ARM Holdings (ARM) reported first-quarter earnings and gave investors a second-quarter outlook that was modestly ahead of our expectations. Revenue was $185.5 million, up 2% sequentially and up 26% from the year-ago quarter. Ongoing processor royalty revenue was up about 7% due to continued healthy demand for ARM-based processors used in smartphones and tablets. Meanwhile, processor licensing revenue was $51 million, down 5% sequentially but still above average historical levels. The company also saw nice traction in unit shipments to nonmobile customers, such as companies in the enterprise space, this quarter. On the profitability front, operating expenses crept up a bit due to some additional stock compensation expenses, but ARM still was able to earn a strong 25% operating margin this quarter.
Looking ahead to the June quarter, ARM expects a "seasonal" decline in mobile processor royalties (the firm estimates a 5%-10% drop) and hinted that processor licensing revenue may not come in at the $50 million level each and every quarter going forward (with $40 million-$45 million being more normalised levels). Nonetheless, ARM is still faring quite well in the semiconductor IP space. The company continues to gain traction and sign new licencees in nonmobile applications. However, the ARM story still centres on the firm's dominant IP position in mobile processors used in smartphones and tablets. ARM should continue to not only profit from the rapid adoption of these high-end devices in the months and years ahead, but should also see higher royalty revenue on each sale. These devices use increasingly complex processors, which should enable ARM to charge higher royalty rates over time.