ARM’s dollar revenues grew 6% despite declining revenues in the semiconductor industry. The operating leverage in the business model, combined with financial discipline and a stronger dollar exchange rate in the closing months of the year, delivered earnings growth of 18%. Cash generation was at record levels with more than £90 million of free cash flow.
During the year our licensees reported shipments of four billion ARM Powered chips. This was achieved as we increased the average value of ARM technology per mobile handset, and also increased our market share beyond mobile devices. We grew our licensing base to more than 580 processor licences which will drive our long-term royalty revenues. We are also very pleased to report progress in our Physical IP Division. Our focus on accelerated R&D through 2006 and 2007 has achieved its goal of technology leadership and has begun to yield strategic licences with major customers. 2008 was also the tenth anniversary of ARM’s Initial Public Offering, and in the last five years we have been pleased to return £338 million to our shareholders.
The success we have seen in 2008 is the result of not one, but 18 years of work by our employees. ARM’s business model is based upon long-term relationships that bear fruit in the form of product sales and revenues years after initial agreements with customers. We have a significant share in consumer products because we have spent many years in partnership with our licensees and their customers. Our proximity to the thought-leaders of the electronics industry has enabled us to tune our business model and products to match their needs and their vision of the future.
Our customers come back to us repeatedly because when they buy into ARM technology, they are buying into a long-term roadmap and the ARM community, not simply a one-off licence. In 2008, we grew the licensing base by an additional 61 licences to 587. Each licence equips a semiconductor company to develop new product lines based on ARM technology, and each of those product lines has the potential to create future royalties. About half of the licences we sold in 2008 were for ARM’s latest Cortex family of processors, and half were for older technologies. The ARM7™ family was first licensed in 1994 and is still producing licensing revenue and being used in new chip designs 14 years later, demonstrating the longevity of ARM technology.
During the year, ten of the top 20 semiconductor companies re-equipped their product lines with new ARM processors, and several companies licensed their first ever ARM processor, increasing the number of leading technology companies who are ARM licensees to 210.
After the licence purchase, the next step for our partners is to complete an ARM technology-based chip design and begin sales of those devices to electronic product manufacturers. It is at that stage, normally about four years after the initial licence sale, when ARM begins to earn royalty revenue from that licence. As we share our customers’ risk so we work together to get their chips designed into end-products, creating sales for those customers and a royalty revenue stream for ARM.
Today there are hundreds of companies building thousands of chips for tens of thousands of equipment manufacturers; and hundreds of thousands of software developers writing programmes for millions of products to be sold to hundreds of millions of consumers.
This universe of people and products creates an extremely powerful and almost self-perpetuating ecosystem around ARM technology.
ARM’s reach is so extensive that universities teach students how to build chips and write software using ARM technology and in turn graduates get jobs developing ARM-based products. Engineering managers choose ARM technology for their next design because of this vast ecosystem of ARM expertise. All those ARM experts and all those products that are already optimised for ARM technology mean that when companies, wherever they are in the value chain, standardise on ARM technology they can enjoy the benefit of huge savings.
During 2008, the world has seen a proliferation of smarter and easier-to-use mobile devices, blurring the distinction between phones and PCs. Smarter phones need more intelligent ARM technology-based chips and, for us yield more royalty. In 2008 there was an average of 1.9 ARM technology-based chips per handset, with some smartphones containing five ARM technology-based chips.
We expect the increasing sophistication of handsets to continue as companies are now licensing ARM processors to develop chips for mobile TV, gaming, BlueTooth and touchscreen controllers.
This increasing sophistication brings an opportunity for ARM to add more specialist technology into mobile devices and other consumer electronics. At the end of 2008, we acquired a new video processing business which further extends the capability of our Mali multimedia processor family. This acquisition has provided us with a smart, fully functional capability to provide additional ARM technology to our existing licensees.
Personally, I find it encouraging that not only have mobile phones become smarter, but the user experience has improved through better use of graphics and a more thoughtful user interface. Smartphones are getting more intelligent, and as they do we all find it easier to use them.
