CAMBRIDGE, UK, Oct. 21 2003 (PRIMEZONE) -- ARM Holdings plc (LSE:ARM) (Nasdaq:ARMHY) announces its unaudited financial results for the third quarter and nine months ended 30 September 2003.
HIGHLIGHTS (Figures in US GAAP)
Third quarter ended 30 September 2003
-- Revenues at GBP31.7 million, up from GBP31.4 million in Q2 2003
-- License revenues amounted to GBP13.1 million, up from GBP12.7 million in Q2 2003. 16 licenses for microprocessor cores signed in the quarter, compared to 11 in the second quarter. Seven new partners signed in the quarter
-- Royalty revenues of GBP11.0 million with record unit shipments of 188 million units (52% up on Q3 2002). 5 new partners commenced shipping in the quarter
-- Two new ARM11(TM) family cores, incorporating new security, low power consumption and processing efficiency features, launched last week at Microprocessor Forum
-- Operating margin increased to 17.7%, up from 17.2% in Q2 2003
-- Profit before taxation at GBP6.8 million, 4% higher than Q2 2003
-- Net cash generation in the quarter of GBP10.4 million. Cash balance of GBP151.4 million at end Q3 2003, up from GBP141.0 million at end Q2 2003
-- Earnings per fully diluted share at 0.5 pence (2.3 cents per ADS*) (Q2 2003: 0.4 pence and 2.1 cents respectively)
-- Each American Depositary Share (ADS) represents three shares
Commenting on the third quarter results, Warren East, Chief Executive Officer, said:
"Following the up-tick in licensing activity in Q2, we are pleased to see the promising mix of license deals in Q3 between new and existing partners, across a range of licensing models. We see this improvement arising both as a result of the increased adoption of the ARM(R) architecture among semiconductor companies and of the timing of the ARM11(TM) product cycle. New product introductions are expected to continue to drive further licensing opportunities, however we remain cautious as to when ARM's licensing revenues will benefit from any general semiconductor recovery."
Tim Score, Chief Financial Officer, added:
"We are encouraged by further sequential increases in revenues and profits and by the generation of more than GBP10 million of cash in the third quarter. Nevertheless, we intend to continue to manage our cost base carefully as the timing of any general industry-led upturn in licensing activity levels remains uncertain."
Operating review
Market conditions, current trading and prospects
News flow from the semiconductor industry in the last quarter indicates that expectations of improved trading conditions are now more widespread. Despite these expectations, it remains uncertain as to how quickly an improvement in industry conditions will feed through to sustained levels of higher licensing activity for ARM. In the meantime, recent new product introductions are expected to result in incremental licensing opportunities.
In the third quarter, a number of important licensing deals were signed and record royalty results achieved, both in terms of revenues and unit shipments. As a consequence of these licensing deals, the backlog (defined as the aggregate value of contracted business not yet recognised in the profit and loss account) was higher at the end of September 2003 than it was at the end of June 2003.
Although a higher than expected proportion of those licensing deals that we anticipated signing in the second half have closed in the third quarter, based on the current levels of licensing activity and on the momentum underlying royalty revenues and despite recent weakness in the US dollar, we expect that revenues in Q4 will be similar to Q3 levels.
Licensing
In our Q2 earnings release, we referred to a number of strategic sales opportunities in the pipeline. We have continued to progress these discussions; indeed, in the third quarter we closed an architecture license with one of our leading partners and signed a term license with another partner covering a range of ARM11 core family products.
Future licensing opportunities are underpinned by the forthcoming introduction of new products which incorporate the new technology features announced earlier in the year, including the TrustZone(TM) security extension, the Thumb(R)-2 extension for improved code density and Intelligent Energy Manager(TM) (IEM) software for low power consumption. Two new ARM11 family cores, the ARM1156T2(F)-S(TM) and the ARM1176JZ(F)-S(TM) cores, which include a number of these new technology features, were announced last week at the Microprocessor Forum in San Jose, Calif., as was a new PrimeXsys(TM) Platform powered by these CPUs. Partner feedback on the ARM1136EJ-S(TM) core, which was delivered to lead partners in December 2002, continues to be encouraging and we now have the first ARM11 core family working silicon.
