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ARM Holdings PLC Reports Results For The Second Quarter And Half Year Ended 30 June 2015

22 July 2015

ARM HOLDINGS PLC REPORTS RESULTS FOR THE SECOND QUARTER AND HALF YEAR ENDED 30 JUNE 2015

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

 

CAMBRIDGE, UK, 22 July 2015 — ARM Holdings plc [(LSE: ARM); (NASDAQ: ARMH)] announces its unaudited financial results for the second quarter and half year ended 30 June 2015

Q2 2015 – Financial Summary

Normalised*

IFRS

Q2 2015

Q2 2014

% Change

Q2 2015

Q2 2014

% Change

Revenue ($m)

357.1

309.6

15%

357.1

309.6

15%

Revenue (£m)

228.5

187.1

22%

228.5

187.1

22%

Operating expenses (£m)

99.3

87.7

13%

127.3

113.4

12%

Operating margin

52.9%

48.9%

40.4%

34.9%

Profit before tax (£m)

123.9

94.2

32%

94.7

68.0

39%

Earnings per share (pence)

7.28

5.43

34%

5.42

3.91

39%

Net cash generation (£m) **

93.3

86.7

Effective revenue fx rate ($/£)

1.56

1.65

H1 2015 – Financial Summary

Normalised*

IFRS

H1 2015

H1 2014

% Change

H1 2015

H1 2014

% Change

Revenue ($m)

705.2

614.8

15%

705.2

614.8

15%

Revenue (£m)

456.0

373.7

22%

456.0

373.7

22%

Operating expenses (£m)

199.3

171.9

16%

242.7

215.0

13%

Operating margin

52.3%

49.7%

42.5%

37.9%

Profit before tax (£m)

244.4

191.3

28%

198.1

146.0

36%

Earnings per share (pence)

14.40

11.02

31%

11.40

8.30

37%

Net cash generation (£m) **

161.8

126.7

Effective revenue fx rate ($/£)

1.55

1.64

 

*

Normalised figures are based on IFRS, adjusted for acquisition-related charges, share-based payment costs, restructuring charges, Linaro-related charges, share of results of joint venture, intangible amortisation, and profit/(loss) on disposal of investments net of impairment. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document, see notes 11.8 to 11.11.

**

Net cash generation is defined as movement on cash, cash equivalents, short-term and long-term deposits and similar instruments, adding back dividend payments and share buy-backs, investment and acquisition consideration, other acquisition-related payments, restructuring payments, share-based payroll taxes, investment in and loans to joint venture, payments to Linaro, and deducting inflows from share option exercises – see notes 11.3 to 11.7.

Q2 2015 Financial Summary

· Group revenues in US$ up 15% year-on-year (£ revenues up 22% year-on-year)

· Processor licensing revenue in US$ up 3% year-on-year

· Processor royalty revenue in US$ up 31% year-on-year

· Normalised profit before tax and earnings per share up 32% and 34% year-on-year respectively

· Interim dividend increased by 25%

Progress on key growth drivers in Q2

· Growth in adoption of ARM® processor technology

o Record 54 processor licences signed for a broad range of applications, from biometric sensors for mobile payments to automotive engine control

· Maintained momentum in licensing of advanced technology, underpinning future royalty revenue growth

o 1 new subscription licence signed with a major Chinese OEM

o 7 ARMv8-A processor licences signed, including three lead licences for next-generation processors

o 9 Mali™ multimedia processor licences signed, including three licences for future technology

o 5 POP IP licences signed, including one for a future processor optimised for a FinFET process

· Growth in shipments of chips based on ARM technology

o 3.4 billion ARM-based chips shipped, up 26% year-on-year

o Strong year-on-year growth for chips going into mobile devices, enterprise infrastructure and embedded applications such as microcontrollers, smart sensors and secure smartcards.


Outlook

ARM enters the second half of 2015 with a robust pipeline of opportunities for licensing. Available industry data for the second quarter, being the shipment period for ARM’s Q3 royalties, points to a small sequential increase in industry revenues. Royalty revenue can grow faster than the overall industry due to increasing royalty per chip in mobile devices, and share gains beyond mobile. Assuming macroeconomic uncertainty does not further impact consumer spending we expect overall Group dollar revenues for full year 2015 to be in-line with current market expectations.

