ARM Investor Relations website

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How we performed in 2009

Throughout 2009 ARM demonstrated the resilience of its business model by outperforming the semiconductor industry. Despite industry revenues being down 20% in the relevant period, ARM’s dollar revenues declined 10% as we continued to gain market share, and made progress on our strategy. Outperformance looks set to continue as we further build the base of licences that will drive long-term royalty growth.

Industry context in 2009

2009 was a difficult year for the semiconductor industry. At the beginning of the year, analysts were forecasting a 30% decline in full-year semiconductor revenues. This forecast presented a challenge for the semiconductor manufacturers; although they wanted to continue their R&D programs, building the chips that will drive revenue in 2011 and beyond, reduced revenues meant that these R&D programs would have constrained budgets.

In H1 2009, due to uncertainties about the duration of the recession, manufacturing of new chips fell to very low levels and inventories rapidly declined throughout the supply chain. In the second half of the year, increasing sales of consumer electronics, initially in China, but then also in the rest of the world, started to result in improved sales by ARM’s semiconductor Partners.

ARM receives royalty payments one quarter in arrears, and reported royalties reflected the shape of the industry downturn. However, royalty revenues declined less than the industry as ARM gained share in target markets.

ARM royalty revenue vs semiconductor industry revenue

ARM royalty revenue vs semiconductor industry revenue* Industry revenues shifted one quarter to align with ARM’s royalty reports.

Even in the downturn ARM royalty revenues outperformed the industry

Licensing revenues are driven by on-going R&D programmes. These programmes continued, but with limited budgets, and ARM signed more licences with constrained licence terms. These licences have a lower up-front cost, but higher future royalties.

KPI:
Growing the number of ARM-based chips

In 2009, ARM’s customers reported 3.9 billion chips shipped, only a small decline on 2008, despite a 20% decline in the semiconductor industry over the relevant period.

This demonstrates ARM’s ability to gain market share even during a downturn in the industry. In 2008 ARM had a 23% market share and in 2009 this rose to 26%.

Total number of chips reported as shipped billions

Total number of chips reported as shipped billions

ARM-based chips started shipping in the early 1990s and by the end of 2009, ARM’s Partners had shipped a total of more than 18 billion chips.

Processor family 2009 unit shipments

Processor family 2009 unit shipments

ARM7 and ARM9 continue to account for the bulk of current ARM-based chips. ARM11 shipments grew 50% compared to 2008 and Cortex shipments now comprise 1% of total ARM shipments.

End-market 2009 unit shipments

End-market 2009 unit shipments

Shipments of ARM-based chips into mobile devices have comprised about two-thirds of overall shipments since 2005, but we are now beginning to see non-mobile start to increase as a proportion as ARM technology is increasingly being used in consumer and embedded products such as hard disk drives, digital TVs and microcontrollers.

KPI: Building the base of licences

Every license represents the opportunity for a future royalty stream. In most years ARM adds between 60-70 processor licences to its existing base of licences.

In 2009, we signed 87 licences, the highest number of licences signed in a year. This takes the licensing base to more than 660 licences.

The strong licensing in 2009 occurred as many ARM customers looked through the downturn at the products they needed to develop for sales in 2011 and beyond. ARM also introduced three new processor products that took ARM into new markets such as mobile computing and very cost-sensitive microcontrollers.

ARM technology is becoming more broadly applicable as digital electronics continue to demand smarter chips to control the world in which we live. ARM continues to see licensing and design wins within mobile products, but increasingly ARM is being designed in other non-mobile applications such as digital TVs, disk drives and microcontrollers.

Number of licences 2005-2009

Number of licences 2005-2009* Adjusted for licences that are no longer expected to generate royalties.

2009 licence by target market

2009 licence by target market

KPI:
Increasing value per mobile phone

During 2009, although the overall number of mobile phones sold declined, the number of smartphones sold increased by 15%.

Smartphones have more chips per phone than basic phones and this has helped to increase the average number of ARM-based chips per phone to 2.1 from 1.9 in 2008.

Growth in ARM royalty revenue per mobile phone handset* %

Growth in ARM royalty revenue per mobile phone handset* %*As a proportion of handset average sales price compared to 2004.

Smartphone chips also have a higher price than basic phones. More chips and higher priced chips is increasing the value ARM gets per phone.

Basic phone

As smartphone shipments continue to grow strongly, the number of ARM-based chips going into mobiles devices looks set to increase.


6x
More royalty
from a smartphone

ARM receives about six times more royalty from a smartphone than from a voice-only phone, as a smartphone contains more ARM-based chips than a basic phone, and the chips are higher value so the royalty derived from each chip is higher.



Developing ARM’s opportunity in mobile computing
Over the last few years we have seen the smartphone become smarter and more like a mobile computer, with internet browsing and e-mail capability. During 2009, ARM and our Partners have been developing products for the next generation of mobile computers that will be launched in 2010, such as netbooks, e-books, smartbooks and tablets.

  • Adobe announced that it will be launching Flash Player 10.1 for ARM-based chips, the video technology that is behind YouTube and BBC’s iPlayer.
  • Google announced that they are creating a new operating system that would be suitable for PCs from desktops to laptops, and would be available for the ARM architecture in H2 2010.
  • OEMs such as Dell, Lenovo and Sharp announced mobile computers based on ARM’s semiconductor Partners. Leading semiconductor manufacturers delivered ARM-based chips for next generation mobile computers.

