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ARM Holdings PLC Reports Results For The Third Quarter And Nine Months Ended 30 September 2013

22 October 2013

A conference call discussing these results will be audiocast today at 09:30 BST at www.arm.com/ir

CAMBRIDGE, UK, 22 October 2013 —ARM Holdings plc announces its unaudited financial results for the third quarter and nine months ended 30 September 2013.

Q3 2013 – Financial Summary

Normalised*

IFRS

 

Q3 2013

Q3 2012

% Change

Q3 2013

Q3 2012

 

Revenue ($m)

286.7

227.9

26%

286.7

227.9

 

Revenue (£m)

184.0

144.6

27%

184.0

144.6

 

Operating margin

48.6%

44.6%

36.0%

35.8%

 

Profit before tax (£m)

92.6

68.1

36%

68.3

55.3

 

Earnings per share (pence)

5.11

3.71

38%

3.44

2.96

 

Net cash generation (£m)**

111.6

88.0

 

Effective revenue fx rate ($/£)

1.56

1.58

 

YTD 2013 – Financial Summary

Normalised*

IFRS

YTD 2013

YTD 2012

% Change

YTD 2013

YTD 2012

Revenue ($m)

814.9

650.3

25%

814.9

650.3

Revenue (£m)

525.5

412.7

27%

525.5

412.7

Operating margin

49.2%

45.2%

27.4%

36.7%

Profit before tax (£m)

268.6

196.6

37%

150.4

161.6

Earnings per share (pence)

15.30

10.63

44%

7.87

8.48

Net cash generation (£m)**

266.6

193.3

Effective revenue fx rate ($/£)

1.55

1.58

Q3 Financial Highlights

  • Group revenues in US$ up 26% year-on-year (£ revenues up 27% year-on-year)
  • PD Licensing revenue in US$ up 52% year-on-year. Order backlog up 3% sequentially
  • PD Royalty revenue in US$ up 14% year-on-year (relevant industry revenues down 2% year-on-year1)
  • Normalised operating expenses of £85.6m (including a £5.5m charge relating to the foreign exchange revaluation of monetary items)
  • Normalised profit before tax and earnings per share up 36% and 38% year-on-year respectively (IFRS PBT and EPS up 24% and 16% year-on-year)
  • Net cash generation of £111.6 million

Progress on key growth drivers in Q3

  • Growth in adoption of ARM® technology

        o 48 processor licenses signed, driven by new technology, new markets and new customers

        o Advanced technology enables a higher royalty percentage per chip

            o 15 Cortex®-A processor licenses signed, including 3 Cortex-A50 series processors

            o 5 Mali™ graphics processor licenses signed

            o POP™ IP helps optimise ARM processor implementations. 4 POP IP licenses signed in Q3

  • Growth in shipments of chips based on ARM processor technology

        o 2.5 billion ARM-based chips shipped

        o Continued penetration of processors containing both Cortex-A and Mali graphics processors

Outlook

ARM enters the final quarter of 2013 with a record order backlog and a robust opportunity pipeline. This combination points to another strong quarter for licensing revenue in Q4. ARM’s Q4 royalty revenue is generated from third quarter chip shipments. Relevant customer and industry data suggests a sequential increase in ARM’s royalty revenue of similar dollar value to previous years. Assuming the macroeconomic situation does not deteriorate significantly in the remainder of the quarter, we expect group dollar revenues for the fourth quarter to be in-line with current market expectations of approximately $290m.

 

Simon Segars, Chief Executive Officer, said:

"As the products we use every day become more connected, and as new categories of smart devices are introduced, there are increasing opportunities for ARM’s high-performance, low-power technology, which drive both license and long-term royalty revenues.

In the third quarter of 2013 we saw strong demand for our processor technology with a record 48 licenses signed by 24 companies, 11 of whom were licensing ARM technology for the first time. ARM’s technology was licensed for an extensive range of end-markets including the Internet-of-Things, wired and wireless communications, and mobile computing. This quarter ARM also signed four large licensing deals with thought-leading technology companies, which included MediaTek signing a broad license for ARM’s latest ARMv8-A processor technology and next generation Mali graphics.

With more customers choosing to deploy ARM technology in their products and ARM’s royalty revenues outperforming the overall semiconductor industry, this has been another quarter that underpins ARM’s long-term growth opportunity.

