ARM Holdings plc Reports Results For the First Quarter 2016

CAMBRIDGE, UK, 20 APRIL 2016 — ARM Holdings plc [(LSE: ARM); (NASDAQ: ARMH)] announces its unaudited financial results for the first quarter ended 31 March 2016.

* Normalised figures are based on IFRS, adjusted for acquisition-related charges, share-based payment costs, share of results of joint ventures, intangible amortisation and profit on disposal of investments. For reconciliation of IFRS measures to normalised non-IFRS measures detailed in this document – see notes 5.7 and 5.8.

** Net cash generation is defined as movement on cash, cash equivalents, short-term and long-term deposits and similar instruments less interest accrued, adding back dividend payments and share buy-backs, investment and acquisition consideration, other acquisition-related payments, share-based payroll taxes, investment in and loans to joint ventures, payments to Linaro, and deducting inflows from share option exercises and proceeds on disposal of investments – see notes 5.3 to 5.6.

Q1 2016 Financial Summary

• Group revenues in US$ up 14% year-on-year (£ revenues up 22% year-on-year)
• Processor royalty revenues in US$ up 15% year-on-year, outperforming the industry by 18pp1
• Normalised operating expenses were impacted by weaker sterling; at constant exchange rate normalised operating expenses were 2% higher than Q4 2015, and around the top end of the guidance range2
• Normalised PBT and EPS up 14% and 15% year-on-year respectively

Progress on long-term growth drivers in Q1 2016

• Growth in adoption of ARM® processor technology
  • 39 processor licences signed by a broad range of companies, including leading semiconductor vendors and OEMs
  • Target applications included mobile computing, automotive, networking infrastructure and servers
• Strong demand for ARM’s most advanced technology
  • 8 licences signed for ARM Cortex-A technology for high-performance and highly efficient application processors
  • 2 Mali™ multimedia processor licences signed, including licences for advanced graphics and display processors
  • ARM extended long-term agreements with two leading foundries to cover a wider range of physical IP technologies from 55nm to 14nm
• Growth in shipments of chips based on ARM technology
  • 4.1 billion ARM-based chips shipped, up 10% year-on-year
  • ARMv8-A, octacore and Mali penetration increased in smartphones, driving a higher royalty per mobile device
  • Continuing growth in chips for networking infrastructure, up 10% year-on-year
  • ARM-based microcontrollers and smartcards up 20% year-on-year
  • 50% of physical IP royalty generated from leading-edge nodes from 28nm to 14nm as ARM technology is increasingly used in semiconductor companies’ most advanced chips

Outlook

At the start of 2016, ARM has seen its current technology gaining share in target end-markets, and strong demand for our next generation of products from a wide range of companies. The licensing pipeline for the rest of the year is robust, with leading companies looking to license ARM technology for their next generation products. We expect that ARMv8-A technology will continue to penetrate in mobile and enterprise markets, and the higher royalty rate earned on these products will underpin future royalty revenues.

Macroeconomic uncertainty remains, and could influence consumer and enterprise spending in 2016, potentially impacting semiconductor sales and industry confidence. Based on current conditions in the semiconductor industry, we expect Group dollar revenues for the full year to be in line with market expectations.

Simon Segars, Chief Executive Officer, said:

“Devices are increasingly being improved by first becoming digital, and then smart, and then connected. This is generating huge amounts of data that needs to be protected, transmitted, managed and stored across the internet. These trends are creating fantastic opportunities for ARM and our Partners. They are driving our licensing, as more companies need access to smart processors to build intelligence into more products, and they will drive future royalty revenue as more consumers and enterprises choose to buy smarter and more connected products.

At our Capital Markets Day in September, we announced a step-up in our investment plans to accelerate share gains in markets such as networking infrastructure and servers, and to create new products that will take advantage of opportunities in the Internet of Things (IoT). In line with those plans we have increased investment in R&D as we develop the next generation of processor, physical IP and on-chip systems technologies. We have also increased investment in support of our ecosystem partners; and we are assisting OEMs and end-users to test and build ARM-based systems, especially in new markets. The future returns on these investments remain in line with our expectations. They will drive our future royalty and license revenue growth, and enable us to extend our opportunities and to create new revenue streams.”

