ARM Holdings plc Reports Results for the Second Quarter and Half Year Ended 30 June 2010

CAMBRIDGE, UK, 27 July 2010—ARM Holdings plc announces its unaudited financial results for the second quarter and half year ended 30 June 2010, demonstrating continuing progress in executing its strategy with multiple design wins taking ARM further into new markets. 

A presentation of the results will be webcast today at 09:30 BST at www.arm.com/ir

Progress against strategy in Q2

• Growth in mobile applications - ARM opportunity increases as smartphone growth continues and ARM technology-based mobile computers begin to come to market

  • Average of 2.6 ARM®-processor based chips per mobile phone

  • 4 processor licenses signed for mobile phone and computing applications

  • Major semiconductor company becomes the third lead-licensee for the “Eagle” Cortex-A™ class processor.

• Growth beyond mobile - Increased share in target markets such as consumer electronics and embedded products

  • Strong year-on-year growth for shipments of ARM-based chips into digital TVs, disk drives and microcontrollers

  • 13 processor licenses signed for a broad range of applications including intelligent sensors, networking, smart energy meters and solid state drives

  • Leading microcontroller company, Freescale, announced their first major family of ARM-based microcontrollers

• Growth in new technology outsourcing

  • 3 licenses for royalty-bearing platforms of physical IP at both advanced nodes and mature nodes

  • TSMC licenses physical IP for 28nm and 20nm early in Q3

  • 3 companies further their commitment to Mali™, ARM’s graphics processor

• Microsoft signed a multi-year architecture license to be at the forefront of working with ARM technology, across a broad range of businesses, addressing multiple application areas

• Interim dividend increased by 20%

Warren East, Chief Executive Officer, said:

“We are pleased to report strong underlying revenue and profit performance in the first half, in improved trading conditions compared with one year ago.  Our strategy remains on track for growth in mobile, non-mobile and new technology outsourcing.  Major semiconductor vendors and consumer electronics companies are making long-term commitments to using ARM technology in their future products. Freescale, Microsoft and TSMC all recently announced adoption of ARM’s latest technology which will further increase ARM’s market penetration, and royalty potential, in a broadening range of end applications.  ARM continued to gain share in the quarter with shipments of ARM-based chips growing faster than the industry in all target markets."

Outlook

We enter the second half of the year with record order backlog, a robust opportunity pipeline and strong momentum as ARM continues to increase penetration across its target markets.  Although the impact of the broader macroeconomic environment on end consumer demand later in the year remains uncertain, we expect group dollar revenues (excluding catch-up PD royalty revenues of $9 million reported in Q2) for the full-year 2010 to be in line with current market expectations. 

¹ Includes catch-up PD royalties in Q2 2010 of $9.0m (£6.2m).

² Includes catch-up PIPD royalties in Q2 2010 of $0.2m (£0.1m) and in Q2 2009 of $2.6m (£1.6m).

¹ Includes catch-up PD royalties in H1 2010 of $9.0m (£6.2m).

² Includes catch-up PIPD royalties in H1 2010 of $0.7m (£0.5m) and in H1 2009 of $4.2m (£2.6m).

Financial review
(IFRS unless otherwise stated)

Total revenues

Total dollar revenues in Q2 2010 were $150.3 million, up 42% on Q2 2009.  Q2 sterling revenues were £100.0 million, up 54% year-on-year.  Excluding the catch-up royalty payment, total dollar revenues in Q2 2010 were $141.3 million, up 34% on Q2 2009 and Q2 sterling revenues were £93.8 million, up 45% year-on-year. 

Half-year dollar revenues in 2010 amounted to $293.6 million, up 30% on H1 2009.

License revenues

Total dollar license revenues in Q2 2010 increased by 22% year-on-year to $47.0m, representing 31% of group revenues.  License revenues comprised $36.6 million from PD and $10.4 million from PIPD. 

Royalty revenues

Total dollar royalty revenues in Q2 2010 increased by 67% to $82.3 million, representing 55% of group revenues. Royalty revenues comprised $72.5 million from PD and $9.8 million from PIPD. 

Royalty revenues are recognised one quarter in arrears with royalties in Q2 generated from semiconductor unit shipments in Q1.  PD royalty revenues in Q2 2010 included a catch-up royalty payment of $9.0m in respect of certain shipments made between 2007 and 2010.  This catch-up royalty was identified by the customer as part of ARM’s ongoing royalty auditing process.  PD underlying royalties of $63.5 million increased 54% year-on-year.  This compares with industry revenues increasing by less than 40% in the shipment period (i.e. Q1 2010 compared to Q1 2009), demonstrating ARM’s market share gains over the last 12 months.  