 

Simon Segars, Chief Executive Officer, said:

“Q2 2015 has been a strong quarter for ARM with a highly diverse range of leading companies choosing to license ARM’s latest processors and physical IP for their future product developments. ARM has been investing in advanced technology products for mobile devices, automotive applications and enterprise infrastructure, and in Q2 ARM signed licences for many of these new products. This licensing activity will help to grow the royalty revenue opportunity for years to come.

As the addressable market for ARM technology grows, we continue to invest in the development of innovative products to support long-term returns for shareholders.”

 

Q2 2015 – Revenue Analysis

Revenue ($m)***

Revenue (£m)

Q2 2015

Q2 2014

% Change

Q2 2015

Q2 2014

% Change

Technology Licensing

Processors

129.5

125.8

3%

82.2

77.0

7%

Physical IP

21.5

20.3

6%

13.6

12.6

8%

Total Technology Licensing

151.0

146.1

3%

95.8

89.6

7%

Technology Royalty

Processors

158.9

121.2

31%

102.5

71.8

43%

Physical IP

17.0

14.3

18%

11.0

8.5

29%

Total Technology Royalty

175.9

135.5

30%

113.5

80.3

41%

Software and Tools

13.7

13.2

4%

8.8

8.0

11%

Services

16.5

14.8

11%

10.4

9.2

13%

Total Revenue

357.1

309.6

15%

228.5

187.1

22%

H1 2015 – Revenue Analysis

Revenue ($m)***

Revenue (£m)

H1 2015

H1 2014

% Change

H1 2015

H1 2014

% Change

Technology Licensing

Processors

238.8

237.3

1%

153.2

146.6

5%

Physical IP

45.5

38.7

18%

29.2

23.9

22%

Total Technology Licensing

284.3

276.0

3%

182.4

170.5

7%

Technology Royalty

Processors

326.4

249.3

31%

212.6

148.7

43%

Physical IP

34.1

30.7

11%

22.4

18.4

22%

Total Technology Royalty

360.5

280.0

29%

235.0

167.1

41%

Software and Tools

28.4

29.3

-3%

18.4

17.7

4%

Services

32.0

29.5

8%

20.2

18.4

9%

Total Revenue

705.2

614.8

15%

456.0

373.7

22%

***

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. Over 95% of invoicing is in dollars.

Includes a deduction, recognised in Q1 2014, of $5 million for prior years’ royalties over-reported to ARM by a customer.

Contacts:

Sarah West/Ben Fry                                                       Ian Thornton/Phil Sparks

Brunswick                                                                        ARM Holdings plc

+44 (0)207 404 5959                                                     +44 (0)1628 427800


Board Appointments

On 8 January 2015, ARM announced the appointment of Chris Kennedy as Director and CFO. Chris will join ARM on 1 September 2015.

 

Financial review

(IFRS unless otherwise stated)

 

Total revenues

Total dollar revenues in Q2 2015 were $357.1 million, up 15% versus Q2 2014. Q2 sterling revenues of £228.5 million were up 22% year-on-year.

Half-year dollar revenues in 2015 amounted to $705.2 million, up 15% on H1 2014.

 

Licence revenue

Total dollar licence revenues in Q2 2015 increased by 3% year-on-year to $151.0 million, representing 42% of Group revenues. Licence revenues comprised $129.5 million from processor licences and $21.5 million from physical IP licences. Following multiple periods of accelerated licence revenue growth (29% compound annual growth in the five years 2010-2014), in-line with previous guidance, we continue to expect licence revenue growth of 5-10% per annum in the medium term.

Group order backlog at the end of Q2 2015 was up 2% sequentially. Based on the medium-term outlook for licence revenue growth, we expect quarterly sequential movements of backlog to be lumpy.

