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ARM Holdings plc Reports Results For The Fourth Quarter and Full Year Ended 31 December 2008

03 February 2009

A presentation of the results will be webcast today at 09:30 at www.arm.com/ir.

CAMBRIDGE, UK, 3 February 2008—ARM Holdings plc [(LSE: ARM); (Nasdaq: ARMH)], the world's leading semiconductor intellectual property supplier, announces its unaudited financial results for the fourth quarter and full year ended 31 December 2008

Q4 Financial Highlights (US GAAP unless otherwise stated)

  • Q4 2008 revenues at $149.4m, up 15% year-on-year (£94.4m, up 47%)
  • Normalised operating margin at 34.6% (US GAAP 24.2%)
  • Normalised PBT at £33.4m, up 57% (US GAAP £23.6m, up 105%)
  • Normalised EPS at 1.93p, up 54% (US GAAP 1.38p, up 86%)
  • £29.6m cash generated in the quarter
  • Final dividend increased by 10% to 1.32 per share

Q4 2008 – Financial Summary

 

£M

Normalised*

US GAAP

Q4 2008

Q4 2007

% Change

Q4 2008

Q4 2007

Revenue

94.4

64.3

47%

94.4

64.3

Income before income tax 33.4  21.3 57%

23.6

11.5

Operating margin

34.6%

31.5%

24.2%

16.3%

Earnings per share (pence)

1.93

1.25

54%

1.38

0.74

Net cash generation**

29.6

10.5

 

 

Effective fx rate  ($/£)

1.58

2.02

 

FY 2008 – Financial Summary

 

£M

Normalised*

US GAAP

FY 2008

FY 2007

% Change

FY 2008

FY 2007

Revenue

298.9

259.2

15%

298.9

259.2

Income before income tax

100.8

86.7

16%

64.8

48.2

Operating margin

32.6%

31.4%

 

20.6%

16.5%

Earnings per share (pence)

5.63

4.67

21%

3.68

2.70

Net cash generation**

91.2

57.1

 

 

 

Effective fx rate  ($/£)

1.83

1.98

 

 

Outlook
Semiconductor industry activity slowed down markedly in the fourth quarter and the near-term outlook for the sector remains uncertain. Whilst not immune from the impact of the industry slow down, ARM continues to build an established base of licenses that drives long-term royalty growth. The current licensing opportunity pipeline to enlarge that base further remains robust.

Although there is less visibility than usual at this time of the year, we believe that ARM is positioned to perform resiliently in the context of the challenging trading environment. Unless conditions deteriorate to a greater extent than generally anticipated, we expect group dollar revenues for full-year 2009 to be at least in line with current market expectations of around $460 million.

Warren East, Chief Executive Officer, said:
"We are pleased to see ARM technology being increasingly utilised in innovative consumer electronics products, leading to the highest ever group revenues for both the fourth quarter and for the full year.

We saw strong demand for new ARM technology, with industry leaders continuing to license our latest generation processors and physical IP. ARM has built a base of more than 580 processor licenses that is driving long-term royalty growth.

We are encouraged to see that the inherent operating leverage in the ARM business model, combined with sound financial discipline and the recent strengthening of the dollar against sterling, has given rise to earnings growth in 2008 of more than 20%."

Q4 Operational Highlights

  • Processor Division (PD): Strong licensing base driving royalty momentum
    • Base of licenses increased to 587 with 21 additional processor licenses signed in Q4
      • Three Cortex-A9 licenses to tier 1 semiconductor companies for mobile computing and gaming
    • Q4 mobile unit shipments grew approximately 35% to more than 750 million units
    • Q4 non-mobile unit shipments grew approximately 70% to 450 million units
  • Physical IP Division (PIPD): Licensing advanced technology nodes to IDMs and foundries
    • 12 companies licensed physical IP in Q4, 7 at advanced nodes, including 32nm
    • backlog grew more than 5% sequentially, whilst PIPD license revenue declined 6% quarter-on-quarter

Q4 2008 – Revenue Analysis

 

Revenue ($M)***

Revenue (£M)

 

Q4 2008

Q4 2007

% Change

Q4 2008

Q4 2007

% Change

Processor Division (PD)

 

 

 

 

 

 

