ARM Holdings PLC Reports Results For The Fourth Quarter And Full Year 2013

CAMBRIDGE, UK, 4 FEBRUARY 2014 — ARM Holdings plc announces its unaudited financial results for the fourth quarter and full year ended 31 December 2013.

* Normalised figures are based on IFRS, adjusted for acquisition-related charges, share-based payment costs, profit or loss on disposal and impairment of available-for-sale investments, share of results in joint venture, Linaro™-related charges, intangible amortisation, and exceptional items. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document, see notes 12.13 to 12.16.

** Net cash generation is defined as movement on cash, cash equivalents, short-term and long-term deposits, adding back dividend payments, investment and acquisition consideration, other acquisition-related payments, share-based payroll taxes, investment in joint venture, payments to Linaro, cash impact of exceptional items and deducting inflows from share option exercises and investment disposal proceeds – see notes 12.8 to 12.12.

Q4 Financial Highlights

• Group revenues in US$ up 15% year-on-year (£ revenues up 15% year-on-year)
• Processor licensing revenue in US$ up 26% year-on-year
• Processor royalty revenue in US$ up 7% year-on-year (relevant industry revenues up 2-3% year-on-year¹)
• Normalised operating expenses of £88.1 million. IFRS operating expenses of £170.3 million include a non-cash exceptional charge of £59.5 million related to the impairment of an asset (see page 5 for details)
• Normalised profit before tax and earnings per share up 19% and 30% year-on-year respectively
• IFRS PBT down 79% year-on-year as a result of the exceptional charge; IFRS loss per share of 0.4 pence in Q4 2013 compared to earnings per share of 3.0 pence in Q4 2012
• Full year 2013 dividend increased by 27% to 5.7p

¹ Source: Semiconductor Industry Association, December 2013

Progress on key growth drivers in Q4

• Growth in adoption of ARM^® processor technology
  • 26 processor licences signed for a broad range of applications from smartphones and mobile computers to medical devices, wearables and the Internet of Things
  • Momentum continues in computing, servers and networking applications with the signing of an ARMv8 architecture licence and two ARMv8 processor licences
• Growth in shipments of chips based on ARM processor technology
  • 2.9 billion chips shipped, up 16% year-on-year with faster growth in low-cost chips in entry-level mobile devices, microcontrollers and smart sensors

Outlook

After a strong licensing performance in 2013 which saw ARM make good progress across its established markets as well as making significant in-roads in servers and smart embedded applications, we enter 2014 with a strong opening order backlog and a healthy pipeline of licensing opportunities.

ARM's full year 2013 processor royalty revenue grew faster than the overall semiconductor industry by 18 percentage points, demonstrating ARM's continuing market share gains, although the degree of outperformance was impacted by slower sales of chips for high-end smartphones in the second half of the year. Despite slower growth in one end market we expect full year 2014 processor royalty revenues to grow at a similar rate to that reported over the last three years.

Assuming the outlook for the semiconductor industry improves as generally anticipated, we expect Group dollar revenues for the full year 2014 to be in line with market expectations.

Simon Segars, Chief Executive Officer, said:

“ARM’s strategy is for our technology to continue to gain share in long-term growth markets, such as smartphones, tablets, enterprise equipment and embedded computing, and to increase the royalty percentage ARM receives from each device. ARM saw good progress in Q4 as our latest technology was chosen by major companies in all our target markets, with further licenses signed for our latest ARMv8-A processors, Mali graphics processors and physical IP technology. These design wins will help to drive ARM’s future royalty revenues.

ARM’s Partners reported that they had shipped 2.9 billion ARM-based chips, a record number despite slower growth of chips for premium smartphones. This takes our cumulative shipments since 1993 to more than 50 billion chips, with over 10 billion reported as shipped in 2013 alone.

In 2013, we continued to improve profitability and increase returns to shareholders at the same time as investing in both R&D and the business infrastructure that underpins our future growth.

2014 brings exciting opportunities and challenges as ARM competes in new markets where we are well positioned to succeed with our leading technology, innovative business model and thriving ecosystem of Partners.”

