A presentation of the results will be webcast today at 09:00 at www.arm.com/ir.
CAMBRIDGE, UK, 5 February 2008—ARM Holdings plc [(LSE: ARM); (Nasdaq: ARMHY)] announces its unaudited financial results for the fourth quarter and full year ended 31 December 2007
Processor Division (PD)
Physical IP Division (PIPD)
Commenting on the results, Warren East, Chief Executive Officer, said:
“We are pleased with ARM’s performance in 2007 against a backdrop of slower growth in the semiconductor industry. Full year revenue growth at approximately twice the rate of the industry and strong licensing momentum in our Processor Division throughout the year confirm our continuing market share gains. Although 2007 was a challenging period for revenue in our Physical IP Division, our reallocation of resources during the year towards the development of leading-edge physical IP technology, together with changes to management and organisational focus, positions the business well for growth in 2008.
We enter 2008 with the group order backlog at its highest ever level, the physical IP business better positioned to capitalise on the long-term growth opportunity and good royalty revenue momentum based on the ongoing proliferation of ARM technology into an ever-broader range of digital devices. Although we remain cautious about the short term industry outlook, we expect ARM to deliver significant constant currency earnings growth in 2008 and believe the long-term growth opportunities for ARM are substantial.”
Q4 2007 – Revenue Analysis
Processor Division (PD)
Physical IP Division (PIPD)
1 Includes catch-up royalties in Q4 2007 of $0.3m (£0.2m) and in Q4 2006 of $0.7m (£0.4m).
FY 2007 – Revenue Analysis
1 Includes catch-up royalties in FY 2007 of $2.7m (£1.4m) and in FY 2006 of $3.1m (£1.7m).
Q4 2007 – Financial Summary
US GAAP Normalised*
US GAAP Reported
|Income before income tax||21.3||21.3|
|Earnings per share (pence)|
Net cash generation**
Effective fx rate ($/£)
¹ Equivalent to £68.0m at Q4 2006 effective $/£ rate
YTD 2007 – Financial Summary
US GAAP Reported
Income before income tax
Earnings per share (pence)
Net cash generation**
Effective fx rate ($/£)
¹ Equivalent to £279.9m at FY 2006 effective $/£ rate
Current trading and prospects
In the current uncertain macroeconomic environment, and at this early stage in the year, we remain cautious on the outlook for the semiconductor industry for 2008.
Within ARM, we have continued to build on our market-leading position and consequently we enter 2008 with the group order backlog at its highest ever level, the physical IP business better positioned to capitalise on the long-term growth opportunity and good royalty revenue momentum based on the continuing proliferation of ARM technology into an ever-broader range of digital devices.
Given this combination of a well-positioned business operating within uncertain industry conditions, we expect dollar revenues in Q1 2008 to be broadly similar to Q4 2007 levels. Assuming no marked deterioration in the trading environment, we expect to increase dollar revenues in FY 2008 by at least the growth rate achieved in 2007. With the operating leverage inherent in ARM’s business model, driven primarily by growth in high-margin royalty revenues, we expect constant currency earnings growth in FY 2008 to be significantly higher than revenue growth.
Fiona Laffan/Pavla Shaw Tim Score/Bruce Beckloff
Brunswick ARM Holdings plc
+44 (0)207 404 5959 +44 (0)1628 427800
* Normalised figures are based on US GAAP, adjusted for stock-based compensation charges, amortisation of intangible assets and other charges. For reconciliation of GAAP measures to normalised non-GAAP measures detailed in this document, see notes 7.1 to 7.27.
** Before dividends and share buybacks, net cash flows from share option exercises and acquisition consideration - see notes 7.14 to 7.18.
*** Dollar revenues are based on the group’s actual dollar invoicing, where applicable, and using the rate of exchange applicable on the date of the transaction for invoicing in currencies other than dollars. Approximately 95% of invoicing is in dollars.
**** Each American Depositary Share (ADS) represents three shares.
(US GAAP unless otherwise stated)
Total dollar revenues in Q4 2007 were $130.3 million, the same level as in Q4 2006. Sterling revenues of £64.3 million were down 5% year-on-year due to the weakening of the dollar against sterling ($2.02 in Q4 2007 compared to $1.92 in Q4 2006). At the Q4 2006 effective rate, Q4 2007 sterling revenues would have been £68.0 million.
