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ARM Holdings plc Preliminary Results For The Year Ended 31 December 2004
32% growth in year-on-year dollar revenues. Strong bookings drive order backlog approximately 30% higher at the end of 2004 compared to the end of 2003
CAMBRIDGE, UK, 26 January 2005 - ARM Holdings plc [(LSE: ARM); (Nasdaq: ARMHY)] announces its unaudited financial results for the fourth quarter and twelve months ended 31 December 2004 HIGHLIGHTS (Figures in US GAAP) Fourth quarter ended 31 December 2004
Twelve months ended 31 December 2004
* 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. Approximately 90% of invoicing is in dollars. Commenting on the fourth quarter and full year results, Sir Robin Saxby, Chairman, said: "We are delighted that a year of strong operational performance for ARM was concluded with the completion of our merger with Artisan. I would like to thank the management and employees of both companies who worked tirelessly to make the merger happen. The combination of ARM® microprocessor IP with the physical IP provided by Artisan accelerates ARM’s momentum towards becoming the architecture for the digital age. We also are pleased that the ARM Board has been strengthened by the appointment of 4 new directors; their knowledge and experience will be invaluable assets." Warren East, Chief Executive Officer, added: "32% year-on-year growth in dollar revenues in 2004 and the positive trend in our order backlog indicate that the ARM stand-alone business is in robust shape. We look forward to 2005 with confidence as we start to realise the benefits arising from the merger with Artisan at the end of last year. Against a likely flatter trading environment in our industry, we expect dollar revenues in the underlying businesses to grow by at least 20% in 2005." Tim Score, Chief Financial Officer, added: "Again in Q4, revenue growth and careful cost control have combined to yield strong cash generation from ARM’s business. We were also particularly encouraged by the strong sequential improvement in licensing revenues, demonstrating that ARM continues to develop a broad range of new technologies which bring real benefit to the ARM Connected Community and end customers." Operating review Market conditions, current trading and prospects Both the former ARM and Artisan stand-alone businesses enter 2005 with healthy order backlogs and sales pipelines which underpin licensing revenues this year. In addition, both companies continue to enjoy good momentum in royalty revenues based on the increasing adoption of ARM and Artisan technology by semiconductor and OEM companies in recent years. The healthy order backlog and sales pipeline and strong momentum in royalty revenues gives confidence that dollar revenues in both underlying businesses are capable of growing by at least 20% in 2005. The group remains exposed to any further weakening in the US dollar against sterling given that more than 90% of total group revenues are earned in US dollars. Following the acquisition of Artisan, approximately 45% of the group’s cost base will be incurred in US dollars, compared to approximately 25% for ARM prior to the acquisition of Artisan. Licensing and product development Licensing activity in 2004 demonstrates both the breadth of ARM’s technology offer as well as the longevity of the products. For example, our partners have now been licensing products in the ARM7 family for more than 11 years, including an incremental 13 ARM7 family licenses in 2004. We expect that licensing of ARM7 family products will continue for some time, demonstrating the relevance of having leading-edge technology at all performance points in the embedded microprocessor space. Licensing of products in the ARM11 family continues to gather momentum with a further 15 licenses being signed in 2004, making a total of 25 licenses signed to date. As ARM11 products move into the mainstream licensing phase, it is encouraging that licensing of the next generation of ARM technology has commenced in 2004. We have now signed 3 lead partners for our "Tiger" product. Other new technologies planned for delivery in 2005 are now available for licensing. Further details of these products will be disclosed later in 2005. The strong licensing performance has driven a further increase in the order backlog in the quarter, resulting in backlog at the end of Q4 being up some 15% sequentially and being approximately 30% higher than at the end of 2003. Revenues from licensing of products other than microprocessors comprised 18% of total license revenues in 2004, compared to 17% in 2003. Following the acquisition of Adelante Technologies N.V., now ARM