CAMBRIDGE, UK, 22 October 2013 ARM Holdings plc announces its unaudited financial results for the third quarter and nine months ended 30 September 2013.
Q3 Financial Highlights
Group revenues in US$ up 26% year-on-year (£ revenues up 27% year-on-year)
PD Licensing revenue in US$ up 52% year-on-year. Order backlog up 3% sequentially
PD Royalty revenue in US$ up 14% year-on-year (relevant industry revenues down 2% year-on-year1)
Normalised operating expenses of £85.6m (including a £5.5m charge relating to the foreign exchange revaluation of monetary items)
Normalised profit before tax and earnings per share up 36% and 38% year-on-year respectively (IFRS PBT and EPS up 24% and 16% year-on-year)
Net cash generation of £111.6 million
Progress on key growth drivers in Q3
- Growth in adoption of ARM® technology
- 48 processor licenses signed, driven by new technology, new markets and new customers
- Advanced technology enables a higher royalty percentage per chip
- 15 Cortex®-A processor licenses signed, including 3 Cortex-A50 series processors
- 5 Mali graphics processor licenses signed
- POP IP helps optimise ARM processor implementations. 4 POP IP licenses signed in Q3
- Growth in shipments of chips based on ARM processor technology
- 2.5 billion ARM-based chips shipped
- Continued penetration of processors containing both Cortex-A and Mali graphics processors
ARM enters the final quarter of 2013 with a record order backlog and a robust opportunity pipeline. This combination points to another strong quarter for licensing revenue in Q4. ARMs Q4 royalty revenue is generated from third quarter chip shipments. Relevant customer and industry data suggests a sequential increase in ARMs royalty revenue of similar dollar value to previous years. Assuming the macroeconomic situation does not deteriorate significantly in the remainder of the quarter, we expect group dollar revenues for the fourth quarter to be in-line with current market expectations of approximately $290m.
Simon Segars, Chief Executive Officer, said:
"As the products we use every day become more connected, and as new categories of smart devices are introduced, there are increasing opportunities for ARMs high-performance, low-power technology, which drive both license and long-term royalty revenues.
In the third quarter of 2013 we saw strong demand for our processor technology with a record 48 licenses signed by 24 companies, 11 of whom were licensing ARM technology for the first time. ARMs technology was licensed for an extensive range of end-markets including the Internet-of-Things, wired and wireless communications, and mobile computing. This quarter ARM also signed four large licensing deals with thought-leading technology companies, which included MediaTek signing a broad license for ARMs latest ARMv8-A processor technology and next generation Mali graphics.
With more customers choosing to deploy ARM technology in their products and ARMs royalty revenues outperforming the overall semiconductor industry, this has been another quarter that underpins ARMs long-term growth opportunity.
* Normalised figures are based on IFRS, adjusted for share-based payment costs, amortisation of intangibles, acquisition-related charges, IP indemnity and similar charges, Linaro-related charges and share of results of joint venture, and profit or loss on disposal and impairments of available-for-sale financial assets. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document, see notes 6.13 to 6.16.
** 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, other acquisition-related payments, share-based payroll taxes, payments related to joint ventures and Linaro, payments for IP indemnity and similar charges, advanced payments, and deducting inflows from share option exercises and investment disposal proceeds see notes 6.8 to 6.12
*** US 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 US dollars.
(IFRS unless otherwise stated)
Total dollar revenues in Q3 2013 were $286.7 million, up 26% versus Q3 2012. Q3 sterling revenues of £184.0 million were up 27% year-on-year.
Year-to-date dollar revenues amounted to $814.9 million, up 25% on 2012.
Total dollar license revenues in Q3 2013 increased by 48% year-on-year to $123.1 million, representing 43% of group revenues. License revenues comprised $106.2 million from PD and $16.9 million from PIPD.
Group order backlog at the end of Q3 2013 was up 3% sequentially.
Royalties are recognised one quarter in arrears with royalties in Q3 2013 generated from semiconductor unit shipments in Q2 2013. Total dollar royalty revenues in Q3 2013 increased year-on-year by 13% to $137.1 million, representing 48% of group revenues. This compares with industry revenues decreasing about 2% in the shipment period1 (i.e. Q2 2013 compared to Q2 2012).