*** Dollar revenues are based on the Group’s actual dollar invoicing and on the rate of exchange applicable on the date of the transaction for invoicing in currencies other than dollars. Over 95% of the Group’s invoicing is in dollars.

Financial review

(IFRS unless otherwise stated)

Total revenues

Total dollar revenues in Q4 2013 were $302.9 million, up 15% versus Q4 2012. Q4 sterling revenues of £189.1 million were up 15% year-on-year.

Full year dollar revenues were $1,117.7 million, up 22% on 2012.

License revenues

Total dollar license revenues in Q4 2013 increased by 27% year-on-year to $127.4 million, representing 42% of Group revenues. License revenues comprised $107.2 million from Processors and $20.2 million from Physical IP.

During Q4, additional Partners entered into long-term commitments to use ARM technology; the revenue associated with these agreements goes into backlog and will be recognised in future quarters when engineering and delivery milestones are achieved. These agreements included an ARMv8 architecture licence and two licences with Partners for ARM’s
Cortex-A50 series processors. Group order backlog at the end of Q4 2013 was down slightly when compared to Q3 2013, and up 17% when compared to Q4 2012.

Full-year dollar licensing revenues were $447.9 million, up 32% on 2012.

Royalty revenues

Royalties are recognised one quarter in arrears, hence royalties in Q4 2013 were generated from semiconductor unit shipments in Q3 2013. Total dollar royalty revenues in Q4 2013 increased by 7% year-on-year to $146.4 million, representing 48% of Group revenues. Royalty revenues comprised $130.4 million from Processors and $16.0 million from Physical IP. Processor dollar royalty revenues in Q4 2013 increased by 7% year-on-year, compared with industry revenues which were up 2-3% over the relevant shipment period (i.e. Q3 2013 compared to Q3 2012).

Full-year Group dollar royalty revenues were $558.9 million, up 18% on 2012. Processor dollar royalty revenues for the full-year increased 19% year-on-year. This compares with industry revenues that increased 1% over the relevant shipment period, being the four quarters from Q3 2012 to Q3 2013.

In Q4 2013 ARM’s processor royalty revenue grew faster than the overall semiconductor industry, however the degree of outperformance was impacted by slower sales of chips for high-end smartphones. ARM’s full-year 2013 processor royalty revenue outperformed the semiconductor industry by 18 percentage points, demonstrating ARM’s continuing market share gains over the last 12 months.

Services, Software and Tools revenues

Service revenues were $14.0 million in Q4 2013, up 22% year-on-year, and $53.8 million for the full-year, up 20% year-on-year. For both Q4 2013 and full-year 2013 service revenues represented 5% of total revenues.

Sales of software and tools in Q4 2013 were $15.1 million, an increase of 8% year-on-year and representing 5% of Group revenues. Full-year software and tools revenues were $57.1 million, up 4% year-on-year.

Gross margins

Gross margin in Q4 2013, excluding share-based payments charges of £0.6 million, was 95.4% compared to 95.1% in Q3 2013 and 95.1% in Q4 2012.

Full-year gross margin, excluding share-based payment charges of £2.1 million, was 94.8%, the same as in 2012.

Operating expenses and operating margin

Normalised income statements for Q4 2013, full-year 2013, Q4 2012 and full-year 2012 are included in notes 12.13 to 12.16 below, which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.

Normalised operating expenses were £88.1 million in Q4 2013, compared to £85.6 million in Q3 2013 and £79.7 million in Q4 2012. Normalised operating expenses in Q4 2013 included charges relating to the foreign exchange revaluation of monetary items and the impact of a weaker dollar on the accounting for derivative instruments, and the write-off of bad debts of about £2 million in aggregate. Normalised operating expenses in Q1 2014 (assuming effective exchange rates similar to current levels) are expected to be in the range £84-86 million as we continue to invest in our research and development teams and in our business infrastructure.

Normalised operating margin was 48.8% in Q4 2013, compared to 48.6% in Q3 2013 and 46.6% in Q4 2012.

Normalised research and development expenses were £38.9 million in Q4 2013, representing 21% of revenues, compared to £35.7 million in Q3 2013 and £36.7 million in Q4 2012. Normalised sales and marketing expenses were £21.3 million in Q4 2013, being 11% of revenues, compared to £19.3 million in Q3 2013 and £18.4 million in Q4 2012. Normalised general and administrative expenses were £27.9 million in Q4 2013 (including the foreign exchange charge referred to above), representing 15% of revenues, compared to £30.6 million in Q3 2013 and £24.6 million in Q4 2012.

