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|Results for the Second Quarter and Half Year|
RNS Number : 4180I
ARM Holdings PLC
25 July 2012
ARM HOLDINGS PLC REPORTS RESULTS FOR THE SECOND QUARTER AND HALF YEAR ENDED 30 JUNE 2012
A presentation of the results will be webcast today at 09:30 BST at www.arm.com/ir
CAMBRIDGE, UK, 25 July 2012-ARM Holdings plc announces its unaudited financial results for the second quarter and half year ended 30 June 2012.
Progress on key growth drivers in Q2
· Growth in adoption of ARM® processor technology
o 23 processor licenses signed across key target markets from microcontrollers to mobile computing
o ARM's momentum in networking continues with an ARMv8 architecture license for intelligent networking applications, and Freescale announcing their first ARM-processor based chips for network infrastructure
· Growth in shipments of chips based on ARM processor technology
o 2.0 billion chips shipped into a wide range of applications, up 9% year-on-year compared with industry shipments being down 4%
o Processor royalties grew 14% year-on-year compared with a decline in industry revenues of 7%
· Growth in outsourcing of new technology
o 3 Mali™ graphics processor licenses signed in Q2, of which two were with new customers for Mali technology
o 5 physical IP Processor Optimisation Packs licensed, enhancing ARM's royalty opportunity per chip
Warren East, Chief Executive Officer, said:
"ARM's royalty revenues continued to outperform the overall semiconductor industry as our customers gained market share within existing markets and launched products which are taking ARM technology into new markets. This quarter we have seen multiple market leaders announce exciting new products including computers and servers from Dell and Microsoft, and embedded applications from Freescale and Toshiba. In addition, ARM and TSMC announced a partnership to optimise next generation ARM processors and physical IP and TSMC's FinFET process technology.
All of these new products are the result of technology engagements over many years, and ARM's long-term commitment to invest in the development of innovative technology."
ARM enters the second half of 2012 with a record order backlog and a robust opportunity pipeline. Relevant data for the second quarter, being the shipment period for ARM's Q3 royalties, points to a small sequential increase in industry revenues. Q4 royalties are harder to predict as macroeconomic uncertainty may impact consumer confidence, and some analysts have become less confident in the semiconductor industry outlook in the second half. However, building on our strong performance in the first half, we expect overall Group dollar revenues for full year 2012 to be in line with market expectations.
1 Includes catch-up PIPD royalties of $1.5m (£1.0m) in Q2 2012 and $nil in Q2 2011.
1 Includes catch-up PIPD royalties of $3.6m (£2.3m) in H1 2012 and $0.6m (£0.4m) in H1 2011.
Sarah West/Anne Bark Tim Score/Ian Thornton
Brunswick ARM Holdings plc
+44 (0)207 404 5959 +44 (0)1628 427800
Total dollar revenues in Q2 2012 were $213.0 million, up 12% on Q2 2011. Q2 sterling revenues were £135.5 million, up 15% year-on-year.
Half-year dollar revenues in 2012 amounted to $422.4 million, up 12% on H1 2011.
Total dollar license revenues in Q2 2012 increased by 12% year-on-year to $78.6 million, representing 37% of Group revenues. License revenues comprised $67.0 million from PD and $11.6 million from PIPD.
Group order backlog at the end of Q2 2012 was up sequentially and is now at its highest ever level. Prospects for order backlog in the second half of 2012 look promising, given the strength of the licensing opportunity pipeline.
Royalties are recognised one quarter in arrears with royalties in Q2 2012 generated from semiconductor unit shipments in Q1 2012. Total dollar royalty revenues in Q2 2012 increased by 15% year-on-year to $110.0 million, representing 52% of Group revenues. This compares with industry revenues decreasing by about 7% in the shipment period (i.e. Q1 2012 compared to Q1 2011), demonstrating ARM's continuing market share gains over the last 12 months.
Royalty revenues in Q2 2012 comprised $96.3 million from PD and $13.7 million from PIPD.
