Q3 2011 Results

A conference call discussing these results will be audiocast today at 08:30 BST at www.arm.com/ir

CAMBRIDGE, UK, 25 October 2011-ARM Holdings plc announces its unaudited financial results for the third quarter and nine months ended 30 September 2011.

Progress on key growth drivers in Q3

·; Growth in adoption of ARM® processor technology

o 28 processor licenses, including 14 new customers, many of whom are established semiconductor companies buying their first ARM processor license

o 9 Cortex™-A and 14 Cortex-M series processor licenses signed, including a next generation processor designed for the smallest and most energy-efficient embedded microcontrollers

o Licenses signed for a broad range of end-markets including automotive applications, computers, microcontrollers, mobile phones, enterprise networking, sensors and smartcards

·; Growth in shipments of chips based on ARM-processor technology

o 1.0 billion chips shipped into mobile phones and mobile computers, up 10% year-on-year

o 0.9 billion chips shipped into consumer and embedded digital devices, up 50% year-on-year

·; Growth in outsourcing of new technology

o Physical IP: 4 Processor Optimisation Pack (POP) licenses signed for Cortex-A series processors, including the first Cortex-A15 POP at 28nm

o Mali™ Graphics: 2 Mali licenses signed for mobile computing and digital TV

"In the third quarter of 2011, we saw a continued high level of design activity with many new customers licensing ARM technology for the first time, driven by end market requirements for smarter, low-power chips. Demand for our technology has come from a broad range of applications, from sensors to computers. Over the last year we have seen strong growth in shipments of ARM technology-based chips, with a 50% increase of shipments into non-mobile markets such as digital TVs, microcontrollers and networking applications. Royalty revenues in Q3 have been impacted by the below seasonal growth in the semiconductor industry, but we continue to gain share. With customers looking to design ARM technology into a widening product portfolio, ARM is continuing to invest in the development of new products to drive long-term growth in our revenues, profits and cash." 

ARM enters the final quarter of 2011 with a healthy opportunity pipeline for licensing and an order backlog which remains at historically high levels. This combination points to another strong quarter for license revenue in Q4 and a robust order backlog at the year end. ARM Q4 royalty revenues are generated from third quarter chip shipments. Data for the third quarter indicates that relevant industry revenues were broadly flat sequentially.

Notwithstanding the below seasonal activity levels in the wider semiconductor industry, we expect that group dollar revenues for the full-year 2011 will be in line with current market expectations of around $763 million.

1 Includes catch-up PIPD royalties of $1.7m (£1.1m) in Q3 2011 and $0.6m (£0.4m) in Q3 2010.

1 Includes catch-up PIPD royalties of $2.3m (£1.4m) in YTD 2011 and $1.3m (£0.8m) in YTD 2010.

Daniel Thole/Dania Saidam Tim Score/Ian Thornton

Brunswick ARM Holdings plc

+44 (0)207 404 5959 +44 (0)1223 400796

Financial review

(IFRS unless otherwise stated)

Total revenues

Total dollar revenues in Q3 2011 were $192.3 million, up 22% versus Q3 2010. Q3 sterling revenues of £120.2 million were up 20% year-on-year. 

Year-to-date dollar revenues amounted to $568.0 million, up 26% on 2010.

License revenues

Total dollar license revenues in Q3 2011 increased by 38% year-on-year to $72.6m, representing 38% of group revenues. License revenues comprised $59.7 million from PD and $12.9 million from PIPD. 

Group order backlog at the end of Q3 2011 was flat sequentially. Group order backlog is at historically high levels and prospects for backlog at the year-end look promising.

Royalty revenues

Royalties are recognised one quarter in arrears with royalties in Q3 2011 generated from semiconductor unit shipments in Q2 2011. Total dollar royalty revenues in Q3 2011 increased year-on-year by 19% to $96.8 million, representing 50% of group revenues. This compares with industry revenues[1] increasing by about 1% in the shipment period (i.e. Q2 2011 compared to Q2 2010), demonstrating ARM's continuing market share gains over the last 12 months.

