ARM Holdings Plc Reports Results For The Fourth Quarter And Full Year 2015

CAMBRIDGE, UK, 10 FEBRUARY 2015 — ARM Holdings plc announces its unaudited financial results for the fourth quarter and full year ended 31 December 2015.

* 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 ventures, intangible amortisation and impairment of investments net of profit on disposal. 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 and similar instruments less interest accrued, 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 ventures, payments to Linaro, and deducting inflows from share option exercises and proceeds on disposal of investments – see notes 12.3 to 12.7.

Q4 2015 Financial Summary

• Group revenues in US$ up 14% year-on-year (£ revenues up 19% year-on-year)
• Processor royalty revenues[1] in US$ up 24% year-on-year (relevant industry revenues down 3% year-on-year[2])
• Order backlog up around 10% sequentially
• Normalised PBT and EPS up 17% and 14% year-on-year respectively
• Directors recommend final dividend increase of 25% to 5.63p

Progress on key growth drivers in Q4 2015

• Growth in adoption of ARM^® processor technology
  • 51 processor licences signed by a broad range of companies, including six market-leading semiconductor vendors and four OEMs
  • Target applications included mobile computing, automotive, security systems and the Internet of Things
• Strong demand for advanced ARM technology
  • Eleven licences signed for our next-generation high-performance and high-efficiency application processors
  • One architecture licence for the recently announced ARMv8-M, which brings advanced security features to
    low-cost chips
  • Eight Mali™ multimedia processor licences signed, including licences for advanced display and video processors
  • First physical IP licence signed for 7nm technology
• Growth in shipments of chips based on ARM processor technology
  • 4.0 billion ARM-based chips shipped, up 16% year-on-year
  • Strong growth in shipments of microcontrollers and chips for mobile devices

Outlook

ARM enters 2016 with a robust opportunity pipeline for licensing helped by the introduction of new ARM technologies and our expanding market opportunities. Chips based on ARMv8-A technology are expected to continue to gain share in mobile and enterprise markets, and the higher royalty rate earned on these products helps to underpin growth in royalty revenues.

Increased economic uncertainty may influence consumer and enterprise spending, potentially impacting semiconductor revenues and industry confidence. Based on current conditions in the semiconductor market, we expect Group dollar revenues for the full year to be broadly in line with market expectations.

Simon Segars, Chief Executive Officer, said:

“2015 was a strong year for the shipment of chips containing advanced ARM technology, and momentum continued through the fourth quarter. During the year ARMv8-A surpassed 50% share of smartphone shipments, Mali became the industry’s highest-shipping GPU architecture, and our Partners increased their shipments into enterprise infrastructure and embedded markets.

Demand for our technology is increasing, and during the quarter we signed multiple licences for the next generation of high-performance and secure ARM processors. Our increased investments in both 2015 and 2016 will help us meet demand by extending the capabilities of our technology and the ecosystem, and will support long-term growth and returns for shareholders.”

*** 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 catch-up payment of $9 million, recognised in Q4 2015, for prior years’ royalties under-reported to ARM by a customer

†† Includes a catch-up payment of $9 million, recognised in Q4 2015, for prior years’ royalties under-reported to ARM by a customer, and a deduction of $5 million, recognised in Q1 2014, for prior years’ royalties over-reported to ARM by a customer

Financial review

(IFRS unless otherwise stated)

Total revenues

Total dollar revenues in Q4 2015 were $407.9 million, up 14% versus Q4 2014. Q4 sterling revenues of £269.1 million were up 19% year-on-year.

Full year 2015 dollar revenues amounted to $1,488.6 million, up 15% on full year 2014.

Licence revenues

Total dollar licence revenues in Q4 2015 were down 2% on Q4 2014 at $158.5 million, representing 39% of Group revenues. Licence revenues comprised $139.5 million from processor licences and $19.0 million from physical IP licences. Processor licence revenues were flat on Q4 2014, which was a particularly strong quarter.

