ARM sees inventory driving stronger Q2

PARIS, FRANCE: ARM, the world's leading chip designer, said chip sales had improved in the second quarter but the rise was due to customers rebuilding inventory rather than a recovery in end-consumer demand.

"Talking to customers we can see that Q2 is looking better," said Chief Executive Warren East, speaking at the Reuters Global Technology summit in Paris.

"This improvement appears to be inventory correction and nothing more at the moment."

Britain's ARM, whose technology is used in more than 90 percent of the world's mobile phones, said the semiconductor market was coming back -- from a 30 percent drop in the first quarter -- but would still be down 20 to 30 percent for the year.

"It will be probably worse than minus 25 percent," he said.

"There is an inventory bounce going on now but I don't think it will be sustained going into the back half. There's no underlying catalyst to make consumers go out and buy electronic products," East said.

Licensing activity, in which ARM's more than 200 customers license a chip design for production, gave a clearer forward view, East said.

"Over the last quarter or so, from October last year, we have seen some caution in the licensing activity -- there's a lot of discussion but not much action," he said. "We can't really see a change in that climate."

East said the proportion of lower-cost licenses – term licenses and single-use licenses -- in the mix was increasing, but he remained comfortable with consensus for licensing sales this quarter of around $30 million.

Intel, the world's largest chipmaker, has designs on taking its PC technology into ARM's territory of smart phones, a threat that East takes seriously.

"Our biggest competitor is in-house designs and it remains in-house designs, but Intel has been very public in their intention to take the x86 architecture into the bulk of consumer electronics," he said.

ARM is planning to pre-empt the threat by capturing some of the market for netbooks -- small, inexpensive notebooks designed for Web browsing -- which is currently dominated by Intel's Atom processor.

"It's about driving a wedge into that sector and helping

counter any gains that Intel makes in the smart phone space."

Companies including Texas Instruments, Freescale, Qualcomm, and Nvidia were developing devices based on ARM-technology that would be suitable for use in netbooks, he said.

"We would expect a handful of ARM-based netbook designs this year," he said.

East said he still expected the netbook market to be somewhere between 20 million and 30 million units this year, while he expected the smart phone market to grow 10 percent this year, adding another incremental 20 million phones.

"For us, smartphone remains the priority that pays the bills, but netbooks are an interesting opportunity for us because maybe the whole PC market flips in a few years' time -- where there are a relatively small number of high performance machines and most of what the consumers buy are (netbooks)."

The company also has further designs in the pipeline, he said, including a medium-performance processor in its Cortex A family.

"We expect to have some licensing for that product to talk about later this year," he said.

ARM employs about 1,740 people and had sales of 299 million pounds ($455 million) last year.

Shares in the company closed up 4.6 percent at 114.75 pence, outperforming the 2.9 percent firmer DJ Stoxx European technology index, and valuing the group at 1.39 billion pounds.