Development Systems and Service revenues
Sales of development systems in Q2 were down 4% year-on-year to $13.3 million, representing 6% of Group revenues. Through 2012 ARM is continuing to transition the Development Systems business to focus on microcontroller tools and premium toolkits for multi-core systems. Due to this transition, we expect that full year revenues for development systems will be broadly flat year-on-year. In addition, due to normal seasonality, Q3 revenue for development systems may be down sequentially.
Service revenues in Q2 2012 were up 6% to $11.1 million, representing 5% of Group revenues.
Gross margins in Q2 2012, excluding share-based payment costs of £0.4 million (see below), were 95.1% compared to 94.8% in Q2 2011.
Operating expenses and operating margin
Normalised income statements for Q2 2012 and Q2 2011 are included in notes 12.13 and 12.14 respectively below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.
Normalised operating expenses (excluding acquisition-related, share-based payments, Linaro-related charges and impairments to investments) were £66.0 million in Q2 2012 compared to £66.1 million in Q1 2012 and £59.3 million in Q2 2011. The year-on-year increase in operating expenses in the second quarter is primarily due to the increased investment in our research and development teams over the last 12 months.
Normalised operating expenses in Q2 2012 benefited from the impact of a stronger dollar on the accounting for derivative instruments which has resulted in a net credit of approximately £2 million being included in general and administrative expenses. Normalised operating expenses in Q3 2012 (assuming effective exchange rates similar to current levels) are expected to be in the range £68-70 million as ARM continues to increase investment in research and development programs.
Normalised operating margin was 46.4% in Q2 2012, compared to 44.5% in both Q1 2012 and Q2 2011.
Normalised research and development expenses were £32.8 million in Q2 2012, representing 24% of revenues, compared to £32.3 million in Q1 2012 and £28.9 million in Q2 2011. Normalised sales and marketing expenses were £15.0 million in Q2 2012, being 11% of revenues, compared to £15.3 million in Q1 2012 and £13.6 million in Q2 2011. Normalised general and administrative expenses were £18.2 million in Q2 2012, representing 13% of revenues, compared to £18.5 million in Q1 2012 and £16.8 million in Q2 2011.
Total IFRS operating expenses in Q2 2012 were £77.3 million (Q2 2011: £78.9 million) including share-based payment costs and related payroll taxes of £7.9 million (Q2 2011: £11.7 million), and amortisation of intangible assets and other acquisition-related charges and impairment of investments of £3.4 million (Q2 2011: £7.9 million).
Total share-based payment costs and related payroll tax charges of £8.3 million in Q2 2012 were included within cost of revenues (£0.4 million), research and development (£5.5 million), sales and marketing (£1.5 million) and general and administrative (£0.9 million).
Earnings and taxation
Profit before tax was £54.8 million in Q2 2012 compared to £33.8 million in Q2 2011. After adjusting for acquisition-related and share-based payment costs, and disposal and impairment of investments, normalised profit before tax was £66.5 million in Q2 2012 compared to £54.2 million in Q2 2011. The Group's effective normalised tax rate was 25% (IFRS 28%) in Q2 2012 compared to 24% (IFRS 21%) in Q2 2011. The Group's effective normalised tax rate for the full year 2012 is estimated to be approximately 25%.
In Q2 2012, fully diluted earnings per share were 2.83 pence (13.32 cents per ADS) compared to earnings per share of 1.93 pence (9.31 cents per ADS) in Q2 2011. Normalised fully diluted earnings per share in Q2 2012 were 3.58 pence per share (16.86 cents per ADS) compared to 2.98 pence (14.34 cents per ADS) in Q2 2011.
Property, plant and equipment has increased from £18.1 million at 31 December 2011 to £34.1 million at 30 June 2012 mainly as a result of the construction and fit-out of a new Data Centre Facility in Cambridge.
Intangible assets at 30 June 2012 were £551.6 million, comprising goodwill of £537.6 million and other intangible assets of £14.0 million, compared to £528.2 million and £12.6 million respectively at 31 March 2012.
Total accounts receivable were £106.7 million at 30 June 2012, compared to £92.8 million at 31 March 2012.
Days sales outstanding (DSOs) were 43 at 30 June 2012 compared to 38 at 31 March 2012.
