A presentation of the results will be webcast today at 09:00 BST at www.arm.com/ir
CAMBRIDGE, UK, 30 July 2008—ARM Holdings plc [(LSE: ARM); (NASDAQ: ARMH)] announces its unaudited financial results for the second quarter and half year ended 30 June 2008.
Highlights (US GAAP unless otherwise stated)
We enter the second half of 2008 with a broad product portfolio for licensing into an increasingly diverse customer base; an opportunity pipeline expected to deliver near-term license revenue and good royalty momentum across the business. We therefore reiterate the guidance for FY 2008 given in both February and April; assuming no further deterioration in the trading environment, we continue to expect to increase dollar revenues in FY 2008 by at least the growth rate achieved in FY 2007.
As in prior years, Q4 revenues are expected to be stronger than Q3 revenues based on normal seasonal impacts on development systems revenues in the third quarter and the typical strength of license and royalty revenues in the fourth quarter.
Commenting on the results, Warren East, Chief Executive Officer, said:
“ARM has made good progress in the first half of 2008 in challenging market conditions, further extending the Group’s backlog which was already at record levels. We see continued strong demand for ARM’s technology including long-term commitments for our processor and physical IP technology by industry leaders.
Prospects for PD licensing in H2 2008 are promising notwithstanding the uncertain current trading environment. We have a broad product portfolio that our customers are designing into applications from mobile computers to microcontrollers. We are encouraged by our second successive quarter of sequential growth in PIPD as we build momentum in that business.
Growth of more than 25% year-on-year in underlying royalty revenues for both PD and PIPD provides further evidence of the increasing use of ARM’s technology in a rapidly broadening range of consumer electronics products.
Whilst investing in future technology innovation, we continue to exercise financial restraint, reducing overall operating costs and headcount, thereby increasing margins sequentially; generating record levels of cash within the quarter; and increasing the interim dividend.”
Q2 2008 – Revenue Analysis
1 Includes catch-up royalties in Q2 2008 of $1.1m (£0.6m) and in Q2 2007 of $0.6m (£0.3m).
H1 2008 – Revenue Analysis
1 Includes catch-up royalties in H1 2008 of $1.9m (£1.0m) and in H1 2007 of $2.1m (£1.1m).
Q2 2008 – Financial Summary
Income before income tax
Earnings per share (pence)
Net cash generation**
Effective fx rate ($/£)
H1 2008 – Financial Summary
Income before income tax
Earnings per share (pence)
Net cash generation**
Effective fx rate ($/£)
Normalised figures are based on US GAAP, adjusted for acquisition-related, share-based compensation and restructuring charges. For reconciliation of GAAP measures to normalised non-GAAP measures detailed in this document, see notes 8.1 to 8.27.
Before dividends and share buybacks, net cash flows from share option exercises and acquisition consideration – see notes 8.14 to 8.18.
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 95% of invoicing is in dollars.
Each American Depositary Share (ADS) represents three shares.
Sarah West/Fiona Laffan/Pavla Shaw Tim Score/Ian Thornton
Brunswick ARM Holdings plc
+44 (0)207 404 5959 +44 (0)1628 427800
(US GAAP unless otherwise stated)
Total dollar revenues in Q2 2008 were $128.1 million, down 1% versus Q2 2007. Sterling revenues of £65.0 million were down 1% year-on-year. ARM’s effective rate in both Q2 2008 and Q2 2007 was $1.97.
Half-year dollar revenues in 2008 amounted to $262.4 million, up 2% on H1 2007.
Total dollar license revenues in Q2 2008 fell by 28% to $42.8 million, representing 33% of group revenues, compared to $59.3 million in Q2 2007. License revenues comprised $30.2 million from PD and $12.6 million from PIPD.
PD licensing revenue was affected by a lower number of deals that were signed in the quarter, and the timing of revenue for the deals that were signed, including a major architecture license for current and future technology where the related revenue will be recognised over a number of years.