Total IFRS operating expenses in Q4 2013 were £170.3 million (Q4 2012: £98.9 million) including share-based payment charges and related payroll taxes of £19.4 million (Q4 2012: £15.6 million), amortisation of intangible assets and other acquisition-related charges of £2.9 million (Q4 2012: £2.4 million), investment impairments, net of profit on disposals, of £0.4 million(Q4 2012: £1.2 million), and a non-cash exceptional charge of £59.5 million (Q4 2012: £nil) (see below).

Total share-based payment charges and related payroll tax charges of £20.0 million in Q4 2013 were included within cost of revenues (£0.6 million), research and development (£12.4 million), sales and marketing (£3.2 million) and general and administrative (£3.8 million).

Total IFRS operating expenses for the full-year 2013 were £521.8 million compared to £336.9 million in 2012.

Impairment of available-for-sale financial asset

In December 2012 it was announced that a consortium of technology companies had formed a company, Bridge Crossing LLC (“BC”), to acquire rights to MIPS Technologies Inc’s portfolio of patents (the Patents) for a total of $350 million. This transaction was completed on 6 February 2013. ARM’s total contribution amounted to $167.5 million, of which $100.5 million was classified within current assets as available-for-sale and $67 million was classified within other intangibles. The available-for-sale financial asset represented ARM’s right to receive cash from the Group's financial interest in the consortium as BC anticipated that a programme of licensing the Patents to third parties would be undertaken. The other intangible asset consists of intellectual property rights that are being amortised over a period of eight and a half years, being the average remaining life of the underlying patent portfolio.

In Q4 2013, BC made a strategic decision not to pursue a licensing programme. As ARM believes that there is significant long-term strategic advantage in owning this intellectual property, the Patents were purchased outright in Q1 2014 for $4m (£2.5m). The patents acquired (approximately 500, granted and pending) are now part of ARM’s portfolio of more than 3,500 patents. As ARM now owns the Patents, there is no future cash to be received from BC, so the available-for-sale financial asset has been impaired, giving rise to a non-cash exceptional charge of £59.5 million.

Earnings and taxation

Profit before tax was £12.2 million in Q4 2013 compared to £59.5 million in Q4 2012. Normalised profit before tax in Q4 2013 was £95.5 million compared to £80.0 million in Q4 2012.

The Group's effective normalised tax rate was 21% in Q4 2013, giving a full-year normalised tax rate of 20% (IFRS: 36% due primarily to the exceptional charge of £59.5 million giving rise to an unrecognised deferred tax asset). The Group’s full-year normalised effective tax rate in 2014 is expected to be around 18%.

In Q4 2013 and including exceptional items, fully diluted losses per share were 0.4 pence (2.2 cents per ADS²) compared to earnings per share of 3.0 pence (14.8 cents per ADS) in Q4 2012. Normalised fully diluted earnings per share in Q4 2013 were 5.3 pence (26.4 cents per ADS) compared to 4.1 pence (19.9 cents per ADS) in Q4 2012.

Full-year 2013 fully diluted earnings per share prepared under IFRS were 7.4 pence compared to earnings per share of 11.5 pence in 2012. Normalised fully diluted earnings per share for 2013 were 20.6 pence per share compared to 14.7 pence per share in 2012.

² Each American Depositary Share (ADS) represents three shares.

Balance sheet

Intangible assets were £608.8 million at 31 December 2013, comprising goodwill of £525.9 million and other intangible assets of £82.9 million, compared to £519.4 million and £11.2 million respectively at 31 December 2012.

Total accounts receivable were £136.2 million at 31 December 2013, compared to £124.5 million at 31 December 2012.

Cash flow and dividend

Net cash generation in Q4 2013 was £77.9 million. Net cash at 31 December 2013 was £706.3 million compared to £670.5 million at 30 September 2013 and £520.2 million at the end of 2012.