Cash flow and interim dividend
Normalised free cash flow in Q2 2012 was £46.9 million. Total cash (see note 12.6) was £495.9 million at 30 June 2012 compared to £469.2 million at 31 March 2012.
In respect of the year to 31 December 2012, the directors are declaring an interim dividend of 1.67 pence per share, an increase of 20% over the 2011 interim dividend of 1.39 pence per share. This interim dividend will be paid, out of the UK GAAP distributable reserves of ARM Holdings plc, on 4 October 2012 to shareholders on the register on 7 September 2012.
A total of 23 processor licenses were signed in Q2 2012.
Of the 23 licenses signed, six were for ARM's advanced Cortex™-A series processors. This included a further licensee for ARM's big.LITTLE technology whereby a company licenses both a "big" Cortex-A15 processor and a "LITTLE" Cortex-A7 processor. Twelve companies now have access to big.LITTLE technology, which delivers both higher performance and lower power in mobile and computing applications.
ARM also signed an ARMv8 architecture license for use in intelligent networking devices. Over the last few years ARM has seen increasing demand for the use of its technology in high-end networking applications such as base station equipment, routers and switches, and backhaul infrastructure. Power consumption is becoming an important requisite for networking equipment and semiconductor companies are increasingly turning to ARM technology to deliver improved performance per Watt. In addition to the architecture licensee mentioned, companies such as Freescale, HiSilicon, LSI, Texas Instruments and Xilinx have recently announced choosing ARM technology in their networking products.
Eleven of the licenses signed in Q2 were for Cortex-M class processors for use in a wide range of applications, from wireless connectivity chips and touchscreen controllers found in mobile and mobile computing devices to deeply embedded processors for automotive applications and general purpose microcontrollers. Two of the Cortex-M class licenses were for Cortex-M0+, ARM's smallest and most power efficient processor to date.
ARM has continued to see semiconductor companies adopting ARM technology for the first time with five of the 23 licenses signed in Q2 2012 being with companies taking their first ARM license. These licenses were for use in a broad range of end applications, including portable media players, video surveillance systems and embedded microcontrollers.
Three of the licenses were for ARM's Mali graphics processors for use in mobile and digital TV (DTV), including one for the Mali-T600 series, ARM's most advanced family of graphics processors. The Mali-T600 series enable the combination of ARM and Mali processors into a unified computing sub-system, delivering the most efficient use of all the resources on the system-on-chip. The digital TV design win will further ARM's position as the market leader for graphics processors in DTVs. The mobile licenses were both for smartphones and tablets and will strengthen ARM's leading position in Android tablets.
Q2 2012 and Cumulative Processor Licensing Analysis
* Adjusted for licenses that are no longer expected to generate royalties
** Two of the Mali licenses signed were with ARM processor customers who were taking their first Mali processor
288 Cortex family processor licenses have been signed to date, making Cortex ARM's most widely licensed family of processors.
Processor Design Wins and Ecosystem Development
Over the last few months multiple market leaders have announced exciting new products which are taking ARM technology into new markets. These included:
· At Computex, in Taiwan, Asus, Acer and Toshiba announced Windows on ARM devices ranging from tablets to laptops
· Microsoft announced that it will release its own Windows RT tablet computer using an ARM-based Tegra processor design from Nvidia
· AMD announced that it had licensed ARM technology for the first time. AMD plan to integrate ARM's Cortex-A5 processors into a security platform to be included with some of their future x86-based system-on-chip designs
· In the server market, Dell announced the development of ARM-based servers for applications such as social networking, cloud hosting, web-servers and off-line analytics
· Calxeda (HP's ARM silicon partner) announced better than expected benchmarks for its Cortex-A9 based servers, stating that they offer a 15X performance per Watt advantage versus current servers
· Freescale announced that its first networking products based around ARM's Cortex-A class technology will start shipping in H2 2013
· In the embedded space, Freescale also announced the industry's first wireless solution built on the ARM Cortex-M4 processor for smart energy, smart metering and building control applications. Toshiba launched a Cortex-M0 based microcontroller family specifically designed for smart metering, and NXP announced its new range of Cortex-M0 processors for low-power USB microcontrollers used in applications such as gaming mice and keyboards.
