A conference call discussing these results will be audiocast today at 08:30 BST at www.arm.com/ir
CAMBRIDGE, UK, 29 April 2008—ARM Holdings plc [(LSE: ARM); (Nasdaq: ARMH)] announces its unaudited financial results for the first quarter ended 31 March 2008
Highlights (US GAAP unless otherwise stated)
- Q1 dollar revenues at $134.3m, up 4% year-on-year
- Processor Division (PD) total revenue at $91.1m, up 11% year-on-year
- PD royalty revenue at $54.8m, up 22% year-on-year
- 889 million units shipped
- Physical IP Division (PIPD) total revenue at $20.9m, up 7% sequentially
- PIPD underlying royalty revenue up 20% year-on-year
- Group backlog flat quarter-on-quarter, remaining at record high
- Normalised PBT and EPS at £21.3m (US GAAP £12.2m) and 1.17p (US GAAP 0.69p) respectively
- Net cash of £55m at end Q1
- £13m spent on share buybacks in Q1
- Normalised cash generation of £14m in Q1
- FY 2008 guidance unchanged
Commenting on the results, Warren East, Chief Executive Officer, said:
“ARM has made an encouraging start to 2008. Our Q1 results demonstrate robust operational execution, with sequential revenue growth in PIPD and continued strong demand for our Cortex® family of microprocessors with a further seven licenses being signed in the quarter. Growth in underlying royalty revenues in both PD and PIPD of more than 20% year-on-year provides further evidence of the increasing use of ARM’s technology in the rapidly broadening range of consumer electronics products.”
Q1 2008 – Revenue Analysis
| ||Revenue ($M)*** ||Revenue (£M) |
| ||Q1 2008 ||Q1 2007 ||% Change ||Q1 2008 ||Q1 2007 ||% Change |
|PD || || || || || || |
|Licensing ||36.3 ||37.4 ||-3% ||18.3 ||19.4 ||-6% |
|Royalties ||54.8 ||45.0 ||22% ||27.8 ||23.0 ||21% |
|Total PD ||91.1 ||82.4 ||11% ||46.1 ||42.4 ||9% |
|PIPD || || || || || || |
|Licensing ||11.8 ||16.9 ||-30% ||5.9 ||8.7 ||-32% |
|Royalties ||9.11 ||8.41 ||9% ||4.71 ||4.31 ||9% |
|Total PIPD ||20.9 ||25.3 ||-17% ||10.6 ||13.0 ||-18% |
|Development Systems ||14.2 ||13.5 ||5% ||7.1 ||6.9 ||3% |
|Services ||8.1 ||8.0 ||2% ||4.1 ||4.2 ||-3% |
|Total Revenue ||134.3 ||129.2 ||4% ||67.9 ||66.5 ||2% |
1 Includes catch-up royalties in Q1 2008 of $0.8m (£0.4m) and in Q1 2007 of $1.5m (£0.8m).
Q1 2008 – Financial Summary
|Normalised* ||US GAAP |
|Q1 2008 ||Q1 2007 ||% Change ||Q1 2008 ||Q1 2007 |
|Revenue ||67.91 ||66.5 ||2% ||67.9 ||66.5 |
|Income before income tax ||21.3 ||21.6 ||-1% ||12.2 ||12.7 |
|Operating margin ||30.6% ||30.3% || ||17.2% ||16.9% |
|Earnings per share (pence) ||1.17 ||1.14 ||3% ||0.69 ||0.70 |
|Net cash generation** ||13.7 ||15.6 || || || |
|Effective fx rate ($/£) ||1.98 ||1.94 || || || |
¹ Equivalent to £69.1m at Q1 2007 effective $/£ rate
Current trading and prospects
ARM has made an encouraging start to 2008 with sequential revenue growth in PIPD and positive momentum in both PD and PIPD royalty revenues.
We remain cautious in the short term given the uncertainty in both the semiconductor industry and the wider macroeconomic environment. Against this backdrop and given the potential impact of industry seasonality on royalty revenues, total dollar revenues in Q2 are unlikely to be higher than Q1. However, consistent with our guidance in February, assuming no marked deterioration in the trading environment, we continue to expect to increase dollar revenues in FY 2008 by at least the growth rate achieved in 2007.
* Normalised figures are based on US GAAP, adjusted for acquisition-related, share-based remuneration and restructuring charges. For reconciliation of GAAP measures to normalised non-GAAP measures detailed in this document, see notes 6.1 to 6.21.
** Before dividends and share buybacks, net cash flows from share option exercises and acquisition consideration - see notes 6.12 to 6.15.
