Chip Design Company Sees Upswing In Orders

ARM (NasdaqGS: - ) licenses its chip designs to some 50 chipmakers. When they're ordering, that's a bullish sign, because it means chipmakers plan to roll out new chips.

As for now? They're ordering, says ARM Chief Executive Warren East. East says the chip industry is recovering from a slump that started late last year.

U.K.-based ARM went public in April 1998, two years before the dot-com bubble burst and its sales and profit fell. But it's had a 32% per-share earnings growth rate in the past five years, and sales have risen at least 18% in each of the past three years.

IBD gives its stock a Relative Strength Rating of 63. That means it's outperformed 63% of all stocks in the past 12 months.

In a recent interview with IBD, East talked about signs of industry recovery and ARM's growth path.

IBD: What'll be the final verdict for the chip industry overall in 2007?

East: When they count the numbers and we look back on 2007, it's going to be small-single-digit growth. That's worse than it looked at some earlier stages, and better than it did at others.

Next year, I think we'll see large-single-digit percentage growth.

IBD: What are the major trends shaping the chip industry?

East: This year, the semiconductor industry's been going through one of its periodic cycles. We had a bit of a course correction back in 2004 and 2005. We've had another one in the back end of last year and the first two or three quarters of this year.

IBD: How have prospects changed in the second half of this year?

East: I think most people expect, and we can see from talking to the semiconductor companies that buy from us, that as we travel toward the end of this year things should get somewhat better.

Against that, the wider economy is not looking as healthy for the next six to 18 months as it did a little while ago. And that wider economic issue might well have an effect on how quickly the semiconductor industry grows, because it will mute the recovery eventually.

We've seen our customers struggle a bit more as their industry slows. But next year, we see the momentum picking up, as I say, subject to this caveat about the wider economy.

IBD: Which of the markets you serve are hottest now?

East: We study demand in the long term and we look at design activity in the short term.

In the long term, we can see strong demand for more embedded microprocessing in consumer products and in deeply embedded (markets such as) autos and industrial and motor controls and so forth. We can see the number of microprocessors in the world used for those things going up quite substantially.

In the design area, the hot things are smart phones. There's been a lot of discussion about that this year, and it's not a coincidence. There's quite a bit of change there.

IBD: What's changed?

East: I think we're reaching a bit of a tipping point 14 cell phones. The 3G (third generation) that people have been talking about for years is here, in volume.

When you're doubling the number of units sold but you're only talking about small numbers (of unit sales), then we can get very enthusiastic but it doesn't mean much.

Now, with (3G) smart phones doubling in sales, you're adding an increment of a hundred million units into a market of circa a billion units. It actually makes an appreciable difference.

IBD: How does ARM come up with new chip designs?

East: It's a mixture of a lot of things. We have some blue-sky people internally. We work with the universities. We talk to semiconductor companies, and we talk to their customers. It's a synthesis of all of those inputs that creates our new products.