*** Dollar revenues are based on the Group’s actual dollar invoicing, where applicable, and use 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.

Financial review
(IFRS unless otherwise stated)

Total revenues

Total dollar revenues in Q1 2016 were $398.0 million, up 14% versus Q1 2015. Q1 sterling revenues of £276.4 million were up 22% year-on-year.

Licence revenues

Total dollar licence revenues in Q1 2016 increased by 11% year-on-year to $148.3 million, representing 37% of Group revenues. Licence revenues comprised $135.3 million from processor licences and $13.0 million from physical IP licences. Processor licence revenue was up 24% year-on-year driven by 39 processor licences signed. Physical IP was down 46% year-on-year mainly due to the timing of engineering milestones linked to revenue recognition on contracts for the next generation of advanced physical IP.

Group order backlog at the end of Q1 2016 was down approximately 5% sequentially.

Royalty revenues

Total dollar royalty revenues in Q1 2016 were up 17% on Q1 2015 at $215.7 million, representing 54% of Group revenues.

Royalty revenues comprised $191.9 million from processors and $23.8 million from physical IP. Processor royalty revenue grew 15% year-on-year, reflecting continuing market share gains, and the increasing proportion of ARMv8-A processor-based chips in mobile computing and enterprise devices. Physical IP royalty revenue grew 39% year-on-year due to the increase in shipments of wafers using ARM’s physical IP at advanced nodes.

Relevant industry revenues were down 3% over the corresponding shipment period (i.e. calendar Q4 2015 compared to calendar Q4 2014).

Other revenues

Sales of software and tools in Q1 2016 were $19.6 million, an increase of 34% year-on-year. Part of the year-on-year increase is the inclusion of revenues from the acquisition of Carbon Design Systems in Q3 2015. Service revenues were $14.4 million in Q1 2016, down 7% year-on-year. Together revenues from software and tools and services represented 9% of Group revenues.

Gross margins

Normalised gross margins in Q1 2016 were 96.7% compared to 96.5% in Q4 2015 and 95.6% in Q1 2015. Operating expenses and operating margin

Normalised income statements for Q1 2016 and Q1 2015 are included in notes 5.7 and 5.8 below which reconcile IFRS to the normalised non-GAAP measures referred to in this earnings release. Non-GAAP measures have been presented as we believe that they allow a clearer comparison of operating results.

Normalised operating expenses were £132.9 million in Q1 2016 compared to £123.9 million in Q4 2015 and £100.0 million in Q1 2015. Approximately £27m of the year-on-year increase in normalised operating expenses was due to ongoing investments in R&D and supporting business infrastructure, which included a 20% year-on-year increase in the headcount of the Group and an annual pay-rise. The remaining £6m is due to the impact of weaker sterling. The change to effective exchange rates increased normalised operating expenses by £4m as a result of the translation of non-sterling costs into sterling; and a further £2 million relates to the revaluation of monetary items. Since over 95% of ARM’s revenues are dollar denominated, the impact on operating expenses from a weaker sterling is more than offset by the increase in sterling revenue.

Removing the foreign exchange impact on translation and the revaluation of monetary items, normalised operating expenses were 27% higher than Q1 2015, 2% higher than Q4 2015, and around the top end of the guided range.

Normalised operating expenses in Q2 2016 (assuming effective exchange rates similar to current levels of 1.42 GBP/USD) are expected to be similar to Q1 2016, in the range £130-133 million.

Normalised operating margin was 48.6% in Q1 2016, compared to 50.5% in Q4 2015 and 51.7% in Q1 2015.