Full-year dollar revenues in 2007 were $514.3 million, up 6% on 2006. Full-year sterling revenues were £259.2 million, down 2% on 2006 again due to the weakening of the dollar against the sterling for the full year ($1.98 in 2007 compared to $1.84 in 2006). At the FY 2006 effective rate, FY 2007 sterling revenues would have been £279.9 million or 8% higher than actual reported revenue.
Total dollar license revenues in Q4 2007 decreased by 11% to $49.2 million, representing 38% of group revenues, compared to $55.5 million in Q4 2006. License revenues comprised $38.4 million for PD and $10.8 million for PIPD.
PD license revenues were up 3% versus Q4 2006 but down sequentially 11%. This was primarily due to the signing of three subscription deals in Q4 where revenue is recognised rateably over the life of the license. These licenses represent a major strategic commitment to ARM’s existing and future technology portfolio by three of the world’s leading semiconductor companies.
PIPD license revenues were down 15% sequentially, being impacted by internal restructuring and productivity improvement activities to position this business for growth in 2008. See the PIPD section in the Operational Review below.
Full-year dollar license revenues were $217.9 million, up 8% on 2006.
Total dollar royalty revenues in Q4 2007 were up 10% versus Q4 2006 and up 14% sequentially at $57.5 million, representing 44% of group revenues. Royalty revenues comprised $48.8 million for PD, a 15% sequential increase, and $8.7 million for PIPD (including $0.3 million of “catch-up” royalties), a 9% sequential increase. Underlying royalties of $8.4 million for PIPD were up 9% sequentially, consistent with higher foundry utilisation levels.
Full-year dollar royalty revenues were $208.8 million, up 5% on 2006.
Development Systems and Service revenues
Sales of development systems in Q4 2007 were up 10% versus Q4 2006 and up 26% sequentially to a record level of $15.5 million, representing 12% of group revenues. Although development systems revenues are predominantly generated from turns business, Q4 revenue included one significant deal of a size that is not expected to recur regularly. We, therefore, expect development systems revenue in Q1 2008 to be lower than that achieved in Q4 2007.
Service revenues in Q4 2007 were down 2% year-on-year at $8.1 million, representing 6% of group revenues, compared to $8.3 million in Q4 2006.
Full-year development systems revenues were $55.6 million, up 5% on 2006. Service revenues were up by 10% to $32.0 million.
Gross margins in Q4 2007, excluding stock-based compensation charges of £0.2 million (see below), were 89.4% compared to 89.0% in Q4 2006.
Full-year gross margins, excluding stock-based compensation charges of £1.0 million, were 89.6% compared to 88.7% in 2006.
Operating expenses and operating margin
Total operating expenses in Q4 2007 were £46.8 million (Q4 2006: £52.4 million) including stock-based compensation charges of £3.0 million (Q4 2006: £5.8 million) and amortisation of intangible assets and other charges of £6.6 million (Q4 2006: £5.8 million). The total stock-based compensation charges of £3.2 million in Q4 2007 are included within cost of revenues (£0.2 million), research and development (£1.9 million), sales and marketing (£0.6 million) and general and administrative (£0.5 million). Normalised Q4 and full-year income statements for 2007 and 2006 are included in notes 7.24 to 7.27 below which reconcile US GAAP to the normalised non-GAAP measures referred to in this earnings release.
Operating expenses (excluding stock-based compensation, amortisation of intangible assets and other charges) in Q4 2007 were £37.2 million compared to £36.5 million in Q3 2007 and £40.8 million in Q4 2006, a 9% reduction versus the previous year. Q4 operating expenses benefited from the regional re-balancing of the group’s resources (see People section below) and general rigorous management of costs.
Normalised research and development expenses were £15.1 million in Q4 2007, representing 23% of revenues, compared to £14.8 million in Q3 2007 and £18.2 million in Q4 2006. Normalised sales and marketing costs in Q4 2007 were £11.1 million, representing 17% of revenues, compared to £10.3 million in Q3 2007 and £11.4 million in Q4 2006. Normalised general and administrative expenses in Q4 2007 were £11.1 million, representing 17% of revenues, compared to £11.4 million in Q3 2007 and £11.2 million in Q4 2006.