Total PIPD royalty revenues of $9.8 million included $0.2 million of catch-up royalties. Underlying royalty revenues increased by more than 80% year-on-year, reflecting the rebound in the foundry industry. 

Development Systems and Service revenues

Sales of development systems in Q2 2010 increased 30% year-on-year to $13.4 million, representing 9% of group revenues.  Due to seasonality, revenue for development systems in Q3 is often 10% to 20% lower sequentially.

Service revenues in Q2 2010 were up 4% to $7.6 million, representing 5% of group revenues.

Gross margins

Gross margins in Q2 2010, excluding share-based payment costs of £0.7 million (see below), were 94.9% compared to 93.0% in Q1 2010 and 91.2% in Q2 2009.

Operating expenses and operating margin

Normalised operating expenses (excluding acquisition-related, share-based payments, Linaro-related and restructuring charges) were £52.1 million in Q2 2010 compared to £49.0 million in Q1 2010 and £43.1 million in Q2 2009. Normalised operating expenses in Q3 2010 (assuming effective exchange rates similar to current levels) are expected to be in the range £53-55 million as ARM continues to increase investment in R&D programs.

Normalised research and development expenses were £26.4 million in Q2 2010, representing 26% of revenues, compared to £25.2 million in Q1 2010 and £22.5 million in Q2 2009.  Normalised sales and marketing expenses were £12.8 million in Q2 2010, being 13% of revenues, compared to £12.0 million in Q1 2010 and £11.6 million in Q2 2009.  Normalised general and administrative expenses were £12.9 million in Q2 2010, representing 13% of revenues, compared to £11.8 million in Q1 2010 and £9.0 million in Q2 2009.

Normalised operating margin was 42.7% (38.9% excluding catch-up royalty revenue of $9 million) in Q2 2010, compared to 40.0% in Q1 2010 and 24.7% in Q2 2009.

Total operating expenses in Q2 2010 were £65.3 million (Q2 2009: £52.6 million) including amortisation of intangible assets and other acquisition-related charges of £3.1 million (Q2 2009: £4.1 million), £8.8 million (Q2 2009: £5.3 million) in relation to share-based payment costs and related payroll taxes and Linaro-related charges of £1.2 million, see below, (restructuring charges in Q2 2009: £0.2 million). Total share-based payment costs and related payroll tax charges of £9.5 million in Q2 2010 were included within cost of revenues (£0.7 million), research and development (£5.7 million), sales and marketing (£1.8 million) and general and administrative (£1.3 million).

Normalised income statements for Q2 2010 and Q2 2009 are included in notes 6.13 and 6.14 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release. 

During Q2, ARM announced, along with several partners, the formation of Linaro, a not-for-profit company, set up to develop optimised Linux software and tools for ARM-processor based chips.  Linaro will provide underpinning technology for all major Linux distributions including Android, Chrome, MeeGo, Limo, Ubuntu, webOS, and others.  Founding members have contributed both money and engineering time to the collaboration.  Linaro is currently a 100% controlled subsidiary of ARM; as other members take up board seats Linaro will cease to be controlled as a subsidiary.  Linaro-related charges in Q2 2010 of £1.2m were charged to the profit and loss account.  Linaro-related charges are expected to total about £4.5m in the first 12 months post launch.

Earnings and taxation 

Profit before tax was £29.6 million in Q2 2010 compared to £6.4 million in Q2 2009. After adjusting for acquisition-related, share-based payment costs, Linaro-related charges and restructuring charges, normalised profit before tax was £43.5 millionin Q2 2010 compared to £16.3 million in Q2 2009. The Group’s effective normalised tax rate was 27.4% (IFRS 26.1%) in Q2 2010 compared to 24.7% (IFRS nil) in Q2 2009.

In Q2 2010, fully diluted earnings per share were 1.62 pence (7.29 cents per ADS****) compared to earnings per share of 0.50 pence (2.46 cents per ADS****) in Q2 2009. Normalised fully diluted earnings per share in Q2 2010 were 2.34 pence per share (10.51 cents per ADS****) compared to 0.95 pence (4.69 cents per ADS****) in Q2 2009. 

Balance sheet

Intangible assets at 30 June 2010 were £574.1 million, comprising goodwill of £556.0 million and other intangible assets of £18.1 million, compared to £549.0 million and £21.8 million respectively at 31 March 2010.

