ARM Holdings plc Reports Results for the Fourth Quarter and Full Year 2014

CAMBRIDGE, UK, 11 FEBRUARY 2015 - ARM Holdings plc announces its unaudited financial results for the fourth quarter and full year ended 31 December 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 net of profit on disposal, exceptional impairment of available for sale financial assets, and exceptional IP indemnity and similar costs. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document, see notes 13.8 to 13.11.

** Net cash generation is defined as movement on cash, cash equivalents, short-term and long-term deposits and similar instruments, adding back dividend payments and share buy-backs, investment and acquisition consideration, other acquisition-related payments, restructuring 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 13.3 to 13.7.

Q4 2014 Financial Highlights

• Group revenues in US$ up 18% year-on-year (£ revenues up 19% year-on-year)
•  Processor licensing revenue in US$ up 30% year-on-year
•  Order backlog up about 5% sequentially
•  Processor royalty revenue in US$ up 16% year-on-year (relevant industry revenues up 5% year-on-year¹)
•  Normalised PBT and EPS up 25% and 36% year-on-year respectively
•  Record net cash generation of £122m
•  Directors recommend final dividend increase of 25% to 4.5p giving full year 2014 dividend of 7.02p, up 23%

Progress on key growth drivers in Q4 2014

•  Growth in adoption of ARM^® processor technology
  • 53 processor licences signed for a broad range of applications including smartphones and mobile computers, enterprise infrastructure and high performance computing, and microcontrollers and chips for sensor hubs
• Advanced technology enables a higher royalty percentage per chip in mobile devices, consumer electronics and enterprise infrastructure markets. In Q4, ARM maintained its licensing momentum for future royalty growth:
  • 9 ARMv8-A processor licences signed, including an architecture licence for high performance computing
  • 10 Mali™ multimedia processor licences signed, including one subscription license for the family of Mali graphics processors
  • 5 POP IP licences signed, including three for Cortex-A53 processors on 28nm processes
•  Growth in shipments of chips based on ARM processor technology
  • 3.5 billion ARM-based chips shipped, up 20% year-on-year
  • Strong growth in shipments of microcontrollers and chips for mobile devices

Outlook

2014 finished strongly, with a record number of licences being signed in Q4 which generated a particularly high revenue contribution in the quarter.

We expect licence revenue growth in full-year 2015 to be consistent with our medium-term guidance. Following the acceleration in royalty revenue growth in the second half of 2014, and with a wide range of OEMs introducing products based on the ARMv8-A architecture this year, the outlook for royalty revenues in 2015 is encouraging. With full year 2015 licence and royalty revenues both anticipated to be consistent with market expectations, we expect total Group dollar revenues to be in line. We anticipate that total Group dollar revenues for Q1 will be up about 10% year on year, based on strengthening royalty revenue growth, and our expectation of the profile of licence revenue through the year.

Simon Segars, Chief Executive Officer, said:

"In Q4 and throughout 2014 ARM has seen strong licence revenue growth, driven by market-leading semiconductor companies increasing their commitment to use ARM technology, and a broadening range of new customers choosing ARM technology for the first time. As expected, ARM's royalty revenue growth rate increased in the fourth quarter. As the ARM Partnership continues to gain share, and as chips based on ARMv8-A processors and Mali graphics IP start shipping in higher volumes, the outlook for royalty revenues in 2015 and beyond is encouraging.

"2015 will bring exciting opportunities and challenges as ARM invests in new products and technologies, and continues to establish itself in competitive new markets."

*** 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 Q4 2014 were $357.6 million, up 18% versus Q4 2013. Q4 sterling revenues of £225.9 million were up 19% year-on-year.

Full year 2014 dollar revenues amounted to $1,292.6 million, up 16% on full-year 2013.

Licence revenues

Total dollar licence revenues in Q4 2014 increased by 27% year-on-year to $162.3 million, representing 46% of Group revenues. Licence revenues comprised $139.5 million from processor licences and $22.8 million from physical IP licences. Processor licence revenues were up strongly in Q4 due both to a record number of licences being signed and to a particularly high proportion of the revenue from those licences being recognised in the quarter.

Group order backlog at the end of Q4 2014 was up about 5% sequentially. This was driven by an ARMv8-A architecture licence, and five partners licensing new processors that are still in development.

Royalty revenues

Total dollar royalty revenues in Q4 2014 were up 13% on Q4 2013 at $165.5 million, representing 46% of Group revenues. Royalty revenues comprised $150.7 million from processors and $14.8 million from physical IP. Processor royalty revenues increased 16% year-on-year reflecting the expected acceleration in growth following a period of inventory management by consumer electronics OEMs. Relevant industry revenues were up 5% over the corresponding shipment period (i.e. calendar Q3 2014 compared to calendar Q3 2013). Physical IP royalty revenue declined 7% year-on-year due to some companies transitioning to the 20nm node, where ARM chose to develop a limited platform of technology as we expect companies to move rapidly to 16/14nm where ARM has a richer library of physical IP.