Q3 2013 – Revenue Analysis

Revenue ($m)***

Revenue (£m)

Q3 2013

Q3 2012

% Change

Q3 2013

Q3 2012

% Change

PD

Licensing

106.2

69.7

52%

68.0

44.3

54%

Royalties

122.0

106.8

14%

78.7

67.8

16%

Total PD

228.2

176.5

29%

146.7

112.1

31%

PIPD

Licensing

16.9

13.7

24%

10.6

8.6

23%

Royalties

15.1

14.3

6%

9.7

9.1

7%

Total PIPD

32.0

28.0

15%

20.3

17.7

15%

Development Systems

12.1

12.1

0%

7.8

7.6

2%

Services

14.4

11.3

27%

9.2

7.2

28%

Total Revenue

286.7

227.9

26%

184.0

144.6

27%

YTD 2013 – Revenue Analysis

Revenue ($m)***

Revenue (£m)

YTD 2013

YTD 2012

% Change

YTD 2013

YTD 2012

% Change

PD

Licensing

275.4

201.9

36%

176.7

128.0

38%

Royalties

364.7

295.9

23%

236.7

188.2

26%

Total PD

640.1

497.8

29%

413.4

316.2

31%

PIPD

Licensing

45.2

36.8

23%

28.7

23.3

23%

Royalties

47.7

41.2

16%

30.9

26.0

19%

Total PIPD

92.9

78.0

19%

59.6

49.3

21%

Development Systems

42.1

41.0

3%

27.1

26.0

4%

Services

39.8

33.5

19%

25.4

21.2

20%

Total Revenue

814.9

650.3

25%

525.5

412.7

27%

*

Normalised figures are based on IFRS, adjusted for share-based payment costs, amortisation of intangibles, acquisition-related charges, IP indemnity and similar charges, Linaro-related charges and share of results of joint venture, and profit or loss on disposal and impairments of available-for-sale financial assets. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document, see notes 6.13 to 6.16.

**

Net cash generation is defined as movement on cash, cash equivalents, short-term and long-term deposits, adding back dividend payments, investment and acquisition consideration, other acquisition-related payments, share-based payroll taxes, payments related to joint ventures and Linaro, payments for IP indemnity and similar charges, advanced payments, and deducting inflows from share option exercises and investment disposal proceeds – see notes 6.8 to 6.12

***

US 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. Over 95% of invoicing is in US dollars.

CONTACTS:

Sarah West/Aideen Lee                                 Ian Thornton/Jonathan Lawton

Brunswick: +44 (0)1223 400400                  ARM Holdings plc: +44 (0)207 404 5959

Financial review

(IFRS unless otherwise stated)

Total revenues

Total dollar revenues in Q3 2013 were $286.7 million, up 26% versus Q3 2012. Q3 sterling revenues of £184.0 million were up 27% year-on-year.

Year-to-date dollar revenues amounted to $814.9 million, up 25% on 2012.

License revenues

Total dollar license revenues in Q3 2013 increased by 48% year-on-year to $123.1 million, representing 43% of group revenues. License revenues comprised $106.2 million from PD and $16.9 million from PIPD.

Group order backlog at the end of Q3 2013 was up 3% sequentially.

Royalty revenues

Royalties are recognised one quarter in arrears with royalties in Q3 2013 generated from semiconductor unit shipments in Q2 2013. Total dollar royalty revenues in Q3 2013 increased year-on-year by 13% to $137.1 million, representing 48% of group revenues. This compares with industry revenues decreasing about 2% in the shipment period1 (i.e. Q2 2013 compared to Q2 2012).

Total dollar royalty revenues in Q3 2013 comprised $122.0 million from PD and $15.1 million from PIPD.

Development Systems and Service revenues

Sales of development systems in Q3 2013 were $12.1 million, flat year-on-year and representing 4% of group revenues. As previously disclosed the development systems business is now focusing on microcontroller tools and premium toolkits for multi-core systems, and full year revenues are expected to be broadly flat year-on-year.

Service revenues in Q3 2013 were $14.4 million, an increase of 27% year-on-year and representing 5% of group revenues.

Gross margins

Gross margins in Q3 2013, excluding the share-based payments charge of £0.5 million (see below), were 95.1% compared to 94.3% in Q2 2013 and 94.6% in Q3 2012.

Operating expenses and operating margin

Normalised income statements for Q3 2013 and YTD 2013 and Q3 2012 and YTD 2012 are included in notes 6.13 to 6.16 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.

