20-F 1 dp28928_20f.htm FORM 20-F
 


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 20-F
(Mark One)
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended:  December 31, 2011
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________
 
OR
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report ________________
Commission file number:  0-29644
 
ARM Holdings plc
(Exact name of Registrant as specified in its charter)
 
England
(Jurisdiction of incorporation or organization)

110 Fulbourn Road
Cambridge CB1 9NJ, England
(Address of principal executive offices)
 


Tim Score, phone:  +44 1223 400 400, fax:  +44 1223 400 700, tim.score@arm.com, 110 Fulbourn Road, Cambridge CB1 9NJ, England
(Name, Telephone, E-mail and/or Facsimile number and Address of Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
American Depositary Shares, each representing 3 Ordinary Shares of 0.05p each
 
The Nasdaq Stock Market LLC
Ordinary Shares of 0.05p each
 
The Nasdaq Stock Market LLC*

*
Not for trading, but only in connection with the registration of American Depositary Shares representing such Ordinary Shares pursuant to the requirements of the Securities and Exchange Commission.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

The number of outstanding shares in the capital of ARM Holdings plc as of December 31, 2011:
Ordinary Shares of 0.05p each                                                  1,351,315,597

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 Yes x      No o
Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer  o Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP o International Financial Reporting Standards as issued by the International Accounting Standards Board x Other o
If “Other” has been checked to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 Item 17 oItem 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 Yes oNo x



 
 
 

Page
Introduction
1
Part I
2
 
2
 
2
 
2
 
11
 
26
 
26
 
45
 
73
 
74
 
74
 
76
 
87
 
90
Part II
92
 
92
 
92
 
92
 
93
 
93
 
93
 
93
 
93
 
93
 
94
 
94
  94
Part III 94
 
94
 
94
 
95
 
 
 
Presentation of Financial Information
 
In this report, the term “US GAAP” refers to generally accepted accounting principles (“GAAP”) in the US and “IFRS” refers to International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”).
 
We prepare our consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
 
Forward-looking Statements
 
This annual report contains forward-looking statements. These forward-looking statements are not historical facts, but rather are based on our current expectations, estimates and projections about our industry, our beliefs and assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties are described in “Item 3. Key Information—Risk Factors” and elsewhere in this annual report. We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this annual report.
 
Certain Information
 
As used in this annual report, “we,” “us,” “our,” the “Company,” the “Group” and “ARM” refer to ARM Holdings plc and its subsidiaries, except where it is clear that such terms mean only ARM Holdings plc.
 
We publish our consolidated financial statements in pounds sterling. In this annual report, references to “pounds sterling,” “pounds,” “sterling,” “£,” “pence” and “p” are to the currency of the United Kingdom (“UK”) and references to “US dollars,” “dollars,” “$” or “c” are to the currency of the United States of America (“US”). See “Item 3. Key Information—Selected Financial Data—Exchange Rate Information” for historical information regarding the period end exchange rates between pounds sterling and US dollars. You should not construe these translations as representations that the pound amounts actually represent such US dollar amounts or could have been or could be converted into US dollars at the rates indicated or at any other rates.
 
This annual report includes product names and other trade names, logos and trademarks, either registered or with respect to which applications are pending, of ARM and of other companies. ARM, ARM Powered, AMBA, ARM7TDMI, ARM9TDMI, Artisan, Artisan Components, Cortex, Embedded-ICE, Integrator, Jazelle, Mali, Move, Multi-ICE, Multi-TRACE, OptimoDE, PrimeCell, PrimeXsys, Process-Perfect, SecurCore, StrongARM, The Architecture for the Digital World, Thumb, and TrustZone are registered trademarks of ARM Limited or its subsidiaries. Advantage, ARM Developer Suite, ARM7, ARM7EJ, ARM7EJ-S, ARM7TDMI-S, ARM720T, ARM9, ARM9TDMI-S, ARM9E, ARM9E-S, ARM9EJ-S, ARM920T, ARM922T, ARM926EJ-S, ARM940T, ARM946E-S, ARM966E-S, ARM10, ARM10E, ARM1020E, ARM1022E, ARM1026EJ-S, ARM11, ARM1136J-S, ARM1136JF-S, ARM1156T2F-S, ARM1156T2-S, ARM1176JZ-S, ARM1176JZF-S, Cortex-M0, Cortex-M1, Cortex-M3, Cortex-M4, Cortex-A8, Cortex-A9, Cortex-R4, Cortex-A5, Cortex-A9 MPCore, Cortex-A15, Cortex-A15 MPCore, CoreSight, ETM, Embedded Trace Macrocell, ETM10, ETM10RV, EmbeddedICE-RT, Keil, Microvision, Mali-55, Mali-200, Mali-JSR184, Mali-JSR226, Mali-JSR239, Mali-JSR287, Mali-JSR297, Mali-SVG-t, Metro, MPCore, Neon, SAGE-X, SAGE-HS, SAGE-HD, SC100, SC110, SC200, SC210, SC300 and Velocity are trademarks of ARM Limited. All other brands or product names are the property of their respective holders. “ARM” is used to represent ARM Holdings plc; its operating company ARM Limited; and the regional subsidiaries ARM Inc.; ARM KK; ARM Korea Limited; ARM Taiwan Limited; ARM France SAS; ARM Consulting (Shanghai) Co. Ltd.; ARM Belgium Services BVBA; ARM Germany GmbH; ARM Physical IP Asia Pacific Pte. Limited; ARM Embedded Technologies Pvt. Ltd.; ARM Norway AS and ARM Sweden AB.
 
Various amounts and percentages set out in this annual report have been rounded and accordingly may not total.
 
 
 
 
Not applicable.
 
 
Not applicable.
 
 
Selected Financial Data
 
Our selected financial data at December 31, 2010 and 2011 and for the years ended December 31, 2009, 2010 and 2011 has been derived from our consolidated financial statements prepared in accordance with IFRS. Our consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Our summary financial data at and for the years ended December 31, 2007 and 2008 are also presented in accordance with IFRS and have been derived from our consolidated financial statements that are not included in this annual report. The following selected financial data should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and the notes thereto.

   
Year ended December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
 
   
(in thousands of pounds, except per share data, percentages, number of shares and employees)
 
Revenues
  £ 259,160     £ 298,934     £ 305,022     £ 406,595     £ 491,826  
Cost of revenues
    (28,105 )     (32,878 )     (25,471 )     (26,071 )     (27,687 )
Operating expenses
    (191,361 )     (206,113 )     (233,937 )     (273,565 )     (315,158 )
Profit from operations
    39,694       59,943       45,614       106,959       148,981  
Investment income, net
    5,402       3,246       1,645       3,068       7,968  
Profit before tax
    45,096       63,189       47,259       110,027       156,949  
Tax
    (9,846 )     (19,597 )     (6,820 )     (24,053 )     (44,307 )
Profit for the year
    35,250       43,592       40,439       85,974       112,642  
Basic earnings per share (pence)
    2.7 p     3.4 p     3.2 p     6.5 p     8.4 p
Diluted earnings per share (pence)
    2.6 p     3.4 p     3.1 p     6.4 p     8.2 p
Dividends declared per share (pence)
    2.0 p     2.2 p     2.42 p     2.9 p     3.48 p
Diluted weighted average number of shares (000s)
    1,361,161       1,286,413       1,300,650       1,352,193       1,375,973  
Research and development as a percentage of revenues
    32.4 %     29.3 %     36.8 %     34.4 %     33.6 %
Balance Sheet Data:
                                       
Capital expenditure
    5,444       8,720       6,875       7,355       13,005  
Cash and cash equivalents, short- and long-term deposits and marketable securities
    51,323       78,789       141,808       291,829       428,985  
Share capital
    672       672       672       672       676  
Shareholders’ equity
    579,162       740,343       738,697       894,905       1,061,204  
Total assets
    642,944       848,183       844,483       1,084,662       1,299,790  
Employees at year end (number)
    1,728       1,740       1,710       1,889       2,116  

Exchange Rate Information
 
The following table sets forth, for the periods indicated, certain information concerning the exchange rate between pounds sterling and US dollars. Period average rates are based on the average daily buying rate (expressed as US dollars per pound sterling). Period end rates are based on the closing midpoint at the end of the period. Such rates are provided solely for the convenience of the reader and are not necessarily the exchange rates (if any) we used in the preparation of our consolidated financial statements included elsewhere in this annual report on Form 20-F. No representation is made that pounds sterling could have been, or could be, converted into US dollars at these rates or at any other rates.
 
 
USD/£1.00
Year Ended December 31,
 
Period Average
   
Period End
 
2007
    2.0018       1.9906  
2008
    1.8552       1.4657  
2009
    1.5659       1.6140  
2010
    1.5455       1.5657  
2011
    1.6039       1.5541  
2012 (through February 27, 2012)
   
1.5638
      1.5868  
 
USD/£1.00
Month
 
High
   
Low
 
October 2011
    1.6124       1.5414  
November 2011
    1.6066       1.5435  
December 2011
    1.5697       1.5426  
January 2012
    1.5723       1.5308  
February 2012 (through February 27, 2012)
 
1.5878
   
1.5690
 

On February 27, 2012 the closing rate was $1.5868/£1.00.
 
 
RISK FACTORS
 
You should carefully consider the risks described below as well as the other information contained in this annual report in evaluating us and our business. If any of the following risks actually occurs, our business, financial condition or results of future operations could be significantly harmed. In that case, the trading price of our shares and ADSs could decline and you may lose all or part of your investment. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risks faced by us described below and elsewhere in this annual report. You should also refer to the other information in this annual report, including our consolidated financial statements and the related notes.
 
Our Quarterly Results May Fluctuate Significantly and Be Unpredictable – This Could Adversely Affect the Market Price of Our Shares
 
We have experienced, and may in the future experience, significant quarterly fluctuations in our results of operations. Our quarterly results may fluctuate because of a variety of factors. Such factors include:
 
 
·  
the timing of entering into agreements with licensees;
 
 
·  
the financial terms and delivery schedules of our agreements with licensees;
 
 
·  
the demand for products that incorporate our technology;
 
 
·  
the mixture of license fees, royalties, revenues from the sale of development systems and fees from services;
 
 
·  
the introduction of new technology by us, our licensees or our competition;
 
 
·  
the timing of orders from and shipments to systems companies of ARM-based microprocessors from our semiconductor partners;
 
 
·  
sudden technological or other changes in the microprocessor industry; and
 
 
·  
new litigation or developments in current litigation.
 
In future periods, our operating results may not meet the expectations of public market analysts or investors. In such an event the market price of our shares could be materially adversely affected. A more detailed description of how we earn revenues from license fees and royalties is set forth in the sections entitled “Item 18. Financial Statements—Notes to the Consolidated Financial Statements—Note 1b. Summary of significant accounting policies—Revenue recognition” and “Item 5. Operating and Financial Review and Prospects—Operating Results— Critical Accounting Policies and Estimates.”
 
We Are Dependent on Both Our Semiconductor Partners and Major Physical Intellectual Property (IP)
 
We rely on our semiconductor partners to manufacture and market microprocessors based on our architecture in order to receive royalties in the future. We also depend on them to add value to our licensed architecture by providing complete ARM-based microprocessor solutions to meet the specific application needs of systems companies. However, the semiconductor partners are not contractually obliged to manufacture, distribute or sell microprocessors based on our technology or to market our microprocessor architecture on an exclusive basis. Some of our existing semiconductor partners design, develop and/or manufacture and market microprocessors based on competing architectures, including their own, and others may do so in the future.
 
We also rely on our major physical IP licensees to manufacture and market physical IP based on our libraries. We anticipate that our revenue will continue to depend on these major customers for the foreseeable future, although the companies considered to be major customers and the percentage of revenue represented by each major customer may vary from period to period depending on the addition of new contracts, the timing of work performed by us and the number of designs utilizing our products. None of our major physical IP licensees are contractually obliged to license future generations of physical IP components or additional physical IP components from us, and we cannot be certain that any customer will license physical IP components from us in the future. Our revenue from these
 
 
customers may be comprised of license fees and royalties. In addition, we cannot be certain that any of the integrated circuit manufacturers will produce products incorporating our physical IP components or that, if production occurs, they will generate significant royalty revenue for us.
 
If one or more of our semiconductor partners or major physical IP licensees stops licensing our microprocessors or physical IP components, reduces its orders, fails to pay license or royalty fees due or does not produce products containing our microprocessors or physical IP components, our operating results could be materially and negatively affected.
 
We cannot assure you that our semiconductor partners or our major physical IP licensees will dedicate the resources necessary to promote and further develop products based on our architecture and physical IP libraries respectively, that they will manufacture products based on our microprocessors or physical IP libraries in quantities sufficient to meet demand, that we will be successful in maintaining our relationships with our semiconductor partners and major physical IP licensees or that we will be able to develop relationships with new semiconductor partners or major physical IP licensees. Although we believe that our strategy of selecting multiple semiconductor partners and major physical IP licensees will expand the market for our architecture and physical IP libraries respectively and lead to more rapid acceptance of our architecture and physical IP libraries by assuring multiple reliable sources of microprocessors and physical IP libraries at competitive prices, such a strategy may also result in distribution channel conflicts. This could create disincentives to market our architecture aggressively and make it more difficult to retain our existing semiconductor partners and major physical IP licensees and to attract new partners and licensees.
 
Accurate prediction of the timing of inception of new licenses is difficult because the development of a business relationship with a potential licensee may frequently span a year or more. The fiscal period in which a new license agreement will be entered into, if at all, is difficult to predict, as are the financial terms of any such agreement. Engineering services are dependent upon the varying level of assistance desired by licensees and, therefore, the timing of revenue from these services is also difficult to predict.
 
With increasing complexity in each successive generation of integrated circuit products, we face the risk that the rate of adoption of smaller process geometries for integrated circuit manufacturing may slow or cease. We also face the risk that licensing revenue may suffer if current or former customers collaborate with each other regarding design standards for particular generations of integrated circuit products.
 
The royalties we receive on ARM-based microprocessors are based on the volumes and prices of microprocessors manufactured and sold by our semiconductor partners and the royalties we receive on physical IP libraries are based on volumes and prices of wafers, manufactured and sold by our major physical IP licensees. Our royalties are therefore influenced by many of the risks faced by the semiconductor market in general. These risks include reductions in demand for systems-on-chip (SoCs) based on our microprocessors and physical IP libraries and reduced average selling prices. The semiconductor market is intensely competitive. It is also generally characterized by declining average selling prices over the life of a generation of microprocessors and physical IP libraries. The effect of these price decreases is compounded by the fact that royalty rates decrease as a function of volume. We cannot assure you that delays in licensing, poor demand for services, decreases in prices or in our royalty rates will not materially adversely affect our business, results of operations and financial condition.
 
We Depend Largely on a Small Number of Customers and Products – This May Adversely Affect Our Revenues
 
Our revenues depend largely on a small number of licensees and products. As regards revenues from licensees, our revenues in a particular period are generally concentrated in a small number of licensees. If we fail to achieve the performance required under a single license contract or if a single customer fails to make its milestone payments, our business, financial condition and results of operations could be materially adversely affected. In addition, any failure to develop successor products which offer significant competitive advantages to these customers in a timely manner or any decrease in demand for ARM microprocessors or for ARM’s range of physical IP libraries could materially adversely affect us.
 
 
Our Success Depends Substantially on Systems Companies
 
Our success depends substantially on the acceptance of our technology by systems companies, particularly those which develop and market high-volume electronic products in the wireless, consumer electronics and networking markets where demand may be highly cyclical. The reason for this dependence is that sales of ARM-based microprocessors by our semiconductor partners to systems companies directly affect the amount of royalties we receive. We are subject to many risks beyond our control that may influence the success or failure of a particular systems company. These risks include:
 
 
·  
competition faced by the systems company in its particular industry;
 
 
·  
the engineering and marketing capabilities of the systems company;
 
 
·  
market acceptance of the systems company’s products;
 
 
·  
technical challenges unrelated to our technology faced by the systems company in developing its products; and
 
 
·  
the financial and other resources of the systems company.
 
It can take a long time to persuade systems companies to accept our technology and, even if accepted, we cannot assure you that our technology will be used in a product that is ultimately brought to market. Furthermore, even if our technology is used in a product brought to market, we cannot assure you that such product will be commercially accepted or result in significant royalties to us. Demand for our intellectual property may also be affected by consolidation in the integrated circuit and related industries, which may reduce the aggregate level of purchases of our intellectual property components and services by the combined companies.
 
The revenue we generate from licensing activities depends in large part on the rate at which systems companies adopt new product generations, which, in turn, is affected by the level of demand for their integrated circuits and other products.
 
Rapid Technological Changes in Our Industry Are Difficult to Predict – Our Business May Be Adversely Affected if We Cannot Develop New Products on a Timely Basis
 
The market for our architecture is characterized by rapidly changing technology and end user needs. Our business, reputation and relationships with our partners could be adversely affected if we cannot develop technological improvements or adapt our architecture and physical IP libraries to technological changes on a timely basis. Whether we will be able to compete in the future will substantially depend on our ability to advance our technology to meet these changing market and user needs and to anticipate successfully or respond to technological changes in hardware, software and architecture standards on a cost-effective and timely basis.
 
We will have to make significant expenditures to develop our products. The long lead time from the initial design of our technology until it is incorporated into new end user applications will place significant strain on our research and development resources. Certain of our products have suffered delays in the past. We cannot assure you that the design of future products will be completed as scheduled, that we will be successful in developing and licensing new products, that we will not experience difficulties that delay or prevent the successful development, introduction and marketing of new products or that any new products that we may introduce will achieve market acceptance.
 
Our Architecture, Physical IP Libraries and Development Systems Tools May Not Continue to Be Accepted by the Market
 
There are competing microprocessor architectures in the market. We cannot assure you that the market will continue to accept our architecture. Market acceptance of our architecture by semiconductor and systems companies for use in a variety of embedded applications is critical for our success. While our microprocessor architecture has already been licensed by many semiconductor and systems companies for use in a variety of high-volume applications in the wireless, consumer electronics and networking markets, other microprocessor architectures have a large installed base of embedded applications and are supported by a broad base of related software and development tools. A more detailed description of these competing architectures is set forth in the section entitled
 
 
“Item 4. Information on the Company—Business Overview—Competition.” It may be difficult for our architecture to succeed against incumbent architectures as systems companies that have used other microprocessor architectures would need to invest in additional training and development tools and convert software for existing embedded applications in order to change to a new architecture. Moreover, some competing microprocessor architectures have been developed by firms, including some of our semiconductor partners, that have substantially greater financial, technical and marketing resources than we do.
 
Our physical IP library products also face significant competition from the internal design groups of integrated circuit manufacturers that have expanded their manufacturing capabilities and portfolio of intellectual property components to participate in the system-on-a-chip market. Our physical IP library products also face competition from integrated circuit designers that have expanded their internal design capabilities and portfolio of intellectual property components to meet their internal design needs. Integrated circuit manufacturers and designers that license our physical IP components have historically had their own internal physical IP component design groups. These design groups continue to compete with ARM for access to the integrated circuit manufacturers’ or designers’ physical IP component requisitions and, in some cases, compete with ARM to supply physical IP components to third parties. Physical IP components developed by internal design groups of integrated circuit manufacturers are designed to utilize the qualities of their own manufacturing process, and may therefore benefit from capacity, informational, cost and technical advantages.
 
Foundry partners may be reluctant to rely on a single vendor for a broad array of IP components and RISC microprocessors and could select another vendor to provide them with products formerly supplied by us. Alternatively, Physical IP Foundry partners could also name another vendor as their vendor of choice to their customers.
 
Our development systems tools business faces significant competitors from both the open source community and third-party tools and software suppliers. In the event that market share is lost to such competitors, there could be a material adverse effect on our revenues.
 
The High Cost of Building Advanced Semiconductor Manufacturing Facilities May Limit the Number of Foundries as Potential Customers for our Physical IP Libraries
 
The cost of developing leading-edge manufacturing facilities and processes needed for building advanced chips is rising. Some of ARM’s current foundry customers may delay or cancel plans for developing new manufacturing processes. Without a new process, ARM will not have an opportunity to develop and sell physical IP libraries for that process. This would reduce the licensing opportunity for ARM. In addition, the bargaining power of the remaining foundries with advanced manufacturing facilities would be increased. This could make it harder for ARM to win profitable licensing deals with these foundries, further reducing both licensing and royalty revenue.
 
Competition – We May Not Be Able to Compete Successfully in the Future
 
The markets for our products are intensely competitive and characterized by rapid technological change. We cannot assure you that we will have the financial resources, technical expertise or marketing or support capabilities to compete successfully in the future. Competition is based on a variety of factors including price, performance, features, product quality, software availability, marketing and distribution capability, customer support, name recognition and financial strength. Further, given our reliance on our semiconductor partners, our competitive position is dependent on their competitive position. In addition, our semiconductor partners do not license our architecture exclusively, and several of them also design, develop, manufacture and market microprocessors based on their own architectures or on other non-ARM architectures. A more detailed description of the competition we face from new technologies or products is set forth in the section entitled “Item 4. Information on the Company—Business Overview—Competition.”
 
