ARM Holdings plc Reports Results for the Second Quarter and Half Year Ended 30 June 2012

CAMBRIDGE, UK, 25 July 2012-ARM Holdings plc announces its unaudited financial results for the second quarter and half year ended 30 June 2012.

Progress on key growth drivers in Q2

• Growth in adoption of ARM® processor technology
  • 23 processor licenses signed across key target markets from microcontrollers to mobile computing
  • ARM's momentum in networking continues with an ARMv8 architecture license for intelligent networking applications, and Freescale announcing their first ARM-processor based chips for network infrastructure
• Growth in shipments of chips based on ARM processor technology
  • 2.0 billion chips shipped into a wide range of applications, up 9% year-on-year compared with industry shipments being down 4%
  • Processor royalties grew 14% year-on-year compared with a decline in industry revenues of 7%
• Growth in outsourcing of new technology
  • 3 Mali™ graphics processor licenses signed in Q2, of which two were with new customers for Mali technology
  • 5 physical IP Processor Optimisation Packs licensed, enhancing ARM's royalty opportunity per chip

Warren East, Chief Executive Officer, said:

"ARM's royalty revenues continued to outperform the overall semiconductor industry as our customers gained market share within existing markets and launched products which are taking ARM technology into new markets. This quarter we have seen multiple market leaders announce exciting new products including computers and servers from Dell and Microsoft, and embedded applications from Freescale and Toshiba. In addition, ARM and TSMC announced a partnership to optimise next generation ARM processors and physical IP and TSMC's FinFET process technology.

All of these new products are the result of technology engagements over many years, and ARM's long-term commitment to invest in the development of innovative technology."

Outlook

ARM enters the second half of 2012 with a record order backlog and a robust opportunity pipeline. Relevant data for the second quarter, being the shipment period for ARM's Q3 royalties, points to a small sequential increase in industry revenues. Q4 royalties are harder to predict as macroeconomic uncertainty may impact consumer confidence, and some analysts have become less confident in the semiconductor industry outlook in the second half. However, building on our strong performance in the first half, we expect overall Group dollar revenues for full year 2012 to be in line with market expectations.

Total revenues

Total dollar revenues in Q2 2012 were $213.0 million, up 12% on Q2 2011. Q2 sterling revenues were £135.5 million, up 15% year-on-year.

Half-year dollar revenues in 2012 amounted to $422.4 million, up 12% on H1 2011.

License revenues

Total dollar license revenues in Q2 2012 increased by 12% year-on-year to $78.6 million, representing 37% of Group revenues. License revenues comprised $67.0 million from PD and $11.6 million from PIPD.

Group order backlog at the end of Q2 2012 was up sequentially and is now at its highest ever level. Prospects for order backlog in the second half of 2012 look promising, given the strength of the licensing opportunity pipeline.

Royalty revenues

Royalties are recognised one quarter in arrears with royalties in Q2 2012 generated from semiconductor unit shipments in Q1 2012. Total dollar royalty revenues in Q2 2012 increased by 15% year-on-year to $110.0 million, representing 52% of Group revenues. This compares with industry revenues[1] decreasing by about 7% in the shipment period (i.e. Q1 2012 compared to Q1 2011), demonstrating ARM's continuing market share gains over the last 12 months.

Royalty revenues in Q2 2012 comprised $96.3 million from PD and $13.7 million from PIPD.

Development Systems and Service revenues

Sales of development systems in Q2 were down 4% year-on-year to $13.3 million, representing 6% of Group revenues. Through 2012 ARM is continuing to transition the Development Systems business to focus on microcontroller tools and premium toolkits for multi-core systems. Due to this transition, we expect that full year revenues for development systems will be broadly flat year-on-year. In addition, due to normal seasonality, Q3 revenue for development systems may be down sequentially.

Service revenues in Q2 2012 were up 6% to $11.1 million, representing 5% of Group revenues.

Gross margins

Gross margins in Q2 2012, excluding share-based payment costs of £0.4 million (see below), were 95.1% compared to 94.8% in Q2 2011.

Operating expenses and operating margin

Normalised income statements for Q2 2012 and Q2 2011 are included in notes 12.13 and 12.14 respectively below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.

Normalised operating expenses (excluding acquisition-related, share-based payments, Linaro-related charges and impairments to investments) were £66.0 million in Q2 2012 compared to £66.1 million in Q1 2012 and £59.3 million in Q2 2011. The year-on-year increase in operating expenses in the second quarter is primarily due to the increased investment in our research and development teams over the last 12 months.

Normalised operating expenses in Q2 2012 benefited from the impact of a stronger dollar on the accounting for derivative instruments which has resulted in a net credit of approximately £2 million being included in general and administrative expenses. Normalised operating expenses in Q3 2012 (assuming effective exchange rates similar to current levels) are expected to be in the range £68-70 million as ARM continues to increase investment in research and development programs.

Normalised operating margin was 46.4% in Q2 2012, compared to 44.5% in both Q1 2012 and Q2 2011.

