Growth on the horizon as ARM reports results


06-02-2008

ARM Holdings plc (LSE: ARM); (Nasdaq: ARMHY) has announced its unaudited financial results for the fourth quarter and full year ended 31 December 2007.

Financial Highlights (US GAAP unless otherwise stated)

• FY dollar revenues at $514.3m***, up 6% on 2006
• Growth rate approximately 2x that of the semiconductor industry
• Q4 dollar revenues at $130.3m

Record bookings quarter in Q4
• Group order backlog up more than 30% sequentially to highest ever level
• Backlog in all divisions higher than at end Q3

Continuing cost discipline
• FY 2007 normalised* operating profit up 15% at constant currency (US GAAP up 25% at constant currency) (FY 2007 results translated at FY 2006 effective $/£ exchange rate)
• FY 2007 normalised (and US GAAP) operating expenses held at FY 2006 level
• FY 2007 normalised operating margin at 31.4% (US GAAP 16.5%) despite 8% weakening of $ vs £

£147m cash returned to shareholders in 2007
• £60m returned in Q4 via share buyback and dividend
• FY 2007 dividend up 100% on 2006
• Net cash of £51.3m at end 2007 - in line with target

Ongoing focus on balance sheet efficiency

Divisional Highlights

Processor Division (PD)

• FY license revenue up 18% on 2006
• Q4 bookings at record level - less short-term revenue impact due to three long-term subscription deals where revenue is recognised over the life of license
• Record royalties in Q4, up 15% sequentially to $48.8m on more than 800 million units

Physical IP Division (PIPD)

• Simon Segars, ARM Holdings plc director, appointed GM of PIPD
• FY revenues at $86.7m and Q4 revenues at $19.5m
• Three further IDM licenses signed in Q4
• Q4 royalties up 9% sequentially
• Q4 revenue impacted by internal restructuring activities to position PIPD for growth in 2008

Development Systems

• FY revenue at $55.6m with record revenue in Q4 at $15.5m

Commenting on the results, Warren East, Chief Executive Officer, said: “We are pleased with ARM’s performance in 2007 against a backdrop of slower growth in the semiconductor industry. Full year revenue growth at approximately twice the rate of the industry and strong licensing momentum in our Processor Division throughout the year confirm our continuing market share gains. Although 2007 was a challenging period for revenue in our Physical IP Division, our reallocation of resources during the year towards the development of leading-edge physical IP technology, together with changes to management and organisational focus, positions the business well for growth in 2008.

"We enter 2008 with the group order backlog at its highest ever level, the physical IP business better positioned to capitalise on the long-term growth opportunity and good royalty revenue momentum based on the ongoing proliferation of ARM technology into an ever-broader range of digital devices. Although we remain cautious about the short term industry outlook, we expect ARM to deliver significant constant currency earnings growth in 2008 and believe the long-term growth opportunities for ARM are substantial.”

Q4 2007 – Revenue Analysis
 
Revenue ($M)***
Revenue (£M)
 
Q4 2007
Q4 2006
% Change
Q4 2007
Q4 2006
% Change
Processor Division (PD)
 
 
 
 
 
 
Licensing
38.4
37.4
+3%
19.3
19.5
-1%
Royalties
48.8
42.8
+14%
23.7
22.2
+7%
Total PD
87.2
80.2
+9%
43.0
41.7
+3%
Physical IP Division (PIPD)
 
 
 
 
 
 
Licensing
10.8
18.1
-40%
5.3
9.4
-44%
Royalties
8.71
9.61
-9%
4.31
5.11
-16%
Total PIPD
19.5
27.7
-30%
9.6
14.5
-34%
Development Systems
15.5
14.1
+10%
7.7
7.3
+5%
Services
8.1
8.3
-2%
4.0
4.5
-11%
Total Revenue
130.3
130.3
 
64.3
68.0
-5%
1 Includes catch-up royalties in Q4 2007 of $0.3m (£0.2m) and in Q4 2006 of $0.7m (£0.4m).
FY 2007 – Revenue Analysis
 
