Revenue growth and strong cash flow support continued strategic investments and initiation of dividend payments
CAMBRIDGE, UK , 27 January 2004—ARM Holdings plc [(LSE: ARM); (Nasdaq: ARMHY)] announces its unaudited financial results for the fourth quarter and twelve months ended 31 December 2003
Twelve months ended 31 December 2003
* 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 90% of invoicing is in dollars.
** The actual average dollar exchange rates were $1.71 in Q4 2003 (compared to the effective average rate for ARM of $1.68), $1.61 in Q3 2003, $1.64 in full year 2003 and $1.50 in full year 2002
*** Net cash generation is the movement in cash, cash equivalents and short-term investments as per the balance sheets at the beginning and end of the relevant periods
**** Each American Depositary Share (ADS) represents three shares
Commenting on the fourth quarter and full year results, Warren East, Chief Executive Officer, said:
"After resetting our cost base at the start of Q4 2002, 2003 has been a year of operational stability and gradually improving financial performance. Our decision to maintain high levels of research and development expenditure during the protracted industry downturn has enabled us to introduce a number of new products in the year based on the innovative technologies we have developed. These are already driving license revenue and underpin our confidence for revenue growth during 2004. ”
Tim Score, Chief Financial Officer, added:
“Careful management of our cost base has contributed to sequential improvements in profitability and good cash generation throughout the year. The cash generative nature of ARM’s business model enables us to address the significant opportunities for ongoing investment in future growth alongside the introduction of annual dividend payments.”
Market conditions, current trading and prospects
Activity levels in the semiconductor industry and recent industry data indicate more favourable trading conditions and an improved outlook for 2004. It remains uncertain, however, as to how quickly these improved conditions will feed through to sustained levels of higher licensing activity for ARM. In the meantime, the broadening of the ARM11 family of products and other new product introductions made in 2003 are expected to continue to result in incremental licensing opportunities for ARM in 2004.
In the fourth quarter, ARM maintained the higher level of licensing activity seen in the third quarter and achieved record royalty results, both in terms of revenues and unit shipments. As a consequence of the stronger licensing performance in the second half, the backlog (defined as the aggregate value of contracted business not yet recognised in the profit and loss account) at the end of 2003 was higher than at the start of the year and at a similar level to the end of Q3 2003.
With approximately 90% of ARM’s revenues being earned in US dollars and costs being predominantly sterling denominated, the ongoing weakness of the US dollar continues to impact our reported results. The effective average exchange rate in the fourth quarter was $1.68 compared to $1.59 in Q3, thereby having a negative impact of approximately £1.9 million on ARM’s Q4 revenues when translated into sterling.
The number of new products available for licensing and the momentum behind ARM’s royalty revenues give us confidence that 2004 will see meaningful year on year dollar revenue growth. In the short term, dollar revenues in the first quarter are expected to be similar to those achieved in the seasonally strong fourth quarter. If the recent further weakening of the US dollar against sterling persists, however, this will inevitably have a further negative impact on Q1 revenues when these are translated into sterling, and when compared with Q4 revenues.
Licensing and product development
The gradual pick up in licensing activity seen in Q3 continued in the fourth quarter. Taking into account the 16 licenses for microprocessor cores that were signed in Q4, a total of 51 licenses for microprocessor cores were signed in 2003, comprising 25 multi-use licenses and 26 per-use licenses. 26 new companies joined the ARM partnership in the year, bringing the total number of semiconductor partners at the end of 2003 to 128. Of the 26 new partners signed in 2003, 7 took multi-use licenses and 19 took per-use licenses.