Our Architecture and Physical IP Libraries May Face Strong Competition from Well Resourced Competitors
 
Some semiconductor companies have developed their own proprietary architecture for specific markets or applications. These companies may reuse their proprietary architecture to penetrate markets where ARM is currently the architecture of choice, or where ARM may be used in the future, making it harder for ARM to penetrate in the future. For example, Intel Corporation has developed the X86 architecture for use in PCs and laptops. With mobile phones becoming smarter, Intel is trying to capture the high-end smartphone market with a family of chips based on
 
 
the X86 architecture. This could limit ARM’s market share in mobile phones and could prevent any further growth into mobile computing devices. Other semiconductor companies have proprietary architectures in other applications including, but not limited to, automotive, networking, digital television, electronic storage and mobile communications. These companies may have much larger engineering, marketing and sales resources than ARM, and if successful in displacing or impeding ARM, could reduce licensing opportunities and royalties, negatively affecting operating results.
 
Some companies develop their own intellectual property components or distribute components developed by foundaries.  For example, Synopsys, Inc. (“Synopsys”) develops intellectual property components that are designed to serve the same purpose as components produced by ARM. Synopsys is combining these components with its other products and services to create a product portfolio that may be difficult for ARM to compete with.  If Synopsys is successful in its strategy, then we would lose both license revenue and royalties, negatively affecting operating results.
 
The Availability of Development Tools, Systems Software, EDA Tools and Operating Systems is Crucial to the Market Acceptance of Our Products
 
We believe that it is crucial for the market acceptance of our products that development tools, systems software, EDA software and operating systems compatible with our architecture be available. We currently work with systems software, EDA software and tools and development partners to offer development tools, systems software, EDA software and operating systems for our architecture. However, we cannot assure you that:
 
 
·  
we will be able to attract additional tools and development, systems software and EDA tool partners;
 
 
·  
our existing partners will continue to offer development tools, systems software, EDA tools and operating systems compatible with our architecture; or
 
 
·  
the available development tools, systems software, EDA tools and operating systems will be sufficient to support customers’ needs.
 
We May Incur Unanticipated Costs Because of Products That Could Have Technical Difficulties or Undetected Design Errors
 
Our products or technology could have a substantial technical difficulty or an undetected design error. This could result in unanticipated costs, including product liability litigation. The discovery of any design defect or any ensuing litigation could damage our results and reputation and our relationships with partners could be adversely affected.
 
We May Not Fully Realize the Anticipated Benefits, including Synergy Benefits, of the Artisan (now PIPD) Acquisition
 
The acquisition of Artisan involved the integration of two companies that previously operated independently. There can be no assurance, however, regarding when or the extent to which the combined company will be able to realize the benefits anticipated to result from the acquisition, including increased revenues, cost savings or other benefits.
 
There May Be Risks Associated with any Strategic Investments or Acquisitions We May Make
 
We envisage making strategic investments or acquisitions where there is an opportunity to further the establishment of the ARM architecture and physical IP libraries. Exploring and implementing any investments or acquisitions may place strain upon our ability to manage our future growth and may divert management attention from our core design and licensing business. There are also other risks associated with this strategy. We cannot assure you that we will be able to make investments or acquire businesses on satisfactory terms or that any business acquired by us or in which we invest will be integrated successfully into our operations or be able to operate profitably.
 
 
Our International Operations Expose Us to Risks
 
We currently have operations in various jurisdictions around the world and may in the future expand our operations either within these jurisdictions or to new jurisdictions. Some risks associated with these international operations are exposure to exchange rate fluctuations, political, economic and financial conditions and unexpected changes in regulatory environments. Another risk we face is that, particularly with respect to intellectual property, we are exposed to different legal jurisdictions. In addition, we could face potentially adverse tax consequences and difficulties in staffing and managing operations. With respect to foreign exchange, a large proportion of our revenues are in US dollars, while our costs reflect the geographic spread of our operations with in excess of 50% of our costs being in pounds sterling. This mismatch will result in gains or losses with respect to movements in foreign exchange rates and may be material. To mitigate this effect, we engage in currency hedging transactions. A more detailed description of these hedging transactions is set forth in the section entitled “Item 5. Operating and Financial Review and Prospects— Operating Results—Foreign Currency Fluctuations.” Although we have not to date experienced any material adverse effects with respect to our foreign operations arising from such factors, we cannot assure you that such problems will not arise in the future. Finally, managing operations in multiple jurisdictions will place further strain on our ability to manage overall growth.
 
Our Business Will Be Adversely Affected if We Cannot Manage the Significant Changes in the Number of Our Employees and the Size of Our Operations
 
Either through acquisition or organic growth, from time to time we may significantly increase the number of our employees and the size of our operations. These changes in head count may place a significant strain on our management and other resources. We will face challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs in different jurisdictions.
 
If we are unable to manage growth in our head count, expenses, technological integration and the scope of operations effectively, the cost and quality of our products may suffer and we may be unable to attract and retain key personnel and develop and market new products. Further, the inability to successfully manage the substantially larger and geographically more diverse organization could have a material adverse effect on the Company and, as a result, on the market prices of our ADSs and our ordinary shares.
 
We May Not Operate Disaster Recovery Plans Which Adequately Mitigate the Effects of an Event Over Which We Do Not Have Direct Control
 
Our business depends on the efficient and uninterrupted operation of our computer and communications software and hardware systems and other information technology. If such systems were to fail for any reason or if we were to experience any unscheduled downtimes, even for only a short period, our operations and financial results could be adversely affected. Our systems could be damaged or interrupted by earthquake, fire, flood, hurricanes, power loss, telecommunications failure, break-ins or similar events. We have formal disaster recovery plans in place. However, these plans may not be entirely successful in preventing delays or other complications that could arise from information systems failure, and, if they are not successful, our business interruption insurance may not adequately compensate us for losses that may occur, negatively affecting operating results.
 
We Are Dependent on Our Senior Management Personnel and on Hiring and Retaining Both Qualified Engineers and Experienced Sales and Marketing Personnel
 
If we lose the services of any of our senior management personnel or a significant number of our engineers or sales and marketing personnel, it could be disruptive to our development efforts or business relationships and could have a material adverse effect on our business, financial condition and results of operations. As our future success depends on whether we can continue to enhance and introduce new generations of our technology, we are particularly dependent upon our ability to identify, attract, motivate and retain qualified engineers with the requisite educational background and industry experience. Competition for qualified engineers, particularly those with significant industry experience, is intense. We are also dependent upon our senior management personnel. In addition, whether we can successfully expand geographically will depend on our ability to attract and retain sales and marketing personnel. In certain geographic regions, there is fierce competition for such personnel.
 
 
Our Business and Future Operating Results May Be Adversely Affected by General Economic Conditions and Other Events Outside of Our Control
 
We are subject to risks arising from adverse changes in global economic conditions. Due to economic uncertainties in many of our key markets, many industries may delay or reduce technology purchases and investments. The impact of this on us is difficult to predict, but if businesses defer licensing our technology, require fewer services or development tools, or if consumers defer purchases of new products which incorporate our technology, our revenue could decline. A decline in revenue would have an adverse effect on our results of operations and could have an adverse effect on our financial condition.
 
Our business and operating results will also be vulnerable to interruption by other events outside of our control, such as earthquakes, fire, power loss, telecommunications failures, political instability, pandemics, military conflict and uncertainties arising out of terrorist attacks, including a global economic slowdown, the economic consequences of additional military action or additional terrorist activities and associated political instability, and the effect of heightened security concerns on domestic and international travel and commerce.
 
Claims May Be Made for Which We Do Not Have Adequate Insurance
 
Since 2001, the insurance industry has faced unprecedented and escalating global events compounded by international economic uncertainty. As a result of these and other pressures, many insurers have withdrawn from certain market sectors. We have continued with our philosophy of only placing coverage with secure underwriters with programs arranged individually to suit our needs. We currently have global insurance policies including coverage for the following significant risks: business interruption, public and products liability and directors’ and officers’ liability. We do not insure against claims concerning patent litigation or other intellectual property infringement claims and potential related indemnification obligations, because we are of the view that any limited coverage that could be obtained is prohibitively expensive. Our results of operations could be materially adversely affected by the occurrence of a catastrophic event, to the extent that any resulting loss or claim is not covered under the terms of our then existing insurance policies.
 
We May Be Unable to Protect and Enforce Our Proprietary Rights
 
Our ability to compete may be affected by whether we can protect our technology and enforce our proprietary rights. We take great care to protect our technology and innovations with patents, agreements with licensees, employees and consultants and other security measures. We also rely on copyright, trademarks and trade secret laws to protect our technology and innovations.
 
However, despite our efforts, we cannot assure you that others will not gain access to our trade secrets, or that we can meaningfully protect our technology and innovations. In addition, effective trade secret protection may be unavailable or limited in certain countries. Although we intend to protect our technology and innovations vigorously, there can be no assurance that such measures will be successful.
 
A more detailed description of how we protect our intellectual property is set forth in the section entitled “Item 4. Information on the Company—Business Overview—Patent and Intellectual Property Protection.”
 
We May Have to Defend Ourselves Against Third Parties Who Claim That We Have Infringed Their Proprietary Rights
 
We take great care to establish and maintain the integrity of our products. We focus on designing and implementing our products without the use of intellectual property belonging to third parties, except under strictly maintained procedures and with the benefit of appropriate license rights. In the event that a third party successfully proves that it has intellectual property rights covering a product that we have licensed to customers, we will take steps to either purchase a license to use the relevant technology or work around the technology by developing our own solution so as to avoid infringement of that third party’s intellectual property rights.
 
An Infringement Claim or a Significant Damage Award Would Adversely Impact Our Operating Results
 
The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. From time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to technologies that are important to our business. We cannot be certain that we would
 
 
ultimately prevail in any dispute or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Any infringement claim brought against us or our partners, regardless of the duration, outcome or size of the damage award, could:
 
 
·  
result in substantial cost to us;
 
 
·  
divert management’s attention and resources;
 
 
·  
be time-consuming to defend;
 
 
·  
result in substantial damage awards;
 
 
·  
damage the company’s reputation;
 
 
·  
cause product shipment delays; or
 
 
·  
require us to seek to enter into royalty or other licensing agreements.
 
Any infringement claim or other litigation against or by us could have a material negative affect on our business.
 
Any assertion of intellectual property rights by a third party against our technology could result in our licensees becoming the target of litigation and we may be bound to indemnify such licensees under the terms of our license agreements. Although our indemnification obligations are generally subject to a maximum amount, such obligations could nevertheless result in substantial expenses to us, which could have a material adverse effect on our business, financial condition and results of operations. In addition to the time and expense required for us to indemnify our licensees, a licensee’s development, marketing and sales of ARM architecture-based products could be severely disrupted or discontinued as a result of litigation, which in turn could also have a material adverse effect on our business, financial condition and results of operations.
 
In addition to the time and expense required for us to satisfy our support and indemnification obligations to our customers and strategic partners, any litigation could severely disrupt or shut down the business of our customers and strategic partners, which in turn could damage our relations with them and have a material adverse effect on our business, financial condition and results of operations.
 
Our Future Capital Needs May Require Us to Seek Debt Financing or Additional Equity Funding Which, if Not Available, Could Cause Our Business to Suffer
 
From time to time, we may be required to raise additional funds for our future capital needs through public or private financing, strategic relationships or other arrangements. There can be no assurance that the funding, if needed, will be available on attractive terms, or at all. Furthermore, any additional financing arrangements may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. Our failure to raise capital when needed could have a material adverse effect on our business.
 
 
 
HISTORY AND DEVELOPMENT OF ARM HOLDINGS PLC
 
History
 
ARM Holdings plc is a public limited company incorporated under the laws of England and Wales. The Company was formed on October 16, 1990 as a joint venture between Apple Computer (UK) Limited and Acorn Computers Limited and operated under the name Advanced RISC Machines Holdings Limited.
 
In 1998, the Company re-registered as a public company under the name ARM Holdings plc when it completed its initial public offering of shares and listed its shares for trading on the London Stock Exchange and for quotation on the NASDAQ National Market. In 2004, ARM Holdings plc acquired Artisan Components, Inc., a publicly held physical IP company based in Sunnyvale, California.
 
 
Our principal executive offices are at 110 Fulbourn Road, Cambridge, CB1 9NJ, England, and our telephone number is +44 1223 400 400. ARM, Inc., our US subsidiary, is located at 150 Rose Orchard Way, San Jose, CA 95134-1358, USA and its telephone number is +1 408 576 1500.
 
Capital Expenditures
 
For a discussion of the Company’s capital expenditures see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
 
 
BUSINESS OVERVIEW
 
ARM designs microprocessors, physical IP and related technology and software, and sells development tools to enhance the performance, cost-effectiveness and energy-efficiency of high-volume embedded applications. ARM licenses and sells its technology and products to leading international electronics companies, which in turn manufacture, market and sell microprocessors, application-specific integrated circuits (“ASICs”) and application-specific standard processors (“ASSPs”) based on ARM’s technology to systems companies for incorporation into a wide variety of end products. By creating a network of Partners, and working with them to best utilize ARM’s technology, ARM is establishing its processor architecture and physical IP for use in many high-volume embedded microprocessor applications, including cellular phones, digital televisions, mobile computers and PC peripherals and for potential use in many growing markets, including smart cards and microcontrollers. ARM also licenses and sells development tools directly to systems companies and provides support services to its licensees, systems companies and other systems designers. ARM’s principal geographic markets are Europe, the US and Asia Pacific.
 
Industry Background
 
The semiconductor industry has been in place for many decades and provides the world’s digital electronics market with a growing variety of products. Over the life of the semiconductor industry, continuous technology developments have enabled miniaturization and given rise to an increasing level of design complexity. This increased complexity has had the effect of increasing structural costs; thus, the semiconductor industry has had to find ways to mitigate this. To this end, the industry has transitioned from being highly vertically integrated to being an industry that looks for horizontal specialization to alleviate structural cost. This in turn has given way to the creation of a sub-sector, semiconductor IP, which serves the needs of semiconductor companies by enabling them to outsource the cost of technology development where there is an inequality between the economic benefit of the development versus the differentiation that the company can achieve for the development. Specific areas where this outsourcing has occurred in a significant manner are in embedded microprocessors and physical IP.
 
Microprocessors are embedded in a wide variety of high-volume electronic products, ranging from video games to automotive control systems to digital cellular phones. While most of these microprocessors are invisible and inaccessible to the end user, product designers use the computational capabilities of these embedded microprocessors to implement the operating features of electronic products and control systems. “Embedded microprocessor” is a general term that refers to microprocessors other than the central processing unit (“CPU”) in traditional desktop personal computers (“PCs”).
 
The embedded microprocessor market has grown to support new electronic products as well as new capabilities and features in existing products. New products with easier user interfaces, such as mobile phones and audio players, all depend on embedded microprocessors. At the same time, new capabilities and features also drive the need for new and more powerful embedded microprocessors in products such as smartphones and digital televisions. As consumers demand electronic products and control systems with more features, capabilities and portability, systems companies which manufacture these products and control systems are demanding embedded microprocessors that support increasingly complex functions at low cost, that use energy efficiently, that can be rapidly implemented to shorten time to market and that are available in volume from multiple sources.
 
To shorten time to market and lower development costs, system designers need technology solutions that can be rapidly implemented, both from a hardware and software standpoint, to meet varying design needs for performance, power consumption and cost. Typically, a system designer will create a SoC integrating one or more microprocessor cores with other processing engines and peripherals. Product designers need an open microprocessor architecture that can be rapidly implemented, used in a variety of hardware formats and easily combined with differentiating technology suited to different applications.
 
 
These designs are highly complex, containing, in some cases, hundreds of millions of transistors. SoC designers incorporate functional blocks in the form of standard physical IP libraries that translate the circuit design of the SoC into the physical layout of transistors on a silicon wafer. The SoC will typically be fabricated either at the in-house facility of the designer’s semiconductor company or at one of the industry’s foundry manufacturing companies. As process node geometries continue to shrink, the increasing complexity of developing physical IP libraries is rendering the in-house development of such technology increasingly expensive and economically unattractive, as compared to the product differentiation derived from the optimization to the designer’s semiconductor manufacturing process. The Company believes that over the long term, there will be an ever-increasing need for companies to outsource this activity in order to meet the demand of increased functionality within digital devices while remaining at a reasonable price.
 
As electronic products and control systems have grown more complex, the software used to implement these products and systems has also grown in complexity, forming an increasingly important component of the overall embedded microprocessor solution and contributing a significant portion of the overall development time and cost. In addition, to implement embedded microprocessor solutions efficiently, effective hardware and software development tools must be available to product designers. Using the industry-leading embedded microprocessor architecture permits a common set of software development tools to be used for application development and preserves software investments by permitting developers to reuse software across a variety of hardware implementations of the same architecture, saving considerable development resources for each new product.
 
ARM Solution
 
ARM addresses the needs of the semiconductor industry by designing and licensing microprocessors, physical IP, system components and software and development tools which enable the rapid design of embedded microprocessor solutions for use across a wide variety of applications. ARM offers systems designers a family of powerful, low-cost, energy-efficient microprocessor “cores” based on a common architecture and spanning a wide performance range. The design of these microprocessor cores is then incorporated by ARM partners with other functional and computational blocks to develop semiconductor chips which are then incorporated into digital electronics products.
 
ARM also offers high-performance and low-power physical library solutions (“physical IP”) on a variety of processes that can be used independently for designs that may or may not contain ARM microprocessor cores. By using physical library components from ARM, users are able to design their systems around standard libraries and then have those designs fabricated at both internal and independent semiconductor manufacturing facilities.
 
In addition, the Company provides the necessary development boards, software development toolkits and software debug tools, which facilitate system design and rapid development of system solutions. Finally, to further support the Company’s architecture, the Company continues to grow its on-chip fabric IP, graphics IP, video IP and embedded software business units and also provides training and support services.
 
ARM believes that worldwide support from its semiconductor, software, design and tools partners provides systems companies with a microprocessor architecture and physical library components which are available from multiple sources and which, due to the flexibility offered by a common architecture, enables semiconductor partners and systems designers to design chips rapidly based on the ARM architecture and facilitates ongoing design and maintenance efforts at cost-competitive prices.
 
The Company Believes That Key Benefits of the ARM Solution are:
 
Maximum flexibility of performance, cost and power. The Company offers a wide range of high-performance, low-cost solutions which enable systems designers to make the appropriate performance/price trade-offs for use in a particular application. The ARM architecture offers designers the flexibility to select an ARM processor with performance, die area (chip size) and power consumption characteristics appropriate for a specific application. ARM believes that its microprocessor architecture offers designers the opportunity to design embedded microprocessors at leading price/performance ratios. ARM believes that incorporating the ARM physical IP libraries for high performance or low power gives the designer a further advantage in using the ARM solution. By minimizing the die size of ARM cores and microprocessors, maximizing the energy efficiency, and maximizing the performance through the combination of the microprocessor core and physical IP system, designers receive an unparalleled advantage by usage of the ARM portfolio of products.
 
 
Standards, re-use, and broad support enable rapid system design. As systems become more complex, use and re-use of proven hardware and software intellectual property are essential to achieve time to market and cost goals. ARM provides a set of IP that enables system designers to standardize portions of their semiconductor chip design and development which enables significant reductions in development time and costs. In addition, ARM offers a means of creating flexible system designs through its range of fabric IP based on the AMBA standard. This allows the designer to concentrate on application-specific portions of the system design, where they add real value. By deploying standard solutions across its range of cores and platforms, and making them widely available via its partnership business model, ARM attracts strong third -party support in the form of EDA modeling tools, software development tools, debug tools, operating system and real-time operating system ports, software intellectual property and peripherals.
 
Global partner network. ARM’s global network of partners assures systems companies of sufficient availability for high-volume products and, together with ARM’s international presence, gives systems designers global support for their design development. At December 31, 2011, ARM’s technology has been licensed to more than 290 semiconductor companies, including the majority of leading semiconductor companies worldwide. ARM’s broad semiconductor partner base provides systems companies with a wide range of suppliers, thus reducing the dependence of systems companies on any one supplier and producing price competition helping to contain costs of ARM-based microprocessors. ARM’s various partners build their own solutions using ARM technology; there are a growing number of ARM-based ASSPs and microcontrollers available for use by systems companies, thus facilitating their use of the ARM architecture. The Company works with numerous industry leading software systems and tools and development partners, including Adobe, Microsoft Corporation, Google, Mozilla, Red Hat Incorporated, Sun Microsystems, and many others who provide the third-party support needed to facilitate the use of ARM technology in a wide variety of applications.
 
Development of software tools and platforms. ARM designs and manufactures its own family of tools that span the complete development process from concept to final product deployment. Each product within this portfolio has been developed closely alongside ARM cores ensuring it maximizes the cores’ performance. These embedded software tools, simulation models and hardware platforms enable validated support for device development. Support for ARM cores is provided in the ARM Development Studio at an early stage when lead partners are just starting to develop designs incorporating new ARM cores. For ARM partners producing microcontrollers, ARM has a single solution for their end-users with the ARM Microcontroller Development Kit, based on the industry leading Keil microcontroller tools, that facilitates end-users migration from 8- to 32-bit MCUs.
 
ARM Strategy and Business Model
 
ARM’s strategy is to create technology that resides at the heart of advanced digital products. It is ARM’s strategy for its IP to be used by the world’s leading semiconductor providers to create these digital products. Therefore, ARM has taken the approach of designing and licensing its IP for which it receives an initial license fee and an ongoing royalty each time ARM’s IP is incorporated into a semiconductor chip. This type of arrangement represents the manner in which the majority of ARM revenue is generated. There is typically a delay of two to four years between the licensing of ARM technology and the time at which royalties are received. ARM’s royalties are generally based on a percentage of the revenues received by licensees on their sales of chips based on ARM technology and are normally payable by a licensee on sales occurring during the life of the ARM technology being licensed. Accordingly, ARM could continue to receive royalties in relation to specific technology even if such technology is no longer licensed to new customers. The Company believes that as ARM technology becomes more widely accepted, the revenues from royalties, as a percentage of total revenues, will increase.
 