Revenue ($M)***
Revenue (£M)
 
FY 2007
FY 2006
% Change
FY 2007
FY 2006
% Change
PD
 
 
 
 
 
 
Licensing
163.5
138.3
+18%
83.4
75.7
+10%
Royalties
176.5
164.1
+8%
88.0
88.7
-1%
Total PD
340.0
302.4
+12%
171.4
164.4
+4%
PIPD
 
 
 
 
 
 
Licensing
54.4
64.2
-15%
27.3
34.9
-22%
Royalties
32.31
34.91
-7%
16.11
19.1¹
-16%
Total PIPD
86.7
99.1
-13%
43.4
54.0
-20%
Development Systems
55.6
53.0
+5%
27.9
28.8
-3%
Services
32.0
29.1
+10%
16.5
16.1
+2%
Total Revenue
514.3
483.6
+6%
259.2
263.3
-2%
1 Includes catch-up royalties in FY 2007 of $2.7m (£1.4m) and in FY 2006 of $3.1m (£1.7m). 
Q4 2007 – Financial Summary
 
£M
US GAAP Normalised*
US GAAP Reported
Q4 2007
Q4 2006
Q4 2007
Q4 2006
Revenue
64.3¹
68.0
64.3
68.0
Income before income tax 21.3 21.3
11.5
9.4
Operating margin
31.5%
29.0%
16.3%
11.4%
Earnings per share (pence)
1.25
1.49
0.74
0.87
Net cash generation**
10.5
13.3
 
 
Effective fx rate  ($/£)
2.02
1.92
 
 
¹ Equivalent to £68.0m at Q4 2006 effective $/£ rate
YTD 2007 – Financial Summary
 
£M
US GAAP Normalised*
US GAAP Reported
FY 2007
FY 2006
FY 2007
FY 2006
Revenue
259.2¹
263.3
259.2
263.3
Income before income tax
86.7
90.1
48.2
57.0
Operating margin
31.4%
31.7%
16.5%
17.1%
Earnings per share (pence)
4.67
5.08
2.70
3.22
Net cash generation**
57.1
50.3
 
 
Effective fx rate  ($/£)
1.98
1.84
 
 
¹ Equivalent to £279.9m at FY 2006 effective $/£ rate
Current trading and prospects
In the current uncertain macroeconomic environment, and at this early stage in the year, we remain cautious on the outlook for the semiconductor industry for 2008.
Within ARM, we have continued to build on our market-leading position and consequently we enter 2008 with the group order backlog at its highest ever level, the physical IP business better positioned to capitalise on the long-term growth opportunity and good royalty revenue momentum based on the continuing proliferation of ARM technology into an ever-broader range of digital devices.
Given this combination of a well-positioned business operating within uncertain industry conditions, we expect dollar revenues in Q1 2008 to be broadly similar to Q4 2007 levels. Assuming no marked deterioration in the trading environment, we expect to increase dollar revenues in FY 2008 by at least the growth rate achieved in 2007. With the operating leverage inherent in ARM’s business model, driven primarily by growth in high-margin royalty revenues, we expect constant currency earnings growth in FY 2008 to be significantly higher than revenue growth.
*******
CONTACTS: 
Fiona Laffan/Pavla Shaw                                          
Brunswick                                                                                                                
 +44 (0)207 404 5959     
Tim Score/Bruce Beckloff 
ARM Holdings plc 
+44 (0)1628 427800       
* Normalised figures are based on US GAAP, adjusted for stock-based compensation charges, amortisation of intangible assets and other charges. For reconciliation of GAAP measures to normalised non-GAAP measures detailed in this document, see notes 7.1 to 7.27.
** Before dividends and share buybacks, net cash flows from share option exercises and acquisition consideration - see notes 7.14 to 7.18.
*** 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.

For the full report, please see http://www.arm.com/news/19813.html

 

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