Licensing

43.0

38.4

12%

26.5

19.3

37%

Royalties

65.5

48.8

34%

42.5

23.7

79%

Total PD

108.5

87.2

24%

69.0

43.0

60%

Physical IP Division (PIPD)

 

 

 

 

 

 

Licensing

9.8

10.8

-9%

6.3

5.3

19%

Royalties

10.5

8.7

20%

6.8

4.3

59%

Total PIPD

20.3

19.5

4%

13.1

9.6

36%

Development Systems

12.9

15.5

-17%

8.1

7.7

5%

Services

7.7

8.1

-5%

4.2

4.0

5%

Total Revenue

149.4

130.3

15%

94.4

64.3

47%

1 Includes catch-up royalties in Q4 2008 of $1.0m (£0.6m) and in Q4 2007 of $0.3m (£0.2m).

FY 2008 – Revenue Analysis

 

Revenue ($M)***

Revenue (£M)

 

FY 2008

FY 2007

% Change

FY 2008

FY 2007

% Change

PD

 

 

 

 

 

 

Licensing

145.1

163.5

-11%

79.3

83.4

-5%

Royalties

226.5

176.5

28%

125.5

88.0

43%

Total PD

371.6

340.0

9%

204.8

171.4

19%

PIPD

 

 

 

 

 

 

Licensing

44.6

54.4

-18%

24.2

27.3

-11%

Royalties

40.3

32.3

24%

22.2

16.1

38%

Total PIPD

84.9

86.7

-2%

46.4

43.4

7%

Development Systems

57.8

55.6

4%

31.1

27.9

12%

Services

31.9

32.0

-

16.6

16.5

1%

Total Revenue

546.2

514.3

6%

298.9

259.2

15%

 
1 Includes catch-up royalties in Q4 2008 of $1.0m (£0.6m) and in Q4 2007 of $0.3m (£0.2m).

* Normalised figures are based on US GAAP, adjusted for acquisition-related, share-based compensation and restructuring charges and profit on disposal and impairment of available-for-sale investments. 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, disposals of available-for-sale investments 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.

CONTACTS:

Sarah West/Pavla Shaw   Tim Score/Ian Thornton
Brunswick ARM Holdings plc 
+44 (0)207 404 5959 +44 (0)1628 427800


Financial review
(US GAAP unless otherwise stated)

Total revenues
Total revenues in Q4 2008 were a record $149.4 million, up 15% on Q4 2007. Q4 sterling revenues were £94.4 million, up 47% year-on-year.

Total 2008 full-year revenues were also a record $546.2 million, up 6% on 2007. Full-year sterling revenues were £298.9 million, up 15% on 2007.

License revenues
Total dollar license revenues in Q4 2008 increased by 8% to $52.8 million, representing 35% of group revenues. PD license revenues were $43.0 million, up 12% versus Q4 2007. Q4 2008 license revenues include a larger than usual contribution from order backlog due to a major engineering milestone being achieved.

PIPD license revenues were $9.8 million, down 9% in Q4; this is primarily due to the timing of revenue recognition. A number of the contracts signed in Q4 were for leading-edge technology which yields lower short-term revenue than more mature technology. As a result, backlog at the end of Q4 2008 was up approximately 5% sequentially. See the PIPD section in the Operational Review below.

Full-year dollar license revenues were $189.7 million, down 13% on 2007.

Royalty revenues
Total dollar royalty revenues in Q4 2008 increased 32% to $76.0 million, representing 51% of group revenues. Royalty revenues comprised $65.5 million for PD and $10.5 million for PIPD.

PD royalties were up 19% sequentially in Q4 2008, due to particularly strong smartphone and microcontroller shipments.

PIPD royalties of $10.5 million include $1.0 million of “catch-up” royalties. Underlying royalties for PIPD were up 2% sequentially, slightly ahead of foundry utilisation levels in Q3 2008.

Full-year dollar royalty revenues were $266.8 million, up 28% on 2007.

Development Systems and Service revenues
Sales of development systems were $12.9 million in Q4 2008, down 17%, representing 9% of group revenues.

Service revenues were $7.7 million in Q4 2008, down 5%, representing 5% of group revenues.

Full-year development systems revenues were $57.8 million, up 4% on 2007. Full-year service revenues were $31.9 million, marginally lower than in 2007.

Gross margins
Gross margin in Q4 2008, excluding share-based compensation charges of £0.3 million, was 89.5%, slightly up on Q4 2007.

