ARM Holdings enjoys strong Q3 profit growth
Year-to-date dollar revenues amounted to $568m, up 26% on 2010.
Total dollar license revenues in Q3 2011 increased by 38% year-on-year to $72.6m, representing 38% of group revenues. License revenues comprised $59.7m from PD and $12.9m from PIPD.
Group order backlog at the end of Q3 2011 was flat sequentially. Group order backlog is at historically high levels and prospects for backlog at the year-end look promising.
Royalties are recognised one quarter in arrears with royalties in Q3 2011 generated from semiconductor unit shipments in Q2 2011. Total dollar royalty revenues in Q3 2011 increased year-on-year by 19% to $96.8m, representing 50% of group revenues. This compares with industry revenues increasing by about 1% in the shipment period (i.e. Q2 2011 compared to Q2 2010), demonstrating ARM's continuing market share gains over the last 12 months.
ARM's Q3 royalty revenue has been impacted by the slowdown of sales by Japanese semiconductor companies. The earthquake and subsequent tsunami disrupted energy supplies and the semiconductor supply chain in the second quarter.
Royalty revenues comprised $84.2m from PD and $12.6m from PIPD (including $1.7m of catch-up royalties).
Sales of development systems in Q3 2011 were $12.5m, a decrease of 20% year-on-year and representing 7% of group revenues. Developments systems business consists of an underlying run-rate of smaller deals plus the occasional large software deal. In Q3 2010 three large software tools deals were signed, compared to none in Q3 2011.
Service revenues in Q3 2011 were $10.4m, an increase of 29% year-on-year and representing 5% of group revenues.
Gross margins in Q3 2011, excluding the share-based payments charge of £0.8m, were 94.9% compared to 94.8% in Q2 2011 and 94.2% in Q3 2010.
Normalised operating expenses (excluding acquisition-related, share-based payment and restructuring charges) were £60.5m in Q3 2011 compared to £59.4m in Q2 2011 and £56.6m in Q3 2010.
Normalised operating expenses in Q4 2011 (assuming effective exchange rates similar to current levels) are expected to be in the range £63m-£65m. The underlying sequential increase in operating costs expected in Q4 is due to ARM's on-going investment in the development and deployment of next generation technology.
Normalised operating margin was 44.6% in Q3 2011, compared to 44.5% in Q2 2011 and 37.7% in Q3 2010.
Normalised research and development expenses were £29.8m in Q3 2011, representing 25% of revenues. Normalised sales and marketing expenses were £15.6m in Q3 2011, being 13% of revenues. Normalised general and administrative expenses were £15.1m in Q3 2011, representing 13% of revenues.
Total IFRS operating expenses in Q3 2011 were £72.4m (Q3 2010: £74.9m) including share-based payment costs and related payroll taxes of £10.9m (Q3 2010: £12.2m), and amortisation of intangible assets and other acquisition-related charges of £1.1m (Q3 2010: £2.9 m).
Total share-based payment costs and related payroll tax charges of £11.7m in Q3 2011.
Profit before tax was £43m in Q3 2011 compared to £19.6m in Q3 2010. After adjusting for acquisition-related, share-based payments costs and Linaro-related charges, normalised profit before tax in Q3 2011 was £55.8m compared to £38.8m in Q3 2010.
The Group's effective normalised tax rate was 24.8% in Q3 2011 (IFRS: 26.9%) compared to 27.5% (IFRS: 24.5%) in Q3 2010. The Group's effective normalised tax rate for the full year 2011 is estimated to be approximately 25%.
In Q3 2011, fully diluted earnings per share were 2.29p (10.68 cents per ADS) compared to earnings per share of 1.09p (5.16 cents per ADS) in Q3 2010. Normalised fully diluted earnings per share in Q3 2011 were 3.05p per share (14.24 cents per ADS) compared to 2.08p (9.82 cents per ADS) in Q3 2010.
Intangible assets at end-September 2011 were £549.4m, comprising goodwill of £538.1m and other intangible assets of £11.3m.
Total accounts receivable were £85.4m at end-September.
Net cash at 30th September 2011 was £397.2m Normalised free cash flow in Q3 2011 was £43.7m.
Warren East, CEO, said: 'In the third quarter of 2011, we saw a continued high level of design activity with many new customers licensing ARM technology for the first time, driven by end market requirements for smarter, low-power chips. Demand for our technology has come from a broad range of applications, from sensors to computers. Over the last year we have seen strong growth in shipments of ARM technology-based chips, with a 50% increase of shipments into non-mobile markets such as digital TVs, microcontrollers and networking applications. Royalty revenues in Q3 have been impacted by the below seasonal growth in the semiconductor industry, but we continue to gain share. With customers looking to design ARM technology into a widening product portfolio, ARM is continuing to invest in the development of new products to drive long-term growth in our revenues, profits and cash.'
ARM said it enters the final quarter of 2011 with a healthy opportunity pipeline for licensing and an order backlog which remains at historically high levels. This combination points to another strong quarter for license revenue in Q4 and a robust order backlog at the year end. ARM Q4 royalty revenues are generated from third quarter chip shipments. Data for the third quarter indicates that relevant industry revenues were broadly flat sequentially.
Notwithstanding the below seasonal activity levels in the wider semiconductor industry, ARM expects that group dollar revenues for the full-year 2011 will be in line with current market expectations of around $763m.
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