ARM Holdings plc (ARMH)

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ARM Holdings plc (ARMHY)

Q3 2007 Conference Call

October 25, 2007 3:30 am ET


Bruce Beckloff - VP of IR

Warren East - CEO

Tim Score - CFO


Nicolas Gaudois - UBS

William Wyman - Cazenove

Jonathan Crossfield - Merrill Lynch

Sandeep Deshpande - JP Morgan

Simon Schafer - Goldman Sachs

Robert Sanders - Dresdner Kleinwort

Didier Scemama of ABN Amro


Bruce Beckloff

Good morning everyone and thank you for joining us this morning. This is Bruce Beckloff, VP of IR at ARM. On today's Q3 and nine months results conference call, we have Warren East, the Chief Executive Officer and Tim Score, the Chief Financial Officer. On today's call, Tim and Warren will take us through the highlights and comments from the quarter results and then we'll open it up to Q&A. Just to remind you guys that on the IR part of the ARM website, there is a set of presentation slides that sort of summarize the results as well.

Before I hand it over to them, I just have a few words to read out with respect to this conference call and what we're about to discuss. The contents of this conference call are being directed only to those of you who have professional experience in matters relating to investments and the information communicated on this call is being made available only to investment professionals. Any person present on this call who does not have professional experience in matters relating to investments should not act or rely on the contents of this call.

The following conference call will contain forward-looking statements which are other than statements of historical fact. The company's actual results for future periods may differ materially from these statements as they are based on current expectation and are subject to a number of risks and uncertainties.

On this note, I'll hand it over to Warren.

Warren East

Good morning everybody and thank you for joining us on the call. I'll start with a summary to set the context for these results and then hand over to Tim to discuss the numbers in some more detail.

So today, I am pleased to say that we are reiterating our confidence in achieving the full year's earnings in line with expectations despite Q3 revenues being somewhat lower than our expectations back in July. Throughout the year in 2007, we have faced challenging conditions as the semiconductor market has improved but only gradually. But during this time, we've managed costs and operations tightly and we've continued to invest in innovation and future technology development.

Putting these together, this has enabled us to firstly come through the current cycle with growth and operating margins ahead of consensus in spite of currency effects. And secondly, develop a cost base which will enable meaningful operating leverage and any expected improvements in market conditions continues into 2008. And into the medium term give us a platform that we laid out at our Analysts Day in May.

So in summary, in Q3, we've continued to push ahead with positioning the business for the future. We've been launching new products, moving forward with our leading edge physical IP, addressing the global balance of resources. And today, we're reporting some very encouraging pointers actually to future growth inline with that scenario that we painted at our Analysts Day back in May.

In the near term, we see the opportunity for a meaningful uptick in Q4 revenues driven by several factors. Firstly, cyclical and seasonal factors combining favorably to drive our royalties. Secondly, new products are continuing to push our licensing. And thirdly, scope for deployment of more engineering time to be focused on conversion of backlog into revenue in our Physical IP division.

And now I will go into a little detail and I'll start with physical IP. For the second quarter in succession, license revenue fell short of our expectations. This was partly due to lumpiness of license deal closure. But mainly due to Q3 being another quarter during which in terms of engineering resource priority, we simply had to choose the future over the present. That is developing new technology.

However, encouragingly, the backlog today sits at a higher level than it did at the end of Q2 in our Physical IP division. And some of the business that didn't close at the end of Q3 has been signed early in Q4. So, despite the short term effect on our revenues in that business, with regards to the allocation of specific engineering resources, I believe it's absolutely the right approach. And although not yet reportable as large scale bookings, the strategy of focusing on new technology development we know is beginning to yield results.

And just to think about some of that, since the time of the acquisition, we've now signed 38 licenses for technology that wasn't in existence at the time we began on physical IP. And more near term in Q3, we actually achieved several milestones including two licenses to IDM companies amongst the top-20 semiconductor companies. We signed our second SOI license, again leading edge technology. And in addition, early in this quarter in the first couple of weeks of October, we signed yet another SOI agreement, this time at 45 nanometers. That's just one year after entering the SOI Physical IP business with the acquisition of Soisic. So, progress in that business with that technology is now running ahead of our expectations.

And still on the subject of Physical IP technology development, looking further ahead, some of you might have noticed the EE Times article coming out of our Developers Conference, which was headlined "ARM gets serious about 32 nanometers." And whilst at our Developers Conference, we made no specific product announcements, it is very clear that the industry is heading in that direction. And at the conference, we reminded our customers that having accelerated our technology development to 45 nanometers, we are now developing the product portfolio which will secure our leadership position going forward.

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