ARM Holdings plc Reports Results For The First Quarter Ended 31 March 2011

CAMBRIDGE, UK, 27 April 2011—ARM Holdings plc announces its unaudited financial results for the first quarter ended 31 March 2011. ARM continues to see its technology chosen by leading companies for a broad range of end markets, helping to deliver our highest-ever revenues and profits.

Progress on key growth drivers in Q1

• Growth in adoption of ARM^® processor technology
  
  • 39 processor licenses signed for all target end markets
  • Broadcom and LG Electronics both sign subscription licenses, enabling access to a wide range of ARM’s processors for use across multiple end markets
  • Several major semiconductor companies developing chips for set-top-box and digital TV applications licensed ARM technology, for the first time in this application area
  • Long-term strategic agreements deliver further growth in order backlog
• Growth in mobile applications
  • 1.15 billion ARM-processor based chips shipped into mobile devices, including smartphones and tablets
• Growth beyond mobile into consumer electronics and embedded products
  • 0.7 billion ARM-processor based chips shipped into a broad range of end applications, including digital TVs, disk drives and microcontrollers
• Growth in outsourcing of new technology
  • Physical IP: 3 Processor Optimization Packs licenses signed for Cortex™-A family processors, further increasing the royalty opportunity from high-value chips in mobile computers and smartphones
  • Graphics: 7 licenses signed for Mali™, ARM’s advanced graphics processor family

Warren East, Chief Executive Officer, said:

“Influential market leaders are licensing ARM technology to gain access to a growing ecosystem of operating systems, software applications, tools and service providers. Many of these companies have been ARM licensees for many years, and are now deploying ARM technology across a multitude of applications; in mobile, consumer electronics and embedded devices.

This licensing drives ARM’s long-term royalty opportunity. Shipments of ARM-processor based chips increased 33% on the same period last year driven by growth in smartphones, tablets, digital TVs and microcontrollers. ARM’s revenue growth enables us to continue to invest in innovative technology development at the same time as delivering strong increases in profits and cash flow.”

Outlook

ARM has made an encouraging start to 2011 with more leading companies choosing to deploy ARM technology in their products. Looking forward, we anticipate normal seasonality for royalty revenues in the second quarter and, notwithstanding the current uncertainty as to the economic impact of the Japanese earthquake on the semiconductor industry supply chain and end-product markets, we expect that group dollar revenues for the full-year 2011 will be at least in line with current market expectations.

Q1 2011 – Revenue Analysis

¹ Includes catch-up royalties in Q1 2011 of $0.6m (£0.4m) and in Q1 2010 of $0.5m (£0.3m).

* Normalised figures are based on IFRS, adjusted for acquisition-related charges, share-based payment costs, restructuring charges, profit on disposal and impairment of available-for-sale investments and Linaro-related charges. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document, see notes 4.1 to 4.12.

** Net cash generation is defined as movement on cash, cash equivalents, short-term investments and marketable securities, adding back share buybacks, dividend payments, investment and acquisition consideration, restructuring payments, other acquisition-related payments, share-based payroll taxes and Linaro-related charges, and deducting inflows from share option exercises and proceeds from investment disposals – see notes 4.7 to 4.10.

*** 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.

Total revenues

Total dollar revenues in Q1 2011 were $185.5 million, up 29% on Q1 2010. Q1 sterling revenues were £116.0 million, up 26% year-on-year. By comparison dollar revenues for the semiconductor industry were up 13% over the equivalent period^[1].

License revenues and backlog

Total dollar license revenues in Q1 2011 increased by 49% year-on-year to $63.9m, representing 34% of group revenues. License revenues comprised $51.3 million from PD and $12.6 million from PIPD.

During Q1, several Partners entered into long-term commitments to use ARM technology where much of the revenue associated with these agreements will be recognised in future quarters. As a result, group backlog at the end of the quarter was up about 15% sequentially and more than doubled year-on-year, to a record high.

Royalty revenues

Royalties are recognised one quarter in arrears with royalties in Q1 2011 generated from semiconductor unit shipments in Q4 2010. Total dollar royalty revenues in Q1 2011 increased by 27% to $98.6 million, representing 53% of group revenues. Royalty revenues comprised $87.9 million from PD and $10.7 million from PIPD. Total PIPD royalties of $10.7 million included $0.6 million of catch-up royalties.

Development Systems and Service revenues

Sales of development systems in Q1 were down 10% year-on-year to $13.3 million, representing 7% of group revenues. As reported one year ago, Q1 2010 revenues for development systems of $14.8 million were higher than normal partly due to additional revenue coming from backlog from two large software tools deals signed in prior periods reaching payment milestones.

Service revenues in Q1 2011 were up 21% year-on-year to $9.7 million, representing 5% of group revenues. The increase in service revenues is consistent with the strong growth in licensing activity in recent quarters.

