ARM Holdings plc Reports Results for the Second Quarter 2016

CAMBRIDGE, UK, 27 JULY 2016 - ARM Holdings plc [(LSE: ARM); (NASDAQ: ARMH)] announces its unaudited financial results for the quarter ended 30 June 2016.

* Normalised figures are based on IFRS, adjusted for acquisition-related charges, share-based payment costs, share of results of joint ventures, intangible amortisation, Linaro-related charges and profit/loss on disposal of investments. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document - see notes 12.8 and 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 and short-term borrowings, adding back dividend payments and share buy-backs, investment and acquisition consideration, other acquisition-related charges, share-based payroll taxes, investment in and loans to joint ventures, payments related to Linaro, and deducting inflows from share option - see notes 12.3 to 12.7.

Q2 2016 Financial Summary

Group revenues in US$ up 9% year-on-year (£ revenues up 17%)
Processor licensing revenues in US$ up 14% year-on-year (£ revenues up 24%)
Processor royalty revenues in US$ up 11% year-on-year, outperforming the industry by 14 pp¹ (£ revenues up 19%)
Normalised operating expenses of £130.7 million at the lower end of the guided range of £130-133 million
Normalised PBT up 5% year-on-year (IFRS up 1%). Normalised EPS up 18% (IFRS up 17%)
Interim dividend increased by 20%
Acquired Apical, a global leader in imaging and embedded computer vision
Announcement of a strategic partnership with the Chinese private equity firm HOPU Investment Management, launching an industry fund focused on the Internet of Things, smart devices, big data and cloud computing

Progress on long-term growth drivers in Q2 2016

Growth in adoption of ARM^® processor technology
- 25 processor licences signed by a broad range of major technology companies
- Major strategic design wins announced with leading organisations including NASA for embedded computing, and Fujitsu and RIKEN for high-performance supercomputing
Strong demand for ARM's most advanced technology
- Five licences signed for ARM Cortex-A technology for high-performance and high-efficiency apps processors
- Architecture licence signed with Guizhou Huaxintong Semiconductor, the joint venture between Qualcomm and Guizhou Province that will develop advanced server chipsets for the Chinese market
- Physical IP platform licence signed for 10nm technology
Growth in shipments of chips based on ARM technology
- 3.6 billion ARM-based chips shipped, up 9% year-on-year
- Rising penetration of advanced technologies such as Mali and octa core in mobile and consumer devices

Outlook

Given the restrictions placed on forward-looking statements as a result of the recommended offer by SoftBank for ARM, it is not appropriate to provide the usual full-year 2016 revenue guidance.

Simon Segars, Chief Executive Officer, said:

"Our royalty revenue growth continues to outperform the wider semiconductor industry, driven by market share gains and the increasing adoption of ARM's latest technologies. With more end-users selecting ARM technology for products ranging from sensors to satellites to supercomputers, we expect this outperformance will continue.

"ARM is continuing to invest in products that will support our partners' roadmaps as they develop next-generation technologies such as 5G networks, autonomous vehicles and the Internet of Things. Our recent acquisition of Apical enhances our expertise in visual computing, a rapidly-advancing field which is enabling smart buildings, augmented reality, self-driving cars and advanced robotics. As new technologies are created and new markets emerge, ARM will continue to evolve its products and business models to capture the opportunities ahead."

*** Dollar revenues are based on the Group's actual dollar invoicing, where applicable, and use 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.

Financial review

All measures are IFRS unless otherwise stated; see section "Use of non-IFRS measures" below.

Total revenues

Total dollar revenues in Q2 2016 were $387.6 million, up 9% versus Q2 2015. Q2 sterling revenues of £267.6 million were up 17% year-on-year.

Half-year dollar revenues in 2016 amounted to $785.6 million, up 11% on H1 2015. Half-year sterling revenues in 2016 amounted to £544.1 million, up 19% on H1 2015.

Licence revenues

Total dollar licence revenues in Q2 2016 increased by 7% year-on-year to $161.3 million, representing 42% of Group revenues. Licence revenues comprised $147.6 million from processor licences and $13.7 million from physical IP licences. Processor licence revenue was up 14% year-on-year driven by 25 processor licences signed. Physical IP was down 37% year-on-year, due to the timing of engineering milestones and a trend to more single-use POP licences.

Group order backlog at the end of Q2 2016 was down around 10% sequentially.

Total sterling licence revenues in Q2 2016 increased by 16% year-on-year to £111.6 million, comprising £102.2 million from processor licences and £9.4 million from physical IP licences.

Royalty revenues

Total dollar royalty revenues in Q2 2016 were up 12% on Q2 2015 at $196.6 million, representing 51% of Group revenues. Royalty revenues comprised $176.7 million from processors and $19.9 million from physical IP. Processor royalty revenue grew 11% year-on-year, representing 14% outperformance vs relevant semiconductor industry revenues, which were down 3% year-on-year over the corresponding shipment period (calendar Q1 2016 compared to calendar Q1 2015). The outperformance was driven by continued market share gains and the increasing deployment of advanced ARM technologies.

