Chip designer ARM Holdings beat market profit expectations in the second quarter, helped by strong demand for smartphones, netbooks and tablet computers. The British company, whose designs are in more than 95 percent of the world's mobile phones, posted record pretax profit of 43.5 million pounds, up 167 percent, on revenue of 100 million pounds, both ahead of expectations.

Earnings per share of 2.34 pence also comfortably beat the 1.83 pence forecast. The results were flattered by a catch-up royalty payment of $9 million for shipments of chips made between 2007 and 2010.

As well as smartphones, which can contain four or five ARM chips each, the Cambridge-based firm said its designs were growing share in consumer electronics and embedded products, such as machinery and appliances.

New licensing deals with Freescale , Microsoft and TSMC <2330.TW> would further increase its market penetration, Chief Financial Officer Tim Score told reporters on Tuesday.

ARM continued to gain share in the quarter with shipments of ARM-based chips growing faster than the industry in all target markets, the company said.

ARM licenses its technology to chipmakers such as Samsung <005930.KS>, Toshiba <6104.T> and Nvidia and then royalties, recognized a quarter in arrears, of an average of about 10 cents per chip shipped. Some 1.4 billion ARM-designed chips were shipped in the prior quarter.

Score said trading conditions had improved strongly in the first half of 2010 after a challenging 2009, and the group was confident it would meet expectations of full-year revenue of about $584 million, excluding the royalty catch-up.


Shares in ARM have outperformed the STOXX European technology index <.SX8R> by 86 percent since the start of the year, and hit an eight-year high of 370 pence on Monday. They trade on a heady 41 times 2010 forecast earnings, according to Reuters data.

They were down 2.3 percent by 0927 GMT, while the index was up 0.6 percent.

This is another strong set of results and could help drive continued momentum in the stock, which currently can do no wrong, said analyst Nick James at Panmure Gordon.

However, we continue to believe that the long-term prospects for ARM are more than valued in at current levels, so retain our sell recommendation.

Score said the group was in good shape on licensing, which accounted for 24 percent of processor design revenue, but the uncertainty in the global economy could make growth in royalties less certain, particularly ahead of Christmas.

ARM signed a broad architecture license agreement with Microsoft on Friday, which could lead to Microsoft designing its own chip, in a similar way as Apple developed the A4 chip based on ARM's Cortex-A8 core for its iPhone 4 and iPad tablet computer.

Score said licensing fees from the multi-year Microsoft deal would probably start to be recognized from the fourth-quarter.

($1=.6473 Pound)

(Editing by Louise Heavens)