ARM's Q3 royalty revenue has been impacted by the slowdown of sales by Japanese semiconductor companies. The earthquake and subsequent tsunami disrupted energy supplies and the semiconductor supply chain in the second quarter.

Royalty revenues comprised $84.2 million from PD and $12.6 million from PIPD (including $1.7 million of catch-up royalties).

Development Systems and Service revenues

Sales of development systems in Q3 2011 were $12.5 million, a decrease of 20% year-on-year and representing 7% of group revenues. Developments systems business consists of an underlying run-rate of smaller deals plus the occasional large software deal. In Q3 2010 three large software tools deals were signed, compared to none in Q3 2011.

Service revenues in Q3 2011 were $10.4 million, an increase of 29% year-on-year and representing 5% of group revenues.

Gross margins

Gross margins in Q3 2011, excluding the share-based payments charge of £0.8 million (see below), were 94.9% compared to 94.8% in Q2 2011 and 94.2% in Q3 2010.

Operating expenses and operating margin

Normalised income statements for Q3 and YTD 2011 and Q3 and YTD 2010 are included in notes 4.13 to 4.16 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.

Normalised operating expenses (excluding acquisition-related, share-based payment and restructuring charges) were £60.5 million in Q3 2011 compared to £59.4 million in Q2 2011 and £56.6 million in Q3 2010. Operating expenses in Q3 2011 benefitted from a net credit largely due to the impact of a stronger dollar on the accounting of derivative instruments. Normalised operating expenses in Q4 2011 (assuming effective exchange rates similar to current levels) are expected to be in the range £63-65 million. The underlying sequential increase in operating costs expected in Q4 is due to ARM's on-going investment in the development and deployment of next generation technology.

Normalised operating margin was 44.6% in Q3 2011, compared to 44.5% in Q2 2011 and 37.7% in Q3 2010.

Normalised research and development expenses were £29.8 million in Q3 2011, representing 25% of revenues, compared to £28.9 million in Q2 2011 and £26.4 million in Q3 2010. Normalised sales and marketing expenses were £15.6 million in Q3 2011, being 13% of revenues, compared to £13.7 million in Q2 2011 and £13.3 million in Q3 2010. Normalised general and administrative expenses were £15.1 million in Q3 2011, representing 13% of revenues, compared to £16.8 million in Q2 2011 and £16.9 million in Q3 2010.

Total IFRS operating expenses in Q3 2011 were £72.4 million (Q3 2010: £74.9 million) including share-based payment costs and related payroll taxes of £10.9 million (Q3 2010: £12.2 million), and amortisation of intangible assets and other acquisition-related charges of £1.1 million (Q3 2010: £2.9 million). 

Total share-based payment costs and related payroll tax charges of £11.7 million in Q3 2011 were included within cost of revenues (£0.8 million), research and development (£7.0 million), sales and marketing (£2.3 million) and general and administrative (£1.6 million).

Earnings and taxation

Profit before tax was £43.0 million in Q3 2011 compared to £19.6 million in Q3 2010. After adjusting for acquisition-related, share-based payments costs and Linaro-related charges, normalised profit before tax in Q3 2011 was £55.8 million compared to £38.8 million in Q3 2010. The Group's effective normalised tax rate was 24.8% in Q3 2011 (IFRS: 26.9%) compared to 27.5% (IFRS: 24.5%) in Q3 2010. The Group's effective normalised tax rate for the full year 2011 is estimated to be approximately 25%.

In Q3 2011, fully diluted earnings per share were 2.29 pence (10.68 cents per ADS[2]) compared to earnings per share of 1.09 pence (5.16 cents per ADS) in Q3 2010. Normalised fully diluted earnings per share in Q3 2011 were 3.05 pence per share (14.24 cents per ADS) compared to 2.08 pence (9.82 cents per ADS) in Q3 2010. 