Group order backlog at the end of Q4 2015 was up around 10% sequentially. This was driven by eleven licences being signed by Partners for some of ARM’s most advanced processors that are still in development.

Royalty revenues

Total dollar royalty revenues in Q4 2015 were up 31% on Q4 2014 at $216.7 million, representing 53% of Group revenues. Royalty revenues comprised $196.6 million from processors and $20.1 million from physical IP.

Processor royalty revenues included a catch-up payment of $9 million where one of our customers had identified that they had under-reported chips shipped in prior years. Relevant industry revenues were down 3% over the corresponding shipment period (i.e. calendar Q3 2015 compared to calendar Q3 2014). Underlying processor royalty revenue grew 24% year-on-year, reflecting continuing market share gains, and the increasing proportion of ARMv8-A processor-based chips in mobile devices.

Physical IP royalty revenue grew 35% year-on-year due to the increase in shipments of wafers using ARM’s physical IP at advanced nodes.

Other revenues

Sales of software and tools in Q4 2015 were $17.3 million, an increase of 19% year-on-year. Service revenues were $15.4 million in Q4 2015, up 1% year-on-year. Together revenues from software and tools and services represented 8% of Group revenues.

Gross margins

Normalised gross margins in Q4 2015 were 96.5% compared to 96.2% in Q3 2015 and 95.9% in Q4 2014.

Operating expenses and operating margin

Normalised income statements for Q4 2015 and FY 2015 and Q4 2014 and FY 2014 are included in notes 12.8 to 12.11 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 £123.9 million in Q4 2015 compared to £108.4 million in Q3 2015 and £100.4 million in Q4 2014. 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 into sterling of Q4 costs incurred in dollars. In addition Q4 included a charge of approximately £1 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.

Normalised operating expenses in Q1 2016 (assuming effective exchange rates similar to current levels) are expected to be in the range of £127-129 million as we continue to invest in our research and development teams and in our business infrastructure. Normalised operating margin was 50.5% in Q4 2015, compared to 51.7% in Q3 2015 and 51.4% in Q4 2014.

Normalised research and development expenses were £60.7 million in Q4 2015, representing 23% of revenues, compared to £55.3 million in Q3 2015 and £44.4 million in Q4 2014. Normalised sales and marketing expenses were £26.8 million in Q4 2015, being 10% of revenues, compared to £23.6 million in Q3 2015 and £23.6 million in Q4 2014. Normalised general and administrative expenses were £36.4 million in Q4 2015, representing 13% of revenues, compared to £29.5 million in Q3 2015 and £32.4 million in Q4 2014.

Total IFRS operating expenses in Q4 2015 were £148.9 million (Q4 2014: £126.3 million) including share-based payment costs and related payroll taxes of £20.5 million (Q4 2014: £23.0 million), amortisation of intangible assets, other acquisition-related charges, and profit on disposal of investments, net of impairment charge of £4.5 million (Q4 2014: £2.9 million).

Total share-based payment costs and related payroll tax charges of £21.1 million in Q4 2015 were included within cost of revenues (£0.6 million), research and development (£13.7 million), sales and marketing (£3.5 million) and general and administrative (£3.3 million).

Earnings and taxation

Normalised profit before tax in Q4 2015 was £138.7 million compared to £118.9 million in Q4 2014. IFRS profit before tax was £113.7 million in Q4 2015 compared to £91.4 million in Q4 2014 after including acquisition-related and share-based payment costs, intangible amortisation, share of results of joint ventures, and profit on disposal of investments, net of impairment charge.

The Group's effective normalised tax rate was 16.2% in Q4 2015 (IFRS: 19.3%), giving a full-year 2015 effective normalised tax rate of 16.2% (IFRS: 18.1%). 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%, ARM’s full-year normalised effective tax rate in 2016 is expected to be about 15%.

In Q4 2015, normalised fully diluted earnings per share were 8.2 pence (36.5 cents per ADS[3]) compared to 7.2 pence (33.8 cents per ADS) in Q4 2014. IFRS fully diluted earnings per share in Q4 2015 were 6.5 pence (28.8 cents per ADS) compared to 5.1 pence (24.0 cents per ADS) in Q4 2014.

