News Release

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EMBARGOED until 7.00am BST 28 July 2009

A conference call discussing these results will be webcast today at 10:30 BST at www.arm.com/ir

CAMBRIDGE, UK, 28 July 2009—ARM Holdings plc [(LSE: ARM); (NASDAQ: ARMH)], the world's leading semiconductor intellectual property supplier, announces its unaudited financial results for the second quarter and half year ended 30 June 2009.

Key Highlights

• ARM has continued to outperform the semiconductor industry and gain market share
• Seventeen processor licenses signed, growing total base of licenses to 617
• ARM achieves an average of two ARM® technology-based chips per mobile handset
• Eight leading semiconductor companies announced new ARM technology-based microcontroller product lines
• Interim dividend up 10% year-on-year
• Reiterating guidance: ARM’s full-year 2009 dollar revenues to be at least in line with current market expectations

Progress on key growth drivers

• Growth in mobile applications
• Average number of ARM technology-based chips per mobile handset increased to two, driven by increasing sophistication of mobile phones
• Nine new processor licenses signed for mobile devices as demand for latest ARM technology continues
• Growth beyond mobile
• Continuing to gain share in end-markets such as microcontrollers, where eight leading semiconductor companies announced new ARM technology-based product lines, networking and consumer products
• Eight new processor licenses signed for a broad range of markets such as digital TV, microcontrollers, toys, touch screen controllers and secure storage
• Growth in new technology outsourcing
• Physical IP strategy remains on-track as first 32nm physical IP technology delivered to lead licensees
• Physical IP royalties again outperform foundry revenues

Warren East, Chief Executive Officer, said:

“The resilience of ARM in a difficult trading environment is demonstrated by these results for the first half of 2009.  We continue to outperform the semiconductor industry; whilst ARM H1 dollar revenues declined 14%, overall industry revenues declined 30%. ARM technology-based chips continue to gain market share in both mobile and non-mobile applications. 

Demand for the latest ARM technology remains robust as customers maintain high interest in licensing Cortex™ -A processors for smartphones and mobile computing, Cortex-M processors for microcontrollers and physical IP technology for advanced process nodes.  With recent signs of increasing industry activity we expect that ARM’s trading performance will be on an improving trend in the second half of the year.”

Outlook

Although the trajectory of end-consumer demand remains unclear, prospects for the semiconductor industry in the second half are more positive. With the opportunity pipeline for licensing remaining robust and market-share gains across target segments set to continue, ARM is well-positioned going into the second half of 2009.  We therefore reiterate guidance that we expect group dollar revenues for the full year to be at least in line with current market expectations, unless industry conditions in the second half are more challenging than is generally anticipated.

1 Includes catch-up royalties in Q2 2009 of $2.6m (£1.6m) and in Q2 2008 of $1.1m (£0.6m).

1 Includes catch-up royalties in H1 2009 of $4.2m (£2.6m) and in H1 2008 of $1.9m (£1.0m).

CONTACTS:      

Sarah West/Daniel Thöle                                                   Tim Score/Ian Thornton                                    
Brunswick                                                                         ARM Holdings plc                                                   
+44 (0)207 404 5959                                                       +44 (0)1223 400400

Financial review

(IFRS unless otherwise stated)

Total revenues
Total dollar revenues in Q2 2009 were $105.5 million, down 18% versus Q2 2008.  Overall semiconductor industry revenues are forecast to have declined about 30% in the same period.

Sterling revenues of £64.8 million were marginally down on Q2 2008, due to the strengthening of the dollar against sterling (ARM’s effective rate in Q2 2009 was $1.63 compared to $1.97 in Q2 2008).  As in Q1, the effective translation rate for group revenues in Q2 of $1.63 is higher than the weighted average exchange rate due to a proportion of revenues coming from order backlog.

Half-year dollar revenues in 2009 amounted to $226.4 million, down 14% on H1 2008.

License revenues
Total dollar license revenues in Q2 2009 declined by 10% year-on-year to $38.7m, representing 37% of group revenues.  License revenues comprised $29.5 million from PD and $9.2 million from PIPD. 

PIPD started to recognise revenues in Q2 for the on-going development work on advanced 32nm technology.  The remainder of these revenues will be recognised through H2 2009 and 2010.  This helped PIPD license revenues to increase 5% sequentially. 

Royalty revenues
Total dollar royalty revenues in Q2 2009 declined year-on-year by 19% to $49.1 million, representing 46% of group revenues. Royalty revenues comprised $41.3 million from PD and $7.8 million from PIPD. 

