ARM Holdings plc Reports Results for the Third Quarter and Nine Months Ended 30 September 2009

CAMBRIDGE, UK -- October 27, 2009 -- ARM Holdings plc [(LSE: ARM); (NASDAQ: ARMH)], the world's leading semiconductor intellectual property supplier, announces its unaudited financial results for the third quarter and nine months ended 30 September 2009.

Key Highlights

• ARM has continued to outperform the semiconductor industry and gain market share
• Strong processor licensing for applications such as smartphones, mobile computing and microcontrollers
• ARM’s advanced physical IP at 28nm was licensed to a major foundry and a fabless semiconductor company
• Sequentially improving operating margin to 31.7% and strong quarterly net cash generation of £28.2m
• Reiterating guidance: ARM’s full-year 2009 dollar revenues to be at least in line with current market expectations

Progress on key growth drivers

• Growth in mobile applications
  • 13 new processor licenses signed for high-performance mobile computers and smartphones
  • ARM licenses 2GHz dual Cortex-A9 processor for mobile computing applications
• Growth beyond mobile
  • 15 new processor licenses signed, including four next-generation processors, for a broad range of markets including digital TV, microcontrollers, hard disk drives and networking applications
  • Strong sequential growth in all target markets including 75% sequential increase in shipments of ARM-technology based microcontrollers due to market share gains and inventory restocking
• Growth in new technology outsourcing
  • First leading fabless semiconductor company licenses ARM’s 28nm physical IP and, shortly after the quarter end, GLOBALFOUNDRIES also licenses 28nm physical IP

Once again we have demonstrated the resilience in the ARM business model; our improving revenue and disciplined cost control has delivered a sequential improvement in margins and profitability, as well as a high level of cash generation.”

Outlook
Going into the final quarter of 2009, ARM is encouraged by the improving confidence in our customer-base, and we reiterate guidance that we expect group dollar revenues for the full year to be at least in line with current market expectations.

Although, in the short term, the trajectory of consumer demand for electronic devices remains unclear, looking ahead through 2010, ARM is well-positioned to take advantage of the generally anticipated improvements in the semiconductor industry. 

¹ Includes catch-up royalties in Q3 2009 of $nil million and in Q3 2008 of $1.7m (£0.9m).

¹ Includes catch-up royalties in YTD 2009 of $4.2m (£2.6m) and in YTD 2008 of $3.6m (£1.9m).

Total revenues
Total dollar revenues in Q3 2009 were $123.0 million, down 8% versus Q3 2008.  Overall semiconductor industry revenues are forecast to have declined about 18%[1] in the same period.

Sterling revenues of £75.2 million were up 5% compared with Q3 2008, due to the strengthening of the dollar against sterling (ARM’s effective rate in Q3 2009 was $1.64 compared to $1.88 in Q3 2008). 

Year-to-date dollar revenues amounted to $349.4 million, down 12% on 2008.

License revenues
Total dollar license revenues in Q3 2009 declined by 14% year-on-year to $39.7m, representing 32% of group revenues.  License revenues comprised $30.9 million from PD and $8.8 million from PIPD. 

ARM signed a record number of twenty-eight processor licenses during the quarter. Four of these licenses were for processors that are still under development and all of the revenue associated with these agreements goes into backlog and will be recognised in future quarters as engineering milestones are achieved.  Group backlog at the end of the quarter was up 3% sequentially.

Royalty revenues
Total dollar royalty revenues in Q3 2009 declined year-on-year by 6% to $62.3 million, representing 51% of group revenues. Royalty revenues comprised $53.1 million from PD and $9.2 million from PIPD. 

Royalties are recognised one quarter in arrears with royalties in Q3 generated from semiconductor unit shipments in Q2.  PD royalty revenues in Q3 2009 decreased 4% year-on-year.  This compares with industry revenues[2] declining by 20% in the shipment period (i.e. Q2 2009 compared to Q2 2008), demonstrating ARM’s continuing market share gains over the last 12 months.   

Total PIPD royalties of $9.2 million did not include any catch-up royalties; therefore underlying royalty revenues were at a similar level to the $9.3 million reported in Q3 2008, compared to the forecasted decline in overall foundry revenues[3] of 21% in the corresponding period.

Development Systems and Service revenues
Sales of development systems in Q3 2009 were $14.0 million, a decrease of 4% year-on-year and representing 11% of group revenues.  However, development systems revenue increased sequentially which was partly due to two large software tools licenses being signed in the quarter. Given that deals of this type are infrequent in this division, development systems revenues in Q4 2009 are expected to be closer to the underlying quarterly revenue run-rate of $10-$12 million.

Service revenues in Q3 2009 were $7.0 million, a decrease of 9% year-on-year and representing 6% of group revenues.

Gross margins
Gross margins in Q3 2009, excluding the share-based compensation charge of £0.4 million (see below), were 92.9% compared to 91.2% in Q2 2009 and 89.9% in Q3 2008. The higher gross margin in Q3 2009 compared to Q2 is due primarily to the higher proportion of royalty and licensing revenue compared to development systems and services revenues.

