UPDATE 2-ARM cautious on Christmas holiday sales

Tue Jul 26, 2011 5:38am EDT

* Q2 sales, profit beats expectations

* Sees sequential rise in industry revenue in current quarter

* Says Q4 harder to predict due to worries on consumer confidence

* Shares reverse early gains, down 2.2 pct (Adds CEO comments, analyst reaction, shares)

By Paul Sandle

LONDON, July 26 (Reuters) - ARM Holdings sounded a note of caution about electronic goods sales this coming Christmas, overshadowing a better-than-expected second-quarter where its technology, already dominant in mobile phones and tablets, was licensed for more and more uses.

The Cambridge-based company, whose processor designs are used by Samsung Electronics , Qualcomm and Texas Instruments , sold 29 licenses in the quarter, helping pretax profit rise 25 percent to 54.2 million pounds ($88.3 million) on 18 percent higher revenue of 117.8 million pounds.

ARM said it expected industry revenue in the second quarter, which drives its third-quarter royalties, to tick up quarter-on-quarter, but it kept forecasts for the year unchanged, indicating less confidence on sales ahead of the key Christmas period.

"There's obviously a number of broad macro economic uncertainties that make us cautious as to whether the normal seasonal uptick you see at the end of the year, ahead of Christmas, is as significant as it had been in some other years," Finance Director Tim Score told reporters on Tuesday.

Shares in the company rose as much as 2.6 percent as the market welcomed strong license sales, before reversing the gains on worries about consumer spending.

They were 2.4 percent lower at 601.5 pence by 0907 GMT, underperforming a 0.2 percent weaker FTSE 100 index .

Analyst Paul Morland at Peel Hunt said the results were "excellent", but with the shares trading at 54 times this year's earnings, they were vulnerable to a set of quarterly results that did not meet the market's high expectations.

"With royalties recognised one quarter in arrears and several semi stocks recently reporting something of a slowdown for Q3, there is a risk that Q4 could be a disappointing quarter for ARM," he said.

LICENSING STRENGTH

Score said the strong license sales would drive future royalties as ARM chips were designed into products ranging from cars, air conditioners and running machines to smartphones and computers.

"We are building that installed license base quicker than we ever have done in the past," he said.

ARM shipped 1.1 billion processors based on its architecture in smartphones and tablets, including Apple's iPhone and iPad, in the quarter. Sales of its chips in smartphones tend to deliver the biggest royalty payments for the company.

But while consumers' appetite for Apple's products is as strong as ever, growth at competing handset makers such as Nokia , Research in Motion , and LG has faltered.

Score said increasing competition among smartphone makers would be good for ARM even if average selling prices of chips fell.

"The more competitive the environment the better it is for the ARM business," he said. "We don't try to pick winners, we try to enable the field. The chipmakers that win will end up paying us the most royalties."

ARM is also eyeing the PC and eventually server markets, which are the strongholds of Intel.

Microsoft is already designing the next generation of Windows software for ARM-based processors, and a number of manufacturers are planning ARM-based notebooks running Google's Chrome operating system later this year.

"The computing space generally is a longer-term opportunity for us in terms of meaningful royalties," Score said. "For those to come through the building blocks need to be being put in place now."

Analysts had expected the group to report pretax profit of 45.3 million pounds on revenue of 109.1 million pounds. ($1 = 0.614 British Pounds) (Editing by Neil Maidment and Andrew Callus)