ARM Holdings plc Reports Results for the First Quarter 2015

CAMBRIDGE, UK, 21 APRIL 2015 - ARM Holdings plc [(LSE: ARM); (NASDAQ: ARMH)] announces its unaudited financial results for the first quarter ended 31 March 2015.

Q1 2015 Financial Summary

• Group revenues in US$ up 14% year-on-year (GBP revenues up 22%)
• Processor royalty revenue in US$ up 31% year-on-year (Underlying¹ revenue up 26% year-on-year)
• Processor licensing revenue in US$ down 2% year-on-year
• Normalised PBT and EPS up 24% and 27% year-on-year respectively

Progress on key growth drivers in Q1 2015

• Growth in adoption of ARM^® processor technology
  • 30 processor licences signed for a broad range of applications from sensors to smartphones to servers
• Maintained momentum in licensing of advanced technology, underpinning future royalty revenue growth:
  • 4 ARMv8-A processor licences signed, and an additional architecture licence for smart mobile devices
  • 4 Mali™ multimedia processor licences signed, including another licence for Mali video technology
  • 2 POP IP licences signed, including one for a Cortex-A53 processor implementation on a 28nm process
• Growth in shipments of chips based on ARM technology
  • 3.8 billion ARM-based chips shipped up 31% year-on-year
  • Strong year-on-year growth in shipments of microcontrollers and chips for mobile devices
  • First physical IP royalty revenues from a leading edge FinFET manufacturing process

Outlook

ARM has made an encouraging start to 2015 with more leading companies choosing to deploy ARM technology in their products. Assuming that the macroeconomic backdrop remains supportive of consumer spending, we expect group dollar revenues for the full-year 2015 to be at least in line with current market expectations.

Relevant industry data for Q1 2015, being the shipment period for ARM's Q2 royalties, points to a sequential decrease in industry-wide revenues, broadly consistent with normal seasonality. In this context we expect group dollar revenues for the second quarter to be in line with current market expectations.

Simon Segars, Chief Executive Officer, said:

"As the world becomes more digital and more connected, we continue to see an increase in the demand for ARM's smart and energy-efficient technology, which is driving both our licensing and royalty revenues.

In recent months many handset OEMs have announced smartphones and tablets based on ARMv8-A and Mali graphics processors. As production of these mobile computers start to ramp up in the second half of the year, ARM will benefit from the higher royalty percentage per chip that these technologies deliver compared to the processors in previous generations of mobile devices.

Building on our leadership in mobile computing, ARM technology continues to be adopted in enterprise infrastructure and embedded devices. In Q1 we licensed ARMv8‑A processors for networking and server applications, and Cortex-M processors for microcontrollers and smart sensors for the Internet of Things.

These design wins underpin future royalty revenue growth and enable continued investment in future innovative technology to create long-term superior returns for our shareholders."

*** Dollar revenues are based on the Group's actual dollar invoicing, where applicable, 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 Q1 2015 were $348.2 million, up 14% versus Q1 2014. Q1 sterling revenues of £227.5 million were up 22% year-on-year.

Licence revenues

Total dollar licence revenues in Q1 2015 increased by 3% year-on-year to $133.2 million, representing 38% of Group revenues. Licence revenues comprised $109.3 million from processor licences and $23.9 million from physical IP licences. Following multiple periods of accelerated license revenue growth (29% compound annual growth in the five years 2010-2014), in line with previous guidance, we continue to expect licence revenue growth of 5-10% per annum in the medium term. Group order backlog at the end of Q1 2015 was down about 7% sequentially. Based on the medium-term outlook for license revenue growth, we expect quarterly sequential movements of backlog to be lumpy.

Royalty revenues

Total dollar royalty revenues in Q1 2015 were up 28% on Q1 2014 at $184.7 million, representing 53% of Group revenues. Relevant industry revenues were up 4% over the corresponding shipment period (i.e. calendar Q4 2014 compared to calendar Q4 2013).

Royalty revenues comprised $167.5 million from processors and $17.2 million from physical IP. Processor dollar royalty revenues in Q1 2014 were net of a deduction of $5 million representing prior years' royalties over-reported to ARM by a customer. Underlying processor royalty revenues increased 26% year-on-year, reflecting the expected acceleration in growth following a period of inventory management by consumer electronics OEMs in 2014. Physical IP royalty revenue increased 5% year-on-year.