[1] Source: Gartner, September 2009
[2] Source: Semiconductor Industry Association, August 2009
[3] Source: Gartner, September 2009

Operating expenses and operating margin
Normalised operating expenses (excluding acquisition-related, share-based compensation and restructuring charges) in Q3 2009 were £46.0 million compared to £43.1 million in Q2 2009 and £40.8 million in Q3 2008. Underlying costs continue to be carefully managed with group headcount at the end of the third quarter being approximately 2% lower than at the start of the year. The pay freeze that was implemented with effect from 1 January 2009 will remain in place for the rest of the year. Normalised operating expenses in Q4 2009 (assuming effective exchange rates similar to current levels) are expected to be £46-48 million.  During the third quarter ARM initiated the closing of its office in Leuven, Belgium resulting in a restructuring charge of £6.6 million.  This will give rise to an annualised saving of approximately £3 million.

Normalised research and development expenses were £21.5 million in Q3 2009, representing 29% of revenues, compared to £22.5 million in Q2 2009 and £15.7 million in Q3 2008. Normalised sales and marketing costs in Q3 2009 were £11.9 million, being 16% of revenues, compared to £11.6 million in Q2 2009 and £11.4 million in Q3 2008. Normalised general and administrative expenses in Q3 2009 were £12.6 million, representing 17% of revenues, compared to £9.0 million in Q2 2009 and £13.7 million in Q3 2008. Normalised operating margin in Q3 2009 was 31.7% ^(4.1) compared to 24.7% ^(4.3) in Q2 2009 and 33.0% ^(4.2) in Q3 2008.

Total operating expenses in Q3 2009 were £62.2 million (Q3 2008: £49.7 million) including amortisation of intangible assets and other acquisition-related charges of £3.6 million (Q3 2008: £4.8 million), £5.8 million (Q3 2008: £3.6 million) in relation to share-based compensation and related payroll taxes and restructuring charges of £6.6 million (Q3 2008: £0.4 million). Total share-based compensation and related payroll tax charges of £6.3 million in Q3 2009 were included within cost of revenues (£0.4 million), research and development (£3.8 million), sales and marketing (£1.2 million) and general and administrative (£0.9 million). Normalised income statements for Q3 2009 and Q3 2008 are included in notes 4.24 and 4.25 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.

Earnings and taxation
Profit before tax in Q3 2009 was £7.7 million compared to £15.8 million in Q3 2008. After adjusting for acquisition-related, share-based compensation and restructuring charges, normalised profit before tax in Q3 2009 was £24.3 million^(4.6)compared to £24.9 million ^(4.7) in Q3 2008.  The Group's effective normalised tax rate in Q3 2009 was 28.1% (IFRS: 10.1%) giving a year-to-date normalised tax rate of 26.6% (IFRS: 14.9%). The tax rate under IFRS is lower than the normalised tax rate due primarily to the impact of tax credits arising on share-based compensation.

In Q3 2009, fully diluted earnings per share prepared under IFRS were 0.53 pence (2.54 cents per ADS****) compared to earnings per share of 0.88 pence (4.70 cents per ADS****) in Q3 2008. Normalised fully diluted earnings per share in Q3 2009 were 1.34 pence ^(4.19) per share (6.44 cents per ADS****) compared to 1.38 pence ^(4.20) (7.41 cents per ADS****) in Q3 2008. 

Balance sheet
Intangible assets at 30 September 2009 were £550.8 million, comprising goodwill of £521.7 million and other intangible assets of £29.1 million, compared to £506.9 million and £32.9 million respectively at 30 June 2009.

Total accounts receivable were £56.1 million at 30 September 2009, comprising £45.3 million of trade receivables and £10.8 million of amounts recoverable on contracts, compared to £56.6 million at 30 June 2009, comprising £45.7 million of trade receivables and £10.9 million of amounts recoverable on contracts. Days sales outstanding (DSOs) were 43 at 30 September 2009 compared to 47 at 30 June 2009 and 49 at 31 December 2008.

Cash flow
Net cash at 30 September 2009 was £121.7 million ^(4.11) compared to £88.2 million ^(4.12) at 30 June 2009. Normalised free cash flow in Q3 2009 was £28.2 million ^(4.14).

Backlog
Group order backlog at the end of Q3 2009 increased 3% sequentially, with processor backlog up about 10% sequentially.  Following licensing activity early in Q4, group order backlog is about 10% higher than at the half year.

Processor licensing
A total of twenty-eight processor licenses were signed in Q3.  Non-mobile devices continue to be a major driver for processor licenses and fifteen of the new processor licenses were signed for a broad range of digital products such as automotive, digital TV, microcontrollers, networking and storage.  The remaining thirteen licenses were acquired for use in application and baseband processors in mobile computers and smartphones.

Twenty-three of the licenses were for ARM’s advanced Cortex and Mali™ graphics processors of which eight licenses were signed for the Cortex-A family processors for use in consumer electronics and mobile computing applications, including a license for ARM’s 2GHz implementation of a dual core Cortex-A9 processor.  Thirteen of the licenses were signed for the Cortex-R and Cortex-M family of processors, for use in embedded applications, including four lead licenses for processors that are still under development. 

