ARMH Arm Holdings Plc ADS Each Representing 3 Ordinary Shares (MM)

By Simon Zekaria 

LONDON--Chip-designer ARM Holdings PLC has fanned concerns about how fast and how profitable its growth will be given less vibrant demand for smartphones, sending its shares lower Wednesday despite sturdy fourth-quarter earnings.

Shares in the Cambridge, U.K.-based company were among the leading decliners among blue-chip stocks in Europe, falling around 5% in early trading before recouping lost ground to trade 1.5% down.

The company said net profit for the three months to Dec. 31 rose 26% to GBP91.7 million ($132.9 million) from GBP72.8 million in the same period a year earlier on a 19% rise in revenue to GBP269.1 million.

The company's operating profit margin, calculated on normalized figures which are adjusted for a range of items, shrank to 50.5% from 51.4% in the fourth quarter the previous year.

ARM, whose microchip designs dominate the global processor market for smartphones including Apple Inc.'s iPhone, said it expects its dollar revenue to be in line with market expectations this year "based on current conditions in the semiconductor market."

ARM reported a 15% improvement in revenue last year to $1.49 billion compared with 2014. Bernstein Research has forecast ARM's revenue this year at $1.7 billion.

Market conditions look less buoyant than they did a few months ago.

Earlier this month, ARM rival Imagination Technologies Group PLC warned it will report a loss for its fiscal year, just the latest in a series of warnings from the company. Last month, Apple, which contributes around 5% of ARM's revenue according to Goldman Sachs estimates, warned that China, its biggest overseas market, had begun to exhibit " signs of economic softness."

ARM acknowledged that increasingly difficult global economic conditions could weigh on its performance.

"Increased economic uncertainty may influence consumer and enterprise spending, potentially impacting semiconductor revenues and industry confidence," the company said.

ARM's outlook was "lukewarm," said Bernstein analyst Pierre Ferragu. Growth in royalties from its processor-design business--up 30% at $196.6 million--were slightly disappointing in the fourth quarter, he said. The figure included a catch-up payment of $9 million as one of ARM's customers underreported chips it had bought.

One challenge ARM faces is finding a new source of growth to match that from smartphones and tablet computers that run on small, efficient batteries, hence recent strong demand for the specialized low-cost, low-energy chips that ARM designs.

Stalling growth for mobile devices means now around half of the company's royalty payments are related to other devices, which much riding on ARM's ability to capture a share of the market for connected devices--from cars to kitchen appliances--and high-energy chips. ARM competes in this part of the market with other chip designers and manufacturers, such as Intel Corp.

"Perhaps global recessionary fears are too much to discount given a mature and slowing high-end smartphone market starting to eat into margins and hopes too high that connected devices can ride to the rescue, " said Accendo analyst Mike van Dulken.

For now, the company is confident of underlying demand for its products.

"[Last year] was a strong year [...] and momentum continued through the fourth quarter," said Chief Executive Simon Segars. "Demand for our technology is increasing," Mr. Segars said in a statement.

ARM is recommending a final dividend of 5.63 pence a share, up 25%.

Write to Simon Zekaria at simon.zekaria@wsj.com

(END) Dow Jones Newswires

February 10, 2016 06:39 ET (11:39 GMT)

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