The Company also intends to generate a diversified revenue base beyond license fees and royalties through support, maintenance and training, and from sales and licensing of toolkits, development boards and systems software. In addition, the Company believes that revenues from support and maintenance, the sale and licensing of development tools and system and physical IP will increase as the ARM architecture continues to become more established across a broader range of markets.
 
To help designers to design systems based on ARM technology and develop software for ARM-based microprocessors, ARM also provides compilers, debuggers and development boards. These tools enable optimal software to be created and improve productivity for system and software developers. These products are sold as a one-time cost to the customer and do not typically include a royalty.
 
 
Leverage partner alliances. ARM’s semiconductor partners help grow the total ARM market by integrating their own intellectual property in conjunction with ARM technology, thus combining their own particular strengths with those of ARM to provide an extensive array of ARM-based solutions. ARM’s business model also enables the Company to benefit from the extensive manufacturing, marketing and distribution networks of its semiconductor partners. The marketing and direct selling of semiconductors to systems companies is undertaken by ARM’s partners. ARM’s ability to manage its partnerships effectively has been and will continue to be a major challenge and a key factor in its success. See “Item 3. Key Information—Risk Factors—We Are Dependent on Both Our Semiconductor Partners and Major Physical IP Licensees.”
 
Increased availability of third-party support of ARM technology. ARM has established partnerships to develop software, tools, operating systems and designs to maximize the level of support for ARM’s technology and provide an efficient environment for system designers. Increasing acceptance and implementation of ARM technology has led to various third parties adapting software programs and development tools to ARM’s architecture. To the extent that such acceptance continues, it should drive even broader acceptance of the ARM technology by systems companies and end users. See “Item 3. Key Information—Risk Factors—The Availability of Development Tools, Systems Software, EDA Tools and Operating Systems is Crucial to the Market Acceptance of Our Products” for a discussion of the Company’s reliance on the availability of systems software and development tools compatible with the ARM architecture.
 
Focus on needs of systems companies. ARM is committed to providing technology solutions responsive to the requirements of end users in a variety of markets. The Company works with systems companies either directly or in tandem with its semiconductor partners to aid the systems companies’ customization of the ARM architecture to perceived market needs. ARM also aims to simplify and shorten the design process for systems companies. See “Item 3. Key Information—Risk Factors—Our Success Depends Substantially on Systems Companies.”
 
Strategic involvement in related products and services. ARM will continue to analyze its market and communicate with its partner network to identify opportunities for product innovation and new product creation, including with respect to features such as low power, high performance media and graphics, security, the creation of efficient code and platform execution environments. ARM will also continue to develop products and encourage and support industry standardization efforts to address the challenges that result from shrinking semiconductor process geometries and the increasing cost and complexity of semiconductor chip design. ARM maintains an ongoing five-year strategy plan for the development and growth of the business and constantly monitors its marketplace and evaluates new business, investment and acquisition opportunities.
 
Target Markets
 
ARM is continuing to see the convergence of the consumer electronics and telecommunications IT markets. This is being driven by a need for low-power, high-performance, secure components which need to be easy to both design and use. The Company’s five market segments (Home Solutions, Mobile Solutions, Enterprise Solutions, Embedded Solutions and Emerging Applications) each demonstrate some or all of these requirements but differ in their applications. The Company continues to evolve from focusing on digital products to focusing on the way people use digital products and also on the solutions the Company provides to meet this demand worldwide.
 
Home Solutions. In the home solutions market, the management and display of audio-visual content are the foremost concerns of consumers. Within this market, applications like digital TVs, set-top boxes, digital still cameras and gaming devices deliver visual content to the home. ARM is well placed in this market with its scalable architecture performance, support for security applications (TrustZone), graphics (Mali) and physical IP libraries.
 
Mobile Solutions. The mobile market comprises a wide variety of mobile communication and portable computing devices, each with their own characteristics and needs. The applications include wireless handsets, mobile computers, portable media players and bluetooth devices. For each of these products, mobility (being able to use them while on the go) is the key concern to consumers. With ARM’s high performance/low power architecture, ARM’s customers can balance performance and power with cost, so that ARM ultimately provides the best solution to end users. With the acceleration of applications becoming critical, energy-efficient ARM technology is well placed to meet the demands of this market. Security is becoming increasingly important as mobile devices are used to carry out financial transactions, generating industry interest in products such as TrustZone.  As low power is critical in mobile devices in order to extend battery life, products such as video and graphics processors, and physical IP libraries are well positioned.
 
 
Enterprise Solutions. In today’s world, having the data you need at your fingertips is key. In the Enterprise Solutions market, ARM focuses on the way data is handled through devices such as storage devices, printers and wireless and wired networking. ARM’s range of microprocessor performance, development systems and data efficient architecture give ARM a competitive advantage in this market space.
 
Embedded Solutions. The world of embedded processors is growing in multiple areas, including anti-lock braking systems, smartcards and industrial control applications. This market has the potential to grow substantially, especially as existing 8- and 16-bit applications need to migrate to 32-bit processors. The reliability and software reusability of the ARM architecture positions ARM to penetrate this market. In addition, the introduction of products such as the Cortex-M class of processors, with their low gate count, small size and capabilities for high code density, together with Keil’s complementary MCU tools, positions ARM for taking designs once owned by 8-and 16-bit processors.
 
Emerging applications. As innovative products are designed, they face fleeting windows of market opportunity that only reward rapidly developed solutions with leading functionality and cost characteristics. With ARM’s proven technology and innovative feature set, ARM is well positioned to take advantage of these opportunities, as emerging applications such as servers, medical devices and mesh networks become available.
 
For a breakdown of total revenues by geographic market, see Note 2 to the Consolidated Financial Statements.
 
ARM’s Products and Services
 
ARM’s comprehensive product offering includes the following:
 
 
·  
Microprocessor Cores: RISC microprocessor cores, including specific functions such as video and graphics IP and on-chip fabric IP;
 
 
·  
Embedded software;
 
 
·  
Physical IP;
 
 
·  
Development tools; and
 
 
·  
Support and maintenance services.
 
Processor Cores
 
Historically, microprocessor designers concentrated on maximizing performance, with cost and size as secondary concerns. Anticipating the growth in portable and embedded markets, ARM has always focused on producing low-cost microprocessor cores that offer the higher performance that increasingly complex applications demand, yet operate within the power constraints of portable devices. This emphasis on low power consumption and low chip and system cost has made ARM’s products suitable for a broad range of applications.
 
Low power consumption has wider benefits in a broad range of markets. In addition to its clear advantage for battery operated devices, it enables the use of lower cost packaging, lower cost power supply components, and it allows more electronics to be packed into a small space without requiring the expense of cooling by fan or airconditioning.
 
ARM microprocessors are designed to allow high performance at a low total system cost. Two key features that help achieve this are small die area (chip size), and high code density. Code density is a measure of the amount of memory required to hold program code. High code density reduces the system cost by reducing the size of the main memory and bandwidth it must deliver.
 
ARM Architecture
 
The foundation of the ARM family of processors is its efficient RISC instruction set. The design of the instruction set has two aims: high code density and easy instruction decoding. Older CISC processors use complex instructions to reduce the number of instructions necessary to code a program, resulting in high code density, but also in complex, power-hungry processor designs. RISC processors, on the other hand, use simple instruction sets
 
 
 but usually code less densely than CISC processors. Code compiled for ARM RISC processors, however – particularly when using the Thumb or Thumb-2 instruction sets – is generally more dense than code for competing CISC processors, delivering the memory cost advantages of high code density, with the performance, power, and die size advantages of RISC processors.
 
Architectural Extensions
 
ARM’s strategy is to develop products incorporating additional features and instruction set enhancements appropriate to application needs, while maintaining a common, general purpose RISC instruction set which provides code compatibility. Architectural extensions are introduced in subsequent versions of the ARM architecture, building on the previous architectures, thus adding backwards code compatibility of new processor cores with older generations. Architectural extensions include:
 
 
·  
Thumb Instruction Set which reduces memory use in early ARM processors;
 
 
·  
Thumb-2 Instruction Set which increases performance whilst retaining the code density benefits;
 
 
·  
EmbeddedICE enabling software debug capability;
 
 
·  
Embedded Trace enabling real time observation of software running in the processor;
 
 
·  
DSP extensions which improve mathematical capability;
 
 
·  
Jazelle accelerating the execution of Java byte codes;
 
 
·  
VFP providing complete support for the IEEE754 floating point standard;
 
 
·  
NEON which more efficiently processes audio, video, signal processing and floating point algorithms; and
 
 
·  
TrustZone which provides a protected area for a secure operating system and applications to run safely.
 
The ARM Microprocessor Families
 
ARM architecture processors offer a wide range of performance options in the ARM7 family, ARM9 family, ARM11 family, ARM Cortex family and ARM SecurCore family. Scalability, the ability to match processing power to the application, is an important consideration when designers select a microprocessor family. The ARM architecture gives systems designers a wide choice of processor cores at different performance/price points, yet all ARM microprocessors use substantially the same instruction set and are capable of running the same software. This protects the investments ARM’s customers make in software development, software tools and staff training. The ARM product roadmap offers customers a proven RISC architecture and intends to deliver innovative, powerful and cost-effective solutions to industry needs in future generations, while maintaining a high degree of compatibility.
 
ARM offers a range of processor cores integrated with memory system solutions such as Cache Memories, Memory Protection Units, and Memory Management Units. Many ARM processor cores can be extended using the coprocessor interface and coprocessor instruction set space to add more functionality.
 
ARM7 family. The ARM7 family comprises low power, general purpose 32-bit RISC microprocessor cores particularly suitable where strict die area and power constraints must be satisfied while maintaining reasonably high performance, as in portable telecommunications. Each processor uses the ARMv4T instruction set with Thumb extension, enhanced Multiply, and EmbeddedICE extensions integrated within the core. See “— Architectural Extensions” above. The ARM7 offers 32-bit architecture capable of operating from 8/16-bit memory on an 8/16-bit bus for low system cost through the implementation of the Thumb instruction set. It is used in cost-sensitive embedded control applications and has been highly successful in the digital cellular telephone market.
 
ARM9 family. The ARM9 family comprises a range of microprocessors in the 150-250MHz range. Each processor has been designed for a specific application or function, such as an application processor for a feature phone or running a WiFi protocol stack. Therefore each has differentiating features appropriate for that application, such as support for real-time or complex operating systems, direct DMA access to memory, and additional DSP instructions for faster mathematical calculations.
 
 
ARM11 family. The ARM11 family comprises a range of microprocessors in the 300-600MHz range. Each processor has been designed for a specific application or function such as an application processor for a smartphone or controlling the engine management system in a car. Therefore, each has differentiating features appropriate for that application, such as support for fast interrupt response time, multiprocessing support and additional instructions for decoding video streams.
 
ARM Cortex family. This is ARM’s newest family of processor cores based on version 7 of the ARM Architecture. The family is split into three series:
 
 
·  
A Series targeting applications processors running complex operating systems;
 
 
·  
R Series targeting real time deeply embedded markets and running Real Time Operating Systems (“RTOSs”); and
 
 
·  
M Series addressing the needs of the low cost microcontroller markets.
 
By ensuring software compatibility across the three series, ARM has enabled the re-use of software, tools and engineering knowledge.
 
Graphics and Video IP
 
ARM develops graphics accelerator IP and software for semiconductor SoC vendors that deliver high-quality multimedia images without compromising performance, power consumption or system cost. The acquisition enhances ARM’s ability to enable industry-leading 3D graphics solutions on mobile phones, portable media players, set-top boxes, handheld gaming devices and infotainment systems (including automotive), providing us with full control over the development of our future 3D graphics solutions.
 
ARM also develops video processor and imaging technology IP, which combined with our graphics IP provides customers with an integrated multimedia platform, which is becoming increasingly important in devices such as mobile computers, portable media players and digital TVs.
 
Physical IP
 
ARM is a leading provider of physical IP components for the design and manufacture of integrated circuits, including SoCs. ARM Artisan physical IP products comprise  embedded memory, standard cell and input/output components which are designed to provide the customers’ desired combination of performance, density, power and yield for a given manufacturing process. Artisan physical IP also includes a limited portfolio of analog and mixed-signal products. ARM’s physical IP components are developed for a variety of process geometries ranging from 20nm – 250nm design and are validated by producing them in silicon to ensure that they perform to specification, reducing the risk of design failure and gaining valuable time to market. ARM licenses its products to customers for the design and manufacture of integrated circuits used in complex, high-volume applications, such as portable computing devices, communication systems, cellular phones, microcontrollers, consumer multimedia products, automotive electronics, personal computers and workstations and many others.
 
ARM’s physical IP components are developed and delivered using a proprietary methodology that includes both commercial and proprietary electronic design automation tools and techniques. This methodology ensures that ARM’s intellectual property components provide optimized power, performance, and area while reducing customer risk and time-to-market. ARM physical IP is easily integrated into a variety of customer design methodologies and support industry standard IC design tools, including those from EDA tool vendors such as Cadence, Magma, Mentor Graphics and Synopsys, as well as many other specialty IC design and modeling tools. To support these various IC design tool environments, each of ARM’s products includes an extremely broad set of verified tool models.
 
Physical IP Products
 
Memory products. ARM’s embedded memory components include random access memories, read only memories and register files.
 
These memories are provided in the form of a configurable “memory compiler” which allows the customer to generate the appropriate configuration for the given application.
 
All of ARM’s memory components include many configurable features such as power-down modes, low-voltage data retention and fully static operation as well as different transistor options to trade off performance and power. In addition, ARM’s memory components include built-in test interfaces that support the leading industry test methodologies and tools. ARM memory components also offer redundant storage elements which may help increase the manufacturing yield of integrated circuit designs containing large memories.
 
ARM’s memory components are designed to enable the chip designer maximum flexibility to achieve the optimum power, performance, and density trade-off. ARM’s high-density memory components are designed for applications where achieving the lowest possible manufacturing cost is critical. These are typically consumer applications with high manufacturing volumes. To achieve the lowest possible manufacturing cost for these products, ARM utilizes proprietary circuit and layout techniques to reduce the overall area of the memories. In addition, ARM uses specific design and analysis techniques to enhance production yield. ARM’s low-power memory components are designed to prolong battery life when used in battery-powered electronic systems. These physical IP components achieve low power through a combination of proprietary design innovations that include latch-based sense amplifiers, a power efficient banked memory architecture, precise core cell balancing and unique address decoder and driver circuitry.
 
Logic products. Standard cell libraries map the logic functions of a design to the physical functions of the design, an essential function for all integrated circuits. ARM’s standard cell products are optimized for each customer’s preferred manufacturing process and integrated circuit design tool environment, resulting in greater density as compared to competitive standard cell components. ARM offers standard cell components that are optimized for high performance, high density or ultra high density to meet the needs of different markets.
 
ARM logic products deliver optimal performance, power and area when building ARM Processors, Graphics, Video and Fabric IP along with general SoC subsystem implementation, designed to deliver highest yield through extensive manufacturing optimization.
 
Processor Optimisation Pack (“POP”) products.  ARM has created optimized logic and memory physical IP for a specific process technology, supported by implementation knowledge and ARM benchmarking.  Combined together, the POP allows chip designers to optimize ARM microprocessors for maximum performance, lowest power or to develop customized solutions balancing power and performance for their specific application.
 
High-speed interface products. ARM delivers physical interface for a range of DDR SDRAM (double-data rate synchronous dynamic random-access memory) applications ranging from high-speed mission critical applications to low-power memory sub-systems. At advanced process geometries 40nm and newer these interfaces are delivered as fully-hardened PHY blocks to reduce customer risk of high speed timing closure of these interfaces.These interface products have been optimized for high data bandwidth, low power and enhanced signaling integrity features to enable support for a wide range of applications completing ARM’s  “Processor to Pads” implementation support philosophy.
 
Silicon on Insulator (“SOI”) products. SOI is an alternative methodology to traditional semiconductor fabrication techniques that enables higher performance and lower power designs than today’s more common bulk silicon process. It is ARM’s belief that SOI may become an increasing proportion of the substrate market over time.
 
System Design
 
ARM’s software development tools help a software design engineer deliver proven products right the first time. Engineers use these tools in the design and deployment of code, from applications running on open operating systems right through to low-level firmware.
 
The ARM Development Studio is complemented by hardware components that allow the software designer to connect to a real target system and control the system for the purposes of finding errors in the software. The ARM DSTREAM unit allows the software developer to control the software running on the prototype product and examine the internal state of the prototype product, which is an essential part of debugging software. It also allows the software developer to capture the way that the software executes on the product in real-time and provides feedback on the prototype product performance.
 
ARM Development Boards are ideal systems for prototyping ARM-based products. This enables the function of the product to be confirmed in advance of building a silicon chip with a foundry or with a silicon partner. Building a
 
 
silicon chip is an expensive process which requires a high degree of certainty in the prototype product function. There are two families of boards within the ARM Development Boards: Versatile Express and Versatile. The Versatile Express product family allows prototypes of the product to be built with a range of ARM cores provided as part of the system. The Versatile family allows software to be executed at a higher speed to check the interaction of the software and the hardware at speeds close to those that are used in the final product. ARM Development Boards are ideal systems for prototyping ARM-based products. They are suitable for architecture and CPU evaluation, hardware and software design, and chip emulation.
 
 The ARM Microcontroller Development Kit supports ARM-based microcontrollers and 8051-based microcontrollers from companies such as Analog Devices, Atmel, Freescale, Fujitsu, NXP, Samsung, Sharp, STMicroelectronics, Texas Instruments and Toshiba. The ARM Microcontroller Development Kit is used by developers who are building products and writing software using standard off-the-shelf microcontrollers.
 
Support and Maintenance Services
 
Support, maintenance and training. ARM provides support and maintenance services under its license agreements to its semiconductor partners as well as ARM product-related training. See “—License Agreements” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview— Service Revenues— Support and maintenance.” In order to serve its partners better, ARM has expanded the range of support, maintenance and training services, and now provides such services from its overseas offices, local to our customers’ engineering teams. To this end ARM has Technical Support staff in its Bangalore, India and China offices. See “Item 3. Key Information—Risk Factors—Our International Operations Expose Us to Risks” for a discussion of certain risks inherent in our international operations.
 
ARM Partner Network
 
Semiconductor partners. ARM licenses its technology on a worldwide and non-exclusive basis to semiconductor partners that manufacture and sell ARM-based chip solutions to systems companies. At December 31, 2011, ARM’s technology has been licensed to more than 290 semiconductor companies, including many of the leading semiconductor companies worldwide. ARM serves this geographically diverse base from offices in the UK, China, France, Germany, Belgium, Israel, Japan, South Korea, Taiwan, India and the United States.
 
Tools and development partners. ARM enables its tools and development partners to design tools that help ARM’s semiconductor partners and customers design ARM-based systems. ARM provides IP and support to these tools and development partners to give end customers of the ARM architecture the widest possible range of tools support.
 
Design partners. There are many design companies who develop ARM-based solutions for specific customer needs. Tasks for the system designers range from developing World Wide Web browser software for ARM-based platforms to offering turnkey product design services. The Company has also introduced the ARM Approved Design Center Program whereby design houses, which pass our strict qualification process, are able to access ARM technologies to enable them to undertake ARM-based designs for third parties.
 
License Agreements
 
ARM is the owner of IP in the field of microprocessor architecture and implementation for embedded signal processing, graphics IP, video IP, system platforms, peripherals, system software and software development and debug tools and physical IP components. ARM creates innovative technology which incorporates such IP. ARM grants licenses to such technology to semiconductor manufacturers, IDMs and fabless companies, original equipment manufacturers and chip design houses to enable such licensees to design, manufacture and distribute silicon chips which combine such technology with licensees’ own differentiating proprietary technology. The licenses are granted under written agreements which contain contractual terms and conditions to protect the technology and the intellectual property embodied therein and to limit ARM’s liability in respect of licensees’ use of the technology. There are a number of different forms of license offered by ARM which are structured to address different licensee requirements and different intellectual property protection issues. In all forms of license, ARM strictly controls the modification rights which it grants to its technology and mandates, in order to protect the integrity of the ARM architecture, that the technology is verified by reference to ARM specified tests prior to distribution in licensee products.
 
 
Fees and royalties. With regard to microprocessors, ARM typically charges a license fee for access to its technology and a royalty for each unit of silicon which incorporates ARM’s technology and is distributed by the licensee. ARM licenses its physical IP components on a non-exclusive, worldwide basis to major IC manufacturers and IC design teams that are customers of such manufacturers.
 
License fees are invoiced in accordance with an agreed set of milestones. Revenue generated in the form of license fees is recognized in accordance with IFRS. Royalties are invoiced and recognized quarterly in arrears.
 
License Programs in respect of the Processor Division
 
The Processor Division’s licenses generally fall under three broad programs: Architecture, Implementation and Foundry. The Architecture License Program is associated with Architecture Licenses. The Implementation License Program encompasses the Implementation License, the Term License, the Per-Use License and the Subscription License. The Foundry License Program is made up of Foundry Licenses and Single Use Design Licenses. Each of these licenses is described below.
 
The Architecture License provides the licensee with the flexibility to differentiate its ARM-based products by creating alternative implementations of the licensed architecture, while retaining instruction set compatibility.
 