Licensing opportunities in 2004 and beyond are underpinned by the introduction in 2003 of new products incorporating new technology features, including the TrustZone™ security extension, the Thumb®-2 extension for improved code density and Intelligent Energy Manager (IEM) hardware and software for low-power consumption. Two new ARM11 family cores, the ARM1156T2(F)-S™ and the ARM1176JZ(F)-S™ cores, which include a number of these new technology features, were launched in October 2003 and are available for licensing now with delivery scheduled for the first half of 2004. We are encouraged by the rate of adoption of ARM11 technology following delivery of the first ARM11 product just over one year ago. Seven partners have taken a total of ten licenses to date. In December 2003, ARM also announced a new ARM9™ family core for deeply embedded applications. The ARM968E-S™ core will be the smallest, lowest power, synthesizable ARM9E family core produced to date and whilst providing an ideal solution in particular for networking applications will also be appropriate for many applications in the automotive, consumer entertainment and wireless sectors.
The Foundry Programme continues to be a good entry point for those companies licensing ARM technology for the first time. We anticipate that the momentum behind this Programme will be maintained by the introduction, in the third quarter of 2003, of the ARM926EJ™ core into the Programme. Per-use design licensees are now able to have this product manufactured by two of our Foundry partners, TSMC and UMC.
Revenues from non-CPU licensing, which comprised 17% of total license revenues in 2003 compared to 15% in 2002, are now earned from a broad range of activities. As well as licensing platforms, models, application software and other peripheral IP products, revenues are now being earned from our strategic collaborations with both Superscape Group plc, the interactive 3D technology enabling specialist in which ARM holds a 12% equity interest and Imagination Technologies, the developer of 3D graphics technology. Further, ARM is now offering through the Foundry Programme, a more complete design package, the ARM926EJ Prime Starter Kit, which includes the core and a new PrimeXsys™ Platform, offering OEM’s and fabless design houses access to the first Jazelle® technology-enabled ARM core along with a platform for shortening design time-to-market. The Prime Starter Kit has already been licensed three times, including the recently announced license with Shanghai Jade Technologies Co. Ltd, a leading developer of digital content processors in China . Shanghai Jade will use the technology for next-generation products for the Chinese consumer, communication and computing markets.
In July 2003, we acquired Adelante Technologies N.V., now known as ARM Belgium , as part of our strategy to develop new revenue from embedded signal and data processing IP. The embedded signal processing market, driven by the demand for ever more sophisticated multimedia and networking communications, continues to grow in significance and size. However, the rapidly changing technology demands can often no longer be efficiently serviced using conventional signal processing approaches. ARM Belgium , in collaboration with other ARM divisions, is developing the OptimoDETM product to address this growing market demand. The OptimoDE product, which comprises a configurable data engine (signal processor) architecture together with related IP and tools, will be deployed in systems alongside existing ARM microprocessor cores and other ARM system IP. Product development is on schedule and is yielding results that exceed initial expectations.
Acquisition of Triscend Corporation
ARM has entered into an agreement to acquire Triscend Corporation, a company specializing in ARM core-based microcontrollers, for cash consideration of $13.2 million plus further cash consideration of up to a maximum of $1.8 million depending on the achievement of certain revenue targets in the first twelve months after completion of the acquisition. Completion of the acquisition is subject to the fulfillment of certain conditions including approval by the shareholders of Triscend. Triscend is based in Mountain View, California and currently has 41 employees.
We view the microcontroller market as a key emerging market for ARM and our partners. We see the adoption of 32-bit microcontrollers happening rapidly as engineers move to higher performance designs. Following the acquisition of Triscend, we will seek to accelerate the proliferation of ARM as the architecture of choice for these next-generation, 32-bit microcontrollers by introducing a new partner programme which will offer a seamless migration path to take mature designs into ARM’s partners’ standard product and ASIC progammes for high volume applications and by selling configurable microcontrollers to OEM’s for emerging market applications.