KPI:
Increasing market penetration in target
end-markets

ARM has increased market share in each of its key end-markets outside of mobile; set-top box and digital TVs, hard disk drive controllers and microcontrollers.

Hard disk drives


65%
market share in 2009

Up from 55% in 2008

notebook

Hard disk drives (HDDs) are used in applications such as servers, PCs, laptops and other storage applications. Leading HDD manufacturers are using ARM technology as disk capacity and density increases and the chips controlling the disks become smarter.

Digital TVs and set-top boxes


30%
market share in 2009

Up from 25% in 2008

tv

ARM-based chips are used to decode the TV signal, to improve image quality on the screen and to display and control the electronic programme guide. Many leading brands use ARM-based chips such as Sony, Samsung and Vizio. High-end digital TVs are also using ARM technology to connect to the internet and display data such as local weather, news and stock market updates.

Microcontroller


6%
market share in 2009

Up from 4%
in 2008

Microcontroller

The microcontroller market is highly fragmented, with many semiconductor companies producing microcontrollers based on proprietary processor designs. To reduce their software development costs large OEMs are increasingly requesting that their semiconductor suppliers use a common processor architecture. ARM is often the choice as it is a suitable architecture that is available to all the semiconductor suppliers.


All of these target end-markets have long-term growth prospects and ARM’s market share gains look set to continue as many of ARM’s licencees have announced new products in these areas.

KPI:
Developing new technology to generate additional royalty streams

During 2009, ARM continued to deliver on its strategic goals to create new technologies that are suitable for licensing to leading semiconductor companies, and for generating additional royalty streams in the future.

Physical IP for advanced manufacturing processes
ARM develops physical IP for use by leading semiconductor companies that manufacture chips using advanced processes. ARM is already the leading physical IP provider and is well-placed as semiconductor companies increasingly outsource manufacturing to ARM’s foundry Partners.

During 2009 ARM saw strong licensing and signed eight platform licences for ARM’s physical IP that will drive future royalty revenues. Physical IP royalties significantly outperformed the overall industry, declining just 10% whilst overall foundry revenues declined 25%.

ARM’s next generation physical IP development is proceeding well, as we have demonstrated the first ARM processor manufactured at the 32nm process node. We also started licensing leading foundry and fabless semiconductor companies at 28nm, demonstrating the continuing demand for ARM physical IP.

Multimedia IP for enhanced user interfaces
For many consumer electronics devices the user interface is a vital part of the communication with the user. Mobile phones, TVs and computers are familiar, and cars, media players and navigation devices are emerging. ARM is developing graphics and video IP to improve the user interface for these devices and so enhance the user experience.

During 2009, ARM signed 13 graphics IP licences including leading semiconductor companies in mobile and consumer electronics markets such as STMicroelectronics and Samsung.

Repeating the business model for other technologies
The design and manufacture of semiconductor chips is getting increasingly complex and costly. Licensing IP, rather than developing it in-house, reduces both cost and risk for the semiconductor company, so ARM is developing new technology that supports a licensing plus royalty business model. These technologies can generate additional royalty streams from an ARM-based chip.

Number of
licences in 2009
Base of licences
by end of 2009
Royalties in 2009
Physical IP 8* 68* Twelve of the top 20 semiconductor companies used physical IP in their chips driving royalties through the foundries.
Video and graphics IP 13 26 Four leading semiconductor manufacturers paid royalties on ARM video and graphics IP.

* Physical IP licences refer only to royalty generating platform licences.


KPI:
Growing normalised operating margin, EPS, cash generation and dividends

ARM’s unique business model and exposure to structural growth markets means that ARM is well positioned to become increasingly profitable, to generate cash and to support a progressive dividend. ARM intends to cover most of its operational costs from the licence revenues of each new technology. This leaves the majority of royalties as profits. Over the medium term, we expect royalties to grow faster than licence revenues and costs.

In 2009 ARM’s financial discipline maintained all the major engineering programmes on track to deliver new products in 2010 and beyond, whilst reducing overall headcount.

Operating margin %

Operating margin %

In 2009, despite with cost control. R&D investment the downturn in the industry, and a 10% decline in revenues, ARM has maintained normalised operating margins over 30%.

Earnings per share p

Earnings per share p

As our customers are the world’s largest semiconductor manufacturers, their regular royalty payments have become a highly reliable cash flow. Given our broad base of Partners and end-markets, ARM is not overly reliant on any one company or consumer product for its future profits and cash.

Net cash generation* £m

Net cash generation* £m

During 2009, ARM generated deliver a reliable cash flow. licences and robust royalties £86 million of cash, compared to £95 million in 2008. The reduction in cash generation is primarily due to the decline in revenue.

Since 2004, ARM has returned over £360 million of cash to shareholders through a mixture of share buybacks and dividends.

Dividend p

Dividend p

Despite the decline in EPS,expectations of medium-term dividends in line with our the directors are proposing an increase in the full year dividend of 10% to 2.42p per EPS growth. share. This increase is based on the board’s confidence in ARM’s long-term growth prospects.


*Net cash generation is defined as movement on cash, cash equivalents, short-term investments and marketable securities, adding back share buybacks, dividend payments, investment and acquisition consideration, restructuring payments, other acquistion-related payments and share-based payroll taxes, and deducting inflows from share option exercises and proceeds from investment disposals. See page 20.