ARM Holdings plc Reports Results for the Second Quarter and Half Year Ended 30 June 2011
CAMBRIDGE, UK, 26 July 2011—ARM Holdings plc announces its unaudited financial results for the second quarter and half year ended 30 June 2011.
† Q2 and H1 2010 revenues include catch-up PD royalty revenues of $9.0m (£6.2m)
Progress on key growth drivers in Q2
- Growth in adoption of ARM® processor technology
- 29 processor licenses signed across a broad range of target markets
- 9 Cortex™-A series licenses signed, including a further 2 licenses for Cortex-A15 for use in server infrastructure, and mobile computing applications
- 12 Cortex-M series processor licenses signed as the momentum behind ARM processor-based microcontrollers continues
- Growth in mobile applications
- 1.1 billion ARM processor-based chips shipped into mobile phones and tablets
- Growth beyond mobile into consumer electronics and embedded products
- 0.8 billion ARM processor-based chips shipped into a broad range of consumer and embedded digital devices
- Growth in outsourcing of new technology
- Physical IP: 4 Processor Optimisation Pack licenses signed for Cortex-A series processors
- Mali™ Graphics: 5 Mali licenses signed, including two next generation Mali graphic processors
Warren East, Chief Executive Officer, said:
"In the first half of 2011, we have seen strong license revenues driven by an increase in design activity around ARM technology across a broad range of end applications. Major semiconductor vendors and consumer electronics companies are making long-term commitments to using ARM technology in their future product developments, underpinning growth in ARM’s long-term royalty revenues.
As the addressable market for ARM technology grows, we continue to invest in the development of innovative technology, whilst simultaneously increasing revenues, profits and cash."
ARM enters the second half of 2011 with a healthy order backlog and a robust opportunity pipeline, which are expected to deliver strong performance in license revenues. Relevant data for the second quarter, being the shipment period for ARM’s Q3 royalties, points to a small sequential increase in industry-wide revenues. Q4 royalties are harder to predict as continuing macroeconomic uncertainties may impact consumer confidence.
Given ARM’s relative mix of license and royalty revenues, we expect overall Group dollar revenues in the second half of 2011 to be in line with current market expectations.
1 Includes catch-up PD royalties of $nil in Q2 2011 and $9.0m (£6.2m) in Q2 2010.
2 Includes catch-up PIPD royalties of $nil in Q2 2011 and $0.2m (£0.1m) in Q2 2010.
1 Includes catch-up PD royalties of $nil in H1 2011 and $9.0m (£6.2m) in H1 2010.
2 Includes catch-up PIPD royalties of $0.6m (£0.4m) in H1 2011 and $0.7m (£0.5m) in H1 2010.
(IFRS unless otherwise stated)
Total dollar revenues in Q2 2011 were $190.2 million, up 27% on Q2 2010. Q2 sterling revenues were £117.8 million, up 18% year-on-year. Excluding the catch-up royalty payment of $9.0 million in Q2 2010, total dollar revenues were up 35% year-on-year in Q2 2011.
Half-year dollar revenues in 2011 amounted to $375.7 million, up 28% on H1 2010.
License revenues and backlog
Total dollar license revenues in Q2 2011 increased by 50% year-on-year to $70.4 million, representing 37% of Group revenues. License revenues comprised $58.1 million from PD and $12.3 million from PIPD. Group order backlog at the end of Q2 2011 was flat sequentially. Group order backlog for ARM is at historically high levels and based on the revenue recognition profile of the deals signed during the first half of 2011and the mix of potential deals in the opportunity pipeline, prospects for backlog in the second half of 2011 look promising.
Royalties are recognised one quarter in arrears with royalties in Q2 2011 generated from semiconductor unit shipments in Q1 2011. Total dollar royalty revenues in Q2 2011 increased by 16% year-on-year to $95.4 million, representing 50% of Group revenues. Royalty revenues in Q2 2011 comprised $84.4 million from PD and $11.0 million from PIPD.
Development Systems and Service revenues
Sales of development systems in Q2 2011 increased 4% year-on-year to $13.9 million, representing 7% of Group revenues. Due to normal seasonality, Q3 revenue for development systems may be down sequentially.
Service revenues in Q2 2011 were up 37% to $10.5 million, representing 6% of Group revenues.
Gross margins in Q2 2011, excluding share-based payment costs of £0.9 million (see below), were 94.8% compared to 94.4% in Q1 2011 and 94.9% in Q2 2010.
Operating expenses and operating margin
Normalised income statements for Q2 2011 and Q2 2010 are included in notes 10.13 and 10.14 respectively below which reconcile IFRS to the normalised non-IFRS measures referred to in this earnings release.