Total accounts receivable were £91.8 million at 30 June 2010, comprising £80.0 million of trade receivables and £11.8 million of amounts recoverable on contracts, compared to £57.9 million at 31 March 2010, comprising £45.0 million of trade receivables and £12.9 million of amounts recoverable on contracts. Days sales outstanding (DSOs) were 34 at 30 June 2010 compared to 26 at 31 March 2010. 

Cash flow and interim dividend

Net cash was £202.3 million at 30 June 2010 compared to £196.0 million at 31 March 2010. Normalised free cash flow in Q2 2010 was £30.4 million.

In respect of the year to 31 December 2010, the directors are declaring an interim dividend of 1.16 pence per share, an increase of 20% over the 2009 interim dividend of 0.97 pence per share. This interim dividend will be paid, out of the UK GAAP distributable reserves of ARM Holdings plc, on 4 October 2010 to shareholders on the register on 3 September 2010.

Backlog

Group order backlog at the end of Q2 2010 is up more than 20% sequentially.  This is ARM’s highest ever backlog, driven partly by long-term strategic deals such as the multi-year architecture license signed with Microsoft and licenses signed with lead-customers for the Eagle processor.  Based on the revenue recognition profile of these deals and the mix of potential deals in the opportunity pipeline, prospects for backlog in the second half of 2010 remain promising. 

Operating review

Processor licensing

A total of 17 processor licenses were signed in Q2. 

Microsoft signed a multi-year architecture license, to be at the forefront of working with ARM technology, across a broad range of businesses, addressing multiple application areas. 

Eleven of the licenses were for ARM’s advanced Cortex™ processors, including a third lead-customer for ARM’s next generation Cortex-A class processor codenamed “Eagle” for use in mobile and consumer electronics and four licenses for other Cortex-A class processors.  Six of the Cortex licenses were Cortex-M class processors mainly for use in microcontrollers. 

In addition, three companies furthered their commitment to Mali, ARM’s graphics processor, in digital TVs and mobile computers.  There was one new license during the quarter and a further two customers extended the period of the license grant from a per-use to multi-year term. 

Non-mobile devices continue to be a major driver for processor licensing with thirteen of the new processor licenses being signed for a broad range of digital products such as microcontrollers, intelligent sensors, medical applications, smart energy meters, and digital TVs.  The remaining four licenses were signed for use in mobile devices from mobile computers to low-cost smartphones.

During the quarter Freescale, a leading microcontroller company, announced that they are launching their first major new family of more than 200 ARM-processor based microcontrollers.  ARM is already the highest shipping architecture in the 32-bit microcontroller market and this commitment is a further demonstration of the growing applicability and adoption of ARM’s technology in this cost-sensitive market. 

Q2 2010 and Cumulative Processor Licensing Analysis

* Adjusted for licenses that are no longer expected to generate royalties

Processor royalties

Royalties are recognised one quarter in arrears with royalties in Q2 generated from semiconductor unit shipments in Q1. PD underlying royalty revenues in Q2 2010, excluding catch-up royalty revenues, increased 54% year-on-year.  This compares with industry revenues increasing by less than 40% in the shipment period (i.e. Q1 2010 compared to Q1 2009), demonstrating ARM’s market share gains over the last 12 months.

Q2 processor royalty revenue came from the sales of 1.4 billion ARM technology-based chips.  The Cortex family now represents 6% of units shipped up from 1 % in the same quarter one year ago.  This increase is primarily due to shipments of Cortex-M class processors in microcontrollers and wireless networking chips, and an increase in Cortex-A shipments driven by high-end smartphones adopting smarter applications processors.

Q2 2010 Processor Unit Shipment Analysis*

* These calculations do not include any units from catch-up royalties as these shipments were from prior quarters

ARM continued to gain share in non-mobile end-markets.  Shipments of ARM technology-based microcontrollers grew more than 130% year on year, compared to 80% growth for the overall microcontroller market.  Part of this growth was due to an increase in sales of Cortex-M class based chips.  These chips go into a wide range of price sensitive markets such as toys, consumer white-goods and industrial controllers.  This growth in microcontrollers looks set to continue with leading microcontroller companies, Freescale and NXP, both announcing ARM Cortex-based microcontroller products in recent months.  In addition, leading FPGA vendors, Actel and Xilinx, both announced new product lines based on Cortex processors.

During the quarter ARM saw strong growth not only in microcontrollers, but also in other low-cost chips such as Bluetooth and smartcard resulting in the average royalty per chip decreasing to 4.5c in the quarter from 4.8c in the prior quarter and 5.7c in the same quarter last year.