Royalties are recognised one quarter in arrears with royalties in Q2 generated from semiconductor unit shipments in Q1.  PD royalty revenues in Q2 2009 declined 19% year-on-year.  This compares with industry revenues declining by more than 30% in the shipment period (i.e. Q1 2009 compared to Q1 2008), demonstrating ARM’s continuing market share gains over the last 12 months.

Total PIPD royalties of $7.8 million included $2.6 million of catch-up royalties. Underlying royalties declined 40% year-on-year, compared to the forecasted decline in overall foundry revenues of more than 55% in the corresponding period.

Development Systems and Service revenues
Sales of development systems in Q2 2009 were $10.3 million, representing 10% of group revenues, compared to $14.6 million in Q1 2009 and $16.2 million in Q2 2008.  As previously reported, development systems revenues in both Q1 2009 and Q2 2008 benefited from large software licensing deals that do not regularly recur.

Service revenues in Q2 2009 were $7.4 million, representing 7% of group revenues, compared to $8.4 million in Q2 2008.

Gross margins
Gross margins in Q2 2009, excluding the share-based compensation charge of £0.4 million (see below), were 91.2% compared to 90.2% in Q1 2009 and 89.1% in Q2 2008. The higher gross margin in Q2 2009 is due primarily to a higher proportion of PIPD engineering time being classified as operating expenses rather than cost of sales, reflecting development of leading-edge physical IP technology.
               
Operating expenses and operating margin
Normalised operating expenses (excluding acquisition-related, share-based compensation and restructuring charges) in Q2 2009 were £43.1 million compared to £48.5 million in Q1 2009 and £37.3 million in Q2 2008. The sequential decrease in operating expenses from Q1 2009 to Q2 2009 is due primarily to the impact of foreign exchange. The weakening of the dollar in Q2 has benefited the translation of dollar denominated costs and the net impact of accounting for derivative instruments has given rise to a net credit in Q2 compared to being neutral in Q1 2009. Underlying costs continue to be carefully managed with group headcount at the end of the second quarter being slightly lower than at the start of the year. The pay freeze that was implemented with effect from 1 January 2009 will remain in place for the rest of the year. Normalised operating expenses in Q3 2009 (assuming effective exchange rates similar to current levels) are expected to be £45-47 million.

Normalised research and development expenses were £22.5 million in Q2 2009, representing 35% of revenues, compared to £21.8 million in Q1 2009 and £15.3 million in Q2 2008. Normalised sales and marketing costs in Q2 2009 were £11.6 million, being 18% of revenues, compared to £12.4 million in Q1 2009 and £10.9 million in Q2 2008. Normalised general and administrative expenses in Q2 2009 were £9.0 million, representing 14% of revenues, compared to £14.3 million in Q1 2009 and £11.2 million in Q2 2008. Normalised operating margin in Q2 2009 was 24.7% (5.1) compared to 29.5% (5.3) in Q1 2009 and 31.7% (5.2) in Q2 2008.

Total operating expenses in Q2 2009 were £52.6 million (Q2 2008: £46.1 million) including amortisation of intangible assets and other acquisition-related charges of £4.1 million (Q2 2008: £4.8 million), £5.4 million (Q2 2008: £3.6 million) in relation to share-based compensation and related payroll taxes, gains on disposal of investments of £0.2 million (Q2 2008: £nil) and restructuring charges of £0.2 million (Q2 2008: £0.5 million). Total share-based compensation and related payroll tax charges of £5.8 million in Q2 2009 were included within cost of revenues (£0.4 million), research and development (£3.5 million), sales and marketing (£1.1 million) and general and administrative (£0.8 million). Normalised income statements for Q2 2009 and Q2 2008 are included in notes 5.24 and 5.25 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.

Earnings and taxation
Profit before tax in Q2 2009 was £6.4 million compared to £12.2 million in Q2 2008. After adjusting for acquisition-related, share-based compensation and restructuring charges, normalised profit before tax in Q2 2009 was £16.3 million (5.6) compared to £21.3 million (5.7) in Q2 2008.  The group’s effective normalised tax rate in Q2 2009 was 25% (IFRS: nil) compared to 29% in Q2 2008 (IFRS: 29%). The effective normalised tax rate in Q2 2009 was lower than Q2 2008 due to the mix of profits being more weighted to countries with lower tax rates. In Q2 2009, the tax charge arising on normalised profit before tax was offset by the tax credits arising on share-based compensation and the amortisation of intangible assets (see note 5.24) to give a nil IFRS effective tax rate.

