ARM Holdings plc Reports Results for the Third Quarter and Nine Months Ended 30 September 2010

CAMBRIDGE, UK, 26 October 2010—ARM Holdings plc announces its unaudited financial results for the third quarter and nine months ended 30 September 2010. Continuing adoption of ARM technology by leading semiconductor companies in a broad range of end-markets is delivering strong revenues, profits and cash.

A presentation of the results will be webcast today at 08:30 BST at www.arm.com/ir

Progress on key growth drivers

• Growth in mobile applications - ARM opportunity increasing with mobile phones, smart phones and now mobile computers growing strongly.
  • 900 million ARM®-processor based chips were shipped in mobile devices.
  • 4 processor licenses signed for mobile phone and computing applications.
• Growth beyond mobile - Increased share in target markets such as consumer electronics and embedded products.
  • 600 million ARM-processor based chips shipped in everything from toys to televisions, cameras to cars.
  • 18 processor licenses signed for a broad range of applications including advanced processors for use in new markets such as network infrastructure and sensors.
• Growth in new technology outsourcing
  • 3 licenses for royalty-bearing platforms of physical IP at advanced nodes and mature nodes including TSMC licensing physical IP for 28nm and 20nm, as previously reported.
  • 2 licenses for Mali™, ARM’s advanced graphics processor

Warren East, Chief Executive Officer, said:

"Q3 was a good quarter for ARM. Not only are we benefiting from growth in applications where we are the established market leader, including in smartphones and mobile computers, but we are gaining share in markets like digital TV and microcontrollers.  Our partners are also starting to develop chips in new markets for ARM, such as servers and laptops, creating longer-term opportunities.  In addition, both physical IP and Mali graphics performed well with important license wins and increasing royalty revenues.

Given the broadening growth opportunities that are available to us, we have accelerated investment in R&D in the first nine months of the year whilst also increasing both profits and cash generation."

Outlook

We enter the final quarter of 2010 with positive momentum and we expect sequential group dollar revenue growth in the fourth quarter.

    Looking further ahead, despite an uncertain macro-economic environment, ARM remains well positioned for growth with leading semiconductor companies increasingly adopting ARM technology for a broadening range of end-markets.

¹ Includes catch-up PIPD royalties in Q3 2010 of $0.6m (£0.4m) and in Q3 2009 of $nil.

² Includes catch-up PD royalties in YTD 2010 of $9.0m (£6.2m).

³ Includes catch-up PIPD royalties in YTD 2010 of $1.4m (£0.9m) and in YTD 2009 of $4.2m (£2.6m).

Normalised non-GAAP figures are based on IFRS, adjusted for acquisition-related charges, share-based payment costs, restructuring charges, Linaro-related charges and profit on disposal and impairment of available-for-sale investments. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document, see notes 5.1 to 5.16.

Net cash generation is defined as movement on cash, cash equivalents, short-term investments and marketable securities, adding back dividend payments, investment and acquisition consideration, restructuring payments, other acquisition-related payments, Linaro-related charges, and share-based payroll taxes, and deducting inflows from share option exercises and proceeds from investment disposals – see notes 5.8 to 5.12.

Dollar revenues are based on the group’s actual dollar invoicing, where applicable, and using the rate of exchange applicable on the date of the transaction for invoicing in currencies other than dollars.  Approximately 95% of invoicing is in dollars.

Financial review
(IFRS unless otherwise stated)

Total revenues

Total dollar revenues in Q3 2010 were $158.1 million, up 29% versus Q3 2009.  Q3 sterling revenues of £100.4 million were up 34% year-on-year.

Year-to-date dollar revenues amounted to $451.7 million, up 29% on 2009.

License revenues

Total dollar license revenues in Q3 2010 increased by 33% year-on-year to $52.7m, representing 33% of group revenues.  License revenues comprised $42.2 million from PD and $10.5 million from PIPD. 

Royalty revenues

Total dollar royalty revenues in Q3 2010 increased year-on-year by 31% to $81.7 million, representing 52% of group revenues. Royalty revenues comprised $70.4 million from PD and $11.3 million from PIPD.

Royalties are recognised one quarter in arrears with royalties in Q3 generated from semiconductor unit shipments in Q2.  PD royalty revenues in Q3 2010 increased 33% year-on-year.  This compares with industry revenues¹ increasing by about 25% in the shipment period (i.e. Q2 2010 compared to Q2 2009), demonstrating ARM’s continuing market share gains over the last 12 months.

Total PIPD royalties of $11.3 million included $0.6 million of catch-up royalties. Underlying royalty revenues increased by 16% year-on-year.

¹ Source: Semiconductor Industry Association, July 2010

Development Systems and Service revenues

Sales of development systems in Q3 2010 were $15.6 million, an increase of 11% year-on-year and representing 10% of group revenues.  Three large software tools deals were signed during the quarter and, given that deals of this type are infrequent, development system revenues in Q4 2010 are expected to be closer to Q2 2010 revenues of $13.4m.

