ARMH

ARM Holdings plc (ARMH)

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ARM Holdings (ARMH)

Q3 2012 Earnings Call

October 23, 2012 4:30 am ET

Executives

Ian Thornton - Vice President of Investor Relations

D. Warren A. East - Chief Executive Officer, Director and Member of Disclosure Committee

Tim Score - Chief Financial Officer, Director, Member of Compliance Committee, Member of Disclosure Committee and Member of Risk Review Committee

Analysts

Francois Meunier - Morgan Stanley, Research Division

Didier Scemama - BofA Merrill Lynch, Research Division

Amit B. Harchandani - Citigroup Inc, Research Division

Simon F. Schafer - Goldman Sachs Group Inc., Research Division

Justis McEvilly - Crédit Suisse AG, Research Division

Nick James - Numis Securities Ltd., Research Division

Kai Korschelt - Deutsche Bank AG, Research Division

Sandeep S. Deshpande - JP Morgan Chase & Co, Research Division

Gareth Jenkins - UBS Investment Bank, Research Division

Sumant Wahi - Redburn Partners LLP, Research Division

Andrew M. Gardiner - Barclays Capital, Research Division

Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division

Jerome Ramel - Exane BNP Paribas, Research Division

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to ARM Q3 Analyst Conference Call. [Operator Instructions] There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I must advise you the conference is being recorded today, Tuesday, the 23rd of October, 2012. I would now like to hand the conference over to your first speaker today, Ian Thornton. Please go ahead, sir.

Ian Thornton

Thank you, Jenny. Good morning, everybody. This is Ian Thornton, Head of Investor Relations at ARM. On today's Q3 Results Conference Call, we have Warren East, Chief Executive Officer; and Tim Score, Chief Financial Officer. On today's call, Warren and Tim will take us through the highlights and comments from the quarter's results and then we'll open up the call to a Q&A session. As a reminder, the presentation and earnings release can be found on the ARM Investor Relations website at www.arm.com/ir.

Before I hand over to the team, I just have to read out a few words 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 persons present on this call who does not have professional experience in matters relating to investment 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 expectations and are subject to a number of risks and uncertainties.

And on this note, I'll hand over to Warren.

D. Warren A. East

Thank you, Ian. Good morning, everybody, and thank you for joining our call. I'm going to run through the highlights as usual and then hand over to Tim, who will provide some more detail on the numbers. And I hope we'll cover most of the content in Q&A.

So it's been a quarter with very strong momentum. Royalty revenues are at record levels, volume shipments at record levels, licensing at record levels and our already record backlog at the half year up by a further 6% by the end. So it's been a very good quarter. We highlighted 3 months ago how various market leaders are licensing ARM technology and introducing new products into a wide range of end markets, and that has continued during Q3 with several important design wins being announced in enterprise, networking, new products launched in mobile, mobile computers, ARM-based servers, wireless centers for the Internet-of-Things right across the application spectrum. The fourth quarter has also started very well. We've recently seen Google announce its new Chrome book from Samsung. And later this week, ARM-based mobile computers running Microsoft's latest PC operating system will start shipping. Generally, the demand for high-performance, low-cost computing is driving our license revenues. And as these products are coming to market, our royalty revenues are growing as well. This quarter, our royalty revenue increased by 27% year-on-year and that's significantly outpacing the semiconductor industry. This revenue growth has enabled us to continue to invest further in our R&D capability. It's enhancing our ability to create new products. In fact, since the beginning of the year, we've added 252 people, with 115 of those joining us in Q3. But at the same time, we've been able to grow earnings by more than 20% and it's been a quarter of record cash generation.

So we're going into the final quarter of 2012 with a record order backlog. The opportunity pipeline is robust, and that points to another strong quarter for licensing revenue in Q4. And our Q4 royalty revenue is generated from Q3 chip shipments, as you'll recall. And the data that we have from our customers so far suggests that there will be a moderate sequential increase in ARM royalty in Q4. So overall, we'd expect group dollar revenue for the fourth quarter to be in line with current expectations.

So now, I'll discuss revenue drivers in a little bit more detail, starting with the processor division and licensing. We signed 29 licenses in the quarter for a very broad range of end applications, from embedded microcontrollers for Internet-of-Things right through to image processors and digital cameras and mobile phones. About 1/3 of the licenses were signed with companies taking their first ARM license. And many of these new licensees are located in Asia, and we continue to see strong demand from this region. These new companies are licensed across the full spectrum of ARM products from Cortex-M, these in embedded applications through to Mali graphics and Cortex-A in mobile and mobile computing.

Read the rest of this transcript for free on seekingalpha.com