The Implementation License is a license with the objective of producing a specific ARM-based end product. The licensee has perpetual design and manufacturing rights for the licensed product.
 
The Term License has the same objectives as the Implementation License. The difference is in the design right license grant, as the design rights are only granted for a limited period of generally three years for the licensed product.
 
The Per-Use License has the same objectives as the Implementation License. The difference is in the design rights, as these are granted for design of one ARM-based end product.
 
The Subscription License allows a partner access to a selected set of ARM products, including unspecified future products, over a defined time period for a set annual fee. Design rights are granted for the subscription period, and manufacturing rights are perpetual for ARM-based products designed during that period.
 
The Foundry Program effectively splits an Implementation License into two parts. The Foundry License is a manufacturing license held by the foundry, which gives the foundry the right to manufacture ARM products but only for a partner who has the corresponding Single Use Design License. The Single Use Design License is held by the partner and gives it the right to design products using the specified ARM product. The Single Use Design Licensee only has access to a design kit and does not get access to the layout of the core. The Single Use Design Licensee will ship the design of the ARM-compliant product to the foundry quoting a design identification and the foundry will only accept the design if the correct design identification is quoted. At the foundry, the full layout of the ARM product is merged into the ARM-compliant product prior to manufacture. All royalties are payable by the Single Use Design Licensee.
 
License Programs in respect of Physical IP
 
ARM charges manufacturers a license fee that gives them the right to manufacture ICs containing physical IP components ARM has developed for its manufacturing process. Manufacturers also agree to pay ARM royalties based on the selling prices of ICs or wafers that contain ARM’s physical IP components. Generally, ARM credits a small portion of the royalty payments to the manufacturer’s account to be applied against license fees for any future orders placed with ARM within a certain time period, if any, payable by the manufacturer. The portion of the royalty payment that is credited to a manufacturer’s account to be applied against future license fees, if any, is based on negotiations at the time the license arrangement is signed.
 
ARM provides the design rights to use ARM’s physical IP from the majority of libraries developed for the manufacturing facilities free of charge. This enables small fabless design companies to easily gain access to the ARM physical IP technology and have their design manufactured at a variety of foundry companies. In some cases, ARM will charge a license fee to the design company for optimized libraries for specific process technologies and process variants. The royalties for these designs are then subsequently collected from the facility where they were manufactured.
 
 
Competition
 
The markets for the Company’s products are intensely competitive and are characterized by rapid technological change. These changes result in frequent product introductions, short product life cycles and increased product capabilities typically representing significant price/performance improvements. Competition is based on a variety of factors including price, performance, product quality, software availability, marketing and distribution capability, customer support, name recognition and financial strength. Further, given the Company’s reliance on its semiconductor partners, the Company’s competitive position is dependent on its partners’ competitive positions. In addition, ARM’s semiconductor partners do not license ARM technology exclusively, and several of them also design, develop, manufacture and market microprocessors based on their own architectures or on other non-ARM architectures and develop their own physical IP in-house. They often compete with each other and with ARM in various applications.
 
Many of the Company’s direct and indirect competitors, including some of ARM’s semiconductor partners, are major corporations with substantially greater technical, financial and marketing resources and name recognition than ARM. Many of these competitors have a much larger base of application software and have a much larger installed customer base than ARM. There can be no assurance that ARM will have the financial resources, technical expertise, marketing or support capabilities to compete successfully in the future.
 
The Company believes that the ARM architecture is the leading independent microprocessor technology openly licensed to other companies and that the broad presence afforded to the Company through its established worldwide network of partners gives it an advantage over other companies which license microprocessor-related technology. The Company believes that its products offer high performance at competitive prices, and compete favorably in the embedded market by providing an open compatible architecture that is scalable from high-performance multimedia applications to small battery operated devices. However, there can be no assurance that the Company will be successful in the face of increasing competition from new technologies or products introduced by existing competitors and by new companies entering the market. See “Item 3. Key Information—Risk Factors—Competition—We May Not Be Able to Compete Successfully in the Future” and “—Our Architecture and Physical IP Libraries May Face Strong Competition from Well Resourced Competitors.”
 
Patent and Intellectual Property Protection
 
The Company has an active program of protecting its proprietary technology through the filing of patents. The Company currently holds 685 US patents in various aspects of its technology, and 986 non-US patents with expiration dates ranging from 2012 to 2032. In addition, the Company has 1,100 patent applications pending worldwide. The Company’s US patents do not prevent the manufacture or sale of ARM-based products outside of the United States. There can be no assurance that the Company’s pending patent applications or any future patent applications will be approved or will not be challenged successfully by third parties, that any issued patents will protect the Company’s technology or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company’s ability to do business. Furthermore, there can be no assurance that others will not independently develop similar or competing technology or design around any patents that have been or may be issued to the Company.
 
The Company attempts to protect its trade secrets and other proprietary information through agreements with licensees and systems companies, proprietary information agreements with employees and consultants and other security measures. The Company also relies on trademarks, copyright and trade secret laws to protect its technology. Despite these efforts, there can be no assurance that others will not gain access to the Company’s trade secrets, or that the Company can meaningfully protect its technology. In addition, effective trademark, copyright and trade secret protection may be unavailable or limited in certain foreign countries. Although the Company intends to protect its rights vigorously, there can be no assurance that such measures will be successful.
 
Certain of the Company’s license agreements require licensees to grant back to ARM a royalty-free non-exclusive license to patented licensee modifications to the ARM technology. Such licenses permit ARM to sublicense to other licensees.
 
 
The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. See “Item 8. Financial Information—Legal Proceedings” for details of current litigation. Further litigation may be necessary in the future to enforce the Company’s patents and other intellectual property rights, to protect the Company’s trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, and there can be no assurance that other parties in any such litigation would not be able to devote substantially greater financial resources to such litigation proceedings or that the Company would prevail in any future litigation. Any such litigation, whether or not determined in the Company’s favor or settled by the Company, would be costly and would divert the efforts and attention of the Company’s management and technical personnel from normal business operations, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
 
Any adverse determinations in litigation could result in the loss of the Company’s proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from licensing its technology, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations. Moreover, the laws of certain countries in which the Company’s technology is or may in the future be licensed may not protect the Company’s intellectual property rights to the same extent as laws in the United Kingdom or the United States, thus reducing the enforceability of the Company’s intellectual property in those countries.
 
In any potential dispute involving the Company’s patents or other intellectual property, the Company’s licensees could also become the target of litigation and the Company may be bound to indemnify such licensees under the terms of its license agreements. Although ARM’s indemnification obligations are generally subject to a maximum amount, such obligations could nevertheless result in substantial expenses to the Company. In addition to the time and expense required for the Company to indemnify its licensees, a licensee’s development, marketing and sales of ARM architecture-based products could be severely disrupted or discontinued as a result of litigation, which in turn could have a material adverse effect on the Company’s business, financial condition and results of operations.  See “Item 3. Key Information Risk Factors We May Be Unable to Protect and Enforce Our Proprietary Rights and We May Have to Defend Ourselves Against Third Parties Who Claim That We Have Infringed Their Proprietary Rights.”
 
Marketing and Distribution
 
In order to speed global acceptance of ARM technology, ARM seeks partners with diverse geographic locations and a broad base of systems company relationships. The Company markets its architecture and technology directly to its semiconductor partners and other customers from its offices in Cambridge, Maidenhead, Sheffield and Blackburn in the United Kingdom and also from offices in Japan, South Korea, France, Germany, Norway, Taiwan, China, Israel, Slovenia, India, and in California, Texas, Massachusetts, North Carolina and Michigan in the United States. The Company’s architecture and technology are marketed on the basis of a number of factors including high performance/low power and price/performance, rapid time-to-market and the availability of third-party support. ARM also capitalizes on the extensive marketing and distribution networks of its semiconductor partners who market and distribute ARM core-based products directly to systems companies. As part of the Company’s strategy to increase ARM’s visibility, the Company’s license agreements generally require its partners to display an ARM logo on the ARM core-based products that they distribute. The Company believes that to the extent ARM technology becomes more widely accepted, the ARM “brand” will become increasingly important to potential partners and will drive the Company’s expansion into related software, development tools and system design. ARM believes that the availability of its marketing, sales and support services to all of its partners worldwide is critical to the success of the ARM architecture.
 
Research and Development
 
The ability of the Company to compete in the future will be substantially dependent on its ability to advance its technology in order to meet changing market needs. To this end, Company engineers are involved in researching and developing new versions of ARM microprocessor cores and physical IP technology as well as related software and tools applications. The Company is also involved in collaborative research with selected universities to leverage the technological expertise available at those universities. The Company has acquired certain patents from these collaborations.
 
 
As of December 31, 2011, ARM had 1,459 full-time research and development staff located at offices in Cambridge, Maidenhead, Sheffield and Blackburn in the United Kingdom; Sophia Antipolis and Grenoble, France; Grasbrunn, Germany; Trondheim, Norway; Sentjernej, Slovenia; Austin, Texas, US; San Jose, Irvine and San Diego, California, US; Olympia, Washington, US; and Bangalore, India.
 
In 2009, 2010 and 2011, research and development costs were approximately £112.2 million, £139.8 million and £165.4 million, respectively. Research and development costs were 37%, 34% and 34% of total revenues in 2009, 2010 and 2011, respectively.
 
Acquisitions
 
On June 15, 2011, the Company purchased the entire share capital of Obsidian Software Inc. (“Obsidian”) for $5.6 million in cash, plus a further $9.5 million payable as earn-out to the shareholders subject to them remaining in employment with ARM for up to 3 years and meeting certain performance criteria.  This purchase has been accounted for as an acquisition.
 
Obsidian, a company based in Austin, Texas, US is a market leader in verification and validation products and services used in the design of increasingly complex processors. The company’s RAVEN software has been used by many of the world’s leading semiconductor companies.  As SoC and processors grow in complexity there is an increasing need to develop more sophisticated verification strategies. This acquisition augments ARM's drive in matching its verification strategies with the rate of change in its high performance, complex SoC IP components.
 
For these reasons, combined with the ability to hire the entire workforce of Obsidian, including the founders and management team, the Company paid a premium for the company giving rise to goodwill.  All intangible assets were recognised at their fair values, with the residual excess over net assets being recognised as goodwill. All of the goodwill recognised is expected to be deductible for income tax purposes.
 
On October 31, 2011, the Company purchased the entire share capital of Prolific Inc. (“Prolific”) for $7.7 million in cash, plus a further $8.5 million payable as an earn-out to the shareholders subject to them remaining in employment with ARM for up to five years and meeting certain performance criteria. This purchase has been accounted for as an acquisition.
 
Prolific, a company based in Newark, California, US develops leading-edge IC design optimisation software tools that significantly reduce development time and improve the performance of cell-based designs. The increasing complexity of 20nm and below process technologies is driving the need for automated layout optimization solutions. This acquisition augments ARM's strategy to provide innovative physical IP products that will enable the ARM partnership to continue to lead in the implementation of highly integrated, low-power SoC solutions.
 
For these reasons, combined with the ability to hire the entire engineering workforce of Prolific, including the founders and the management team, the Company paid a premium for the company giving rise to goodwill.  All intangible assets were recognised at their fair values, with the residual excess over net assets being recognised as goodwill.  All of the goodwill recognised is expected to be deductible for income tax purposes.
 
There were no acquisitions in 2010.
 

 
ORGANIZATIONAL STRUCTURE
 
ARM Holdings plc is the holding company for a number of subsidiaries. The following is a list of our significant subsidiaries at December 31, 2011. Not all subsidiaries are included, as the list would be excessive in length. Unless stated otherwise, each subsidiary is wholly owned.
 
 
Company
 
 
Jurisdiction of Incorporation
ARM, Inc.
 
United States
ARM Germany GmbH
 
Germany
ARM KK
 
Japan
ARM Korea Limited
 
South Korea
ARM Limited
 
England and Wales
ARM Taiwan Limited
 
Taiwan
ARM France SAS
 
France
ARM Consulting (Shanghai) Co. Ltd
 
China
ARM Norway AS
 
Norway
ARM Sweden AB (formerly Logipard AB)
 
Sweden
ARM Embedded Technologies Pvt. Ltd.
 
India
 
PROPERTIES
 
The Company leases land and buildings for its executive offices, engineering, marketing, administrative and support operations and design centers. The following table summarizes certain information with respect to the principal facilities leased by the Company:
 
 
Location
 
 
Freehold/Leasehold
 
Lease Term and Commencement Date
 
Approximate Area (square feet)
 
 
Principal Use
Cambridge, UK (110 Fulbourn Road)
 
Leasehold
 
20 years
September 20, 1999
 
45,000
 
Executive offices and engineering, marketing and administrative operations
Cambridge, UK (130 Fulbourn Road)
 
Leasehold
 
20 years
March 28, 2002
 
35,000
 
Executive offices and engineering, marketing and administrative operations
Cambridge, UK (90 Fulbourn Road)
 
Leasehold
 
20 years
December 25, 1993
 
10,000
 
Executive offices and engineering, marketing and administrative operations
Cambridge, UK (100 Fulbourn Road)
 
Leasehold
 
13 years
 October 4,
 2010
 
30,000
 
Executive offices and engineering, marketing and administrative operations
Maidenhead, UK
 
Leasehold
 
25 years
July 28, 1998
 
20,000
 
Executive offices and design center
San Jose, California, US
 
Leasehold
 
7 years
August 1, 2008
 
92,000
 
Executive offices and engineering, marketing and administrative operations
Austin, Texas, US
 
Leasehold
 
7 years
August 1, 2009
 
47,000
 
Design center, marketing and support operations
Bangalore, India
 
Leasehold
 
5 years
July 15, 2007
 
63,500
 
Executive offices and engineering, marketing and administrative operations

In addition, the Company leases offices in Sheffield, England; Blackburn, England; Vilvoorde, Belgium; Grasbrunn, Germany; Trondheim, Norway; Lund, Sweden; Sophia Antipolis and Grenoble, France; Sentjernej, Slovenia; Hsinchu, Taiwan; Irvine, California, USA; Plano, Texas, USA; and Olympia, Washington, USA that are used for engineering and administrative purposes as well as in Shin-Yokohama, Japan; Taipei, Taiwan; and Seoul, South Korea which are used for marketing and support operations. Company personnel based in Boston, Massachusetts, US; Detroit, Michigan, US; Salem, New Hampshire, US; San Diego, California, US;
 
 
Shanghai, Shenzhen and Beijing, China; Munich, Germany; Paris, France; Singapore and Kfar Saba, Israel have office space available to them.
 
 
None.
 
 
 
OPERATING RESULTS
 
The following discussion should be read in conjunction with the consolidated financial statements of ARM Holdings plc and notes thereto included elsewhere in this document which have been prepared in accordance with IFRS, which differ in certain respects from U.S. GAAP, and with the discussion of certain risk factors set forth under “Item 3. Key Information—Risk Factors” that might materially affect the Company’s operating results and financial condition.
 
Within the review of the Operating Results we have included certain non-IFRS measures, specifically we present (i) research and development costs, (ii) sales and marketing expenditure, (iii) general and administrative costs, (iv) operating costs for each of the segments and (v) profit/loss before tax for each of the segments, adjusted in each case to exclude share-based compensation charges including payroll taxes, amortization of intangibles acquired with business combinations, other acquisition-related charges, charges relating to the disposal and impairment of investments, costs relating to the Company’s associate company Linaro, and restructuring charges.  Where such non-IFRS measures are presented, we also present the reconciling items detailed above and amount thereof, to the most directly comparable IFRS measures of research and development costs, sales and marketing expenditure, general and administrative and operating costs and profit/loss before tax for each of the segments, respectively. 
 
We believe that disclosing such non-IFRS measures enables investors to isolate and evaluate clearly the impact of the items detailed above separately from the underlying financial performance of the Company.  We believe this also allows for a clearer comparison of performance from year to year (including of our research and development costs, sales and marketing expenditure, general and administrative costs, and operating costs and profit/loss before tax for each of the segments). Management believes that this provides analysts and investors with valuable additional information which gives them an improved insight into the business.
 
It should be noted that the non-IFRS measures presented are adjusted items and that all items for which the non-IFRS measures are adjusted are included in our reported financial information because they represent real costs of our business in the periods presented. As a result, non-IFRS measures merely allow investors to differentiate among different kinds of costs and they should not be used in isolation. Our determination of non-IFRS measures, together with our presentation of them within this financial information, may differ from similarly titled non-IFRS measures of other companies.
 
Overview
 
ARM designs the technology that lies at the heart of advanced digital products, from wireless, networking and consumer entertainment solutions to imaging, automotive, security and storage devices. ARM’s comprehensive product offering includes 16/32-bit RISC microprocessors, data engines, graphics processors, digital libraries, embedded memories, peripherals, software and development tools, as well as analog functions and high-speed connectivity products. The Company licenses this technology to semiconductor companies which, in turn, manufacture, market and sell microprocessors and related products. ARM has developed an innovative, intellectual property-centered and market-driven business model in which it neither manufactures nor sells the products incorporating ARM technology, but concentrates on the research and development, design and support of the ARM architecture and supporting development tools and software. ARM provides a total system solution that offers a fast, reliable path to market for leading electronics companies.
 
The Company’s revenues in 2011 increased in US dollars, being the primary currency of revenues generated, by approximately 24% whilst the semiconductor industry (excluding memory and analog) US dollar revenues as a whole increased by about 8% during the period October 1, 2010 to September 30, 2011. This period is, in the Company’s opinion, relevant for comparison purposes because the Company’s royalty revenues are recognized
 
 
when the Company receives notification from the customer of product sales, and such notification is typically received in the quarter following shipment of the product by the customer. Looking ahead to 2012, semiconductor industry revenues are generally anticipated to grow by approximately 2% compared to 2011 and the Company is well positioned to continue to outperform the industry.
 
In 2011, the Company has remained both profitable and cash generative (before investing activities). On operating profits of £149.0 million, cash inflows from operating activities were £193.8 million, resulting in cash being returned to shareholders through dividends of £42.2 million. At the end of the year, the Company reported cash, cash equivalents and short- and long-term deposits, net of accrued interest of £424.0 million.
 
Revenues
 
The Company’s revenues are classified as either “Product Revenues,” consisting of license fees, sales of development systems and royalties, or “Service Revenues,” consisting of revenues from support, maintenance and training. The most significant component of ARM’s total revenues are license fees and royalty income which accounted for approximately 83%, 86% and 88% of total revenues in 2009, 2010 and 2011, respectively.
 
License fees as a percentage of total revenues will be affected by fluctuations in royalties and in demand for ARM’s development systems and support and maintenance services. These products and services complement ARM’s licenses by supporting ARM’s semiconductor partners in their efforts to reduce time to market. In addition, they provide ARM with a way to support systems companies who purchase finished ARM technology-based products from semiconductor companies as well as certain software vendors whose software runs on ARM microprocessors. Growth in these complementary products and services will depend on continued success in demonstrating to semiconductor companies, systems companies and software vendors the enhanced implementation possibilities which such products and services provide for ARM technology-based products and, more generally, on continued market acceptance of the ARM architecture. Growth in these complementary products and services will also depend on whether the Company can devote sufficient engineering staff to support growth in services. Revenues from development systems and support and maintenance services represented approximately 17%, 14% and 12% of total revenues in 2009, 2010 and 2011, respectively.
 
Revenues from royalties accounted for approximately 51%, 54% and 51% of total revenues in 2009, 2010 and 2011, respectively. The Company believes royalty revenue will continue to contribute a significant portion of total revenue going forward as the total number of partners and licenses increases.
 
As of December 31, 2011, the Company had more than 290 semiconductor licensees who, in turn, provide access to many other customers worldwide.
 
Product Revenues
 
License fees. Most licenses are designed to meet the specific requirements of the particular customer and can vary from rights to embed ARM technology into a customer’s own application specific product to the complete design of a “system-on-chip.” See “Item 4. Information on the Company—Business Overview—License Agreements.” Over the term of a license, contractual payments can range from hundreds of thousands of dollars to several millions of dollars. The intellectual property licensed by the Company consists of software and related documentation which enable a customer to design and manufacture microprocessors and related technology and software. A license may be perpetual or time-limited in its application. In general, the time between the signing of a license and final customer validation of the ARM technology is between 6 and 15 months with most time allocated to the period between delivery and validation of the technology. Delivery generally occurs within a short time period after the signing of a license. The licensee obtains license rights to the intellectual property at the time of signing. In addition, the licensee obtains ownership of the licensed rights to the in-process customization as well as the completed customization. License fees are invoiced according to an agreed schedule. Typically, the first invoice is generated on signing of the contract, the second is generated on delivery of the customized intellectual property (being the intellectual property and other technical information relating to the product licensed) and the third is a date-based milestone, usually within nine months of signature of the license. No upgrades or modifications to the licensed intellectual property are provided, except those updates and upgrades provided on a when-and-if-available basis under post-delivery service support. Following licensee validation of the ARM technology, the Company has no further obligations under the license agreement, except those under a valid post-delivery service support arrangement as mentioned above.
 
 
In addition to the license fees, contracts generally contain an agreement to provide post-delivery service support (support, maintenance and training) which consists of an identified customer contact at the Company and telephonic or e-mail support. Fees for post-delivery service support, which is provided after customer acceptance, are specified in the contract. Revenues from post-delivery service support are shown within Service Revenues and are discussed further below under “—Service Revenues—Support and maintenance.”
 