Service revenues in Q3 2010 were $8.1 million, an increase of 15% year-on-year and representing 5% of group revenues.

Gross margins

Gross margins in Q3 2010, excluding the share-based payments charge of £0.9 million (see below), were 94.2% compared to 94.9% in Q2 2010 and 92.9% in Q3 2009.

Operating expenses and operating margin

Normalised operating expenses (excluding acquisition-related, share-based payment, Linaro™-related and restructuring charges) were £56.6 million in Q3 2010 compared to £52.1 million in Q2 2010 and £46.0 million in Q3 2009.   The sequential increase is largely due to the impact of a weaker dollar on the accounting of derivative instruments which has resulted in a net charge being included in general and administrative expenses in Q3 compared to a net credit in Q2.  Normalised operating expenses in Q4 2010 (assuming effective exchange rates similar to current levels) are expected to be in the range £56-58 million.

Normalised research and development expenses were £26.4 million in Q3 2010, representing 26% of revenues, compared to £26.4 million in Q2 2010 and £21.5 million in Q3 2009.  Normalised sales and marketing costs in Q3 2010 were £13.3 million, being 13% of revenues, compared to £12.8 million in Q2 2010 and £11.9 million in Q3 2009. Normalised general and administrative expenses in Q3 2010 were £16.9 million, representing 17% of revenues, compared to £12.9 million in Q2 2010 and £12.6 million in Q3 2009.  

Normalised operating margin in Q3 2010 was 37.7% compared to 42.7% in Q2 2010 and 31.7% in Q3 2009.

Total operating expenses in Q3 2010 were £74.9 million (Q3 2009: £62.2 million) including amortisation of intangible assets and other acquisition-related charges of £2.9 million (Q3 2009: £3.8 million), £12.2 million (Q3 2009: £5.8 million) in relation to share-based payments and related payroll taxes and Linaro-related charges of  £3.2 million (Q3 2009: £nil). Total share-based payments and related payroll tax charges of £13.1 million in Q3 2010 were included within cost of revenues (£0.9 million), research and development (£7.9 million), sales and marketing (£2.5 million) and general and administrative (£1.8 million). Normalised income statements for Q3 2010 and Q3 2009 are included in notes 5.13 and 5.14 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.

As reported in 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.  At the end of last quarter Linaro was a 100% controlled subsidiary of ARM, but as other members have now taken up board seats, Linaro ceased to be controlled as a subsidiary at the end of Q3.  Linaro-related charges in Q3 2010 of £3.2 million were charged to the profit and loss account.  No further Linaro-related charges are expected to be incurred in the 12 months post launch (June 2010).

Earnings and taxation

Profit before tax in Q3 2010 was £19.6 million compared to £7.7 million in Q3 2009. After adjusting for acquisition-related, share-based payments, Linaro-related and restructuring charges, normalised profit before tax in Q3 2010 was £38.8 million compared to £24.3 million in Q3 2009.  The Group's effective normalised tax rate in Q3 2010 was 27.5% (IFRS: 24.5%) giving a year-to-date normalised tax rate of 27.4% (IFRS: 25.1%). The tax rate under IFRS is lower than the normalised tax rate due primarily to the impact of tax credits arising on share-based payments.

In Q3 2010, fully diluted earnings per share prepared under IFRS were 1.09 pence (5.16 cents per ADS¹) compared to earnings per share of 0.53 pence (2.54 cents per ADS) in Q3 2009. Normalised fully diluted earnings per share in Q3 2010 were 2.08 pence per share (9.82 cents per ADS) compared to 1.34 pence (6.44 cents per ADS) in Q3 2009. 

¹ Each American Depositary Share (ADS) represents three shares.

Balance sheet

Intangible assets at 30 September 2010 were £543.9 million, comprising goodwill of £529.0 million and other intangible assets of £14.9 million, compared to £556.0 million and £18.1 million respectively at 30 June 2010.

Total accounts receivable were £70.7 million at 30 September 2010, comprising £56.8 million of trade receivables and £13.9 million of amounts recoverable on contracts, compared to £91.8 million at 30 June 2010, comprising £80.0 million of trade receivables and £11.8 million of amounts recoverable on contracts. Days sales outstanding (DSOs) were 41 at 30 September 2010 compared to 34 at 30 June 2010 and 43 at 30 September 2009.

Cash flow

Net cash at 30 September 2010 was £251.9 million compared to £202.3 million at 30 June 2010. Normalised free cash flow in Q3 2010 was £65.0 million.

Operating review
Backlog

Group order backlog at the end of Q3 2010 is up more than 10% sequentially. This is ARM’s highest ever backlog, driven partly by long-term strategic deals, including TSMC licensing ARM’s advanced physical IP and a major semiconductor company acquiring an architecture license.

Based on the revenue recognition profile of these deals and the mix of potential deals in the opportunity pipeline, prospects for backlog in the last quarter of 2010 remain promising.

Processor licensing

A total of twenty-two processor licenses were signed in Q3.

