ARM Holdings PLC Reports Results For The Fourth Quarter And Full Year 2012
CAMBRIDGE, UK, 5 FEBRUARY 2013 ARM Holdings plc announces its unaudited financial results for the fourth quarter and full year ended 31 December 2012.
Progress on key growth drivers in Q4
Growth in adoption of ARM® processor technology
36 processor licenses signed for a broad range of applications, from smartphones and mobile computers to medical devices and microcontrollers
Momentum continues in computing, servers and networking applications with the signing of two ARMv8 architecture licenses, six ARMv8 processor licenses and three ARM Cortex-A15 processor licenses
Growth in shipments of chips based on ARM processor technology
2.5 billion chips shipped
Processor royalty revenue grew 21% year-on-year, driven by strong growth in Cortex-A and Mali-based chips
Growth in outsourcing of new technology
Warren East, Chief Executive Officer, said:
ARM has seen good revenue and earnings growth throughout 2012. Customers are developing products to meet the needs of the post PC era and are driving demand for ARM's most advanced technology. In Q4 we again saw influential market-leaders demonstrating their commitment to ARM technology by licensing our latest products. Royalty revenue has also grown strongly during Q4 underpinned by ARMs market share gains and an increased royalty percentage from Cortex-A class processors being deployed into smartphones and tablets.
2013 brings exciting opportunities and challenges as ARM enters competitive new markets where we are well positioned to succeed with leading technology, an innovative business model and a thriving ecosystem of partners.
ARM enters 2013 with a robust opportunity pipeline for licensing and a record order backlog. Market share gains in long-term growth sectors look set to continue as our partners introduce new chips based on ARM technology. The global macro-economic environment continues to be characterised by uncertainty and the prospect of low growth for some time. The ongoing influence on consumer and enterprise spending inevitably impacts semiconductor revenues and industry confidence. However, assuming the macroeconomic situation does not deteriorate significantly, we expect group dollar revenues for the full-year to be at least in line with current market expectations.
In recent quarters, the year-on-year growth of ARMs processor royalty revenues has outperformed the semiconductor industry by 15-20%. ARMs royalty revenues for Q1 2013 are based on shipments in Q4 2012. Relevant data for the fourth quarter of 2012 suggests that semiconductor revenues were marginally up year-on-year. Assuming year-on-year royalty growth based on similar trends and given the positive outlook for license revenues, total revenues in the first quarter of 2013 are expected to be around $250 million.
* Normalised figures are based on IFRS, adjusted for acquisition-related charges, share-based payment costs, profit or loss on disposal and impairment of available-for-sale investments, share of results in joint ventures and Linaro-related charges. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document, see notes 11.13 to 11.16.
** Net cash generation is defined as movement on cash, cash equivalents, short-term and long-term deposits, adding back dividend payments, investment and acquisition consideration, restructuring payments, other acquisition-related payments, share-based payroll taxes, payments to joint ventures and Linaro, and deducting inflows from share option exercises and investment disposal proceeds see notes 11.8 to 11.12.
*** Dollar revenues are based on the groups 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.
(IFRS unless otherwise stated)
Total dollar revenues in Q4 2012 were $262.8 million, up 21% versus Q4 2011. Q4 sterling revenues of £164.2 million were up 19% year-on-year.
Full year dollar revenues were $913.1 million, up 16% on 2011.
Total dollar license revenues in Q4 2012 increased by 28% year-on-year to $100.6 million, representing 38% of group revenues. License revenues comprised $85.2 million from PD and $15.4 million from PIPD.
During Q4, additional partners entered into long-term commitments to use ARM technology where the revenue associated with these agreements goes into backlog and will be recognised in future quarters as engineering and delivery milestones are achieved. These agreements included the signing of two ARMv8 architecture licenses and five licenses with lead partners for ARMs Cortex-A50 series processors. As a result, group order backlog at the end of Q4 2012 was up 25% sequentially.
Full-year dollar licensing revenues were $339.3 million, up 19% on 2011.