Other revenues

Sales of software and tools in Q1 2015 were $14.7 million, a decrease of 9% year-on-year. Service revenues were $15.6 million in Q1 2015, up 6% year-on-year. Together revenues from software and tools and services represented 9% of Group revenues.

Gross margins

Normalised gross margins in Q1 2015 were 95.6% compared to 95.9% in Q4 2014 and 95.6% in Q1 2014.

Operating expenses and operating margin

Normalised income statements for Q1 2015 and Q1 2014 are included in notes 6.7 and 6.8 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 £100.0 million in Q1 2015 compared to £100.4 million in Q4 2014 and £84.3 million in Q1 2014.

Normalised operating expenses in Q2 2015 (assuming effective exchange rates similar to current levels) are expected to be in the range £102-104 million as we continue to invest in our research and development teams and in our business infrastructure.

Normalised operating margin was 51.7% in Q1 2015, compared to 51.4% in Q4 2014 and 50.4% in Q1 2014.

Normalised research and development expenses were £47.8 million in Q1 2015, representing 21% of revenues, compared to £44.4 million in Q4 2014 and £39.8 million in Q1 2014. Normalised sales and marketing expenses were £21.6 million in Q1 2015, representing 10% of revenues, compared to £23.6 million in Q4 2014 and £20.4 million in Q1 2014. Normalised general and administrative expenses were £30.6 million in Q1 2015, representing 13% of revenues, compared to £32.4 million in Q4 2014 and £24.1 million in Q1 2014.

Total IFRS operating expenses in Q1 2015 were £115.4 million (Q1 2014: £101.6 million) including share-based payment costs and related payroll taxes of £18.7 million (Q1 2014: £14.6 million), amortisation of intangible assets and other acquisition-related charges of £2.4 million (Q1 2014: £2.7 million) and profit on disposal of investments of £5.7 million (Q1 2014: £nil).

Total share-based payment costs and related payroll tax charges of £19.3 million in Q1 2015 were included within cost of revenues (£0.6 million), research and development (£12.5 million), sales and marketing (£3.3 million) and general and administrative (£2.9 million).

Earnings and taxation

Normalised profit before tax in Q1 2015 was £120.5 million compared to £97.1 million in Q1 2014. After including acquisition-related and share-based payment costs, intangible amortisation, profit on disposal of investments and share of results of joint ventures, IFRS profit before tax was £103.4 million in Q1 2015 compared to £78.0 million in Q1 2014.

The Group's effective normalised tax rate was 16.0% in Q1 2015 (IFRS: 17.8%). ARM's full-year normalised effective tax rate in 2015 is expected to be about 16%.

In Q1 2015, normalised fully diluted earnings per share were 7.1 pence (31.7 cents per ADS²) compared to earnings per share of 5.6 pence (28.0 cents per ADS) in Q1 2014. IFRS fully diluted earnings per share in Q1 2015 were 6.0 pence (26.7 cents per ADS) compared to earnings per share of 4.4 pence (22.0 cents per ADS) in Q1 2014.

 

Balance sheet

Intangible assets at 31 March 2015 were £673.4 million, comprising goodwill of £594.5 million and other intangible assets of £78.9 million, compared to £567.0 million and £77.2 million respectively at 31 December 2014.

Total accounts receivable were £145.4 million at 31 March 2015, compared to £138.6 million at 31 December 2014.

Cash flow

Normalised cash generation in Q1 2015 was £68.5 million. Net cash at 31 March 2015 was £921.8 million, compared to £861.7 million at 31 December 2014.

 

Technology Licensing

 

Processor licensing

Thirty processor licences were signed in Q1 2015 reflecting the ongoing demand for ARM's latest technology. Eight of the licences signed were for ARM's Cortex-A series processors, for use in mobile computers, servers, enterprise networking, automotive infotainment and consumer electronics devices. Four of the licences were for processors based on the ARMv8-A architecture, including two further licences for Cortex-A72, ARM's recently announced next-generation processor. ARM also signed an ARMv8-A architecture licence with a Partner targeting mobile and computing applications. To date, ARM has signed 68 ARMv8-A processor and architecture licences which typically command a higher royalty compared to previous generations of ARM technology.