Royalty revenues and unit shipments
Royalty revenues earned in 2003 were £44.3 million on 782 million units shipped, up 65% and 71% respectively on 2002. Royalty revenues recognised in the quarter ended 31 December 2003 (we receive and report royalty data one quarter in arrears) were £12.8 million on 236 million units shipped, up 64% and 86% respectively on the same period a year ago. A further five partners began shipping ARM core-based products in the quarter to 30 September 2003, bringing the total number of licensees shipping to 60. Average royalty rates reported in the fourth quarter were similar to those in the previous quarter (9.15 cents per unit compared to 9.17 cents). Of the total reported unit shipments in the fourth quarter, 15% related to units based on ARM9 technology. The increasingly widespread penetration of ARM technology is illustrated by unit shipments across segments other than wireless growing at the same rate as shipments in the wireless sector. Indeed, in the third quarter our partners shipped some 80 million units into end markets other than wireless. The wireless market remained the largest end market using ARM technology in the third quarter, accounting for approximately 66% of unit shipments.
Lawrence Tesler will be retiring from the Board at the Annual General Meeting on 26 April 2004, having served two three year terms as a non-executive director. With his strong technology background and industry experience, he has made a significant contribution over the past 6 years, which the Board has greatly appreciated.
It is intended that Jeremy Scudamore who is CEO of Avecia Group (formerly the specialty chemicals business of Zeneca) be appointed as a non-executive director of the company immediately following the Annual General Meeting on 26 April 2004. He has considerable international business experience and will bring a broad range of skills to the Board that extend beyond the semiconductor industry. Mr Scudamore was a director of Cyprotex plc from December 2001 until February 2003 but otherwise has not held any directorship in any other publicly quoted companies at any time in the previous five years. There is no information in 6F.2(b) to (g) of the Listing Rules of the UK Listing Authority that is required to be disclosed in relation to Mr Scudamore.
At the end of 2003 we had 740 full time employees compared to 721 at the end of 2002, the net increase being primarily due to the addition of 25 people with the acquisition of ARM Belgium in July.
In May 2002, Nazomi Communications Inc. filed a lawsuit against ARM claiming that the ARM Jazelle technology infringes Nazomi’s US patent number 6,332,215. In February 2003, ARM’s motion for partial summary judgement on non-infringement was heard and in May 2003 the “Markman” hearing (which is a proceeding to determine the scope of the patent claims at issue) took place. On 30 September 2003, the ruling on the partial summary judgement was issued, favouring ARM and ruling that products using the current commercial design of the ARM Jazelle technology do not infringe on Nazomi’s patent. Nazomi have appealed the ruling and the appeal is expected to be heard towards the end of 2004. ARM is confident that the original ruling will be upheld on appeal.
As part of the out of court settlement of a patent infringement lawsuit against picoTurbo Inc. in December 2001, ARM agreed to invest or otherwise pay the sum of $3,025,000 in cash with respect to a newly incorporated fabless semiconductor company that picoTurbo’s shareholders planned to set up to sell ARM microprocessor cores under license from ARM. The amount was disclosed as a contingent liability in ARM’s 2001 and 2002 statutory accounts. ARM originally expected that the new company would be incorporated and commence operations during 2002 following agreement of an appropriate business plan and a satisfactory investment agreement to protect the value of ARM’s investment. To date, ARM has not received the relevant documentation, but in spite of this, Herodion (picoTurbo’s successor entity) has alleged, among other things, that ARM is required to pay the $3,025,000. Herodion claims, among other things, that ARM has breached the December 2001 settlement agreement and now seeks damages in compensation, including compensation for loss of license revenue and royalty payments. In an attempt to resolve these issues, ARM and Herodion submitted the dispute to arbitration in California . The outcome of the arbitration, which took place in January 2004, is expected in the first quarter of this year.
The protection of our intellectual property and the growth of our patent portfolio are key priorities for the business. We have patent families for 322 inventions covering the broad scope of our activities and which comprise, to date, 290 issued patents and 676 patent applications around the world. In 2003 we filed twice as many patents as in 2002 and we anticipate that the rate of patent filing will continue to increase in 2004.
( US GAAP unless otherwise stated)
Fourth quarter ended 31 December 2003
Total revenues for the fourth quarter ended 31 December 2003 amounted to £34.0 million, representing a 7% increase from £31.7 million in the third quarter of 2003, and a 5% increase over fourth quarter 2002 revenues of £32.3 million. In US dollar terms*, fourth quarter revenues of $57.0 million were 13% up on Q3 2003 and 13% up on Q4 2002. The effective US dollar to sterling exchange rate in Q4 2003 was $1.68 compared to $1.59 in Q3 2003 and $1.56 in Q4 2002.