Normalised research and development expenses were £68.1 million in Q1 2016, representing 25% of revenues, compared to £60.7 million in Q4 2015 and £47.8 million in Q1 2015. Normalised sales and marketing expenses were £24.9 million in Q1 2016, representing 9% of revenues, compared to £26.8 million in Q4 2015 and £21.6 million in Q1 2015. Normalised general and administrative expenses were £39.9 million in Q1 2016, representing 14% of revenues, compared to £36.4 million in Q4 2015 and £30.6 million in Q1 2015.

Total IFRS operating expenses in Q1 2016 were £157.0 million (Q1 2015: £115.4 million) including share-based payment costs and related payroll taxes of £19.7 million (Q1 2015: £18.7 million), amortisation of intangible assets and other acquisition-related charges of £4.4 million (Q1 2015: £2.4 million) and profit on disposal of investments of £nil (Q1 2015: £5.7 million). Total share-based payment costs and related payroll tax charges of £20.3 million in Q1 2016 were included within cost of revenues (£0.6 million), research and development (£13.9 million), sales and marketing (£3.0 million) and general and administrative (£2.8 million).

Earnings and taxation

Normalised profit before tax in Q1 2016 was £137.5 million compared to £120.5 million in Q1 2015. After including acquisition-related and share-based payment costs, intangible amortisation, profit on disposal of investments and share of results of joint ventures, IFRS profit before tax was £112.0 million in Q1 2016 compared to £103.4 million in Q1 2015.

The Group's effective normalised tax rate was 15.1% in Q1 2016 (IFRS: 18.3%). ARM’s full-year normalised effective tax rate in 2016 is expected to be about 15%.

In Q1 2016, normalised fully diluted earnings per share were 8.2 pence (35.5 cents per ADS3) compared to 7.1 pence (31.7 cents per ADS) in Q1 2015. IFRS fully diluted earnings per share in Q1 2016 were 6.5 pence (27.8 cents per ADS) compared to 6.0 pence (26.7 cents per ADS) in Q1 2015.

Balance sheet

Intangible assets at 31 March 2016 were £760.7 million, comprising goodwill of £671.0 million and other intangible assets of £89.7 million, compared to £650.7 million and £92.0 million respectively at 31 December 2015.

Total accounts receivable were £224.9 million at 31 March 2016, compared to £183.7 million at 31 December 2015; see note 3 for more information.

Cash flow

Normalised cash generation in Q1 2016 was £80.6 million. Net cash at 31 March 2016 was £1,005.9 million, compared to £950.9 million at 31 December 2015. ARM intends to continue its share buyback programme in order to maintain a flat share count over the medium term. In Q1 2016, 2.0 million shares were bought back at a total cost of £18.3 million.

Technology Licensing

Processor licensing

Thirty-nine processor licences were signed in Q1 2016 reflecting the ongoing demand for ARM’s latest technology. Included within the 27 companies signing licences were some of the largest semiconductor companies and OEMs who are continuing to develop their future products on ARM technology, and there were sixteen companies acquiring their first ever ARM processor licence.

Eight of the licences signed were for ARM’s Cortex-A series processors, mainly for use in smartphones, networking infrastructure and secure server applications.

Twenty-two of the licences signed in Q1 were for Cortex-M class processors for use in the key components of smart connected devices: microcontrollers, smart sensors and low-power wireless communication chips. Two of these licences were for next-generation processors, codenamed Teal and Grebe, that are designed for energy-efficient and secure embedded applications from smart automotive to wearable technology.

Five of the licences were for Cortex-R class processors for use in real-time embedded applications including next-generation modems, high-end camera equipment, storage, and automotive applications.

ARM signed two licences for its Mali multimedia processors which are used in devices with graphics displays, such as smartphones, mobile computing devices, digital TV and automotive applications.

Q1 2016 and Cumulative Processor Licensing Analysis

* Includes ARM7, ARM9, ARM10 and ARM11
** Includes one company taking their first Mali graphics licence
*** Includes CPU and Mali subscription licences
† Includes all extant licences that are 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 7nm. During the quarter ARM signed significant agreements with two leading foundries, including UMC, which extended our existing relationship to cover a greater range of technologies.