Total dollar royalty revenues in Q3 2013 comprised $122.0 million from PD and $15.1 million from PIPD.
Development Systems and Service revenues
Sales of development systems in Q3 2013 were $12.1 million, flat year-on-year and representing 4% of group revenues. As previously disclosed the development systems business is now focusing on microcontroller tools and premium toolkits for multi-core systems, and full year revenues are expected to be broadly flat year-on-year.
Service revenues in Q3 2013 were $14.4 million, an increase of 27% year-on-year and representing 5% of group revenues.
Gross margins in Q3 2013, excluding the share-based payments charge of £0.5 million (see below), were 95.1% compared to 94.3% in Q2 2013 and 94.6% in Q3 2012.
Operating expenses and operating margin
Normalised income statements for Q3 2013 and YTD 2013 and Q3 2012 and YTD 2012 are included in notes 6.13 to 6.16 below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.
Normalised operating expenses were £85.6 million in Q3 2013 compared to £78.2 million in Q2 2013 and £72.3 million in Q3 2012. Normalised operating expenses in Q3 2013 included a charge of £5.5 million relating to the foreign exchange revaluation of monetary items. Normalised operating expenses in Q3 2013 excluding this charge were approximately
Normalised operating expenses in Q4 2013 (assuming effective exchange rates similar to current levels) are expected to be in the range £82-84 million as we continue to invest in our research and development teams and in our business infrastructure.
Normalised operating margin was 48.6% in Q3 2013, compared to 48.6%in Q2 2013 and 44.6% in Q3 2012.
Normalised research and development expenses were £35.7 million in Q3 2013, representing 19% of revenues, compared to £37.2 million in Q2 2013 and £32.2 million in Q3 2012. Notwithstanding the ongoing investment in our research and development teams, total research and development expenses in Q3 2013 were lower than in Q2 2013 as, following legislation enacted in the third quarter, certain research and development tax credits are classified above-the-line in operating expenses rather than as a credit to the tax charge as in previous periods. Normalised sales and marketing expenses were £19.3 million in Q3 2013, being 10% of revenues, compared to £17.8 million in Q2 2013 and £15.6 million in Q3 2012. Normalised general and administrative expenses were £30.6 million in Q3 2013 (including the foreign exchange charge of £5.5 million referred to above), representing 17% of revenues, compared to £23.2 million in Q2 2013 and £24.5 million in Q3 2012.
Total IFRS operating expenses in Q3 2013 were £108.2 million (Q3 2012: £84.6 million) including share-based payment costs and related payroll taxes of £18.8 million (Q3 2012: £10.6 million), amortisation of intangible assets and other acquisition-related charges of £3.4 million (Q3 2012: £1.7 million), and investment impairments of £0.4 million (Q3 2012: £nil).
Total share-based payment costs and related payroll tax charges of £19.3 million in Q3 2013 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 (£4.0 million).
Earnings and taxation
Profit before tax was £68.3 million in Q3 2013 compared to £55.3 million in Q3 2012. Normalised profit before tax in Q3 2013 was £92.6 millioncompared to £68.1 million in Q3 2012.The Group's effective normalised tax rate was 22.1% in Q3 2013 (IFRS: 28.9%) compared to 23.9% (IFRS: 25.3%) in Q3 2012. The Groups effective normalised tax rate for the full year 2013 is estimated to be just under20%.
In Q3 2013, fully diluted earnings per share were 3.44 pence (16.72 cents per ADS 2) compared to earnings per share of 2.96 pence (14.35 cents per ADS) in Q3 2012. Normalised fully diluted earnings per share in Q3 2013 were 5.11 pence (24.84 cents per ADS) compared to 3.71 pence (17.96 cents per ADS) in Q3 2012.
Intangible assets at 30 September 2013 were £597.3 million, comprising goodwill of £527.8 million and other intangible assets of £69.5 million, compared to £555.6 million and £69.5 million respectively at 30 June 2013.
