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ARM Holdings PLC Results For The Nine Months Ended September 30,2002ARM Holdings plc announces third quarter revenues of £33.3 million and pre-tax profit of £8.0 million CAMBRIDGE, UK, October 15, 2002--ARM Holdings plc [(LSE: ARM); (Nasdaq: ARMHY)] announces its unaudited financial results for the third quarter and the nine months ended September 30, 2002.
FINANCIAL HIGHLIGHTS (US GAAP)
Third quarter ended September 30, 2002
Nine months ended September 30, 2002
Commenting on the results, Sir Robin Saxby, Chairman, said: "Although the difficult medium term outlook for our industry has necessitated an adjustment to our cost base, we are determined that ARM will not be diverted from its objective to become the significant global standard architecture in embedded microprocessors."
Warren East, Chief Executive Officer, added: "Even though the length and severity of the current semiconductor industry downturn has now impacted ARM's financial results, we are confident that the company's business model remains robust and resilient. By taking decisive action to reduce our employee costs now, we will be better positioned to benefit from any improvement in market conditions. In the meantime, we will continue to focus on strengthening our competitive position, building on our leadership in the wireless market and increasing our penetration of newer markets."
Tim Score, Chief Financial Officer, said: "ARM continues to be profitable and cash generative despite the fall in revenue due to the prolonged semiconductor industry downturn. Sustained efforts to improve working capital performance and tightly manage the cost base will enable us to balance long term growth opportunities and short to medium term trading pressures."
Review of Third Quarter ended September 30, 2002
Operating environment
Market conditions
On 2 October 2002, ARM issued a Q3 trading update which referred to the persistent downturn in the semiconductor industry. In our half year update in July 2002, we indicated that, notwithstanding the difficult market conditions, we expected growth in the remainder of 2002 to be consistent with that achieved in the first half. This outlook was based on the visibility afforded by our sales pipeline and backlog of contracted business at that time, together with indications that reasonable prospects existed for a general industry upturn in the second half of 2002.
There has in fact been no upturn in the industry in the second half to date. Indeed, conditions deteriorated further in the third quarter, resulting in a deferment of investment decisions by our partners and therefore a slowdown in licensing activity. It is our current view that, unless industry conditions improve, the timing of closure of licensing deals with our partners will continue to be affected.
Key long-term growth indicators for the company remain healthy and we have seen no evidence that the slowdown in licensing activity in the third quarter has resulted from loss of business to our competitors. Indeed, we believe that our relative competitive position has strengthened through the downturn as new and existing partners have further demonstrated their commitment to ARM's product roadmap and extensive third party network which supports the ARM technology. We aim to strengthen our competitive position further with the launch of the new ARM1136J-S™ core, more licensing of the recently introduced ARM1026EJ-S™ core, the introduction of additional platform products, the recent launch of several new development systems products and the expansion of the foundry programme.
Current trading and prospects
Notwithstanding the positive long-term growth indicators, we are taking a cautious view of the revenue outlook in the short to medium term. The slow-down in licensing activity has caused the backlog to decrease, however the percentage decline in the backlog is less than the percentage fall in revenues between the second and third quarters. Although the current run rate of royalty revenues, sales of development systems and services business, together with contracted revenue already in the backlog, give us reasonable visibility of future revenues, the timing of the closure of new license deals is unpredictable. We therefore anticipate that, based on the Q3 2002 run rate of £33 million, revenues are likely to be flattish for the foreseeable future.
In anticipation of an uncertain outlook for revenues in the medium term, we will be managing our cost base tightly. To this end we have decided to reduce our employee costs by approximately £5 million per annum with approximately 10% of our total workforce being made redundant before the end of this year. As a result of this action, our Q4 2002 results will include a one-off charge of approximately £2 million. Following this reduction, our total headcount will be at a similar level to a year ago. We believe that this level is more appropriate given the current industry outlook.
Financial review
Revenues Total revenues for the third quarter ended September 30, 2002 amounted to £33.3 million, representing a 23% decline from £43.2 million in the second quarter of 2002, and an 11% decrease on third quarter 2001 revenues of £37.6 million. The effect of the weakening US dollar was to reduce reported sterling revenues in the quarter by approximately £2 million. The effective $ to £ exchange rate in the third quarter was 1.53 compared to 1.45 in the second quarter.
License revenues amounted to £17.9 million representing 54% of revenues compared to £25.7 million or 60% of revenues in the second quarter of 2002. We signed eight licenses with partners during the third quarter of 2002: two per-use licenses to new partners, four upgrades and two derivative licenses.
Both of the new per-use partners took licenses to the ARM7TDMI core. There were four upgrades where existing partners took licenses to a new family of cores that they had not previously licensed. Of these, there were two licenses to the ARM926EJ-STM core, one to the ARM1026EJ-S core and one to the ARM1136J-S core, the first core from the v6 architecture. There were also two derivative licenses sold in the third quarter, one for the ARM7TDMI core and one for the ARM946E-STM core. Within these numbers, two partners who had previously taken per-use licenses took full licenses, bringing the total number of partners to have done this to three.
