ARM Investor Relations website

ARM Investor Relations website

Print this page

Bookmark this Page

Financial review

ARM’s strong licensing momentum in 2009 was driven by our customers looking beyond the short-term downturn and into their future product development for sales in 2011 and beyond. ARM’s new processor products are taking our technology into new markets and ARM’s mainstream products are being deployed in a broadening range of applications.

Performance

The Group’s key financial performance indicators include dollar revenue, operating margin and earnings per share. Non-financial key performance indicators include the number of ARM-based chips sold and licences signed. These are discussed both as part of this review and in the “How we have performed in 2009” section on pages 5 to 8.

Revenues

Total revenues for the year ended 31 December 2009 amounted to £305.0 million (2008: £298.9 million). In US dollar terms, revenues were $489.5 million in 2009 compared to $546.2 million in 2008, a decrease of 10%; this is despite industry dollar revenues being down about 20% in the relevant period. Due to the significant strengthening of the US dollar in the second half of 2008 with only a partial rebound in 2009, the actual average dollar exchange rate for ARM revenues in 2009 was $1.60 compared to $1.83 in 2008. As a result, sterling revenue grew by 2% compared to the underlying US dollar revenue reduction.

Total licensing revenues in 2009 were £98.5 million, being 32% of total revenues, compared to £103.5 million or 35% of total revenues in 2008. In US dollars, total licensing revenues in 2009 were $164.1 million compared to $189.7 million in 2008, a decrease of 14%.

Royalty revenues in 2009 were £155.4 million, representing 51% of total revenues in the year, compared to £147.7 million or 49% of total revenues in 2008. Total royalty revenues in US dollars in 2009 were $244.3 million, down 8% from $266.8 million in 2008.

Sales of development systems in 2009 were £32.9 million, being 11% of total revenues, compared to £31.1 million, or 10% of total revenues in 2008. Development systems revenues in US dollars were down 11% in 2009 to $51.6 million from $57.8 million in 2008. Service revenues, which include consulting services and revenues from support, maintenance and training, were £18.2 million in 2009, representing 6% of total revenues, compared to £16.6 million, or 6% of total revenues in 2008. Service revenues in US dollars were down 8% at $29.5 million compared to $31.9 million in 2008.

Licensing revenues

Total licensing revenues for 2009 were £98.5 million, comprising £76.5 million from the Processor Division (PD) and £22.0 million from the Physical IP Division (PIPD). In US dollars, PD licensing revenues were $128.2 million (down 12% on $145.1 million in 2008) and PIPD was $35.9 million (down 20% on $44.6 million in 2008).

In 2009, we signed 87 licenses in PD, the highest number signed in a year, taking the total licence base to 662. The majority of the licences were for ARM’s advanced Cortex processors. ARM’s strong licensing momentum in 2009 was driven by our customers looking beyond the short-term downturn and into their future product development for sales in 2011 and beyond. ARM’s new processor products are taking our technology into new markets and ARM’s mainstream products are being deployed in a broadening range of applications. The licences signed in 2009 were for a broadening range of applications, both mobile and non-mobile, with approximately two-thirds of licences outside of the mobile market, in such areas as microcontrollers, storage and home entertainment.

During 2009 we signed eight platform licences for ARM’s physical IP that will drive future royalty revenues. ARM’s next generation physical IP development is proceeding well and 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.

Royalty revenues and unit shipments

Total royalty revenues for 2009 were £155.4 million, comprising £132.5 million (2008: £125.5 million) from PD and £22.9 million (2008: £22.2 million) from PIPD. Royalties in PD came from unit shipments by ARM licensees of 3.9 billion, down slightly compared to 4.0 billion chips in 2008 but compared to a significantly larger decline in the overall industry in the comparable period. Dollar royalty revenues earned in PD were $208.1 million, down 8% on 2008.

Royalties, similarly to licensing, came from a variety of market segments and ARM product families. For the last several years, approximately two-thirds of shipments have come from the mobile market, but we are beginning to see significant growth in non-mobile as ARM technology is beginning to ship in volume in consumer and embedded products. ARM7 and ARM9 still form the majority of all shipments but ARM11 has had significant year-on-year growth, albeit on smaller volumes, and Cortex has gained good traction in its early product releases.

The ARM content per device has also increased in 2009, with an average 2.1 ARM-based chips per mobile handset compared to 1.9 in 2008, predominantly resulting from growth in smartphones despite overall handset decline. The chips in smartphones are more advanced than regular phones, and as a result have a higher ASP and consequently yield a higher royalty to ARM.

Gross margin

Gross margin in 2009 was 91.6% compared to 89.0% in 2008. Cost of sales in 2009 includes compensation charges in respect of share-based payments and related payroll taxes of £1.7 million (2008: £1.1 million). Excluding these compensation charges, gross margin in 2009 was 92.2% (2008: 89.4%). The higher margin reflects both a greater share of total revenue from royalties, as well as a larger proportion of engineers’ costs being classified as operating expenses rather than cost of sales, resulting from more development work versus product customisation work being performed in PIPD.