Normalised research and development expenses were £32.8 million in Q2 2012, representing 24% of revenues, compared to £32.3 million in Q1 2012 and £28.9 million in Q2 2011. Normalised sales and marketing expenses were £15.0 million in Q2 2012, being 11% of revenues, compared to £15.3 million in Q1 2012 and £13.6 million in Q2 2011. Normalised general and administrative expenses were £18.2 million in Q2 2012, representing 13% of revenues, compared to £18.5 million in Q1 2012 and £16.8 million in Q2 2011.

Total IFRS operating expenses in Q2 2012 were £77.3 million (Q2 2011: £78.9 million) including share-based payment costs and related payroll taxes of £7.9 million (Q2 2011: £11.7 million), and amortisation of intangible assets and other acquisition-related charges and impairment of investments of £3.4 million (Q2 2011: £7.9 million).

Total share-based payment costs and related payroll tax charges of £8.3 million in Q2 2012 were included within cost of revenues (£0.4 million), research and development (£5.5 million), sales and marketing (£1.5 million) and general and administrative (£0.9 million).

Earnings and taxation

Profit before tax was £54.8 million in Q2 2012 compared to £33.8 million in Q2 2011. After adjusting for acquisition-related and share-based payment costs, and disposal and impairment of investments, normalised profit before tax was £66.5 million in Q2 2012 compared to £54.2 million in Q2 2011. The Group's effective normalised tax rate was 25% (IFRS 28%) in Q2 2012 compared to 24% (IFRS 21%) in Q2 2011. The Group's effective normalised tax rate for the full year 2012 is estimated to be approximately 25%.

In Q2 2012, fully diluted earnings per share were 2.83 pence (13.32 cents per ADS) compared to earnings per share of 1.93 pence (9.31 cents per ADS) in Q2 2011. Normalised fully diluted earnings per share in Q2 2012 were 3.58 pence per share (16.86 cents per ADS) compared to 2.98 pence (14.34 cents per ADS) in Q2 2011.

Balance sheet

Property, plant and equipment has increased from £18.1 million at 31 December 2011 to £34.1 million at 30 June 2012 mainly as a result of the construction and fit-out of a new Data Centre Facility in Cambridge.

Intangible assets at 30 June 2012 were £551.6 million, comprising goodwill of £537.6 million and other intangible assets of £14.0 million, compared to £528.2 million and £12.6 million respectively at 31 March 2012.

Total accounts receivable were £106.7 million at 30 June 2012, compared to £92.8 million at 31 March 2012.

Days sales outstanding (DSOs) were 43 at 30 June 2012 compared to 38 at 31 March 2012.

Cash flow and interim dividend

Normalised free cash flow in Q2 2012 was £46.9 million. Total cash (see note 12.6) was £495.9 million at 30 June 2012 compared to £469.2 million at 31 March 2012.

In respect of the year to 31 December 2012, the directors are declaring an interim dividend of 1.67 pence per share, an increase of 20% over the 2011 interim dividend of 1.39 pence per share. This interim dividend will be paid, out of the UK GAAP distributable reserves of ARM Holdings plc, on 4 October 2012 to shareholders on the register on 7 September 2012.

Operating review

Processor licensing

A total of 23 processor licenses were signed in Q2 2012.

Of the 23 licenses signed, six were for ARM's advanced Cortex™-A series processors. This included a further licensee for ARM's big.LITTLE technology whereby a company licenses both a "big" Cortex-A15 processor and a "LITTLE" Cortex-A7 processor. Twelve companies now have access to big.LITTLE technology, which delivers both higher performance and lower power in mobile and computing applications.

ARM also signed an ARMv8 architecture license for use in intelligent networking devices. Over the last few years ARM has seen increasing demand for the use of its technology in high-end networking applications such as base station equipment, routers and switches, and backhaul infrastructure. Power consumption is becoming an important requisite for networking equipment and semiconductor companies are increasingly turning to ARM technology to deliver improved performance per Watt. In addition to the architecture licensee mentioned, companies such as Freescale, HiSilicon, LSI, Texas Instruments and Xilinx have recently announced choosing ARM technology in their networking products.

Eleven of the licenses signed in Q2 were for Cortex-M class processors for use in a wide range of applications, from wireless connectivity chips and touchscreen controllers found in mobile and mobile computing devices to deeply embedded processors for automotive applications and general purpose microcontrollers. Two of the Cortex-M class licenses were for Cortex-M0+, ARM's smallest and most power efficient processor to date.

ARM has continued to see semiconductor companies adopting ARM technology for the first time with five of the 23 licenses signed in Q2 2012 being with companies taking their first ARM license. These licenses were for use in a broad range of end applications, including portable media players, video surveillance systems and embedded microcontrollers.

Three of the licenses were for ARM's Mali graphics processors for use in mobile and digital TV (DTV), including one for the Mali-T600 series, ARM's most advanced family of graphics processors. The Mali-T600 series enable the combination of ARM and Mali processors into a unified computing sub-system, delivering the most efficient use of all the resources on the system-on-chip. The digital TV design win will further ARM's position as the market leader for graphics processors in DTVs. The mobile licenses were both for smartphones and tablets and will strengthen ARM's leading position in Android tablets.