In Q2 2009, fully diluted earnings per share prepared under IFRS were 0.50 pence (2.46 cents per ADS****) compared to earnings per share of 0.67 pence (4.02 cents per ADS****) in Q2 2008. Normalised fully diluted earnings per share in Q2 2009 were 0.95 pence (5.19) per share (4.69 cents per ADS****) compared to 1.18 pence (5.20) (7.03 cents per ADS****) in Q2 2008. 

Balance sheet
Intangible assets at 30 June 2009 were £539.8 million, comprising goodwill of £506.9 million and other intangible assets of £32.9 million, compared to £580.0 million and £40.4 million respectively at 31 March 2009.

Total accounts receivable were £56.6 million at 30 June 2009, comprising £45.7 million of trade receivables and £10.9 million of amounts recoverable on contracts, compared to £65.7 million at 31 March 2009, comprising £50.7 million of trade receivables and £15.0 million of amounts recoverable on contracts. Days sales outstanding (DSOs) were 47 at 30 June 2009 unchanged from 31 March 2009. 

Cash flow and interim dividend
Net cash at 30 June 2009 was £88.2 million (5.11) compared to £91.3 million (5.12) at 31 March 2009. Normalised free cash flow in Q2 2009 was £11.6 million (5.14).

In respect of the year to 31 December 2009, the directors are declaring an interim dividend of 0.97 pence per share, an increase of 10% over the 2008 interim dividend of 0.88 pence per share. This interim dividend will be paid, out of the UK GAAP distributable reserves of ARM Holdings plc, on 5 October 2009 to shareholders on the register on 4 September 2009.

Operating review

Backlog
Group order backlog at the end of Q2 2009 is flat sequentially. The opportunity pipeline for licensing in the second half comprises an encouraging mix of newer and more mature ARM technology.

PD licensing
Seventeen processor licenses were signed in Q2.  Eleven licenses were for ARM’s advanced Cortex and Mali™ graphics processors. Four licenses were signed for Cortex-A family processors for use in consumer electronics and mobile computing applications, including licenses for Cortex-A8 and Cortex-A9 processors and two licenses for future processors that are still under development.  Four companies acquired Cortex-M processors demonstrating the continuing demand for ARM in microcontrollers. Three Mali graphics processors were licensed for use in mobile handsets and mobile computers.

Non-mobile applications continue to be a major driver for processor licenses.  Eight of the new processor licenses were signed for a broad range of digital products such as digital TV, microcontrollers, toys, touch screen controllers and secure storage. 

Nine of the ARM processors and graphics processors were acquired for use in a widening range of mobile technology such as chips for baseband, Bluetooth, gaming and mobile computing.

Q2 2009 and Cumulative PD Licensing Analysis

PD royalties
Royalties are recognised one quarter in arrears with royalties in Q2 generated from semiconductor unit shipments in Q1.  PD royalty revenues in Q2 2009 declined 19% year-on-year.  This compares with industry revenues declining by about 30% in the shipment period (i.e. Q1 2009 compared to Q1 2008), demonstrating ARM’s market share gains over the last 12 months.

This revenue came from the sales of 728 million ARM technology-based chips.  The ARM11™ family represents 6% of total unit shipments, with the ARM7™ and ARM9™ families now representing 53% and 41% of total shipments respectively. Not only does this demonstrate the longevity of ARM technology but it also underscores the material additional value yet to be derived from the significant license sales of ARM11, Cortex and Mali processors that have already been made. 

For the quarter, ARM achieved an average of two ARM technology-based chips per mobile handset, up from 1.8 a year ago.  As well as smartphones containing multiple ARM technology-based chips, more feature phones are now being shipped with multiple ARM cores.  Advanced smartphones based on Cortex-A8 technology are also now starting to ship in volume, including phones from Palm, Samsung, Sony Ericsson and Toshiba.  These products are the next step in the evolution from mobile phone to mobile computer.  ARM is working with leading OEMs and semiconductor companies to develop the supporting ecosystem of operating systems, browsers and plug-ins that bring the complete internet experience to ARM technology-based devices.  This ecosystem is further enhanced by Google's recent announcement of the Chrome operating system (OS).  Chrome is a PC-class OS targeting the ARM architecture and will be available from H2 2010. 