Further partner announcements can be found on the ARM website at www.arm.com/news.
Royalty revenues are recognised one quarter in arrears with royalties reported in Q2 2012 generated from semiconductor chip shipments in Q1 2012. Q2 revenue came from the sales of about 2 billion ARM technology-based chips, the highest ever shipped in a quarter.
ARM's average royalty revenue per chip in Q2 2012 was 4.8 cents, up from 4.5 cents one year ago. This increase is mainly due to:
· Integration of multiple ARM processors into a single chip
· Higher royalty percentages from chips incorporating Cortex-A family processors
· Increased shipments of chips containing a Mali graphics processor.
ARM typically receives a higher average royalty percentage from chips that contain multiple ARM processors. In Q2 2012, ARM customers reported shipping nearly twice as many integrated Wi-Fi and Bluetooth chips compared with the same quarter last year. We also often receive a higher royalty per chip when the applications processor and baseband modem in a mobile phone are integrated together.
Shipments of chips based on Cortex-A family processors were up nearly 100% year-on-year, driven by high-end smartphones, mobile computers and digital TVs adopting smarter applications processors. Shipments of Cortex-A class processors now represent 8% of all units shipped, up from 4% a year ago. As well as commanding a higher royalty percentage, Cortex-A processor-based chips are normally associated with higher value chips. In addition, an increasing number of these chips also contained Mali graphics, which provides an additional royalty per chip.
The benefit arising from the combination of more integrated chips and more Cortex-A family and Mali based chips increased the average royalty revenue per chip in mobile and in consumer electronics by 12% and 6% respectively.
The growth of ARM processors in lower cost chips such as microcontrollers, smartcards and sensors can reduce the overall average and in Q2 2012 nearly half a billion ARM based microcontrollers and smartcards were sold. This was an increase of 20% compared to less than 10% growth for the overall microcontroller market.
Q2 2012 Processor Unit Shipment Analysis
During the quarter ARM signed a multi-year collaboration with TSMC to develop optimised next generation 64-bit ARM processors and physical IP with TSMC's FinFET process technology. The royalty-bearing platform agreement will enable ARM's partners to implement their systems-on-chip using state-of-the-art FinFET silicon for mobile, computing and enterprise markets that require both high performance and energy efficiency.
ARM also signed a platform license with a leading foundry at 130nm for hybrid digital/mixed-signal applications. Cumulatively, 92 physical IP platform licenses have now been signed and it is this base of platform licenses that help drive ARM's future royalty potential.
ARM continues to see strong demand for physical IP optimised for use with processors, especially the Cortex-A series processor. These processor optimisation packs (POPs) enable the licensee to more readily achieve a high-performance, low-power processor implementation through specially optimised physical IP technology. For every chip implemented using a POP, ARM receives a royalty both for the processor in the chip and for the physical IP. During the quarter ARM signed five licenses for POPs bringing the total number of POPs licensed to 32.
Q2 2012 and Cumulative PIPD Licensing Analysis
* Adjusted for licenses that are no longer expected to generate royalties
ARM's physical IP is used by fabless semiconductor companies to implement their chip designs. During the quarter, ARM continued to see strong demand from these companies to use physical IP at advanced nodes, with a further four leading technology companies choosing to use ARM's advanced physical IP at 28nm. As our partners transition from older process technology to more advanced nodes so this progression helps to drive ARM's future royalty revenue.
Physical IP royalties are generated mainly from chips manufactured in foundries. Royalties are recognised one quarter in arrears with royalties in Q2 generated from semiconductor unit shipments in Q1.
Underlying PIPD royalties in Q2 2012 were $12.2 million, up 11% year on year. ARM continues to benefit from our customers' high-volume production moving to more advanced nodes at 45nm and below at multiple leading foundries.
At 30 June 2012, ARM had 2,253 full-time employees, a net increase of 137 since the start of the year. At the end of June, the Group had 921 employees based in the UK, 573 in the US, 279 in Continental Europe, 317 in India and 163 in the Asia Pacific region.