As indicated in April, now the physical IP technology acceleration phase is largely complete, PIPD has entered a more “business-as-usual” state for the development of leading-edge technology. PIPD licensing revenues have grown sequentially, as more engineering effort has been directed towards developing technology for immediate customer delivery.
Half-year dollar license revenues were $91.0 million, down 20% versus H1 2007, comprising $66.6 million from PD and $24.4 million from PIPD.
Total dollar royalty revenues in Q2 2008 grew by 28% to $60.7 million, representing 47% of group revenues, compared to $47.4 million in Q2 2007.
PD royalties grew by 27% to $51.0 million compared to $40.1 million in Q2 2007. This was due to increased penetration of ARM technology-based chips across all applications, and continuing growth in the logic and microcontroller industry.
Total PIPD royalties grew 33% year-on-year to a record $9.7 million, including $1.1 million of catch-up royalties. Underlying royalties, excluding catch-up royalties in both periods, were up by 28% year-on-year.
Half-year royalty revenues in 2008 amounted to $124.6 million, up 24% on H1 2007.
Development Systems and Service revenues
Sales of development systems in Q2 2008 grew 15% to $16.2 million, representing 13% of group revenues, compared to $14.2 million in Q1 2008 and $14.1 million in Q2 2007. The sequential increase was partly due to a large tools licensing deal, with a tier 1 semiconductor company adopting ARM tools across multiple sites. Given that large licensing deals of this type are infrequent in this division and as a result of normal Q3 seasonality, the Q1 2008 revenue of $14.2 million is a more appropriate base when considering expected development systems revenues in the third quarter.
As indicated in April, there has been some restructuring of development systems’ product lines which will give rise to a headcount reduction of about 50 within the System Design Division (SDD). As a result, a restructuring charge of £0.5 million has been incurred in Q2 2008. The reduction in headcount will be completed during Q3 2008.
Service revenues in Q2 2008 were $8.4 million, representing 7% of group revenues, compared to $8.4 million in Q2 2007.
Half-year development systems revenues in 2008 amounted to $30.3 million, up 9% on H1 2007. Half-year service revenues in 2008 amounted to $16.5 million, up 1% on H1 2007.
The gross margin in Q2 2008 was 88.8% compared to 89.2% in Q2 2007. Gross margins in Q2 2008, excluding share-based compensation charges of £0.2 million (see below), were 89.1% compared to 88.8% in Q1 2008 and 89.7% in Q2 2007. The lower gross margin in Q2 2008, when compared to Q2 2007, is due primarily to the higher revenue contribution from technology which includes payments to collaborative partners recorded as a cost of sale.
Gross margins for the half-year, excluding share-based compensation charges of £0.5 million (see below), were 89.0% compared to 89.6% for the first half of 2007.
Operating expenses and operating margin
Total operating expenses in Q2 2008 were £45.8 million (Q2 2007: £48.0 million) including amortisation of intangible assets and other acquisition-related charges of £4.5 million (Q2 2007: £4.8 million), £3.3 million (Q2 2007: £4.5 million) in relation to of share-based compensation and related payroll taxes and restructuring charges of £0.5 million (Q2 2007: £0.8 million). Total share-based compensation and related payroll tax charges of £3.6 million in Q2 2008 were included within cost of revenues (£0.2 million), research and development (£2.4 million), sales and marketing (£0.5 million) and general and administrative (£0.5 million). Normalised income statements for Q2 and H1 2008 and Q2 and H1 2007 are included in notes 8.24 to 8.27 below which reconcile US GAAP to the normalised non-GAAP measures referred to in this earnings release.
Operating expenses (excluding acquisition-related, share-based compensation and restructuring charges) in Q2 2008 were £37.5 million compared to £39.5 million in Q1 2008 and £37.8 million in Q2 2007.
The sequential decrease in operating expenses is due partly to the restructuring activities in PIPD and SDD which have contributed to a net reduction of headcount of 33 since the start of the year. More generally, we continue to manage costs carefully in the uncertain trading environment and expect operating expenses in FY 2008 to grow at no more than 4% over FY 2007.