Balance sheet

Intangible assets at 30 September 2011 were £549.4 million, comprising goodwill of £538.1 million and other intangible assets of £11.3 million, compared to £523.0.0 million and £12.4 million respectively at 30 June 2011.

Total accounts receivable were £85.4 million at 30 September 2011, comprising £79.1 million of trade receivables and £6.3 million of amounts recoverable on contracts, compared to £78.3 million at 30 June 2011, comprising £68.6 million of trade receivables and £9.7 million of amounts recoverable on contracts.

Days sales outstanding (DSOs) were 40 at 30 September 2011 compared to 43 at 30 June 2011 and 40 at 30 September 2010.

Cash flow

Net cash at 30 September 2011 was £397.2 million compared to £353.8 million at 30 June 2011. Normalised free cash flow in Q3 2011 was £43.7 million.

 Operating review

Processor licensing

Twenty-eight processor licenses were signed in Q3 across a broad range of end markets for use in the simplest of microcontrollers to the most advanced mobile computers. These included:

·; Deeply embedded products such as automotive applications, embedded computers, a range of microcontroller applications, sensors and smartcards;

·; Enterprise applications such as networking and storage;

·; Smart consumer devices such as digital TVs, mobile phones and mobile computers.

Half of the deals signed were with companies taking their first processor license with ARM. The majority of the new customers are established semiconductor companies choosing ARM technology for the first time. As the trend towards smarter products gains pace, so semiconductor companies are finding ARM technology instrumental in helping them gain share in an increasingly competitive market place.

Twenty-six of the licenses were for ARM's advanced Cortex and Mali graphics processors. ARM signed licenses for nine Cortex-A series processors, including three Cortex-A15 processors for use in networking, mobile and embedded computing applications. There were another fourteen Cortex-M series licenses taking the total signed to date to over 120. These included another lead licensee for ARM's next-generation processor - its smallest and most efficient Cortex-M series processor to date, aimed at ultra-low power embedded applications. ARM signed two licenses for Mali graphics processors for use in digital TV and mobile computing, one for the latest Mali-T658, and one with a semiconductor company taking their first Mali license, bringing the number of companies licensing Mali graphics technology to forty-three.

Q3 2011 and Cumulative Processor Licensing Analysis

* Includes an existing ARM customer taking their first Mali license.

Processor Design Wins and Ecosystem Development

Over the last few months many leading technology companies have announced details of their ARM-based product developments. These included:

·; Microsoft giving more details about Windows 8 on ARM technology-based chips, with NVIDIA, Qualcomm and Texas Instruments demonstrating the Windows Developer Preview;

·; Broadcom, Freescale, HiSilicon, LG, Samsung, ST-Ericsson and Texas Instruments announcing their intention to develop chips for smartphones and mobile computers utilizing Cortex-A7, ARM's newest and most energy-efficient processor that can also be paired with Cortex-A15 to deliver low-power and high-performance in the same device;

·; Several ARM partners announcing new elements to their microcontroller (MCU) strategies:

o Atmel released a new version of its Arduino community-based development kit based on an ARM Cortex-M3 microcontroller;

o Freescale released details about their latest family of ultra low-power MCUs for cost sensitive applications;

o STMicroelectronics launched a high-speed Cortex-M4 based MCU for electric motor control and medical applications;

o TI announced new MCU families for safety-critical systems and industrial automation.

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

Processor royalties

Royalties are recognised one quarter in arrears with royalties in Q3 generated from semiconductor unit shipments in Q2. PD dollar royalty revenues in Q3 2011 increased 20% year-on-year. This compares with industry revenues increasing by about 1%[3] in the shipment period (i.e. Q2 2011 compared to Q2 2010), demonstrating ARM's market share gains over the last 12 months.

Q3 revenue came from the sales of about 1.9 billion ARM technology-based chips.

ARM continued to gain share in non-mobile end-markets. Non-mobile processor shipments now represent 45% of all ARM-based shipments, up from less than 40% one year ago. Shipments of ARM technology-based microcontrollers were particularly strong, growing over 80% year on year, compared to less than 10% growth for the overall microcontroller market[4]. Part of this growth was due to an increase in sales of Cortex-M series processor-based chips, which now represent 14% of all processor shipments, up from 6% in Q3 2010.