Other revenues

Sales of software and tools in Q4 2014 were $14.6 million, a decrease of 3% year-on-year. Service revenues were $15.2 million in Q4 2014, up 9% year-on-year. Together revenues from software and tools and services represented 8% of Group revenues.

Gross margins

Normalised gross margins in Q4 2014 were 95.9% compared to 94.8% in Q3 2014 and 95.4% in Q4 2013.

Operating expenses and operating margin

Normalised income statements for Q4 2014 and FY 2014 and Q4 2013 and FY 2013 are included in notes 13.8 to 13.11 below which reconcile IFRS to the normalised non-GAAP measures referred to in this earnings release. Non-GAAP measures have been presented as we believe that they allow a clearer comparison of operating results.

Normalised operating expenses were £100.4 million in Q4 2014 compared to £86.8 million in Q3 2014 and £88.1 million in Q4 2013. The sequential increase in normalised operating expenses was primarily due to ongoing investments in R&D, higher bonus provisions following the strong finish to the year, and the impact of the stronger dollar on the translation of Q4 costs incurred in dollars into sterling. In addition Q3included a credit of approximately £5 million relating to the revaluation of monetary items due to changes in foreign exchange rates and the impact of a stronger dollar on the accounting for derivative instruments, which did not recur in Q4.

Normalised operating expenses in Q1 2015 (assuming effective exchange rates similar to current levels) are expected to be in the range of £98-100 million as we continue to invest in our research and development teams and in our business infrastructure. Normalised operating margin was 51.4% in Q4 2014, compared to 50.4% in Q3 2014 and 48.8% in Q4 2013.

Normalised research and development expenses were £44.4 million in Q4 2014, representing 20% of revenues, compared to £41.2 million in Q3 2014 and £38.9 million in Q4 2013. Normalised sales and marketing expenses were £23.6 million in Q4 2014, being 10% of revenues, compared to £19.8 million in Q3 2014 and £21.3 million in Q4 2013. Normalised general and administrative expenses were £32.4 million in Q4 2014, representing 14% of revenues, compared to £25.8 million in Q3 2014 and £27.9 million in Q4 2013.

Total IFRS operating expenses in Q4 2014 were £126.3 million (Q4 2013: £170.3 million) including share-based payment costs and related payroll taxes of £23.0 million (Q4 2013: £19.4 million), amortisation of intangible assets, other acquisition-related charges, restructuring charges and impairment of investments of £2.9 million (Q4 2013: £3.3 million), and exceptional items in 2013 of £59.5 million.

Total share-based payment costs and related payroll tax charges of £23.7 million in Q4 2014 were included within cost of revenues (£0.7 million), research and development (£15.5 million), sales and marketing (£4.0 million) and general and administrative (£3.5 million).

Earnings and taxation

Normalised profit before tax in Q4 2014 was £118.9 million compared to £95.5 million in Q4 2013. After including acquisition-related and share-based payment costs, intangible amortisation, impairments, restructuring charges, share of results of joint ventures, and exceptional items, IFRS profit before tax was £91.4 million in Q4 2014 compared to £12.2 million in Q4 2013.

As a result of the continued phasing in of the UK's patent box tax regime, which seeks to tax all profits attributable to patented technology at a reduced rate of 10%, the Group's effective normalised tax rate was 13.9% in Q4 2014 (IFRS: 20.4%), giving a full-year 2014 effective normalised tax rate of 16.7% (IFRS: 19.3%). ARM's full-year normalised effective tax rate in 2015 is expected to be about 16% which incorporates a 1% reduction in the UK corporation tax rate from 21% to 20% and a further year of the UK's patent box five year phasing in period.

In Q4 2014, normalised fully diluted earnings per share were 7.2 pence (33.8 cents per ADS²) compared to 5.3 pence (26.4 cents per ADS) in Q4 2013. IFRS fully diluted earnings per share in Q4 2014 were 5.1 pence (24.0 cents per ADS) compared to loss per share of 0.4 pence (2.2 cents per ADS) in Q4 2013.

 

Balance sheet

Intangible assets at 31 December 2014 were £644.2 million, comprising goodwill of £567.0 million and other intangible assets of £77.2 million, compared to £525.9 million and £82.9 million respectively at 31 December 2013. Total accounts receivable were £138.6 million at 31 December 2014, compared to £136.2 million at 31 December 2013.

Cash flow and dividend

Normalised cash generation in Q4 2014 was £122.0 million. Net cash at 31 December 2014 was £861.7 million, compared to £706.3 million at 31 December 2013.