The Foundry Programme continues to be a good entry point for those companies licensing ARM technology for the first time. We anticipate that the momentum behind this Programme will be maintained by the recently-announced introduction of the ARM926EJ(TM) core into the Programme, which single use design licensees are now able to have manufactured by two of our Foundry partners, TSMC and UMC. For the first time in this Programme, ARM is also offering a more complete design package, the ARM926EJ Prime Starter Kit, which includes the core and a new PrimeXsys Platform.
Progress continues to be made in our non-CPU licensing business comprising the licensing of platforms, peripherals, models and application software. For example, since the end of the second quarter, Superscape Group plc, the interactive 3D technology enabling specialist in which ARM holds a 12% equity interest, has announced that the Swerve i3D Graphics Client technology, developed jointly by ARM and Superscape, has been licensed to Motorola, Samsung and Siemens, demonstrating the increasingly widespread acceptance of the Swerve technology.
Royalty revenues and unit shipments
Royalty revenues recognised in the quarter ended 30 September 2003 (we receive and report royalty data one quarter in arrears) were GBP11.0 million on 188 million units shipped, up 77% and 52% respectively on the same period a year ago. These record results were achieved despite the inventory issues in Asia which we referred to in our Q2 earnings release, which negatively impacted the shipments made by some of our partners in the second quarter (but which are reported by us in Q3). A further five partners began shipping ARM core-based products in the quarter to June 2003, bringing the total number of licensees shipping to 55. Average royalty rates in the third quarter were marginally up on the previous quarter (9.17 cents per unit compared to 9.05 cents) due primarily to the increasing proportion of ARM9(TM) family cores being shipped by our partners. Of the total reported unit shipments in the third quarter, 16% related to units based on ARM9 technology. The broad reach of the ARM technology is demonstrated by the fact that royalty revenues are being earned from products being shipped into a wide range of end markets. The wireless market remained the largest end market using ARM technology in the third quarter, accounting for approximately 66% of unit shipments.
People
At the end of September 2003 we had 752 full time employees compared to 721 at 31 December 2002, reflecting the addition of 25 people with the acquisition of Adelante Technologies NV (now ARM Belgium NV), announced in July this year.
Legal matters
In May 2002, Nazomi Communications Inc. filed a lawsuit against ARM claiming that the ARM Jazelle(R) technology infringes Nazomi's US patent number 6,332,215. In February 2003, ARM's motion for partial summary judgement on non-infringement was heard and in May 2003 the "Markman" hearing (which is a proceeding to determine the scope of the patent claims at issue) took place. On 30 September 2003, the ruling on the partial summary judgement was issued, favouring ARM and ruling that products using the current commercial design of the ARM Jazelle technology do not infringe on Nazomi's patent. Only that part of the lawsuit relating to earlier, discontinued ARM prototypes will, for now, proceed.
As part of the out of court settlement of a patent infringement lawsuit against picoTurbo Inc. in December 2001, ARM agreed to invest or otherwise pay the sum of $3,025,000 in cash with respect to a newly incorporated fabless semiconductor company that picoTurbo's shareholders planned to set up to sell ARM microprocessor cores under license from ARM. The amount was disclosed as a contingent liability in ARM's 2001 and 2002 statutory accounts. ARM originally expected that the new company would be incorporated and commence operations during 2002 following agreement of an appropriate business plan and a satisfactory investment agreement to protect the value of ARM's investment. To date, ARM has not received the relevant documentation, but in spite of this, Herodion (picoTurbo's successor entity) has alleged, among other things, that ARM is required to pay the $3,025,000. In an attempt to resolve these issues, ARM and Herodion have submitted the dispute to arbitration in California. Herodion claims, among other things, that ARM has breached the December 2001 settlement agreement and now seeks damages in compensation, including compensation for loss of license revenue and royalty payments. ARM believes that it is unlikely that Herodion's claims will be successful and is confident that the outcome of any arbitration will uphold ARM's position. Notwithstanding this, ARM and Herodion have scheduled mediation for the fourth quarter of 2003 where ARM will consider settlement of this dispute if appropriate terms can be agreed.