The Cortex processor family now represents 22% of all units shipped, up from 19% in the prior quarter. This sequential increase is primarily due to shipments of Cortex-M series processors in microcontrollers and smartcards, and an increase in Cortex-A series processor shipments driven by high-end smartphones and mobile computers adopting smarter applications processors. Cortex-A series processors now represent 5% of all shipments, up from 2% in Q3 2010.

The average royalty per chip decreased sequentially from 4.5 cents to 4.4 cents as the strong growth in high-volume low-cost chips, such as microcontrollers, smartcards and touch screen controllers outweighed the growth in Cortex-A processor-based chips, which typically command higher average royalty percentages and are normally associated with higher value chips.

The growth in mobile computing and super-smartphones continues to benefit ARM. In Q3 2011, ARM's customers reported a greater than 300% year-on-year increase in Cortex-A processor-based wireless and mobile computing chips. The first smartphone containing a dual-core Cortex-A9 started shipping in volume at the start of this year, and in Q2 the penetration of dual-core applications processors had risen to about 15%[5] penetration of smartphones. For the quarter, ARM achieved an average of 2.4 ARM technology-based chips per mobile handset, down from 2.5 chips per phone in Q2 2011. The number of chips per phone decreased as more discrete WiFi and Bluetooth connectivity processors were integrated onto the same chip. In Q3 2011, ARM's partners reported a doubling of integrated WiFi and Bluetooth chip shipments compared with the same quarter last year. Chips that integrate multiple functions into a single chip often contain several ARM processors. Typically, ARM receives a higher percentage of the chip price when there is more ARM technology integrated into the chip.

Q3 2011 Processor Unit Shipment Analysis

PIPD licensing

In Q3, ARM signed a physical IP license with UMC for a new 28nm royalty-bearing platform, extending the companies' decade-long partnership. This platform targets a wide range of applications that include portable devices, such as mobile and wireless devices, and high performance applications, such as digital home and high-speed networking. Cumulatively, 81 physical IP platform licenses have now been signed and it is this base of platform licenses that drives ARM's future royalty potential. 

ARM is seeing increasing demand for physical IP optimised for use with our advanced Cortex-A series processors. These packages enable the licensee to reproduce a high-performance, low-power processor implementation using pre-built components. During the quarter we signed four licenses for Cortex-A9 and Cortex-A15 processor optimisation packs (POPs) at 28nm, 32nm and 40nm nodes, for use in digital TV and mobile computing applications, including the first POP for Cortex-A15 on 28nm.

In addition, we signed agreements to create more POPs for Cortex-A series processors at the 28 and 20nm nodes.

Q3 2011 and Cumulative PIPD Licensing Analysis

PIPD royalties

Physical IP royalties are generated mainly from chips manufactured in foundries such as TSMC, UMC and GLOBALFOUNDRIES. Royalties are recognised one quarter in arrears with royalties in Q3 generated from semiconductor unit shipments in Q2. 

Underlying PIPD royalties in Q3 2011 were $11.0 million, up 3% sequentially, broadly in line with foundry revenue growth in the relevant period. Royalty revenue from physical IP at advanced nodes, at 65nm and beyond, continues to increase and now accounts for approximately one third of revenues.

People

At 30 September 2011, ARM had 2,039 full-time employees, a net increase of 150 since the start of the year, being mainly engineers joining ARM's processor R&D teams. At the end of Q3, the group had 850 employees based in the UK, 530 in the US, 234 in Continental Europe, 293 in India and 132 in the Asia Pacific region.

Given the broad range of opportunities, ARM is investing in its R&D programs and operations, and expects some further recruitment in Q4 2011.

