ARM Holdings reported 3Q13 results on Thursday that were above consensus estimates. On a positive note, ARMH’s license revenue continues to significantly exceed expectations, and ARM PD (Processor Division) royalty revenue continues to outperform ARM’s served available market (SAM) according to management’s guidance. Admittedly, shares are richly valued, and the market clearly wanted a perfect quarterly report with perfect guidance. However, there were a few imperfect items including a sub-consensus 4Q13 revenue guide and a modest q/q deterioration in ARM PD royalty rate/unit.

September quarterly revenue of $286.7 million (up 26% y/y; up 9% q/q) compared favorably to our estimate of $273.9 million and consensus of $275.1 million. License revenue drove the revenue upside. The 4Q13 revenue guide, however, was slightly below prior consensus (although q/q and y/y growth is still expected). Sept-Q operating margin (non-GAAP) was 48.6% vs. our estimate of 48.0%. Included in the normalized (non-GAAP) operating expenses was a £5.5 million foreign exchange charge. Without the charge, the non-GAAP operating margin would have been 51.5%. Non-GAAP EPS of $0.24 compares to consensus (and our estimate) of $0.23. Without the foreign currency charge, non-GAAP EPS would have been $0.25.

The company issued Dec-Q revenue guidance of ~$290 million (up 10% y/y; up 1% q/q). Guidance compares to prior consensus of $296.3 million (source: Thomson Reuters [ARMH management cited current consensus at $290 million, which is based on management’s unscientific survey]). Embedded within management’s 4Q13 revenue guidance is an expectation that ARM PD license revenue will decrease ~$16.0 million q/q from the record $106.2 million achieved in 3Q13. This assumption may prove conservative as has been the case for the past two years.

Again, backlog is at a record level, and based on this conservative 4Q13 ARM PD license revenue guidance, management is assuming lower bookings during 4Q13 and/or a lower amount of license revenue recognized from backlog. Also embedded within management’s 4Q13 revenue guidance is the assumption royalties will grow 15% q/q. This robust q/q royalty growth assumption is most likely a function of: 1) the timing of Apple iPhone 5s/5c launch and 2) normal seasonality and a relatively strong 3Q13 for the chip industry.