Belgium, in 2003, we formally announced the launch of our OptimoDE™ embedded signal processing technology in May 2004. This new technology, having undergone a series of rigorous benchmarking evaluations by our partners and potential partners, is now beginning to generate license revenues. In November 2004, we announced that Thomson had licensed our OptimoDE Data Engine for the development of broadcast video processing integrated circuits (ICs) and in January 2005, we announced that LG Electronics had licensed the OptimoDE solution for use in its video encoding and decoding product lines, with the first LG product scheduled to benefit from the technology being an H.264 based high-definition digital television. ARM has introduced this disruptive technology to address the processing requirements of very data-intensive applications across all end markets, which are often outstripping the capabilities of general-purpose digital signal processors (DSPs). The OptimoDE product, which comprises a configurable data engine (signal processor) together with related IP and tools, will be deployed in systems alongside existing ARM microprocessor cores and other ARM technology, including the electronic system level (ESL) design tools from Axys, acquired in August 2004. The acquisition of Axys, a provider of fast, accurate, integrated, processor and system modelling and simulation solutions, brings ESL expertise to our RealView® design tools portfolio. Axys’ ESL products reduce overall system costs by allowing designs to be modelled early in the development cycle, decreasing time-to-market and minimising design errors. In the second quarter 2004 we established an embedded software group within ARM to capitalise on the opportunities we see to generate revenues from software. This team will drive growth in embedded software revenue, building on the strong foundation of the existing Jazelle® acceleration technology, Intelligent Energy Manager (IEM) technology, TrustZone™ security software and Swerve (co-developed with Superscape Group plc) technologies and bring more focus to the development of enabling software technology to support further growth of microprocessor and physical IP licensing, development systems and data engines revenues. Royalty revenues and unit shipments Royalty revenues recognised in the quarter ended 31 December 2004 (we receive and report royalty data one quarter in arrears) were $29.4 million on 367 million units shipped, up 37% and 56%, respectively, on the same period a year ago. The average royalty rate per unit reported in the fourth quarter was 8.0 cents compared to 8.4 cents per unit in the third quarter. The sequential reduction in average royalty rate is due to several of our partners shipping higher volumes of more mature ARM7 and ARM9 family-based product in the third quarter. Of the total unit shipments reported in the fourth quarter, 24% related to units based on ARM9 family technology. As products based on the older ARM9 family technologies have only been shipping for a relatively short period, a number of our partners are moving through volume-related price breaks that is having an impact on the weighted average royalty rate. Unit shipments based on the ARM926EJ-S™ microprocessor accounted for approximately 3% of total shipments in the quarter. The proportion of ARM926EJ-S processor-based devices is expected to increase over the next several quarters. In 2004, the proportion of total unit shipments accounted for by the wireless segment was 68%, representing 868 million units. The 32% relating to the aggregate shipments in all sectors other than wireless represents 405 million units in 2004, more than triple the 119 million units shipped in 2002, demonstrating the increasing penetration of ARM technology in the full range of digital products. In 2004 unit shipments have grown strongly across all segments with particularly strong growth in the microcontroller, storage and consumer segments. Acquisition of Artisan Components, Inc. From a technology standpoint, the combined company will seek to leverage Artisan’s expertise in designing physical IP components, essential building blocks of ICs, with ARM’s complementary expertise in designing microprocessors. As a result, alongside the physical IP available for use with third party microprocessors, the combined company will be able to develop IP components that are highly optimised for use in and with ARM microprocessor cores. The opportunities for tighter integration and finer tuning of the IP components with the microprocessor cores has the potential to produce substantial benefits for end users, such as reduced power consumption and increased processor