Full-year gross margin, excluding share-based compensation charges of £1.0 million, was 89.4% compared to 89.6% in 2007.

Operating expenses and operating margin
Total operating expenses in Q4 2008 were £61.3 million (Q4 2007: £46.8 million) including share-based compensation charges of £3.8 million (Q4 2007: £3.0 million), amortisation of intangible assets and other acquisition charges of £5.4 million (Q4 2007: £5.3 million) and restructuring charges of £0.3 million (Q4 2007: £0.1 million). The restructuring charges of £0.3 million in Q4 2008 relate to a reduction in headcount of approximately 3% across the group in Q4 2008 and Q1 2009. Further restructuring charges of approximately £1.2 million are expected to be incurred in Q1 2009 in relation to this headcount reduction. The total share-based compensation charge of £4.1 million in Q4 2008 are included within cost of revenues (£0.3 million), research and development (£2.8 million), sales and marketing (£0.5 million) and general and administrative (£0.5 million). Normalised Q4 and full-year income statements for 2008 and 2007 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 share-based compensation, amortisation of intangible assets and other acquisition charges, restructuring charges and impairment of investments) in Q4 2008 were £51.8 million compared to £40.8 million in Q3 2008 and £37.2 million in Q4 2007.

The sequential increase in operating expenses this quarter is due primarily to the significant strengthening of the dollar against sterling which has had two primary effects: firstly, an increase in the sterling value of the group’s US dollar denominated costs and secondly, the impact of accounting for derivative instruments giving rise to a net charge of £3.0 million in Q4 2008. Taking these impacts and other quarterly seasonal factors into account, normalised operating expenses in Q1 2009 (assuming effective exchange rates similar to current levels) are expected to be significantly less than Q4 2008, in the range £44-47 million. Costs continue to be carefully managed with group headcount at the end of 2008 only marginally higher than at the start of the year and a pay freeze being implemented across the group with effect from 1 January 2009.

Normalised research and development expenses were £18.6 million in Q4 2008, representing 20% of revenues, compared to £15.7 million in Q3 2008 and £15.1 million in Q4 2007. Normalised sales and marketing costs in Q4 2008 were £14.1 million, representing 15% of revenues, compared to £11.4 million in Q3 2008 and £11.1 million in Q4 2007. Normalised general and administrative expenses in Q4 2008 were £19.2 million, representing 20% of revenues, compared to £13.7 million in Q3 2008 and £11.1 million in Q4 2007. The increase in operating expenses due to the strengthening dollar explained above is reported for the most part within general and administrative expenses.

Normalised operating margin in Q4 2008 was 34.6%(7.1) compared to 33.0%(7.2) in Q3 2008 and 31.5%(7.3) in Q4 2007. Full-year operating expenses for 2008 were £204.6 million, including share-based compensation charges of £14.1 million, amortisation of intangible assets and other acquisition charges of £19.0 million and restructuring charges of £1.9 million. Excluding these charges, operating expenses for the full year were £169.6 million, compared to £150.8 million in 2007. Normalised operating margin in the full-year 2008 was 32.6%(7.4) compared to 31.4%(7.5) in 2007.

Earnings and taxation
Income before income tax in Q4 2008 was £23.6 million compared to £11.5 million in Q4 2007. After adjusting for sharebased  compensation, amortisation of intangibles and other acquisition charges and restructuring charges, normalised income before income tax in Q4 2008 was £33.4 million(7.6) compared to £21.3 million(7.8) in Q4 2007. The group's effective tax rate under US GAAP for the full-year 2008 was 26.6%.

In Q4 2008, fully diluted earnings per share prepared under US GAAP were 1.38 pence compared to earnings per share of 0.74 pence in Q4 2007. Normalised fully diluted earnings per share in Q4 2008 were 1.93 pence(7.19) per share compared to 1.25 pence(7.21) per share in Q4 2007.

Full-year 2008 fully diluted earnings per share prepared under US GAAP were 3.68 pence compared to earnings per share of 2.70 pence in 2007. Normalised fully diluted earnings per share for 2008 were 5.63 pence(7.22) per share compared to 4.67 pence(7.23) per share in 2007.