Royalty revenues in the third quarter were £6.2 million accounting for 19% of revenues compared to £6.5 million or 15% of revenues in the second quarter of 2002 and £6.4 million or 17% of revenues in the third quarter of 2001. In dollar terms, royalty revenues in the third quarter were up sequentially at $9.6 million (Q2 - $9.4 million). Unit shipments for the quarter ending June 30, 2002 (we receive data one quarter in arrears) grew to 124 million units compared to 95 million units in the previous quarter. This included the shipments of smart cards by one of our partners which only reports every six months. Two new per-use licensees began shipping in the quarter. ARM now has 101 partners comprising 57 multi-use licensees (34 of whom are shipping) and 44 per-use licensees (3 of whom are shipping). The decline in royalty rates in the quarter to June 30, 2002 was principally due to a change in mix of the end products served, including the shipments of lower priced smart cards.
Sales of development systems amounted to £5.0 million, representing 15% of total revenues compared to £6.1 million or 14% of total revenues in the second quarter of 2002 and £5.3 million or 14% of revenues in the third quarter of 2001.
Service revenues were £4.2 million comprising consulting fees of £0.9 million and support, maintenance and training fees of £3.3 million compared to total service revenues of £4.9 million in the second quarter of 2002 and £4.1 million for the third quarter in 2001.
Gross margins Gross margins for the third quarter were 89%, down from 93% in the second quarter. Gross margins decreased in the quarter due to the proportion of licensing revenues in Q3 being smaller than in Q2.
Operating expenses Research and development expenses were £12.2 million in the third quarter of 2002 representing 37% of revenues. This compares to £13.0 million or 30% of revenues in the second quarter of 2002. Sales and marketing costs for the third quarter were £6.4 million compared to £6.3 million in the second quarter of 2002. General and administration expenses decreased from £5.9 million in the second quarter of 2002 to £4.0 million in the third quarter. This was principally due to the inclusion in costs in Q2 of accrued legal expenses and an increase in the provision for doubtful debts which did not recur in Q3. Headcount rose from 722 at the end of 2001 to 794 at the end of the third quarter of 2002. Operating margins were 21.0% for the quarter.
Earnings and taxation Income before income tax for the third quarter of 2002 was £8.0 million or 24.0% of revenues compared to £16.2 million or 37.5% of revenues in the second quarter of 2002 and £12.9 million or 34.3% of revenues in the third quarter of 2001.
Third quarter fully diluted earnings per share prepared under US GAAP were 0.6 pence (2.7 cents per ADS) compared to 0.9 pence (3.8 cents per ADS) for the corresponding period in 2001.
Balance sheet and cash flow Net cash inflow from operating activities of £15.0 million was generated in the third quarter. Cash and short term investments increased by £6.3 million in the quarter to £121.7 million at 30 September 2002.
Capital expenditure in the quarter amounted to £4.5 million, bringing the total spend for the nine months to date to £11.8 million. In addition, further expenditure of £5.3 million has been incurred in 2002 to date to lease design tools instead of purchasing them outright. Design tools leases are classified as Prepaid expenses and other assets and are written off over the life of the lease. Total capital expenditure and payments for leased tools amounted to £17.1 million in the nine months to 30 September 2002, compared to £13.1 million in the equivalent period in 2001.
Accounts receivable decreased from £40.2 million at 30 June 2002 to £28.2 million at 30 September 2002, reflecting good cash collections in the quarter and the reduced level of invoicing towards the end of the period compared to the latter stages of the second quarter. The provision for doubtful debts decreased from £2.3 million to £2.1 million in the quarter due to the receipt of monies, the collection of which had previously been considered uncertain.
Deferred revenues decreased to £13.8 million at the end of September 2002 from £17.4 million at 30 June 2002.
Financial Tables (13K PDF)
CONTACTS:
The financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 240 (3) of the Companies Act 1985. Statutory accounts of the Company in respect of the financial year ended December 31, 2001 have been delivered to the Registrar of Companies, upon which the Company's auditors have given a report which was unqualified and did not contain a statement under Section 237(2) or Section 237(3) of that Act.
About ARM ARM is the industry's leading provider of 16/32-bit embedded RISC microprocessor solutions. ARM licenses its high-performance, low-cost, power-efficient RISC processors, peripherals, and system-on-chip designs to leading electronics companies. The company also provides comprehensive support required in developing a complete system. ARM's microprocessor cores are rapidly becoming a volume RISC standard in applications such as automotive, consumer entertainment, security, imaging, industrial, mass storage, networking and wireless. ARM and ARM7TDMI are registered trademarks of ARM Limited. ARM7TDMI-S, ARM7EJ-S, ARM720T, ARM922T, ARM926EJ-S, ARM946E, ARM946E-S, ARM966E-S, ARM1022E, ARM1026EJ-S and ARM1136J-S are trademarks of ARM Limited. All other brands or product names are the property of their respective holders. "ARM" refers to ARM Holdings plc (LSE: ARM and Nasdaq: ARMHY) together with its subsidiaries including ARM Limited; ARM, INC.; ARM KK; ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS and ARM Consulting(Shanghai) Co.Ltd..
This announcement contains "forward-looking statements" including statements concerning plans, future events or performance and underlying assumptions and other statements which are other than statements of historical fact. The Company's actual results for future periods may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. The factors that could cause actual results to differ materially include, without limitation, potential for significant fluctuation in and unpredictability of results, the ability of semiconductor partners to manufacture and market microprocessors based on the ARM architecture; the acceptance of ARM technology by systems companies; the availability of development tools, systems software and operating systems; the rapid change in technology in the industry and ARM' s ability to develop new products in a timely manner; management of growth; competition from other architectures; general business and economic conditions; the growth in the semiconductor industry; the Company's ability to protect its intellectual property; and ARM' s ability to attract and retain employees.
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