Normalised research and development expenses were £15.3 million in Q2 2008, representing 23% of revenues, compared to £16.3 million in Q1 2008 and £15.5 million in Q2 2007. Normalised sales and marketing costs in Q2 2008 were £10.9 million, being 17% of revenues, compared to £11.0 million in Q1 2008 and £10.5 million in Q2 2007. Normalised general and administrative expenses in Q2 2008 were £11.3 million, representing 17% of revenues, compared to £12.2 million in Q1 2008 and £11.9 million in Q2 2007.
Normalised operating margin in Q2 2008 was 31.5% (8.1) compared to 30.6% (8.2) in Q1 2008 and 32.0% (8.3) in Q2 2007.
Earnings and taxation
Income before income tax in Q2 2008 was £12.6 million compared to £12.0 million in Q2 2007. After adjusting for acquisition-related, share-based compensation and restructuring charges, normalised income before income tax in Q2 2008 was £21.1 million (8.6) compared to £22.5 million (8.8) in Q2 2007. The group’s effective tax rate under US GAAP in Q2 2008 was 27% (Q2 2007: 26%).
In Q2 2008, fully diluted earnings per share prepared under US GAAP were 0.71 pence (4.21 cents per ADS****) compared to earnings per share of 0.64 pence (3.87 cents per ADS****) in Q2 2007. Normalised fully diluted earnings per share in Q2 2008 were 1.17 pence (8.19) per share (6.96 cents per ADS****) compared to 1.18 pence (8.21) (7.11 cents per ADS****) in Q2 2007.
Intangible assets at 30 June 2008 were £375.3 million, comprising goodwill of £344.7 million and other intangible assets of £30.6 million, compared to £345.2 million and £35.2 million respectively at 31 March 2008.
Total accounts receivable were £60.3 million at 30 June 2008, comprising £42.9 million of trade receivables and £17.4 million of amounts recoverable on contracts, compared to £72.0 million at 31 March 2008, comprising £53.9 million of trade receivables and £18.1 million of amounts recoverable on contracts. Days sales outstanding (DSOs) were 45 at 30 June 2008 compared to 52 at 31 March 2008 and 51 at 30 June 2007. The reduction in accounts receivable and DSOs has contributed to a record level of cash generated in the quarter.
Cash flow, share buyback programme and interim dividend
Net cash at 30 June 2008 was £50.6 million (8.11) compared to £55.2 million (8.12) at 31 March 2008. Normalised free cash flow in Q2 2008 was £26.5 million (8.14).
During the quarter, £15.4 million of cash was returned to shareholders through the purchase of 15 million shares. It is anticipated that the buyback programme will resume after the announcement of these results.
In respect of the year to 31 December 2008, the directors are declaring an interim dividend of 0.88 pence per share, an increase of 10% over the 2007 interim dividend of 0.80 pence per share. This interim dividend will be paid, out of the UK GAAP distributable reserves of ARM Holdings plc, on 6 October 2008 to shareholders on the register on 3 September 2008.
International Financial Reporting Standards (IFRS)
ARM reports results quarterly in accordance with US GAAP. At 30 June and 31 December each year, in addition to the US GAAP results, ARM is also required to publish results under IFRS. The operating and financial review commentary included in this release on the US GAAP numbers is for the most part applicable to the IFRS numbers and, in particular, revenues, dividends and share buybacks are recorded in the same way under both sets of accounting rules. A summary of the accounting differences between IFRS and US GAAP and reconciliations of IFRS and US GAAP profit and shareholders’ equity are set out in note 7 to the financial tables below.
Already at a record high coming into Q2, group order backlog increased sequentially and is up by more than 30% on the level at the end of Q2 2007. PD order backlog was particularly strong, up more than 50% over the end of Q2 2007.
Eleven processor licenses were signed with semiconductor companies in Q2 for ARM7, ARM9, ARM11, Cortex and Mali technology. Q2 also included four significant licenses with major OEMs: a leading handset OEM who bought a long-term architecture license to ARM’s current and future technology for use in mobile computing; a leading aerospace OEM who licensed an ARM processor for use in embedded real-time applications; a leading consumer electronics OEM; and Cisco, a leading enterprise and consumer networking OEM, who licensed Mali200.
