidance for Q4 looks cautious given the strong royalties," they said.

ARM, which reports royalty revenues a quarter in arrears, said indications from its chip making customers pointed to a moderate sequential increase in royalty revenue in the final quarter, reflecting caution about holiday period sales.

Score said the semiconductor industry expected to see a low-single digit percentage uplift quarter-on-quarter for the holiday period, rather than about the about 10 percent growth usually seen.

He said, however, that even with expectations for the final quarter unchanged, the beat in the third would help ARM to exceed current full-year expectations, which for dollar revenues stood at a shade under $880 million.

"We would expect full-year consensus revenue to go up somewhere around $10 million to $885 to $890 (million)," he said.

(Editing by Kate Holton and Mark Potter)

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