ARM Holdings plc Reports Results for the Second Quarter and Half Year Ended 30 June 2014

CAMBRIDGE, UK, 22 July 2014 - ARM Holdings plc [(LSE: ARM); (NASDAQ: ARMH)] announces its unaudited financial results for the second quarter and half year ended 30 June 2014

* Normalised figures are based on IFRS, adjusted for acquisition-related charges, share-based payment costs, restructuring charges, Linaro-related charges, share of results of joint venture, intangible amortisation, impairment of investments, and exceptional items. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document, see notes 12.8 to 12.11.

** 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 outflow from exceptional IP indemnity and similar charges and deducting inflows from share option exercises - see notes 12.3 to 12.7.

Q2 financial summary

• Group revenues in US$ up 17% year-on-year (£ revenues up 9% year-on-year)
• Processor licensing revenue in US$ up 42% year-on-year
• Processor royalty revenue in US$ up 2% year-on-year
• Normalised profit before tax and earnings per share up 9% and 11% year-on-year respectively
• Net cash generation of £86.7m
• Interim dividend increased by 20%

Progress on key growth drivers in Q2

• Growth in adoption of ARM^® technology
  • 41 processor licences signed across our target markets of mobile computing, consumer electronics and embedded intelligent devices, taking the cumulative number of licences signed to more than 1,100
• Advanced technology enables a higher royalty percentage per chip in mobile devices, consumer electronics and enterprise infrastructure
  • 7 ARMv8-A processor licences signed, including lead licences for next generation designs
  • 8 Mali multimedia processor licences signed, including first licences for video and display processors
• Growth in shipments of chips based on ARM processor technology
  • 2.7 billion ARM-based chips shipped, up 11% year-on-year
  • Shipment growth especially strong in enterprise networking and microcontrollers

Outlook

ARM enters the second half of the year with a healthy pipeline of opportunities that is expected to both underpin continued strong licence revenue and give rise to an increase in the level of backlog. Market data indicates improving semiconductor industry conditions, leading to the expectation of an acceleration in royalty revenue growth in H2 2014. Given these dynamics, we expect Group dollar revenues for full year 2014 to be in line with market expectations.

Simon Segars, Chief Executive Officer, said:

"Our continued strong licensing performance reflects the intent of existing and new customers to base more of their future products on ARM technology. The 41 processor licences signed in Q2 were driven by demand for ARM technology in smart mobile devices, consumer electronics and embedded computing chips for the Internet of Things, and include further licences for ARMv8-A and Mali processor technology. This bodes well for growth in ARM's medium and long term royalty revenues.

As expected, our royalty revenue in Q2 2014 has been impacted by seasonal trends and inventory management in parts of the electronics supply chain. An improving market environment in the second half gives us confidence in strengthening royalty revenue in H2 2014."

*** 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. Over 95% of invoicing is in dollars.

† Includes a deduction, recognised in Q1 2014, of $5 million for prior years' royalties over-reported to ARM by a customer.

Financial review
(IFRS unless otherwise stated)

Total revenues

Total dollar revenues in Q2 2014 were $309.6 million, up 17% versus Q2 2013. Q2 sterling revenues of £187.1 million were up 9% year-on-year.

Half-year dollar revenues in 2014 amounted to $614.8 million, up 16% on H1 2013.

Licence revenue

Total dollar licence revenues in Q2 2014 increased by 42% year-on-year to $146.1 million, representing 47% of Group revenues. Licence revenues comprised $125.8 million from processor licences and $20.3 million from physical IP licences.

Group order backlog at the end of Q2 2014 was down about 10% sequentially. It is expected that the licensing opportunity pipeline, including potential subscription licences and opportunities for more licences of ARM's next generation processors, will give rise to an increasing level of backlog in the second half.

Royalty revenues

Total dollar royalty revenues in Q2 2014 were up slightly on Q2 2013 at $135.5 million, representing 44% of Group revenues. Royalty revenues comprised $121.2 million from processors and $14.3 million from physical IP. Processor royalty revenues increased 2% year-on-year. Industry revenues were up 5% over the relevant shipment period (i.e. Q1 2014 compared to Q1 2013).

ARM's royalty revenues in Q2 2014 were impacted by ongoing inventory management in consumer electronics, for example operators selling off older 3G handsets ahead of switching subsidies to LTE handsets. ARM expects to outperform the overall semiconductor industry in H2 2014 as more chips are sold to OEMs building more advanced devices, which typically utilise more ARM technology.

Other revenues

Sales of software and tools in Q2 2014 were $13.2 million, a decrease of 2% year-on-year. Service revenues were $14.8 million in Q2 2014, up 14% year-on-year. Together revenues from software and tools and services represented 9% of Group revenues.