Principal risks and uncertainties
The principal risks and opportunities faced by the Group are included within the "Risks and risk management" section of the 2011 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 2011 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 ARM's technology against claims that we have infringed others' proprietary rights; an infringement claim against ARM's technology may result in a significant damages award which 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 owners of the parent.
ARM Holdings plc
Consolidated statement of comprehensive income - IFRS
ARM Holdings plc
Consolidated cash flow statement - IFRS
ARM Holdings plc
Consolidated statement of changes in shareholders' equity - IFRS
* Capital reserve. In 2004, the premium on the shares issued in part consideration for the acquisition of Artisan Components Inc. was credited to a merger reserve on consolidation in accordance with Section 131 of the Companies Act 1985. On transition to IFRS in 2005 the merger reserve was incorrectly classified as part of the Group's share premium account. This reserve has been classified as a capital reserve to reflect the nature of the original credit to equity arising on acquisition. The comparative has been restated to reflect this treatment. There is no impact on the profits, cash flows or total equity of the Group. This capital reserve is clearly distinguished from the share premium arising on share issues during the year.
** Share option reserve. The share option reserve represents the fair value of options granted on the acquisition of Artisan Components Inc. in 2004.
*** Refund of costs related to share issue. During Q2 2012, it was confirmed by HMRC that they would not challenge a ruling that the stamp duty incurred on the issue of shares of a UK company to a depositary or clearance system outside the EU was in breach of EU law. ARM has therefore been able to claim a full refund of £2.7 million for stamp duty incurred on the issue of shares for the acquisition of Artisan Components Inc. in 2004.
Notes to the Financial Information
(1) Basis of preparation and accounting policies
The financial information prepared in accordance with the Group's IFRS accounting policies (consistent with those stated in the financial statements for the year ended 31 December 2011 with the exception of finance leases as described below) comprises the consolidated balance sheets as at 30 June 2012 and 31 December 2011, consolidated income statements and consolidated statements of comprehensive income for the three months and six months ended 30 June 2012 and 2011, and consolidated cash flow statements and consolidated statements of changes in shareholders' equity for the six months ended 30 June 2012 and 2011, together with related notes. This condensed set of consolidated interim financial information for the six months ended 30 June 2012 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. This financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2011, which have been prepared in accordance with IFRSs as adopted by the European Union.
Leases of property, plant and equipment, where the Group has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalised at the lease's commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments.
New standards, amendments and interpretations
The following new amendment is effective in 2012 but not relevant to the Group:
· Amendments to IFRS 7, "Financial instruments: Disclosures". The amendments will promote transparency in the reporting of transfer transactions.
In addition to those highlighted in the annual financial statements for the year ended 31 December 2011, the following new standards, amendments to standards, or interpretations have been issued but are not effective for the financial year beginning 1 January 2012, have not been early adopted, and would not have a material impact on the Group. These standards are not yet endorsed by the EU:
· Annual improvements 2011: This set of amendments includes changes to five standards. These are minor amendments and are not expected to have a significant impact on the Group.
The following new standards, amendments to standards, or interpretations have been issued but are not effective for the financial year beginning 1 January 2012, have not been early adopted, and are not currently relevant to the Group:
· Amendment to IAS 12,"Income taxes". This amendment introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. This standard is not yet endorsed by the EU.
· Amendment to IAS 19, "Employee benefits". This amendment eliminates the corridor approach and calculates finance costs on a net funding basis. This standard was endorsed by the EU in June 2012.
· Amendment to IAS 1,"Financial statement presentation". The main change resulting from this amendment is a requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). This standard was endorsed by the EU in June 2012.
· IAS 27 (revised 2011) "Separate financial statements". This standard includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10. This standard is not yet endorsed by the EU.
· Amendment to IAS 32, "Financial instruments: Presentation". This amendment updates the application guidance in IAS 32 to clarify some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. This standard is not yet endorsed by the EU.
Critical accounting estimates and judgements
The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.
(2) Going concern
After dividend payments of £28.8 million made in the first six months of 2012, the highly cash generative nature of the business enabled the Group to increase its cash, cash equivalents, short- and long-term deposits balance to £495.9 million (net of accrued interest of £6.0 million) at 30 June 2012 from £424.0 million at the start of the year (net of accrued interest of £5.0 million).