Three more Cortex-M3 licenses were signed in the quarter for microcontroller applications, further demonstrating the attractiveness of ARM-based solutions in this high-volume market opportunity.
Q2 2008 PD Licensing Analysis – 553 cumulative processor licenses
U:Upgrade D:Derivative N:New
PD licensing has a healthy opportunity pipeline, which we expect to deliver higher licensing revenue in Q3 and Q4 2008 than we have seen in Q2. We have a broad portfolio of processor technologies and strong demand from semiconductor companies and OEMs across a range of applications. Also, Cortex-A9 is now available for general licensing, making our latest technology available for a much wider market.
Year-on-year, reported PD unit shipments grew strongly in Q2 2008 (our partners report royalties one quarter in arrears) buoyed by growth in bluetooth, digital consumer, microcontrollers, smartphones, storage (HDD and flash) and Wi-Fi. Reported processor unit shipments were 892 million, up 37% compared to Q2 2007.
The ARM7, ARM9 and ARM11 families now represent 55%, 43% and 2% of total shipments respectively. There are now four partners shipping Cortex-M3 based microcontrollers and ARM received the first royalties from Cortex-A8 based chips in the quarter. Not only does this demonstrate the longevity of ARM technology but it also underscores the material additional value to be derived from the significant license sales of ARM11 and later technology that have already been made.
For the quarter, an ARM technology-based mobile phone contained an average of 1.8 ARM microprocessors, up from 1.7 in the prior quarter. As well as smartphones containing multiple ARM technology-based chips, more feature phones are now being shipped with multiple ARM cores.
In Q2 2008, shipments of ARM-based chips in embedded devices continued to grow compared to Q2 2007. Microcontrollers were up 55% compared with Q2 2007; units shipped into enterprise applications grew by 30% driven by increased use of ARM in Wi-Fi and penetration of ARM9 into storage devices; whilst units shipped into home grew 31% driven by increased shipments of consumer electronics such as DVD, set-top-box and digital TV.
PIPD license revenue increased sequentially to $12.6 million in Q2 2008 from $11.8 million in Q1 2008. Sixteen physical IP licenses were signed in the quarter for products across the technology portfolio. This included a license to a tier 1 semiconductor company, which has now bought three significant physical IP licenses in three sequential quarters, the latest for advanced 45nm/40nm technology, demonstrating a trend for outsourcing physical IP by leading semiconductor manufacturers. This is further evidenced by STMicroelectronics buying a 40nm platform license early in Q3.
The attractiveness of ARM’s combined processor and physical IP offer was illustrated again in Q2 with two additional licenses being signed which included technology from both divisions.
Q2 2008 PIPD Licensing Analysis – 379 cumulative physical IP licenses
Process Node (nm)
Standard Cell Libraries
PIPD royalties in Q2 2008 were a record $9.7 million, up 6% from $9.1 million in Q1 2008 and up 33% from $7.3 million in Q2 2007. Underlying royalties for PIPD were $8.6 million, up 28% year-on-year. Sequentially, underlying royalties were up 3% despite an estimated 2% decline in overall foundry shipments (source - Gartner Dataquest, July 2008).
Three semiconductor companies are now shipping ARM’s 65nm physical IP in volume, including one foundry and two IDMs, demonstrating the uptake of ARM’s physical IP at advanced nodes.
At 30 June 2008, ARM had 1,695 full-time employees, a net reduction of 33 since the end of 2007, following the restructuring activities in PIPD in Q1 2008 and in SDD in Q2 2008. At the end of Q2, the group had 626 employees based in the UK, 510 in the US, 186 in Continental Europe, 296 in India and 77 in the Asia Pacific region.
ARM had been involved in patent infringement litigation proceedings with Technology Properties Limited, Inc. The litigation has now been concluded with a ruling of non-infringement granted in ARM's favour.
