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|ARM Holdings plc Reports Results for the Second Quarter and Half Year Ended 30 June 2010|
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A presentation of the results will be webcast today at 09:30 BST at www.arm.com/ir
CAMBRIDGE, UK, 27 July 2010—ARM Holdings plc announces its unaudited financial results for the second quarter and half year ended 30 June 2010, demonstrating continuing progress in executing its strategy with multiple design wins taking ARM further into new markets.
Progress against strategy in Q2
Warren East, Chief Executive Officer, said:
“We are pleased to report strong underlying revenue and profit performance in the first half, in improved trading conditions compared with one year ago. Our strategy remains on track for growth in mobile, non-mobile and new technology outsourcing. Major semiconductor vendors and consumer electronics companies are making long-term commitments to using ARM technology in their future products. Freescale, Microsoft and TSMC all recently announced adoption of ARM’s latest technology which will further increase ARM’s market penetration, and royalty potential, in a broadening range of end applications. ARM continued to gain share in the quarter with shipments of ARM-based chips growing faster than the industry in all target markets."
We enter the second half of the year with record order backlog, a robust opportunity pipeline and strong momentum as ARM continues to increase penetration across its target markets. Although the impact of the broader macroeconomic environment on end consumer demand later in the year remains uncertain, we expect group dollar revenues (excluding catch-up PD royalty revenues of $9 million reported in Q2) for the full-year 2010 to be in line with current market expectations.
1 Includes catch-up PD royalties in Q2 2010 of $9.0m (£6.2m).
1 Includes catch-up PD royalties in H1 2010 of $9.0m (£6.2m).
Sarah West/Daniel Thole
Tim Score/Ian Thornton
(IFRS unless otherwise stated)
Half-year dollar revenues in 2010 amounted to $293.6 million, up 30% on H1 2009.
Royalty revenues are recognised one quarter in arrears with royalties in Q2 generated from semiconductor unit shipments in Q1. PD royalty revenues in Q2 2010 included a catch-up royalty payment of $9.0m in respect of certain shipments made between 2007 and 2010. This catch-up royalty was identified by the customer as part of ARM’s ongoing royalty auditing process. PD underlying royalties of $63.5 million increased 54% year-on-year. This compares with industry revenues increasing by less than 40% in the shipment period (i.e. Q1 2010 compared to Q1 2009), demonstrating ARM’s market share gains over the last 12 months.
Total PIPD royalty revenues of $9.8 million included $0.2 million of catch-up royalties. Underlying royalty revenues increased by more than 80% year-on-year, reflecting the rebound in the foundry industry.
Development Systems and Service revenues
Service revenues in Q2 2010 were up 4% to $7.6 million, representing 5% of group revenues.
Total operating expenses in Q2 2010 were £65.3 million (Q2 2009: £52.6 million) including amortisation of intangible assets and other acquisition-related charges of £3.1 million (Q2 2009: £4.1 million), £8.8 million (Q2 2009: £5.3 million) in relation to share-based payment costs and related payroll taxes and Linaro-related charges of £1.2 million, see below, (restructuring charges in Q2 2009: £0.2 million). Total share-based payment costs and related payroll tax charges of £9.5 million in Q2 2010 were included within cost of revenues (£0.7 million), research and development (£5.7 million), sales and marketing (£1.8 million) and general and administrative (£1.3 million).
Normalised income statements for Q2 2010 and Q2 2009 are included in notes 6.13 and 6.14 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.
During Q2, ARM announced, along with several partners, the formation of Linaro, a not-for-profit company, set up to develop optimised Linux software and tools for ARM-processor based chips. Linaro will provide underpinning technology for all major Linux distributions including Android, Chrome, MeeGo, Limo, Ubuntu, webOS, and others. Founding members have contributed both money and engineering time to the collaboration. Linaro is currently a 100% controlled subsidiary of ARM; as other members take up board seats Linaro will cease to be controlled as a subsidiary. Linaro-related charges in Q2 2010 of £1.2m were charged to the profit and loss account. Linaro-related charges are expected to total about £4.5m in the first 12 months post launch.
Earnings and taxation
In Q2 2010, fully diluted earnings per share were 1.62 pence (7.29 cents per ADS****) compared to earnings per share of 0.50 pence (2.46 cents per ADS****) in Q2 2009. Normalised fully diluted earnings per share in Q2 2010 were 2.34 pence per share (10.51 cents per ADS****) compared to 0.95 pence (4.69 cents per ADS****) in Q2 2009.
Intangible assets at 30 June 2010 were £574.1 million, comprising goodwill of £556.0 million and other intangible assets of £18.1 million, compared to £549.0 million and £21.8 million respectively at 31 March 2010.