After reviewing the 2012 budget and longer-term plans, the directors are satisfied that it is appropriate to adopt the going concern basis in preparing this condensed set of consolidated interim financial information of the Group.
(3) Financial risk management
(3.1) Financial risk factors
The Group's operations expose it to a variety of financial risks that include currency risk, interest rate risk, securities price risk, credit risk and liquidity risk. This condensed set of consolidated interim financial information does not include all financial risk management information and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2011.
(3.2) Fair value estimation
The table below shows the financial instruments carried at fair value by valuation method:
*Level 1 valued using unadjusted quoted prices in active markets for identical instruments. Level 2 valued using techniques based significantly on observable market data. Level 3 valued using information other than observable market data.
(4) Share-based payment costs and acquisition-related expenses
Included within the consolidated income statement for the quarter ended 30 June 2012 are total share-based payment costs (including related payroll taxes) of £8.3 million (2011: £12.5 million), allocated £0.4 million (2011: £0.8 million) in cost of revenues, £5.5 million (2011: £7.5 million) in research and development expenses, £1.5 million (2011: £2.4 million) in sales and marketing expenses and £0.9 million (2011: £1.8 million) in general and administrative expenses.
Included within the consolidated income statement for the six months ended 30 June 2012 are total share-based payment costs (including related payroll taxes) of £18.1 million (2011: £31.9 million), allocated £0.9 million (2011: £1.7 million) in cost of revenues, £11.4 million (2011: £19.3 million) in research and development expenses, £3.3 million (2011: £6.4 million) in sales and marketing expenses and £2.5 million (2011: £4.5 million) in general and administrative expenses.
Included within operating expenses for the quarter ended 30 June 2012 are total acquisition-related charges of £1.6 million (including retention bonuses on acquisitions amounting to £1.3 million) (2011: £0.4 million), allocated £1.3 million (2011: £nil) in research and development expenses, £0.1 million (2011: £0.1 million) in sales and marketing expenses and £0.2 million (2011: £0.3 million) in general and administrative expenses.
(4) Share-based payment costs and acquisition-related expenses (continued)
Included within operating expenses for the six months ended 30 June 2012 are total acquisition-related charges of £3.4 million (including retention bonuses on acquisitions amounting to £2.8 million) (2011: £0.6 million), allocated £2.8 million (2011: £nil) in research and development expenses, £0.2 million (2011: £0.2 million) in sales and marketing expenses and £0.4 million (2011: £0.4 million) in general and administrative expenses.
In respect of the year to 31 December 2012, the directors are declaring an interim dividend of 1.67 pence per share (an estimated cost of £23 million). This interim dividend will be paid on 4 October 2012 to shareholders who are on the register of members on 7 September 2012.
(6) Accrued and other liabilities, available-for-sale financial assets and taxation
Included within accrued and other liabilities at 30 June 2012 are £9.4 million (31 December 2011: £22.6 million) relating to the provision for payroll taxes on share awards, and £7.6 million (31 December 2011: £23.7 million) relating to employee bonus and sales commission provisions.
Available-for-sale financial assets have decreased from £27.3 million at 31 December 2011 to £16.1 million at 30 June 2012 primarily as a result of the sale of the Group's investment in Cognovo Limited.
The March 2012 Budget included changes to the main rates of tax for UK companies, including the proposal of a reduction in the main rate of corporation tax from 24% to 23% from 1 April 2013. This was substantively enacted on 3 July 2012. The effect of the future changes would not have a material impact on deferred tax balances at 30 June 2012.
(7) Related party transactions
There were no related party transactions in the six months ended 30 June 2012. During the six months ended 30 June 2011 the Group incurred subscription costs of £6.8 million from Linaro Limited, an associated company of the Group, representing ARM's committed aggregate contributions to Linaro for the next two years.
(8) Obligations under finance leases
Minimum lease payments
Present value of minimum lease payments
The Group has entered into a 3 year finance lease arrangement in respect of certain IT equipment.
(9) Financial contingencies
It is common industry practice for licensors of technology to offer to indemnify their licensees for loss suffered by the licensee in the event that the technology licensed is held to infringe the intellectual property of a third party.