Patent protection
The continued protection of our intellectual property and growth of our patent portfolio remains important to us. We have patent families for 300 inventions covering the broad scope of our activities and which comprise, to date, 284 issued patents and 602 patent applications around the world. In 2002 we filed twice as many patents as in 2001 and the rate of patent filing has continued to rise in 2003.
Financial review
Third quarter ended 30 September 2003
Revenues
Total revenues for the third quarter ended 30 September 2003 amounted to GBP31.7 million, representing a 1% increase from GBP31.4 million in the second quarter of 2003, and a 5% decrease over third quarter 2002 revenues of GBP33.3 million.
License revenues amounted to GBP13.1 million representing 41% of revenues compared to GBP12.7 million or 40% of revenues in the second quarter of 2003 and GBP17.9 million or 54% of revenues for the corresponding period in 2002. We signed 16 licenses with partners during the third quarter of 2003, seven of which were with new partners, bringing the total number of semiconductor partners to 122, after taking into account three companies which had signed licenses in previous periods but which are not utilising the license and no longer have access to ARM technology. Of the new partners, two took licenses for the ARM926EJ-S(TM) core, two for the ARM946E-S(TM) core, two took per use licenses for the ARM946E(TM) core and one foundry took a license for the ARM7TDMI(R) core. Of the nine existing partners who took licenses in the quarter, there were three upgrades, where existing partners took licenses to a new family of cores that they had not previously licensed. One of these took a per use license for the ARM926EJ core, one took a term license for a range of ARM11 core family products and one took a license for the next generation of ARM microprocessors. There were five derivatives, where existing partners took licenses to cores within a family of cores that they had previously licensed. Of these, two foundries and one semiconductor partner took licenses for the ARM926 core, one partner took a license for the ARM7TDMI-S(R) core and one partner converted their per use license for the ARM7TDMI core to a term license. Finally, one existing partner took an architecture license.
Royalty revenues in the third quarter were GBP11.0 million accounting for 35% of revenues compared to GBP10.2 million or 33% of revenues in the second quarter of 2003 and GBP6.2 million or 19% of revenues for the corresponding period in 2002. Sales of development systems were GBP4.1 million, representing 13% of total revenues compared to GBP4.8 million or 15% of total revenues in the second quarter of 2003 and GBP5.0 million or 15% of revenues in the third quarter of 2002. Service revenues were GBP3.5 million, representing 11% of total revenues, comprising consulting fees of GBP0.5 million and support, maintenance and training fees of GBP3.0 million compared to total service revenues of GBP3.7 million in the second quarter of 2003 and GBP4.2 million for the corresponding period in 2002.
Gross margins
Gross margins for the third quarter were 92%, the same level as in Q2 2003, reflecting the proportion of development systems and service revenues.
Operating expenses
Research and development expenses were GBP12.7 million in the third quarter of 2003 representing 40% of revenues. This compares to GBP12.1 million or 39% of revenues in the second quarter of 2003. The increase is due primarily to the acquisition of ARM Belgium, which added around GBP0.7 million to research and development expenses in the third quarter. Sales and marketing costs for the third quarter were GBP5.9 million or 19% of revenues compared to GBP5.7 million or 18% of revenues in the second quarter of 2003. General and administration expenses decreased from GBP5.7 million (18% of revenues) in the second quarter of 2003 to GBP5.0 million (16% of revenues) in the third quarter.
Operating margins
Operating margins were 17.7% for the third quarter of 2003 compared to 17.2% for the second quarter of 2003.
Interest
Interest in the third quarter rose slightly to GBP1.2 million, reflecting the higher average cash balances in the quarter.
Earnings and taxation
Income before income tax for the third quarter of 2003 was GBP6.8 million or 21.6% of revenues compared to GBP6.6 million or 20.9% of revenues in the second quarter of 2003 and GBP8.0 million or 24.0% of revenues in the third quarter of 2002.
Third quarter fully diluted earnings per share prepared under US GAAP were 0.5 pence (2.3 cents per ADS) compared to 0.6 pence (2.7 cents per ADS) for the corresponding period in 2002 and 0.4 pence (2.1 cents per ADS) in the second quarter of 2003.