License revenues amounted to £12.9 million representing 38% of revenues compared to £13.1 million or 41% of revenues in the third quarter of 2003 and £15.8 million or 49% of revenues for the corresponding period in 2002. In US dollar terms*, license revenues of $21.5 million in Q4 2003 were 3% ahead of Q3 2003 ($20.9 million). We signed 16 licenses with partners during the fourth quarter of 2003, nine of which were with new partners, bringing the total number of semiconductor partners to 128, after taking into account two per-use licensee partners who have been acquired by other semiconductor companies and one company which had signed a license in previous periods but which is not utilising the license and no longer has access to ARM technology. Of the new partners, one took a license for the ARM7TDMI-S™ core, one took a license for the ARM968E-S core, three took per-use licenses for the ARM7TDMI® core, two took per-use licenses for the ARM926EJ core (as part of a Prime Starter Kit) and two took per-use licenses to the ARM922T™ core. Five existing partners took seven further licenses in the quarter. There were two upgrades, where existing partners took licenses to a new family of cores that they had not previously licensed. One of these took a per-use license for the ARM926EJ core and one took a term license for the ARM926EJ-S™ core. There were four derivatives, where an existing partner took licenses to cores within a family of cores that they had previously licensed. One partner took per-use licenses for the ARM946E™ and ARM922T cores, one took a per-use license to the ARM926EJ core (as part of a Prime Starter Kit) and one took a term license for ARM1176JZ(F)-S™. One per-use partner took a license to further uses of the same core that that it had previously licensed.
Royalty revenues in the fourth quarter were £12.8 million accounting for 38% of revenues compared to £11.0 million or 35% of revenues in the third quarter of 2003 and £7.8 million or 24% of revenues for the corresponding period in 2002. Sales of development systems were £4.0 million, representing 12% of total revenues compared to £4.1 million or 13% of total revenues in the third quarter of 2003 and £4.4 million or 14% of revenues in the fourth quarter of 2002. Service revenues were £4.3 million, representing 12% of total revenues, comprising consulting fees of £0.6 million and support, maintenance and training fees of £3.7 million compared to total service revenues of £3.5 million in the third quarter of 2003 and £4.3 million for the corresponding period in 2002.
Gross margins for the fourth quarter were 91%, down from 92% in Q3 2003, reflecting the increased proportion of license revenues earned from our strategic relationships with Imagination Technologies and Superscape. The share of revenues attributable to Imagination and Superscape is accounted for within cost of revenues. The total amount of revenue recognised in the fourth quarter from these relationships was £1.6 million.
Total operating expenses in the quarter were £23.2 million compared to £23.6 million in the third quarter of 2003 and £23.5 million (excluding restructuring costs of £2.0 million) in Q4 2002.
Research and development expenses were £11.4 million in the fourth quarter of 2003 representing 34% of revenues. This compares to £12.7 million or 40% of revenues in the third quarter of 2003. The decrease is due primarily to the reversal of an accrual for bonus payments and a reduction in the cost of electronic design automation tools in the quarter. Sales and marketing costs for the fourth quarter were £6.0 million or 18% of revenues compared to £5.9 million or 19% of revenues in the third quarter of 2003. General and administration expenses increased from £5.0 million (16% of revenues) in the third quarter of 2003 to £5.8 million (17% of revenues) in the fourth quarter. General and administrative expenses have increased in the fourth quarter due to accrued legal costs, the recording of unrealised future foreign exchange losses on certain committed but not yet invoiced future revenue streams in accordance with SFAS 133 and a charge in respect of the accelerated amortization of intangible assets being only partially offset by a one-off credit arising from the restructuring of ARM Belgium’s defined benefit pension scheme.