Normalised operating expenses (excluding acquisition-related, share-based payments, Linaro-related and restructuring charges) were £59.4 million in Q2 2011 compared to £60.3 million in Q1 2011 and £52.1 million in Q2 2010. Most of the increase in underlying normalised operating expenses between Q2 2010 and Q2 2011 was due to increased investment in the development and deployment of next generation technology, with £2 million of the difference, accounted for in general and administrative expenses, relating to the net impact of accounting for derivative instruments. Normalised operating expenses in Q3 2011 (assuming effective exchange rates similar to current levels) are expected to be in the range £60-£62 million as ARM continues to increase investment in research and development programs.
Normalised operating margin was 44.5% in Q2 2011, compared to 42.5% in Q1 2011 and 42.7% in Q2 2010.
Normalised research and development expenses were £28.9 million in Q2 2011, representing 25% of revenues, compared to £28.9 million in Q1 2011 and £26.4 million in Q2 2010. Normalised sales and marketing expenses were £13.7 million in Q2 2011, being 12% of revenues, compared to £14.0 million in Q1 2011 and £12.8 million in Q2 2010. Normalised general and administrative expenses were £16.8 million in Q2 2011, representing 14% of revenues, compared to £17.6 million in Q1 2011 and £12.9 million in Q2 2010.
Total IFRS operating expenses in Q2 2011 were £78.9 million (Q2 2010: £65.3 million) including share-based payment costs and related payroll taxes of £11.6 million (Q2 2010: £8.8 million), amortisation of intangible assets and other acquisition-related charges of £1.1 million (Q2 2010: £3.1 million) and Linaro-related charges of £6.9 million, representing ARM’s committed aggregate contributions to Linaro for the next two years.
Total share-based payment costs and related payroll tax charges of £12.4 million in Q2 2011 were included within cost of revenues (£0.9 million), research and development (£7.4 million), sales and marketing (£2.4 million) and general and administrative (£1.7 million).
Earnings and taxation
Profit before tax was £33.8 million in Q2 2011 compared to £29.6 million in Q2 2010. After adjusting for acquisition-related charges, share-based payment costs, Linaro-related charges and restructuring charges, normalised profit before tax was £54.2 million in Q2 2011 compared to £43.5 million in Q2 2010. The Group’s effective normalised tax rate was 24.4% (IFRS 21.3%) in Q2 2011 compared to 27.4% (IFRS 26.1%) in Q2 2010. The Group’s effective normalised tax rate for the full year 2011 is estimated to be approximately 26%.
In Q2 2011, fully diluted earnings per share were 1.93 pence (9.31 cents per ADS) compared to earnings per share of 1.62 pence (7.29 cents per ADS) in Q2 2010. Normalised fully diluted earnings per share in Q2 2011 were 2.98 pence per share (14.34 cents per ADS) compared to 2.34 pence (10.51 cents per ADS) in Q2 2010. Balance sheet
Intangible assets at 30 June 2011 were £535.4 million, comprising goodwill of £523.0 million and other intangible assets of £12.4 million, compared to £520.5 million and £11.2 million respectively at 31 March 2011.
Total accounts receivable were £78.3 million at 30 June 2011, comprising £68.6 million of trade receivables and £9.7 million of amounts recoverable on contracts, compared to £75.2 million at 31 March 2011, comprising £68.5 million of trade receivables and £6.7 million of amounts recoverable on contracts.
Days sales outstanding (DSOs) were 43 at 30 June 2011 compared to 41 at 31 March 2011. Cash flow and interim dividend
Total cash (see note 10.6) was £353.8 million at 30 June 2011 compared to £344.3 million at 31 March 2011. Normalised free cash flow in Q2 2011 was £45.7 million.
In respect of the year to 31 December 2011, the directors are declaring an interim dividend of 1.39 pence per share, an increase of 20% over the 2010 interim dividend of 1.16 pence per share. This interim dividend will be paid, out of the UK GAAP distributable reserves of ARM Holdings plc, on 5 October 2011 to shareholders on the register on 9 September 2011. Operating review
A total of 29 processor licenses were signed in Q2 2011.
ARM has continued to see semiconductor companies adopting ARM technology for the first time; nine of the 29 licenses signed in Q2 2011 were with companies taking their first ever ARM license. These licenses were for use in a broad range of end applications, including digital TVs, microcontrollers and Near Field Communication (NFC) chips. In addition, leading semiconductor vendors renewed their commitment to ARM’s technology roadmap by relicensing and upgrading their ARM technology.