Currently ARM is developing new platforms from 40nm for smart sensors for the low-cost Internet of Things devices, to 7nm for advanced chips that will be used in consumer products and enterprise equipment and for future applications such as augmented reality and computer learning. ARM is also investing in program with leading foundries and EDA companies to develop physical IP for even more advanced nodes.

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:

• OPNFV (Open Platform for Network Function Virtualisation) announced the availability of its latest software (codenamed Brahmaputra) including support for ARM based networking equipment
• ENEA opened the “Pharos Lab” to provide software developers and operators with compliance testing capability for networking applications on ARM-based systems
• Broadcom announced its 5G-HD WiFi chip, based on ARMv8-A technology, for enterprise access points at high-traffic venues like airports, stadiums, convention centers, and university campuses
• SK Telecom in Korea, Orange and Bouygues Telecom in France, Swisscom in Switzerland and Tata Communication in India announced plans to deploy nationwide Low Power Wide Area (LPWA) LoRa networks creating huge opportunities for the deployment of millions of ARM-based IoT devices.
• Mobile Network Operators, including Vodafone, Deutsche Telekom, Telefonica, China Mobile, Eisalat, KDDI, AT&T, and Verizon Wireless, are progressing trials of LPWA solutions in licensed spectrum. These technologies include Narrow Band (NB-IoT), Extended Coverage EGPRS (EC-EGPRS) and LTE Machine Type Communication (Cat-M) driving growth of millions of ARM-based mobile operator-connected IoT devices.
• HP Enterprise announces that they are using ARM’s mbed IoT Device Platform to manage networks of connected applications for industrial automation, smart cities, environmental monitoring and smart lighting.
• Multiple partners announced new ARM’s chips for IoT devices including NXP, Renesas, and STMicroelectronics
• Several OEMs announced new ARM-based server products including Gigabyte (based on Cavium ThunderX), Soft Iron and Silver Linings (both based on AMD A1100)

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

Technology Royalties

Processor royalties

Q1 royalty revenue was generated from the shipment of 4.1 billion ARM processor-based chips, up 10% year-on-year.

Growth in the number of ARM-based chips shipped into embedded applications continued, with particularly strong growth in ARM-based chips for automotive applications, smartcards, smart sensors and power management chips.

Q1 2016 Processor Unit Shipment Analysis

* Includes ARM7, ARM9, ARM10 and ARM11

Increasing the royalty revenue opportunity per chip

During the quarter, 20 companies reported that they had shipped a total of 280 million ARMv8-A based chips. Of these approximately 100 million chips contained a high number of cores, enabled by ARM big.LITTLE technology. ARMv8-A based chips are being deployed in smartphones, tablets, other consumer electronic devices, enterprise networking equipment and servers.

Mali, ARM’s multimedia processor had a strong quarter with 27 companies now shipping application processors containing a Mali graphics processor. Most Mali graphics processors are found in chips containing an ARM Cortex-A class processor, increasing the royalty percentage per chip.

ARM’s physical IP dollar royalty revenue in Q1 2016 was up 38% year-on-year, with around 50% of royalty revenues generated from wafers manufactured at advanced nodes from 28nm to 14/16nm.

People

At 31 March 2016, ARM had 4,064 full-time employees, compared with 3,975 at 31 December 2015, and 3,397 at the end of 31 March 2015. At the end of Q1 the Group had 1,609 employees based in the UK, 935 in the US, 654 in Continental Europe, 541 in India and 325 in the Asia Pacific region.

Financial Tables
To read financial tables, click here

About ARM

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 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.

1 Relevant industry revenues were down 3%, World Semiconductor Trade Statistics, April 2016

2 Removing translational FX impact and a £2m charge related to the revaluations of monetary items due to the weaker sterling

3 Each American Depositary Share (ADS) represents three shares.