Balance sheet and cash flow
Net cash inflow from operating activities of GBP12.5 million was generated in the third quarter, measured under UK GAAP. Capital expenditure in the quarter was GBP0.4 million. Cash and short term investments increased by GBP10.4 million in the quarter to GBP151.4 million.
Accounts receivable decreased to GBP19.5 million at 30 September 2003 from GBP19.9 million at 30 June 2003. The allowance against receivables decreased to GBP1.6 million at 30 September 2003 compared to GBP2.3 million at the end of 30 June 2003, primarily due to the write-off of one receivable of circa GBP0.7 million which had been fully provided.
Dividend
Consistent with statements made in previous quarters, the Board has no immediate plans to return cash to shareholders, either by payment of a dividend or by other means, but this position continues to be regularly reviewed.
ARM Holdings plc
Third Quarter and Nine Months Results - US GAAP
(in thousands except per share data)
Quarter Quarter
ended ended
30 September 30 September
2003 2002
Unaudited Unaudited
GBP'000 GBP'000
Revenues
Product revenues 28,242 29,137
Service revenues 3,486 4,162
Total revenues 31,728 33,299
Cost of revenues
Product costs (1,264) (1,938)
Service costs (1,251) (1,709)
Total cost of revenues (2,515) (3,647)
Gross profit 29,213 29,652
Research and development (12,711) (12,219)
Sales and marketing (5,886) (6,425)
General and administration (5,002) (4,009)
Total operating expenses (23,599) (22,653)
Income from operations 5,614 6,999
Interest 1,228 1,027
Minority interest - (47)
Income before income tax 6,842 7,979
Provision for income taxes (2,018) (2,115)
Net income 4,824 5,864
Net income 4,824 5,864
Other comprehensive income
Foreign currency adjustments 189 (271)
Unrealized holding gain on
available-for-sale securities,
net of tax 1,950 --
Total comprehensive income 6,963 5,593
Earnings per share (assuming
dilution)
Shares outstanding ('000) 1,038,088 1,019,888
Earnings per share - pence 0.5 0.6
Earnings per ADS (assuming
dilution)
ADS's outstanding ('000) 346,029 339,963
Earnings per ADS - cents 2.3 2.7
Nine months Nine months Nine months
ended ended ended
30 September 30 September 30 September
2003 2002 2003 (1)
Unaudited Unaudited Unaudited
GBP'000 GBP'000 $'000
Revenues
Product revenues 83,261 104,946 138,297
Service revenues 10,857 13,664 18,033
Total revenues 94,118 118,610 156,330
Cost of revenues
Product costs (4,089) (5,199) (6,792)
Service costs (3,753) (5,421) (6,234)
Total cost of revenues (7,842) (10,620) (13,026)
Gross profit 86,276 107,990 143,304
Research and (36,735) (36,333) (61,017)
development
Sales and (16,915) (19,043) (28,096)
marketing
General and (16,537) (15,642) (27,468)
administration
Total operating expenses (70,187) (71,018) (116,581)
Income from operations 16,089 36,972 26,723
Interest 3,462 3,080 5,750
Minority interest (105) (177) (174)
Income before income 19,446 39,875 32,299
tax
Provision for income (5,999) (11,839) (9,964)
taxes
Net income 13,447 28,036 22,335
Net income 13,447 28,036 22,335
Other comprehensive
income
Foreign
currency adjustments (94) (563) (156)
Unrealized
holding gain on
available-for-sale
securities, net of
tax 2,888 -- 4,797
Total comprehensive 16,241 27,473 26,976
income
Earnings per share
(assuming dilution)
Shares outstanding 1,029,093 1,022,954
('000)
Earnings per share - 1.3 2.7
pence
Earnings per ADS
(assuming dilution)
ADS's outstanding 343,031 340,985
('000)
Earnings per ADS - 6.5 12.9
cents
(1) US dollar amounts have been translated from sterling at the 30 September 2003 closing rate of $1.661=GBP1
ARM Holdings plc
Consolidated Balance Sheet-US GAAP
30 September 31 December 30 September
2003 2002 2003 (1)
Unaudited Audited Unaudited
GBP'000 GBP'000 $'000
Assets
Current assets:
Cash and cash 151,406 130,304 251,485
equivalents
Accounts 19,477 20,516 32,351
receivable, net of
allowance of
GBP1,628,000 in
2003 and
GBP2,193,000
in 2002
Inventory 1,162 1,515 1,930