As smartphones continue to get smarter, they are evolving into mobile computers; always on, always connected and always with the potential to enable communication, productivity or provide entertainment. ARM has an extremely important role to play as mobile computers need ever higher levels of computing performance, but without compromising on battery life. They also need PC-class operating systems, browsers, plug-ins and software. I am very pleased, therefore, to see ARM and our community of semiconductor, software and equipment manufacturers working successfully to create complete applications that will enhance consumer experience, portability and usability.
We have also seen a wealth of smarter ARM Powered products beyond mobile during 2008. This increased intelligence is making life better – more enjoyable, simpler and safer – by enabling the products we use everyday to make better decisions, by connecting people and allowing them access to their content, whether at home or work.
Digital televisions are becoming smarter so they can display digital TV and high-definition movies, but also be connected to the home network to display user-generated content and data from the internet. Smarter televisions may have Wi-Fi for network connection, and may have internal storage and a keyboard as a more sophisticated remote control. All of this is driving the need for more ARM technology-based chips.
Health care is becoming cheaper and more effective by connecting doctors with their patients. An example of this is a project run by T+Medical that ARM has supported to enable children with diabetes to monitor their blood-sugar levels and communicate quickly and effectively with medical professionals. Management of diabetes requires responsive action, and this programme allows advice from doctors to quickly reach the patient. The patient regularly tests their blood and the results are transmitted, by BlueTooth, phone and internet, to the doctor who can record the information and send advice back to the patient. This means an instant diagnosis and recommendation, enabling the patient to act immediately.
The use of ARM in non-mobile devices is growing rapidly; our partners reported 1.4 billion chips shipped in 2008, an increase of 45%. We expect ARM to continue to grow market share as about two-thirds of the licences signed in 2008 were initially for non-mobile applications such as digital TVs, networking, robotics and microcontrollers.
When ARM acquired Artisan in 2004 we noted that we would start to see tier 1 semiconductor companies regularly licensing physical IP within four to seven years. I am very pleased to report that we are well on track to achieve this goal having achieved several key milestones during the year.
When we entered 2008, we were coming to the end of a period of rapid technology development in our Physical IP Division to create a portfolio of products suited to our target customers operating at the leading edge of silicon technology.
We have demonstrated our capabilities by delivering ARM physical IP and processors at the most advanced process nodes; 45nm at the beginning of the year and 32nm towards the end of the year.
These technology and product developments have yielded significant contracts with tier 1 customers. Six of the top 20 semiconductor companies licensed ARM physical IP in 2008, including STMicroelectronics who licensed 40nm technology in Q3 and Q4. In addition, IBM, Chartered and Samsung have licensed ARM physical IP for their 32nm and 28nm processes.
Clearly 2009 is going to be a difficult year across all sectors. As consumer expenditure goes down, we see challenging times for our semiconductor partners and their customers. We cannot ignore these factors as we look into the year ahead. However, we believe that ARM is positioned to perform resiliently in the context of a difficult environment.
ARM’s leadership team has experience of managing the business in these conditions; like many in this industry, we learned valuable lessons during the industry downturn of 2002. We are prepared for the next economic cycle with a diversified product portfolio and a broad customer base, and we continue to run a tight ship. However, it is important for ARM to make investments in future technology. Our customers license ARM technology for their future roadmaps, and they are continuing a long-term relationship that will drive our future royalty growth. We will monitor and judge the balance between essential investment for the medium-to-longer term benefit of the business and necessary financial prudence in the short-term.
During 2009 we will release several new ARM products, our silicon partners will bring many new chip designs to market and we expect many thousands of new ARM Powered product designs will go on sale. We are growing our market share in a number of key market sectors, and expect to continue to out-perform the industry. ARM will achieve more licences and more design wins, and will continue to reap royalties because ARM technology provides a genuinely better solution for consumers. More ARM technology will be used in smartphones in 2009 than in 2008, and we expect to continue to grow market share within other product categories.
I look forward to a challenging 2009, in which ARM will continue to strengthen its world-leading position and seek to deliver an excellent and sustained return for our shareholders.