Physical IP royalty revenue grew 18% year-on-year due to the increase in shipments of wafers using ARM's physical IP at advanced nodes.

Total sterling royalty revenues in Q2 2016 increased by 19% year-on-year to £135.6 million, comprising £121.9 million from processor licences and £13.7 million from physical IP licences.

Other revenues

Sales of software and tools in Q2 2016 were $15.3 million, an increase of 11% year-on-year. Part of the year-on-year increase is the inclusion of revenues from the acquisition of Carbon Design Systems in Q3 2015. Service revenues were $14.4 million in Q2 2016, down 12% year-on-year. Together revenues from software and tools and services represented 7% of Group revenues.

Total sterling software and tools revenues in Q2 2016 were £10.7 million, an increase of 22% year-on-year. Service revenues were £9.7 million in Q2 2016, down 7% year-on-year.

Gross margins

Normalised gross margins in Q2 2016 were 96.4% compared to 96.7% in Q1 2016 and 96.3% in Q2 2015. IFRS gross margins in Q2 2016 were 96.2% compared to 96.5% in Q1 2016 and 96.1% in Q2 2015.

Normalised operating expenses and operating margin

Normalised operating expenses were £130.7 million in Q2 2016 compared to £132.9 million in Q1 2016 and £99.3 million in Q2 2015. The year-on-year increase is primarily due to the increase in headcount. This includes a charge of £3.1 million relating to the revaluation of monetary items and £0.8 million relating to Apical cost base since acquisition; excluding these items normalised operating expenses for Q2 2016 were £3.2 million below the guided range of £130 million to £133 million.

Normalised operating margin was 47.6% in Q2 2016, compared to 48.6% in Q1 2016 and 52.9% in Q2 2015.

Normalised research and development expenses were £67.9 million in Q2 2016, representing 25% of revenues, compared to £68.1 million in Q1 2016 and £51.1 million in Q2 2015. Normalised sales and marketing expenses were £24.2 million in Q2 2016, representing 9% of revenues, compared to £24.9 million in Q1 2016 and £21.1 million in Q2 2015. Normalised general and administrative expenses were £38.6 million in Q2 2016, representing 14% of revenues, compared to £39.9 million in Q1 2016 and £27.1 million in Q2 2015.

IFRS operating expenses and operating margin

Total IFRS operating expenses in Q2 2016 were £162.6 million (Q2 2015: £127.3 million). The IFRS operating margin was 35.4% (Q2 2015: 40.4%).

Total IFRS operating expenses in Q2 2016 include share-based payment costs and related payroll taxes of £24.0 million (Q2 2015: £17.4 million), plus amortisation of intangible assets and other acquisition-related charges of £7.9 million (Q2 2015: £3.2 million). In addition, in Q2 2015, total IFRS operating expenses include Linaro-related charges of £7.0 million and a loss on disposal of investments of £0.4 million. Total share-based payment costs and related payroll tax charges of £24.7 million in Q2 2016 were included within cost of revenues (£0.7 million), research and development (£17.3 million), sales and marketing (£3.5 million) and general and administrative (£3.2 million).

IFRS research and development expenses were £90.9 million in Q2 2016, compared to £86.3 million in Q1 2016 and £65.5 million in Q2 2015. Normalised sales and marketing expenses were £27.9 million in Q2 2016, compared to £28.0 million in Q1 2016 and £24.1 million in Q2 2015. Normalised general and administrative expenses were £43.8 million in Q2 2016, compared to £42.7 million in Q1 2016 and £37.7 million in Q2 2015.

Earnings and taxation

Normalised profit before tax in Q2 2016 was £130.1 million compared to £123.9 million in Q2 2015. After including acquisition-related charges and share-based payment costs, intangible amortisation and share of results of joint ventures, IFRS profit before tax was £95.9 million in Q2 2016 compared to £94.7 million in Q2 2015.

The Group's effective normalised tax rate was 6.0% in Q2 2016 (IFRS: 6.2%). This quarter's effective tax rate is lower than the prior quarters due to the release of a tax provision of £11.5 million following the receipt of correspondence from a tax authority.

In Q2 2016, normalised fully diluted earnings per share were 8.6 pence (34.6 cents per ADS²) compared to 7.3 pence (34.4 cents per ADS) in Q2 2015. IFRS fully diluted earnings per share in Q2 2016 were 6.3 pence (25.5 cents per ADS) compared to 5.4 pence (25.6 cents per ADS) in Q2 2015.

Balance sheet

Intangible assets at 30 June 2016 were £1,056.3 million, comprising goodwill of £874.2 million and other intangible assets of £182.1 million, compared to £671.0 million and £89.7 million respectively at 31 March 2016.