Sixteen of the licences signed in Q1 were for Cortex-M class processors for use in the key components of smart connected devices: microcontrollers, smart hubs, wireless communications, and the secure chip in a bank card.

ARM signed four licences for its Mali multimedia processors. These processors are used in devices with graphics displays, such as smartphones, mobile computing devices and set-top boxes. One of the licences signed in Q1 was for our new Mali-V500 series video processor.

Q1 2015 and Cumulative Processor Licensing Analysis

	Existing Licensees	New Licensees	Quarter Total	Cumulative Total†
Classic ARM*				526
Cortex-A	6	2	8	208
Cortex-R	1		1	51
Cortex-M	13	3	16	300
Mali	4		4	109
Architecture	1		1	18
Subscription**				16
Total	25	5	30	1,228

* Includes ARM7, ARM9, ARM10 and ARM11

** Includes CPU and Mali subscription licences

† Includes all extant licenses that are expected to generate royalties

Physical IP licensing

During the quarter ARM saw continuing 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 two further POP licences, including a licence for a 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:

• ARM introduced the Cortex-A72 processor, the highest performing CPU technology for premium mobile devices, which has now been licensed 12 times by leading semiconductor companies.
• New Chromebooks from Haier and Hisense were launched using Rockchip's ARM quad-core Cortex-A17 based SOC.
• Many OEMs announcing ARMv8-A based smartphones and tablets at Mobile World Congress, including mobile devices from Acer, Alcatel, HTC, Huawei, Lenovo, LG, Motorola, Samsung, Sony and ZTE.
• Atmel demonstrating the Smart SAM L21 family of ultra-low-power microcontrollers, based on ARM Cortex-M processors, and which are intended for Internet of Things devices that need to run for years on a battery.
• Gigabyte Technologies introducing two new ARM-based boards for servers and enterprise infrastructure; one developed using Applied Micro's X-Gene chip and the other using Annapurna's Alpine chip.
• Cavium demonstrating a comprehensive Cloud RAN (Radio Access Network) application on a 48 Core 64-bit ARMv8-A ThunderX System-on-chip.
• EZChip introducing the Tile-MX100, a high-performance networking chip with 100 ARM cores delivering scalability and power-efficiency for data-centers and carrier networks.
• Freescale announcing the Kinetis V series of ARM-based microcontrollers for more efficient electric motor control.

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

Technology Royalties

Q1 royalty revenue was generated from the shipment of 3.8 billion ARM processor-based chips, up 31% year-on-year.

Compared with Q1 a year ago, we saw a significant increase in the number of chips going into mobile devices, with much of this increase due to the inventory correction in the first half of 2014. Growth in the number of ARM-based chips shipped into embedded applications continued, about 40% up year-on-year, with particularly strong growth in ARM-based microcontrollers and smartcards, and in automotive infotainment systems.

Q1 2015 Processor Unit Shipment Analysis

Processor Series	Unit Shipments
Classic*	35%
Cortex-A	18%
Cortex-R	4%
Cortex-M	43%

Market	Unit Shipments
Mobile and connectivity	46%
Home	6%
Enterprise	14%
Embedded	34%

* Includes ARM7, ARM9, ARM10 and ARM11

Increasing the royalty revenue opportunity per chip

During the quarter, nine companies reported that they had shipped ARMv8-A based chips, which in aggregate represented around 3.5% of ARM's total unit shipments.

Q1 shipments of chips containing an ARM Mali graphics processor were consistent with our full-year expectations of 600m to 700m units. Most Mali graphics processors are found in chips containing an ARM Cortex-A class processor.

ARM's physical IP dollar royalty revenue in Q1 2015 was up 5% year-on-year. This included the first physical IP royalties generated from wafers manufactured at a leading edge FinFET node.

People

At 31 March 2015, ARM had 3,397 full-time employees, a net increase of 103 since the start of the year, being mainly engineers joining ARM's processor R&D teams. At the end of Q1 the Group had 1,449 employees based in the UK, 728 in the US, 479 in Continental Europe, 477 in India and 264 in the Asia Pacific region.

Principal risks and uncertainties

The principal risks and uncertainties faced by the Group in 2015 are included within the "Risks and risk management" section of the 2014 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 2014 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.