Development systems. Dollar revenues from sales of development boards and tool kits fluctuate with demand from licensees, systems companies and certain software vendors whose software runs on ARM microprocessors.
 
Royalties. Royalties are either set as a percentage of the licensee’s net sale price per chip or, less frequently, as a fixed amount per chip. In both cases, the royalty percentage typically declines as the total volume of ARM-compliant products shipped increases before typically flattening out at an agreed volume level. Royalty payment schedules in individual contracts vary depending on the nature of the license and the degree of market acceptance of the ARM architecture prevailing at the contract date. The average royalty rate reported in any period will also depend on the mix of end products into which ARM-based chips have been designed in the period. ARM technology is designed into a wide range of end products which incorporate chips with a broad spectrum of selling prices. Royalties are payable by licensees when they have manufactured and sold the resulting ARM-compliant microprocessors and peripherals to systems companies. The license contracts provide for reports to be issued to ARM with details of such sales and, in certain cases, with forecasts of sales for periods in the near future.
 
Systems software. The Company earns additional product revenues with the sale of systems software. Revenue is recognized on customer acceptance.
 
Service Revenues
 
Support and maintenance. ARM generally requires its licensees to pay an annual fee for support and maintenance for a minimum of one year. The fair value of this post-delivery service support is determined by reference to the consideration the customer is required to pay when it is sold separately, and the service portion is recognized ratably over the term of the support arrangement. Revenue related to post-delivery service support is recognized based on fair value, which is determined with reference to contractual renewal rates.
 
Costs of Revenues
 
Product costs. Product costs are limited to variable costs of production, such as the costs of manufacture of development systems, amortization of the Company’s third-party technology licenses, cross-license payments to collaborative parties and the time spent by engineers on developing physical IP products.
 
Service costs. Service costs include the costs of support and maintenance services to licensees of ARM technology.
 
Critical Accounting Policies and Estimates
 
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements. We believe our most critical accounting policies include revenue recognition and cost estimation on certain contracts for which we use a percentage-of-completion method of accounting, impairment of purchased goodwill, trade receivables and intangible assets and loss provisions.
 
The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results. Note that the preparation of the financial statements included in this annual report on Form 20-F requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
 
Revenue Recognition
 
The Company follows the principles of IAS 18, “Revenue recognition”, in determining appropriate revenue recognition policies. Revenue associated with the sale of goods is recognized when all of the following conditions have been satisfied:
 
 
 
·
the Company has transferred to the buyer the significant risks and rewards of ownership of the goods;
 
 
·  
the Company does not retain either continuing managerial involvement to the degree usually associated with ownership or effective control over the goods sold;
 
 
·  
the amount of revenue can be measured reliably;
 
 
·  
it is probable that the economic benefits associated with the transaction will flow to the Company; and
 
 
·  
the costs incurred or to be incurred in respect of the sale can be measured reliably.
 
Revenue associated with the rendering of services is recognized when all of the following conditions have been satisfied:
 
 
·  
the amount of revenue can be measured reliably;
 
 
·  
it is probable that the economic benefits associated with the transaction will flow into the Company;
 
 
·  
the stage of completion of the transaction at the end of the reporting period can be measured reliably; and
 
 
·  
the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
 
Revenue is shown net of value-added tax, returns, rebates and discounts, and after eliminating sales within the Company.
 
Revenue comprises the value of sales of licenses to ARM technology, royalties arising from the resulting sale of licensees’ ARM technology-based products, revenues from support, maintenance and training, consulting contracts and the sale of development boards and software toolkits.
 
Revenue from standard license products which are not modified to meet the specific requirements of each customer is recognized when the all of the conditions relevant to revenue associated with the sale of goods have been satisfied:
 
 
·  
the significant risks and rewards of ownership are transferred when a license arrangement has been agreed and the goods have been delivered to the customer;
 
 
·  
continuing managerial involvement and effective control over goods sold is relinquished at the point at which goods are delivered to the customer;
 
 
·  
the amount of revenue can be measured reliably; any consideration due under the licensing arrangement that is not deemed to be reliably measurable is deferred until it can be measured reliably; and
 
 
·  
it is probable that the economic benefits associated with the transaction will flow to the Company; any economic benefits of the transaction that are deemed unlikely to flow to the Company are deferred until it becomes probable that they will flow to the Company.
 
The majority of the Company’s revenues come from the licensing of intellectual property and there are therefore very few direct costs associated with the sale of goods; where there are direct costs of revenues, these are measured with reference to the purchasing agreements in place with the Company’s suppliers.
 
Many license agreements are for products which are designed to meet the specific requirements of each customer. Revenue from the sale of such licenses is recognized on a percentage-of-completion basis over the period from signing of the license to customer acceptance. Under the percentage-of-completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. The percentage-of-completion is measured by monitoring progress using records of actual time incurred to date in the project compared with the total estimated project requirement, which approximates the extent of performance.
 
 
Where invoicing milestones on license arrangements are such that the receipts fall due significantly outside the period over which the customization is expected to be performed or significantly outside its normal payment terms for standard license arrangements, the Company evaluates whether it is probable that economic benefits associated with these milestones will flow to the Company and therefore whether these receipts should initially be included in the arrangement consideration.
 
In particular, it considers:
 
 
·  
whether there is sufficient certainty that the invoice will be raised in the expected timeframe, particularly where the invoicing milestone is in some way dependent on customer activity;
 
 
·  
whether it has sufficient evidence that the customer considers that the Company’s contractual obligations have been, or will be, fulfilled;
 
 
·  
whether there is sufficient certainty that only those costs budgeted to be incurred will indeed be incurred before the customer will accept that a future invoice may be raised; and
 
 
·  
the extent to which previous experience with similar product groups and similar customers supports the conclusions reached.
 
Where the Company considers that there is insufficient evidence that it is probable that the economic benefits associated with such future milestones will flow to the Company, taking into account these criteria, such milestones are excluded from the arrangement consideration until there is sufficient evidence that it is probable that the economic benefits associated with the transaction will flow into the Company. The Company does not discount future invoicing milestones, as the effect of doing so would be immaterial.
 
Where agreements involve several components, the entire fee from such arrangements is allocated to each of the individual components based on each component’s fair value, where fair value is the price that is regularly charged for an item when sold separately. Where a component in a multiple-component agreement has not previously been sold separately, the assessment of fair value for that component is based on other factors, including, but not limited to, the price charged when it was sold alongside other items and the book price of the component relative to the book prices of the other components in the agreement. If fair value of one or more components in a multiple-component agreement is not determinable (where such component is not considered incidental to the overall arrangement), the entire arrangement fee is deferred until such fair value is determinable, or the component has been delivered to the licensee. Where, in substance, two or more elements of a contract are linked and fair values cannot be allocated to the individual components, the revenue recognition criteria are applied to the elements as if they were a single element.
 
Agreements including rights to unspecified future products (as opposed to unspecified upgrades and enhancements) are accounted for using subscription accounting, with revenue from the arrangement being recognized on a straight-line basis over the term of the arrangement, or an estimate of the economic life of the products offered if no term is specified, beginning with the delivery of the first product.
 
In addition to the license fees, contracts generally contain an agreement to provide post-delivery service support, in the form of support, maintenance and training which consists of the right to receive services and/or unspecified product upgrades or enhancements that are offered on a when-and-if-available basis. Fees for post-delivery service support are generally specified in the contract. Revenue related to post-delivery service support is recognized based on fair value, which is determined with reference to contractual renewal rates. If no renewal rates are specified, and fair value of the post-delivery support service cannot be determined by other methods, the entire fee under the transaction is amortized and recognized on a straight-line basis over the contractual post-delivery service support period. Where renewal rates are specified, revenue for post-delivery service support is recognized on a straight-line basis over the period for which support and maintenance is contractually agreed by the Company with the licensee.
 
If the amount of revenue recognized exceeds the amounts invoiced to customers, the excess amount is recorded as amounts recoverable on contracts within accounts receivable.
 
The excess of license fees and post-delivery service support invoiced over revenue recognized is recorded as deferred revenue.
 
Sales of software, including development systems, which are not specifically designed for a given license (such as off-the-shelf software) are recognized upon delivery, when the significant risks and rewards of ownership have been transferred to the customer. At that time, the Company has no further obligations except that, where necessary, the costs associated with providing post-delivery service support have been accrued. Services (such as training) that the Company provides which are not essential to the functionality of the IP are separately stated and priced in the contract and, therefore, accounted for separately. Revenue is recognized as services are performed and it is probable that the economic benefits associated with the transaction will flow into the Company.
 
Royalty revenues are earned on sales by the Company’s customers of products containing ARM technology. Royalty revenues are recognized when it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be reliably measured. Revenues are recognized when the Company receives notification from the customer of product sales, or receives payment of any fixed royalties. Notification is typically received in the quarter following shipment of the products by the customer.
 
Certain products have been co-developed by the Company and a collaborative partner, where both parties had the right to sell licenses to the product. In those cases where the Company receives royalty revenues from the sale of these products, the total value of the royalty is recorded as revenue and the amount payable to the collaborative partner is recorded as cost of sales. Where the collaborative partner collects royalties on the sales of these products, the Company records as revenue the commission it is due when informed by the collaborative partner that a sale has been made.
 
The Company makes significant estimates in applying its revenue recognition policies. In particular, as discussed in detail above, estimates are made in relation to the use of the percentage-of-completion accounting method, which requires that the extent of progress toward completion of contracts may be anticipated with reasonable certainty. The use of the percentage-of-completion method is itself based on the assumption that, at the outset of license agreements, there is an insignificant risk that customer acceptance may not be obtained. The Company also makes assessments, based on prior experience, of the extent to which future milestone receipts represent a probable future economic benefit to the Company. In addition, when allocating revenue to various components of arrangements involving several components, it is assumed that the fair value of each element is reflected by its price when sold separately. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the revenue recognition policies affect the amounts reported in the financial statements. If different assumptions were used, it is possible that different amounts would be reported in the financial statements.
 
Purchased Goodwill and Intangible Assets
 
Goodwill. Goodwill represents the excess of the fair value of the consideration paid on acquisition of a business over the fair value of the assets, including any intangible assets identified and liabilities acquired. Goodwill is not amortized but is measured at cost less impairment losses. In determining the fair value of consideration, the fair value of equity issued is the market value of equity at the date of completion, the fair value of share options assumed is calculated using the Black-Scholes valuation model, and the fair value of contingent consideration is based upon whether the directors believe any performance conditions will be met and thus whether any further consideration will be payable.
 
Other intangible assets. Computer software, purchased patents and licenses to use technology are capitalized at cost and amortized on a straight-line basis over a prudent estimate of the time that the Company is expected to benefit from them. Costs that are directly attributable to the development of new business application software and which are incurred during the period prior to the date that the software is placed into operational use, are capitalized. External costs and internal costs are capitalized to the extent they enhance the future economic benefit of the asset.
 
Although an independent valuation is made of any intangible assets purchased as part of a business combination, the directors are primarily responsible for determining the fair value of intangible assets.
 
In-process research and development projects purchased as part of a business combination may meet the criteria set out in IFRS 3, “Business combinations,” for recognition as intangible assets other than goodwill. The directors track the status of in-process research and development intangible assets such that their amortization commences when the assets are brought into use.
 
Amortization is calculated so as to write off the cost of intangible assets, less their estimated residual values, which are adjusted, if appropriate, at each balance sheet date, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal economic lives used for this purpose are:
 
Computer software
Three to five years
Patents and licenses
Three to ten years
In process research and development
One to five years
Developed technology
One to five years
Existing agreements and customer relationships
One to six years
Core technology
Five years
Trademarks and tradenames
One to five years
Order backlog
One year

Impairment of non-financial assets
 
Assets that have an indefinite useful life, for example goodwill, are not subject to amortization but are tested annually for impairment.
 
Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
 
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Further discussion of the assumptions used in these impairment tests is included in Note 15 to the Consolidated Financial Statements.
 
At the annual tests in 2009, 2010 and 2011, impairment tests showed there was no impairment with respect to goodwill. Furthermore, no trigger events have been identified that would suggest the impairment of any of the Company’s other intangibles.
 
Provisions
 
Over recent years, as we have established an increasing number of partners, as our intellectual property has become more widely accepted and as our balance sheet has become stronger, we have become involved in more litigation and claims have been asserted against us more frequently.
 
Provisions for restructuring costs and legal claims are recognized when: the Company has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount of the outflow can be reliably estimated.
 
Application of these accounting principles to potential losses that could arise from intellectual property disputes is inherently difficult given the complex nature of the facts and law involved. Deciding whether or not to provide for loss in connection with such disputes requires management to make determinations about various factual and legal matters beyond the Company’s control. To the extent management’s determinations at any time do not reflect subsequent developments or the eventual outcome of any dispute, future income statements and balance sheets may be materially affected with an adverse impact upon our results of operation and financial position. Among the factors that the Company considers in making decisions on provisions are the nature of the litigation, claim, or assessment, the progress of the case (including progress after the date of the financial statements but before those statements are issued), the opinions or views of legal counsel and other advisers, the experience of the Company in similar cases, and any decision of the Company’s management as to how the Company intends to respond to the litigation, claim, or assessment. The fact that legal counsel is unable to express an opinion that the outcome will be favorable to the Company does not necessarily mean that the above conditions for accrual of a loss are met.
 
 
Results of Operations
 
The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items reflected in the Company’s consolidated statements of operations.
 
   
Year ended December 31,
 
   
2009
   
2010
   
2011
 
   
%
   
%
   
%
 
Revenues
                 
Product revenues
    94.0       95.0       94.7  
Service revenues
    6.0       5.0       5.3  
Total revenues
    100.0       100.0       100.0  
Cost of revenues
                       
Product costs
    5.5       3.9       3.2  
Service costs
    2.9       2.5       2.4  
Total cost of revenues
    8.4       6.4       5.6  
Gross profit
    91.6       93.6       94.4  
Operating expenses
                       
Research and development
    36.8       34.4       33.6  
Sales and marketing
    20.2       17.2       14.8  
General and administrative
    19.7       15.7       15.7  
Total operating expenses
    76.7       67.3       64.1  
Profit from operations
    14.9       26.3       30.3  
Investment income
    0.6       0.9       1.6  
Interest payable
    0.0       0.1       0.0  
Profit before tax
    15.5       27.1       31.9  
Tax
    2.2       5.9       9.0  
Profit for the year
    13.3       21.2       22.9  

Total revenues for the year ended December 31, 2011 were £491.8 million, an increase of 21% from £406.6 million in 2010, which was an increase of 33% from £305.0 million in 2009. Dollar revenues were $785.0 million in 2011, an increase of 24% from $631.3 million in 2010, which was an increase of 29% from $489.5 million in 2009. The actual average dollar exchange rate in 2011 was $1.60 compared with $1.55 in 2010 and $1.60 in 2009.
 
Management analyzes product revenues in the categories of royalties, licenses and development systems. Service revenues consist of support, maintenance and training income. The following table sets forth, for the periods indicated, the amount of total revenues represented by each component of revenue:
 
   
Year ended December 31,
 
   
2009
   
2010
   
2011
 
   
(in thousands)
 
Product Revenues
                 
Royalties
  £ 155,447     £ 217,624     £ 252,346  
Licenses
    98,446       132,528       180,521  
Development Systems
    32,941       35,993       32,928  
      286,834       386,145       465,795  
Service Revenues
                       
Support, Maintenance and Training
  £ 18,188     £ 20,450     £ 26,031  
Total Revenues
    305,022       406,595       491,826  

Product revenues. Product revenues consist of license fees, sales of development systems and royalties. Product revenues for 2009, 2010 and 2011 were £286.8 million, £386.1 million and £465.8 million, respectively, representing 94% , 95% and 95% of total revenues in 2009, 2010 and 2011, respectively. Product revenues in US dollars, being the primary currency of revenues generated, increased from $460.0 million in 2009 to $598.9 million in 2010 and increased to $743.7 million in 2011.
 
License revenues increased from £98.4 million in 2009 to £132.5 million in 2010 and further increased to £180.5 million in 2011, representing approximately 32%, 33% and 37% of total revenues in 2009, 2010 and 2011, respectively. License revenues in US dollars increased from $164.1 million in 2009 to $208.2 million in 2010 and further increased to $285.7 million in 2011.
 
Processor Division (PD) dollar license revenues increased by 30% in 2010 and increased by 42% in 2011.
 
The portfolio of licensable products comprises a rich mix of proven ARM technology, such as the ARM7, ARM9 and ARM11 families of products and newer technology such as the Cortex family of products and the Mali 3D graphics processors.
 
121 new licenses were signed in 2011 compared to 91 in 2010 and 87 in 2009. Revenues from Cortex family products accounted for 52% of PD license revenues in 2011, compared to 48% in 2010, and 42% in 2009. Cortex products started generating revenue in 2005. ARM11 accounted for 2% of PD license revenues in 2011, compared to 7% in 2010, and 9% in 2009. Revenues from long-term licenses with certain strategic customers accounted for 23% of PD license revenues in 2011, compared to 18% in 2010 and 10% in 2009. 36 companies became new ARM Partners in 2011, bringing the total number of semiconductor partners to more than 290 at the end of the year. This total number of semiconductor partners was net of those companies that have signed licenses with ARM in the past but have since been acquired by other companies or who no longer have access to ARM technology for other reasons.
 
During 2011, 89 Cortex family licenses were signed, bringing the accumulated total of Cortex family licenses to 250. 19 licenses to ARM’s Mali 3D graphics processors were signed in 2011, bringing the accumulated total of Mali licenses to 58. Graphics processor revenues accounted for 8% of PD license revenues in 2011, compared to 12% in 2010, and 13% in 2009.
 
License revenues from non-core products, covering items such as platforms, peripherals, embedded trace modules, embedded software, data engines, models and sub-systems were £16.2 million in 2011, compared to £12.7 million in 2010 and £9.8 million in 2009, representing approximately 11% of processor license revenues in 2011, 12% in 2010 and 13% in 2009, respectively.
 
By the end of 2011, ARM had signed a total of 29 royalty-bearing advanced physical IP platform licenses at 65nm and below. ARM’s Physical IP Division (PIPD) reported license revenues of £31.2 million in 2011 (2010: £26.6 million, 2009: £22.0 million), representing approximately 17% of total license revenues in 2011 (2010: 20%; 2009: 22%).
 
In 2011, ARM maintained progress in achieving the long term strategic goal of providing ARM’s physical IP to leading Integrated Device Manufacturers (“IDM”) and Fabless semiconductor companies and continued to sign synergistic licenses that have been enabled by the combination of ARM and Artisan. Cortex-A class processors benefit from physical IP optimized for high-performance and low-power on advance process nodes; and Cortex-M class processors benefit from physical IP optimized for low-performance and low-power on mature process nodes. 16 licenses were signed for processor optimization packages in 2011, bringing the total number of licenses for this technology to 26.
 
Revenues from the sale of development systems increased from £32.9 million in 2009 to £36.0 million in 2010, and decreased to £32.9 million in 2011, representing approximately 11% of total revenues in 2009, 9% in 2010 and 7% in 2011. Development systems revenues in US dollars increased from $51.6 million in 2009 to $55.4 million in 2010 and decreased to $52.5 million in 2011. The decline in development systems revenues in 2011 is largely due to the growth of Linux-based operating systems, which are supported by free software development tools. The Company is now refocusing this business on microcontroller tools and premium toolkits for multi-core systems.
 
Royalties are either set as a percentage of the licensee’s average selling price (“ASP”) per chip or, less frequently, as a fixed amount and are recognized when the Company receives notification from the customer of product sales. In effect, this means that it is normally in the quarter following the shipments that data is received and so royalty data for a year reflects actual shipments made from the beginning of October of the previous year to the end of September of the current year. As the penetration of ARM technology-based chips grows across a wide range of end-market applications, the range of ASPs gets wider.
 
 
Royalties increased from £155.4 million in 2009 to £217.7 million in 2010 and further increased to £252.3 million in 2011, representing 51%, 54% and 51% of total revenues in 2009, 2010 and 2011, respectively. US dollar royalty revenues increased from $244.4 million in 2009 to $335.3 million in 2010 and further increased to $405.6 million in 2011. Royalty revenues in 2011 comprised £222.2 million from PD and £30.1 million from PIPD. PD volume shipments increased from 3.9 billion units in 2009 to 6.1 billion units in 2010 and 7.9 billion units in 2011, representing an increase of 29% compared to 2010. Worldwide unit shipments of mobile handsets increased by 11% in 2011, and as more ARM technology is typically incorporated into feature-rich handsets, the Company also benefited from the higher proportion of smartphones being shipped in the year. Beyond mobile, the Company also continued to gain share in all target end-markets including mobile computing, digital televisions and microcontrollers.
 
The Company expects royalty revenues to grow over the medium term although they may be subject to significant fluctuations from quarter to quarter. The total number of partners shipping ARM technology-based products at the end of 2011 was 147 after taking into account corporate activity within the ARM partnership. 29 companies were paying meaningful royalties for physical IP products at the end of the year.
 
Service revenues. Service revenues consist of support, maintenance and training. Service revenues increased from £18.2 million in 2009 to £20.4 million in 2010 and further increased to £26.0 million in 2011, representing 5% of total revenues in 2011 (2010: 5%, 2009: 6%). Service revenues in US dollars, being the primary currency of revenues generated, increased from $29.4 million in 2009 to $32.4 million in 2010 and further increased to $41.3 million in 2011.
 