Royalties are recognised one quarter in arrears with royalties in Q4 2012 generated from semiconductor unit shipments in Q3 2012. Total dollar royalty revenues in Q4 2012 increased year-on-year by 19% to $136.8 million, representing 52% of group revenues. Royalty revenues comprised $121.8 million from PD and $15.0 million from PIPD. PD dollar royalty revenues in Q4 2012 increased 21% year-on-year. This compares with industry revenues which were down 3% over the relevant shipment period (i.e. Q3 2012 compared to Q3 2011).
Full-year dollar royalty revenues were $473.9 million, up 17% on 2011. This compares with industry revenues that declined 2% over the relevant shipment period (i.e. Q3 2011 to Q3 2012), demonstrating ARMs continuing market share gains over the last 12 months.
Development Systems and Service revenues
Sales of development systems in Q4 2012 were $13.9 million, an increase of 10% year-on-year and representing 5% of group revenues. Full-year development systems revenue were $54.9 million, up 5% year-on-year.
Service revenues were $11.5 million in Q4 2012, up 7% year-on-year, and $45.0 million for the full-year, up 9% year-on-year.
Gross margins in Q4 2012, excluding share-based payments charges of £0.6 million (see below), were 95.1% compared to 94.6% in Q3 2012 and 96.0% in Q4 2011.
Full-year gross margin, excluding share-based payment costs of £2.1 million, was 94.8% compared to 95.1% in 2011.
Operating expenses and operating margin
Total IFRS operating expenses in Q4 2012 were £98.9 million (Q4 2011: £84.1 million) including share-based payment costs and related payroll taxes of £15.6 million (Q4 2011: £13.2 million), and amortisation of intangible assets and other acquisition-related charges and impairments of £3.6 million (Q4 2011: £5.1 million).
Total share-based payment costs and related payroll tax charges of £16.2 million in Q4 2012 were included within cost of revenues (£0.6 million), research and development (£8.3 million), sales and marketing (£2.6 million) and general and administrative (£4.7 million).
Total IFRS operating expenses for the full-year 2012 were £336.9 million compared to £315.2 million in 2011.
Normalised income statements for Q4 and full-year 2012 and 2011 are included in notes 11.13 to 11.16 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.
Normalised operating expenses were £79.7 million in Q4 2012 compared to £72.3 million in Q3 2012 and £65.8 million in Q4 2011. Given the strong revenue and bookings performance in the quarter, Q4 operating expenses included incremental bonus and sales commission costs of approximately £5 million. There was also a charge of approximately £2 million due to the impact of a weaker dollar on the accounting for derivative instruments.
Normalised expenses after these one-off items were around £73 million in Q4.
Given the ongoing investment in our research and development teams, normalised operating expenses in Q1 2013 (assuming effective exchange rates similar to current levels) are expected to be in the range £75-77 million.
Normalised operating margin was 46.6% in Q4 2012, compared to 44.6% in Q3 2012 and 48.2% in Q4 2011. Normalised operating margin in the full-year 2012 was 45.6% compared to 45.1% in 2011.
Normalised research and development expenses were £36.7 million in Q4 2012, representing 22% of revenues, compared to £32.2 million in Q3 2012 and £31.4 million in Q4 2011. Normalised sales and marketing expenses were £18.4 million in Q4 2012, being 11% of revenues, compared to £15.6 million in Q3 2012 and £17.3 million in Q4 2011. Normalised general and administrative expenses were £24.6 million in Q4 2012, representing 15% of revenues, compared to £24.5 million in Q3 2012 and £17.1 million in Q4 2011.
Total normalised operating expenses for the full-year 2012 were £284.2 million compared to £245.9 million in 2011.