Normalised operating margin in Q4 2007 was 31.5% (7.1) compared to 31.8% (7.2) in Q3 2007 and 29.0% (7.3) in Q4 2006. At constant currencies, using the Q4 2006 effective rate of $1.92/£1, the operating margin for Q4 2007 would have been approximately 33%.
Full-year operating expenses for 2007 were £188.4 million, including stock-based compensation charges of £15.4 million and amortisation of intangible assets and other charges of £22.2 million. Excluding these charges, operating expenses for the full year were £150.8 million, compared to £150.1 million in 2006, an increase of 0.5%.
Normalised operating margin in the full year 2007 was 31.4% (7.4) compared to 31.7% (7.5) in 2006. At constant currencies, using the 2006 effective rate of $1.84/£1, the normalised operating margin for 2007 would have been approximately 34%.
Earnings and taxation
Income before income tax in Q4 2007 was £11.5 million compared to £9.4 million in Q4 2006. After adjusting for stock-based compensation, amortisation of intangibles and other charges, normalised income before income tax in Q4 2007 was £21.3 million (7.6) compared to £21.3 million (7.7) in Q4 2006. The group’s effective tax rate under US GAAP for the full-year 2007 was 23.6%, reflecting the availability of research and development tax credits and taking into account the benefits arising from the structuring of the Artisan® acquisition.
In Q4 2007, fully diluted earnings per share prepared under US GAAP were 0.74 pence (4.41 cents per ADS****) compared to earnings per share of 0.87 pence (5.13 cents per ADS****) in Q4 2006. Normalised fully diluted earnings per share in Q4 2007 were 1.25 pence (7.19) per share (7.48 cents per ADS****) compared to 1.49 pence (7.21) (8.73 cents per ADS****) in Q4 2006. The decline in earnings per share for the comparable period was due primarily to a non-recurring tax credit in Q4 2006 arising from a tax-deductible foreign exchange loss.
Full-year 2007 fully diluted earnings per share prepared under US GAAP were 2.70 pence (16.10 cents per ADS****) compared to earnings per share of 3.22 pence (18.88 cents per ADS****) in 2006. Normalised fully diluted earnings per share for 2007 were 4.67 pence (7.22) per share (27.89 cents per ADS****) compared to 5.08 pence (7.23) (29.85 cents per ADS****) in 2006.
Intangible assets at 31 December 2007 were £384.0 million, comprising goodwill of £344.6 million and other intangible assets of £39.4 million, compared to £336.0 million and £43.1 million respectively at 30 September 2007.
Total accounts receivable were £68.2 million at 31 December 2007, comprising £43.7 million of trade receivables and £24.5 million of amounts recoverable on contracts, compared to £65.0 million at 30 September 2007, comprising £37.6 million of trade receivables and £27.4 million of amounts recoverable on contracts. Days sales outstanding (DSOs) were 49 at 31 December 2007 compared to 39 at 30 September 2007 and 43 at 31 December 2006.
Cash flow, share buyback programme and 2007 final dividend
Net cash at 31 December 2007 was £51.3 million, in line with previous guidance, compared to £99.3 million at 30 September 2007. Normalised cash generation in Q4 2007 was £10.5 million(7.14).
During the quarter, £60.1 million of cash was returned to shareholders via the purchase of 38 million ARM shares at a cost of £49.6 million and the payment of the interim dividend of £10.5 million.
The directors recommend payment of a final dividend in respect of 2007 of 1.20 pence per share, which taken together with the interim dividend of 0.80 pence per share paid in October 2007, gives a total dividend in respect of 2007 of 2.0 pence per share, an increase of 100% on the total dividend of 1.0 pence per share in 2006. Subject to shareholder approval, the final dividend will be paid on 21 May 2008 to shareholders on the register on 2 May 2008.
At the start of 2007, ARM announced its intention to reduce its cash balance to approximately £50 million by the year end. In achieving this level of net cash, we have returned a total of £147 million to shareholders via both an accelerated share buyback programme and a dividend at twice the level of 2006. Given ARM’s market leadership position and increasingly strong cash flows as the benefits of the licensing and royalty model bear fruit, we remain focused on balance sheet efficiency.