*** 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 95% of invoicing is in dollars.
**** Each American Depositary Share (ADS) represents three shares.
(US GAAP unless otherwise stated)
Total dollar revenues in Q1 2008 were $134.3 million, up 4% versus Q1 2007. Sterling revenues of £67.9 million were up 2% year-on-year after a 2% weakening of the dollar against sterling (ARM’s effective rate of $1.98 in Q1 2008 compared to $1.94 in Q1 2007). At the Q1 2007 effective rate, Q1 2008 sterling revenues would have been £69.1 million.
Total dollar license revenues in Q1 2008 fell by 12% to $48.1 million, representing 36% of group revenues, compared to $54.3 million in Q1 2007. License revenues comprised $36.3 million from PD and $11.8 million from PIPD.
Total dollar royalty revenues in Q1 2008 grew by 20% to $63.9 million, representing 47% of group revenues, compared to $53.4 million in Q1 2007. Royalty revenues comprised $54.8 million from PD and $9.1 million from PIPD.
Against the backdrop of growth in more sophisticated mobile phones, underlying PD royalties grew 12% sequentially and 22% compared to Q1 2007.
Total PIPD royalties grew 9% to $9.1 million including $0.8 million of catch-up royalties. Underlying royalties were up by 20% year-on-year.
Development Systems and Service revenues
Sales of development systems in Q1 2008 were $14.2 million, representing 11% of group revenues, compared to $13.5 million in Q1 2007. Service revenues in Q1 2008 were $8.1 million, representing 6% of group revenues, compared to $8.0 million in Q1 2007.
Gross margins in Q1 2008, excluding the FAS123(R) charge of £0.3 million (see below), were 88.8% compared to 89.4% in Q4 2007 and 89.5% in Q1 2007. The lower gross margin in Q1 2008 is due primarily to the higher revenue contribution from technology which includes payments to collaborative partners recorded as a cost of sale.
Operating expenses and operating margin
Total operating expenses in Q1 2008 were £48.4 million (Q1 2007: £48.0 million) including amortisation of intangible assets and other acquisition-related charges of £4.5 million (Q1 2007: £5.1 million), £3.6 million (Q1 2007: £3.6 million) in relation to the fair value of share-based remuneration and related payroll taxes and restructuring charges of £0.7 million (Q1 2007: nil). Total share-based remuneration and related payroll tax charges of £3.9 million in Q1 2008 were included within cost of revenues (£0.3 million), research and development (£2.6 million), sales and marketing (£0.5 million) and general and administrative (£0.5 million). Normalised income statements for Q1 2008 and Q1 2007 are included in notes 6.20 and 6.21 below which reconcile US GAAP to the normalised non-GAAP measures referred to in this earnings release.
Operating expenses (excluding acquisition-related, share-based remuneration and restructuring charges) in Q1 2008 were £39.5 million compared to £39.3 million in Q1 2007 and £37.2 million in Q4 2007. The sequential increase in operating expenses from Q4 2007 to Q1 2008 is due primarily to salary inflation effective from the beginning of the year, the quarterly phasing profile of certain vacation pay and sabbatical accruals and a negative quarter-on-quarter foreign exchange impact on opex. Cost management remains a key focus with opex in the remaining quarters of 2008 expected to be lower than the Q1 level, subject to the potential negative impact on opex arising from movements in exchange rates.
Normalised research and development expenses were £16.3 million in Q1 2008, representing 24% of revenues, compared to £15.1 million in Q4 2007 and £16.6 million in Q1 2007. Normalised sales and marketing costs in Q1 2008 were £11.0 million, being 16% of revenues, compared to £11.1 million in Q4 2007 and £11.1 million in Q1 2007. Normalised general and administrative expenses in Q1 2008 were £12.2 million, representing 18% of revenues, compared to £11.1 million in Q4 2007 and £11.6 million in Q1 2007.
Normalised operating margin in Q1 2008 was 30.6% (6.1) compared to 31.5% (6.2) in Q4 2007 and 30.3% (6.3)in Q1 2007. Operating margins in Q1 2008 were slightly ahead of Q1 2007 despite the weakening of the US dollar against sterling.
Earnings and taxation
Income before income tax in Q1 2008 was £12.2 million compared to £12.7 million in Q1 2007. After adjusting for acquisition-related, share-based remuneration and restructuring charges, normalised income before income tax in Q1 2008 was £21.3 million (6.5) compared to £21.6 million (6.7) in Q1 2007. The group’s effective tax rate under US GAAP in Q1 2008 was 27% (Q1 2007: 25%) reflecting the availability of research and development tax credits and a reduction in the benefits arising from the structuring of the Artisan® acquisition.