 

Royalty revenues

Total dollar royalty revenues in Q2 2015 were up 30% on Q2 2014 at $175.9 million, representing 49% of Group revenues. Relevant industry revenues were up 4% over the corresponding shipment period (i.e. calendar Q1 2015 compared to calendar Q1 2014).

Royalty revenues comprised $158.9 million from processors and $17.0 million from physical IP. Processor dollar royalty revenues were up 31% year-on-year reflecting the expected acceleration in growth following a period of inventory management by consumer electronics OEMs in 2014. Physical IP royalty revenue increased 18% year-on-year.

 

Other revenues

Sales of software and tools in Q2 2015 were $13.7 million, an increase of 4% year-on-year. Service revenues were $16.5 million in Q2 2015, up 11% year-on-year. Together revenues from software and tools and services represented 9% of Group revenues.

 

Gross margins

Normalised gross margins in Q2 2015 were 96.3% compared to 95.6% in Q1 2014 and 95.8% in Q2 2014.

 

Operating expenses and operating margin

Normalised income statements for Q2 2015, H1 2015, Q2 2014 and H1 2014 are included in notes 11.8 to 11.11 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release. Non-GAAP measures have been presented as we believe that they allow a clearer comparison of operating results.

Normalised operating expenses were £99.3 million in Q2 2015 compared to £100.0 million in Q1 2015 and £87.7 million in Q2 2014. Normalised operating expenses in Q2 2015 included a credit of £4.5 million relating to the revaluation of monetary items due to changes in foreign exchange rates, and the impact of a weaker dollar on the accounting for derivative instruments. Normalised operating expenses in Q3 2015 (assuming effective exchange rates similar to current levels) are expected to be in the range £106-108 million as we continue to invest in our research and development teams and in our business infrastructure. As with previous years, the sequential increase in normalised operating expenses tends to be higher in Q3 as that is the quarter when the majority of our graduate intake joins the Group.

Normalised operating margin was 52.9% in Q2 2015, compared to 51.7% in Q1 2015 and 48.9% in Q2 2014.

Normalised research and development expenses were £51.1 million in Q2 2015, representing 22% of revenues, compared to £47.8 million in Q1 2015 and £39.7 million in Q2 2014. Normalised sales and marketing expenses were £21.1 million in Q2 2015, being 9% of revenues, compared to £21.6 million in Q1 2015 and £19.8 million in Q2 2014. Normalised general and administrative expenses were £27.1 million in Q2 2014, representing 12% of revenues, compared to £30.6 million in Q1 2015 and £28.2 million in Q2 2014.

Total IFRS operating expenses in Q2 2015 were £127.3 million (Q2 2014: £113.4 million) including share-based payment costs and related payroll taxes of £17.4 million (Q2 2014: £14.3 million), and amortisation of intangible assets, other acquisition-related charges, impairment of investments and Linaro-related charges of £10.6 million (Q2 2014: £3.0 million). Additionally in Q2 2014 there was a restructuring charge of £8.4 million that did not reoccur in Q2 2015.

Total share-based payment costs and related payroll tax charges of £17.9 million in Q2 2015 were included within cost of revenues (£0.5 million), research and development (£11.8 million), sales and marketing (£3.0 million) and general and administrative (£2.6 million).

 

Earnings and taxation

Normalised profit before tax in Q2 2015 was £123.9 million compared to £94.2 million in Q2 2014. After including acquisition-related and share-based payment costs, intangible amortisation, restructuring charges, Linaro-related charges and share of results of joint ventures, IFRS profit before tax was £94.7 million in Q2 2015 compared to £68.0 million in Q2 2014.

The Group's effective normalised tax rate was 16.4% in Q2 2015 (IFRS: 18.6%). ARM’s full-year normalised effective tax rate in 2015 is expected to be about 16%.

In Q2 2015, normalised fully diluted earnings per share were 7.28 pence (34.36 cents per ADS[1]) compared to 5.43 pence (27.83 cents per ADS) in Q2 2014. IFRS fully diluted earnings per share in Q2 2015 were 5.42 pence (25.56 cents per ADS) compared to earnings per share of 3.91 pence (20.06 cents per ADS) in Q2 2014.

