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ARM HOLDINGS PLC REPORTS RESULTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED 30 SEPTEMBER 2014

21 October 2014

ARM HOLDINGS PLC REPORTS RESULTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED 30 SEPTEMBER 2014

A conference call discussing these results will be audiocast today at 09:30 BST at www.arm.com/ir

CAMBRIDGE, UK, 21 October 2014 —ARM Holdings plc announces its unaudited financial results for the third quarter and nine months ended 30 September 2014.

Q3 2014 – Financial Summary

Normalised*

IFRS

 

Q3 2014

Q3 2013

% Change

Q3 2014

Q3 2013

 

Revenue ($m)

320.2

286.7

12%

320.2

286.7

 

Revenue (£m)

195.5

184.0

6%

195.5

184.0

 

Operating expenses (£m)

86.8

85.6

1%

107.0

108.2

 

Operating margin

50.4%

48.6%

39.8%

36.0%

 

Profit before tax (£m)

101.2

92.6

9%

79.2

68.3

 

Earnings per share (pence)

5.92

5.11

16%

4.57

3.44

 

Net cash generation (£m)**

91.1

111.6

 

Effective revenue fx rate ($/£)

1.64

1.56

 

YTD 2014 – Financial Summary

Normalised*

IFRS

 

YTD 2014

YTD 2013

% Change

YTD 2014

YTD 2013

 

Revenue ($m)

935.0

814.9

15%

935.0

814.9

 

Revenue (£m)

569.3

525.5

8%

569.3

525.5

 

Operating expenses (£m)

258.8

238.4

9%

322.1

351.6

 

Operating margin

49.9%

49.2%

38.5%

27.4%

 

Profit before tax (£m)

292.5

268.6

9%

225.1

150.4

 

Earnings per share (pence)

16.93

15.30

11%

12.86

7.87

 

Net cash generation (£m)**

217.9

266.6

 

Effective revenue fx rate ($/£)

1.64

1.55

 

*

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, impairment of available for sale financial assets, and exceptional IP indemnity and similar costs. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document, see notes 6.8 to 6.11.

**

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 joint venture, payments to Linaro, cash outflow from exceptional IP indemnity and similar charges and deducting inflows from share option exercises – see notes 6.3 to 6.7.

Q3 Financial Highlights

· Group revenues in US$ up 12% year-on-year (£ revenues up 6% year-on-year)

· Processor licensing revenue in US$ up 13% year-on-year

· Processor royalty revenue in US$ up 11% year-on-year

· Normalised PBT and EPS up 9% and 16% year-on-year respectively (IFRS PBT and EPS up 16% and 33% respectively)

· Net cash generation of £91.1m

Progress on key growth drivers in Q3

· Growth in adoption of ARM® technology

o 43 processor licences signed across our target markets of mobile computing, enterprise infrastructure, and embedded intelligent devices

· Advanced technology enables a higher royalty percentage per chip in mobile devices, consumer electronics and enterprise infrastructure markets. In Q3, ARM maintained its licensing momentum for future royalty growth:

o 7 ARMv8-A processor licences signed, including three more licences for next generation designs

o 4 Mali™ multimedia processor licences signed, including another display processor license

o 5 POP IP licences signed including 4 for Cortex-A53 processors

· Growth in shipments of chips based on ARM processor technology

o 3 billion ARM-based chips shipped, up 19% year-on-year

o Strong growth in shipments of microcontrollers and enterprise infrastructure chips


Outlook

ARM enters the final quarter of 2014 with a robust opportunity pipeline that points to both strong licence revenues in Q4 and a sequential increase in order backlog. With market data underpinning the short-term outlook for royalty revenues, we expect group dollar revenues for the fourth quarter to be in-line with market expectations of about $350 million.

Simon Segars, Chief Executive Officer, said:

“Q3 has seen accelerating royalty revenue growth and strong demand for our processors and physical IP. We have seen encouraging license momentum and design activity throughout our customer base, with more Partners choosing to deploy ARMv8-A architecture in multiple end markets.

We launched important new products in the quarter. Our Cortex-M7 processor will deliver unprecedented performance for microcontroller chips, and our mbed IoT Device Platform offers developers foundational software that can realize the potential of the Internet of Things. Our Partners also demonstrated the capabilities of ARM’s innovative technology. For example, PayPal showed how ARM-based servers from HP can deliver class-leading performance and efficiency, and HiSilicon produced the first ARM-based networking processor on TSMC’s advanced FinFET manufacturing process.

