|Results For The Second Quarter And Six Months Ended 30 June 2003
|Sequential Increases in Revenue and Profit Before Tax in the Second Quarter
CAMBRIDGE, UK, 22 July 2003—ARM Holdings plc [(LSE: ARM); (Nasdaq: ARMHY)] announces its unaudited financial results for the
second quarter and the six months ended 30 June 2003
(Figures in US GAAP)
Second quarter ended 30 June 2003
- Revenues at £31.4 million, up from £31.0 million in Q1 2003
- License revenues amounted to £12.7 million, up from £12.1 million in Q1 2003. 11 licenses for microprocessor cores signed
in the quarter, compared to eight in the first quarter. Six new partners signed bringing the total number of semiconductor
partners to 118
- Sustained spending on product development resulting in new features and functionality to be introduced over coming quarters
which will underpin long-term licensing activity. Recent announcements include TrustZone™ security extension, Thumb®-2 core
technology for feature-rich applications and the AMBA™ AXI protocol (interconnect technology extension for ultra high performance
and complex system-on-chip designs)
- Royalty revenues match seasonally high first quarter levels with record unit shipments of 180 million units (89% up on Q2
- Profit before taxation at £6.6 million, 8% higher than Q1 2003
- Strong net cash generation in the quarter of £5.7 million. Cash balance of £141.0 million at end Q2 2003, up from £135.3 million
at end Q1 2003
- Earnings per fully diluted share at 0.4 pence (2.1 cents per ADS*) (Q1 2003: 0.4 pence and 2.0 cents respectively)
Six months ended 30 June 2003
- Revenues at £62.4 million (H1 2002: £85.3 million; H2 2002: £65.6 million)
- Royalty revenues at £20.5 million (H1 2002: £12.9 million) on unit shipments of 358 million (H1 2002: 205 million)
- Profit before taxation at £12.6 million (H1 2002: £31.9 million; H2 2002: £13.5 million)
- Net cash generated in H1 2003 of £10.7 million at similar level to H1 2002 (£10.9 million) after buying out the minority interest
in ARM Korea for $4.8 million in the second quarter of 2003
- Earnings per fully diluted share at 0.8 pence (4.2 cents per ADS*) (H1 2002: 2.2 pence and 9.9 cents respectively)
* Each American Depositary Share (ADS) represents three shares
Commenting on the second quarter and half year results, Warren East, Chief Executive Officer, said:
"We are pleased to see that the stability in our business has been further evidenced by a small sequential increase in revenues
in the second quarter. Licensing to both new and existing partners has increased from the first quarter and royalty revenues
matched the seasonally high level seen in Q1. With mixed news emerging from across the semiconductor industry, we expect subdued
activity levels to continue among our partners for the remainder of the year with ARM's performance being driven by recent
technology developments, including the ARM11™ family, sales of new RealView® development systems products, and continued strength
in royalty revenues. Our long- term position continues to improve, underpinned by discussions of broader, strategic collaboration
with a number of large semiconductor companies and continued penetration of small and medium-sized companies."
Tim Score, Chief Financial Officer, added:
"Stable revenues and tight cost control have yielded improved profitability and strong free cash flow, which enables us to
maintain R&D expenditure at 39% of sales. This sustained investment in product development and innovation will result in new
features and functionality in our product portfolio which underpin future licensing activity."
Market conditions, current trading and prospects
The first half of 2003 has continued to witness challenging trading conditions in the semiconductor industry, set against
uncertain global economic conditions exacerbated by war and the SARS epidemic. News flow from the semiconductor industry continues
to illustrate mixed fortunes amongst the ARM partnership and we continue to manage the company in anticipation of the lower
activity levels seen in recent quarters persisting in the second half.
Underlying momentum in the business is supported by the level of licensing negotiations in progress, the recent introduction
of new development systems products and the positive trend in royalty revenues. With inventory issues in Asia likely to impact
our royalty revenues in the second half and given the company's exposure to weakness in the US dollar, with 90 to 95% of ARM's
revenues being in US dollars, we anticipate that despite the underlying momentum, revenues in the second half of 2003 will
remain at similar levels to the first half with Q3 possibly being weaker than Q4 due to seasonality.
As anticipated, given that the licenses signed in the first half were for more mature ARM products, the backlog (defined as
the aggregate value of contracted business not yet recognised in the profit and loss account) was lower at the end of June
2003 compared to the end of March 2003, although today it is close to end-March levels again. The prospect of further ARM11
family licensing in the second half, combined with other strategic sales opportunities in the pipeline, gives us confidence
that the backlog will be higher at the end of the year than it was at the start.