Geographic analysis. The Company earns revenues from customers who are based in many different geographies. The following table sets forth, for the periods indicated, revenue by geographic destination as a percentage of total revenue per the Company’s consolidated financial statements. The proportion of revenues from the Asia Pacific region (excluding Japan) is increasing as the level of licensing and royalty shipments from customers based in China, South Korea and Taiwan increases.
 
   
Year ended December 31,
 
   
2009
   
2010
   
2011
 
   
%
   
%
   
%
 
Revenue by destination:
                 
North America
    34       38       39  
Japan
    16       11       10  
Asia Pacific, excluding Japan
    35       37       39  
Europe
    15       14       12  
Total
    100       100       100  

Product costs. Product costs are limited to variable costs of production such as the costs of manufacture of development systems, amortization of third-party technology licenses, cross-license payments to collaborative partners and time of engineers on PIPD projects. Product costs were £16.6 million in 2009, £15.8 million in 2010 and £15.8 million in 2011, representing 5%, 4% and 3% of total revenues in 2009, 2010 and 2011, respectively. Product costs were similar in 2011 compared to 2010 as the increase in PIPD direct costs offset the decreases in development systems costs and amounts paid for third-party licenses. Product costs decreased in 2010 due to the lower costs of cross-license payments to third parties as the Company’s own products increasingly replace these technologies. In 2009 and 2010, the proportion of development systems costs was approximately 20% with PIPD direct costs of approximately 55% and the balance third-party licenses and cross-license payments to collaborative partners. In 2011, development systems costs made up approximately 20% of total product costs, PIPD direct costs accounting for approximately 75% and the balance relating to third-party licenses and cross-license payments. Product gross margin in 2011 was 97%, compared to 96% in 2010 and to 94% in 2009.
 
Service costs. Service costs include the costs of support and maintenance services provided to licensees of ARM technology. Cost of services was £8.8 million in 2009, £10.3 million in 2010 and £11.9 million in 2011. The gross margins earned on service revenues were approximately 51% in 2009, 50% in 2010 and 54% in 2011. Costs increased in 2010 largely due to the rise in stock-based compensation including payroll taxes included within service costs to £2.8 million, compared to £1.7 million in 2009. In 2011, the increase was largely due to stock-based
 
compensation, which increased to £3.5 million as well as an increase in staff costs to support the growth in service revenues.
 
Performance indicators. The Company’s management uses several performance indicators in assessing the Company’s performance, of which revenues and earnings per share are the most important. Revenues are discussed in further detail in “—Results of Operations” above. Earnings per share are disclosed in our financial statements filed herewith. Another performance indicator for the business is backlog, defined as the aggregate value of contracted business not yet recognized as revenue in the profit and loss account. Period-end backlog excludes royalty revenue, which is recognized upon receipt of the royalty reports from our partners and consequently passes into backlog and is immediately released when invoiced.
 
The Company discloses the quarterly trend in backlog along with the maturity profile (how much is expected to be recognized as revenue in the next two quarters, in the subsequent two quarters, and over more than one year), and its composition is split between the main component parts.
 
   
At December 31,
 
Maturity profile of backlog
 
2010
   
2011
 
Next two quarters (Q1 and Q2)
    25%       25%  
Subsequent two quarters (Q3 and Q4)
    22%       23%  
Greater than twelve months
    53%       52%  
Total
    100%       100%  

   
At December 31,
 
Backlog composition
 
2010
   
2011
 
Processors
    71%       74%  
Physical IP
    14%       13%  
Support & Maintenance and Others
    15%       13%  
Total
    100%       100%  

At the end of 2011, backlog was 34% higher than at the beginning of the year due to the licensing of new technologies to lead partners along with the signing of further large long-term licensing deals where revenue is expected to be recognized over a number of accounting periods.

Another performance indicator is the number of patent applications submitted by ARM employees. ARM incentivizes its employees to submit patent applications by awarding patent bonuses. The number of proposed patent applications submitted by ARM employees was 196 in 2011, 185 in 2010 and 193 in 2009.
 
Research and development costs. Research and development costs increased from £112.2 million in 2009 to £139.8 million in 2010 and further increased to £165.4 million in 2011, representing 37%, 34% and 34% of total revenues in 2009, 2010 and 2011, respectively. Costs in 2009, 2010 and 2011 included £14.8 million, £25.2 million and £34.8 million of share-based compensation charges including payroll taxes, and £7.7 million, £3.5 million and £2.4 million of amortization of intangible assets acquired with business combinations, respectively. Costs in 2011 also included £2.5 million of acquisition-related charges. Costs relating to the Company’s associate company Linaro amounted to £3.5 million and £6.8 million in 2010 and 2011, respectively. Excluding these charges, research and development costs were £89.7 million, £107.6 million and £118.9 million, representing 29%, 26% and 24% of total revenues in 2009, 2010 and 2011, respectively. Continued investment in research and development remains an essential part of the Company’s strategy as the development of new products for licensing is key to its future growth.
 
Average engineering headcount increased from 1,141 in 2009 to 1,208 in 2010 and further increased to 1,366 in 2011. Staff costs increased in both 2010 and 2011 as a result of the growth in headcount as well as employee cost inflation and the higher level of bonuses and sales commissions payable on the achievement of financial performance targets.
 
Typically, when a new product is in development, the Company seeks to work with a small number of potential customers interested in licensing the product prior to the completion of its development. Once the customers are identified, further work is undertaken to complete the product’s fundamental design, after which it is transferred to the
 
 
customers’ semiconductor process so that a series of test chips may be manufactured and validated. The Company cannot determine whether the product can be manufactured in accordance with its design specifications, including functions, features, and technical performance requirements, until the end of this process. Since all design, coding, and testing activities must be completed before technological feasibility is established, the Company does not capitalize any product development costs.
 
Sales and marketing. Sales and marketing expenditure increased from £61.7 million in 2009 to £70.1 million in 2010 and further increased to £72.6 million in 2011, representing 20%, 17% and 15% of total revenues in 2009, 2010 and 2011, respectively. Costs in 2009, 2010 and 2011 included £4.7 million, £8.0 million and £11.3 million of share-based compensation charges including payroll taxes, £8.5 million, £7.9 million and £0.8 million of amortization of intangibles acquired with business combinations, respectively, and in 2010 included £0.1 million of Linaro-related costs. Excluding these charges, sales and marketing costs were £48.5 million, £54.1 million and £60.5 million, representing 16%, 13% and 12% of total revenues in 2009, 2010 and 2011, respectively. Average headcount in this area increased from 334 in 2009 to 337 in 2010 and further increased to 349 in 2011. Overall sales and marketing costs have increased in 2010 and 2011 due primarily to increased staff bonuses and sales commissions.
 
General and administrative. General and administrative costs were £60.0 million in 2009, £63.7 million in 2010 and £77.2 million in 2011, representing 20%, 16% and 16% of total revenues in 2009, 2010 and 2011, respectively. Costs included £3.4 million, £5.9 million and £8.1 million relating to share-based compensation charges including payroll taxes, less than £0.1 million, £nil and £nil of amortization of intangibles acquired with business combinations, £0.2 million, £nil and £1.8 million of investment-related charges in 2009, 2010 and 2011, respectively, and in 2011 included £0.7 million of acquisition-related costs. Furthermore, these costs included £8.5 million in 2009 of restructuring charges and a credit in respect of restructuring of £0.4 million in 2010. In 2010, general and administrative costs also included £0.9 million related to Linaro. Excluding these items, general and administrative costs were £47.9 million, £57.3 million and £66.6 million, representing 16%, 14% and 14% of total revenues in 2009, 2010 and 2011, respectively. General and administrative costs rose in 2011 due to additional investment in information technology to provide additional engineering clusters as well as due to general growth in the business.
 
General and administrative average headcount in 2011 was 281, up from 254 in 2010 and 248 in 2009.
 
Unrealized future foreign exchange gains on certain committed but not yet invoiced future revenue streams of £1.2 million (2010: losses of £0.2 million; 2009: losses of £9.8 million) were recorded in 2011. There were other foreign exchange gains of £17.1 million in 2009, gains of £1.7 million in 2010 and charges of £4.2 million in 2011. The foreign exchange rate between the US dollar and sterling has been relatively stable during 2010 and 2011. The gains in 2009 were predominantly due to the weakening of the dollar during the year resulting in a combination of the reversal of some of the currency exchange contracts’ mark-to-market provisions made in 2008 and the revaluation of the embedded derivatives noted above once invoiced. The overall net charge or gain depends upon the mix and quantum of non-sterling denominated monetary assets (including cash, accounts receivable and accounts payable), embedded derivatives and currency exchange contracts.
 
Restructuring costs. During 2011, there were no restructuring charges. In 2010, there was a small reversal of the provisions made for restructuring costs in previous years of £0.4 million. Restructuring costs were £8.5 million in 2009, primarily relating to staff severance costs. The majority of the 2009 restructuring costs relate to the closure of the Belgian operation.
 
Amortization of intangible assets. Licenses to use third party technology are capitalized and amortized over the useful economic period that the Company is expected to gain benefit from them (generally between three and ten years). Licenses totaling £5.9 million were purchased during 2001 to 2006, with further licenses for £7.0 million being purchased in 2008. No licenses were purchased in 2009, 2010 or 2011. Amortization of these licenses amounted to £1.6 million in 2011 (2010: £1.6 million; 2009: £1.8 million). At December 31, 2011, the net book value of these assets was £4.1 million which will be amortized over the next five years.
 
During 2004, the Company purchased Axys Design Automation, Inc. and Artisan Components, Inc. (now part of ARM, Inc.). Intangibles acquired and capitalized as part of these business combinations (including developed and core technology, customer relationships, trademarks and in-process research and development) totaled £2.3 million and £74.4 million, respectively, and were amortized over five years and between one and six years. The total charge
 
 
for Axys and Artisan, respectively, was £0.3 million and £10.9 million in 2009 and £nil and £7.3 million in 2010. These assets were fully amortized by the end of 2010.
 
During 2005, the Company purchased Keil Elektronik GmbH and Keil Software, Inc. Intangibles acquired and capitalized consisted of developed technology, customer relationships and tradenames and totaled £8.7 million. These intangibles were amortized between two and five years and the amortization was £1.0 million in 2009 and £0.8 million in 2010. These assets were amortized by the end of 2010.
 
During 2006, the Company purchased Falanx Microsystems AS, a graphics IP company in Norway. Intangibles acquired and capitalized consisted of developed technology and customer relationships and totaled £5.3 million. These are being amortized over three to five years and the charge in 2009 was £1.0 million, in 2010 was £0.8 million and in 2011 was £0.3 million. The Company also purchased Soisic SA, an IP company based in France and the US. Intangibles acquired and capitalized were all developed technology and totaled £4.3 million. This is being amortized over five years with £1.1 million being charged in 2009, £1.1 million in 2010 and £0.9 in 2011. The Company also purchased certain assets of PowerEscape Inc., giving rise to £1.0 million of in-process research and development. This is being amortized over three years with £0.2 million, £nil and £nil charged to the income statement in 2009, 2010 and 2011, respectively. These assets were fully amortized by the end of 2011.
 
During 2008, the Company purchased Logipard AB, a video IP company in Sweden. Intangibles acquired and capitalized consisted of developed technology, customer relationships and in-process research and development and totaled £5.0 million. These are being amortized over three to five years and the charge in 2009 was £1.2 million, in 2010 was £0.9 million and in 2011 was £0.9 million. As part of the acquisition, the Company also acquired some contracts from the parent company of Logipard. The value of these contracts is £1.8 million which has been capitalized and will be amortized over their useful economic lives and the charge in 2009, 2010 and 2011 was £0.5 million. At December 31, 2011, the net book value of these assets was £2.3 million.
 
During 2011, the Company purchased Obsidian Software Inc., a developer of verification and validation products and services, based in Texas.  Intangibles acquired and capitalized consisted of patents and customer relationships and totaled £2.8 million.  These are being amortized over 3 years and the charge in 2011 was £0.4 million. At December 31, 2011, the net book value of these assets was £2.4 million. The Company also acquired Prolific, Inc., a California-based company that develops leading-edge IC design optimisation software tools. Intangibles acquired and capitalized consisted of developed technology, customer relationships and trademarks and totaled £2.4 million.  These are being amortized over 6 months to 2 years and the charge in 2011 was £0.1 million. At December 31, 2011, the net book value of these assets was £2.3 million.
 
Interest. Net investment income increased from £1.6 million in 2009 to £3.1 million in 2010 and further increased to £8.0 million in 2011. The increase in 2011 was mainly due to both significantly higher cash balances and higher interest rates received as a result of placing deposits for a longer period.  The increase in 2010 was due to significantly higher cash balances throughout the year. Cash was invested for periods of up to two years although more typically for periods of less than one year. Offset against the investment income in 2010 is an amount of £0.6 million relating to a charitable interest-free loan made by the Company in 2010. Interest received in 2011 included £0.1 million relating to this charitable loan.
 
Profit before tax. Profit before tax was £47.3 million in 2009, £110.0 million in 2010 and £156.9 million in 2011, representing 15%, 27% and 32% of total revenues, respectively. In 2009, the strength of the US dollar resulted in sterling revenues being higher than for the previous year, although the strength of the US dollar was also largely responsible for an increase in operating expenses, which combined with an increase in share-related and restructuring charges resulted in lower overall profits. In 2010, revenues were higher as a result of increased licensing activity as well as higher royalty revenues following a 55% increase in shipments by the Company’s partners. The higher revenues also gave rise to increased performance-based bonuses which has had the effect of increasing costs. In 2011, both licensing and royalty revenues again grew strongly. Licensing revenue was 36% higher and royalty revenue was 16% higher.   The overall impact of these effects is a 43% increase in profit before tax.
 
Tax charge. The Company’s effective tax rates were 14% in 2009, 22% in 2010 and 28% in 2011. In 2009, the increase in the share price reversed the impact on the deferred tax assets on share-based awards resulting in a
 
significantly lower tax rate. In 2010, the tax rate was impacted by the utilization of certain US deferred tax assets and continued to be lower than the tax rates of the main countries in which the Company operates as a result of the research and development tax credits available in those countries. In 2011, the Company’s taxable profits were reduced by a combination of research and development tax credits and gains on employee shares awards, leading to a reduction in the Company’s tax liability. This meant that the Company was unable to fully  offset the overseas withholding tax it suffered on its royalty income against its tax liability for the year. The unutilized overseas withholding tax became irrecoverable and caused the Company’s effective tax rate to increase.

Segment Information
 
At December 31, 2011, the Company was organized on a worldwide basis into three business segments, namely the Processor Division (“PD”), the Physical IP Division (“PIPD”) and the System Design Division (“SDD”). This was based upon the Company’s internal organization and management structure and was the primary way in which the Chief Operating Decision Maker (“CODM”) and the rest of the board were provided with financial information. Whilst revenues were reported into four main revenue streams (namely licensing, royalties, development systems and services), the costs, operating results and balance sheets were only analyzed by the three segments.
 
PD primarily comprises the ARM processor and services businesses. Recent acquisitions have been allocated to the various divisions as follows: Falanx in 2006, Logipard in 2008 and Obsidian in 2011 to PD, and Soisic in 2006 and Prolific in 2011 to PIPD. Goodwill on each acquisition has also been allocated to these divisions, except for Artisan where the goodwill arising was allocated between PD and PIPD. See Note 15 to the Consolidated Financial Statements for the allocation of goodwill by segment.
 
Processor Division (PD)
 
The Processor Division encompasses those resources that are centered around microprocessor cores, including specific functions such as graphics IP, fabric IP, embedded software IP and configurable digital signal processing (“DSP”) IP.
 
Revenues. Total PD revenues for 2009, 2010 and 2011 were £227.2 million, £315.7 million and £397.6 million, respectively.
 
License revenues increased from £76.5 million in 2009 to £105.9 million in 2010 and further increased to £149.3 million in 2011, representing approximately 34%, 34% and 38% of total PD revenues in 2009, 2010 and 2011, respectively. License revenues in US dollars increased from $128.2 million in 2009 to $166.9 million in 2010 and further increased to $236.5 million in 2011. Licensing revenues are driven by customers’ ongoing R&D programs. Despite the difficult economic climate, these programs continued during 2009, but with limited budgets with the result that ARM signed more licenses with a lower up-front cost, but higher expected future royalties. In 2010, customers were able to make greater investment in the technology and revenues increased accordingly. In 2011, customers continued to invest further and also licensed higher value products resulting in the higher licensing revenues. The portfolio of licensable products comprises a rich mix of proven ARM technology, such as the ARM7, ARM9 and ARM11 families of products, and newer technology such as the Cortex family of products and the Mali 3D graphics processors. See “—Results of Operations—Product revenues” above for further details. Optimized versions of certain processor cores were able to command higher prices which contributed to revenue growth in 2010 and 2011. This optimization has been achieved by the combination of the Company’s physical IP with Cortex processor cores.
 
Royalties are either set as a percentage of the licensee’s average selling price (“ASP”) or, less frequently, as a fixed amount and are recognized when the Company receives notification from the customer of product sales. In effect, this means that it is normally in the quarter following the shipments that data is received and so royalty data for a year reflects actual shipments made from the beginning of October of the previous year to the end of September of the current year.
 
PD royalties increased from £132.5 million in 2009 to £189.4 million in 2010 and further increased to £222.2 million in 2011, representing 58%, 60% and 56% of total PD revenues in 2009, 2010 and 2011, respectively. Royalty revenues in US dollars were $208.1 million, $291.5 million and $356.9 million in 2009, 2010 and 2011, respectively. PD volume shipments increased from 3.9 billion units in 2009 to 6.1 billion units in 2010 and further increased to 7.9 billion units in 2011, representing a decrease of 2%, an increase of 55% and an increase of 29% in 2009, 2010 and 2011, respectively. Royalty revenues when reported in US dollars decreased in 2009 by a greater
 
 
amount than the decline in units shipped due to a decrease in overall average royalty per chip as the Company’s products get designed into a wider range of end-products such as microcontrollers and Bluetooth chips which typically have a lower selling price. This trend of reducing royalty rates continued in 2010 and 2011, but the strong growth in unit shipments resulted in higher revenues.
 
Service revenues consist of design consulting services and revenues from support, maintenance and training. Service revenues increased from £18.2 million in 2009 to £20.4 million in 2010 and further increased to £26.0 million in 2011, representing 8%, 6% and 6% of total PD revenues in 2009, 2010 and 2011, respectively. Service revenues in US dollars were $29.5 million in 2009, $32.4 million in 2010 and $41.3 million in 2011.
 
Operating costs. Operating costs for 2009, 2010 and 2011 were £148.8 million, £179.2 million and £223.8 million, respectively. Operating costs include cost of sales (comprising products costs and service costs), research and development costs, sales and marketing costs and general and administrative costs. Included within these costs were £13.9 million, £25.0 million and £37.0 million of share-based compensation charges including payroll taxes, £2.6 million, £2.2 million and £4.6 million of amortization of intangibles and other charges relating to business combinations, £0.2 million, £nil, less than £0.1 million of investment-related charges and £nil, £4.4 million and £6.8 million of Linaro-related charges, respectively. Furthermore, operating costs in 2009, 2010 and 2011 included restructuring costs of £7.3 million, relating primarily to the closure of the Belgium office, a credit of £0.4 million and £nil , respectively. Excluding these charges, PD operating costs were £124.8 million, £148.0 million and £175.4 million in 2009, 2010 and 2011, respectively. The increase in costs in both 2010 and 2011 was due primarily to an increase in the research and development capability of the division.
 
Profit before tax. Profit before tax was £78.4 million in 2009, £136.5 million in 2010 and £173.7 million in 2011, representing 34%, 43% and 44% of total PD revenues, respectively. Excluding the charges noted above, margins in 2009, 2010 and 2011 were 45%, 53% and 56%, respectively.
 
Capital expenditure. Capital expenditure represents additions of property, equipment and software. In 2009, 2010 and 2011 such expenditure was £2.9 million, £3.9 million and £7.8 million, respectively.
 
Total assets, total liabilities and net assets. Total assets in 2009, 2010 and 2011 were £215.3 million, £239.9 million and £274.6 million, respectively. Total assets increased at the end of both 2010 and 2011, largely due to the increased sales activity leading to higher receivables. Total liabilities in 2009, 2010 and 2011 were £54.5 million, £115.8 million and £155.3 million, respectively. Liabilities increased in 2010 and 2011 compared to 2009 due to the increasing level of accruals at the end of each year for bonuses and the increase in deferred revenue due to amounts invoiced on a number of high-value deals for products, the revenue for which will be recognized over a number of accounting periods. PD had net assets of £160.8 million, £124.1 million and £119.3 million in 2009, 2010 and 2011, respectively.
 
Goodwill. A portion of the goodwill arising on the acquisition of Artisan Components, Inc. in December 2004 was allocated to PD. The directors believe that revenue will accrue to PD as a result of the ownership of PIPD for the following reasons:
 
 
·  
the development of faster and more power-efficient microprocessors as a result of collaboration between PD and PIPD engineering teams. This is expected to generate more PD licensing deals at higher prices; and
 
 
·  
the potential for PD to win more microprocessor licensing business as a result of ARM being able to offer both processor and physical IP in-house.
 
Goodwill increased from £135.7 million in 2009 to £139.6 million in 2010 and further increased to £143.7 million in 2011. The movement in 2011 is mostly due to the acquisition of Obsidian Software Inc., which resulted in £3.2 million of additional goodwill.  The other movements are as a result of fluctuations in the year-end currency exchange rates.
 