ARM continued to gain share in non-mobile end-markets, such as microcontrollers.  Despite industry shipments of microcontrollers being down 35% in Q1 2009, the number of ARM technology-based microcontrollers shipped declined about 25%.  This gain in market share looks set to continue as several leading semiconductor companies announced microcontroller product lines based on ARM technology, including: Atmel, Fujitsu, Maxim, Melfas, NXP, ST, TI and Toshiba.  In networking and consumer products, Atmel, Cavium, LG, Mindspeed and Netronome all announced new ARM technology-based product lines.

PIPD licensing

ARM signed eight physical IP licenses in Q2 for technologies at process nodes from 180nm to 40nm for a wide range of ARM products including platforms of physical IP technology components and also additional standard cell libraries, memories and PHYs.

The base of platform licenses for physical IP drives ARM’s future royalty potential.  Demand for new platforms continues as ARM signed an agreement to develop a platform at 90nm.  ARM also signed an agreement to update an existing platform at 130nm. 

ARM’s strategy at 32nm remains on track.  We are developing physical IP for the 32nm technology node in partnership with leading foundries and in advance of leading integrated device manufacturers (IDMs) who are considering out-sourcing their physical IP development.  During Q2 ARM started to recognise revenues for the on-going development work on advanced 32nm technology, as the first deliverables of 32nm physical IP were made to lead licensees.  In addition, ARM has been able to demonstrate the first working Cortex processors on 32nm.

Q2 2009 and Cumulative PIPD Licensing Analysis

PIPD royalties
Physical IP royalties are mainly generated from chips manufactured in foundries such as TSMC, UMC and Chartered.  A portion of these companies’ business comes from large IDMs who utilise the independent foundries in addition to their in-house manufacturing capacity.  As semiconductor sales decline, the foundries can be disproportionately impacted relative to the semiconductor industry as a whole as the IDMs tend to move manufacturing back in-house.

PIPD royalties in Q2 2009 were $7.8 million, down from $9.7 million in Q2 2008, reflecting the significant slowdown in foundry activity levels.  Underlying royalties in Q2 were $5.2 million, down 40% year-on-year, compared to the forecasted decline in overall foundry revenues during the corresponding period of over 55%.    Foundry revenues are reported as growing sequentially in Q2 2009.  These revenues will be reflected in ARM’s Q3 royalties.

People
At 30 June 2009, ARM had 1,735 full-time employees, a net reduction of 5 since the start of the year. At the end of Q2, the group had 644 employees based in the UK, 504 in the US, 220 in Continental Europe, 287 in India and 80 in the Asia Pacific region. 

Principal risks and uncertainties
The principal risks and uncertainties faced by the Group that could affect the results for the second half of 2009 and beyond are noted within the Annual Report on Form 20-F for the fiscal year ended 31 December 2008.  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; and ARM competes in the intensely competitive semiconductor market.

ARM Holdings plc
Second Quarter and First Half Results
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 balance sheet - IFRS

ARM Holdings plc
Consolidated cash flow statement - IFRS

ARM Holdings plc
Consolidated statement of changes in shareholders’ equity – IFRS

 ARM Holdings plc
Consolidated statement of comprehensive income - IFRS

Notes to the Financial Information

(1) Basis of preparation
International Financial Reporting Standards
The financial information prepared in accordance with the Group's IFRS accounting policies comprises the consolidated balance sheets as of 30 June 2009 and 31 December 2008, consolidated income statements for the quarters and six months ended 30 June 2009 and 2008, and consolidated statements of cash flows, changes in shareholders’ equity and comprehensive income for the six months ended 30 June 2009 and 2008, together with related notes.  This financial information has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, “Interim financial reporting”, as adopted by the European Union.  In preparing this financial information management has used the principal accounting policies as set out in the Group’s annual financial statements for the year ended 31 December 2008.

The following new standards, amendments to standards or interpretations are mandatory for the first time for the financial year beginning 1 January 2009:

• Amendment to IFRS 2, “Share-based payments” This clarifies what events constitute vesting conditions and also specifies that all cancellations, whether by the Group or by another party, should receive the same accounting treatment. This does not have a material impact on the Group’s financial statements as it does not have a significant number of the types of options affected.

• IAS 1 (revised), “Presentation of financial statements” This revised standard requires entities to prepare a statement of comprehensive income. All non-owner changes in equity are required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). Owner changes in equity are shown in a statement of changes in equity. Also entities making restatements or reclassifications of comparative information are required to present a restated balance sheet as at the beginning of the comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The Group has disclosed a statement of comprehensive income in these interim results.