Licensing activity in the first half of 2003 was at similar levels to that experienced in the second half of 2002. Notwithstanding
difficult trading conditions for our existing and potential partners, we have been successful in translating the growing interest
in the ARM® architecture amongst the semiconductor industry into signed license deals. We have signed 19 licenses in the first
half and the pipeline of licensing opportunities remains healthy. By the end of June we had 118 semiconductor partners compared
to 108 at the end of 2002.
In order to ensure that the full spectrum of semiconductor companies are in a position to license ARM technology, even when
budgets are constrained, we have continued to expand the range of licensing models available to partners. Today architecture,
subscription, multi-use, term and per-use licenses are available to our partners, enabling them to license and utilise ARM
technology on the basis most appropriate for them.
Future licensing opportunities with existing and new licensees are generated as a result of the ongoing migration to the use
of 16- and 32-bit microprocessors across a number of end markets. ARM is able to realise these opportunities by expanding
the product portfolio with new cores such as the ARM 11 family of products, supplemented by the introduction of major new
technology enhancements such as the TrustZone security extension, the Thumb-2 extension for improved code density and Intelligent
Energy Manager™ software for low power consumption.
Further opportunities for license revenue growth are provided by the Foundry Programme which was established in 2000 in order
to facilitate the adoption of the ARM architecture by small- and medium-size semiconductor companies. As at the end of Q2,
58 partners have licensed 94 authorised designs through the Foundry Programme. Four cores are available through the Programme,
with seven foundries being approved to manufacture the designs developed by ARM's licensees. It is anticipated that further
cores will be made available for licensing through the Programme in due course. To date 9 per-use licensees have commenced
shipping ARM core-based chips, with aggregate volumes shipped now in excess of 3 million units, and six per-use licensees
have progressed to either term or multi-use implementation licenses.
Alongside our CPU core licensing business, the licensing of non-CPU technology comprising platforms, peripherals, models and
application software continues to represent a meaningful portion of our existing licensing business comprising 17% of total
license revenues in the first half. In the second quarter, it was announced that Savaje Technologies, developers of a universal
open Java™ applications platform and operating system for wireless devices, licensed the ARM Swerve i3D Graphics Client, developed
by ARM in collaboration with Superscape Group plc, the interactive 3D technology enabling specialist in which ARM holds a
12% equity interest, to embed into the Savaje technology platform. Revenues were generated in the quarter from ARM's collaboration
with Imagination Technologies on 3D graphics technology and from the licensing of the PrimeXsys™ Dual Core Platform for networking
applications to one of our existing partners.
Royalties and unit shipments
Royalty revenues earned in the six month period ended in March 2003 (we receive and report royalty data one quarter in arrears)
were £20.5 million on 358 million units shipped, up 59% and 75% respectively on the same period a year ago. Royalty revenues
in the second quarter were £10.2 million on 180 million units shipped, compared to £10.3 million in the previous quarter on
178 million units shipped. This quarter's reported royalties include some $700k from one partner which relates to unit shipments
made in earlier periods. Whilst the medium-term outlook for royalties is positive, it is probable that inventory issues that
have arisen in Asia in recent months will have a negative impact on reported royalties in the second half. A further two partners
began shipping ARM core-based product in the quarter to March 2003, bringing the total number of licensees shipping to 50
(out of 118 partners). This quarter also includes the first royalties earned from the licensing of our Java technology-based
software products. Average royalty rates in the second quarter are very similar to those achieved in Q1. Of the total reported
unit shipments in the first half, 9% related to units based on ARM9™ technology. The broad reach of the ARM technology is
demonstrated by the fact that royalty revenues are being earned from products being shipped into a wide range of end markets.
The wireless market remained the largest end market using ARM technology in the first half of 2003, accounting for approximately
71% of unit shipments. However, units are being shipped in all target end markets, with the imaging and networking sectors
in particular showing positive trends in the period.
Sales of development systems were stable in the quarter after a very strong performance in East Asia in the first quarter.
Performance in East Asia was not as strong in the second quarter, due partly to the impact of SARS. During the second quarter
the development systems management team has been strengthened to bring more focus on Product Marketing and Business Development.