Physical IP Division (PIPD)
 
Revenues. Total PIPD revenues in 2009, 2010 and 2011 were £44.9 million, £54.9 million and £61.3 million, respectively. In 2009, 2010 and 2011, PIPD’s license revenues were £22.0 million, £26.6 million and £31.2 million, respectively; and its royalty revenues were £22.9 million, £28.3 million and £30.1 million, respectively. In US dollar terms, licensing revenue increased from $35.9 million in 2009 to $41.3 million in 2010 and further increased to $49.2 million in 2011, and royalty revenue increased from $36.2 million in 2009 to $43.8 million in 2010 and
 
 
further increased to $48.7 million in 2011. Both licensing and royalty revenues were lower in 2009 as a result of foundries cutting capacity due to the difficult economic conditions. In 2010, foundry utilization was higher, resulting in increased royalty revenues. In addition, a number of licenses were signed for the latest technologies resulting in an improvement in license revenue. In 2011, the increase in license and royalty revenues was due to continued higher licensing activity and further utilization of ARM physical IP by foundries.
 
Operating costs. Operating costs for 2009, 2010 and 2011 were £81.1 million, £82.5 million and £81.1 million, respectively. Operating costs include product cost of sales, service cost of sales, research and development costs, sales and marketing costs and general and administrative costs. Included within these costs were £6.5 million, £9.9 million and £12.1 million of share-based compensation charges including payroll taxes, £12.1 million, £8.4 million and £1.6 million of amortization of intangibles and other charges relating to business combinations, respectively, and in 2011 £1.6 million relating to a write down of an investment. Furthermore, operating costs included restructuring costs of £0.3 million, £nil and £nil in 2009, 2010 and 2011, respectively, primarily related to staff severance costs. Excluding these share-based compensation, amortization and other charges relating to business combinations and restructuring charges, PIPD operating costs were £62.2 million, £64.2 million and £65.7 million in 2009, 2010 and 2011, respectively.
 
Total average PIPD headcount was 512, 496 and 488 in 2009, 2010 and 2011, respectively. The headcount decreased in 2010 and 2011 as part of the strategic cost management of the division. The increase in the sterling value of costs in 2009 was largely due to the strengthening of the US dollar. Costs were higher in 2010 largely due to the increase in performance-related bonuses. Costs remained at a similar level in 2011 following a period of consolidation.
 
Loss before tax. PIPD recorded a loss before tax of £36.2 million, £27.7 million and £19.7 million in 2009, 2010 and 2011, respectively. Excluding the share-based compensation, amortization and other charges relating to business combinations and restructuring charges noted above, PIPD recorded a loss before income tax of £17.3 million, a loss of £9.3 million and a loss of £4.4 in 2009, 2010 and 2011, respectively. In 2010, revenues and margins recovered from the short-term impact of the recession with both licensing and royalty revenues increasing. In 2011, the reduction of the loss was due to the increased licensing and royalty revenues.
 
Capital expenditure. Capital expenditure represents additions of property, equipment and software. In 2009, 2010 and 2011 such expenditure was £3.4 million, £2.8 million and £4.1 million, respectively.
 
Total assets, total liabilities and net assets. Total assets in 2009, 2010 and 2011 were £402.2 million, £414.9 million and £419.9 million, respectively, with the movements in all three years being largely attributable to foreign exchange differences on goodwill and other intangibles arising on the Artisan acquisition, and amortization of the intangibles. Total liabilities in 2009, 2010 and 2011 were £24.8 million, £38.6 million and £40.0 million, respectively. Liabilities were higher in 2010 as a result of the increased bonuses and deferred revenue and remained at a similar level in 2011. PIPD had net assets of £377.4 million, £376.4 million and £379.9 million in 2009, 2010 and 2011, respectively.
 
Goodwill. Goodwill in 2009, 2010 and 2011 was £366.3 million, £377.8 million and £383.9 million, respectively. The increase in 2010 and 2011 was primarily due to foreign exchange movements. The further increase in 2011 was due to the acquisition of Prolific Inc., which resulted in an additional £3.2 million of goodwill. Part of the goodwill in respect of the Artisan acquisition has been allocated to PD (see above).
 
System Design Division (SDD)
 
Revenues. SDD revenues increased from £32.9 million in 2009 to £36.0 million in 2010 and decreased to £32.9 million in 2011. US dollar revenues for the division were $51.6 million in 2009, $55.4 million in 2010 and $52.5 million in 2011. The decrease in US dollar revenues in 2009 was due to the overall industry and economic conditions. SDD has continued to enter into more multi-year contracts for larger product volumes which improves the visibility of business going forward and builds a good customer base from which to drive innovation. The increase in 2010 was due to a return to more beneficial economic conditions. The decline in development systems revenues in 2011 was largely due to the growth of Linux-based operating systems, which are supported by free software development tools. The Company is now refocusing this business on microcontroller tools and premium toolkits for multi-core systems.
 
Operating costs. Operating costs for 2009, 2010 and 2011 were £37.0 million, £39.5 million and £41.2 million, respectively. Operating costs include cost of sales, research and development costs, sales and marketing costs and general and administrative costs. Included within these costs were share-based compensation charges of £4.3 million, £7.0 million and £8.7 million and amortization of intangibles purchased through business combinations and other acquisition costs of £1.5 million, £0.8 million and £0.2 million in 2009, 2010 and 2011, respectively. Furthermore in 2009, 2010 and 2011, there were charges relating to the restructuring of the division of £0.8 million, less than £0.1 million and £nil, respectively, which were predominantly in respect of staff severance costs and in 2011, there were investment-related charges of £0.1 million. Excluding these charges, operating costs were £30.4 million, £31.7 million and £32.2 million, respectively.
 
In 2010, costs rose slightly, mostly due to increased performance related bonuses. In 2011, costs remained similar to the previous year as headcount remained constant and a general increase in the costs of the business as a whole was partially offset by lower bonuses.
 
Loss before tax. SDD recorded a loss before income tax of £4.1 million, £3.5 million and £8.2 million in 2009, 2010 and 2011, respectively. Excluding the charges for share-based compensation, amortization and restructuring noted above, SDD made a profit of £2.6 million, a profit of £4.3 million and a profit of £0.7 million in 2009, 2010 and 2011, respectively.
 
Capital expenditure. Capital expenditure represents additions of property, equipment and software. In 2009, 2010 and 2011 such expenditure was £0.6 million, £0.7 million and £1.2 million, respectively.
 
Total assets, total liabilities and net assets. Total assets in 2009, 2010 and 2011 were £28.1 million, £29.8 million and £30.9 million, respectively. The movements between years are due to fluctuations in working capital. Total liabilities in 2009, 2010 and 2011 were £9.2 million, £14.6 million and £15.0 million, respectively. Liabilities were higher in 2010 largely due to increased performance related bonuses. SDD had net assets of £18.9 million, £15.2 million and £15.9 million in 2009, 2010 and 2011, respectively. In 2011, assets and liabilities remained at similar levels to the previous year.
 
Goodwill. Goodwill in 2009, 2010 and 2011 was £14.8 million, £15.0 million and £14.9 million, respectively. The fluctuations are primarily due to the impact of foreign exchange difference on the Axys and KSI goodwill which is denominated in dollars and KEG goodwill which is denominated in euros.
 
Foreign Currency Fluctuations
 
Foreign currency fluctuations. The Company’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates, principally the US dollar rate, as most of the Company’s revenues and cash receipts are denominated in US dollars while a high proportion of its costs are in sterling.
 
The Company hedges its exposure using forward contracts for the sale of US dollars, which are entered into with major banks. The Company also uses currency options for a limited proportion of its dollar exposure. The fair values of the currency exchange contracts outstanding at December 31, 2009, 2010 and 2011 are disclosed in Note 1c to the Consolidated Financial Statements. The settlement period of the forward contracts outstanding at December 31, 2011 was between January 6, 2012 and March 26, 2012. The settlement period of the option contracts outstanding at December 31, 2011 was between January 18, 2012 and December 31, 2012.
 
Contingencies and Loss Provisions
 
The accounting policy with respect to loss provisions is described in “—Operating Results—Critical Accounting Policies and Estimates—Provisions” above. Intellectual property disputes to which we are party are described in “Item 8. Financial Information—Legal Proceedings.” There was a £0.6 million provision for such disputes as of December 31, 2011 (2010: £1.0 million; 2009: £0.9 million) as, based on the facts and circumstances surrounding any disputes, the Company believes these costs are likely to be incurred in resolving the disputes.
 
Risk Factors
 
For a discussion of the risks faced by the Company, see “Item 3. Key Information—Risk Factors.”
 
 
Recently Issued Accounting Announcements
 
IFRS Accounting Standards and Pronouncements
 
For a description of newly published IFRS accounting standards see Note 1 to the Consolidated Financial Statements. There are no significant amendments to accounting policies during the year as a result of new accounting standards.
 
LIQUIDITY AND CAPITAL RESOURCES
 
We have financed our operations primarily through cash generated from operations. Over the previous three years we have received £51.6 million in cash from the issuance of shares and transfers of treasury shares to employees who have exercised options in the Company.
 
The Company’s operating activities provided net cash of £96.6 million, £176.9 million and £193.8 million in 2009, 2010 and 2011, respectively.
 
Accounts receivable decreased by £9.5 million in 2009, increased by £39.9 million in 2010 and further increased by £13.4 million in 2011. Days’ sales outstanding were 46 at December 31, 2009, were 41 at December 31, 2010 and were 46 at December 31, 2011. In 2010, revenue and deferred revenue were much higher throughout the year, but particularly so in the fourth quarter resulting in the much higher debtor balance. In 2011, continued increased licensing activity resulted in an increase in both accounts receivable and deferred revenue. Included within accounts receivable are amounts recoverable on contracts. Prepaid expenses and other assets increased by £10.2 million in 2009, decreased by £4.9 million in 2010 and increased by £12.3 million in 2011. The decrease in 2010 was primarily as a result of the decrease in the fair-value of embedded derivatives. The increase in 2011 was due primarily to the timing of large multi-year EDA tools purchases. Inventories in 2010 and 2011 remained at similar levels to 2009. There have been no other significant movements in other current assets.
 
Accounts payable decreased by £4.7 million in 2009, increased by £2.0 million in 2010 and increased by £4.4 million in 2011. Movements in the accounts payable balance reflect the timing of receipt of invoices from suppliers. Accrued and other liabilities increased by £14.6 million in 2009, increased again by £25.3 million in 2010 and further increased by £10.2 million in 2011. The increase in 2009 was as a result of higher sales and staff bonuses, restructuring provisions in Belgium and Germany and an increase in provisions for personnel taxes on share options due to the increased share price. The increase in 2010 was due to an accrual for share-based payment taxes as a result of the appreciation in the share price as well as higher performance-related bonuses which were payable in 2011. The increase in 2011 was due primarily to the higher level of bonus payments along with an increase in the accrual for social security on share-based payments.
 
At December 31, 2011, the Company recorded approximately £116.8 million of deferred revenues which represented cash or receivables scheduled to be recognized as revenues in varying amounts after December 31, 2011. At December 31, 2009 and 2010, the Company recorded approximately £39.6 million and £92.7 million of deferred revenues, respectively. Deferred revenues are an element of customer backlog, and represent amounts invoiced to customers not yet recognized as revenues in the income statement. Similarly, the Company recorded £4.9 million of amounts recoverable on contracts (“AROC”) at December 31, 2011, compared to £12.4 million and £8.7 million at December 31, 2009 and 2010, respectively. AROC represents amounts that have been recognized as revenue in the income statement but are yet to be invoiced to customers. Both deferred revenue and AROC fluctuate due to the maturity profile of ARM’s products, and invoicing milestones within contracts. Deferred revenues have increased due to the higher number of long-term license deals with certain strategic partners where the revenue will be recognized over a number of accounting periods as well as license deals for newer technologies where a greater proportion of the revenue is deferred until later periods. At December 31, 2011, £14.6 million of deferred revenue is expected to be recognized after more than one year.
 
The Company believes that, given its current level of business, it has sufficient working capital for the foreseeable future.
 
Cash flow from operations has been used to fund the working capital requirements of the Company as well as capital expenditure. Cash outflow from capital expenditure in 2011 was £12.1 million for property, plant and equipment, and £0.8 million for other intangible assets, compared with £6.2 million and £1.2 million in 2010 and £6.0 million and £3.9 million in 2009, respectively. Capital expenditure on property, plant and equipment was
 
 
higher in 2011 primarily due to greater investment in engineering cluster servers, larger quantities of which are required to enable research and development work at the lower geometries.
 
The Company made no acquisitions in 2009 but made additional payments in respect of the Soisic and Logipard acquisitions of £0.6 million. The Company made no acquisitions or additional payments in 2010.
 
In 2011, the Company made two acquisitions: Prolific, Inc. and Obsidian Software, Inc. and made an additional payment in respect of the acquisition of Keil Elektronik GmbH of £0.5 million.
 
The Company envisages making further strategic investments in the future in situations where the Company can broaden its product portfolio, where it can obtain skilled engineering resources and where the potential for furthering ARM core-based design wins is improved significantly.
 
In 2009, the Company invested £0.9 million in Esol Co Ltd, an embedded software company in Japan, £2.1 million in Ideaworks 3D Limited, a UK software company, £0.4 million in Smooth-stone, Inc., a US company specializing in low-power server technology, £0.4 million in Triad Semiconductor Inc, a US company specializing in mixed signal ASICs, £0.1 million in Cyclos Semiconductor Inc, a US company specializing in on-chip energy harvesting, £0.7 million in Arteris Holdings Inc, a US network-on-chip company and £4.6 million in Cognovo Limited, a UK company specializing in software-defined modem techniques and solutions.
 
In 2010, the Company made further investments in Cognovo Limited of £3.5 million, Ideaworks 3D Limited of £1.0 million, Smooth-stone, Inc. of £3.7 million (Smooth-stone changed its name to Calxeda Inc. during 2010), Cyclos Semiconductor Inc. of less than £0.1 million and Arteris Holdings Inc. of less than £0.1 million. In addition, the Company invested £2.4 million in Nethra Imaging, Inc., a US chip company specializing in imaging solutions and £0.2 million in Ambiq Micro Inc., a US company specializing in ultra low-power microcontrollers.
 
In 2011, the Company made further investments in Cognovo Limited of £2.3 million, Ideaworks 3D Limited of £0.5 million, and in Ambiq Micro Inc. of £0.2 million. In addition, the Company invested £5.4 million in various companies and investment funds, including companies focusing on energy-efficiency.
 
From time to time the Company has bought back shares in order to supplement dividends in returning surplus funds to shareholders. The Company did not buy back any shares during 2009, 2010 or 2011. Dividends totaling £42.2 million were paid to shareholders in 2011 (2010: £34.3 million; 2009: £29.0 million). In aggregate, the Company has returned £444 million since 2005 through buy-backs and dividends. Share option exercises in 2011 gave rise to a £8.5 million cash inflow to the Company compared to £24.0 million in 2010 and £19.1 million in 2009.
 
Cash, cash equivalents and short- and long-term deposits, net of accrued interest at December 31, 2011 were £424.0 million compared to £290.1 million at December 31, 2010 and £141.8 million at December 31, 2009.
 
Our cash requirements depend on numerous factors, including: our ability to generate revenues from new and existing licensing and other agreements; expenditures in connection with ongoing research and development and acquisitions and disposals of and investments in complementary technologies and businesses; competing technological and market developments; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; the purchase of additional capital equipment; fluctuations in foreign exchange rates; and capital expenditures required to expand our facilities. Changes in our research and development plans or other changes affecting our operating expenses may result in changes in the timing and amount of expenditures of our capital resources.
 
 
RESEARCH AND DEVELOPMENT
 
Research and development is of major importance and, as part of its research activities, the Company collaborates closely with universities worldwide, and plans to continue its successful engagement with the University of Michigan. Key areas of product development for 2012 include the development of further energy-efficient, high-performance engines for both data and control applications such as ARM cores based on the next generation of the ARM architecture that includes support for 64-bit processing. The Company is investing in future physical IP development, including lower-power, low-leakage technologies for both bulk CMOS and SOI processes to ensure leadership in this market. In addition, the Company will deliver development tools, graphics processors and fabric IP to enable its customers to design and program SoC products. The Company incurred
 
 
research and development costs of £165.4 million in 2011, £139.8 million in 2010 and £112.2 million in 2009. See “Item 4. Information on the Company—Business Overview—Research and Development” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations—Research and development costs” above.
 
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
 
Our major outstanding contractual commitments relate to rental of office facilities and certain equipment under non-cancelable operating lease agreements which expire at various dates through 2023. Our contractual commitments as of December 31, 2011 were as follows:
 
   
Payments due by period (£’000)
 
   
Total
   
Less than 1 year
   
2-3 years
   
4-5 years
   
Thereafter
 
Operating leases
    83,757       25,812       42,473       10,107       5,365  
Capital purchase commitments
    4,913       4,913                    
Other financial commitments (expenditure on investments)
    500       500                    
Total
    89,170       31,225       42,473       10,107       5,365  

The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.
 
 
DIRECTORS AND SENIOR MANAGEMENT
 
Directors
 
The directors of the Company (each, a “director,” and together, the “directors”) at February 27, 2012 were as follows:
 
Name(1)
 
Age
 
Term Expires
 
Position
Doug Dunn OBE
 
67
 
2012
 
Chairman
Warren East
 
50
 
2012
 
Chief Executive Officer; Director
Tim Score
 
51
 
2012
 
Chief Financial Officer; Director
Tudor Brown
 
53
 
2012
 
President, Director from July 1, 2008, previously Chief Operating Officer; Director
Mike Inglis
 
52
 
2012
 
EVP and General Manager, Processor Division, from July 1, 2008, previously EVP Sales and Marketing; Director
Mike Muller
 
53
 
2012
 
Chief Technology Officer; Director
Simon Segars
 
44
 
2012
 
EVP and General Manager, Physical IP Division; Director
Kathleen O’Donovan
 
54
 
2012 (2)
 
Senior Independent Director (Non-Executive)
Young Sohn
 
56
 
2012 (2)
 
Independent Non-Executive Director
Philip Rowley
 
59
 
2012 (2)
 
Independent Non-Executive Director
Janice Roberts
 
56
 
2012 (2)
 
Independent Non-Executive Director
Larry Hirst
 
60
 
2012 (2)
 
Independent Non-Executive Director
Andy Green
 
56
 
2012 (2)
 
Independent Non-Executive Director

(1)     
The address for each listed director is c/o ARM Holdings plc, 110 Fulbourn Road, Cambridge CB1 9NJ, England.
 
(2)     
Non-Executive Directors are nomally appointed for three-year terms subject to election or re-election each year at the AGM.
 
Doug Dunn, age 67, OBE, Chairman. Doug Dunn joined the Board as an independent non-executive director in December 1998 and was non-executive Chairman from October 1, 2006. He intends to retire from the Board on May 3, 2012. He was previously President and Chief Executive Officer of ASM Lithography Holding N.V. until his retirement in December 2004. Before joining ASML, he was Chairman and Chief Executive Officer of the Consumer Electronics Division of Royal Philips Electronics N.V. and a member of the Board. He was previously Managing Director of the Semiconductor divisions of Plessey and GEC and held several engineering and
 
 
45

 
management positions at Motorola. He was awarded an OBE in 1992. He is a non-executive director of ST Microelectronics N.V., Soitec S.A., TomTom N.V. and BE Semiconductor Industries N.V.
 
Warren East, age 50, Chief Executive Officer. Warren East joined ARM in 1994 to set up ARM’s consulting business. He was Vice President, Business Operations from February 1998. In October 2000 he was appointed to the Board as Chief Operating Officer and in October 2001 was appointed Chief Executive Officer. Before joining ARM he was with Texas Instruments. He is a chartered engineer, Fellow of the Institution of Engineering and Technology, Fellow of the Royal Academy of Engineering and a Companion of the Chartered Management Institute. He has an honorary doctorate from Cranfield University and is a member of the UK Trade and Investment Executive Board for Technology, responsible for driving the UK’s trade and investment objectives in the telecoms and IT sectors. He is a non-executive director and Chairman of the Audit Committee of De La Rue plc.
 
Tim Score, age 51, Chief Financial Officer. Tim Score joined ARM as Chief Financial Officer and director in March 2002. Before joining ARM, he was Finance Director of Rebus Group Limited. He was previously Group Finance Director of William Baird plc, Group Controller at LucasVarity plc and Group Financial Controller at BTR plc. He is a non-executive director and Chairman of the Audit Committee of National Express Group plc.
 
Tudor Brown, age 53, President. Tudor Brown was one of the founders of ARM. Before joining the Company, he was at Acorn Computers where he worked on the ARM R&D program. He joined the Board in 2001, became President in 2008 and will be retiring from the Board on May 3, 2012.  He had responsibility for developing high-level relationships with industry partners and governmental agencies and for regional development. His previous roles include Engineering Director and Chief Technology Officer, EVP Global Development and Chief Operating Officer. He is a Fellow of the Institution of Engineering and Technology and is a non-executive director of ANT plc. He currently sits on the UK Government Asia Task Force.
 
Mike Inglis, age 52, EVP and General Manager, Processor Division. Mike Inglis joined ARM in 2002 and became EVP and General Manager of the Processor Division in July 2008, having previously been EVP, Sales and Marketing. Before joining ARM, he worked in management consultancy with A.T. Kearney and held a number of senior operational and marketing positions at Motorola, Texas Instruments, Fairchild and BIS Macintosh and gained his initial industrial experience with GEC Telecommunications. He is a chartered engineer and a Member of the Chartered Institute of Marketing. He is a non-executive director of Pace plc.
 