Of the 29 licenses signed, nine were for ARM’s advanced Cortex-A series processors, including two new licensees for Cortex-A15 processor and two for ARM’s next generation Cortex-A series ‘Kingfisher’ processor; a product aimed at entry level smartphones and feature phones. The Cortex-A15 processor has now been licensed to 10 partners and will enable the next generation of scalable computing from super-smartphones and mobile computers to servers and networking infrastructure applications.
Non-mobile devices continue to be a major driver for processor licensing with 20 of the licenses signed in Q2 2011 being used in applications beyond mobile, including consumer electronics and enterprise products. In addition, ARM has continued its penetration into the microcontroller market, with twelve of the 20 licenses signed for Cortex-M series processors, taking the total number of Cortex-M series processor licenses to date to more than one hundred.
Five of the licenses were for ARM’s advanced Mali graphics processors for use in mobile and consumer electronics, including two for the next generation of Mali graphics processors.
Q2 2011 and Cumulative Processor Licensing Analysis
* Adjusted for licenses that are no longer expected to generate royalties
Processor Design Wins and Ecosystem Development
Over the last few months many leading technology companies have announced their commitment to develop products around the ARM processor portfolio. These included:
- Microsoft demonstrated their on-going development of "Windows 8" for ARM processor-based low-power system-on-chips from NVIDIA, TI and Qualcomm. In addition, they demonstrated their next generation of Internet Explorer, IE10, running on ARM processor-based chips.
- Google announced that Chrome OS will soon be available for ARM processor-based chips, to enable lower power and smaller form-factor computing devices.
- At Computex, in Taiwan, many leading ODMs and OEMs demonstrated mobile computing applications based on chips containing high-performance dual-core ARM Cortex-A9 processors, including Acer, Asus, Compal and ViewSonic.
- Panasonic released a new Cortex-A series processor-based system-on-chip design for the next generation of smart digital TVs. Panasonic’s UniPhier chip will enable faster loading of Internet content and smart TV applications, as well as reduce device power consumption.
- Important graphics companies continued to demonstrate their software on Mali-400 GPUs, including Unity, a leading game engine developer which supports over 2000 games and is optimising its top gaming titles to run on Mali GPUs in high definition 3D, and Mentor Graphics, who are optimising their embedded user interface product, Inflexion, to run faster on Mali.
Many more partner announcements can be found on the ARM website at www.arm.com/news.
Royalties are recognised one quarter in arrears with royalties in Q2 generated from semiconductor unit shipments in Q1. In Q2 2011, underlying PD royalty revenues increased more than 30% year-on-year. This compares with industry revenues increasing by around 10% in the corresponding shipment period (i.e. Q1 2011 compared to Q1 2010), demonstrating ARM’s market share gains over the last 12 months.
Q2 revenue came from the sales of about 1.9 billion ARM technology-based chips, the highest ever shipped in a quarter.
ARM continued to gain share in non-mobile end-markets compared with one year ago. Shipments of ARM technology-based microcontrollers grew over 100% year on year, compared to less than 10% growth for the overall microcontroller market. Part of this growth was due to an increase in sales of Cortex-M series processor-based chips, which now represent 13% of units shipped, up from 4% in Q2 2010.
The Cortex processor family now represents 19% of units shipped up from 17% in the prior quarter. This sequential increase is primarily due to shipments of Cortex-M series processors in microcontrollers and smartcards, and an increase in Cortex-A series processor shipments driven by high-end smartphones adopting smarter applications processors. Cortex-A series processors now represent 4% of all shipments, up from 1% in Q2 2010.
Q2 2011 Processor Unit Shipment Analysis
The average royalty per chip decreased sequentially from 4.8 cents to 4.5 cents as the strong growth in high-volume low-cost chips, such as microcontrollers, smartcards and wireless connectivity chips outweighed the growth in Cortex-A processor-based chips, which typically command higher average royalty percentages and are normally associated with higher value chips.
The increasing penetration of smartphones continues to benefit ARM. In Q2 2011, ARM’s customers reported about a 300% year-on year increase in Cortex-A processor-based wireless chips sales, driven by a near doubling of the smartphone market and an increasing proportion of these shipments being super-smartphones. For the quarter, ARM achieved an average of 2.5 ARM technology-based chips per mobile handset, the same as the prior quarter, and up from 2.4 a year ago.
ARM continues to see strong demand for physical IP optimised for use with processors, especially the Cortex-A series processor. These processor optimisation packs (POPs) enable the licensee to more readily achieve a high-performance, low-power processor implementation through specially optimised physical IP technology. For every chip implemented using a POP, ARM receives a royalty both for the processor in the chip and for the physical IP. During the quarter ARM signed four licenses for POPs bringing the total number of POP licenses to 17.
