TMCnet News
Arm slides on disappointing first quarter update(Guardian Web Via Acquire Media NewsEdge) Pharmaceuticals shares have continued to climb after Tuesday's deal frenzy, but chip designer Arm has fallen back after its latest update disappointed investors. The company, whose customers include Apple, Samsung and Lenovo, said its first quarter profits were up 9% to £97.1m but warned the usual seasonal decline in the first three months of the year would affect royalty revenues in the second quarter. It added: Assuming the outlook for the semiconductor industry in the second half of the year improves, as generally anticipated, we expect group dollar revenues for the full year 2014 to be in line with market expectations. But the note of caution has sent its shares 37.5p or nearly 4% lower to 945.5p. Liberum, which has a sell rating on the company, said: Arm has reported a weaker than expected set of first quarter results with sales of £186.7m coming in 4% below our forecast. The miss came mainly in processor royalties which on a reported basis was 9% below our forecast. Even excluding a one-off adjustment of $5m in the quarter, royalties were 5% below our expectations. We had written a detailed note in March outlining our case on why Arm's royalty outlook is well below that of the market over the next five years in our view, due to slowing growth in smartphones and tablets and the on-going shift in these products to the low end. We had also highlighted that Arm's guidance of a 19% growth in royalties this year is too optimistic. The miss in royalties today, coming on the back of a miss in the fourth quarter 2013 as well provides further evidence of this weakening royalty trend. While in past years very strong licensing sales had led to earnings beats, the licensing backlog has weakened again this quarter suggesting that licensing growth is likely to moderate as well in future. We believe consensus forecasts for Arm are too optimistic both for this year and for future years while valuations are stretched. But Espirito Santo was more positive on the outlook despite the first quarter figures: The pattern in this morning's results is similar to the previous two quarters – licensing ahead but royalties lower. As a result, the 8% underlying growth represents an outperformance of only 2% versus the industry, much lower than the historical ten year average of 15%. Looking ahead, we believe that the semi cycle is improving as evidenced by TSMC's recent better than expected results and guidance. With a number of structural drivers such as higher royalty rate in mobile, market share gains in enterprise networking along with the potential market opportunity in "Internet of Things", Arm remains well positioned, in our view. While first quarter results are relatively lacklustre, we believe Arm is likely to have a strong second half and we re-iterate our buy recommendation. Overall, the FTSE 100 is virtually unchanged, up jost 0.16 points at 6681.92 as UK public finances came in better than expected, but weaker Chinese PMI prompted a mixed performance from the mining sector. Antofagasta is down 49p to 795.5p as its shares went ex-dividend, but Rio Tinto has risen 5p to £32.62. Among the pharmaceutical shares, AstraZeneca has added 94p to £40.54 on continued hopes of a bid from Pfizer, while another potential takeover target, Shire, is up 25p at £31.71. GlaxoSmithkline, which unveiled a complex asset swap and joint venture with Novartis, has edged up 8p to £16.48. A number of other companies were quoted without the right to the latest dividends, including British Gas owner Centrica, down 14.8p at 330.1p. Morrisons is down 6.3p at 197.8p as JP Morgan cut its price target from 175p to 150p with an underweight rating. The bank said: Morrison published its annual report last week. We would highlight the relaxed depreciation policies (which reduces earnings quality) and the big reduction in labour intensity, in line with trends seen at Sainsbury and Tesco in recent years (which limits the scope for future cost cutting). We cut earnings per share by 18% for 2015/16 and, thus, our target price from 175p to 150p. But Associated British Foods is the biggest riser in the FTSE 100, up 213p at £28.35 after a 1% rise in first half profits, as a strong performance from its Primark discount fashion chain outweighed a fall in its sugar business. (c) 2014 Guardian Newspapers Limited. |