Principal risks and uncertainties

The principal risks and opportunities faced by the Group are included within the "Risks and risk management" section of the 2010 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 2010 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; ARM may have to protect its intellectual property or defend itself against claims that we have infringed others' proprietary rights; an infringement claim or a significant damages award would adversely impact ARM's operating results; companies within the semiconductor industry may consolidate reducing the number of customers that ARM may sell its technology to; for ARM to enter new markets or develop new technology may require significant investment and may not result in profitable operations; and ARM competes in the intensely competitive semiconductor market.

ARM Holdings plc

Consolidated balance sheet - IFRS

ARM Holdings plc

Consolidated income statement - IFRS

All activities relate to continuing operations. 

All of the profit for the period is attributable to the equity shareholders of the parent.

ARM Holdings plc

Consolidated statement of comprehensive income - IFRS

ARM Holdings plc

Consolidated statement of changes in shareholders' equity - IFRS

Notes to the Financial Information

(1) Basis of preparation

The financial information prepared in accordance with the Group's IFRS accounting policies comprises the consolidated balance sheets as of 30 September 2011 and 31 December 2010, consolidated income statements and consolidated statements of comprehensive income for the three months and nine months ended 30 September 2011 and 2010, and consolidated statements of changes in shareholders' equity for the nine months ended 30 September 2011 and 2010, together with related notes. This condensed set of consolidated interim financial information for the nine months ended 30 September 2011 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority. This financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2010, which have been prepared in accordance with IFRSs as adopted by the European Union.

(2) Share-based payment costs and acquisition-related expenses

Included within the consolidated income statement for the quarter ended 30 September 2011 are total share-based payment costs (including related payroll taxes) of £11.7 million (2010: £13.1 million), allocated £0.8 million (2010: £0.9 million) in cost of revenues, £7.0 million (2010: £7.9 million) in research and development expenses, £2.3 million (2010: £2.5 million) in sales and marketing expenses and £1.6 million (2010: £1.8 million) in general and administrative expenses.

Included within the consolidated income statement for the nine months ended 30 September 2011 are total share-based payment costs (including related payroll taxes) of £43.6 million (2010: £31.3 million), allocated £2.5 million (2010: £2.1 million) in cost of revenues, £26.3 million (2010: £18.8 million) in research and development expenses, £8.6 million (2010: £6.0 million) in sales and marketing expenses and £6.2 million (2010: £4.4 million) in general and administrative expenses.

Also included within operating expenses for the quarter ended 30 September 2011 is amortisation of intangibles acquired on business combinations of £0.8 million (2010: £2.7 million), allocated £0.7 million (2010: £0.9 million) in research and development expenses and £0.1 million (2010: £1.8 million) in sales and marketing expenses.

(3) Accounts receivable, accrued and other liabilities, and current tax

Included within accounts receivable at 30 September 2011 are £6.3 million (31 December 2010: £8.7 million) of amounts recoverable on contracts.

Included within accrued and other liabilities at 30 September 2011 are £19.4 million (31 December 2010: £17.7 million) relating to the provision for payroll taxes on share awards, and £15.0 million (31 December 2010: £22.7 million) relating to employee bonus and sales commission provisions.

Total current tax assets and liabilities as at 30 September 2011 amounted to an overall net asset of £8.8 million (31 December 2010: net liability of £16.6 million). Share option and award tax benefits from exercises in Q1 2011 account for the majority of the movement. These benefits will be utilised against taxable profits during the remainder of the year.

.

(4) Non-GAAP measures

The following non-GAAP measures, including reconciliations to the IFRS measures, have been used in this earnings release. These measures have been presented as they allow a clearer comparison of operating results that exclude acquisition-related charges, share-based payment costs, restructuring charges, profit on disposal and impairment of available-for-sale investments, and Linaro-related charges. Full reconciliations of Q3 2011, Q3 2010, 9M 2011 and 9M 2010, are shown in notes 4.13 to 4.16. All figures in £'000 unless otherwise stated.

(4.13) Normalised income statement for Q3 2011

(4.14) Normalised income statement for Q3 2010

(4.15) Normalised income statement for 9M 2011

(4.16) Normalised income statement for 9M 2010