ARM Holdings plc Morgan Stanley 7 th Annual TMT Conference 14 November 2007 Warren East Chief Executive Officer 1
Background Semiconductor Market ARM is a secular growth story with a 25+ year time horizon Technical progress brings a basis for industry evolution Miniaturisation, increase in complexity Increased complexity has exponential effect on design costs Rising costs give way to specialisation and outsourcing Creates a sub-sector: Semiconductor IP Vertical Suppliers ASIC Vendors Fabless Semis IP Driven Design Fully Vertically Integrated System Manufacturer ASIC Vendor Design & Distribution EDA Manufacturing Design EDA IP Manufacturing Fab Equipment 1970 s 1980 s 1990 s Today 2
What does ARM do? Connected Community Development Tools Software IP Processors: Microprocessors Graphics Engines Audio Engines SoC memory Physical and Fabric IP 3
Business Model Yields Long-Term Returns Develop leadership-standard technology and license widely Opportunity to broaden ARM technology offer in electronic devices Once deployed, yields royalty into perpetuity Usage across multiple designs and applications Industry timescales provide long-term visibility 4
ARM s Digital World 5
Driving Growth Build on existing design wins Further penetrate the ARM partner base Leverage existing relationships Utilise ARM sphere of influence Increase barriers to entry for competition Growth Opportunities Growth in non-mobile applications Increasing the ARM value per consumer transaction Extending the outsourcing model to Physical IP 6
Extending the ARM Processor Portfolio Cortex-A9 MPCore Total Cumulative Processor Licenses Continued licensing of both mature and new technology 34 Cortex 58 ARM11TM Family ARM1176JZ-S 233 ARM9TM Family 1997 2003 ARM926EJ-S 151 ARM7TM Family 1993 Cortex-A8 ARM7TDMI-S 2005 2007 Available Now 7
Royalty Harvest in Early Stages Note: License unit data only includes Multi-use and Term Licenses 8
Making Market Share Gains Happen 2006: 12B Unit Opportunity ARM Market Share 21% 14000 12000 10000 8000 6000 4000 2000 16000 Volume of Units (Billion) Volume of Units (Billion) 16000 2010: 16B Unit Opportunity ARM Market Share >30% 14000 12000 10000 8000 6000 4000 2000 0 0 Mobile Non-mobile Total Microprocessors ARM Mobile Non-mobile Total Microprocessors ARM ARM has developed industry leading technology for use in all target markets The world s leading semiconductor suppliers have licensed appropriate ARM technology OEM and value chain relationships in place to create pull Leveraging success in Mobile into other market segments 9
Increasing the ARM Value in a Design 2007 Smart Phone 3G BB - $$ Apps Processor - $$$? WiFi - $ BT - $ Future Smart Phone ARM value - $ x 5 to 7 High-end BB - $$ Apps Processor - $$$ WiFi / WiMax - $ Physical IP - $ BT/UWB - $ 2007 - Ultra Low Cost Low-end BB - $ Graphics - $$ Audio DE - $ Software - $ ARM value - $ x 1 ARM value - $ x 12 $ = Unit of Royalty 10
Increasing ARM s Value per Transaction 21% Decline 76% Increase 11 Handset ASP ($) 10 160 9 140 8 7 120 6 100 Average Royalty Per Handset (c) 180 5 2002 2003 2004 2005 2006 Mobile Phone Handset Average Selling Price* ARM Average Royalty Per Handset* (Only includes royalty derived from handsets) * Source: Gartner Dataquest, ARM Estimates 11
Consistent Execution in Physical IP Why ARM will win: Open Standard ARM is Independent Positioned to amortise development costs across the industry ARM makes 1st 45nm deliveries 7 Licenses by end of 2006 to TSMC, IBM, Samsung and Chartered 5 meaningful synergistic licenses signed Samsung and Fujitsu license ARM Physical IP for foundry and internal designs Further 12 65nm Licenses signed ARM delivers 1st 65nm Products 10 Licenses by end of 2005 Qualcomm to manufacture with IBM common platform ST to import 32nm CMOS Freescale joins IBM common platform ARM acquires Artisan Rationale: Increased complexity has exponential effect on design costs Rising costs give way to specialisation and outsourcing IDM and fabless companies will outsource physical IP development 2005 2006 2007 4 7 year process for meaningful outsourcing 2008 2009 12
Realising Long-Term Economic Value Business Actions CAGR 07-10 Revenues ($) Processor Growth Opportunities Licensing Royalty Growth in non-mobile applications Increasing the ARM value per consumer transaction Extending the outsourcing model to Physical IP 5-15% 15-20% Physical IP Licensing 15-20% Royalty 15-20% Development Systems/Services 10-15% Total Revenues 10-20% 13
Business Model Yields Operating Leverage 2006 - a year of significant investment 25% increase in headcount 335 new heads 2007 year of digestion and productivity But full year effect of 2006 hires Bigger margin benefit in 2008 Business model creates upward pressure on margin Sustainable operating margins in excess of 40% in medium term Headcount/costs related to licensing revenue Engineering resources re-balanced to lower cost territories PIPD technology acceleration Royalties are 100% margin Royalties will continue to grow as proportion of total revenues Operating expenses reduce as % of total revenue 14
Increasing Cash Returned to Shareholders Reduction of cash balance to ~ 50m m Dividends Buybacks Total 2004 9.0-9.0 2005 10.4 16.2 26.6 2006 12.4 76.5 88.9 2007 YTD* 18.5 79.0 97.5 Total 50.3 171.7 222.0 by end of 2007 Proposed doubling of FY dividend Benefits of licensing and royalty model bearing fruit Acceleration in share buyback program > 100m to be returned through 150 share repurchase in 2007 Dividend Estimated Estimated FY 2007 FY 2007 m Share Buybacks 100 50 * Includes interim dividend paid by October 2007 0 2004 2005 2006 15 2007 YTD*
Outlook Positive outlook for Q4 and beyond due to strong pipeline and demand for new technology Anticipate Q4 revenues will see a meaningful uplift on Q3 Healthy and improving licensing pipeline Improving industry environment underpinning royalties Seasonal strength in royalties and development systems Higher backlog conversion to revenue in Physical IP Division Reiterating confidence in achieving FY earnings in line with expectations 16
Why ARM is Unique in the Semi Industry ARM has clear market and brand leadership Sustainable revenue growth higher than the overall industry Business model yields operating leverage High (and increasing) competitive barriers for other entrants High (and increasing) switching costs for customers Lower technology risk Increasing visibility Compelling growth drivers Established processor license base Leading position in handset market Early stage in market penetration beyond mobile Early in royalty harvest from existing licenses Acceleration in PIPD and other licensing streams Increasing cash returns and balance sheet efficiency 17