Total accounts receivable were £113.1 million at 30 September 2013, compared to £136.5 million at 30 June 2013.
Normalised free cash flow in Q3 2013 was £111.6 million. Net cash at 30 September 2013 was £670.5 million compared to £613.1 million at 30 June 2013.
A record 48 processor licenses were signed in Q3 2013, with 24 companies. The technology licensed includes ARMs latest Cortex-A, Cortex-R and Cortex-M processors and will be used in a broad range of end applications, including mobile devices, smart embedded applications and general purpose microcontrollers. Nearly half of the 24 licensees were licensing ARM technology for the first time. Many of these new customers are planning to use ARM technology in emerging applications such as fingerprint recognition, internet-of-things, and wearable digital devices.
During the quarter ARM signed four large licensing deals with thought-leading technology companies. These included MediaTek licensing ARMs latest ARMv8-A processor technology and next generation Mali graphics, and a major provider of enterprise networking equipment licensing a broad suite of ARM technology for wired and wireless communications applications.
Fifteen of the licenses signed were for ARMs Cortex-A series processors, including 3 Cortex-A50 series processors. ARMs Cortex-A series technology is licensed for deployment in a broad range of end-markets, including smartphones, tablets, display technology, digital TVs and enterprise networking applications.
Demand for ARMs range of processors for the embedded market remained strong with 18 of the 48 licenses signed this quarter being for ARMs Cortex-M series technology. ARM has now signed nearly two hundred Cortex-M licenses with almost 150 companies. Many of these licenses will be used in microcontrollers or applications for the Internet-of-Things.
ARM also signed 5 further licenses for its Mali graphics processors, 4 of whom were licensing ARMs Mali graphics technology for the first time.
Q3 2013 and Cumulative Processor Licensing Analysis
| || Existing |
| New |
| Quarter |
| Cumulative |
| Classic ARM* || 4 || 1 || 5 || 533 |
| Cortex-A || 14 || 1 || 15 || 158 |
| Cortex-R || 4 || || 4 || 41 |
| Cortex-M || 10 || 8 || 18 || 196 |
| Mali || 4*** || 1 || 5 || 85 |
| Architecture || || || || 15 |
| Subscription || 1 || || 1 || 12 |
| Total || 37 || 11 || 48 || 1040 |
* Includes ARM7, ARM9, ARM10 and ARM11
**Adjusted for licenses that are no longer expected to generate royalties
*** Includes 3 existing ARM customers taking their first Mali license
ARMs physical IP is used by fabless semiconductor companies to implement their chip designs. Platform licenses are royalty bearing licenses that enable foundries to manufacture chips using ARMs physical IP. Each foundry requires a platform license for each process node. ARM has signed a full range of platform licenses with leading foundries, from 250nm to 14nm.
PIPD continues the development of advanced technology Physical IP for FinFET process technologies at multiple foundries, and this quarter delivered FinFET Physical IP to a major customer for their pre-production product development.
ARM also continues to see 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 two further POP licenses for Cortex-A processors and two for Mali graphics technology. This included a major multi-year subscription license for 28nm POP IP signed with major Asian semiconductor company.
Number of Physical IP Licenses*
| || |
Total for the Quarter
*Adjusted for licenses that are no longer expected to generate royalties
Customers Licensing Multiple ARM Technologies
In some end markets, such as application processors in mobile phones, mobile computers and digital TVs there can be synergies from using multiple ARM technologies in the same system-on-chip design. The system benefits that can be generated include faster time-to-market and reduced development risk, and lower cost and higher performance of the resultant chip. For example, this can include two Cortex-A processors combined in a big.LITTLE configuration, coupled with Mali graphics and implemented using ARMs physical IP (possibly in the form of POP IP). To date ARM has signed 158 Cortex-A licenses, 84 Mali licenses and 52 POP IP licenses. ARM typically receives a percentage of the chip price for each ARM technology included within the chip, so chips that contain multiple ARM technologies can enhance ARMs overall royalty opportunity.
