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ARM wrestles with slimmer profits
Wednesday, October 02 2002
by Matthew Clark


Shares in ARM Holdings plc crashed in London in pre-lunch trading on Wednesday as
the biggest semiconductor designer in Europe issued a profit warning.

The company said it would miss analysts' expectations for the third quarter, with
revenue likely to fall 12 percent to STG33 million (EUR52.5 million). The
company's pre-tax profits look set to come in at STG8 million, approximately 50
percent lower than analysts' predictions and a fall of 38 percent sequentially. 



By lunchtime Wednesday the company's shares were hitting four-year lows in
London, down almost 65 percent to STG47.5.  





"In our second quarter earnings announcement in July, we referred to continued
challenging market conditions in the industry," the company said. "These
conditions have deteriorated further in the third quarter, resulting in the
deferment of investment decisions by our partners and therefore a slowdown in
licensing activity." 





ARM, like other chip designers, had avoided the most severe aspects of the
semiconductor downturn over the last 18 months because it designed so-called
next-generation chips and was able to convince clients like Intel and Infineon to
invest in its future technologies. In fact, for the last 18 quarters, the
company's earnings have met or exceeded analyst expectations, Executive Officer
Warren East said in a conference call. 





Analysts now say that after months of continuing to license ARM designs, clients
appear unwilling to spend more as the semiconductor downturn persists. "Whilst
our sales pipeline and backlog of signed contracts give us reasonable visibility
in our business, the persistent difficult market conditions mean that the timing
of the closure of licensing deals is unpredictable," ARM said. The company also
said it expects the situation to improve substantially in the fourth quarter. 





"The semiconductor industry is experiencing its worst ever downturn," East
noted. "Whilst ARM has continued to achieve robust results to date, the
persisting challenging market conditions have eventually caused some of our
partners to delay decisions about licensing our technology." 





The news did little to help shares in ARM competitor Parthus, an Irish company
that is in the closing days of its merger with DSP Group subsidiary Ceva. Parthus
shares sank 7.5 percent in London by lunchtime on Wednesday to STG0.125. 







The backlash against ARM may be somewhat undeserved, a few analysts noted,
because the company continues to expect profitability for the full year. In fact,
ARM said it continues to generate cash and it expects cash balances to increase
to approximately STG121.7 million at the end of the third quarter, compared with
STG115.4 million at 30 June 2002. 





The UK-based employer of 800 said it is not planning any job cuts following the
news, although it did say it would not recruit any new workers after boosting
staff levels by 100 this year.