The Product Marketing team has refocused the development systems RealView product line to provide developers with fully integrated
solutions. During the quarter development systems completed the engineering of the RealView Developer Kit for Oki which represents
an important new channel to market for our technology. We are now collaborating with our semiconductor partners to produce
software development toolkits customised for use with their specific products only. Typical products are microcontroller families
or Application Specific Standard Processors. The first RealView Developer Kits for Oki were shipped in the second quarter.
Notwithstanding the lower revenue levels experienced over the last four quarters, ARM continues to view investment in innovative
technology as a major priority of the business. This is demonstrated by investment in research and development being 39% of
revenues in the first half of 2003 compared to the historical range of 25-30% of revenues. This level of expenditure has enabled
the company not only to deliver the first ARM11 family core successfully to lead partners at the end of 2002, but also to
develop a series of new features and functionality which will be introduced into our portfolio of products over the coming
quarters. In May, we announced the specification for our TrustZone technology, a new security extension to the ARM architecture.
This technology provides a secure foundation for systems running open operating systems such as Linux, Palm OS, Symbian OS
and Windows CE. Further, TrustZone technology complements secure application environments such as Sun Microsystems' Java technology
by making security implementation on devices more efficient. TrustZone technology will be available for licensing in ARM cores
In June, we announced the introduction of Thumb-2 core technology, which provides enhanced levels of performance, energy efficiency
and code density for a wide range of embedded applications. Thumb-2 core technology is a new blended instruction set combining
both 16-bit and 32-bit instructions, enabling new embedded and mobile devices that support feature-rich applications with
longer battery life. Also in June, we announced the extension of the industry standard AMBA interconnect technology with the
AXI protocol, designed to meet the needs of ultra high performance and complex system-on-chip designs, furthering the widespread
adoption of the AMBA design methodology.
ARM today announces the acquisition of Adelante Technologies N.V., part of Adelante Technologies Holdings B.V. Adelante Technologies
N.V. is a 25-person company based in Leuven, Belgium. The company's key product offering, A|RT™, comprises a methodology for
designing optimised processing blocks to accelerate signal processing applications. A|RT technology, combined with ARM's industry-leading
architectural capability, will enable ARM to provide innovative IP solutions to meet the growing design challenges within
the electronics industry. The provision of processing engines for data intensive tasks enables ARM to further its market reach
and strengthen its position as the industry's leading IP provider.
Following the reduction of our headcount by 12% in Q4 2002, we have as anticipated maintained our headcount through 2003 to
date at a similar level to that which we exited 2002. At the end of June 2003 we had 716 full time employees compared to 721
at 31 December 2002.
In May 2002, Nazomi Communications, Inc. filed a lawsuit against ARM before the Federal District Court for Northern California
claiming that ARM's Jazelle® technology for Java acceleration infringes a US patent owned by Nazomi. ARM is confident that
its products do not infringe the patent cited in the lawsuit or any other Nazomi patents and we intend to pursue Nazomi for
all legal costs incurred by ARM in defending our intellectual property in this case. The "Markman" hearing in this suit (which
is a proceeding to determine the scope of the patent claims at issue) took place on 28 May 2003 and based on the court's stated
timing ARM expects the outcome of the "Markman" hearing and the summary judgment motion in the near future.
Second quarter ended 30 June 2003
Total revenues for the second quarter ended 30 June 2003 amounted to £31.4 million, representing a 1% increase from £31.0
million in the first quarter of 2003, and a 27% decrease over second quarter 2002 revenues of £43.2 million.
License revenues amounted to £12.7 million representing 40% of revenues compared to £12.1 million or 39% of revenues in the
first quarter of 2003 and £25.7 million or 60% of revenues for the corresponding period in 2002. We signed 11 licenses with
partners during the second quarter of 2003: six per use licenses with new partners and three upgrade and two derivative licenses
with existing partners. Of the six new Foundry Programme partners, three licenses were taken for the ARM7TDMI core and three
for the ARM922TTM core. Of the three upgrades, where existing partners took licenses to a new family of cores that they had
not previously licensed, there was one license for the ARM926EJ-STM core, one for the ARM1026EJ-STM core license and one Foundry
Programme customer upgraded to the ARM922T core. Both the derivative licenses in the second quarter were full licenses for
former Foundry Programme customers. One took a full license to the ARM7TDMI core having previously taken a per-use license
to the same core and the other took a full license to the ARM7EJ-STM core.