These milestones are further evidence of the broadening adoption of ARM technology and are encouraging for future royalty revenue growth.”

Q3 2014 – Revenue Analysis

Revenue ($m)***

Revenue (£m)

Q3 2014

Q3 2013

% Change

Q3 2014

Q3 2013

% Change

Technology Licensing

Processors

120.1

106.2

13%

74.6

68.0

10%

Physical IP

22.4

16.9

33%

13.8

10.6

30%

Total Technology Licensing

142.5

123.1

16%

88.4

78.6

12%

Technology Royalty

Processors

135.5

122.0

11%

81.6

78.7

4%

Physical IP

14.7

15.1

-3%

8.8

9.7

-10%

Total Technology Royalty

150.2

137.1

9%

90.4

88.4

2%

Software and Tools

13.4

12.1

11%

8.1

7.8

5%

Services

14.1

14.4

-2%

8.6

9.2

-6%

Total Revenue

320.2

286.7

12%

195.5

184.0

6%

 

YTD 2014 – Revenue Analysis

Revenue ($m)***

Revenue (£m)

YTD 2014

YTD 2013

% Change

YTD 2014

YTD 2013

% Change

Technology Licensing

Processors

357.5

275.4

30%

221.1

176.7

25%

Physical IP

61.0

45.2

35%

37.8

28.7

31%

Total Technology Licensing

418.5

320.6

31%

258.9

205.4

26%

Technology Royalty

Processors

384.8

364.7

6%

230.4

236.7

-3%

Physical IP

45.4

47.7

-5%

27.1

30.9

-12%

Total Technology Royalty

430.2

412.4

4%

257.5

267.6

-4%

Software and Tools

42.7

42.1

1%

25.8

27.1

-5%

Services

43.6

39.8

9%

27.1

25.4

7%

Total Revenue

935.0

814.9

15%

569.3

525.5

8%

 

***

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


Financial review

(IFRS unless otherwise stated)

Total revenues

Total dollar revenues in Q3 2014 were $320.2 million, up 12% versus Q3 2013. Q3 sterling revenues of £195.5 million were up 6% year-on-year.

Year-to-date dollar revenues amounted to $935.0 million, up 15% on 2013.

Licence revenues

Total dollar licence revenues in Q3 2014 increased by 16% year-on-year to $142.5 million, representing 45% of Group revenues. Licence revenues comprised $120.1 million from processor licences and $22.4 million from physical IP licences.

Group order backlog at the end of Q3 2014 was down slightly sequentially. It is expected that the licensing opportunity pipeline will give rise to an increased level of backlog by the end of the year.

Royalty revenues

Total dollar royalty revenues in Q3 2014 were up 9% on Q3 2013 at $150.2 million, representing 47% of Group revenues. Royalty revenues comprised $135.5 million from processors and $14.7 million from physical IP. Processor royalty revenues increased 11% year-on-year. Relevant industry revenues were up 10% over the corresponding shipment period (i.e. Q2 2014 compared to Q2 2013).

ARM’s royalty revenues in Q3 2014 reflect the improving industry trends following the inventory management in consumer electronics. ARM expects its royalty revenue growth to continue to accelerate in Q4 2014.

Other revenues

Sales of software and tools in Q3 2014 were $13.4 million, an increase of 11% year-on-year. Service revenues were $14.1 million in Q3 2014, down 2% year-on-year. Together revenues from software and tools and services represented 8% of Group revenues.

Gross margins

Normalised gross margins in Q3 2014 were 94.8% compared to 95.8% in Q2 2014 and 95.1% in Q3 2013.


Operating expenses and operating margin

Normalised income statements for Q3 2014 and YTD 2014 and Q3 2013 and YTD 2013 are included in notes 6.8 to 6.11 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.

Normalised operating expenses were £86.8 million in Q3 2014 compared to £87.7 million in Q2 2014 and £85.6 million in Q3 2013. Normalised operating expenses in Q3 2014 included a credit of approximately £5 million relating to the revaluation of monetary items due to changes in foreign exchange rates and the impact of a stronger dollar on the accounting for derivative instruments, offset by approximately £3 million of other charges that are not expected to occur regularly. Normalised operating expenses in Q4 2014 (assuming effective exchange rates similar to current levels) are expected to be in the range of £92-94 million as we continue to invest in our research and development teams and in our business infrastructure.