Balance sheet
Intangible assets at 31 December 2008 were £507.1 million, comprising goodwill of £465.5 million and other intangible assets of £41.6 million, compared to £344.7 million and £39.4 million respectively at 31 December 2007. A regular review of the carrying value of assets arising on acquisition was performed during Q4 2008 and it was concluded that no impairment charge was required.

Total accounts receivable were £76.9 million at 31 December 2008, comprising £59.0 million of trade receivables and £17.9 million of amounts recoverable on contracts, compared to £66.2 million at 30 September 2008, comprising £48.8 million of trade receivables and £17.4 million of amounts recoverable on contracts. Days sales outstanding (DSOs) were 49 at 31 December 2008 compared to 55 at 30 September 2008 and 49 at 31 December 2007.

Cash flow, share buyback programme and 2008 final dividend
Net cash at 31 December 2008 was £78.8 million(7.11), compared to £66.0 million(7.12) at 30 September 2008. Normalised cash generation in Q4 2008 was £29.6 million(7.14)
.
During the quarter, £14.3 million of cash was returned to shareholders via the purchase of 3.8 million ARM shares at a cost of £3.2 million and the payment of the 2008 interim dividend of £11.1 million.

The directors recommend payment of a final dividend in respect of 2008 of 1.32 pence per share, up 10%, which taken together with the interim dividend of 0.88 pence per share paid in October 2008, gives a total dividend in respect of 2008 of 2.2 pence per share, an increase of 10% on the total dividend of 2.0 pence per share in 2007. Subject to shareholder approval, the final dividend will be paid on 20 May 2009 to shareholders on the register on 1 May 2009.

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.

Following the ruling issued by the Securities and Exchange Commission in November 2007, allowing foreign private issuers to file financial statements using IFRS as published by the International Accounting Standards Board, ARM will report quarterly, half-yearly and annual results in accordance with IFRS with effect from Q1 2009. ARM will no longer report results under US GAAP.

Operating review

Backlog
In Q4 2008, certain major engineering milestones relating to delivery of technology were achieved and as a result the proportion of license revenues arising from order backlog was higher than usual. At the end of Q4 2008, backlog was slightly down sequentially and just under 10% lower than a year ago.

PD Licensing
ARM signed 21 processor licenses in Q4. The quarter was characterised by licensing of ARM technologies across the portfolio, with licenses being signed for the ARM7™, ARM9™, ARM11™ and Cortex processor families, as well as for the Mali™ graphics processor.

Non-mobile applications continue to be the driver for a high proportion of processor licenses, including graphics processors. Approximately 60% of licenses are expected to be used initially in applications such as automotive, gaming, microcontrollers and high-speed broadband.

In mobile, ARM processors and graphics processors are being designed into a widening range of mobile technology such as chips for Bluetooth®, gaming, mobile computing and mobile TV.

In Q4, six new companies licensed ARM processor technology for the first time.

Q4 2008 and Cumulative PD Licensing Analysis

 

Multi-use

Term

Per-use

 

Cumulative

 

U

D

N

U

D

N

U

D

N

Total

Total

ARM7

 

2

1

 

 

 

 

 

1

3

161

ARM9

1

 

1

 

 

1

1

 

 

4

253

ARM11

1

 

1

 

 

 

 

 

 

2

72

Cortex-M3

2

 

 

1

 

 

 

 

 

3

25

Cortex-R4

 

 

 

1

 

 

 

 

 

1

13

Cortex-A8

 

 

 

 

 

 

 

 

 

 

10

Cortex-A9

2

 

 

 

1

 

 

 

 

3

8

Mali

2

1

2

 

 

 

 

 

 

5

15

Other

 

 

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

 

 

 

Total

21

587

U: Upgrade     D: Derivative     N: New

PD Royalties
Reported PD unit shipments grew 20% sequentially in Q4 2008 (our partners report royalties one quarter in arrears) buoyed by growth in automotive, Bluetooth, digital consumer, microcontrollers, storage (HDD and Flash) and Wi-Fi. Reported processor unit shipments were 1.2 billion in the quarter, up 46% compared to Q4 2007. FY 2008 reported processor unit shipments were 4.0 billion, up 38% compared to FY 2007.

The ARM7, ARM9 and ARM11 families represented 56%, 39% and 5% of total shipments respectively for the quarter. More than 2 million Cortex processor-based products were reported in the quarter, shipping into a broad range of applications including consumer electronics, microcontrollers, mobile computers, networking and Wi-Fi applications.