Normalised operating expenses were £85.6 million in Q3 2013 compared to £78.2 million in Q2 2013 and £72.3 million in Q3 2012. Normalised operating expenses in Q3 2013 included a charge of £5.5 million relating to the foreign exchange revaluation of monetary items. Normalised operating expenses in Q3 2013 excluding this charge were approximately
£80 million.

Normalised operating expenses in Q4 2013 (assuming effective exchange rates similar to current levels) are expected to be in the range £82-84 million as we continue to invest in our research and development teams and in our business infrastructure.

Normalised operating margin was 48.6% in Q3 2013, compared to 48.6% in Q2 2013 and 44.6% in Q3 2012.

Normalised research and development expenses were £35.7 million in Q3 2013, representing 19% of revenues, compared to £37.2 million in Q2 2013 and £32.2 million in Q3 2012. Notwithstanding the ongoing investment in our research and development teams, total research and development expenses in Q3 2013 were lower than in Q2 2013 as, following legislation enacted in the third quarter, certain research and development tax credits are classified “above-the-line” in operating expenses rather than as a credit to the tax charge as in previous periods. Normalised sales and marketing expenses were £19.3 million in Q3 2013, being 10% of revenues, compared to £17.8 million in Q2 2013 and £15.6 million in Q3 2012. Normalised general and administrative expenses were £30.6 million in Q3 2013 (including the foreign exchange charge of £5.5 million referred to above), representing 17% of revenues, compared to £23.2 million in Q2 2013 and £24.5 million in Q3 2012.

Total IFRS operating expenses in Q3 2013 were £108.2 million (Q3 2012: £84.6 million) including share-based payment costs and related payroll taxes of £18.8 million (Q3 2012: £10.6 million), amortisation of intangible assets and other acquisition-related charges of £3.4 million (Q3 2012: £1.7 million), and investment impairments of £0.4 million (Q3 2012: £nil).

Total share-based payment costs and related payroll tax charges of £19.3 million in Q3 2013 were included within cost of revenues (£0.5 million), research and development (£11.8 million), sales and marketing (£3.0 million) and general and administrative (£4.0 million).

Earnings and taxation

Profit before tax was £68.3 million in Q3 2013 compared to £55.3 million in Q3 2012. Normalised profit before tax in Q3 2013 was £92.6 million compared to £68.1 million in Q3 2012.The Group's effective normalised tax rate was 22.1% in Q3 2013 (IFRS: 28.9%) compared to 23.9% (IFRS: 25.3%) in Q3 2012. The Group’s effective normalised tax rate for the full year 2013 is estimated to be just under20%.

In Q3 2013, fully diluted earnings per share were 3.44 pence (16.72 cents per ADS 2) compared to earnings per share of 2.96 pence (14.35 cents per ADS) in Q3 2012. Normalised fully diluted earnings per share in Q3 2013 were 5.11 pence (24.84 cents per ADS) compared to 3.71 pence (17.96 cents per ADS) in Q3 2012.

Balance sheet

Intangible assets at 30 September 2013 were £597.3 million, comprising goodwill of £527.8 million and other intangible assets of £69.5 million, compared to £555.6 million and £69.5 million respectively at 30 June 2013.

Total accounts receivable were £113.1 million at 30 September 2013, compared to £136.5 million at 30 June 2013.

Cash flow

Normalised free cash flow in Q3 2013 was £111.6 million. Net cash at 30 September 2013 was £670.5 million compared to £613.1 million at 30 June 2013.


Technology Licensing

Processor licensing

A record 48 processor licenses were signed in Q3 2013, with 24 companies. The technology licensed includes ARM’s latest Cortex-A, Cortex-R™ and Cortex-M™ processors and will be used in a broad range of end applications, including mobile devices, smart embedded applications and general purpose microcontrollers. Nearly half of the 24 licensees were licensing ARM technology for the first time. Many of these new customers are planning to use ARM technology in emerging applications such as fingerprint recognition, internet-of-things, and wearable digital devices.

During the quarter ARM signed four large licensing deals with thought-leading technology companies. These included MediaTek licensing ARM’s latest ARMv8-A processor technology and next generation Mali graphics, and a major provider of enterprise networking equipment licensing a broad suite of ARM technology for wired and wireless communications applications.