The majority of these licenses were for non-mobile applications.  Eight licenses where signed for enterprise applications with Cortex™-A series processors taking ARM technology into new markets such as high-end networking infrastructure products and servers.  Ten licenses were signed for consumer electronics and embedded applications such as digital TVs, microcontrollers and sensors.  Four licenses were signed for ARM processors in mobile applications such as chips for baseband modems and for the main applications processors in smartphones and mobile computers.

Eighteen of the licenses were for ARM’s advanced Cortex and Mali™ graphics, including five Cortex-A9 processor licenses for use across all of ARM’s target markets.  In addition, a major semiconductor company became an architecture licensee with a focus on server applications.

Q3 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 Q3 generated from semiconductor unit shipments in Q2.  PD dollar royalty revenues in Q3 2010 increased 33% year-on-year.  This compares with industry revenues increasing by about 25% in the shipment period (i.e. Q2 2010 compared to Q2 2009), demonstrating ARM’s market share gains over the last 12 months.

Q3 processor royalty revenue came from the sales of 1.5 billion ARM technology-based chips.  The Cortex family now represents 9% of units shipped up from 2% in the same quarter one year ago.  This increase is primarily due to Cortex-M series shipments in microcontrollers and wireless networking chips, and Cortex-A series shipments driven by high-end smartphones adopting smarter applications processors.

This continuing growth of Cortex-A series shipments has resulted in the average royalty per chip increasing to 4.7c this quarter from 4.5c in the previous quarter.

Q3 2010 Processor Unit Shipment Analysis*

ARM continued to gain share in non-mobile end-markets.  Shipments of ARM processor-based microcontrollers grew over 65% year-on-year, compared to about 50% for the overall microcontroller market.  The majority of this growth was due to a tenfold increase in the sale of Cortex-M based chips for microcontrollers.

The rapid growth of smartphones and the introduction of mobile computers, such as tablets, continue to benefit ARM.  In Q3 2010 ARM’s customers reported about a 35% year-on-year increase in shipments of mobile handset chips, driven by a 50% growth in smartphone shipments. For the quarter, ARM achieved an average of 2.7 ARM technology-based chips per mobile handset¹, up from 2.6 in the prior quarter, and up from 2.1 a year ago.  ARM’s momentum in mobile computing continued with leading OEMs, such as Dell, RIM and Samsung, announcing mobile computers utilizing ARM technology-based chips, and with Beijing Nufront announcing a high-performance chip for Linux-based laptops for China, with a 2GHz dual-core Cortex-A9 processor and Mali graphics processor.

¹ The number of chips per handset does not include mobile computers, for example tablets and netbooks

ARM signed three physical IP licenses in Q3 for new royalty-bearing platforms, at the 20, 28, and 65 nm nodes.  Each platform contains a wide range of physical IP technology components including standard cell libraries and memories.  Cumulatively, 76 physical IP licenses have now been signed and it is this base of platform licenses that is driving ARM’s future royalty potential.

As already reported, at the beginning of the quarter TSMC licensed two platforms at the advanced 28 and 20 nm nodes. Our early access to TSMC’s process technology puts ARM in a good position to generate royalties as semiconductor companies start fabrication on these advanced nodes.  In addition, a leading foundry licensed another physical IP platform to create a high-density variant of one of their process nodes.

ARM is seeing increasing demand for physical IP optimised for use with our advanced Cortex-A series processors.  These packages enable the licensee to reproduce a high-performance, low-power processor implementation using pre-built components.  During the quarter we signed three licenses for Cortex-A9 processor optimisation packages at 32 and 40nm nodes, for use in digital TV, networking infrastructure and server applications.

Q3 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 chips manufactured in foundries such as TSMC, UMC and GLOBALFOUNDRIES.  Royalties are recognised one quarter in arrears with royalties in Q3 generated from semiconductor unit shipments in Q2.

Underlying PIPD royalties in Q3 2010 were $10.7 million, up 11% sequentially and 16% higher than the $9.2 million reported in Q3 2009.  More than 30 companies are now building chips using ARM’s advanced processors at 65nm and below, together driving royalties from 10 platform licenses.  In Q3, these nodes generated about 30% of PIPD’s royalties, up from about 15% a year ago.   

People

At 30 September 2010, ARM had 1,861 full-time employees, a net increase of 151 since the start of the year, mainly engineers into ARM’s processor R&D team. At the end of Q3, the group had 773 employees based in the UK, 496 in the US, 219 in Continental Europe, 272 in India and 101 in the Asia Pacific region.

Given the broad range of opportunities, ARM is investing in its R&D programs and operations, and expects some further recruitment in Q4 2010.

Principal risks and uncertainties

The principal risks and uncertainties faced by the Group that could affect the results for the first nine months of 2010 and beyond are noted within the Annual Report on Form 20-F for the fiscal year ended 31 December 2009.  There have been no changes to these risks that would materially impact the Group in the foreseeable future.  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.

Download the ARM Holdings Q3 2010 Earnings Tables (86Kb PDF)

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.