The directors recommend payment of a final dividend in respect of 2013 of 3.6p pence per share, up 27%. Taken together with the interim dividend of 2.1 pence per share paid in October 2013, this gives a total dividend in respect of 2013 of 5.7 pence per share, an increase of 27% on the total dividend of 4.5 pence per share in 2012. Subject to shareholder approval, the final dividend will be paid on 16 May 2014 to shareholders on the register on 22 April 2014.

As well as continuing to grow the dividend, the Board intends to undertake a limited share buyback programme to maintain a flat share count over time.

Technology Licensing

Processor licensing

26 processor licences were signed in Q4 2013, with 22 companies. The technology licensed includes ARM’s latest Cortex‑A, Cortex-M™ and Mali processors and will be used in a broad range of end applications, including mobile computers, servers and smart embedded applications.

More than half of the 22 companies were licensing ARM technology for the first time. Many of these new customers are planning to use ARM technology in emerging applications such as healthcare, Internet of Things, and wearable digital devices. During the quarter we signed technology licences with a wide range of companies including telecoms operators, major software companies, equipment manufacturers and OEMs.

Three of the licences signed were for ARM's ARMv8-A 64-bit technology including one architecture licence and two Cortex-A50 series processors. These technologies can be deployed into a broad range of end-markets, including smartphones, tablets, display devices, digital TVs, enterprise networking and low-power server applications.

Demand for ARM’s processors for the embedded market remained strong, with 15 licences signed for ARM’s Cortex-M series technology. ARM has now signed more than 200 Cortex-M licences with over 150 companies. Many of these licences will be used in microcontrollers or applications for the Internet of Things.

ARM also signed four further licences for its Mali graphics processors, including an existing Mali licensee upgrading to the latest Mali-T700 series, and a major semiconductor company licensing Mali for the first time, also choosing the Mali-T700 series.

Q4 2013 and Cumulative Processor Licensing Analysis

* Includes ARM7, ARM9, ARM10 and ARM11

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

*** Includes 1 existing ARM customer taking their first Mali licence

† Four Mali subscription licences reclassified from “Mali” to “Subscription”

Physical IP licensing

ARM’s physical IP is used by fabless semiconductor companies to implement their chip designs. Platform licences are royalty bearing licences that enable foundries to manufacture chips using ARM’s physical IP. Each foundry requires a platform licence for each process node. ARM has signed a full range of platform licences with leading foundries, from 250nm to 14nm.

ARM continues the development of advanced technology physical IP for FinFET process technologies at multiple foundries, and this quarter another two fabless semiconductor companies started to design chips with ARM's physical IP for use in a FinFET process technology. Four companies are now designing chips using ARM's physical IP for FinFET.

In addition, ARM signed a new licence to provide physical IP at 90nm to a foundry choosing to use ARM physical IP for the first time, and an existing customer signed a licence for 40nm physical IP.

ARM also continues to see strong demand for physical IP optimised for use with processors (POP IP). POP IP enables a licensee to more readily achieve high-performance, low-power processor implementations through specially optimised physical IP technology. For every chip implemented using POP IP, ARM receives a royalty both for the processor in the chip and for the physical IP. This quarter ARM signed four further POP licences for Cortex-A processors and one for Mali graphics technology. This included POP licences for our latest Cortex-A50 series processors and Mali-T700 series graphics processors, both for use on 28nm manufacturing processes.

Number of Physical IP Licences*

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

Customers Licensing Multiple ARM Technologies

In some end markets, such as application processors in mobile phones, mobile computers and digital TVs there can be synergies from using multiple ARM technologies in the same system-on-chip design. The system benefits that can be generated include faster time-to-market, reduced development risk and lower cost and higher performance of the resultant chip. For example, this can include two Cortex-A processors combined in a big.LITTLE configuration, coupled with Mali graphics and implemented using ARM’s physical IP (possibly in the form of POP IP). To date ARM has signed 162 Cortex-A licences, 86 Mali licences and 57 POP IP licences. ARM typically receives a percentage of the chip price for each ARM technology included within the chip, so chips that contain multiple ARM technologies can enhance ARM’s overall royalty opportunity.