 

Balance sheet

Intangible assets at 30 June 2015 were £650.2 million, comprising goodwill of £569.3 million and other intangible assets of £80.9 million, compared to £567.0 million and £77.2 million respectively at 31 December 2014.

Total accounts receivable were £142.7 million at 30 June 2015, compared to £138.6 million at 31 December 2014.

 

Cash flow and interim dividend

Net cash generation in Q2 2015 was £93.3 million. Net cash at 30 June 2015 was £903.8 million compared to £861.7 million at 31 December 2014.

In respect of the year to 31 December 2015, the directors are declaring an interim dividend of 3.15 pence per share, an increase of 25% over the 2014 interim dividend of 2.52 pence per share. This interim dividend will be paid, out of the UK GAAP distributable reserves of ARM Holdings plc, on 5 October 2015 to shareholders on the register on 4 September 2015.

Since February 2014, ARM has undertaken a limited share buyback programme with the objective of maintaining a flat share count over time. In this context, the Group bought back 4.0 million shares in Q2 2015 at a total cost of £45 million.

 

Technology Licensing

 

Processor licensing

Fifty-four processor licences were signed in Q2 2015. This is a record number for licences signed in a quarter, and reflects the strong demand for ARM’s latest technology across a diverse range of end markets and customers.

During Q2 ARM signed a subscription licence with a major Chinese OEM. A subscription licence gives the customer access to multiple ARM processors helping them to deploy ARM technology across their product lines.

Fifteen of the licences signed were for ARM’s Cortex-A series processors. As well as mobile devices and enterprise infrastructure, Cortex-A processors are increasingly being deployed as embedded computers into Internet of Things (IOT) applications. In Q2 this included adding the intelligence into industrial controls systems and image sensors going into medical equipment. Seven of these Cortex-A series processors were ARMv8-A including three licences for the next generation “Artemis” processor.

ARM also signed nine licences for its Mali multimedia processors, mainly for use in mobile and consumer electronics. Four of these licences were for Mali graphics processors, including two for next generation products, and five licences were for Mali display and video technologies, including one for a next generation video processor.

Eight licences were signed for Cortex-R class processors. These included an additional licence for “Kite”, the first ARMv8-R class processor, which is designed for advanced real-time embedded systems such as safety-related automotive applications.

Twenty of the licences signed in Q2 were for Cortex-M class processors for use in technologies required for the Internet of Things; microcontrollers, biometric sensors and low-power wireless communication chips. This included two licenses for “Grebe” the next generation of processor design for energy-efficient and secure embedded applications.

Over recent years, ARM has seen increasing interest from OEMs wanting to take more control over the chips going into their products, including licensing ARM technology. In Q2, five major OEMs licensed ARM technology for their future products.

 

Q2 2015 and Cumulative Processor Licensing Analysis

Existing Licensees

New Licensees

Quarter Total

Cumulative Total†

Classic ARM*

1

1

527

Cortex-A

13

2

15

223

Cortex-R

5

3

8

59

Cortex-M

14

6

20

318

Mali

9

9

118

Architecture

18

Subscription**

1

1

17

Total

42

12

54

1,280

* Includes ARM7, ARM9, ARM10 and ARM11

** Includes CPU and Mali subscription licences

Includes all extant licences that are expected to generate royalties

 

Physical IP licensing

During the quarter ARM saw continuing demand for physical IP optimised for use with processors (POP IP). POP IP enables a licensee to more readily achieve high-performance, low-power processor implementations through specially optimised physical IP technology. For every chip implemented using POP IP, ARM receives a royalty both for the processor in the chip and for the physical IP. This quarter ARM signed five further licences, including a licence for POP IP that will optimise ARM’s next generation “Artemis” processor on a FinFET manufacturing process.