In Q1 2008, fully diluted earnings per share prepared under US GAAP were 0.7 pence (4.1 cents per ADS****) compared to earnings per share of 0.7 pence (4.1 cents per ADS****) in Q1 2007. Normalised fully diluted earnings per share in Q1 2008 were 1.17 pence (6.16) per share (7.0 cents per ADS****) compared to 1.14 pence (6.18) (6.7 cents per ADS****) in Q1 2007.
Intangible assets at 31 March 2008 were £380.4 million, comprising goodwill of £345.2 million and other intangible assets of £35.2 million, compared to £344.7 million and £39.4 million respectively at 31 December 2007.
Total accounts receivable were £72.0 million at 31 March 2008, comprising £53.9 million of trade receivables and £18.1 million of amounts recoverable on contracts, compared to £68.2 million at 31 December 2007, comprising £43.7 million of trade receivables and £24.5 million of amounts recoverable on contracts. Days sales outstanding (DSOs) were 52 at 31 March 2008 compared to 49 at 31 December 2007 and 41 at 31 March 2007. Having been temporarily higher at the end of Q1 2008, DSOs are now back to more typical levels following strong cash receipts in April.
Cash flow and share buyback programme
Net cash at 31 March 2008 was £55.2 million (6.9) compared to £51.3 million (6.10) at 31 December 2007. Normalised free cash flow in Q1 2008 was £13.7 million (6.12).
During the quarter, £13.0 million of cash was returned to shareholders through the purchase of 15 million shares. It is anticipated that the buyback programme will resume after the announcement of these results.
Group order backlog at the end of Q1 2008 remained at the record high level that was achieved in Q4 2007 and was up more than 20% on the level at the end of Q1 2007.
Fifteen processor licenses were signed in Q1 across the entire range of processor technology. Seven Cortex licenses were signed, including one further license for our newest microprocessor, the Cortex-A9 core. Interest in ARM’s 3D Mali™ graphics technology continued to develop, with Broadcom taking a license in the quarter, further demonstrating ARM’s success in selling specialist processor technologies beyond the traditional ARM® microprocessors.
Q1 2008 PD Licensing Analysis – 542 cumulative processor licenses
| ||Multi-use ||Term ||Per-use || ||Cumulative |
| ||U ||D ||N ||U ||D ||N ||U ||D ||N ||Total ||Total |
|ARM7 ||1 || || || || || || || || ||1 ||154 |
|ARM9 || || || 1 ||1 || ||1 || || ||1 ||4 ||243 |
|ARM11 ||1 || || || || || || || || ||1 ||65 |
|Cortex-M3 || ||1 ||2 || ||1 || || || || ||4 ||18 |
|Cortex-R4 || ||1 || || || || || || || ||1 ||11 |
|Cortex-A8 ||1 || || || || || || || || ||1 ||10 |
|Cortex-A9 || ||1 || || || || || || || ||1 ||5 |
|Mali || || || || || ||1 || || || ||1 ||6 |
|Other || ||1 || || || || || || || ||1 ||30 |
| || || || || || || || || ||Total ||15 ||542 |
U:Upgrade D:Derivative N:New
PD unit shipments grew strongly in Q4 2007 (our partners report royalties one quarter in arrears) buoyed by growth in smartphones, audio players and other consumer electronics. Reported processor unit shipments were 889 million, up 7% sequentially and up 23% compared to Q1 2007. The ARM11™ family achieved 80% sequential growth and now represents approximately 3% of all units shipped. Shipments of new Cortex-based devices gathered pace with more than a quarter of a million units being shipped in a quarter for the first time. The ARM7™ and ARM9™ families now represent 57% and 40% of total shipments respectively. Not only does this demonstrate the longevity of ARM technology but it also underscores the material additional value to be derived from the significant license sales of ARM11 and later technology that have already been made.
The proportion of total units shipped in mobile devices grew to 70%, up from 67% in the previous quarter. The cause of this shift was a significant increase in the proportion of smartphones shipped during the Christmas season which contain more ARM technology per phone than less feature-rich devices. For the quarter, an ARM technology-based mobile phone contained an average of 1.7 ARM microprocessors. As smartphones typically use more sophisticated semiconductor devices with higher average selling prices per chip and as ARM’s royalties are typically based on a percentage of the selling price of the semiconductor chip, the overall average royalty per ARM microprocessor increased from 5.9c in Q4 2007 to 6.2c in Q1 2008.
