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ARM Holdings PLC - Results For The Third Quarter Ended 30 September 2003Sequential Increases in Revenue and Profit Before Tax and Strong Cash Flow in the Third Quarter
CAMBRIDGE, UK, 21 October 2003 —ARM Holdings plc [(LSE: ARM); (Nasdaq: ARMHY)] announces its unaudited financial results for the third quarter and nine months ended 30 September 2003.
HIGHLIGHTS (Figures in US GAAP)
Third quarter ended 30 September 2003 * Each American Depositary Share (ADS) represents three shares
Commenting on the third quarter results, Warren East, Chief Executive Officer, said:
"Following the up-tick in licensing activity in Q2, we are pleased to see the promising mix of license deals in Q3 between new and existing partners, across a range of licensing models. We see this improvement arising both as a result of the increased adoption of the ARM® architecture among semiconductor companies and of the timing of the ARM11™ product cycle. New product introductions are expected to continue to drive further licensing opportunities, however we remain cautious as to when ARM's licensing revenues will benefit from any general semiconductor recovery."
Tim Score, Chief Financial Officer, added:
"We are encouraged by further sequential increases in revenues and profits and by the generation of more than £10 million of cash in the third quarter. Nevertheless, we intend to continue to manage our cost base carefully as the timing of any general industry-led upturn in licensing activity levels remains uncertain."
Operating review
Market conditions, current trading and prospects
In the third quarter, a number of important licensing deals were signed and record royalty results achieved, both in terms of revenues and unit shipments. As a consequence of these licensing deals, the backlog (defined as the aggregate value of contracted business not yet recognised in the profit and loss account) was higher at the end of September 2003 than it was at the end of June 2003.
Although a higher than expected proportion of those licensing deals that we anticipated signing in the second half have closed in the third quarter, based on the current levels of licensing activity and on the momentum underlying royalty revenues and despite recent weakness in the US dollar, we expect that revenues in Q4 will be similar to Q3 levels.
Licensing
Future licensing opportunities are underpinned by the forthcoming introduction of new products which incorporate the new technology features announced earlier in the year, including the TrustZone™ security extension, the Thumb®-2 extension for improved code density and Intelligent Energy Manager™ (IEM) software for low power consumption. Two new ARM11 family cores, the ARM1156T2(F)-S™ and the ARM1176JZ(F)-S™ cores, which include a number of these new technology features, were announced last week at the Microprocessor Forum in San Jose, Calif., as was a new PrimeXsys™ Platform powered by these CPUs. Partner feedback on the ARM1136EJ-S™ core, which was delivered to lead partners in December 2002, continues to be encouraging and we now have the first ARM11 core family working silicon.
The Foundry Programme continues to be a good entry point for those companies licensing ARM technology for the first time. We anticipate that the momentum behind this Programme will be maintained by the recently-announced introduction of the ARM926EJ™ core into the Programme, which single use design licensees are now able to have manufactured by two of our Foundry partners, TSMC and UMC. For the first time in this Programme, ARM is also offering a more complete design package, the ARM926EJ Prime Starter Kit, which includes the core and a new PrimeXsys Platform.
Progress continues to be made in our non-CPU licensing business comprising the licensing of platforms, peripherals, models and application software. For example, since the end of the second quarter, Superscape Group plc, the interactive 3D technology enabling specialist in which ARM holds a 12% equity interest, has announced that the Swerve i3D Graphics Client technology, developed jointly by ARM and Superscape, has been licensed to Motorola, Samsung and Siemens, demonstrating the increasingly widespread acceptance of the Swerve technology. Royalty revenues recognised in the quarter ended 30 September 2003 (we receive and report royalty data one quarter in arrears) were £11.0 million on 188 million units shipped, up 77% and 52% respectively on the same period a year ago. These record results were achieved despite the inventory issues in Asia which we referred to in our Q2 earnings release, which negatively impacted the shipments made by some of our partners in the second quarter (but which are reported by us in Q3). A further five partners began shipping ARM core-based products in the quarter to June 2003, bringing the total number of licensees shipping to 55. Average royalty rates in the third quarter were marginally up on the previous quarter (9.17 cents per unit compared to 9.05 cents) due primarily to the increasing proportion of ARM9™ family cores being shipped by our partners. Of the total reported unit shipments in the third quarter, 16% related to units based on ARM9 technology. The broad reach of the ARM technology is demonstrated by the fact that royalty revenues are being earned from products being shipped into a wide range of end markets. The wireless market remained the largest end market using ARM technology in the third quarter, accounting for approximately 66% of unit shipments.