Operating expenses

Over recent years, ARM has acquired a number of companies giving rise to the recognition of intangible assets other than goodwill. These are amortised over their expected useful lives, with the cost recorded against research and development, sales and marketing or general and administrative expenses as appropriate. In order to aid comparability, these costs have been separately identified as “acquisition-related charges” in the narrative below. In addition, the issuance of ARM share-based remuneration to employees of the Group gives rise to share-based payment charges. These are also separately identified in the narrative below.

Total net operating expenses in the year to 31 December 2009 were £233.9 million compared to £206.1 million in 2008. Operating expenses in 2009 include acquisition-related charges relating to amortisation of intangibles of £15.7 million (2008: £19.6 million), other acquisition-related charges of £0.4 million (2008: £0.4 million), impairment of available-for-sale investments of £0.2 million (2008: nil), restructuring charges of £8.5 million (2008: £1.9 million) and compensation charges in respect of share-based payments and related payroll taxes of £23.0 million (2008: £14.8 million). Excluding these charges, total operating expenses in 2009 were £186.2 million, compared to £169.5 million in 2008.

Research and development expenses in 2009 were £112.2 million, representing 37% of revenues. This compares to £87.6 million or 29% of revenues in 2008. Average headcount in this area increased to 1,141 in 2009 from 1,115 in 2008. Research and development expenses in 2009 include total acquisition-related charges of £7.7 million (2008: £11.1 million) and compensation charges in respect of share-based payments and related payroll taxes of £14.8 million (2008: £10.7 million). Excluding these charges, research and development expenses in 2009 were £89.7 million and £65.8 million in 2008, representing 29% and 22% of revenues respectively. The increase in costs is primarily as a result of the strengthening US dollar resulting in our US dollar cost base having a higher sterling equivalent, but also as a result of the classification of some engineering development costs as noted above.

Sales and marketing costs in 2009 were £61.7 million or 20% of revenues, compared to £57.4 million or 19% of revenues in 2008. Average headcount in this area decreased from 350 in 2008 to 334 in 2009. Sales and marketing costs in 2009 include total acquisition-related charges of £8.5 million (2008: £8.1 million) and compensation charges in respect of share-based payments and related payroll taxes of £4.7 million (2008: £2.0 million). Excluding these charges, sales and marketing costs in 2009 were £48.5 million and £47.4 million in 2008, representing 16% of revenues in both years.

General and administrative expenses in 2009 were £60.0 million or 20% of revenues, compared to £61.1 million or 20% of revenues in 2008. Average headcount in this area increased to 248 in 2009 from 246 in 2008. General and administrative expenses in 2009 include total acquisition-related charges of £nil (2008: £0.9 million), restructuring charges of £8.5 million (2008: £1.9 million), impairment of an available-for sale security of £0.2 million (2008: £nil) and compensation charges in respect of share-based payments and related payroll taxes of £3.5 million (2008: £2.1 million). Excluding these charges, general and administrative expenses in 2009 were £47.9 million, compared to £56.3 million in 2008 representing 16% and 19% of revenues respectively. The decrease in costs in this area mainly reflects the impact of accounting for derivative and other foreign exchange instruments which gave rise to a net charge in 2008 of approximately £3.0 million and a net credit in 2009 of £7.3 million.

Operating margin

The operating margin in 2009 was 15.0% compared to 20.1% in 2008. The operating margin in 2009, excluding acquisition-related charges of £16.2 million, restructuring charges of £8.5 million, impairment of an available-for sale security of £0.2 million and compensation charges in respect of share-based payments and related payroll taxes of £24.7 million was 31.2% compared to 32.7%, before acquisition-related charges of £20.0 million, restructuring charges of £1.9 million and compensation charges in respect of share-based payments and related payroll taxes of £15.9 million, in 2008.

Earnings and taxation

Profit before tax in 2009 was £47.3 million compared to £63.2 million in 2008. Profit before tax in 2009, excluding acquisition-related charges of £16.2 million, restructuring charges of £8.5 million, impairment of an available-for sale security of £0.2 million and compensation charges in respect of share-based payments and related payroll taxes of £24.7 million, was £96.8 million or 31.7% of revenues. This compares to £101.0 million, before acquisition-related charges of £20.0 million, restructuring charges of £1.9 million and compensation charges in respect of share-based payments and related payroll taxes of £15.9 million, or 33.8% of revenues in 2008.

The Group’s effective taxation rate in 2009 was 14.4%, compared to 31.0% in 2008. This decrease was primarily due to the accounting for tax on share-based payments in the respective years.