In Q1 2008, shipments in ARM-based chips in embedded devices continued to grow compared to the previous quarter. Microcontrollers continued to grow, up 55% compared with Q1 2007, and ARM powered smartcards, used in secure identity cards, credit cards and SIM cards grew 25% sequentially to 30m units. The contribution from units shipped in home and enterprise was flat with growth in units shipped in digital TV being offset by falls in digital still cameras.
PIPD license revenue increased sequentially to $11.8 million in Q1 from $10.8 million in Q4 2007. Thirteen physical IP licenses were signed in the quarter for products across the technology portfolio, including two further licenses with top ten semiconductor companies. The attractiveness of ARM’s combined processor and physical IP offer was illustrated again in Q1 with additional business being signed which included technology from both divisions.
In February, we described how the PIPD business is transitioning from the technology catch-up phase which has been a key strategic focus since the acquisition of Artisan, to a more business-as-usual state for the development of leading-edge technology. In order to facilitate this transition, a reorganization of the business was undertaken in Q1 which included the creation of dedicated design centres to align better the skill sets of each centre with the challenges of customer centric development of leading-edge technology. This alignment included the elimination of 30 positions from our US operation in the quarter resulting in a restructuring charge of £0.7 million.
Also in Q1, we have strengthened PIPD’s ability to capitalise on the longer-term growth opportunity by investing both in key engineering and commercial management and in the infrastructure to improve internal processes to drive increased productivity and improved product delivery to customers. We have increased the breadth of our product offering through the addition of products available via our web channel and achieved significant milestones in the delivery of advanced technology to tier-1 customers.
Q1 2008 PIPD Licensing Analysis - 363 cumulative physical IP licenses
| ||Process Node (nm) ||Total |
|Platform Licenses || || |
|Metro ||180/130 ||2 |
|Advantage ||65 ||1 |
|Standard Cell Libraries || || |
|Advantage ||65/90 ||3 |
|Metro || |
|Memory Compilers || || |
|Advantage || |
|Velocity PHYs ||90/65 ||5 |
|Quarter Total || ||13 |
|Cumulative Total || ||363 |
PIPD royalties in Q1 2008 were $9.1 million, up 4% from $8.7 million in Q4 2007 and up 9% from $8.4 million in Q1 2007. Underlying royalties for PIPD were $8.3 million up 20% year-on-year. Sequentially, underlying royalties were broadly flat, representing market share gains given the 2.3% decline (source - Gartner Dataquest, January 2008) in foundry utilization rates during the corresponding period.
At 31 March 2008, ARM had 1,707 full-time employees, a net reduction of 21 since the year end, following the restructuring activities in PIPD in the first quarter. At the end of Q1, the group had 659 employees based in the UK, 494 in the US, 188 in Continental Europe, 293 in India and 73 in the Asia Pacific region.
Change to ARM’s NASDAQ ticker
On 14 April 2008, ARM American Depositary Receipts (ADR) started trading on NASDAQ under the new ticker symbol "ARMH". This change makes ARM ADRs compatible with the new NASDAQ platform and better aligns ARM with other leading NASDAQ semiconductor companies such as BRCM, INTC, MRVL and QCOM. The 3:1 ratio between ARM ordinary shares and an American Depositary Share (ADS) remains unchanged.
ARM is currently involved in ongoing litigation proceedings with Technology Properties Limited, Inc. Details are set out in the 2007 Annual Report on Form 20-F filed with the Securities and Exchange Commission on 7 April 2008. Based on independent legal advice, ARM does not expect any significant liability to arise in respect of these proceedings.
ARM had been involved in ongoing litigation proceedings with Nazomi Communications, Inc. The litigation has now been concluded with a ruling granted in ARM's favour.
Download Q1 2008 Earnings Release - Financial Tables (39KB .pdf ) About ARM
ARM designs the technology that lies at the heart of advanced digital products, from mobile, home and enterprise solutions to embedded and emerging applications. ARM’s comprehensive product offering includes 16/32-bit RISC microprocessors, data engines, graphics processors, digital libraries, embedded memories, peripherals, software and development tools, as well as analog functions and high-speed connectivity products. Combined with the company’s 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
ARM is a registered trademarks of ARM Limited. ARM7, ARM9, ARM11, Cortex and Mali are trademarks of ARM Limited. All other brands or product names are the property of their respective holders. “ARM” is used to represent ARM Holdings plc; its operating company ARM Limited; and the regional subsidiaries: ARM, Inc.; ARM KK; ARM Korea Ltd.; ARM Taiwan Limited; ARM France SAS; ARM Consulting (Shanghai) Co. Ltd.; ARM Belgium N.V.; ARM Germany GmbH; Keil Elektronik GmbH; ARM Embedded Technologies Pvt. Ltd. and ARM Norway, AS.