People
Legal matters
As part of the out of court settlement of a patent infringement lawsuit against picoTurbo Inc. in December 2001, ARM agreed to invest or otherwise pay the sum of $3,025,000 in cash with respect to a newly incorporated fabless semiconductor company that picoTurbo's shareholders planned to set up to sell ARM microprocessor cores under license from ARM. The amount was disclosed as a contingent liability in ARM's 2001 and 2002 statutory accounts. ARM originally expected that the new company would be incorporated and commence operations during 2002 following agreement of an appropriate business plan and a satisfactory investment agreement to protect the value of ARM's investment. To date, ARM has not received the relevant documentation, but in spite of this, Herodion (picoTurbo's successor entity) has alleged, among other things, that ARM is required to pay the $3,025,000. In an attempt to resolve these issues, ARM and Herodion have submitted the dispute to arbitration in California. Herodion claims, among other things, that ARM has breached the December 2001 settlement agreement and now seeks damages in compensation, including compensation for loss of license revenue and royalty payments. ARM believes that it is unlikely that Herodion's claims will be successful and is confident that the outcome of any arbitration will uphold ARM's position. Notwithstanding this, ARM and Herodion have scheduled mediation for the fourth quarter of 2003 where ARM will consider settlement of this dispute if appropriate terms can be agreed.
Patent protection
Financial review Third quarter ended 30 September 2003
Revenues Total revenues for the third quarter ended 30 September 2003 amounted to £31.7 million, representing a 1% increase from £31.4 million in the second quarter of 2003, and a 5% decrease over third quarter 2002 revenues of £33.3 million.
License revenues amounted to £13.1 million representing 41% of revenues compared to £12.7 million or 40% of revenues in the second quarter of 2003 and £17.9 million or 54% of revenues for the corresponding period in 2002. We signed 16 licenses with partners during the third quarter of 2003, seven of which were with new partners, bringing the total number of semiconductor partners to 122, after taking into account three companies which had signed licenses in previous periods but which are not utilising the license and no longer have access to ARM technology. Of the new partners, two took licenses for the ARM926EJ-STM core, two for the ARM946E-S™ core, two took per use licenses for the ARM946E™ core and one foundry took a license for the ARM7TDMI® core. Of the nine existing partners who took licenses in the quarter, there were three upgrades, where existing partners took licenses to a new family of cores that they had not previously licensed. One of these took a per use license for the ARM926EJ core, one took a term license for a range of ARM11 core family products and one took a license for the next generation of ARM microprocessors. There were five derivatives, where existing partners took licenses to cores within a family of cores that they had previously licensed. Of these, two foundries and one semiconductor partner took licenses for the ARM926 core, one partner took a license for the ARM7TDMI-S® core and one partner converted their per use license for the ARM7TDMI core to a term license. Finally, one existing partner took an architecture license.
Royalty revenues in the third quarter were £11.0 million accounting for 35% of revenues compared to £10.2 million or 33% of revenues in the second quarter of 2003 and £6.2 million or 19% of revenues for the corresponding period in 2002. Sales of development systems were £4.1 million, representing 13% of total revenues compared to £4.8 million or 15% of total revenues in the second quarter of 2003 and £5.0 million or 15% of revenues in the third quarter of 2002. Service revenues were £3.5 million, representing 11% of total revenues, comprising consulting fees of £0.5 million and support, maintenance and training fees of £3.0 million compared to total service revenues of £3.7 million in the second quarter of 2003 and £4.2 million for the corresponding period in 2002.
Gross margins
Operating expenses
Operating margins
Interest
Earnings and taxation
Third quarter fully diluted earnings per share prepared under US GAAP were 0.5 pence (2.3 cents per ADS) compared to 0.6 pence (2.7 cents per ADS) for the corresponding period in 2002 and 0.4 pence (2.1 cents per ADS) in the second quarter of 2003.
Balance sheet and cash flow
Accounts receivable decreased to £19.5 million at 30 September 2003 from £19.9 million at 30 June 2003. The allowance against receivables decreased to £1.6 million at 30 September 2003 compared to £2.3 million at the end of 30 June 2003, primarily due to the write-off of one receivable of circa £0.7 million which had been fully provided.
Dividend
Download Q3 2003 Earnings Financial Tables (25K PDF) 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. More information on ARM is available at http://www.arm.com
ARM, ARM7TDMI, Thumb, RealView and Jazelle are registered trademarks of ARM Limited. ARM7EJ-S, ARM922T, ARM926EJ, ARM926EJ-S, ARM1026EJ-S, ARM11, ARM1136J-S, ARM1156T2-S, ARM1156T2F-S, ARM1176JZ-S, ARM1176JZF-S, AMBA, TrustZone and PrimeXsys 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, ARM Consulting(Shanghai) Co.Ltd and ARM Belgium N.V.
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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