Processor Design Wins and Ecosystem Development

Over the last few months multiple market leaders have announced exciting new products which are taking ARM technology into new markets. These included:

• At Computex, in Taiwan, Asus, Acer and Toshiba announced Windows on ARM devices ranging from tablets to laptops
• Microsoft announced that it will release its own Windows RT tablet computer using an ARM-based Tegra processor design from Nvidia
• AMD announced that it had licensed ARM technology for the first time. AMD plan to integrate ARM's Cortex-A5 processors into a security platform to be included with some of their future x86-based system-on-chip designs
• In the server market, Dell announced the development of ARM-based servers for applications such as social networking, cloud hosting, web-servers and off-line analytics
• Calxeda (HP's ARM silicon partner) announced better than expected benchmarks for its Cortex-A9 based servers, stating that they offer a 15X performance per Watt advantage versus current servers
• Freescale announced that its first networking products based around ARM's Cortex-A class technology will start shipping in H2 2013
• In the embedded space, Freescale also announced the industry's first wireless solution built on the ARM Cortex-M4 processor for smart energy, smart metering and building control applications. Toshiba launched a Cortex-M0 based microcontroller family specifically designed for smart metering, and NXP announced its new range of Cortex-M0 processors for low-power USB microcontrollers used in applications such as gaming mice and keyboards.

Processor royalties

Royalty revenues are recognised one quarter in arrears with royalties reported in Q2 2012 generated from semiconductor chip shipments in Q1 2012. Q2 revenue came from the sales of about 2 billion ARM technology-based chips, the highest ever shipped in a quarter.

ARM's average royalty revenue per chip in Q2 2012 was 4.8 cents, up from 4.5 cents one year ago. This increase is mainly due to:

• Integration of multiple ARM processors into a single chip
• Higher royalty percentages from chips incorporating Cortex-A family processors
• Increased shipments of chips containing a Mali graphics processor.

ARM typically receives a higher average royalty percentage from chips that contain multiple ARM processors. In Q2 2012, ARM customers reported shipping nearly twice as many integrated Wi-Fi and Bluetooth chips compared with the same quarter last year. We also often receive a higher royalty per chip when the applications processor and baseband modem in a mobile phone are integrated together.

Shipments of chips based on Cortex-A family processors were up nearly 100% year-on-year, driven by high-end smartphones, mobile computers and digital TVs adopting smarter applications processors. Shipments of Cortex-A class processors now represent 8% of all units shipped, up from 4% a year ago. As well as commanding a higher royalty percentage, Cortex-A processor-based chips are normally associated with higher value chips. In addition, an increasing number of these chips also contained Mali graphics, which provides an additional royalty per chip.

The benefit arising from the combination of more integrated chips and more Cortex-A family and Mali based chips increased the average royalty revenue per chip in mobile and in consumer electronics by 12% and 6% respectively.

The growth of ARM processors in lower cost chips such as microcontrollers, smartcards and sensors can reduce the overall average and in Q2 2012 nearly half a billion ARM based microcontrollers and smartcards were sold. This was an increase of 20% compared to less than 10% growth for the overall microcontroller market[2].

PIPD licensing

During the quarter ARM signed a multi-year collaboration with TSMC to develop optimised next generation 64-bit ARM processors and physical IP with TSMC's FinFET process technology. The royalty-bearing platform agreement will enable ARM's partners to implement their systems-on-chip using state-of-the-art FinFET silicon for mobile, computing and enterprise markets that require both high performance and energy efficiency.

ARM also signed a platform license with a leading foundry at 130nm for hybrid digital/mixed-signal applications. Cumulatively, 92 physical IP platform licenses have now been signed and it is this base of platform licenses that help drive ARM's future royalty potential.

ARM continues to see strong 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 optimised 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 five licenses for POPs bringing the total number of POPs licensed to 32.

Q2 2012 and Cumulative PIPD Licensing Analysis

ARM's physical IP is used by fabless semiconductor companies to implement their chip designs. During the quarter, ARM continued to see strong demand from these companies to use physical IP at advanced nodes, with a further four leading technology companies choosing to use ARM's advanced physical IP at 28nm. As our partners transition from older process technology to more advanced nodes so this progression helps to drive ARM's future royalty revenue.

PIPD royalties

Physical IP royalties are generated mainly from chips manufactured in foundries. Royalties are recognised one quarter in arrears with royalties in Q2 generated from semiconductor unit shipments in Q1.

Underlying PIPD royalties in Q2 2012 were $12.2 million, up 11% year on year. ARM continues to benefit from our customers' high-volume production moving to more advanced nodes at 45nm and below at multiple leading foundries.

People

At 30 June 2012, ARM had 2,253 full-time employees, a net increase of 137 since the start of the year. At the end of June, the Group had 921 employees based in the UK, 573 in the US, 279 in Continental Europe, 317 in India and 163 in the Asia Pacific region.

Financial Tables

To read financial tables, click here

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.

[1] Source: Semiconductor Industry Association, May 2012

[2] Source: Semiconductor Industry Association, May 2012