Gross margins

Normalised gross margins in Q2 2014 were 95.8% compared to 95.6% in Q1 2014 and 94.3% in Q2 2013.

Operating expenses and operating margin

Normalised income statements for Q2 2014, H1 2014, Q2 2013 and H1 2013 are included in notes 12.8 to 12.11 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.

Normalised operating expenses were £87.7 million in Q2 2014 compared to £84.3 million in Q1 2014 and £78.2 million in Q2 2013. Normalised operating expenses in Q2 2014 included a charge of £2.7 million relating to the revaluation of monetary items due to changes in foreign exchange rates, and the impact of a weaker dollar on the accounting for derivative instruments. Normalised operating expenses in Q3 2014 (assuming effective exchange rates similar to current levels) are expected to be in the range £90-92 million as we continue to invest in our research and development teams and in our business infrastructure.

Normalised operating margin was 48.9% in Q2 2014, compared to 50.4% in Q1 2014 and 48.6% in Q2 2013.

Normalised research and development expenses were £39.7 million in Q2 2014, representing 21% of revenues, compared to £39.8 million in Q1 2014 and £37.2 million in Q2 2013. Normalised sales and marketing expenses were £19.8 million in Q2 2014, being 11% of revenues, compared to £20.4 million in Q1 2014 and £17.8 million in Q2 2013. Normalised general and administrative expenses were £28.2 million in Q2 2014, representing 15% of revenues, compared to £24.1 million in Q1 2014 and £23.2 million in Q2 2013.

Total IFRS operating expenses in Q2 2014 were £113.4 million (Q2 2013: £148.2 million after exceptional IP and indemnity charges of £41.8m) including share-based payment costs and related payroll taxes of £14.3 million (Q2 2013: £15.7 million), a restructuring charge of £8.4 million (including £3.4 million in respect of accelerated share-based payment charges) (Q2 2013: £nil), and amortisation of intangible assets, other acquisition-related charges, impairment of investments and Linaro-related charges of £3.0 million (Q2 2013: £12.5 million). The restructuring charge of £8.4 million follows a review of the skills and capabilities across the business during which approximately 130 people left the Group. We are reinvesting in new skills and capabilities to further strengthen the organisation for future growth. We finished the first half having grown net headcount by 211 employees.

Total share-based payment costs and related payroll tax charges of £14.8 million in Q2 2014 were included within cost of revenues (£0.5 million), research and development (£9.8 million), sales and marketing (£2.4 million) and general and administrative (£2.1 million).

Earnings and taxation

Normalised profit before tax in Q2 2014 was £94.2 million compared to £86.6 million in Q2 2013. After including acquisition-related and share-based payment costs, intangible amortisation, restructuring charges and share of results of joint ventures, IFRS profit before tax was £68.0 million in Q2 2014 compared to £15.0 million in Q2 2013.

The Group's effective normalised tax rate was 18.3% in Q2 2014 (IFRS: 18.4%). ARM's full-year normalised effective tax rate in 2014 is expected to be slightly below 18%.

In Q2 2014, normalised fully diluted earnings per share were 5.43 pence (27.83 cents per ADS¹) compared to 4.89 pence (22.23 cents per ADS) in Q2 2013. IFRS fully diluted earnings per share in Q2 2014 were 3.91 pence (20.06 cents per ADS) compared to earnings per share of 0.75 pence (3.41 cents per ADS) in Q2 2013.

Balance sheet

Intangible assets at 30 June 2014 were £603.4 million, comprising goodwill of £520.7 million and other intangible assets of £82.7 million, compared to £525.9 million and £82.9 million respectively at 31 December 2013.

Total accounts receivable were £122.4 million at 30 June 2014, compared to £136.2 million at 31 December 2013.

Cash flow and interim dividend

Net cash generation in Q2 2014 was £86.7 million. Net cash at 30 June 2014 was £746.4 million compared to £706.3 million at 31 December 2013.

In respect of the year to 31 December 2014, the directors are declaring an interim dividend of 2.52 pence per share, an increase of 20% over the 2013 interim dividend of 2.1 pence per share. This interim dividend will be paid, out of the UK GAAP distributable reserves of ARM Holdings plc, on 3 October 2014 to shareholders on the register on 5 September 2014.

In February 2014, the Board indicated that it intended to continue to maintain a flat share count over time by undertaking a limited share buyback programme. In this context, the Group bought back 1.4 million shares in Q2 at a total cost of £12 million.

Technology Licensing

Processor licensing

41 processor licences were signed in Q2 2014, higher than ARM's normal licensing run rate and reflecting the strong demand for ARM's latest technology.