Earnings and taxation
Profit before tax was £59.5 million in Q4 2012 compared to £49.7 million in Q4 2011. After adjusting for acquisition-related and share-based payment costs, disposal and impairment of investments and share of results of joint ventures, normalised profit before tax in Q4 2012 was £80.0 million compared to £69.0 million in Q4 2011.The Group's effective normalised tax rate was 28.8% in Q4 2012 (IFRS: 28.7%) giving a full-year normalised tax rate of 25.8% (IFRS: 27.3%). The tax rate in Q4 2012 was higher than in the first nine months of the year due primarily to the partial de-recognition of an existing deferred tax asset considered non-recoverable following a change in US state law. With the introduction of the Patent Box tax regime in April 2013, ARMs full-year normalised effective tax rate in 2013 is expected to be around 20%.
In Q4 2012, fully diluted earnings per share were 3.04 pence (14.8 cents per ADS) compared to earnings per share of 2.40 pence (11.2 cents per ADS) in Q4 2011. Normalised fully diluted earnings per share in Q4 2012 were 4.08 pence (19.9 cents per ADS) compared to 3.71 pence (17.3 cents per ADS) in Q4 2011.
Full-year 2012 fully diluted earnings per share prepared under IFRS were 11.51 pence compared to earnings per share of 8.19 pence in 2011. Normalised fully diluted earnings per share for 2012 were 14.70 pence per share compared to 12.45 pence per share in 2011
Intangible assets at 31 December 2012 were £530.7 million, comprising goodwill of £519.4 million and other intangible assets of £11.3 million, compared to £522.6 million and £12.6 million respectively at 30 September 2012.
Property, plant and equipment has increased from £18.1 million at 31 December 2011 to £36.0 million at 31 December 2012 mainly as a result of the construction and fit-out of a Data Centre Facility in Cambridge.
Deferred tax assets have reduced from £105.9 million at 31 December 2011 to £70.1 million at 31 December 2012 due to a combination of lower assets on outstanding share options and awards and the partial de-recognition of UK and US deferred tax assets following a reduction in applicable tax rates and changes in tax law (as noted above).
Total accounts receivable were £124.5 million at 31 December 2012, compared to £98.3 million at 30 September 2012.
Days sales outstanding (DSOs) were 48 at 31 December 2012 compared to 47 at 30 September 2012.
Cash flow and dividend
Net cash generation in Q4 2012 was £74.1 million. Net cash at 31 December 2012 was £520.2 million compared to £477.9 million at 30 September 2012.
The directors recommend payment of a final dividend in respect of 2012 of 2.83 pence per share, up 35%, which taken together with the interim dividend of 1.67 pence per share paid in October 2012, gives a total dividend in respect of 2012 of 4.5 pence per share, an increase of 29% on the total dividend of 3.48 pence per share in 2011, continuing the steady growth in dividends in recent years through challenging economic cycles. Subject to shareholder approval, the final dividend will be paid on 17 May 2013 to shareholders on the register on 19 April 2013.
36 processor licenses were signed in Q4 2012.
Fifteen of the licenses signed were for ARMs Cortex-A series processors, mainly for markets such as smartphones, mobile computers, industrial PCs, servers and enterprise networking. These included six licenses for ARMs latest 64-bit Cortex-A50 series processor, three licenses for the Cortex-A15 processor and four for the Cortex-A7 processor. Cortex-A15 and Cortex-A7 together form the ARM big.LITTLE technology which delivers both higher performance and lower power for next generation smartphones and mobile computers. To date, sixteen companies have been enabled with the big.LITTLE technology.
During the quarter ARM also signed two further ARMv8 architecture licenses, for use in multiple end markets including supercomputing, mobile and enterprise applications, and two licenses with lead partners for ARMs next generation Cortex-R and Cortex-M series products.
The embedded and real-time markets continue to create licensing opportunities and this quarter ARM signed five
Cortex-R and six Cortex-M series licenses. These licenses were signed for a variety of end applications, including baseband modems, high-end networking, medical applications and industrial microcontrollers.
ARM also signed seven licenses for its Mali graphics processors for use in entry-level and high-end smartphones, mobile computing, consumer electronics and automotive infotainment, including one new licensee for ARMs Mali technology.