speed. The integration of the two businesses is proceeding as planned. The former Artisan business now forms the Physical IP division of ARM, with one unified worldwide sales force being responsible for selling the full range of products offered by the combined company. ARM’s office in Los Gatos, California will close in March 2005, with employees relocating to Artisan’s Sunnyvale facility, the new headquarters for ARM in the US. Good momentum was maintained in the Artisan business during the fourth quarter with total bookings being consistent with the levels achieved in recent quarters. In anticipation of the acquisition of the company by ARM, Artisan elected to carry forward as much backlog as possible into 2005. Total revenues in the quarter were $15 million, comprising license revenues of $7 million and royalty revenues of $8 million. A significant proportion of engineering effort in the quarter was directed towards research and development projects and technical marketing activity, rather than converting order backlog into revenue. As a result of the good bookings in the quarter and the decision not to convert backlog into revenue, the backlog at 31 December is well ahead of the prior quarter. Board changes On 4 January 2005, ARM announced the appointments of Simon Segars as an executive director and Philip Rowley as an independent non-executive director. Simon Segars joined ARM's engineering team in 1991. He has worked on many ARM CPU products and has held a number of engineering management positions. In January 2002 he was appointed Executive Vice President, Engineering and in January 2004 became Executive Vice President, Worldwide Sales. Philip Rowley is President and CEO of AOL Europe, the interactive services, web brands, internet technologies and e-commerce provider. He is a qualified chartered accountant and was Group Finance Director of Kingfisher plc from August 1998 to March 2001. Prior to that his roles have included Executive Vice President and Chief Financial Officer of EMI Music Worldwide. These appointments recognise the valuable contribution that Simon is already making to the direction of the business and Philip’s broad industry experience which will further strengthen the non-executive team. People Legal matters Financial review Fourth quarter ended 31 December 2004 Total revenues License revenues Nineteen licenses for microprocessor cores were signed in the fourth quarter of 2004. Four new partners took a total of five per use licenses; four to the ARM926EJ-S processor and one license to the ARM922T™ processor. Nine existing partners took licenses to a further 14 cores, comprising 3 derivatives from the ARM7 family, 5 derivatives and 1 upgrade to the ARM9 family, 3 upgrades to the ARM11 family and 2 upgrades to next-generation ARM cores. Royalty revenues Development Systems and Service revenues Gross margins Operating expenses In November 2004, ARM entered into a technology license agreement whereby ARM will pay $13.3 million in four equal, semi-annual installments over the next two years. The first installment of $3.3 million was paid in Q4 2004. For accounting purposes, the agreement is deemed to comprise a retrospective element amounting to $8.6 million (£4.5 million), which has been charged to the profit and loss account as a non-recurring charge in Q4 2004, and a prospective element amounting to $4.7 million (£2.4 million), which has been accounted for as a prepayment at 31 December 2004. Research and development expenses were £13.0 million in the fourth quarter of 2004, representing 31% of revenues. This compares to £13.0 million or 33% of revenues in Q3 2004. Sales and marketing costs for the fourth quarter were £6.3 million or 15% of revenues compared to £6.0 million or 15% of revenues in the third quarter of 2004. General and administration expenses in Q4 2004 were £11.3 million, including a non-recurring charge of £4.5 million in respect of a technology licensing agreement. Excluding this non-recurring charge, general and administration expenses in the quarter were £6.8 million or 16% of revenues compared to £6.2 million or 16% of revenues, in the third quarter of 2004. Operating margins Interest receivable Earnings and taxation Fourth quarter fully diluted earnings per share prepared under US GAAP were 0.4 pence (2.4 cents per ADS****) compared to a loss per share of 0.04 pence (loss of 0.2 cents per ADS****) in Q4 2003. Earnings per fully diluted share in Q4 2004, before non-recurring and acquisition-related charges of £8.2 million, were 1.2 pence(6.6) (6.8 cents per ADS****) (Q3 2004: 1.0 pence(6.7) and 5.2 cents) compared to 0.6 pence(6.8) (3.1 cents per ADS****), before non-recurring