Operating margins were 22.3% for the fourth quarter of 2003 compared to 17.7% for the third quarter of 2003, reflecting the increased revenues in the quarter.
Interest receivable in the fourth quarter rose slightly to £1.3 million, reflecting the higher average cash balances in the quarter.
Earnings and taxation
Income before income tax for the fourth quarter of 2003 was £8.9 million or 26.3% of revenues compared to £6.8 million or 21.6% of revenues in the third quarter of 2003 and £5.5 million or 17.2% of revenues in the fourth quarter of 2002.
Fourth quarter fully diluted earnings per share prepared under US GAAP were 0.6 pence (3.1 cents per ADS) compared to 0.4 pence (1.7 cents per ADS) for the corresponding period in 2002 and 0.5 pence (2.3 cents per ADS) in the third quarter of 2003.
Net cash inflow from operating activities of £13.0 million was generated in the fourth quarter, measured under UK GAAP. Cash, cash equivalents and short term investments increased by £8.4 million in the quarter to £159.8 million.
Twelve months ended 31 December 2003
Total revenues for the twelve months ended 31 December 2003 amounted to £128.1 million, a decrease of 15% from total revenues of £150.9 million in the twelve months ended 31 December 2002. The actual average dollar exchange rate in 2003 was $1.64 (compared to the effective average exchange rate for ARM of $1.61) compared to $1.50 in 2002. This has had the effect of reducing total reported revenues by approximately £9.6 million.
Licensing revenues in 2003 were £50.8 million, being 40% of total revenues, compared to £83.0 million or 55% of total revenues, in the twelve months to 31 December 2002. Royalty revenues were £44.3 million, representing 34% of total revenues, in the twelve months to 31 December 2003, compared to £26.8 million or 18% of total revenues, in the twelve months to 31 December 2002. Sales of development systems were £17.9 million, being 14% of total revenues, in 2003 compared to £23.1 million or 15% of total revenues, in 2002. Service revenues, which include consulting services and revenues from support, maintenance and training, were £15.1 million in 2003, representing 12% of total revenues compared to £18.0 million or 12% of total revenues, in 2002.
Gross margins for the twelve months to 31 December 2003 were 91%, the same level as in 2002.
Total operating expenses in 2003 were £93.4 million compared to £94.5 million in 2002 (net of restructuring costs of £2.0 million).
Research and development expenses in 2003 were £48.1 million, representing 38% of revenues compared to £47.3 million or 31% of revenues, in 2002. Sales and marketing costs decreased from £24.7 million or 16% of revenues in the twelve months to 31 December 2002 to £23.0 million or 18% of revenues in 2003. General and administration expenses were £22.3 million or 17% of revenues in the twelve months to 31 December 2003, compared to £22.5 million or 15% of revenues, in 2002.
Operating margins decreased from 27.4% in the twelve months to 31 December 2002 to 18.5% for 2003 when measured under US GAAP.
Interest receivable was £4.8 million for the twelve months to 31 December 2003 compared to £4.4 million in 2002, reflecting the benefit of higher average cash balances in 2003.
Earnings and taxation
For the twelve months ended 31 December 2003, income before income tax under US GAAP was £28.4 million or 22.1% of revenues compared to £45.4 million or 30.1% of revenues in the twelve months ended 31 December 2002. Under UK GAAP profit before taxation was £29.6 million or 23.1% of revenues compared to £45.5 million or 30.1% of revenues in the twelve months ended 31 December 2002.
The group’s taxation rate under US GAAP increased from 30.3% in the twelve months to 31 December 2002 to 31.5% in the full year 2003 due primarily to the impact of certain non-cash accounting charges not being deductible for tax purposes being only partially offset by the availability of research and development tax credits in the UK for a full year. The group’s taxation rate under UK GAAP in 2003 is 26.9%, reduced from 28.6% in 2002, due mainly to research and development tax credits being available for a full year compared to being available for 9 months in the previous period.
Fully diluted earnings for the year ended 31 December 2003 under US GAAP were 1.9 pence per share (10.1 cents per ADS) compared to 3.1 pence per share (15.0 cents per ADS) for the year ended 31 December 2002.
