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Smartphone slowdown hits ARM's royalties in fourth quarter

By Paul Sandle

LONDON (Reuters) - British chip designer ARM Holdings said a slowdown in demand for Apple and Samsung smartphones was behind a smaller than expected rise in fourth-quarter royalty revenues.

ARM, whose technology is in nearly every smartphone, reported processor royalties of $130.4 million, up 7 percent, but short of analyst forecasts of $137.9 million.

The top-end smartphone market has showed signs of reaching saturation, with Apple and Samsung, both ARM customers, last month reporting lower than expected sales of the iPhone 5S and Galaxy S4 phones in the holiday season.

But the Cambridge-based company also said there was strong demand for licensing its technology across a whole range of applications from servers to dishwashers, exercise machines and wearable technology such as smart watches.

ARM said its royalties continued to grow faster than the broader semiconductor market, but the degree of outperformance was impacted by slower sales of chips for high-end smartphones in the second half of the year.

Chief Financial Officer Tim Score said the smartphones, which provide just under half of ARM's royalty revenue, were "slowing down" at the very high end, but cheaper devices were selling well.

"Overall royalties in 2014 we expect to grow at a similar rate to the last three years, broadly 19-20 percent," he said.

Royalties make up just over half of ARM's revenues, with licenses accounting for slightly less than half.

ARM shares fell to a five-month low after the results, and were down 3.1 percent at 902.5 pence at 1034 GMT.

Score said ARM continued to see strong demand for the licensing of its energy-efficient technology for new uses in networking, servers and wearable devices.

Processing licensing revenue rose 26 percent to $107.2 million in the fourth quarter, beating market consensus expectations of $94.7 million.

"We continue to benefit from the growth of digital electronics ... from smart consumer electronics such as phones, tablets and TVs, to energy efficient enterprise networking and serves to more embedded computing into things like smart sensors and wearable technology," he said.

10 BILLION CHIPS

Analyst Julian Yates at Investec said: "Royalties were slightly below expectations due to slower high end smartphone sales." He said he expected to trim royalty estimates by about 3 percent, having forecast 22 percent year-on-year growth.

But the stronger licensing outlook would compensate, he said, resulting in no change to his headline numbers, which were about 5 percent below consensus. He sees 2014 pretax profit of 419.8 million pounds.

ARM licenses its designs to partners, such as Qualcomm Inc and Samsung and receives a small royalty on every chip shipped. Some 10 billion ARM-based chips were shipped in 2013, Score said.

The chips in the latest smartphones, such as the first 64-bit processors in the iPhone 5S, carry higher royalty rates than those in simpler phones.

Score said, however, mid and low-tier smartphones, where most of the growth will come in the next five years, were incorporating more and more ARM technology, enabling it to stick to its medium-term forecast of 15-25 percent per year growth in smartphone royalties over the next five years.

Overall, ARM posted a 19 percent rise in pretax profit to 95.5 million pounds ($156 million) on revenue up 15 percent at 189.1 million pounds, broadly in line with expectations.

The company said it expected to meet analyst forecasts for 2014 revenue, which Score said stood at $1.28 billion.

($1=0.6123 British pounds)

(Editing by Greg Mahlich and Jane Merriman)

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