The directors recommend payment of a final dividend in respect of 2014 of 4.5p pence per share, up 25%. Taken together with the interim dividend of 2.52 pence per share paid in October 2014, this gives a total dividend in respect of 2014 of 7.02 pence per share, an increase of 23% on the total dividend of 5.7 pence per share in 2013. Subject to shareholder approval, the final dividend will be paid on 15 May 2015 to shareholders on the register on 24 April 2015.

As well as growing the dividend, the Board intends to continue to undertake a limited share buyback programme to maintain a flat share count over time. In 2014, 7.9 million shares were bought back at a total cost of £66.9 million.

Technology Licensing

Processor licensing

53 processor licences were signed in Q4 2014, taking the total signed in the year to 163, reflecting the ongoing demand for ARM's latest technology.

Fifteen of the licences signed were for ARM's Cortex-A series processors, mainly for use in enterprise infrastructure, automotive infotainment and consumer electronics devices. Eight of the licences were for processors based on the ARMv8-A architecture, including a further licence for Cortex-A72, ARM's recently announced next-generation processor. ARM also signed an ARMv8-A architecture licence with a Partner targeting high performance computing applications. To date, ARM has signed 63 ARMv8-A processor and architecture licences which typically command a higher royalty compared to previous generations of ARM technology.

Twenty-three of the licences signed in Q4 were for Cortex-M class processors for use in the key components of smart connected devices: microcontrollers, smart sensors and low-power wireless communication chips. Five of these licences were for next-generation processors, codenamed Teal and Grebe, that are designed for energy-efficient and secure embedded applications from smart automotive to wearable technology.

ARM signed ten licences for its Mali multimedia processors, including one subscription license. These processors are used in devices with graphics displays, such as smartphones, mobile computing devices and set-top boxes. Two of the licences signed in Q4 were for our Mali-DP500 series display technology IP, and two were for our Mali-V500 series video processor.

Q4 2014 and Cumulative Processor Licensing Analysis

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 ARM saw 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 five further POP licences, including three licenses for 28nm POP IP optimised for the Cortex-A53 processor.

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:

• Multiple handset manufacturers releasing smartphones based on ARMv8-A technology, including Asus, Huawei, HTC, LG, Lenovo, Oppo, Samsung and Xiaomi
• Netgear unveiling its ReadyNAS 200 storage server based on ARM Cortex-A15 chips from Annapurna Labs
• Cray announcing that it is working with Cavium to deliver Cray clusters based on Cavium's 48-core ThunderX™ ARM processors
• Ambiq Micro introducing the Apollo family of microcontrollers based on the Cortex-M4F, targeting energy sensitive applications such as wearable and medical devices
• Leading semiconductor companies HiSilicon, Mediatek and Rockchip all announcing that they had licensed and had lead access to ARM's latest processor for premium mobile devices: Cortex-A72 previously codenamed "Maia".

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

Technology Royalties

 

Processor royalties

Q4 royalty revenue was generated from the shipment of 3.5 billion ARM processor-based chips, up 20% year-on-year. Seven companies reported in the fourth quarter that they had shipped ARMv8-based chips, which represented around 1.5% of ARM's total unit shipments.

ARM is gaining share in a broad spectrum of semiconductor applications, from smartcards priced below 10c to enterprise infrastructure chips priced above $200. The average royalty revenue per chip is the outcome of the mix of selling prices of these chips, and the royalty percentages per chip, which is typically based on the ARM technology within each chip. In Q4 we have seen very strong unit growth in high-volume markets such as microcontrollers, smartcards, and sensors, and also strong revenue growth from Cortex-A class processors going into mobile and enterprise markets. The combination of these positive trends took the average royalty revenue per chip to 4.3 cents, from 4.5 cents one year ago.

Q4 2014 Processor Unit Shipment Analysis

Physical IP royalties

Royalties are recognised one quarter in arrears with royalties in Q4 2014 generated from semiconductor wafer shipments in Q3 2014. ARM's physical IP dollar royalty revenue in Q4 2014 was down 7% year-on-year and up 1% sequentially. This decline was due to some companies transitioning to the 20nm node, where ARM chose to develop a limited platform of technology as we expect companies to move rapidly to 16/14nm where ARM has a richer library of physical IP.

People

At 31 December 2014, ARM had 3,294 full-time employees, a net increase of 461 during the year, being mainly engineers joining ARM's processor R&D teams. At the end of Q4 the Group had 1,400 employees based in the UK, 714 in the US, 459 in Continental Europe, 472 in India and 249 in the Asia Pacific region.

Segmental reporting

Prior to 31 December 2014, in its half year and full year reports, ARM provided a segmental analysis for Processor, Physical IP and System Design divisions. In 2014, the Group's internal operational structure has been re-organised to create an organisation that is more scalable and more accountable, and that offers to our customers a more integrated product portfolio. This has resulted in one reportable segment (see note 12).

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.