Consistent with such practice, the Group provides such indemnification to its licensees but subject, in all cases, to a limitation of liability. The obligation for the Group to indemnify its licensees is subject to certain provisos and is usually contingent upon a third party bringing an action against the licensee alleging that the technology licensed by the Group to the licensee infringes such third party's intellectual property rights. The indemnification obligations typically survive any termination of the licence and will continue in perpetuity.
The Group does not provide for any such indemnities unless it has received notification from the other party that they are likely to invoke the indemnity. A provision is made if both of the following conditions are met: (i) information available prior to the issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements; and (ii) the amount of the liability can be reasonably estimated. Any such provision is based upon the directors' estimate of the fair value of expected costs of any such claim.
At present, the Group is not a party in any legal proceedings in which the directors believe that it is probable that the resolution of such proceedings will result in a material liability for the Group. Currently, there are legal proceedings against some of the Group's licensees in which it is asserted that certain of the Group's technology infringes third party patents, but in each of those proceedings the Group either presently has no obligation to indemnify, because certain preconditions to indemnification have not been satisfied by such licensees, or to the extent that there is any present obligation to indemnify, the Group does not believe that it is probable that the resolution of such proceedings will result in a material liability for the Group. It is possible that, in future, preconditions to indemnification may be satisfied and that in certain circumstances an indemnification obligation may arise which could result in a material liability for the Group.
(10) Segmental reporting
At 30 June 2012, 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, 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 Chief Operating Decision Maker 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.
Business segment information
(10) Segmental reporting (continued)
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 cash and cash equivalents, short and long-term deposits, available-for-sale investments, loans and receivables, embedded derivatives, current and deferred tax, and VAT. Unallocated operating costs consist of foreign exchange transactions.
There have been no acquisitions during the six months to 30 June 2012.
On 15 June 2011, the Group purchased the entire share capital of Obsidian Software Inc. for $5.6 million in cash, plus a further $9.5 million payable as an earn-out to the shareholders subject to them remaining in employment with ARM for up to 3 years and meeting certain performance criteria. This purchase has been accounted for as an acquisition.
On 31 October 2011, the Group purchased the entire share capital of Prolific inc. for $7.7 million in cash, plus a further $8.5 million payable as an earn-out to the shareholders subject to them remaining in employment with ARM for up to 5 years and meeting certain performance criteria. This purchase has been accounted for as an acquisition.
The details of these acquisitions can be found within the financial statements for the year ended 31 December 2011.
(12) 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/(loss) on disposal and impairment of available-for-sale investments, and Linaro-related charges. Full reconciliations of Q2 2012, Q2 2011, H1 2012 and H1 2011, are shown in notes 12.13 to 12.16. All figures in £m unless otherwise stated.
(12.13) Normalised income statement for Q2 2012
(12.14) Normalised income statement for Q2 2011
(12.15) Normalised income statement for H1 2012
(12.16) Normalised income statement for H1 2011
Statement of directors' responsibilities
The directors confirm that these condensed interim financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:
· an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
· material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.
The directors of ARM Holdings plc are listed in the ARM Holdings plc Annual Report for the year ended 31 December 2011, with the exception of the following changes in the period:
· Doug Dunn retired on 3 May 2012 and Sir John Buchanan was appointed on 3 May 2012; and
· Tudor Brown retired on 3 May 2012.
A list of current directors is maintained on the ARM Holdings plc website: www.arm.com
By order of the Board
Chief Financial Officer
25 July 2012
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 2012, which comprises the IFRS consolidated income statement, the IFRS consolidated balance sheet as at 30 June 2012, 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 2012 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.
(a) 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 financial statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The results shown for Q2 2012, Q1 2012, Q2 2011, H1 2012, and H1 2011 are unaudited. The results shown for FY 2011 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 2011 were approved by the Board of directors on 27 February 2012 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 2012 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 2011 and in the Annual Report on Form 20-F for the fiscal year ended 31 December 2011.
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 2011 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 athttp://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.
 Source: Semiconductor Industry Association, May 2012
 Source: Semiconductor Industry Association, May 2012
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