and acquisition-related charges of £6.4 million, in Q4 2003 Cash flow Twelve months ended 31 December 2004 Revenues Licensing revenues in 2004 were £59.4 million, being 39% of total revenues, compared to £50.8 million or 40% of total revenues in 2003. Royalty revenues in 2004 were £59.7 million, representing 39% of total revenues, compared to £44.3 million or 34% of total revenues in 2003. Sales of development systems in 2004 were £19.7 million, being 13% of total revenues, compared to £17.9 million or 14% of total revenues in 2003. Service revenues, which include consulting services and revenues from support, maintenance and training, were £14.2 million in 2004, representing 9% of total revenues, compared to £15.1 million or 12% of total revenues in 2003. Gross margins Operating expenses Research and development expenses were £50.1 million in 2004, representing 33% of revenues. This compares to £48.1 million or 38% of revenues in 2003. Sales and marketing costs in 2004 were £23.9 million or 16% of revenues compared to £23.0 million or 18% of revenues in 2003. General and administration expenses in 2004 were £31.3 million, including a non-recurring charge of £4.5 million in respect of a technology licensing agreement. Excluding this non-recurring charge, general and administration expenses in 2004 were £26.8 million or 18% of revenues compared to £22.3 million or 17% of revenues, before a non-recurring charge of £6.4 million, in 2003. Operating margins Interest receivable Earnings and taxation The group’s taxation rate under US GAAP in 2004 was 27.2% compared to 40.7% in 2003. The reduction is due primarily to the lower level of disallowable items and increased availability of research and development tax credits in the UK in 2004 compared to 2003. The group’s taxation rate under UK GAAP in 2004 is 24.1%, reduced from 34.3% in 2003. The difference in the group’s tax rate under US and UK GAAP arises primarily from tax deductions arising on the exercise of employee share options being included in the tax charge under UK GAAP but being recorded as an increase in shareholders’ funds under US GAAP. Fully diluted earnings per share prepared under US GAAP in 2004 were 2.7 pence (15.4 cents per ADS****) compared to 1.3 pence (6.8 cents per ADS****) in 2003. Earnings per fully diluted share in 2004, before non-recurring and acquisition-related charges of £8.7 million, were 3.5 pence(6.9) (20.1 cents per ADS****) compared to 1.9 pence(6.10) (10.1 cents per ADS****), before non-recurring and acquisition-related charges of £6.4 million, in 2003. Balance sheet and cash flow Accounts receivable at 31 December 2004 were £34.3 million, including £14.0 million relating to Artisan, compared to £20.6 million at 30 September 2004 and £17.3 million at 31 December 2003. The allowance against receivables was £1.5 million at 31 December 2004. Deferred revenues were £21.4 million at 31 December 2004, including £7.3 million relating to Artisan, compared to £12.6 million at the end of Q3 2004 and £11.1 million at the end of 2003. The consolidated cash, cash equivalents, short-term investments and long-term marketable securities balance was £142.8 million(6.4) at 31 December 2004 compared to £159.8 million(6.13) at 31 December 2003. In 2004, £122.3 million was paid as the cash element of the consideration for the acquisition of Artisan, £3.9 million of fees and expenses were paid in respect of the acquisition of Artisan prior to 31 December 2004 and net cash, cash equivalents, short-term investments and long-term marketable securities amounting to £82.6 million were acquired on completion of the Artisan transaction. A further £14 million of fees and expenses related to the Artisan transaction are expected to be paid subsequent to 31 December 2004. Reconciliation of US and UK GAAP A detailed reconciliation of profit for the year and shareholders’ funds at 31 December 2004 between US and UK GAAP is set out below. Dividend 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 31 December 2003 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, Jazelle and RealView are registered trademarks of ARM Limited. ARM7, ARM9, ARM926EJ, ARM7, ARM9, ARM926EJ, ARM922T, ARM11, TrustZone and OptimoDE are trademarks of ARM Limited. Artisan Components and Artisan are registered trademarks of ARM Physical IP, Inc., a wholly owned subsidiary of ARM. 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 Physical IP Inc., Axys Design Automation Inc., Axys GmbH; ARM KK, ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS, ARM Consulting (Shanghai) Co. Ltd.; ARM Belgium NV.; and ARM Embedded Solutions Pvt. Ltd.
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