Fifteen of the licenses signed were for ARM’s Cortex-A series processors, including 3 Cortex-A50 series processors. ARM’s Cortex-A series technology is licensed for deployment in a broad range of end-markets, including smartphones, tablets, display technology, digital TVs and enterprise networking applications.

Demand for ARM’s range of processors for the embedded market remained strong with 18 of the 48 licenses signed this quarter being for ARM’s Cortex-M series technology. ARM has now signed nearly two hundred Cortex-M licenses with almost 150 companies. Many of these licenses will be used in microcontrollers or applications for the Internet-of-Things.

ARM also signed 5 further licenses for its Mali graphics processors, 4 of whom were licensing ARM’s Mali graphics technology for the first time.

Q3 2013 and Cumulative Processor Licensing Analysis

Existing

Licensees

New
Licensees

Quarter
Total

Cumulative Total**

Classic ARM*

4

1

5

533

Cortex-A

14

1

15

158

Cortex-R

4

4

41

Cortex-M

10

8

18

196

Mali

4***

1

5

85

Architecture

15

Subscription

1

1

12

Total

37

11

48

1040

* Includes ARM7, ARM9, ARM10 and ARM11

**Adjusted for licenses that are no longer expected to generate royalties

*** Includes 3 existing ARM customers taking their first Mali license

PIPD licensing

ARM’s physical IP is used by fabless semiconductor companies to implement their chip designs. Platform licenses are royalty bearing licenses that enable foundries to manufacture chips using ARM’s physical IP. Each foundry requires a platform license for each process node. ARM has signed a full range of platform licenses with leading foundries, from 250nm to 14nm.

PIPD continues the development of advanced technology Physical IP for FinFET process technologies at multiple foundries, and this quarter delivered FinFET Physical IP to a major customer for their pre-production product development.

ARM also continues to see strong demand for physical IP optimised for use with processors (POP IP). POP IP enables a licensee to more readily achieve high-performance, low-power processor implementations through specially optimised physical IP technology. For every chip implemented using POP IP, ARM receives a royalty both for the processor in the chip and for the physical IP. This quarter ARM signed two further POP licenses for Cortex-A processors and two for Mali graphics technology. This included a major multi-year subscription license for 28nm POP IP signed with major Asian semiconductor company.

Number of Physical IP Licenses*

Total for the Quarter

Cumulative Total

Platform Licenses

-

100

POP IP

4

52

*Adjusted for licenses that are no longer expected to generate royalties

Customers Licensing Multiple ARM Technologies

In some end markets, such as application processors in mobile phones, mobile computers and digital TVs there can be synergies from using multiple ARM technologies in the same system-on-chip design. The system benefits that can be generated include faster time-to-market and reduced development risk, and lower cost and higher performance of the resultant chip. For example, this can include two Cortex-A processors combined in a big.LITTLE configuration, coupled with Mali graphics and implemented using ARM’s physical IP (possibly in the form of POP IP). To date ARM has signed 158 Cortex-A licenses, 84 Mali licenses and 52 POP IP licenses. ARM typically receives a percentage of the chip price for each ARM technology included within the chip, so chips that contain multiple ARM technologies can enhance ARM’s overall royalty opportunity.

Processor Design Wins and Ecosystem Development

Many leading technology companies have announced details of their ARM-based product developments in recent months. These included:

· Mediatek introducing MT8135, its ARMv7-based big.LITTLE application processor aimed at tablet computers

· Spansion announcing plans for a wide range of ARM-based chips for automotive, industrial and embedded consumer applications

· Huawei announcing that it has licensed Cortex-A57 and Cortex-A53 to enable the development of low power high performance chips

· AMD announcing its Hierofalcon chips, a four or eight core ARM-based Cortex-A57 system-on-chip running at
2.0 GHz aimed at embedded networking applications

· Broadcom announcing a new ARMv8-A 64-bit chip for enterprise networking applications

· Freescale announcing their 5V Kinetis E range of microcontrollers. Based around ARM’s Cortex-M0+ processor technology, these microcontrollers are designed for performance in harsh electromagnetic environments

· Atmel introducing SAM D20 ultra low power ARM-based Cortex M0+ microcontrollers for use in automation, consumer, metering and industrial applications

Many more partner announcements can be found on the ARM website at www.arm.com/news.