In Q4 2008, shipments of ARM technology-based chips in mobile devices grew approximately 35% compared to Q4 2007. For the quarter, an ARM technology-based mobile phone contained an average of 1.9 ARM microprocessors, up from 1.8in the prior quarter. As well as smartphones containing multiple ARM technology-based chips, mid-range phones are now being shipped with multiple ARM processors. Shipments of ARM technology-based chips in embedded devices continued to grow strongly with microcontroller shipments up approximately 95% compared with Q4 2007. Units shipped into enterprise applications grew by approximately 85% driven by increased use of ARM in networking and storage devices; whilst units shipped into the home products market grew approximately 30% driven by increased market share in consumer electronics products such as DVD, set-top boxes and digital TV. In Q4 2008, shipments of ARM processor units in mobile, embedded, enterprise and home represented 62%, 17%, 14% and 7% respectively.

PIPD Licensing
ARM signed 12 physical IP licenses in Q4 for technologies at all process nodes from 180nm to 28nm; and for a wide range of ARM products including platforms of physical IP for new process nodes; memories, standard cells and PHYs for mature nodes; and power-optimised components for use with ARM processors.

Demand for leading-edge physical IP continues as ARM signed a further agreement with an IBM Common Platform partner to develop and license 32nm and 28nm physical IP.

At leading foundries, the 45 and 40nm process nodes are used for manufacturing the highest performance chips available today. Five licenses for physical IP at these nodes were signed with tier-1 semiconductor companies, such as STMicroelectronics who have licensed additional 40nm technology one quarter after licensing a substantial platform at this node. Also for use at the 45nm process node, a top 10 fabless semiconductor company licensed physical IP optimised for use with an ARM Cortex-M3 processor.

Q4 2008 and Cumulative PIPD Licensing Analysis

 

Process Node (nm)

Total

Platform Licenses 

 

 

 

 32/28

 1

 

 45/40

 3

Standard Cell Libraries

 40

 1

 

 130

 2

 Memory Compilers

 65

 1

 

 130

 1

 PHYs

 45/40

1

 

 90

 2

Quarter Total

 

12

 Cumulative Total

 

 405

PIPD Royalties
Underlying PIPD royalties in Q4 2008 increased 13% year-on-year to a record $9.5m, ahead of foundry revenues that were up 5% in the equivalent period. ARM continued to expand market share in Q4 (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. PIPD catch-up royalties were $1.0m compared with $0.3m in Q4 2007.

Acquisition of Logipard AB
In December 2008, ARM acquired Logipard AB, a leading video processor and imaging technology company, from Anoto Group AB. The company has offices in Lund, Sweden and has existing licensing deals in place with a global mobile phone manufacturer. The company has changed its name to ARM Sweden AB.

The acquisition of video processor technology builds on the success of the ARM Mali graphics processor, and enables ARM to provide customers with an integrated multimedia platform, which is becoming increasingly important in devices such as mobile computers, portable media players and digital TVs.

People
At 31 December 2008, ARM had 1,740 full-time employees, representing a net increase of 12 over the year, including the 15 people who joined the group through the acquisition of Logipard. At the end of Q4, the group had 645 employees based in the UK, 501 in the US, 212 in Continental Europe, 300 in India and 82 in the Asia Pacific region.

Download 2008 Earnings Release - Financial Tables (600KB .pdf)

Notes
The results shown for Q4 2008, Q3 2008, Q4 2007 and FY 2008 are unaudited. The results shown for FY 2007 are audited.
The condensed consolidated financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. Statutory accounts of the Company in respect of the financial year ended 31 December 2007 were approved by the Board of directors on 4 April 2008 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified and contained neither an emphasis of matter paragraph nor any statement under Section 237 of the Companies Act 1985.

The results for ARM for Q4 2008 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 2007 and in the Annual Report on Form 20-F for the fiscal year ended 31 December 2007. 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 2007 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.

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, 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, 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 Limited.; ARM Taiwan Limited; ARM France SAS; ARM Consulting (Shanghai) Co. Ltd.; ARM Belgium NV; ARM Germany GmbH; ARM Embedded Technologies Pvt. Ltd.; ARM Norway AS and ARM Sweden AB.