Total accounts receivable were £221.5 million at 30 June 2016, compared to £224.9 million at 31 March 2016; see note 6 for more information. Available-for-sale current assets have risen £24.2 million since 31 December 2015, primarily due to increases in the share price of Thunder Software Technology Co Ltd, which listed on the Shenzhen Stock Exchange in December 2015.

Net cash generation and interim dividend

Net cash generation in Q2 2016 was £127.9 million. Net cash at was £805.2 million, compared to £1,005.9 million at 31 March 2016. See note 12.1 for the components of the net cash figure - these include a short-term borrowing facility of £55.0 million which was repaid on 11 July 2016.

In respect of the year to 31 December 2016, the directors are declaring an interim dividend of 3.78 pence per share, an increase of 20% over the 2015 interim dividend of 3.15 pence per share; see note 5 for details of the record date and payment date.

In Q2 2016, 2.0 million shares were bought back at a total cost of £18.8 million.

Technology Licensing

Processor licensing

In Q2 2016 ARM signed 25 processor licences, reflecting the ongoing demand for ARM's latest technology. ARM signed licences with thought-leading semiconductor companies in each of its target end markets including smartphone application processors, networking, servers and deeply embedded computing.

Included within the 23 companies signing licences were 12 acquiring their first ever ARM processor licence. One of these was Guizhou Huaxintong, a joint venture between Qualcomm and China's Guizhou province. The venture will accelerate advanced server chipset technologies in the rapidly expanding Chinese server market, the second largest data center market in the world.

Five of the licences signed were for ARM's Cortex-A series processors, mainly for use in smartphones and networking infrastructure applications. This included a licence for a next-generation processor for premium mobile devices.

Thirteen of the licences signed in Q2 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. One of these was a license for the next-generation processor codenamed "Teal" for energy-efficient and secure embedded applications.

Two of the licences were for Cortex-R class processors for use in advanced memory control and wireless communications applications.

ARM signed two licences for its Mali multimedia processors for use in mobile computing devices and digital TVs.

Q2 2016 and Cumulative Processor Licensing Analysis

Physical IP licensing

ARM's physical IP is used by fabless semiconductor companies to implement their chip designs. ARM has two types of physical IP: royalty-bearing platform IP, which is licensed to foundries, and POP IP, which is licensed to semiconductor companies.

Foundries require a platform licence for each manufacturing process on which they wish to deploy ARM physical IP. ARM has signed more than one hundred platform licences, from 250nm to 7nm. During the quarter ARM signed an agreement with an important foundry for their new 10nm manufacturing process. POP IP licenses enable semiconductor companies to optimise the power, performance and manufacturing cost of their ARM-based chips on a particular manufacturing process. ARM has signed more than 90 POP licenses, including two signed in Q2 2016.

A recent trend in the industry has seen foundries introduce new manufacturing processes on older nodes, e.g. the low power derivatives for 55/40/28nm announced by TSMC, Samsung and UMC. Process iterations are becoming more frequent, and in the long-run, we expect this trend will increase demand for platform physical IP. In the near-term, however, this trend has impacted the mix of POP IP licenses we have signed: more companies have been choosing to take a single-use POP IP licence for each process iteration, rather than take a multiple-use licence that would allow them to make several chip designs on that process.

ARM's physical IP dollar licence revenue in Q2 was down 37% year-on-year (down 31% in sterling), at a similar level to the prior quarter. This fall year-on-year is due to strong licencing throughout 2015, the timing of engineering milestones, and the trend to more single-use POP IP licenses.

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:

Fujitsu revealing that the next generation of supercomputer for the RIKEN Advanced Institute for Computational Science will be based on ARM technology
Cavium announcing Thunder X2, its second generation of ARM-based chips for server applications
Applied Micro making available Mudan, a reference platform for Ceph storage servers
NASA selecting the ARM architecture for its High Performance Spaceflight Computing (HPSC) Processor Chiplet program to provide optimal power-to-performance for upgradeability, software availability, ease of use, and cost.
Xilinx announcing new additions to its Zync MPSoC portfolio of ARM-based chips including the "CG" family based on quad Cortex-A53, dual Cortex-R5 and Mali graphics processors. These are targeting a breadth of markets, including motor control, sensor fusion, medical endoscopy, and handheld radios.
NXP announcing four members of the QorIQ LS2 family of networking processors based on the Cortex-A72 and NXP's second-generation packet-processing hardware.
Mellanox announcing a new SoC family that integrates its ConnectX Ethernet-adapter designs with the Tilera processor technology acquired with EZchip. Code-named BlueField, the new SoCs will have up to 16 ARM Cortex-A72 cores.
Broadcom launching its first ARMv8-A StrataGX SoCs with Cortex-A57 CPUs and a host of accelerators for realizing virtual network functions.