Gross margins

Gross margins in Q1 2011, excluding the share-based payment costs of £0.8 million (see below), were 94.4% compared to 93.0% in Q1 2010, reflecting the increasing proportion of royalty revenues.

Operating expenses and operating margin

Normalised income statements for Q1 2011 and Q1 2010 are included in notes 4.11 to 4.12 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.

Normalised operating expenses (excluding acquisition-related and share-based payments) were £60.3 million in Q1 2011 compared to £49.0 million in Q1 2010. Most of the increase in underlying normalised operating expenses between Q1 2010 and Q1 2011 was due to increased investment in the development of next generation technology, with £4 million of the difference, accounted for in general and administrative expenses, relating to the net impact of accounting for derivative instruments. Normalised operating expenses in Q2 2011 (assuming effective exchange rates similar to current levels) are expected to be in the range £58-60 million as ARM continues to invest in R&D programs.

Normalised operating margin was 42.5% in Q1 2011, compared to 40.0% in Q1 2010.

Normalised research and development expenses were £28.7 million in Q1 2011, representing 25% of revenues, compared to £25.2 million in Q1 2010. Normalised sales and marketing costs were £14.0 million in Q1 2011, being 12% of revenues, compared to £12.0 million in Q1 2010. Normalised general and administrative expenses were £17.6 million in Q1 2011, representing 15% of revenues, compared to £11.8 million in Q1 2010.

Total IFRS operating expenses in Q1 2011 were £79.8 million (Q1 2010: £60.2 million) including share-based payment costs and related payroll taxes of £18.6 million (Q1 2010: £8.2 million) and amortisation of intangible assets and other acquisition-related charges of £0.8 million (Q1 2010: £3.0 million).

Total share-based payment costs and related payroll tax charges of £19.5 million in Q1 2011 were included within cost of revenues (£0.8 million), research and development (£11.9 million), sales and marketing (£4.0 million) and general and administrative (£2.8 million). The charge in respect of share-based payments of £19.5 million in Q1 2011 is higher than the recent quarterly run rate due to the impact of the increase in the ARM share price in Q1 on the accounting for such payments. Assuming the share price remains at current levels, we expect the quarterly charge in respect of share-based payments in the remainder of 2011 to be similar to that reported in Q3 and Q4 2010.

Earnings and taxation

Profit before tax was £30.5 million in Q1 2011 compared to £25.9 million in Q1 2010. After adjusting for acquisition-related and share-based payment costs, normalised profit before tax was £50.8 million in Q1 2011 compared to £37.6 millionin Q1 2010. The Group’s effective normalised tax rate was 26.5% (IFRS 29.3%) in Q1 2011 compared to 27.4% (IFRS 24.4%) in Q1 2010.

In Q1 2011, fully diluted earnings per share prepared under IFRS were 1.57 pence (7.57 cents per ADS****) compared to earnings per share of 1.47 pence (6.67 cents per ADS****) in Q1 2010. Normalised fully diluted earnings per share in Q1 2011 were 2.73 pence per share (13.12 cents per ADS****) compared to 2.04 pence per share (9.30 cents per ADS****) in Q1 2010.

Balance sheet

Intangible assets at 31 March 2011 were £531.7 million, comprising goodwill of £520.5 million and other intangible assets of £11.2 million, compared to £532.3 million and £12.1 million respectively at 31 December 2010.

Total accounts receivable were £75.2 million at 31 March 2011, comprising £68.5 million of trade receivables and £6.7 million of amounts recoverable on contracts, compared to £105.7 million at 31 December 2010, comprising £97.0 million of trade receivables and £8.7 million of amounts recoverable on contracts.

Days sales outstanding (DSOs) were 34 at 31 March 2011 compared to 41 at 31 December 2010.  

Cash flow

Total cash (see note 4.5) was £344.3 million at 31 March 2011 compared to £290.1 million at 31 December 2010. Normalised free cash flow in Q1 2011 was £62.9 million. 

Operating review

Processor licensing

A total of 39 processor licenses were signed in Q1.

ARM processor technology is increasingly being chosen for use across companies’ product portfolios. In Q1 several major technology companies licensed ARM processors for multiple end-markets including Broadcom and LG Electronics who both signed a subscription license for access to a range of ARM’s processors.

Non-mobile devices continue to be a major driver for processor licensing with 32 licenses being signed in Q1 for a broad range of digital products such as digital TVs and set-top boxes, microcontrollers, networking and smart energy meters. This included several leading companies, building chips for consumer electronics, choosing to use ARM processors in digital TVs or set-top-boxes for the first time. The remaining 7 licenses were signed for use in mobile devices including smartphones and mobile computers.

Seven of the licenses were for ARM’s advanced Mali graphics processors for use in smartphones, mobile computers and digital TVs. 26 of the licenses were for ARM’s Cortex processors, including the two subscription licenses. Ten licenses were with companies taking their first ARM license.