• IFRS 7 (Revised), “Financial instruments: Disclosures” This amendment forms part of the IASB's response to the financial crisis and addresses the G20 conclusions aimed at improving transparency and enhancing accounting guidance. The amendment increases the disclosure requirements about fair value measurement and reinforces existing principles for disclosure about liquidity risk. The amendment introduces a three-level hierarchy for fair value measurement disclosure and requires some specific quantitative disclosures for financial instruments in the lowest level in the hierarchy. In addition, the amendment clarifies and enhances existing requirements for the disclosure of liquidity risk primarily requiring a separate liquidity risk analysis for derivative and non-derivative financial liabilities. This will only affect presentation in the Group’s annual financial statements.

The following new standards, amendments to standards or interpretations are mandatory for the first time for the financial year beginning 1 January 2009, but are not currently relevant to the Group:

• Amendment to IAS 39, “Financial instruments: Recognition and measurement”, and IFRS 7, “Financial instruments: Disclosures”;
• Amendment to IAS 32, “Financial instruments: Presentation”, and IAS 1, “Presentation of financial statements on ‘Puttable financial instruments and obligations arising on liquidation'”;
• IAS 23 (Revised), “Borrowing costs”;
• IFRIC 13, “Customer loyalty programmes relating to IAS 18, Revenue”;
• IFRIC 14, “IAS 19, The limit on a defined benefit asset, minimum funding requirements and their interaction”;
• IFRIC 15, “Agreements for construction of real estates”; and
• IFRIC 16, “Hedges of a net investment in a foreign operation”.

(2) Share-based compensation charges and acquisition-related expenses

Included within the consolidated income statement for the quarter ended 30 June 2009 are total share-based payment costs of £5.8 million (2008: £3.9 million), allocated £0.4 million (2008: £0.3 million) in cost of revenues, £3.5 million (2008: £2.6 million) in research and development costs, £1.1 million (2008: £0.5 million) in sales and marketing costs and £0.8 million (2008: £0.5 million) in general and administrative costs.

Included within the consolidated income statement for the six months ended 30 June 2009 are total share-based payment costs of £10.5 million (2008: £7.7 million), allocated £0.7 million (2008: £0.5 million) in cost of revenues, £6.3 million (2008: £5.2 million) in research and development costs, £2.0 million (2008: £1.0 million) in sales and marketing costs and £1.5 million (2008: £1.0 million) in general and administrative costs.

Also included within operating costs for the quarter ended 30 June 2009 is amortisation of intangibles acquired on business combinations of £4.0 million (2008: £4.7 million), allocated £2.0 million (2008: £2.6 million) in research and development costs, £2.0 million (2008: £1.9 million) in sales and marketing costs and £nil (2008: £0.2 million) in general and administrative costs.

(3) Accounts receivable
Included within accounts receivable at 30 June 2009 are £10.9 million (31 December 2008: £17.9 million) of amounts recoverable on contracts.

(4) Segmental reporting
At 30 June 2009, the Group is organised on a worldwide basis into three main business segments:

Processor Division (PD), encompassing those resources that are centred on microprocessor cores, including specific functions such as graphics IP, video IP, fabric IP and embedded software.

Physical IP Division (PIPD), concerned with the building blocks necessary for translation of a circuit design into actual silicon.

Systems Design Division (SDD), focused on the tools and models used to create and debug software and system-on-chip (SoC) designs.

This is based upon the Group’s internal organisation and management structure and is the primary way in which the board of directors is provided with financial information.  Whilst revenues are reported into four main revenue streams (namely licensing, royalties, development systems and services), the costs, operating results and balance sheets are only analysed into these three divisions.

The following analysis is of revenues, operating expenses, investment income, interest payable, profit/(loss) before tax, tax, profit/(loss) for the period, amortisation of intangible assets purchased through business combinations, total share-based payment costs (including the related payroll taxes), goodwill and total assets for each segment and the Group in total. 

There are no inter-segment revenues.  The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.  Unallocated assets include financial assets, current and deferred tax and VAT.

 
(5) 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 compensation and restructuring charges and profit on disposal and impairment of available-for-sale investments. All figures in £’000 unless otherwise stated.

 (5.24) Normalised income statement for Q2 2009

(5.25) Normalised income statement for Q2 2008

(5.26) Normalised income statement for H1 2009

(5.27) Normalised income statement for H1 2008