ARM11 and Cortex class processors typically have a higher royalty rate per chip.  As these processors become a greater proportion of overall ARM shipments, we are beginning to see an increase in the average percentage royalty per chip, thereby contributing to the growth in ARM’s overall royalty revenue.

The increasing penetration of smartphones continues to benefit ARM.  In Q2 2010 ARM’s customers reported about a 65% increase in wireless chips sales driven by 50% growth in smartphone shipments. For the quarter, ARM achieved an average of 2.6 ARM technology-based chips per mobile handset, up from 2.4 in the prior quarter, and up from 2.0 a year ago. 

During the quarter, ARM received catch-up royalties of $9.0m in respect of shipments made between 2007 and 2010.  This catch-up royalty was discovered by the customer as part of ARM’s ongoing royalty auditing process.

ARM signed three new licenses in Q2 for royalty-bearing platforms of physical IP, at 65nm and 45nm, with another at 130nm.  The base of platform licenses for physical IP further drives ARM’s future royalty potential.  Cumulatively, by the end of Q2, 73 platform licenses have been signed.

Early in Q3, TSMC signed a license for ARM’s advanced physical IP platforms at 28nm and 20nm.  This long term commitment underlines ARM’s technology strategy to be at the vanguard of developing market-leading physical IP for the latest manufacturing processes.  Semiconductor companies will now be able to reduce their chip implementation costs by selecting ARM’s advanced physical IP for 32nm and 28nm at all of the major foundries.

In addition, ARM has now released production versions of the complete 32nm physical IP platform for manufacturing processes at IBM, GLOBALFOUNDRIES and Samsung.  The ARM engineering teams are now focusing on developing 28nm platforms and are actively engaged in advanced R&D for 22nm and 20nm.

Q2 2010 and Cumulative PIPD Licensing Analysis 

In addition, we signed two further licenses for ARM’s physical IP optimised to enable a Cortex-A9 processor to run at high-speed whilst consuming little power.

PIPD royalties

Physical IP royalties are generated mainly from wafers manufactured in foundries such as TSMC, UMC and GLOBALFOUNDRIES.  Royalties are recognised one quarter in arrears with royalties in Q2 generated from semiconductor unit shipments in Q1.

Underlying PIPD royalties in Q2 2010 were $9.6 million, up 80% year-on-year, reflecting the recovery in the foundry industry.  ARM is now receiving royalty revenue from wafer shipments across eleven different advanced processes at 65nm and below, contributing more than 15% of PIPD’s total royalty revenues.

People

At 30 June 2010, ARM had 1,775 full-time employees, a net increase of 65 since the start of the year, mainly engineers into ARM’s processor R&D team. At the end of June, the group had 726 employees based in the UK, 485 in the US, 207 in Continental Europe, 267 in India and 90 in the Asia Pacific region.

ARM is continuing to invest in its R&D programs and operations, and expects to continue to recruit in H2 2010.

Principal risks and uncertainties

The principal risks and uncertainties faced by the Group that could affect the results in 2010 and beyond are noted within the Annual Report for the year ended 31 December 2009.  These include but are not limited to: ARM's quarterly results may fluctuate significantly and be unpredictable which could adversely affect the market price of ARM ordinary shares; general economic conditions may reduce ARM's revenues and harm its business; and ARM competes in the intensely competitive semiconductor market. There have been no changes to these risks that would materially impact the Group in the foreseeable future. 

Download the ARM Holdings H1 & Q2 2010 Earnings Tables (143Kb PDF)

Statement of directors’ responsibilities

The directors confirm that, to the best of their knowledge, this condensed set of consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union. The interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

An indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

Material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

 The directors of ARM Holdings plc are listed in the ARM Holdings plc Annual Report for the year ended 31 December 2009.

 By order of the Board
Tim Score
Chief Financial Officer
27 July 2010

About ARM
ARM designs the technology that lies at the heart of advanced digital products, from wireless, networking and consumer entertainment solutions to imaging, automotive, security and storage devices. ARM’s comprehensive product offering includes 32-bit RISC microprocessors, graphics processors, video engines, enabling software, cell libraries, embedded memories, high-speed connectivity products, peripherals and development tools. Combined with comprehensive design services, training, support and maintenance, and the company’s broad Partner community, they provide a total system solution that offers a fast, reliable path to market for leading electronics companies. More information on ARM is available at http://www.arm.com.