Processor Design Wins and Ecosystem Development
- Many leading technology companies have announced details of their ARM-based product developments in recent months. These included:
- Mediatek introducing MT8135, its ARMv7-based big.LITTLE application processor aimed at tablet computers
- Spansion announcing plans for a wide range of ARM-based chips for automotive, industrial and embedded consumer applications
- Huawei announcing that it has licensed Cortex-A57 and Cortex-A53 to enable the development of low power high performance chips
- AMD announcing its Hierofalcon chips, a four or eight core ARM-based Cortex-A57 system-on-chip running at
- 2.0 GHz aimed at embedded networking applications
- Broadcom announcing a new ARMv8-A 64-bit chip for enterprise networking applications
- Freescale announcing their 5V Kinetis E range of microcontrollers. Based around ARMs Cortex-M0+ processor technology, these microcontrollers are designed for performance in harsh electromagnetic environments
- Atmel introducing SAM D20 ultra low power ARM-based Cortex M0+ microcontrollers for use in automation, consumer, metering and industrial applications
Many more partner announcements can be found on the ARM website at www.arm.com/news.
ARMs processor royalties are recognised one quarter in arrears with royalties in Q3 generated from semiconductor unit shipments in Q2. PD dollar royalty revenues in Q3 2013 increased 14% year-on-year. This compares with relevant industry revenues decreasing by about 2%1 in the relevant shipment period (i.e. Q2 2013 compared to Q2 2012) resulting in ARM outperforming the semiconductor industry by 16 percentage points. Q3 revenue came from the sales of about 2.5 billion ARM-based chips, up 14% year-on-year.
ARM continued to benefit from the growth of smartphones and tablets, especially high volume entry-level devices. These devices typically use ARMs more advanced and higher royalty bearing Cortex-A series technology and increasingly contain ARMs Mali graphics designs. In Q3, shipments of Cortex-A and Mali graphic processors more than doubled year-on-year and ARMs mobile royalty revenues increased by nearly 20% over the same period. ARMs mobile shipments were up 8% year-on-year, growing at twice the rate of the wider handset market3.
This quarter, we saw strong growth in the number of ARM-based chips sold into markets beyond mobile devices. The non-mobile markets now represent 52% of all ARM-based shipments. ARM-based microcontrollers and smartcards shipments increased 20% year-on-year, compared to a market that was down nearly 10% over the same period1. ARM is also beginning to gain traction in the enterprise networking market, with ARM-based chip shipments up nearly 150%.
ARMs average royalty revenue per chip in Q3 was flat year-on-year at 4.9 cents as the growth in higher value, lower volume application processors was balanced by the strong growth in shipments of higher volume, lower cost chips, such as microcontrollers and touchscreen controllers.
Q3 2013 Processor Unit Shipment Analysis
Royalties are recognised one quarter in arrears with royalties in Q3 generated from wafer shipments in Q2. PIPD royalties in Q3 2013 were $15.1 million, up 6% year-on-year.
At 30 September 2013, ARM had 2,756 full-time employees, a net increase of 364 since the start of the year. Most of these new employees are engineers joining ARMs processor R&D teams. At the end of Q3, the group had 1,137 employees based in the UK, 652 in the US, 345 in Continental Europe, 398 in India and 224 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 2012 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 2012 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; we depend largely on a small number of customers and products; failure by ARM to achieve the performance under a license 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 ARMs business could be adversely impacted if these changes are not managed successfully; 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 ARMs technology may result in a significant damages award which would adversely impact ARMs operating results.
Full Earnings Table [518KB PDF]
ARM designs the technology that is at the heart of advanced digital products, from wireless, networking and consumer entertainment solutions to imaging, automotive, security and storage devices. ARMs comprehensive product offering includes RISC microprocessors, graphics processors, video engines, enabling software, cell libraries, embedded memories, high-speed connectivity products, peripherals and development tools. Combined with comprehensive design services, training, support and maintenance, and the companys broad Partner community, they provide a total system solution that offers a fast, reliable path to market for leading electronics companies. More information on ARM is available at http://www.arm.com.
1Source: Semiconductor Industry Association, October 2013
2 Each American Depositary Share (ADS) represents three shares.
3 Source: Gartner, October 2013