Q4 2012 and Cumulative Processor Licensing Analysis
Processor Design Wins and Ecosystem Development
Many leading technology companies have announced details of their ARM processor-based product developments in recent months. These included:
Samsung announcing its Exynos 5 Octa chip, the worlds first application processor to use ARMs big.LITTLE technology. The application processor offers higher performance and up to 70% improvement in energy efficiency compared to previous generations of Exynos processors
Broadcom announcing that it had licensed both the ARMv7 and ARMv8 architectures and that it intends to use this technology for a range of end markets, including set-top-boxes and broadband access chips
Red Hat and Applied Micro announcing a collaboration around ARMs 64-bit technology for servers. Red Hat intends to make its server software available on Applied Micros X-Gene Server-on-Chip design
Infineon expanding its microcontroller family utilising the Cortex-M4 technology to digital power convertors, switching and uninterruptable power supplies
Xilinx unveiling its Zynq-7000 programmable System-on-Chip automotive driver assistance systems. The Zynq-7000 chips are based around a dual-core Cortex-A9 processor
ARM, Cadence and Samsung taping out the first 14nm FinFET Cortex-A7 test chips. These test chips will demonstrate ARMs most power efficient processor manufactured on Samsungs advanced low-power process
Many more partner announcements can be found on the ARM website at www.arm.com/news.
Q4 revenue came from the sales of about 2.5 billion ARM processor-based chips, up 13% year-on-year. ARM's average royalty revenue per chip increased to 4.8 cents, compared to 4.5 cents one year ago, driven primarily by strong growth in Cortex-A class processor shipments (doubling year-on-year) and in the number of chips containing Mali graphics (increasing more than four times year-on-year). ARM typically receives a higher royalty percentage for chips incorporating Cortex-A class processors and an additional royalty if these chips also contain a Mali graphics processor. In Q4, about a quarter of Cortex-A based chips also contained a Mali processor.
ARM continued to gain share across all its target markets. Sales of ARM processor-based chips into consumer electronics, including digital TVs and set-top-boxes were particularly strong, more than doubling year on year. ARM processor-based microcontrollers also performed well, increasing 25% over Q4 last year.
Q4 2012 Processor Unit Shipment Analysis
During the quarter ARM signed three further royalty bearing platforms licenses. These included two more licenses for 14nm FinFET and another platform license with a leading foundry at 40nm. ARM has now signed a total of 99 platform licenses.
Q4 2012 and Cumulative PIPD Licensing Analysis
ARM continues to see strong demand for physical IP optimised for use with processors (POP IP). POP IP enables the 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.
Royalties are recognised one quarter in arrears with royalties in Q4 generated from semiconductor unit shipments in Q3. Underlying PIPD royalties in Q4 2012 were $14.6 million, up 21% year-on-year. In 2012, PIPDs underlying royalty revenue grew 17% year-on-year. This compares with foundry revenues that increased 7% over the relevant shipment period (i.e. Q3 2012 compared to Q3 2011).
At 31 December 2012, ARM had 2,392 full-time employees, a net increase of 276 since the start of the year, being mainly engineers joining ARMs processor R&D teams. At the end of Q4, the group had 993 employees based in the UK, 583 in the US, 296 in Continental Europe, 347 in India and 173 in the Asia Pacific region.
Principal risks and uncertainties
The principal risks and opportunities faced by the Group are included within the Risks and risk management section of the 2011 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 2011 which is on file with the Securities and Exchange Commission (the SEC) and is available on the SECs website at www.sec.gov. There have been no changes to these risks that would materially impact the group in the foreseeable future. These 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; ARM may have to protect its intellectual property or defend the technology against claims that we have infringed others proprietary rights; an infringement claim against ARMs technology may result in a significant damages award which would adversely impact ARMs operating results; companies within the semiconductor industry may consolidate reducing the number of customers that ARM may sell its technology to; for ARM to enter new markets or develop new technology may require significant investment and may not result in profitable operations; and ARM competes in the intensely competitive semiconductor market.
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