Royalty revenues in the second quarter were £10.2 million accounting for 33% of revenues compared to £10.3 million or 33%
of revenues in the first quarter of 2003 and £6.5 million or 15% of revenues for the corresponding period in 2002. Sales of
development systems were £4.8 million, representing 15% of total revenues compared to £5.0 million or 16% of total revenues
in the first quarter of 2003 and £6.1 million or 14% of revenues in the second quarter of 2002. Service revenues were £3.7
million comprising consulting fees of £0.6 million and support, maintenance and training fees of £3.1 million compared to
total service revenues of £3.6 million in the first quarter of 2003 and £4.9 million for the corresponding period in 2002.
Gross margins for the second quarter were 92%, up from 91% in the first quarter, reflecting the small drop in the proportion
of development systems sales.
Research and development expenses were £12.1 million in the second quarter of 2003 representing 39% of revenues. This compares
to £11.9 million or 38% of revenues in the first quarter of 2003. Sales and marketing costs for the second quarter were £5.7
million or 18% of revenues compared to £5.4 million or 17% of revenues in the first quarter of 2003. General and administration
expenses decreased from £5.9 million in the first quarter of 2003 or 19% of revenues to £5.7 million in the second quarter
or 18% of revenues. Expenses in the first quarter included write downs in listed and unlisted investments of £1.6 million
which did not recur in the second quarter. Expenses in the second quarter, however, include a £0.6 million charge relating
to unrealised future foreign exchange losses on certain committed but not yet invoiced future revenue streams in accordance
with SFAS 133. Operating margins were 17.2% for the second quarter of 2003 compared to 16.4% for the first quarter of 2003.
Income before income tax for the second quarter of 2003 was £6.6 million or 20.9% of revenues compared to £6.1 million or
19.5% of revenues in the first quarter of 2003 and £16.2 million or 37.5% of revenues in the second quarter of 2002.
Second quarter fully diluted earnings per share prepared under US GAAP were 0.4 pence (2.1 cents per ADS) compared to 1.1
pence (5.1 cents per ADS) for the corresponding period in 2002 or 0.4 pence (2.0 cents per ADS) in the first quarter of 2003.
Six months ended 30 June 2003
Total revenues for the six months ended 30 June 2003 amounted to £62.4 million, compared to £85.3 million in the six months
ended 30 June 2002. First half revenues in 2003 were reduced by approximately £7 million as a result of the weaker US dollar
against sterling in 2003 when compared to the same period in 2002.
Product revenues, which include license fees, royalties and the sale of development systems, were £55.0 million, representing
88% of total revenues in the six months to 30 June 2003. This compared to £75.8 million, representing 89% of revenues in the
corresponding period of 2002. Royalty revenues were £20.5 million in the first six months of 2003, compared to £12.9 million
in the first six months of 2002. The number of licensees shipping silicon chips based on the ARM architecture is now 50. Licensing
revenues were £24.7 million in the six months to 30 June 2003 compared to £49.2 million in 2002. Sales of development systems
were £9.8 million for the first six months of 2003 compared to £13.7 million in the first six months of 2002.
Service revenues, which include consulting services and revenues from support, maintenance and training, were £7.4 million
in the first six months of 2003, representing 12% of total revenues compared to £9.5 million and 11% of revenues in the first
six months of 2002. Consulting revenues were £1.2 million in the first six months of 2003 compared to £2.6 million in the
same period of 2002, while revenues from support, maintenance and training were £6.2 million versus £6.9 million in the first
half of 2002.
Gross margin for the first six months of 2003 was 91%, compared to 92% for the first six months of 2002.
Research and development expenses were £24.0 million or 39% of revenues in the first half of 2003 compared with £24.1 million
or 28% of revenues in 2002. Sales and marketing costs decreased from £12.6 million or 15% of revenues in the first six months
of 2002 to £11.0 million or 18% of revenues in 2003. General and administration costs were £11.5 million or 18% of revenues
in the first six months of 2003 compared to £11.6 million or 14% of revenues in the first six months of 2002.
Operating margins in the first half of 2003 were 16.8% compared to 35.1% reported in the first six months of 2002.
Interest rose slightly from £2.1 million for the first six months of 2002 to £2.2 million in 2003, with the benefit of the
higher average cash balances being offset by lower interest rates in the first half of 2003.
Earnings and taxation
For the six months ended 30 June 2003, income before income tax under US GAAP was £12.6 million or 20.2% of revenues compared
to £31.9 million or 37.4% of revenues in the six months ended 30 June 2002. The group's effective taxation rate under US GAAP
increased from 30.5% in the first six months of 2002 to 31.6% in 2003, with the benefits of research and development tax credits
in the UK being offset by the incidence of certain disallowable expenses.