 

Technology Design Wins and Ecosystem Development

Many leading technology companies have announced details of their ARM processor-based product developments in recent months. These included:

· Barcelona Supercomputing Center announcing that its “inexpensive” ARM-based High Performance Computers are now fully-operational and made available to scientific community across Europe

· PayPal releasing information demonstrating the benefits of using ARM based servers with a 50% reduction in capex, an 85% reduction in running costs and a 10-fold increase in server density compared to traditional data center equipment

· At Computex, Cavium announcing server platforms from ASUS, Gigabyte and Wiwynn using Cavium’s ARM-based server Thunder-X chip

· The BBC revealing the Micro Bit, a pocket sized computer, based on the ARM Cortex-M0, that will be incorporated into school lessons for one million year 7 students across the UK

· Renesas introducing the Synergy family of ARM-based microcontrollers which are designed to make it easier to create Internet of Things devices

· In addition, Renesas introducing new ASSPs targeting industrial IOT where there is a trend toward increased connectivity, autonomous and interactive machines, and flexible manufacturing to improve operation and reduce costs.

Many more partner announcements can be found on the ARM website at www.arm.com/news.

 

Technology Royalties

Q2 royalty revenue was generated from the shipment of 3.4 billion ARM processor-based chips, up 26% year-on-year.

Growth in the number of ARM-based chips shipped into embedded applications continued, up 60% year-on-year, with particularly strong growth in ARM-based microcontrollers and smartcards. In addition the number of chips going into networking equipment increased by 30%, mainly driven by shipments of ARM technology into base-station and office-networking equipment.

 

Q2 2015 Processor Unit Shipment Analysis

Processor Series

Unit Shipments

Market

Unit Shipments

Classic*

36%

Mobile and connectivity

40%

Cortex-A

17%

Home

5%

Cortex-R

7%

Enterprise

12%

Cortex-M

40%

Embedded

43%

* Includes ARM7, ARM9, ARM10 and ARM11

 

Increasing the royalty revenue opportunity per chip

During the quarter, ten companies reported that they had shipped a total of 150m ARMv8-A based chips, which will be deployed into smartphones, tablets, other consumer electronic devices, enterprise networking and servers.

Q2 shipments of chips containing an ARM Mali graphics processor were consistent with our full-year expectations of 600m to 700m units. Most Mali graphics processors are found in chips containing an ARM Cortex-A class processor.

ARM’s physical IP dollar royalty revenue in Q2 2015 was up 18% year-on-year. This included increasing physical IP royalty revenue generated from wafers manufactured at a leading edge FinFET node.

 

People

At 30 June 2015, ARM had 3,524 full-time employees, a net increase of 230 since the start of the year, being mainly engineers joining ARM’s processor R&D teams. At the end of Q2 the Group had 1,466 employees based in the UK, 776 in the US, 506 in Continental Europe, 489 in India and 287 in the Asia Pacific region.

 

Principal risks and uncertainties

The principal risks and uncertainties faced by the Group in 2015 are included within the “Risks and risk management” section of the 2014 Annual Report and Accounts filed with Companies House in the UK. Details of other risks and uncertainties faced by the Group are noted within the Annual Report on Form 20-F for the year ended 31 December 2014 which is on file with the Securities and Exchange Commission (the “SEC”) and is available on the SEC’s website at www.sec.gov. There have been no changes to these risks that are expected to materially impact the Group. These risks include but are not limited to: ARM's quarterly results may fluctuate significantly and be unpredictable which could adversely affect the market price of ARM ordinary shares; general economic conditions may reduce ARM's revenues and harm its business; we depend largely on a small number of customers and products; failure by ARM to achieve the performance under a licence or failure of a customer to make an obligated milestone payment could materially impact our revenues; we operate in an intensely competitive industry and our customers may choose to use their own or competing technology; ARM has grown its operations significantly over recent years and ARM’s business could be adversely impacted if these changes are not managed successfully; ARM's technology is used in a wide range of electronic products, any bug or fault in our technology could lead to significant damage to our brand and reputation; ARM may have to protect its intellectual property or defend the technology against claims that we have infringed others’ proprietary rights; and an infringement claim against ARM’s technology may result in a significant damages award which would adversely impact ARM’s operating results.

 

Earnings Tables [642KB PDF]







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