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 3.6 billion ARM processor-based chips, up 9% year-on-year.

Q2 2016 Processor Unit Shipment Analysis

Increasing the royalty revenue opportunity per chip

During the quarter, approximately 250 million chips contained ARMv8-A processors. The proportion of smartphones containing ARMv8-A technology was similar to the previous quarter, at around 65%. 110 million chips contained a high number of cores enabled by ARM big.LITTLE technology. This takes the proportion of smartphones with a high core count to around 30% up from around 25% in the prior quarter. The proportion of smartphones containing Mali graphics processors also continued to rise. Two companies shipped their first chips containing ARM's Mali graphics technology, taking the total number of Mali shippers to 29.

ARM's physical IP dollar royalty revenue in Q2 2016 was up 18% year-on-year (up 25% in sterling).

Acquisition of Apical

On 18 May 2016, ARM announced it had acquired Apical Limited (Apical). Apical is a global leader in imaging and embedded computer vision technology that can be used in advanced smartphones and other consumer/industrial devices including IP cameras, digital stills cameras and tablets. The acquisition closed on 17 May 2016 for a consideration of £237.9 million paid in cash in full, and £13.6 million of contingent consideration.

Around 100 people, mainly R&D engineers, transferred to ARM. Over the next few years, ARM intends to increase investment to accelerate the development of this imaging and computer vision technology, to enable markets where visual computing can deliver a transformation in device capabilities and the way humans interact with machines.

See note 9 for more information.

People

At 30 June 2016, ARM had 4,227 full-time employees, compared with 4,064 at 31 March 2016, and 3,524 at 30 June 2015. At the end of Q2 the Group had 1,695 employees based in the UK, 957 in the US, 684 in Continental Europe, 537 in India and 354 in the Asia Pacific region.

Around 20% of ARM's UK-based employees are non-British European Union nationals. The result of the referendum on the UK's membership of the European Union increases the uncertainty around our ability to recruit and retain appropriately qualified people.

Use of non-IFRS measures

Included with the highlights and the commentary to the results are certain non-IFRS measures. We present normalised operating expenses and normalised profit from operations and normalised profit before and after tax. Normalised operating expenses are those that the Group manages on a day-to-day basis and largely reflect the cash flows of the business. All staff, including senior management, are remunerated according to the Group's performance against the normalised results.

Normalised measures are adjusted to exclude exceptional items, share-based compensation charges including payroll taxes incurred and those provided on unvested awards, amortization of intangibles acquired with business combinations, other acquisition-related charges including third-party integration costs, profit or loss on disposal of investments, share of results of joint venture and costs of associate undertakings. Where such non-IFRS measures are presented, we provide a reconciliation to the most directly comparable IFRS measures (see 12.8 to 12.11).

We believe that disclosing such non-IFRS measures enables analysts and investors to isolate and evaluate clearly the impact of the items detailed above on the financial performance of the Company. We believe this also allows for a fuller understanding of performance from year to year. Management believes that this provides analysts and investors with valuable additional information which gives them an improved insight into the business.

It should be noted that the non-IFRS measures presented are adjusted items and that all items for which the non-IFRS measures are adjusted are included in our reported financial information because they represent real costs of our business in the periods presented. As a result, non-IFRS measures merely allow investors to differentiate among different kinds of costs and they should not be used in isolation.

We present a net cash figure which includes all cash instruments, being cash, cash equivalents, short and long term deposits and similar instruments, net of any borrowings and accrued interest. The different classifications are more related to the length and maturity profile of the instruments rather than the underlying asset itself. As these can move from one classification to another between periods, presenting them in aggregate is a more consistent measure of the overall balance. Similarly, a net cash generation number is shown to demonstrate the movement in net cash that has arisen excluding those items that are more financing in nature, thereby reflecting the cash flows purely from the normal business operations. These include dividends and share buybacks, share awards, investment and acquisition consideration, and other acquisition-related cash flows, which can be large and irregular and can detract from the cash being generated from ongoing operations.

We also present revenues in US dollars since this is the predominant currency in which the revenues are received. This gives a clearer indication of the underlying revenue performance since it largely eliminates foreign exchange rate movements.

Principal risks and uncertainties

The principal risks and uncertainties faced by the Group in 2016 are included within the "Risk management" section of the 2015 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 2015 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 are expected to materially impact the Group. These risks include but are not limited to: ARM's quarterly results may fluctuate significantly and be unpredictable for multiple reasons, including movements in currency exchange rates, 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; an infringement claim against ARM's technology may result in a significant damages award which would adversely impact ARM's operating results; and ARM may find it difficult to recruit and retain appropriately qualified people in order to achieve its growth ambitions.

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.

¹ Relevant industry revenues were down 3%, World Semiconductor Trade Statistics, July 2016

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