Normalised operating margin was 50.4% in Q3 2014, compared to 48.9% in Q2 2014 and 48.6% in Q3 2013.

Normalised research and development expenses were £41.2 million in Q3 2014, representing 21% of revenues, compared to £41.0 million in Q2 2014 and £35.7 million in Q3 2013. Normalised sales and marketing expenses were £19.8 million in Q3 2014, being 10% of revenues, compared to £18.5 million in Q2 2014 and £19.3 million in Q3 2013. Normalised general and administrative expenses were £25.8 million in Q3 2014, representing 13% of revenues, compared to £28.2 million in Q2 2014 and £30.6 million in Q3 2013.

Total IFRS operating expenses in Q3 2014 were £107.0 million (Q3 2013: £108.2 million) including share-based payment costs and related payroll taxes of £17.4 million (Q3 2013: £18.8 million), and amortisation of intangible assets, other acquisition-related charges, restructuring charges and impairment of investments of £2.8 million (Q3 2013: £3.8 million).

Total share-based payment costs and related payroll tax charges of £17.9 million in Q3 2014 were included within cost of revenues (£0.5 million), research and development (£11.9 million), sales and marketing (£2.9 million) and general and administrative (£2.6 million).

Earnings and taxation

Normalised profit before tax in Q3 2014 was £101.2 million compared to £92.6 million in Q3 2013. After including acquisition-related and share-based payment costs, intangible amortisation, impairments, restructuring charges and share of results of joint ventures, IFRS profit before tax was £79.2 million in Q3 2014 compared to £68.3 million in Q3 2013.

The Group's effective normalised tax rate was 17.0% in Q3 2014 (IFRS: 18.1%). ARM’s full-year normalised effective tax rate in 2014 is expected to be slightly below 18%.

In Q3 2014, normalised fully diluted earnings per share were 5.92 pence (28.80 cents per ADS1) compared to 5.11 pence (24.84 cents per ADS) in Q3 2013. IFRS fully diluted earnings per share in Q3 2014 were 4.57 pence (22.24 cents per ADS) compared to earnings per share of 3.44 pence (16.72 cents per ADS) in Q3 2013.

Balance sheet

Intangible assets at 30 September 2014 were £625.6 million, comprising goodwill of £546.6 million and other intangible assets of £79.0 million, compared to £525.9 million and £82.9 million respectively at 31 December 2013.

Total accounts receivable were £131.1 million at 30 September 2014, compared to £136.2 million at 31 December 2013.

Cash flow

Normalised cash generation in Q3 2014 was £91.1 million. Net cash at 30 September 2014 was £797.0 million, compared to £706.3 million at 31 December 2013.


Technology Licensing

Processor licensing

43 processor licences were signed in Q3 2014, taking the total signed in the year to 110, reflecting the ongoing demand for ARM’s latest technology.

Eleven of the licences signed were for ARM’s Cortex-A series processors, mainly for use in enterprise infrastructure, automotive infotainment and consumer electronics devices. Seven of the licences were for processors based on the ARMv8-A architecture, including three more licences for ARM’s next generation Cortex-A processors. To date, ARM has signed 57 ARMv8-A processor and architecture licences which typically command a higher royalty compared to previous generations of ARM technology.

Twenty-two of the licences signed in Q3 were for Cortex-M class processors for use in technologies required for Wearable devices and the Internet of Things, microcontrollers, smart sensors and low-power wireless communication chips.

ARM signed four licences for its Mali multimedia processors, for use in smartphones and mobile computing. Two of these licences were for next generation Mali graphics processors, and one was an additional licence for our display technology.

In addition, ARM signed two subscription licences in the quarter with a major technology company, one for a wide range of ARM processors, and the other for the family of Mali graphics processors. Although an existing ARM customer they were not previously a subscription licensee, demonstrating an increasing commitment to deploying ARM technology in their products.