International Financial Reporting Standards (IFRS)
ARM reports results quarterly in accordance with US GAAP. At 30 June and 31 December each year, in addition to the US GAAP results, ARM is also required to publish results under IFRS. The operating and financial review commentary included in this release on the US GAAP numbers is for the most part applicable to the IFRS numbers and, in particular, revenues, dividends and share buybacks are recorded in the same way under both sets of accounting rules. A summary of the accounting differences between IFRS and US GAAP and reconciliations of IFRS and US GAAP profit and shareholders’ equity are set out in note 6 to the financial tables below.
In Q4 ARM achieved its highest bookings quarter ever, growing the backlog more than 30% sequentially. All divisions achieved higher backlog compared to Q3 with the Processor Division up more than 50% resulting from the three subscription licenses that were signed in Q4. The revenue from these subscription licenses will be recognised rateably over the life of the subscription agreements.
PD Licensing – Equipping the Leading Semiconductor Companies with ARM Processor IP
2007 saw even broader acceptance of our market-leading processor IP products by the semiconductor industry. During the year we saw significant commitments by tier one semiconductor companies to our latest technology. We signed 14 further licenses for Cortex™ products, including 3 lead partners for the next-generation Cortex-A9 processor, bringing the total number of Cortex licenses to 37. This represents the fastest uptake of a microprocessor family in the history of ARM. We were also very encouraged with the licensing activity of our Mali™ 3D graphics technology, with the signing in Q4 of our fifth license since acquisition of that technology. Nine semiconductor companies are now licensed to design products using our graphics technology.
The long-term commitment of our partners to ARM technology is further evidenced by the signing of 4 subscription licenses in 2007, 3 of which were signed in Q4. Of the original subscription licensees (NXP, ST and Samsung) all have renewed their long-term commitment to ARM technology. Further, in Q4 we signed a new subscription license with a top five Japanese semiconductor company, significantly expanding the penetration of ARM technology into that region.
Q4 2007 and Cumulative PD Licensing Analysis
U: Upgrade D: Derivative N: New
PD Royalties – Broadening the Usage of ARM Processor IP
PD unit shipments in Q3 (our partners report royalties one quarter in arrears) increased 19% sequentially to a record 828 million units in the quarter. For the reported year, ARM partners shipped just under 3 billion units (2.9bn), up 18% on 2006 and are now at a run rate of ~9 million units per day. We also reached a significant milestone in 2007 with our partners shipping the 10 billionth ARM microprocessor since ARM’s inception in 1990.
In the quarter, ARM9™ family shipments comprised 41% of total units, including 20% relating to ARM926EJ-S™ processor shipments. ARM11™ family shipments now comprise 2% of total shipments. In the quarter we received our first royalties from our Mali 3D graphics product and from the initial shipments of Cortex products.
ARM unit shipments showed significant resilience in a year that was affected by the industry-wide inventory correction which started in the second half of 2006. The proportion of shipments into the mobile and non-mobile segments during 2007 remained broadly consistent with the proportion of mobile shipments edging up slightly in Q4 to 68%. The ARM content per phone continued to increase, reaching approximately 1.7 cores per phone by year end.
We continue to see strength in the embedded segment, rising to 13% of shipments in the quarter, in part due to the continued significant growth in MCU shipments with growth of 2.4x over 2006. MCUs are now the highest volume individual application after wireless handsets.
PIPD Licensing – Extending the IP Outsourcing Model to ARM Physical IP
PIPD signed a further 21 licenses in Q4, mostly for earlier generation technology. In the quarter, a further three IDMs (including one top 10 semiconductor company) signed physical IP licenses, demonstrating the growing appetite for IDMs to complement their in-house physical IP development with outsourced physical IP from ARM. This brings the total number of license deals with IDMs to 7 in 2007.
Although 2007 has been a challenging year for revenue, we made progress in positioning the business for growth in 2008 and beyond. In 2007, we continued to focus on the acceleration of the physical IP roadmap to include leadership-standard, leading-edge physical IP. In 2007, we signed an additional three 45nm licenses, of which one was for our SOI technology, and ten 65nm licenses. Of the 202 licenses signed since the acquisition of Artisan, 42 licenses have been signed for technology that ARM has developed since the acquisition.