Total accounts receivable were £91.8 million at 30 June 2010, comprising £80.0 million of trade receivables and £11.8 million of amounts recoverable on contracts, compared to £57.9 million at 31 March 2010, comprising £45.0 million of trade receivables and £12.9 million of amounts recoverable on contracts. Days sales outstanding (DSOs) were 34 at 30 June 2010 compared to 26 at 31 March 2010.
Cash flow and interim dividend
Net cash was £202.3 million at 30 June 2010 compared to £196.0 million at 31 March 2010. Normalised free cash flow in Q2 2010 was £30.4 million.
In respect of the year to 31 December 2010, the directors are declaring an interim dividend of 1.16 pence per share, an increase of 20% over the 2009 interim dividend of 0.97 pence per share. This interim dividend will be paid, out of the UK GAAP distributable reserves of ARM Holdings plc, on 4 October 2010 to shareholders on the register on 3 September 2010.
Microsoft signed a multi-year architecture license, to be at the forefront of working with ARM technology, across a broad range of businesses, addressing multiple application areas.
Eleven of the licenses were for ARM’s advanced Cortex™ processors, including a third lead-customer for ARM’s next generation Cortex-A class processor codenamed “Eagle” for use in mobile and consumer electronics and four licenses for other Cortex-A class processors. Six of the Cortex licenses were Cortex-M class processors mainly for use in microcontrollers.
In addition, three companies furthered their commitment to Mali, ARM’s graphics processor, in digital TVs and mobile computers. There was one new license during the quarter and a further two customers extended the period of the license grant from a per-use to multi-year term.
Non-mobile devices continue to be a major driver for processor licensing with thirteen of the new processor licenses being signed for a broad range of digital products such as microcontrollers, intelligent sensors, medical applications, smart energy meters, and digital TVs. The remaining four licenses were signed for use in mobile devices from mobile computers to low-cost smartphones.
During the quarter Freescale, a leading microcontroller company, announced that they are launching their first major new family of more than 200 ARM-processor based microcontrollers. ARM is already the highest shipping architecture in the 32-bit microcontroller market and this commitment is a further demonstration of the growing applicability and adoption of ARM’s technology in this cost-sensitive market.
Q2 2010 and Cumulative Processor Licensing Analysis
* Adjusted for licenses that are no longer expected to generate royalties
Q2 processor royalty revenue came from the sales of 1.4 billion ARM technology-based chips. The Cortex family now represents 6% of units shipped up from 1 % in the same quarter one year ago. This increase is primarily due to shipments of Cortex-M class processors in microcontrollers and wireless networking chips, and an increase in Cortex-A shipments driven by high-end smartphones adopting smarter applications processors.
Q2 2010 Processor Unit Shipment Analysis*
* These calculations do not include any units from catch-up royalties as these shipments were from prior quarters
ARM continued to gain share in non-mobile end-markets. Shipments of ARM technology-based microcontrollers grew more than 130% year on year, compared to 80% growth for the overall microcontroller market. Part of this growth was due to an increase in sales of Cortex-M class based chips. These chips go into a wide range of price sensitive markets such as toys, consumer white-goods and industrial controllers. This growth in microcontrollers looks set to continue with leading microcontroller companies, Freescale and NXP, both announcing ARM Cortex-based microcontroller products in recent months. In addition, leading FPGA vendors, Actel and Xilinx, both announced new product lines based on Cortex processors.
During the quarter ARM saw strong growth not only in microcontrollers, but also in other low-cost chips such as Bluetooth and smartcard resulting in the average royalty per chip decreasing to 4.5c in the quarter from 4.8c in the prior quarter and 5.7c in the same quarter last year.
ARM11 and Cortex class processors typically have a higher royalty rate per chip. As these processors become a greater proportion of overall ARM shipments, we are beginning to see an increase in the average percentage royalty per chip, thereby contributing to the growth in ARM’s overall royalty revenue.
The increasing penetration of smartphones continues to benefit ARM. In Q2 2010 ARM’s customers reported about a 65% increase in wireless chips sales driven by 50% growth in smartphone shipments. For the quarter, ARM achieved an average of 2.6 ARM technology-based chips per mobile handset, up from 2.4 in the prior quarter, and up from 2.0 a year ago.
During the quarter, ARM received catch-up royalties of $9.0m in respect of shipments made between 2007 and 2010. This catch-up royalty was discovered by the customer as part of ARM’s ongoing royalty auditing process.
ARM signed three new licenses in Q2 for royalty-bearing platforms of physical IP, at 65nm and 45nm, with another at 130nm. The base of platform licenses for physical IP further drives ARM’s future royalty potential. Cumulatively, by the end of Q2, 73 platform licenses have been signed.
Early in Q3, TSMC signed a license for ARM’s advanced physical IP platforms at 28nm and 20nm. This long term commitment underlines ARM’s technology strategy to be at the vanguard of developing market-leading physical IP for the latest manufacturing processes. Semiconductor companies will now be able to reduce their chip implementation costs by selecting ARM’s advanced physical IP for 32nm and 28nm at all of the major foundries.
