Today’s first-quarter results from ARM Holdings (LSE: ARM) are impressive — revenue in pounds up 22% year-on-year, profit before tax up 24% and earnings per share up 27%. Good. Growth remains on track.
These results come hard on the heels of a great year of execution in 2014, according to firm’s chief executive.
Last year, revenues from licensing soared 30% year on year, and ARM’s customers shipped around $12 billion of chips containing ARM processors, which drove royalty growth.
Over the last five years the firm has played a blinder, and there’s every reason to expect vibrant medium-term performance in the years ahead. Here’s why:
Right place, right time
The company occupies a sweet spot in the rapid-digitalisation movement that must rank as one of the most prominent trends of our time.
ARM-designed technology finds its way into devices and gizmos across the spectrum of original equipment manufacturers (OEMs), thanks to a comprehensive partnering set-up. ARM designs, others build and install. Meanwhile, the firm’s licensing and royalty arrangements ensure robust and growing cash flow and profits. ARM claims to blend comprehensive design services, training, support and maintenance to deliver its partner community a total-system solution with a fast, reliable path to market.
Judging by the growth figures, ARM’s solutions enjoy wide acceptance and, according to the directors, that acceptance and adoption of ARM’s offering is set to grow further.
The firm’s operational progress over the last five years shines from the figures:
|
Year to December |
2010 |
2011 |
2012 |
2013 |
2014 |
|
Net cash from operations (£m) |
176 |
194 |
261 |
315 |
342 |
|
Net assets (£m) |
895 |
1,061 |
1,206 |
1,311 |
1,528 |
|
Dividend |
2.9p |
3.48p |
4.5p |
5.7p |
7.02p |
Over four years, net cash from operations has grown 94%, the net asset figure 71% and the dividend 142%.
That’s real expansion stripped bare and expressed in terms that are unlikely to deceive. The share price responded accordingly over the period, rising from 430p in December 2010 to around 1222p as I write today — a gain of 184%.
So what?
Past performance is no guarantee of future returns, they say, and I agree. However, is it wise to allow past good performance to blind us to potential? No, it isn’t. When it comes to businesses, past performance is a good indicator of form. When good form meets a promising outlook, as in the case of ARM Holdings now, the situation is attractive.
ARM looks at its operations under three categories — Mobile, Embedded Intelligence and Enterprise Structure. All three are doing well. Looking ahead, the directors see more opportunities to make ARM technology relevant in more and more markets. The firm is investing in its business in terms of research and development now, and sees opportunity for more investment to capitalise on further market potential in the future — this is a business with plenty of growth left under the hood and, as such, there is no reason for ARM’s lofty-looking valuation multiple to contract in the medium term.
Three high-performing sectors
In the Mobile category, ARM sees mature markets in developed countries widening as we all use our mobile devices to connect with other things, such as cars, heating systems, door locks, appliances and other applications. In developing countries, a switch from wide usage of mobile phones to lower-budget smatphones suggests high-volume opportunity. However, the market also involves tablets and clamshell style computing, an area where ARM is making good progress as it delivers higher compute power in energy efficient devices.
Although ARM deals with the main CPU that is driving the intelligence in these devices, the potential for expansion in mobile computing extends to connectivity, the touch screens and sensors that interact with other devices. Such a broad market drives the volume sales of ARM processors in mobile computing, a sector that accounts for about 47% of all the $12 billion chips sold by the firm’s partners last year.
Progress is also good in ARM’s Embedded Technology category. The Cortex-M series of chips drives the firm’s business in this area and the directors report 4.4 billion chips shipped by partner companies based on the existing technology, representing about 24% market share up from a 19% share during 2013.
It’s a great story in the firm’s Enterprise Infrastructure category, too, with a year-on-year doubling of market share from 5% in 2013 to 10% in 2014.
Firing on all cylinders
ARM’s share-price potential remains promising. If the company can repeat its dividend raising performance of the last five years over the next five years, it’s easy to see potential for the share price to at least double from here if the valuation multiples remain at a similar level.
For the valuation to remain similar to today’s, it is necessary for ARM to stay on course with growth. By today’s results and the director’s full-year presentation for 2014, there seems every reason to expect that to happen.
