ARM Holdings PLC Reports Results For The Third Quarter And Nine Months Ended 30 September 2015

 

*** 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. Over 95% of invoicing is in dollars.
Includes a deduction, recognised in Q1 2014, of $5 million for prior years’ royalties over-reported to ARM by a customer.

Board Appointments

On 4 August 2015, ARM announced the appointment of Lawton Fitt and Stephen Pusey as independent non-executive directors. They both joined the board on 1 September 2015, with Lawton also joining the audit committee.

Total revenues

Total dollar revenues in Q3 2015 were $375.5 million, up 17% versus Q3 2014. Q3 sterling revenues of £243.1 million were up 24% year-on-year.

Year-to-date dollar revenues amounted to $1,080.7 million, up 16% on the relevant period in 2014.

Licence revenues

Total dollar licence revenues in Q3 2015 were up 2% on Q3 2014 at $145.1 million, representing 39% of Group revenues. Processor licence revenues in Q3 2015 were up 5% at $125.9 million. Physical IP licence revenues were down 14% at $19.2 million. Physical IP licensing has declined in Q3 2015 compared with prior quarters primarily as we are completing agreements related to 28nm and 20nm nodes and are starting to transition to delivering technology related to more advanced nodes.

Following multiple periods of accelerated licence revenue growth (29% compound annual growth in the five years 2010-2014), and in-line with previous guidance, we continue to expect licence revenue growth of 5-10% per annum in the medium term.

Group order backlog at the end of Q3 2015 was down about 7% sequentially. Based on the medium-term outlook for licence revenue growth, we expect quarterly sequential movements of backlog to remain lumpy.

Royalty revenues

Total dollar royalty revenues in Q3 2015 were up 35% on Q3 2014 at $203.0 million, representing 54% of Group revenues. Royalty revenues comprised $185.6 million from processors and $17.4 million from physical IP. Processor royalty revenues increased 37% year-on-year. Relevant industry revenues were down about 2% over the corresponding shipment period (i.e. Q2 2015 compared to Q2 2014).

During Q3, ARM continued to benefit from recently-launched ARMv8-A based chips, which delivered a combination of premium chip pricing and an elevated royalty percentage per chip. Our guidance remains unchanged; over the medium-term we expect royalty revenue growth to outperform semiconductor industry growth by 15 percentage points.

Other revenues

Sales of software and tools in Q3 2015 were $11.5 million, a decrease of 15% year-on-year. Service revenues were $15.9 million in Q3 2015, up 13% year-on-year. Together revenues from software and tools and services represented 7% of Group revenues.

Gross margins

Normalised gross margins in Q3 2015 were 96.2% compared to 96.3% in Q2 2015 and 94.8% in Q3 2014.

Operating expenses and operating margin

Normalised income statements for Q3 2015, YTD 2015, Q3 2014 and YTD 2014 are included in notes 7.8 to 7.11 below which reconcile IFRS to the normalised non-IFRS 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 £108.4 million in Q3 2015 compared to £99.3 million in Q2 2015 and £86.8 million in Q3 2014. Normalised operating expenses in Q3 2015 included a credit of approximately £4 million relating to the revaluation of monetary items due to changes in foreign exchange rates and the impact of a stronger dollar on the accounting for derivative instruments.

Normalised operating expenses in Q4 2015 (assuming effective exchange rates similar to current levels) are expected to be in the range of £117 million to £119 million. This faster growth in operating expenses reflects the increased investments announced at ARM Capital Markets Day on 15 September 2015. These investments are expected to accelerate ARM’s share gains in key markets such as enterprise infrastructure, and create an opportunity for new revenue streams from the Internet of Things.

Normalised operating margin was 51.7% in Q3 2015, compared to 52.9% in Q2 2015 and 50.4% in Q3 2014.

Normalised research and development expenses were £55.3 million in Q3 2015, representing 23% of revenues, compared to £51.1 million in Q2 2015 and £41.2 million in Q3 2014. Normalised sales and marketing expenses were £23.6 million in Q3 2015, representing 10% of revenues, compared to £21.1 million in Q2 2015 and £19.8 million in Q3 2014. Normalised general and administrative expenses were £29.5 million in Q3 2015, representing 12% of revenues, compared to £27.1 million in Q2 2015 and £25.8 million in Q3 2014.

Total IFRS operating expenses in Q3 2015 were £131.4 million (Q3 2014: £107.0 million) including share-based payment costs and related payroll taxes of £18.8 million (Q3 2014: £17.4 million), and amortisation of intangible assets, other acquisition-related charges, restructuring charges and impairment of investments of £4.2 million (Q3 2014: £2.8 million).

Total share-based payment costs and related payroll tax charges of £19.4 million in Q3 2015 were included within cost of revenues (£0.6 million), research and development (£12.7 million), sales and marketing (£3.1 million) and general and administrative (£3.0 million).

Earnings and taxation

Normalised profit before tax in Q3 2015 was £128.4 million compared to £101.2 million in Q3 2014. After including acquisition-related and share-based payment costs, intangible amortisation, impairments, restructuring charges and share of results of joint ventures, IFRS profit before tax was £102.9 million in Q3 2015 compared to £79.2 million in Q3 2014.

The Group's effective normalised tax rate was 16.0% in Q3 2015 (IFRS: 16.5%). ARM’s full-year normalised effective tax rate in 2015 is expected to be about 16%.

In Q3 2015, normalised fully diluted earnings per share were 7.61 pence (34.59 cents per ADS

[1]) compared to 5.92 pence (28.80 cents per ADS) in Q3 2014. IFRS fully diluted earnings per share in Q3 2015 were 6.06 pence (27.55 cents per ADS) compared to earnings per share of 4.57 pence (22.24 cents per ADS) in Q3 2014.

Balance sheet

Intangible assets at 30 September 2015 were £715.3 million, comprising goodwill of £626.8 million and other intangible assets of £88.5 million, compared to £567.0 million and £77.2 million respectively at 31 December 2014. The increase in intangible assets is primarily due to the acquisition of Sansa Security. See note 6 for more information.

Total accounts receivable were £166.5 million at 30 September 2015, compared to £138.6 million at 31 December 2014.

 

Cash flow

Normalised cash generation in Q3 2015 was £86.6 million. Net cash at 30 September 2015 was £898.2 million, compared to £861.7 million at 31 December 2014.

Technology Licensing

Processor licensing


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