Technology Royalties

Processor royalties

ARM’s processor royalties are recognised one quarter in arrears with royalties in Q3 generated from semiconductor unit shipments in Q2. PD dollar royalty revenues in Q3 2013 increased 14% year-on-year. This compares with relevant industry revenues decreasing by about 2%1 in the relevant shipment period (i.e. Q2 2013 compared to Q2 2012) resulting in ARM outperforming the semiconductor industry by 16 percentage points. Q3 revenue came from the sales of about 2.5 billion ARM-based chips, up 14% year-on-year.

ARM continued to benefit from the growth of smartphones and tablets, especially high volume entry-level devices. These devices typically use ARM’s more advanced and higher royalty bearing Cortex-A series technology and increasingly contain ARM’s Mali graphics designs. In Q3, shipments of Cortex-A and Mali graphic processors more than doubled year-on-year and ARM’s mobile royalty revenues increased by nearly 20% over the same period. ARM’s mobile shipments were up 8% year-on-year, growing at twice the rate of the wider handset market3.

This quarter, we saw strong growth in the number of ARM-based chips sold into markets beyond mobile devices. The non-mobile markets now represent 52% of all ARM-based shipments. ARM-based microcontrollers and smartcards shipments increased 20% year-on-year, compared to a market that was down nearly 10% over the same period1. ARM is also beginning to gain traction in the enterprise networking market, with ARM-based chip shipments up nearly 150%.

ARM’s average royalty revenue per chip in Q3 was flat year-on-year at 4.9 cents as the growth in higher value, lower volume application processors was balanced by the strong growth in shipments of higher volume, lower cost chips, such as microcontrollers and touchscreen controllers.

Q3 2013 Processor Unit Shipment Analysis

Processor Family

Unit Shipments

Market

Unit Shipments

ARM7

27%

Mobile

48%

ARM9

16%

Enterprise

18%

ARM11

4%

Home

5%

Cortex-A

18%

Embedded

29%

Cortex-R

4%

 

Cortex-M

31%

 

PIPD royalties

Royalties are recognised one quarter in arrears with royalties in Q3 generated from wafer shipments in Q2. PIPD royalties in Q3 2013 were $15.1 million, up 6% year-on-year.

People

At 30 September 2013, ARM had 2,756 full-time employees, a net increase of 364 since the start of the year. Most of these new employees are engineers joining ARM’s processor R&D teams. At the end of Q3, the group had 1,137 employees based in the UK, 652 in the US, 345 in Continental Europe, 398 in India and 224 in the Asia Pacific region.

Principal risks and uncertainties

The principal risks and opportunities faced by the Group are included within the “Risks and risk management” section of the 2012 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 2012 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 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; we depend largely on a small number of customers and products; failure by ARM to achieve the performance under a license 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 may have to protect its intellectual property or defend the technology against claims that we have infringed others’ proprietary rights; and an infringement claim against ARM’s technology may result in a significant damages award which would adversely impact ARM’s operating results.

Full Earnings Table [518KB PDF]

Notes

The results shown for Q3 2013, Q2 2013, Q3 2012, 9M 2013, and 9M 2012 are unaudited. The results shown for FY 2012 are audited. The consolidated financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts of the Company in respect of the financial year ended 31 December 2012 were approved by the Board of directors on 27 February 2013 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 498 of the Companies Act 2006.

The results for ARM for Q3 2013 and previous quarters as shown reflect the accounting policies as stated in Note 1 to the financial statements in the Annual Report and Accounts filed with Companies House in the UK for the fiscal year ended 31 December 2012 and in the Annual Report on Form 20-F for the fiscal year ended 31 December 2012.

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 acquisitions, unforeseen liabilities arising from 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 2012 including (without limitation) under the captions, “Risk Factors”(on pages 4 to 11) which is on file with the Securities and Exchange Commission (the “SEC”) and available at the SEC’s website at www.sec.gov.

About ARM

ARM designs the technology that is 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 RISC 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.

ARM, Artisan, AMBA and Cortex are registered trademarks of ARM Limited. CoreLink, big.LITTLE, Mali and POP 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 Limited.; ARM Taiwan Limited; ARM France SAS; ARM Consulting (Shanghai) Co. Ltd.; ARM Germany GmbH; ARM Embedded Technologies Pvt. Ltd.; ARM Norway, AS, ARM Sweden AB, and ARM Finland Oy.



1Source: Semiconductor Industry Association, October 2013

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

3 Source: Gartner, October 2013





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