Q3 2014 and Cumulative Processor Licensing Analysis

Existing Licensees

New Licensees

Quarter Total

Cumulative Total†

Classic ARM*

1

1

532

Cortex-A

8

3

11

189

Cortex-R

2

1

3

48

Cortex-M

11

11

22

261

Mali

4

4

98

Architecture

16

Subscription **

2

2

17

Total

28

15

43

1,161

* Includes ARM7, ARM9, ARM10 and ARM11

** Includes CPU and Mali subscriptions

Adjusted for licences that are no longer expected to generate royalties

Physical IP licensing

ARM’s physical IP is used by fabless semiconductor companies to implement their chip designs. Platform licences are royalty bearing licences that enable foundries to manufacture chips using ARM’s physical IP. Each foundry requires a platform licence for each process node. ARM has signed more than one hundred platform licences with leading foundries, from 250nm to 14nm.

During the quarter we signed a platform licence with a leading foundry at 40nm. ARM now has physical IP agreements with nine foundries at the 40/45nm node, which is a very popular node for mainstream mobile and low-cost consumer electronics.

In Q3 ARM saw strong 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 POP licences, four of which were for Cortex-A53 processors on TSMC 28nm HPM and HPC process variants.


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:

· HiSilicon manufacturing the first multi-core ARMv8-A-based chip using TSMC’s 16nm FinFET process. The chip contains 32 ARM Cortex-A57 processors, running at up to 2.6GHz, and will be deployed in next-generation wireless communications and routers

· HP announcing two new ARM-based servers as part of the HP ProLiant Moonshot portfolio, including the first enterprise-class 64-bit ARM-based server, based on the Applied Micro X-Gene chip

· Samsung announcing the ARMv8-A-based Exynos 7 Octa processor with ARM Cortex-A57 and Cortex-A53 in big.LITTLE™ configuration, alongside an ARM Mali-T760 GPU. According to Samsung, the Exynos 7 delivers a 57% gain in CPU performance over the previous generation, and a 74% increase in graphics capability

· Commercial availability of server software on ARMv8-A based servers from Canonical (Ubuntu, Juju and Metal-as-a-Service) and IBM (Informix)

· PayPal demonstrating their first deployment of ARM-based servers with an HP Moonshot server using Texas Instruments Keystone II chip

· Applied Micro announcing the ARMv8-A-based Helix family for enterprise networking

· AllWinner introducing its first ARMv8-A chip for mobile computing devices.

· ST announcing that they are already sampling their STM32 F7 series of chips based on ARM’s recently introduced Cortex-M7 processor for automotive, connected home and industrial applications.

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

Technology Royalties

Processor royalties

Q3 royalty revenue was generated from the shipment of about 3 billion ARM processor-based chips, up 19% year-on-year. ARM saw particularly strong growth in microcontrollers and enterprise networking. In Q3 there were more than 1.1 billion ARM-based microcontrollers and smartcards reported as shipped.

In Q3 2014 ARM’s average royalty revenue per chip was 4.5 cents, down from 4.9 cents one year ago. This is mainly due to low-cost ARM-based microcontrollers and smartcards growing faster than high-value chips into smartphones and tablets. In Q3 shipments of Cortex-A series processors were up about 20% year-on-year, whilst the growth of ARM based microcontrollers was more than double this rate.

More companies reported in the third quarter that they had shipped ARMv8-based chips, albeit mostly in very low volumes, and together they represented less than 1% of ARM’s total unit shipments.

Q3 2014 Processor Unit Shipment Analysis

Processor Series

Unit Shipments

Market

Unit Shipments

ARM7

26%

Mobile

40%

ARM9

14%

Enterprise

17%

ARM11

3%

Home

5%

Cortex-A

18%

Embedded

38%

Cortex-R

4%

 

Cortex-M

34%

 

Physical IP royalties

Royalties are recognised one quarter in arrears with royalties in Q3 2014 generated from semiconductor wafer shipments in Q2 2014. ARM’s physical IP dollar royalty revenue in Q2 2014 was down 3% year-on-year and up 2% sequentially. As with processor royalties, a large proportion of Physical IP royalties is derived from chips going into consumer and mobile electronics which has been cyclically weak, and is now recovering.

People

At 30 September 2014, ARM had 3,244 full-time employees, a net increase of 411 since the start of the year, being mainly engineers joining ARM’s processor R&D teams. At the end of Q3 the Group had 1,377 employees based in the UK, 746 in the US, 407 in Continental Europe, 465 in India and 249 in the Asia Pacific region.


Principal risks and uncertainties

The principal risks and uncertainties faced by the Group in 2014 are included within the “Risks and risk management” section of the 2013 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 2013 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 would materially impact the group in the foreseeable future. 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.

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