Principal risks and uncertainties
The principal risks and uncertainties faced by the Group that could affect the results for the second half of 2008 and beyond are noted within the Annual Report on Form 20-F for the fiscal year ended 31 December 2007. There have been no changes to these risks that would materially impact the Group in the foreseeable future. These include but are not limited to: ARM's quarterly results may fluctuate significantly and be unpredictable which could adversely affect the market price of ARM ordinary shares; general economic conditions may reduce ARM's revenues and harm its business; ARM competes in the intensely competitive semiconductor market and ARM may not operate systems which comply fully with the requirement of the Sarbanes-Oxley Act.
ARM Holdings plc Financial Results Detail [Download the 86K PDF]
for the Second Quarter and Half Year Ended 30 June 2008
Independent review report to ARM Holdings plc
We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008, which comprises the IFRS consolidated income statement, IFRS consolidated balance sheet, IFRS consolidated statement of changes in shareholders’ equity, IFRS consolidated cash flow statement and related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.
Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’ issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
30 July 2008
(a) The maintenance and integrity of the ARM Holdings plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The results shown for Q2 2008, Q1 2008, Q2 2007, H1 2008 and H1 2007 are unaudited. The results shown for FY 2007 are audited. The condensed consolidated interim financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. Statutory accounts of the Company in respect of the financial year ended 31 December 2007 were approved by the Board of directors on 4 April 2008 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified and did not contain an emphasis of matter paragraph nor any statement under Section 237 of the Companies Act 1985.
The results for ARM for Q2 2008 and previous quarters as shown reflect the accounting policies as stated in Note 1 to the US GAAP financial statements in the Annual Report and Accounts filed with Companies House in the UK for the fiscal year ended 31 December 2007 and in the Annual Report on Form 20-F for the fiscal year ended 31 December 2007.
This document contains forward-looking statements as defined in section 102 of the Private Securities Litigation Reform Act of 1995. These statements are subject to risk factors associated with the semiconductor and intellectual property businesses. When used in this document, the words “anticipates”, “may”, “can”, “believes”, “expects”, “projects”, “intends”, “likely”, similar expressions and any other statements that are not historical facts, in each case as they relate to ARM, its management or its businesses and financial performance and condition are intended to identify those assertions as forward-looking statements. It is believed that the expectations reflected in these statements are reasonable, but they may be affected by a number of variables, many of which are beyond our control. These variables could cause actual results or trends to differ materially and include, but are not limited to: failure to realize the benefits of our recent acquisitions, unforeseen liabilities arising from our recent acquisitions, price fluctuations, actual demand, the availability of software and operating systems compatible with our intellectual property, the continued demand for products including ARM’s intellectual property, delays in the design process or delays in a customer’s project that uses ARM’s technology, the success of our semiconductor partners, loss of market and industry competition, exchange and currency fluctuations, any future strategic investments or acquisitions, rapid technological change, regulatory developments, ARM’s ability to negotiate, structure, monitor and enforce agreements for the determination and payment of royalties, actual or potential litigation, changes in tax laws, interest rates and access to capital markets, political, economic and financial market conditions in various countries and regions and capital expenditure requirements.
More information about potential factors that could affect ARM’s business and financial results is included in ARM’s Annual Report on Form 20-F for the fiscal year ended 31 December 2007 including (without limitation) under the captions, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is on file with the Securities and Exchange Commission (the “SEC”) and available at the SEC’s website at www.sec.gov.
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 32-bit RISC microprocessors, graphics processors, 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/.
ARM is a registered trademark of ARM Limited. ARM7, ARM9, ARM11, Cortex and Mali are trademarks of ARM Limited. All other brands or product names are the property of their respective holders. “ARM” is used to represent ARM Holdings plc; its operating company ARM Limited; and the regional subsidiaries: ARM, Inc.; ARM KK; ARM Korea Ltd.; ARM Taiwan Limited; ARM France SAS; ARM Consulting (Shanghai) Co. Ltd.; ARM Belgium N.V.; ARM Germany GmbH; Keil Elektronik GmbH; ARM Embedded Technologies Pvt. Ltd. and ARM Norway, AS.