Fully diluted earnings for the six months ended 30 June 2003 under US GAAP were 0.8 pence per share (4.2 cents per ADS) compared
to 2.2 pence per share (9.9 cents per ADS) for the six months ended 30 June 2002.
Balance sheet and cash flow
Net cash inflow from operating activities of £18.3 million was generated in the first six months of 2003, measured under UK
GAAP. Capital expenditure in the period was £1.5 million. Cash and short term investments increased by £10.7 million in the
six months to £141.0 million at 30 June 2003 from £130.3 million at the end of December 2002, after taking into account the
$4.8 million cash consideration paid in the second quarter in order to buy out the minority interest in ARM Korea Ltd.
Accounts receivable decreased to £19.9 million at 30 June 2003 from £20.7 million at 31 March 2003 and £20.5 million at the
end of December 2002. The allowance against receivables decreased to £2.3 million at the end of June from £2.4 million at
31 March 2003. Deferred revenues increased to £14.1 million at the end of June 2003 from £12.1 million at 31 March 2003.
Consistent with statements made in previous quarters, the Board has no immediate plans to return cash to shareholders, either
by payment of a dividend or by other means, but this position continues to be regularly reviewed.
|Sarah Marsland/ Juliet Clarke
||ARM Holdings plc
|+44 (0) 207 831 3113
||+44 (0)1223 400 432
ARM is the industry's leading provider of 16/32-bit embedded RISC microprocessor solutions. ARM licenses its high-performance,
low-cost, power-efficient RISC processors, peripherals, and system-on-chip designs to leading electronics companies. The company
also provides comprehensive support required in developing a complete system. ARM's microprocessor cores are rapidly becoming
a volume RISC standard in applications such as automotive, consumer entertainment, security, imaging, industrial, mass storage,
networking and wireless.
ARM, ARM7TDMI Thumb,RealView and Jazelle are registered trademarks of ARM Limited. ARM7EJ-S, ARM922T, ARM926EJ-S, ARM1026EJ-S,
ARM11, AMBA, TrustZone, Intelligent Energy Manager and PrimeXsys are trademarks of ARM Limited. All other brands or product
names are the property of their respective holders. "ARM" refers to ARM Holdings plc (LSE: ARM and Nasdaq: ARMHY) together
with its subsidiaries including ARM Limited, ARM INC., ARM KK, ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS and ARM Consulting(Shanghai)
This announcement contains "forward-looking statements" including statements concerning plans, future events or performance
and underlying assumptions and other statements which are other than statements of historical fact. The Company's actual results
for future periods may differ materially from those expressed in any forward-looking statements made by or on behalf of the
Company. The factors that could cause actual results to differ materially include, without limitation, potential for significant
fluctuation in and unpredictability of results, the ability of semiconductor partners to manufacture and market microprocessors
based on the ARM architecture; the acceptance of ARM technology by systems companies; the availability of development tools,
systems software and operating systems; the rapid change in technology in the industry and ARM's ability to develop new products
in a timely manner; management of growth; competition from other architectures; general business and economic conditions;
the growth in the semiconductor industry; the Company's ability to protect its intellectual property; and ARM' s ability to
attract and retain employees.
More information on ARM is available at http://www.arm.com
Independent review report to ARM Holdings plc
We have been instructed by the company to review the financial information which comprises the UK GAAP consolidated profit
and loss account, the UK GAAP consolidated balance sheet, the UK GAAP consolidated cash flow statement and related notes.
We have read the other information contained in the interim report and considered whether it contains any apparent misstatements
or material inconsistencies with the financial information.
The interim report, including the financial information contained therein, is the responsibility of, and has been approved
by the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the
Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should
be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for
them, are disclosed.
The maintenance and integrity of the ARM Holdings plc website is the responsibility of the directors; the work carried out
by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for
any changes that may have occurred to the interim report since it was initially presented on the website. Legislation in the
United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for
use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures
to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and
presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed
in accordance with United Kingdom Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly
we do not express an audit opinion on the financial information.
This report, including the conclusion, has been prepared for and only for the company for the purpose of the Listing 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.
On the basis of our review we are not aware of any material modifications that should be made to the financial information
as presented for the six months ended 30 June 2003.
21 July 2003