Balance sheet

Intangible assets at 31 December 2015 were £742.7 million, comprising goodwill of £650.7 million and other intangible assets of £92.0 million, compared to £567.0 million and £77.2 million respectively at 31 December 2014. The increase in intangible assets is primarily due to acquisitions made during the year, see note 10 for more information.

Total accounts receivable were £183.7 million at 31 December 2015, compared to £138.6 million at 31 December 2014, see note 7 for more information.

Cash flow and dividend

Normalised cash generation in Q4 2015 was £112.2 million. Net cash at 31 December 2015 was £950.9 million, compared to £861.7 million at 31 December 2014.

The directors recommend payment of a final dividend in respect of 2015 of 5.63p pence per share, up 25%. Taken together with the interim dividend of 3.15 pence per share paid in October 2015, this gives a total dividend in respect of 2015 of 8.78 pence per share, an increase of 25% on the total dividend of 7.02 pence per share in 2014. Subject to shareholder approval, the final dividend will be paid on 13 May 2016 to shareholders on the register on 22 April 2016.

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 the medium term. In 2015, 9.0 million shares were bought back at a total cost of £92.2 million.

Capital structure and capital returns

ARM continues to generate cash which we use to support our long-term investment in growth. Consistent with our current approach, the Board keeps the level of net cash under continuous review, reflecting the organic and inorganic investment requirements of the business, balanced by the discipline to ensure that the investment will generate an appropriate return for shareholders.

As set out in the recent Capital Markets Day in September, we are increasing our investment in R&D in 2016 to accelerate our opportunity to gain share in target growth markets in 2020, with a resulting step up in our operating expenditure. We are also investing inorganically to extend growth.

ARM is committed to maintaining a net cash balance in the medium term. This reflects the continued commitment to invest in R&D that is vital to the product development pipeline for ARM and its Partners. Regardless of the external environment, ARM can maintain this R&D commitment to deliver the next generation of ARM technology. This also ensures ARM retains the flexibility to move quickly and decisively in a fast moving industry when there are opportunities to extend growth.

The Board also remains committed to continue growing the dividend in line with the growth of the business and maintains its intention to increase the ordinary dividend over time, extending a run of 11 consecutive years of dividend increases. In 2015 ARM returned £108 million by way of ordinary dividends. In addition, ARM will continue to repurchase shares over time to offset the dilution from share-based compensation.

Based on the increased investment in R&D in 2016 and the current pipeline of acquisition opportunities, the Board is comfortable with the levels of net cash expected in the coming year, and will review again at the start of 2017.

Technology Licensing

Processor licensing

51 processor licences were signed in Q4 2015, taking the total signed in the year to 173, reflecting the ongoing demand for ARM’s latest technology.

Eleven of the licences signed were for ARM’s Cortex-A series processors, mainly for use in smartphones, computer vision and automotive applications. Eight of the licences were for processors based on the ARMv8-A architecture, including six for future generations of advanced processors still in development.

During the quarter, ARM introduced a new type of licence for lead partners called the “Built on ARM Cortex Technology” licence. This new licence involves a deep technical collaboration between ARM and the silicon partner, resulting in ARM delivering a customised design built on an ARM Cortex processor that has been adapted to the partner’s unique requirements. This further increases the ability of partners to optimise their chip design, whilst remaining fully software compatible with the ARM software ecosystem. Qualcomm is the first “Built on ARM Cortex Technology” licensee, with their agreement covering multiple ARM processors.

Twenty-five of the licences signed in Q4 were for Cortex-M class processors for use in the key components of smart connected devices: microcontrollers, industrial controllers, medical equipment, smart sensors and low-power wireless communication chips. Two 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 also signed an ARMv8-M architecture licence in the quarter, with a Partner targeting secure devices.