Prepaid expenses 11,326 11,345 18,813
and other assets
Total current 183,371 163,680 304,579
assets
Deferred income 1,624 1,697 2,698
taxes
Property and 17,997 25,721 29,893
equipment, net
Intangible 11,635 10,417 19,326
assets
Investments 6,394 4,229 10,620
Total assets 221,021 205,744 367,116
Liabilities and
shareholders' equity
Accounts payable 2,263 4,730 3,759
Income taxes 4,992 3,828 8,292
payable
Personnel taxes 927 824 1,540
Accrued 9,854 8,636 16,367
liabilities
Deferred revenue 13,511 14,415 22,442
Total 31,547 32,433 52,400
liabilities
Minority -- 841 --
interest
31,547 33,274 52,400
Shareholders' equity
Ordinary shares 512 511 850
Additional paid 62,014 69,566 103,005
in capital
Deferred (2,099) (313) (3,487)
compensation
Treasury stock, (7,934) (18,034) (13,178)
at cost
Retained 134,850 121,403 223,986
earnings
Unrealized
holding gain on
available-for-sale
securities, net of
tax 2,888 -- 4,797
Cumulative (757) (663) (1,257)
translation
adjustment
Total 189,474 172,470 314,716
shareholders' equity
Total 221,021 205,744 367,116
liabilities
and
shareholders'equity
(1) US dollar amounts have been translated from sterling at the 30 September 2003 closing rate of $1.661=GBP1
The financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 240 (3) of the Companies Act 1985. Statutory accounts of the Company in respect of the financial year ended 31 December 2002 have been delivered to the Registrar of Companies, upon which the Company's auditors have given a report which was unqualified and did not contain a statement under Section 237(2) or Section 237(3) of that Act.
About ARM
ARM is the industry's leading provider of 16/32-bit embedded RISC microprocessor solutions. ARM licenses its high-performance, low-cost, power-efficient RISC processors, peripherals, and system-on-chip designs to leading electronics companies. The company also provides comprehensive support required in developing a complete system. ARM's microprocessor cores are rapidly becoming a volume RISC standard in applications such as automotive, consumer entertainment, security, imaging, industrial, mass storage, networking and wireless.
ARM, ARM7TDMI, Thumb, RealView and Jazelle are registered trademarks of ARM Limited. ARM7EJ-S, ARM922T, ARM926EJ, ARM926EJ-S, ARM1026EJ-S, ARM11, ARM1136J-S, ARM1156T2-S, ARM1156T2F-S, ARM1176JZ-S, ARM1176JZF-S, AMBA, TrustZone and PrimeXsys are trademarks of ARM Limited. All other brands or product names are the property of their respective holders. "ARM" refers to ARM Holdings plc (LSE: ARM and Nasdaq: ARMHY) together with its subsidiaries including ARM Limited, ARM INC., ARM KK, ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS, ARM Consulting(Shanghai) Co.Ltd and ARM Belgium N.V.
This announcement contains "forward-looking statements" including statements concerning plans, future events or performance and underlying assumptions and other statements which are other than statements of historical fact. The Company's actual results for future periods may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. The factors that could cause actual results to differ materially include, without limitation, potential for significant fluctuation in and unpredictability of results, the ability of semiconductor partners to manufacture and market microprocessors based on the ARMO architecture; the acceptance of ARM technology by systems companies; the availability of development tools, systems software and operating systems; the rapid change in technology in the industry and ARM's ability to develop new products in a timely manner; management of growth; competition from other architectures; general business and economic conditions; the growth in the semiconductor industry; the Company's ability to protect its intellectual property; and ARM's ability to attract and retain employees.
More information on ARM is available at http://www.arm.com
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