Processor Design Wins and Ecosystem Development

Many leading technology companies have announced details of their ARM-based product developments in recent months. These included:

• Altera announced a quad-Core ARMv8-A 64-bit chip, manufactured on 14nm Tri-Gate process, for data centre and communications infrastructure.
• AMD announced the imminent sampling of its low-power server SOCs, based on Cortex-A57.
• Amlogic introduced an SOC for digital TVs and set top boxes incorporating a six-core ARM Mali-450 MP graphics processor and a quad-core ARM Cortex-A9 processor, both implemented with ARM Artisan® Physical IP.
• Broadcom announced a new ARMv8-A 64-bit chip for enterprise networking applications.
• IBM announced that it has licensed a broad range of ARM technology for custom chips aimed at wired and wireless communications.
• NVIDIA announced the Tegra K1 for premium mobile computing featuring a Quad-Core ARM Cortex-A15.
• Microchip launched the SSC7102 sensor hub for the Internet of Things containing an ARM Cortex-M4 processor
• Rockchip announced that it has entered into a subscription licence, including ARM’s latest Cortex-A50 series processors and Mali graphics processors, to develop chips for mobile computing and smart home devices.
• ST Microelectronics' released details of its STi8K family for digital home applications based on ARM Cortex-A50 series processors
• Telenor Connexion licensed ARM’s Sensinode software for use in ARM-based Internet of Things technologies. Telenor Connexion will use these devices to provide standards-based, energy-efficient and secure machine-to-machine (M2M) services.

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

Technology Royalties

Processor royalties

Q4 revenue came from the sales of about 2.9 billion ARM-based chips, up 16% year-on-year.

ARM continued to gain share across target markets. Sales of ARM processor-based chips into embedded electronics, including microcontrollers, smartcards and wearable computing, grew 35% year-on-year. Enterprise networking also did well, growing nearly three-fold year-on-year.

Chips using Cortex-A class and Mali graphics processors grew strongly in Q4. More than 520m Cortex-A class processors were reported as shipped, nearly twice the number as a year ago, and about 140m Mali graphics processors were reported as shipped, taking the total for the year to about 400m, up from 150m in 2012.

ARM’s average royalty revenue per chip in Q4 was 4.5c compared with 4.8c a year ago. This decline is mainly due to the mix of chips sold with an increase in the number of ARM based microcontrollers and smartcards, where the chip average price is less than one US dollar, and also lower than is typical year-on-year growth in higher value applications processors in premium smartphones. ARM’s average royalty revenue per chip for full year 2013 was 4.8c, the same as in 2012.

Q4 2013 Processor Unit Shipment Analysis

Physical IP royalties

Royalties are recognised one quarter in arrears, with royalties in Q4 generated from wafer shipments in Q3. Physical IP royalty revenues in Q4 2013 were $16.0 million, up 7% year-on-year.

People

At 31 December 2013, ARM had 2,833 full-time employees, a net increase of 441 since the start of the year. More than 70% of these new employees are engineers joining ARM’s processor R&D teams. At the end of the quarter, the Group had 1,185 employees based in the UK, 669 in the US, 355 in Continental Europe, 395 in India and 229 in the Asia Pacific region.

Principal risks and uncertainties

The principal risks and opportunities faced by the Group are included within the “Risks and risk management” section of the 2012 Annual Report and Accounts filed with Companies House in the UK. Details of other risks and uncertainties faced by the Group are noted within the Annual Report on Form 20-F for the year ended 31 December 2012 which is on file with the Securities and Exchange Commission (the “SEC”) and is available on the SEC’s website at www.sec.gov. These risks 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; we depend largely on a small number of customers and products; failure by ARM to achieve the performance under a licence or failure of a customer to make an obligated milestone payment could materially impact our revenues; we operate in an intensely competitive industry and our customers may choose to use their own or competing technology; ARM has grown its operations significantly over recent years and ARM’s business could be adversely impacted if these changes are not managed successfully; ARM's technology is used in a wide range of electronic products, any bug or fault in our technology could lead to significant damage to our brand and reputation; ARM may have to protect its intellectual property or defend the technology against claims that we have infringed others’ proprietary rights; and an infringement claim against ARM’s technology may result in a significant damages award which would adversely impact ARM’s operating results.

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