In addition, ARM also signed two new royalty bearing platforms at 22nm and 250nm.
Q2 2011 and Cumulative PIPD Licensing Analysis
ARM’s physical IP is used by fabless semiconductor companies to implement their chip designs. During the quarter, ARM continued to see strong demand from these companies to use physical IP at advanced nodes, with a further semiconductor partner choosing to use ARM’s advanced physical IP at 28nm. As our partners transition from older process technology to more advanced nodes so this progression helps to drive ARM’s future royalty revenue.
Physical IP royalties are generated mainly from chips manufactured in foundries such as TSMC, UMC and GLOBAL FOUNDRIES. Royalties are recognised one quarter in arrears with royalties in Q2 generated from semiconductor unit shipments in Q1.
Underlying PIPD royalties in Q2 2011 were $11.0 million, up 12% year on year. ARM continues to benefit from our customers’ high-volume production moving to more advanced nodes at 45nm and below at multiple leading foundries.
At 30 June 2011, ARM had 1,986 full-time employees, a net increase of 97 since the start of the year. At the end of June, the Group had 812 employees based in the UK, 533 in the US, 227 in Continental Europe, 289 in India and 125 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 2010 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 2010 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 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 itself against claims that we have infringed others’ proprietary rights; an infringement claim or a significant damages award would adversely impact ARM’s 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.
Download the ARM Holdings Results Financial Tables For the Second Quarter and Half Year Ended 30 June 2011 (140Kb PDF)
Independent review report to ARM Holdings plc
We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2011, which comprise the consolidated balance sheet as at 30 June 2011, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated cash flow statement, the consolidated statement of changes in equity, and related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.
Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’ issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
26 July 2011
(a) The maintenance and integrity of the ARM Holdings plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The results shown for Q2 2011, Q1 2011, Q2 2010, H1 2011, and H1 2010 are unaudited. The results shown for FY 2010 are audited. The consolidated financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts of the Company in respect of the financial year ended 31 December 2010 were approved by the Board of directors on 28 February 2011 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified and did not contain an emphasis of matter paragraph nor any statement under Section 498 of the Companies Act 2006.
The results for ARM for Q2 2011 and previous quarters as shown reflect the accounting policies as stated in Note 1 to the financial statements in the Annual Report and Accounts filed with Companies House in the UK for the fiscal year ended 31 December 2010 and in the Annual Report on Form 20-F for the fiscal year ended 31 December 2010.
This document contains forward-looking statements as defined in section 102 of the Private Securities Litigation Reform Act of 1995. These statements are subject to risk factors associated with the semiconductor and intellectual property businesses. When used in this document, the words "anticipates", "may", "can", "believes", "expects", "projects", "intends", "likely", similar expressions and any other statements that are not historical facts, in each case as they relate to ARM, its management or its businesses and financial performance and condition are intended to identify those assertions as forward-looking statements. It is believed that the expectations reflected in these statements are reasonable, but they may be affected by a number of variables, many of which are beyond our control. These variables could cause actual results or trends to differ materially and include, but are not limited to: failure to realize the benefits of acquisitions, unforeseen liabilities arising from acquisitions, price fluctuations, actual demand, the availability of software and operating systems compatible with our intellectual property, the continued demand for products including ARM’s intellectual property, delays in the design process or delays in a customer’s project that uses ARM’s technology, the success of our semiconductor partners, loss of market and industry competition, exchange and currency fluctuations, any future strategic investments or acquisitions, rapid technological change, regulatory developments, ARM’s ability to negotiate, structure, monitor and enforce agreements for the determination and payment of royalties, actual or potential litigation, changes in tax laws, interest rates and access to capital markets, political, economic and financial market conditions in various countries and regions and capital expenditure requirements.
More information about potential factors that could affect ARM’s business and financial results is included in ARM’s Annual Report on Form 20-F for the fiscal year ended 31 December 2010 including (without limitation) under the captions, "Risk Factors"(on pages 4 to 11) which is on file with the Securities and Exchange Commission (the "SEC") and available at the SEC’s website at www.sec.gov.
ARM designs the technology that lies at the heart of advanced digital products, from wireless, networking and consumer entertainment solutions to imaging, automotive, security and storage devices. ARM’s comprehensive product offering includes 32-bit 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 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/.
 Source: Semiconductor Industry Association, May 2011
 Source: Semiconductor Industry Association, May 2011
 Gartner: Market Share Analysis: Mobile Devices Worldwide, 1Q11, May 2011
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