Although semiconductor companies are generally maintaining their new product development activity, many have constrained R&D budgets in 2009.  ARM has met the continuing demand for its products by, in some cases, offering term and single-use licenses.  Typically, these licenses have a lower upfront fee but a higher on-going royalty rate.  During the quarter, ARM signed a record number of licenses; with a higher proportion than usual for single-use and term, rather than perpetual multi-use.

Q3 2009 and Cumulative Processor Licensing Analysis

Processor royalties
Royalties are recognised one quarter in arrears with royalties in Q3 generated from semiconductor unit shipments in Q2.  PD royalty revenues in Q3 2009 declined 4% year-on-year.  This compares with industry revenues declining by about 20% in the shipment period (i.e. Q2 2009 compared to Q2 2008), demonstrating ARM’s market share gains over the last 12 months.

This revenue came from the sales of over 1.0 billion ARM technology-based chips.  The ARM11™ family represents 5% of total unit shipments, with the ARM7™ and ARM9™ families now representing 54% and 40% of total shipments respectively.    The Cortex family represents 1% of total unit shipments, and the first royalties were received for shipments of Cortex-A9 technology-based chips.

ARM continued to gain share in non-mobile end-markets.  Shipments of ARM-based microcontrollers grew 75% sequentially, compared to 30% for the overall microcontroller market.  Part of this growth was due to an increase in sales of Cortex-M3 based chips.  These chips go into a wide range of price sensitive markets such as toys, white-goods and industrial controllers.  This strong sequential growth in low-cost microcontrollers has resulted in the average royalty rate decreasing to 5.3c in the quarter from 5.7c in the prior quarter and 5.5c in the same quarter last year.

The increasing penetration of smartphones continues to benefit ARM.  In Q2 smartphone shipments grew about 25% year-on-year, whilst overall mobile phone shipments declined about 5%.  For the quarter, ARM achieved an average of 2.1 ARM technology-based chips per mobile handset, up from 2.0 in the previous quarter.  Over the last few months more new smartphones and mobile computers based on Cortex-A technology were announced by OEMs including Acer, Dell, HTC, Nokia and Sharp. 

Q3 2009 Processor Royalty Analysis

PIPD licensing
ARM signed eight physical IP licenses in Q3 for technologies at process nodes from 180nm to 28nm for a wide range of ARM products including platforms of physical IP technology components and also additional standard cell libraries and memories.

The base of platform licenses for physical IP drives ARM’s future royalty potential.  During the quarter the first leading fabless semiconductor company licensed a platform of ARM's advanced 28nm physical IP. Shortly after the end of the quarter, GLOBALFOUNDRIES also licensed a platform of ARM's 28nm physical IP.  ARM's strategy of developing advanced physical IP at the leading edge of semiconductor manufacturing is addressing the growing need by foundries and their customers to reduce development costs and time to market, whilst improving yield and power efficiency. 

Demand for new platforms at more mature nodes also continues and ARM signed an agreement to develop a platform at 40nm.  ARM also signed an agreement to update an existing platform at 180nm.  At the end of the quarter ARM had signed 65 platform licenses.

Q3 2009 and Cumulative PIPD Licensing Analysis

* GLOBALFOUNDRIES license was signed early in Q4.

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

Underlying PIPD royalties in Q3 2009 were $9.2 million, up about 80% sequentially and at a similar level to the $9.3 million reported in Q3 2008.  PIPD demonstrates continuing market share gain as industry revenues declined 20% compared to a year ago[4].  In addition, ARM received its first 45nm royalties from a leading foundry.

People
At 30 September 2009, ARM had 1,709 full-time employees, a net reduction of 31 since the start of the year. At the end of Q3, the group had 649 employees based in the UK, 494 in the US, 224 in Continental Europe, 260 in India and 82 in the Asia Pacific region.  As mentioned in the Financial Review, ARM’s office in Leuven will be closing in Q4 leading to a reduction of 24 full-time employees.

Principal risks and uncertainties
The principal risks and uncertainties faced by the Group that could affect the results for the first nine months of 2009 and beyond are noted within the Annual Report on Form 20-F for the fiscal year ended 31 December 2008.  There have been no changes to these risks that would materially impact the Group in the foreseeable future.  These include but are not limited to: ARM's quarterly results may fluctuate significantly and be unpredictable which could adversely affect the market price of ARM ordinary shares; general economic conditions may reduce ARM's revenues and harm its business; and ARM competes in the intensely competitive semiconductor market.

Download the full ARM Holdings plc Third Quarter Results Tables 2009 in PDF (380Kb .pdf)

About ARM

ARM designs the technology that lies at the heart of advanced digital products, from mobile, home and enterprise solutions to embedded and emerging applications. ARM’s comprehensive product offering includes 16/32-bit RISC microprocessors, graphics processors, digital libraries, embedded memories, peripherals, software and development tools, as well as analog functions and high-speed connectivity products. Combined with 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.

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