In addition, ARM has now released production versions of the complete 32nm physical IP platform for manufacturing processes at IBM, GLOBALFOUNDRIES and Samsung. The ARM engineering teams are now focusing on developing 28nm platforms and are actively engaged in advanced R&D for 22nm and 20nm.
Q2 2010 and Cumulative PIPD Licensing Analysis
In addition, we signed two further licenses for ARM’s physical IP optimised to enable a Cortex-A9 processor to run at high-speed whilst consuming little power.
Underlying PIPD royalties in Q2 2010 were $9.6 million, up 80% year-on-year, reflecting the recovery in the foundry industry. ARM is now receiving royalty revenue from wafer shipments across eleven different advanced processes at 65nm and below, contributing more than 15% of PIPD’s total royalty revenues.
ARM is continuing to invest in its R&D programs and operations, and expects to continue to recruit in H2 2010.
Principal risks and uncertainties
ARM Holdings plc
ARM Holdings plc
All activities relate to continuing operations.
ARM Holdings plc
ARM Holdings plc
ARM Holdings plc
* During the six-month period to 30 June 2010, £36,775,000 (2009: £17,403,000) of treasury shares offset within retained earnings were released as a result of employee share option exercises and award vestings, being the cost of 32,577,556 (2009: 12,018,805) shares in the Company. At 30 June 2010, there was £28,327,000 (2009: £90,560,000) offset within retained earnings being the cost of 27,743,805 (2009: 79,141,683) shares in the Company
Notes to the Financial Information
(1) Basis of preparation
The following new standards and amendments to standards are mandatory for the first time in 2010:
The following new standards, amendments to standards, or interpretations are effective in 2010 but not relevant to the Group:
(2) Share-based payment costs and acquisition-related expenses
Included within the consolidated income statement for the quarter ended 30 June 2010 are total share-based payment costs (including related payroll taxes) of £9.5 million (2009: £5.8 million), allocated £0.7 million (2009: £0.4 million) in cost of revenues, £5.7 million (2009: £3.5 million) in research and development expenses, £1.8 million (2009: £1.1 million) in sales and marketing expenses and £1.3 million (2009: £0.8 million) in general and administrative expenses.
Included within the consolidated income statement for the six months ended 30 June 2010 are total share-based payment costs (including related payroll taxes) of £18.2 million (2009: £10.5 million), allocated £1.1 million (2009: £0.7 million) in cost of revenues, £11.0 million (2009: £6.3 million) in research and development expenses, £3.5 million (2009: £2.0 million) in sales and marketing expenses and £2.6 million (2009: £1.5 million) in general and administrative expenses.
Also included within operating expenses for the quarter ended 30 June 2010 is amortisation of intangibles acquired on business combinations of £3.0 million (2009: £4.0 million), allocated £1.0 million (2009: £2.0 million) in research and development expenses and £2.0 million (2009: £2.0 million) in sales and marketing expenses.
In respect of the year to 31 December 2010, the directors are declaring an interim dividend of 1.16 pence per share (an estimated cost of £15.3m). This interim dividend will be paid on 4 October 2010 to shareholders who are on the register of members on 3 September 2010.
(4) Accounts receivable
(5) Segmental reporting
Processor Division (PD), encompassing those resources that are centred on microprocessor cores, including specific functions such as graphics IP, fabric IP and embedded software and configurable digital signal processing IP.
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 also 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 (in both GBP and USD), operating expenses, investment income, interest payable, profit/(loss) before tax, tax, profit/(loss) for the period, amortisation of intangible assets, share-based payment costs, 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, VAT, and assets of the disposal group held for sale.
(6) Non-GAAP measures
(6.13) Normalised income statement for Q2 2010
(6.14) Normalised income statement for Q2 2009
(6.15) Normalised income statement for H1 2010
(6.16) Normalised income statement for H1 2009
Statement of directors’ responsibilities
The directors confirm that, to the best of their knowledge, this condensed set of consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union. The interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:
The directors of ARM Holdings plc are listed in the ARM Holdings plc Annual Report for the year ended 31 December 2009.
By order of the Board
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 2010, which comprise the IFRS consolidated income statement, the IFRS consolidated balance sheet as at 30 June 2010, the IFRS consolidated statement of comprehensive income, the IFRS consolidated cash flow statement, the IFRS consolidated statement of changes in equity, 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 2010 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.
The results shown for Q2 2010, Q2 2009, H1 2010, and H1 2009 are unaudited. The results shown for FY 2009 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 2009 were approved by the Board of directors on 31 March 2010 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 Q2 2010 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 2009 and in the Annual Report on Form 20-F for the fiscal year ended 31 December 2009.
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 2009 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.
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, 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 is a registered trademarks 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 Services BVBA; ARM Germany GmbH; ARM Embedded Technologies Pvt. Ltd.; ARM Norway AS; and ARM Sweden AB.