As the business transitions from technology catch-up to a more business-as-usual state for development of leading-edge technology, there is increased focus on improvement in internal processes to drive increased productivity, better resource management and improved product delivery to customers. In order to enable our partners to create the best physical implementations of their designs and for ARM to continue to be the industry leader in physical IP, we are striving to ensure that PIPD is a leader in technology development, on-time delivery, customer satisfaction and engineering efficiency. Simon Segars became the General Manager of PIPD in September 2007 to accelerate these activities. Simon joined ARM in 1991 and has been a member of the Board since 2004. He has previously held a number of positions fundamental to ARM’s development, including VP of Engineering, EVP of Sales and EVP of Business Development.
Enhanced engineering efficiency is being realised through the reorganisation of the business into dedicated design centres to align better the skill sets of each centre with the challenges of developing leading-edge technology as well as to define better the accountabilities and tasks of each engineering team. This reorganisation has resulted in the elimination in Q1 2008 of approximately 30 positions within our Sunnyvale, CA facility as we align its skill base with the needs of the organisation going forward.
In order to capture the specific growth opportunities we see as we enter 2008, we are further focusing the business to concentrate on the high volume, mass-market opportunity represented by the traditional Artisan free library business model and on the high-value business of licensing physical IP to IDMs and large fabless customers, both for earlier generation and leading-edge technology. We have already achieved considerable success, having licensed the leading foundries through to the 45nm process node and having signed a further 7 IDM licenses in 2007. In 2008, we expect growth to be generated from further penetration of the foundries with ARM technology; expanding the number of licenses to IDMs and large fabless customers for earlier generation technology and securing the initial licenses for leading-edge physical IP technology with IDM and large fabless customers.
Additionally, the research and development teams in PD and PIPD will continue to focus on enabling our partners to create highly optimised physical implementations of their ARM processors, utilising processor-specific physical IP.
Q4 2007 and Cumulative PIPD Licensing Analysis
Process Node (nm)
Standard Cell Libraries
PIPD Royalties – Broadening the Usage of ARM Physical IP
Underlying PIPD royalties were strong in Q4 2007, increasing 9% sequentially. ARM continued to expand market share in Q3 (our foundry partners report royalties one quarter in arrears) as underlying royalties were up by more than the improvement in utilisation rates at the foundries for earlier generations technology nodes, where ARM currently earns the majority of its royalties.
At 31 December 2007, ARM had 1,728 full-time employees, a net increase of 69 in the year. Year-to-date headcount has increased by 89 in India with a net reduction of 20 in other regions, illustrating the ongoing regional re-balancing of ARM’s resources. At the end of Q4, the group had 650 employees based in the UK, 523 in the US, 190 in Continental Europe, 292 in India and 73 in the Asia Pacific region.
ARM is involved in ongoing litigation proceedings with Nazomi Communications, Inc. and Technology Properties Limited, Inc. In both cases, a district court has found in favour of ARM and both cases are now pending before the Court of Appeals for the Federal Circuit. Details are set out in the 2006 Annual Report on Form 20-F filed with the Securities and Exchange Commission on 11 April 2007. Based on independent legal advice, ARM does not expect any significant liability to arise in respect of these proceedings.
The results for ARM for Q4 2007 and previous quarters as shown reflect the accounting policies as stated in Note 1 to the US GAAP financial statements in the Annual Report and Accounts filed with Companies House in the UK for the fiscal year ended 31 December 2006 and in the Annual Report on Form 20-F for the fiscal year ended 31 December 2006, except in relation to accounting for sabbatical leave in accordance with EITF 06-2 and provisioning for uncertain tax positions in accordance with FIN 48.
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 realise 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 2006 including (without limitation) under the captions, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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 mobile, home and enterprise solutions to embedded and emerging applications. ARM’s comprehensive product offering includes 16/32-bit RISC microprocessors, data engines, 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.
ARM is a registered trademark of ARM Limited. ARM7, ARM9, ARM926EJ-S, ARM11, Cortex, Mali, Classic, Advantage, Metro and Velocity 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 Germany GmbH, ARM KK, ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS, ARM Consulting (Shanghai) Co. Ltd., ARM Belgium NV., ARM Embedded Technologies Pvt. Ltd., Keil Elektronik GmbH, and ARM Norway AS.