Net cash inflow from operating activities of £43.7 million was generated in the year, measured under UK GAAP. Cash, cash equivalents and short term investments increased by £29.5 million to £159.8 million at 31 December 2003.
Accounts receivable decreased to £17.3 million at 31 December 2003 from £19.5 million at 30 September 2003. The allowance against receivables decreased to £1.1 million at 31 December 2003 compared to £1.6 million at the end of September. Deferred revenues were £11.1 million at 31 December 2003 compared to £13.5 million at the end of the third quarter.
As noted in previous earnings releases, the Board reviews uses of the group’s cash resources on an ongoing basis. In light of the group’s strong financial position and the cash generative nature of its business, the directors intend to introduce an annual dividend commencing with effect from the 2003 financial year. This will enable us to use our strong cash generation to return cash to shareholders while maintaining significant investment in research and development and satisfying the ongoing capital requirements of the business.
Recognising that ARM has significant opportunities to invest in the business, both organically and via “bolt-on” acquisitions, the directors recommend a combined interim and final dividend in respect of the year to 31 December 2003 of 0.6 pence per share which, subject to approval at the Annual General Meeting on 26 April 2004, will be paid on 7 May 2004 to shareholders on the register at 2 April 2004.
From 2004 onwards, the directors intend that an interim dividend will be paid in October of each year (commencing in October 2004) and a final dividend will be paid in May of each year (commencing in May 2005). The interim dividend is likely to represent approximately 40% of the total dividend for the year. On this basis, the interim dividend for 2003 would have been 0.25 pence and the final dividend 0.35 pence.
The Board intends to adopt a progressive dividend policy which will take into account both the opportunity for continued investment in the business going forward and the underlying operational performance of the group.
Sarah Marsland/ Juliet Clarke
ARM Holdings plc
+44 (0) 207 831 3113
+44 (0)1223 400 432
ARM is the industry’s leading provider of 16/32-bit embedded RISC microprocessor solutions. ARM licenses its high-performance, low-cost, power-efficient RISC processors, peripherals, and system-on-chip designs to leading electronics companies. The company also provides comprehensive support required in developing a complete system. ARM's microprocessor cores are rapidly becoming a volume RISC standard in applications such as automotive, consumer entertainment, security, imaging, industrial, mass storage, networking and wireless.
ARM, ARM7TDMI, Thumb and Jazelle are registered trademarks of ARM Limited. ARM7TDMI-S, ARM9, ARM9E, ARM922T, ARM926EJ, ARM926EJ-S, ARM946E, ARM968E-S, ARM11, ARM1156T2-S, ARM1156T2F-S, ARM1176JZ-S, ARM1176JZ(F)-S, TrustZone, PrimeXsys and OptimoDE 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 KK, ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS, ARM Consulting(Shanghai) Co.Ltd and ARM Belgium N.V.
This announcement contains “forward-looking statements” including statements concerning plans, future events or performance and underlying assumptions and other statements which are other than statements of historical fact. The Company’s actual results for future periods may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. The factors that could cause actual results to differ materially include, without limitation, potential for significant fluctuation in and unpredictability of results, the ability of semiconductor partners to manufacture and market microprocessors based on the ARMÒarchitecture; the acceptance of ARM technology by systems companies; the availability of development tools, systems software and operating systems; the rapid change in technology in the industry and ARM’s ability to develop new products in a timely manner; management of growth; competition from other architectures; general business and economic conditions; the growth in the semiconductor industry; the Company’s ability to protect its intellectual property; and ARM’s ability to attract and retain employees.
The financial tables included within this preliminary annoucement were subsequently amended prior to the 2003 audit report being issued as a result of the settlement of all outstanding issues with Herodion, as detailed in the announcement on 19 March 2004. The amended financial tables, detailing results extracted from the audited financial statements for the year ended 31 December 2003, can be found with the 19 March 2004 announcement
More information on ARM is available at http://www.arm.com