LONDON ARM Holdings posted a 9 percent rise in second-quarter profit as licensing of its processor technology compensated for a slowdown in high-end smartphone sales that decimated growth in royalties.
The Cambridge-based company, which sells blueprints for chip designs and receives royalties on every chip shipped by partners such as industry leader Taiwan Semiconductor Manufacturing Co, reported pre-tax profit of 94.2 million pounds ($161 million) on revenue also up 9 percent to 187.1 million pounds, both beating analysts' expectations.
With the smartphone industry in the doldrums, nearly all of ARM's revenue growth, measured in dollars, was the result of chipmakers signing 41 new licenses for its processors. That prompted a 42 percent rise in revenue, to $125.8 million, across applications from micro-controllers to wearable technology.
Royalty revenue from chips shipped in products like Samsung's and Apple's smartphones, grew just 2 percent in dollars, and once translated into sterling fell 8 percent.
The smartphone market is suffering a period of slowing growth as penetration rates in some major Western and Asia markets start to exceed 50 percent, and consumers upgrade their devices less often.
Samsung, the market leader, said earlier this month that its second quarter earnings would be hit by a build up of unsold products in Europe.
Chief Executive Simon Segars said ARM's royalties were hit by the same seasonal trends and inventory management in parts of the electronics supply chain.
The smartphone market is however expected to receive a boost in the third quarter when Apple is widely tipped to release the successor to the iPhone 5.
ARM's chief financial officer Tim Score said market data indicated improving semiconductor industry conditions, which should result in a recovery in royalty growth.
"During the second half we would expect royalty revenue growth to reaccelerate towards more normal level," he said. "Whether we get all the way back to the more normal levels in the high teens we will see."
He said some of the stock that had languished on shelves was 3G smartphones, as consumers increasingly wanted 4G devices.
"Some of the guidance from some of ARM's bigger royalty shippers is encouraging, we are going to see the roll out of new technologies - 4G, LTE - which is going to increasingly incorporate the latest ARM technology, which yield higher royalty rates for us," he told reporters on Tuesday.
Shares in ARM, which were trading at 12 month lows coming into the results, were up 4.8 percent to 874 pence by 0858 GMT, the top riser in the FTSE 100 index.
Analysts at Investec, who have a "buy" rating on the stock, said headline pre-tax profit was inline, and the outlook for full-year revenue intact, but the mix continued to shift towards license revenue.
"Royalty weakness is not ideal, but it should bounce back as the 4G cycles kicks in, with license strength underpinning the mid-term outlook," they said.
The company, which said it was on track to meet market revenue expectations of $1.3 billion for the year, increased its interim dividend by 20 percent to 2.52 pence a share.
Analysts had expected pre-tax profit of 90.9 million pounds and revenue of 182.5 million pounds ($312 million), according to a weighted consensus compiled by Thomson Reuters.
(Editing by Kate Holton and Sophie Walker)