ARM signed eight licences for its Mali multimedia processors which are used in devices with graphics displays, such as smartphones, mobile computing devices, digital TV and automotive applications. Included within these eight licences were three future processors still in development. Two of the licences signed in Q4 were for our Mali display technology IP, and one for our Mali video processor.

Q4 2015 and Cumulative Processor Licensing Analysis

* Includes ARM7, ARM9, ARM10 and ARM11

** Includes CPU and Mali subscription licences

*** Includes one company taking their first Mali graphics licence

† Includes all extant licences that are 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 7nm. During the quarter, ARM signed physical IP platform licences for the next generation of manufacturing technology, at 10nm and 7nm. In addition, ARM signed a physical IP platform licence for high-volume manufacturing of lower cost chips, such as microcontrollers, at 130nm.

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 two licences for POP IP optimised for a future ARM processor optimised at 28nm and 16nm.

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:

• Automotive applications that are increasingly requiring more connectivity and computing capability and several ARM Partners including NVIDIA, Qualcomm and Renesas announced new ARM-based super-computers for advanced driver assistance systems
• Several companies announcing ARMv8-A-based networking chips, including the Annapurna Alpine Platform-on-Chip (Home Network and Storage), the Broadcom BCM4908 (Router) and the Marvell Armada 3700 (retail networking)
• Multiple ARM Partners announced new ARM-based chips for servers and super computers including AMD, NVIDIA and Qualcomm, and several OEMs announced new equipment for servers utilising ARM-based server chips including E4 Computer Engineering, Gigabyte, Inventec, Penguin Computing and Wistron
• University of Michigan announcing the world’s smallest computer with an ARM Cortex-M0 based chip measuring just 0.4mm vs 0.8mm
• Enlighten, ARM’s global illumination technology, was chosen for more leading console games including the likes of Square Enix’s Final Fantasy VII Remake as well as upcoming mobile titles from Exient, Perfect World and all developers using Unity 5 game engine
• At the Consumer Electronics Show in Las Vegas multiple OEMs, including LG, Philips, Sony, TCL, and Vizio, announced digital TV’s using ARM-based chips, supporting high dynamic range technology such as Dolby Vision.

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 4.0 billion ARM processor-based chips, up 16% year-on-year (not including any of the chips related to the catch-up payment recognised in Q4).

Growth in the number of ARM-based chips shipped into embedded applications continued, with particularly strong growth in ARM-based microcontrollers and smartcards, up 25% year-on-year. In addition, ARM’s Partners reported a 20% increase in ARM-based chips being deployed into networking infrastructure equipment.

Q4 2015 Processor Unit Shipment Analysis

 

* Includes ARM7, ARM9, ARM10 and ARM11

Increasing the royalty revenue opportunity per chip

During the quarter, 16 companies reported that they had shipped a total of 240 million ARMv8-A based chips. Of these about 75 million chips contained a high number of cores, enabled by ARM big.LITTLE technology. These are being deployed in smartphones, tablets, other consumer electronic devices, enterprise networking and servers.

For the full year 2015, shipments of chips containing an ARM Mali graphics processor were 750 million, a 36% increase on 2014. Most Mali graphics processors are found in chips containing an ARM Cortex-A class processor, further increasing the royalty percentage per chip.

ARM’s physical IP dollar royalty revenue in Q4 2015 was up 36% year-on-year, with around 40% of royalty revenues generated from wafers manufactured at advanced nodes from 28nm to 14/16nm.

People

At 31 December 2015, ARM had 3,975 full-time employees, a net increase of 681 during the year, being mainly engineers joining ARM’s processor R&D teams. At the end of Q4 the Group had 1,577 employees based in the UK, 905 in the US, 628 in Continental Europe, 541 in India and 324 in the Asia Pacific region.

Earnings Tables [747KB PDF]

[1] Excluding a $9 million catch-up payment for prior years’ royalties under-reported to ARM by a customer

[2] Source: World Semiconductor Trade Statistics, January 2016

[3] Each American Depositary Share (ADS) represents three shares.