Shares dive as ARM confirms fall-off in royalties

ARM Holdings, the chip designer based in Cambridge, saw £223m wiped off its market value yesterday after investors fretted that the highly rated company was coming under pressure.

While the company said demand for both its prod- ucts and services remained "strong", investors took fright at the falls in both royalty and deferred revenues in the first quarter of the year.

Shares in the company, where Warren East is chief executive, closed down 8 per cent, or 22p, at 248p, making the stock the biggest faller in the FTSE 100 index yesterday.

"They say the pipeline is still strong and there's lots of activity but we have seen more pressure on revenues," said Robin Hutchings, an analyst at WestLB Panmure. "Maybe they are reaching a point of saturation with the current technology."

In the first quarter to 31 March, ARM reported a better-than-expected £15.7m pre-tax profit, up from a profit of £13.8m in the previous quarter. Sales were £42.1m, up from £40.2m in the fourth quarter.

However, while the company said the current year had started "well", analysts focused on its deferred revenues – sales that have been billed but not booked – which fell to £13.3m in the first quarter from £19.4m in the previous quarter.

Sir Robin Saxby, its executive chairman, was unconcerned by the drop, saying it reflected a shift in the maturity of ARM's products.

Moreover, he said the company's order backlog – orders it had received but had not billed – had not decreased although he refused to put a figure on it.

"The important thing is the backlog – the order book – and that has not gone down. I think people think 'oh the deferred revenue has gone down and the backlog must have come down'. Well, the backlog hasn't gone down," he said.

ARM's royalty revenues, meanwhile, dropped 6 per cent to £6.4m, or 15 per cent of revenues, in the first quarter of the year from £6.8m, or 17 per cent of revenues, in the fourth quarter of last year.

The company, which had previously said it had expected the figure to be "flattish" or "plus or minus 10 per cent" on the fourth quarter, blamed the drop on weak chip prices.

In the first quarter, ARM's licencing revenues came in at £23.6m, up from £22.7m in the fourth quarter. Sales of development systems were £7.6m, up 31 per cent from the previous quarter.