When ARM Holdings predicted a “meaningful uplift” in fourth-quarter revenues back in October, it was doubtful that the modest 3.7 per cent increase delivered in today’s full-year numbers was what it had in mind.
But then the world of the Cambridge-based semiconductor maker has evidently changed over the last three months. The autumn’s confidence - ARM had just signed three licensing deals worth an estimated $33 million - has now given way to caution.
The company predicts that this year’s growth in US dollar revenues will “at least” match the 6 per cent achieved in 2007 - creditable, perhaps, but a severe disappointment given consensus expectations of a 15 per cent rise.
Accordingly, the shares fell 15 per cent, taking their slide since October to a hefty 37 per cent.
Like all semiconductor stocks, ARM is hostage to the fortunes of its electronics clients, so the poor outlook for consumer spending means caveats are inevitable.
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But ARM must still also prove itself strategically. A question mark still hangs over Artisan, the badly-received £500 million US acquisition of four years ago: revenues from ARM’s physical IP division, in which it sits, were down 34 per cent on the quarter and 20 per cent year on year.
The steady growth of ARM’s licence base means that high-margin royalties continue to rise strongly, with the effect that earnings should outpace the expected 6 per cent increase in sales: revised estimates suggest a 16 per cent improvement.
Even so, that leaves the shares on 18 times 2008 forecasts, which seems steep given the danger of further downgrades. Avoid.