Q1 2011 and Cumulative Processor Licensing Analysis 

* Adjusted for licenses that are no longer expected to start generating royalties

Processor Design Wins and Ecosystem Development

Over the last few months many leading technology companies have announced their commitment to develop products around the ARM processor portfolio. These included:

• Microsoft announcing their intention to make future versions of their Windows operating systems and Office application software available for low-power ARM-processor based chips;
• The leading baseband modem providers declaring that they would be using ARM processors for their next generation LTE and LTE-Advanced modems;
• Major consumer electronics companies demonstrating their products based on chips containing ARM-technology, such as NDS, a leading pay-TV software provider, who have optimised their InfiniteTV platform for Cortex-A9 and Mali 400 graphics processors. In addition, major digital TV manufacturers Skyworth and Hisense demonstrating their new ARM-processor based Android TVs;
• Important graphics companies demonstrated their software on Mali-400 based chips, including Autodesk who have ported the Scaleform User Interface, used in some of the leading PC- and Console- based games, and Gameloft and Polarbit who have both optimised some of their top gaming titles to run on Mali in high definition 3D graphics.

Many more partner announcements can be found on the ARM website at www.arm.com/news.

Processor royalties

Royalties are recognised one quarter in arrears with royalties in Q1 generated from semiconductor unit shipments in Q4. PD royalty revenues in Q1 2011 increased 32% year-on-year. This compares with industry revenues growing by 13% in the shipment period (i.e. Q4 2010 compared to Q4 2009)^[2], demonstrating ARM’s market share gains over the last 12 months.

Q1 revenue came from the sales of about 1.85 billion ARM technology-based chips, the highest ever shipped in a quarter.

ARM continued to gain share in non-mobile end-markets compared with one year ago. Shipments of ARM technology-based microcontrollers grew 60% year on year, compared to less than 20% growth for the overall microcontroller market^[3]. Part of this growth was due to an increase in sales of Cortex-M series processor based chips, which now represent 12% of units shipped.

The Cortex family now represents 17% of units shipped up from 13% in the prior quarter. This sequential increase is primarily due to shipments of Cortex-M series processors in microcontrollers and wireless networking chips, and an increase in Cortex-A series processor shipments driven by high-end smartphones adopting smarter applications processors. Cortex-A series processors now represents 4% of all shipments, up from 3% in Q4 2010.

Q1 2011 Processor Unit Shipment Analysis

The average royalty per chip increased sequentially from 4.6 cents to 4.8 cents as the strong growth in Cortex-A series processors, which typically command higher average royalty percentages and are normally associated with higher value chips, outweighed the impact of growth in high volume low-cost chips, such as microcontrollers and Bluetooth processors.

The increasing penetration of smartphones and tablets continues to benefit ARM. In Q1 2011 ARM’s customers reported about a 30% year-on year increase in wireless chips sales in Q4 2010, driven by smartphone shipments growing about 80% year-on-year. For the quarter, ARM achieved an average of 2.5 ARM technology-based chips per mobile handset, the same as the prior quarter, and up from 2.1 a year ago.

PIPD licensing

ARM continues to see demand for physical IP optimised for use with processors, especially the Cortex-A series processor. These processor optimisation packs (POPs) enable the licensee to more readily achieve a high-performance, low-power processor implementation through specially optimized physical IP technology. For every chip implemented using a POP, ARM receives a royalty both for the processor in the chip and for the physical IP. During the quarter ARM signed three licenses for POPs bringing the total number of POP licenses to 13. In addition, we signed agreements to create new process optimization packs for Cortex-A family processors at 28 and 20nm.

ARM signed one new license for its royalty-bearing platforms of physical IP at the 130nm node. The base of platform licenses for physical IP further drives ARM’s future royalty potential. Cumulatively, ARM has now signed 78 platform licenses.

ARM is seeing strong demand from fabless semiconductor companies for our physical IP, at 40nm and below, as they transition from older process technology to more advanced nodes. This transition drives ARM’s future royalty revenue as the fabless semiconductor companies start to place wafer orders with our foundry licensees.

Q1 2011 and Cumulative PIPD Licensing Analysis

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 Q1 generated from semiconductor unit shipments in Q4.  

Underlying PIPD royalties in Q1 2011 were $10.1 million, down 1% year on year, similar to the foundry industry as whole. ARM is beginning to benefit as our customers’ high-volume production moves to more advanced nodes at 45nm and below at multiple leading foundries.

People

At 31 March 2011, ARM had 1,922 full-time employees, a net increase of 33 since the start of the year. At the end of March, the group had 788 employees based in the UK, 511 in the US, 221 in Continental Europe, 286 in India and 116 in the Asia Pacific region.

Download the ARM Holdings plc Q1 2011 Financial Results Tables (86K 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.

Source: Semiconductor Industry Association, February 2011. As royalty revenues are recognised one quarter in arrears the “equivalent period” for Q1 2011 is considered to be Q4 2010.

^[2] Source: Semiconductor Industry Association, February 2011

^[3] Source: Semiconductor Industry Association, February 2011

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