ARM CEO Sees Leverage Against Intel, Says WSJ

In case you missed it, I and my colleague Shara Tibken sat down this morning with ARM Holdings (ARMH) CEO Warren East, and Shara has put together an excellent write-up of East’s remarks about the mobile chip business and how the competition with Intel (INTC) is shaping up.

Essentially, East thinks his chip designs have a better chance of capturing some share of the PC market, via licenses with ARM’s partners such as Nvidia (NVDA), Qualcomm (QCOM), and Texas Instruments (TXN), than does Intel at capturing some share of the mobile phone and tablet market. That market is currently dominated by ARM and its partners.

Regarding Intel’s undeniable lead in process technology — the first company to ship in high volume chips with features at 22 billions of a meter, or 22 nanometer, and the first with 3D transistors in commercial production — East was fairly dismissive. He notes that the new line of PC microprocessors using these tricks, “Ivy Bridge,” have been said to gain a mere 20% improvement in power efficiency. When Intel’s phone and tablet line of chips, “Atom,” comes to this process, East thinks the result will be no big deal.

Meantime, chips using ARM’s designs will probably hit a threshold in terms of how powerful they can be before it just doesn’t matter anymore to consumers. Basically, today’s quad-core wonders may become passe a couple years down the road. The equivalent of Intel’s desktop “Core i5” chips could probably be shipping in a smartphone or tablet a couple of years from now, according to some observers.

That’s just fine, according to East: Mobile chips only need to be good enough, he’s convinced, in order to handle the tasks most users want on a tablet or phone — Web surfing, email, video playback, some lightweight content creation, etc.

One interesting thing to note about ARM is that its operating profit margin, on a non-IFRS basis (that’s non-GAAP to us here in the States), is trending in the mid-40s as a percent of revenue. That’s way, way up from the low-30s a few years ago. That’s probably a result of the fact that licenses the company sells turn into a steady royalty stream.

As East said to Shara, the company’s R&D expense, for one, is only headed down, over time, as a percentage of revenue as the royalties stream in without requiring further engineering effort.� We unfortunately didn’t have time to press East on the matter of whether margins have topped, or if they can go higher.

Another financial issue that’s always a big one for ARM is the matter of backlog. Backlog declined in Q1 on a quarter-over-quarter basis for the first time in 8 quarters, ending what seems to be the longest streak of sequential backlog growth in ARM’s history.

Backlog growth is reassuring, because it means ARM has some future revenue “in the bag,” if you will. When it doesn’t grow, investors are not happy. ARM’s shares fell hard the day of that announcement.

Unfortunately, no update on East’s thinking about that today, but we’ll keep an eye on the matter.

ARM’s American Depository Receipts today 67 cents, or 3%, to close at $22.35.