Twelve of the licences signed were for ARM's Cortex-A series processors, mainly for use in smartphones, tablets and other consumer electronics devices. Seven of the licences were for processors based on the ARMv8-A architecture, including the first two lead licences for ARM's next generation Cortex-A processors. To date, ARM has signed a total of 50 ARMv8-A processor and architecture licences which typically command a higher royalty compared to previous generations of ARM technology.

ARM also signed eight licences for its Mali multimedia processors, for use in mobile and consumer electronics, and in embedded computing applications such as point-of-sale systems. The Mali graphics processor product line has been extended to include video and display processors, and two of the eight licences were for these new technologies.

Twenty of the licences signed in Q2 were for Cortex-M class processors for use in technologies required for the Internet of Things; microcontrollers, smart sensors and low-power wireless communication chips.

Q2 2014 and Cumulative Processor Licensing Analysis

* Includes ARM7, ARM9, ARM10 and ARM11
**Adjusted for licences that are no longer expected to generate royalties

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 more than one hundred platform licences with leading foundries, from 250nm to 14nm.

During the quarter we signed a platform licence with a leading foundry at 55nm. ARM now has physical IP agreements with four foundries at the 55nm node, the smallest geometry with general purpose embedded flash, which is a requirement for many embedded and Internet of Things applications.

In Q2 we saw strong licence revenue growth as we achieved engineering milestones, on licences signed in previous quarters, for technologies including 20nm and 16/14nm physical IP.

Technology Design Wins and Ecosystem Development

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

• Google announced the latest version of the Android operating system for smartphones "L" which includes support for the ARMv8-A architecture
• Cavium disclosed details of its Thunder-X ARMv8-A based chips for use in data centre and cloud applications
• AMD announced a roadmap of ARMv8-A based chips, including "Project SkyBridge" and "K12" for embedded, server and client markets as well as semi-custom solutions
• Applied Micro announced multiple ecosystem partnerships with server companies using their ARMv8-A based X-Gene chip including Cirrascale, E4 Computer Engineering, Eurotech, Mellanox and SoftIron
• Freescale announced its new family of QorIQ chips including the QorIQ LS2085A which has eight ARMv8-A Cortex-A57 cores and brings support for open-standard protocols which enable virtualised networks
• NXP announced that its popular LPCXpresso development boards now support the ARM mbed™ platform, accelerating the development of new Internet of Things applications
• Arduino unveiled the Arduino Zero, a development board for Internet of Things based on an ARM Cortex-M0+ chip from Atmel;
• Mediatek announced the MT6795 with an ARMv8-A big.LITTLE octa-core configuration (quad-core Cortex-A57 plus quad-core Cortex-A53) for smartphones and tablets. This is the third chip in Mediatek's family of ARMv8-A based application processors covering premium, mid-range and entry-level mobile devices.

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

Technology Royalties

Processor royalties

Q2 royalty revenue was generated from the shipment of some 2.7 billion ARM processor-based chips, up 11% year-on-year. ARM saw particularly strong growth in enterprise networking and microcontrollers which grew more than 30% and 40% respectively.

In Q2 2014 ARM's average royalty revenue per chip was 4.6 cents down from 5.0 cents one year ago. This is mainly due to low-cost ARM-based microcontrollers and smartcards growing faster than high-value chips into smartphones and tablets. In Q2 shipments of Cortex-A series processors were up about 25% year-on-year, whilst the growth of ARM based microcontrollers was nearly double this rate.

Q2 2014 Processor Unit Shipment Analysis

ARM11 shipments have halved year on year partly due to ARM11-based feature phones being replaced by entry-level smartphones based on Cortex-A family processors, from which ARM typically receives a higher royalty.

Physical IP royalties

Royalties are recognised one quarter in arrears with royalties in Q2 2014 generated from semiconductor wafer shipments in Q1 2014. ARM's physical IP dollar royalty revenue in Q2 2014 was down 11% year-on-year. As with processor royalties, a large proportion of Physical IP royalties is derived from chips going into consumer and mobile electronics which were impacted by the ongoing inventory management by OEMs and operators.

People

At 30 June 2014, ARM had 3,044 full-time employees, a net increase of 211 since the start of the year, being mainly engineers joining ARM's processor R&D teams. At the end of Q2 the Group had 1,258 employees based in the UK, 723 in the US, 401 in Continental Europe, 421 in India and 241 in the Asia Pacific region.

Principal risks and uncertainties

The principal risks and uncertainties faced by the Group in 2014 are included within the "Risks and risk management" section of the 2013 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 2013 which is on file with the Securities and Exchange Commission (the "SEC") and is available on the SEC's website at www.sec.gov. There have been no changes to these risks that would materially impact the group in the foreseeable future. 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.

Financial Tables

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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 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.