Fully diluted earnings per share in 2009 were 3.1 pence compared to 3.4 pence in 2008. Earnings per fully diluted share in 2009, before acquisition-related charges of £16.2 million, restructuring charges of £8.5 million, impairment of an available-for sale security of £0.2 million, compensation charges in respect of share-based payments and related payroll taxes of £24.7 million and related estimated tax adjustments thereon of £19.1 million, were 5.4 pence, compared to 5.7 pence before acquisition-related charges of £20.0 million, restructuring charges of £1.9 million, compensation charges in respect of share-based payments and related payroll taxes of £15.9 million and related estimated tax adjustments thereon of £8.5 million, in 2008.

Balance sheet and cash flow

Goodwill at 31 December 2009 was £516.8 million, compared to £567.8 million at 31 December 2008. The decrease in goodwill in 2009 is due primarily to foreign exchange movements, given the significant weakening of the US dollar against sterling from $1.46 at 31 December 2008 to $1.61 at the end of 2009. Goodwill is not amortised under IFRS but is subject to impairment review on at least an annual basis. The review performed in 2009 concluded that no impairment was required.

Other intangible assets at 31 December 2009 were £24.7 million, compared to £45.1 million at 31 December 2008. The movement in other intangible assets in 2009 primarily reflects amortisation of the intangible assets and foreign exchange movements as above. Further analysis can be found in note 17 to the financial statements. Other intangible assets are amortised through the income statement over their estimated useful lives to the Group.

Accounts receivable at 31 December 2009 were £65.2 million, compared to £76.9 million at 31 December 2008. The allowance against receivables was £2.4 million at 31 December 2009, compared to £1.7 million at 31 December 2008. Deferred revenues were £39.6 million at 31 December 2009, compared to £29.9 million at the end of 2008.

Resources available

The consolidated cash, cash equivalents, short-term investments and marketable securities balance was £141.8 million at 31 December 2009 compared to £78.8 million at 31 December 2008. The cash generative nature of the ARM business allowed the Group to grow its cash balance as well as making increased dividend payments in the year. Normalised cash generation for the Group in 2009 was £86.1 million (2008: £93.1 million).

Interest receivable
Net interest receivable was £1.6 million for 2009 compareto £3.2 million in 2008. The reduction is due to significantllower interest rates being only partially offset by the increased average cash balances held by the Group during the year.

Returns to shareholders

Dividend
The directors recommend payment of a final dividend in respect of 2009 of 1.45 pence per share which, taken together with the interim dividend of 0.97 pence per share paid in October 2009, gives a total dividend in respect of 2009 of 2.42 pence per share, an increase of 10% over 2.2 pence per share in 2008. Subject to shareholder approval, the final dividend will be paid on 19 May 2010 to shareholders on the register on 30 April 2010.

Total dividends actually paid in 2009 amounted to £29.0 million (2008: £26.4 million).

Share buyback programme
The Group initiated a rolling share-buyback programme in 2005 to supplement dividends in returning surplus funds to shareholders. Since inception, the Company has bought back 213 million shares (being 16% of issued share capital) at a total cost of £262 million.

No share buybacks were undertaken in 2009. The rolling authority to buy back shares given by the shareholders at the 2009 AGM remains in place and a resolution to authorise the directors to make purchases in appropriate circumstances will be proposed at the 2010 AGM.

Capital structure
The authorised share capital of the Company is 2,200,000,000 ordinary shares of 0.05 pence each (2008: 2,200,000,000). The issued share capital at 31 December 2009 was 1,344,055,696 ordinary shares of 0.05 pence each (2008: 1,344,055,696). As a result of the buyback programme, the Company owns 60,321,361 of its own shares at 31 December 2009 (2008: 91,160,488).

Treasury policies and objectives

The Group has established treasury policies aimed both at mitigating the impact of foreign exchange fluctuations on reported profits and cash flows and at ensuring appropriate returns are earned on the Group’s cash resources.

With more than 95% of Group revenues earned in US dollars and over 40% of Group costs being incurred in US dollars, the Group has a significant exposure to movements in the exchange rate between the US dollar and sterling. This exposure is partially mitigated by an ongoing hedging programme, involving forward contracts and option contracts where appropriate.

Principal risks and uncertainties

In line with the guidance for the preparation of an operating and financial review, the principal risk factors faced by the Group are identified in the “Trends, risks and opportunities” section on pages 24 to 25. Details of the Group’s internal control and risk management procedures are included in the Corporate Governance Report on pages 31 to 36.

Tim Score

Tim Score
Chief Financial Officer

Tim Score,
Chief Financial Officer

photo

Financial highlights 2009

$489.5m
Revenue
31.2%
Normalised operating margin
5.45p
Normalised diluted EPS
2.42p
Full year dividend
£86.1m
Net cash generation