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12/4/2012 7:08:00 PM
Look out, Intel, ARM Holdings is encroaching on your turf.
The U.K. chip designerARM ( ARMH ) dominates the smartphone and tablet markets, but now is making progress penetrating the personal computer and server markets, areas long controlled byIntel ( INTC ).
Microsoft ( MSFT ) launched the first version of its Windows PC operating system to run on ARM-based chips Oct. 26. The new OS, called Windows RT, is a break from the decades-old Windows-Intel, or Wintel, alliance. Windows RT runs Microsoft's convertible tablet-notebook called Surface. Other hardware companies are making Windows RT machines as well.
Also, recent news reports haveApple ( AAPL ) considering a switch from Intel processors to its own chips based on ARM technology for future Mac computers. ARM-based chips already power Apple's iPhones and iPads.
On the server front, computer makers are designing new servers around ARM's new 64-bit chip architecture.
ARM shares have been on a roll since Oct. 23 when the company reported better-than-expected Q3 results and said Q4 sales would be in line with Wall Street's forecasts. ARM's U.S. shares are trading near a 12-year high.
"In-line guidance for the fourth quarter is a victory in itself because most chip companies in the fourth quarter are expecting revenue declines of about 5%," said Gary Mobley, an analyst with the Benchmark Company. "Certainly, ARM is the brightest star in the chip solar system."
While ARM's success in the mobile device sector is driving its current sales, the firm has aspirations to move up the computing food chain with higher performance processors for PCs and servers.
The growth of ARM's licensing business indicates that some of those initiatives are taking off, Mobley says.
ARM has two revenue streams: licensing and royalties. Chip and computer companies license its intellectual property when they're developing new products. And once those products ship, they pay a royalty per unit sale.
"Over the past 12 months, the royalty revenue growth has been pretty darn good relative to the broader chip group," Mobley said "But it's been the licensing activity that has really driven the strength for ARM Holdings."
ARM has the "de facto licensable, third-party, general-purpose processor" intellectual property, he says.
Plus, it's licensing technology at a much higher value per transaction than it once did because it's upselling customers other technologies, such as performance optimization packs and graphics processor designs.
In addition to mobile devices, ARM has a solid presence in consumer electronics, such as Internet-enabled TVs and home appliances, says Patrick Moorhead, an analyst with Moor Insights & Strategy.
"Overall their prospects look good because they're very strong in the areas of growth," he said. By contrast, companies linked to the declining PC industry, including Intel andAMD (AMD), have seen their fortunes fall.
But ARM has opportunities to take market share in the PC and server markets, Moorhead says. "By 2015, they could have upwards of 10% market share in the PC space conservatively," including Windows RT computers, he said.
Apple might be looking at ARM processors for a new type of computing device that would fill a niche for a lower-cost PC in its product line, Moorhead said.
The opportunity is potentially bigger in the server market because businesses that run web centers are looking for servers that consume less electricity.
Chip companies likeApplied Micro Circuits (AMCC),Cavium (CAVM), Calxeda andMarvell (MRVL) are developing server chips using 64-bit ARM multicore processor designs. Those chips would compete directly with Intel's industry-leading processors.
The ARM server chip business is still in its early days. Licensing revenue is starting to roll in, but royalty revenue likely won't show up until 2014, Mobley says.
In order for ARM to penetrate the server market, a new ecosystem has to be created around its chips. Server operating systems and application software would have to be written or ported over to the ARM architecture, he says.
"The opportunities are great," Mobley said.
ARM's third-quarter earnings jumped 29% from a year ago to 18 cents per U.S. share. Sales rose 18% to $228 million. Analysts had forecast earnings per share of 17 cents and sales of $222 million.
For the December quarter, ARM expects sales to be "in-line with current market expectations." Analysts polled by Thomson Reuters are looking for ARM to earn 19 cents a share, up 12%, on sales of $237 million, up 10%.