Annual report and accounts 2008

ARM Holdings plc is the world’s leading semiconductor intellectual property (IP) supplier. The technology we design is at the heart of many of the digital electronic products sold in 2008.

ARM has an innovative business model. Instead of bearing the costs associated with manufacturing, we license our technology to a network of partners, mainly leading semiconductor manufacturers and OEMs. These partners utilise our designs to create smart, low-energy chips suitable for modern electronic devices.

By the end of 2008, more than 200 leading semiconductor companies had licensed more than 580 ARM technology designs.

Why do semiconductor companies use ARM technology?

The design work that ARM does requires a large amount of R&D investment and expertise. Every semiconductor company would need to spend between $50 million and $150 million every year to reproduce what ARM does. This represents an additional $20 billion of annual cost for the industry. By designing once and licensing many times, ARM spreads the R&D costs over the whole industry and thereby helps make digital electronics cheaper.

How does ARM make money?

The partner companies who adopt ARM technology pay an up-front licence fee to gain access to a design and also a royalty on every chip that uses the licensed design. A single licence is the starting point for many different ARM Powered® chip designs and in 2008, ARM partners shipped four billion ARM Powered chips.

Our designs are used in more than 95% of the world’s mobile phones and are increasingly designed into a wide range of other digital electronic products.

How does ARM create value for investors?

ARM aims to recover its costs from the future licence revenues of each new technology. This would leave the majority of royalties as profits. Over the medium term, we expect royalties to grow much faster than licence revenues and costs, making ARM increasingly profitable.

As our customers are the world’s largest semiconductor manufacturers, their regular royalty payments have become a highly reliable cash flow. Given our broad base of partners and end markets, ARM is not overly reliant on any one company or consumer product for its future profits and cash.

Since 2004, ARM has returned over £300 million of cash to shareholders through a mixture of share buybacks and dividends.

ARM licenses technology designs to semiconductor companies. The licence fee is typically several million dollars, dependent upon which technology has been licensed and the type of licence. The semiconductor company will design and manufacturer a chip utilising the ARM technology. The chip will then be incorporated into a digital electronic product, which is sold to the consumer. ARM receives a royalty, typically based on a percentage of the chip price, for every chip sold by the semiconductor company containing ARM technology.

It takes an average of 3-4 years from the time the semiconductor company signs the licence until they start to pay royalties.

Many customers are able to re-use the same ARM technology in many different chips going into a broad range of end markets. Each new chip starts a new stream of royalties.