Mike Muller, age 53, Chief Technology Officer. Mike Muller was one of the founders of ARM. Before joining the Company, he was responsible for hardware strategy and the development of portable products at Acorn Computers. He was previously at Orbis Computers. At ARM he was VP, Marketing from 1992 to 1996 and EVP, Business Development until October 2000 when he was appointed Chief Technology Officer. He was appointed to the Board in October 2001.
 
Simon Segars, age 44, EVP and General Manager, Physical IP Division. Simon Segars joined the Board in January 2005 and was appointed EVP and General Manager of the Physical IP Division in September 2007. He has previously been EVP, Engineering, EVP, Worldwide Sales and latterly EVP, Business Development. He joined ARM in early 1991 and worked on many of the early ARM CPU products. He led the development of the ARM7 and ARM9 Thumb® families. He holds a number of patents in the field of embedded CPU architectures. He is a director of the SOI Industry Consortium and the EDA consortium.
 
Kathleen O’Donovan, age 54, Senior Independent Non-Executive Director. Kathleen O’Donovan joined the Board in December 2006. She is a non-executive director of Prudential plc (retiring March 31, 2012), a non-executive director and Chairman of the Audit Committee of Trinity Mirror plc and Chairman of Invensys Pension Trustee Ltd. Previously she was a non-executive director and Chairman of the Audit Committees of the Court of the Bank of England, Great Portland Estates plc, EMI Group plc and a non-executive director of a O2 plc. Prior to that, she was Chief Financial Officer of BTR plc and Invensys plc and before that she was a partner at Ernst & Young.
 
Young Sohn, age 56, Independent Non-Executive Director. Young Sohn joined the Board in April 2007. He has extensive experience in the semiconductor industry both in Silicon Valley and in Asia. He is a non-executive director of Cymer, Inc. and Nanosys Inc. He is the former CEO of Inphi Corporation, Inc., where he remains as a Senior Advisor. Previously he was President of the semiconductor products group at Agilent Technology, Inc. and
 
 
Chairman of Oak Technology, Inc. Prior to that, he was President of the hard drive business of Quantum Corporation and, before that, Director of Marketing at Intel Corporation.
 
Philip Rowley, age 59, Independent Non-Executive Director. Philip Rowley joined the Board in January 2005. He was Chairman and CEO of AOL Europe, the internet services and web brands provider until February 2007. He is a qualified chartered accountant and was Group Finance Director of Kingfisher plc from 1998 to 2000 and Deputy CEO and CFO of the General Merchandise Division until 2001. Prior to that, his roles included EVP and Chief Financial Officer of EMI Music Worldwide. He is a non-executive director of Misys plc and non-executive director and Chairman of the Audit Committee of Promethean World plc and Chairman of HMV Group plc and Livestation Limited.
 
Janice Roberts, age 56, Independent Non-Executive Director. Janice Roberts joined the Board in January 2011. She has been a Managing Director at Mayfield Fund since 2000, a Silicon Valley-based venture capital firm with approximately $3 billion under management, where she focuses on the mobile, wireless communications and consumer technology industries.  Prior to that, she held various executive positions at 3Com Corporation including President Palm Computing, President 3Com Ventures and Senior Vice President, Business Development and Global Marketing.  She is a non-executive director of RealNetworks, Inc. and several private technology companies in the US.
 
Larry Hirst, age 60, Independent Non-Executive Director. Larry Hirst joined the Board in January 2011. He is a non-executive director of MITIE Group plc and a Trustee and director of Sentebale. He is the former Chairman of IBM Europe, Middle East and Africa. He retired from IBM in 2010, having previously held a wide range of senior positions since joining the company in 1977. He is Chairman of the UK Trade and Investment Executive Board for Technology responsible for driving the UK’s trade and investment objectives.  He is also a UK Business Ambassador. He is a former Commissioner for the Commission for Employment and Skills and a former Chair of e-skills UK (the UK Sector Skills Council for Business and Information Technology).  He was awarded a CBE in 2006.
 
Andy Green, age 56, Independent Non-Executive Director. Andy Green joined the Board in February 2011.  He has been CEO of Logica plc since 2008.  He is a former CEO of BT Global Services and a former CEO of Group Strategy and Operations at BT plc and was CEO of BT Openworld.  He is Chair of e-Skills UK (the UK Sector Skills Council for Business and Information Technology), is on the board and the President’s Committee of the CBI and is a Companion of the Chartered Management Institute.
 
Election and re-election of Directors
 
In line with the provisions of the UK Corporate Governance Code 2010, all directors will stand for election or re-election annually.
 
Executive Officers
 
Name(1)
 
Age
 
Position
Warren East
 
50
 
Chief Executive Officer; Director
Tim Score
 
51
 
Chief Financial Officer; Director
Tudor Brown
 
53
 
President; Director
Mike Inglis
 
52
 
Executive Vice President and General Manager, Processor Division; Director
Simon Segars
 
44
 
Executive Vice President and General Manager, Physical IP Division; Director
Mike Muller
 
53
 
Chief Technology Officer; Director

(1)
The address for each listed executive officer is c/o ARM Holdings plc, 110 Fulbourn Road, Cambridge CB1 9NJ, England.
 
 
COMPENSATION
 
The aggregate compensation (including pension contributions) paid by the Company to all persons who served in the capacity of director or executive officer in 2011 (15 persons) was £7.6 million. This includes £1.8 million of share-based compensation. This does not include expenses reimbursed to officers (including business travel, professional and business association dues and expenses) but includes amounts expended by the Company for automobiles made available to its officers and other benefits commonly reimbursed or paid by companies in the UK. Each executive officer participates in the Company’s Deferred Annual Bonus Plan under which he may receive a bonus of up to 150% of base salary, 50% of which is compulsorily deferred into shares and an equity match of up to
 
 
2:1 if certain targets (determined by agreement between the executive and the Remuneration Committee) are exceeded. The aggregate amount accrued by the Company during 2011 to provide pension, retirement or similar benefits for directors and executive officers was £182,000.
 
Directors’ emoluments
 
The emoluments of the executive directors of the Company in respect of services to the Company were paid through its wholly-owned subsidiary, ARM Limited, as were non-executive directors, with the exception of Janice Roberts and Young Sohn who were paid through ARM, Inc., and were as follows:
 
 
Director
 
 
Fees
   
 
Basic salary
   
 
Bonus payments (1)
   
 
Benefits (2)
   
 
Subtotal 2011
   
Pension contributions 2011
   
Share-based payments 2011 (3)
   
 
Total 2011
   
 
Subtotal 2010
   
Pension contributions 2010
   
Share-based payments 2010 (3)
   
 
Total 2010
 
    £       £       £       £       £       £       £       £       £       £       £       £    
Executive
                                                                                               
Warren East
          475,000       712,500       50,679       1,238,179       13,557       449,828       1,701,564       982,391       49,089       404,617       1,436,097  
Tim Score
          383,000       574,500       25,236       982,736       40,703       380,991       1,404,430       856,667       39,183       349,822       1,245,672  
Tudor Brown
          220,000       330,000       11,554       561,554       38,328       224,537       824,419       501,891       40,022       236,904       778,817  
Mike Inglis
          270,000       405,000       14,673       689,673       29,827       267,291       986,791       599,575       29,068       244,504       873,147  
Mike Muller
          265,000       397,500       15,054       677,554       29,826       260,553       967,933       588,641       40,651       238,299       867,591  
Simon Segars
          268,000       402,000       188,949       858,949       29,480       264,398       1,152,827       698,131       28,380       242,222       968,733  
Total
            1,881,000       2,821,500       306,145       5,008,645       181,721       1,847,598       7,037,964       4,227,296       226,393       1,716,368       6,170,057  
Non-executive
                                                                                               
Doug Dunn
    175,000                         175,000                   175,000       168,000                   168,000  
Lucio Lanza (retired May 14, 2010)
                                                    15,581                   15,581  
Kathleen O’Donovan
    60,000                         60,000                   60,000       42,000                   42,000  
Philip Rowley
    60,000                         60,000                   60,000       47,500                   47,500  
John Scarisbrick (retired May 12, 2011)
    18,391                         18,391                   18,391       42,000                   42,000  
Jeremy Scudamore (retired January 31, 2011)
    5,000                         5,000                   5,000       47,500                   47,500  
Andy Green
    42,816                         42,816                   42,816                          
Larry Hirst
    46,791                         46,791                   46,791                          
Janice Roberts
    53,084                         53,084                   53,084                          
Young Sohn
    56,324                         56,324                   56,324       42,000                   42,000  
Total
    517,406                         517,406                   517,406       404,581                   404,581  
Total
    517,406       1,881,000       2,821,500       306,145       5,526,051       181,721       1,847,598       7,555,370       4,631,877       226,393       1,716,368       6,574,638  

(1)
The bonus payments above represent the full bonus earned during 2011. According to the terms of the Deferred Annual Bonus, 50% of this bonus is not paid in cash, but is deferred and becomes payable in shares after three years. Details of the awards made in February 2012 in respect of these deferrals are detailed in “—Share Ownership—The Deferred Annual Bonus Plan” below.
 
(2)
All the executive directors receive family healthcare and annual travel insurance as part of their benefits in kind. In addition, Tim Score has the use of a company car with fuel benefit and Warren East, Tudor Brown, Mike Inglis and Mike Muller receive a car and petrol allowance. Simon Segars also receives living, transportation and other allowances as part of his placement in the US. Warren East receives an additional cash allowance in place of Company pension contributions that can no longer be contributed in a tax-efficient way.
 
(3)
Share based payments represent each director’s individual compensation charge as calculated under IFRS 2, which the Company adopted from January 1, 2005. Further details of this are given in Note 22 to the Consolidated Financial Statements.
 
It is the Company’s policy to allow executive directors to hold non-executive positions at other companies and receive remuneration for their services. The Board believes that experience of the operations of other companies and their boards and Committees is valuable to the development of the executive directors. Details of executive’s roles within other companies and their remuneration are as follows:
 
Warren East is a non-executive director of De La Rue plc and he received remuneration totaling £47,000 up to December 31, 2011 (2010: £47,000). Tudor Brown is a non-executive director of ANT plc and he received remuneration totaling £12,000 up to December 31, 2011 (2010: £22,500). Mike Inglis is a non-executive director of Pace plc and he received remuneration totaling £42,000 up to December 31, 2011 (2010: £42,000). Tim Score is a non-executive director of National Express Group plc and he received remuneration totaling £60,500 up to December 31, 2011 (2010: £56,000).
 
All the executive directors are accruing benefits under a money purchase pension scheme as a result of their services to the Company, contributions for which were fully paid during the year.
 
Directors’ Interests
 
Save as disclosed in “—Share Ownership” below none of the directors has any interest in the issued share capital of the Company which is required to be notified to the Company pursuant to the UK Listing Authority’s rules (LR 9.8.6R(1)).
 
 
BOARD PRACTICES
 
Corporate Governance
 
Compliance with the UK Corporate Governance Code 2010 (UK) and the Sarbanes-Oxley Act 2002 (US)
 
The Group has complied with the provisions of the UK Corporate Governance Code 2010 throughout 2011 with one exception.  Between August 2010 (when John Scarisbrick completed nine years’ service as an independent non-executive director) and the appointment of Janice Roberts and Larry Hirst in January 2011, there were four independent non-executive directors and six executive directors.

The Company continued to comply with the requirements of Section 404 of the Sarbanes-Oxley Act.

Composition and operation of the Board
 
The UK Corporate Governance Code 2010 requires that at least half of the Board, excluding the Chairman, should comprise independent non-executive directors. The Board currently comprises six executive directors, six independent non-executive directors and the Chairman. The number of executive directors will reduce to five when the President retires in May 2012.
 
The executive directors are the Chief Executive Officer, the President, the Chief Financial Officer, the Chief Technology Officer and the General Managers of the Processor and Physical IP Divisions, all of whom play significant roles in the day-to-day management of the business. The Board has considered the overall balance between executive and non-executive directors and believes that the number of executive directors is fully justified by the contribution made by each of them. All directors have completed conflicts of interest questionnaires and any planned changes in their directorships outside the Company are subject to prior approval by the Board. No conflicts of interest arose in 2011 or to date in 2012 and no situations were or have since been identified that might lead to a conflict of interest.
 
The Board reviews the independence of the non-executive directors on appointment and at appropriate intervals and considers the six independent non-executive directors to be independent in character, judgment and behavior, based on both participation and performance at Board and committee meetings. There are no relationships or circumstances which are likely to affect the judgment of any of them. The Chairman was regarded as independent at the time of his appointment.
 
Kathleen O'Donovan became the Senior Independent Director upon the retirement of Jeremy Scudamore on January 31, 2011. The Senior Independent Director provides a communication channel between the Chairman and non-executive directors and is available to discuss matters with shareholders, if required. Janice Roberts and Larry Hirst (who joined the Board on January 25, 2011), Andy Green (who joined the Board on February 25, 2011) and Young Sohn all have a broad understanding of the Company’s technology and the practices of major US-based technology companies. Philip Rowley and Kathleen O’Donovan are both financial experts with strong financial backgrounds. The beneficial interests of the directors in the share capital of the Company are set out in “Share Ownership”. In the opinion of the Board, these shareholdings do not detract from the non-executive directors’ independent status.
 

 
The table below shows directors’ attendance at scheduled Board meetings and conference calls or ad hoc meetings which they were eligible to attend during the 2011 financial year:
 
 
 
Scheduled Board meetings
 
Board conference calls/ad hoc meetings
Total number of meetings
6
 
6
Doug Dunn
6/6
 
5/6
Warren East
6/6
 
3/6
Tudor Brown
6/6
 
2/6
Andy Green (appointed February 25, 2011)
5/5
 
4/6
Larry Hirst (appointed January 25, 2011)
6/6
 
5/6
Mike Inglis
6/6
 
4/6
Mike Muller
6/6
 
4/6
Kathleen O’Donovan
5/6
 
4/6
Janice Roberts (appointed January 25, 2011)
6/6
 
5/6
Philip Rowley
6/6
 
6/6
John Scarisbrick (retired on May 12, 2011)
3/3
 
2/2
Jeremy Scudamore (retired on January 31, 2011)
1/1
 
-
Tim Score
6/6
 
5/6
Simon Segars
6/6
 
5/6
Young Sohn
6/6
 
3/6

The Chairman is a non-executive director of four other companies (ST Microelectronics N.V., Soitec S.A., TomTom N.V. and BE Semiconductor Industries N.V.) and he does not chair any other board.
 
Non-executive directors are encouraged to suggest matters for Board discussions and in 2011 were active in contributing to the agenda for the strategic review and ensuring the amount of time spent on strategic and operational issues was appropriately balanced. In the event that directors are unable to attend a meeting or a conference call they receive and read the papers for consideration at that meeting and have the opportunity to relay their comments and, if necessary, to follow up with the Chairman or the Chief Executive Officer after the meeting. During 2011, the Chairman held at least three meetings with the non-executive directors without the executives present and the non-executive directors met on at least one occasion without the Chairman being present.
 
The directors have the benefit of directors’ and officers’ liability insurance and there is an established procedure for individual directors, who consider it necessary in the furtherance of their duties, to obtain independent legal or other professional advice at the Company’s expense. In addition, all members of the Board have access to the advice of the Company Secretary. The Company Secretary also acts as secretary to the Board committees.
 
Chairman
 
Main responsibilities of the Chairman include:
 
 
·  
leadership of the Board and creating the conditions for overall Board and individual director effectiveness and a constructive relationship with good communications between the executive and non-executive directors;
 
 
·  
ensuring that the Board as a whole plays a full and constructive part in the development of strategy and overall commercial objectives;
 
 
·  
chairing the Nomination Committee which initiates succession planning to retain and build an effective and complementary Board;
 
 
·  
ensuring that there is effective communication with shareholders and that members of the Board develop an understanding of the views of the major investors in the Company;
 
 
·  
promoting the highest standards of integrity, probity and corporate governance throughout the Company, particularly at Board level; and
 
 
 
·  
ensuring that the performance of the Board as a whole, its committees, and individual directors is formally and rigorously evaluated at least once a year.
 
Chief Executive Officer
 
Main responsibilities of the Chief Executive Officer include:
 
 
·  
proposing and developing the Company’s strategy and overall commercial objectives in conjunction with the executive committee;
 
 
·  
day-to-day management of the Company;
 
 
·  
managing the executive committee;
 
 
·  
leading the communication program with shareholders and analysts; and
 
 
·  
fostering good relationships with key stakeholders.
 
Board evaluation, induction and training
 
The Board undertakes an annual board evaluation. During 2011, this exercise was conducted internally, facilitated by the Company Secretary. An external evaluation last took place in 2010 and the Board plans to continue with a cycle of external evaluations every three years and internal evaluations in between.
 
The 2011 evaluation covered:
 
 
·  
strategic development, execution and monitoring;
 
 
·  
risk management and control;
 
 
·  
leadership development and succession planning;
 
 
·  
shareholder and stakeholder communication;
 
 
·  
performance management;
 
 
·  
board structure, committees and their operation;
 
 
·  
induction and development; and
 
 
·  
assessment of the performance of individual committees and the Chairman.
 
The overall conclusion was that individual Board members are satisfied that the Board works well and operates effectively in an environment where there is constructive challenge from the non-executive directors. They are also satisfied with the contribution made by their colleagues and that Board committees operate properly and efficiently.
 
A full, formal induction programme is arranged for new directors, tailored to their specific requirements, the aim of which is to introduce them to key executives across the business and to enhance their knowledge and understanding of the Company and its activities.
 
The new non-executive directors have spent time outside Board meetings with members of the Executive Committee and the management team as part of their formal induction process. All members of the Board are invited to attend our Annual Partner Meeting which is our key customer event of the year and also the Analyst and Investor Day. These events offer the opportunity to understand more about the business, products, technology development roadmap, customer base and investor perspective. In addition, during 2011 a strategy meeting was held in Beijing. This enabled Board members to meet the local ARM team, customers and Government officials and to develop their knowledge and understanding of ARM’s business and objectives in China.
 
Board members receive guidance on the regulatory regimes and corporate governance framework that the Company operates under. In particular, during 2011 the Board received an update from the Company Secretary on
 
the UK Bribery Act 2010. The Group has a commitment to training and all directors, executive or non-executive, are encouraged to attend suitable training courses at the Group’s expense.

Executive Committee
 
The Executive Committee is responsible for developing and implementing the strategy approved by the Board. In particular, the committee is responsible for ensuring that the Company’s budget and forecasts are properly prepared, that targets are met and for generally managing and developing the business within the overall budget.
 
Variations from the budget and changes in strategy require approval from the main Board of the Company. The Executive Committee, which meets monthly, comprises the Chief Executive Officer, Chief Financial Officer, the President, the Chief Operating Officer, the Chief Technology Officer, the EVPs and General Managers of the Processor, Physical IP and System Design Divisions, the EVPs of Human Resources, Strategy, Corporate Development, Sales and Marketing, the General Counsel and the Company Secretary and meetings are attended by other senior operational personnel, as appropriate.
 
The terms of reference of the Audit, Remuneration and Nomination Committees are published on the Company’s website at www.arm.com.
 
Management structure
 
The Company has a traditional UK board structure with a unitary Company board comprising the Chairman, executive and non-executive directors. The Audit and Remuneration Committees are made up of independent non-executive directors and they, together with the Nomination Committee, report to the Board. The divisions and functions report to the Executive Committee. The Risk Review Committee reports periodically to the Executive
 
Committee, Audit Committee and the Board.  The VP Business Assurance/Head of Internal Audit also has a separate reporting arrangement to the Chairman of the Audit Committee.
 
Audit Committee
 
The table below sets out membership of the Committee during the year:
 
Name of Director
 
Position
 
Meetings Attended
Kathleen O’Donovan (Chairman)
 
Senior Independent Director (Committee Chairman from January 26, 2011)
 
5/5
Larry Hirst
 
Independent non-executive director (appointed January 25, 2011)
 
4/5
Janice Roberts
 
Independent non-executive director (appointed January 25, 2011)
 
5/5
Philip Rowley
 
Independent non-executive director (Committee Chairman until January 26, 2011)
 
5/5
Jeremy Scudamore
 
Independent non-executive director (retired January 31, 2011)
 
0/1
Young Sohn
 
Independent non-executive director (ceased Committee membership January 31, 2011)
 
1/1

Kathleen O’Donovan assumed the Chairmanship of the Committee on January 26, 2011. She is qualified as the audit committee financial expert as defined in the Sarbanes-Oxley Act. Philip Rowley is also qualified to fulfil this role. Both have recent and relevant financial expertise. The external auditors, Chief Executive Officer, Chief Financial Officer, the VP Finance ARM Group, the VP Business Assurance/Head of Internal Audit, the Head of Tax and the Company Secretary attend all meetings in order to ensure that all the information required by the Audit Committee for it to operate effectively is available. Representatives of the Company’s external auditors meet with the Audit Committee at least once a year without any executive directors being present.
 
As part of the process to refresh the Board and its Committees, Janice Roberts and Larry Hirst joined and Young Sohn and Jeremy Scudamore stepped down from the Audit Committee in January 2011.
 
During the year, the activities of the Committee included:
 
 
·  
further work to enhance the Corporate Risk Register including linkage to Operational and Internal Audit Plans, giving the Board greater visibility of risk assessment and mitigation within the Group. This further enhanced the Board’s understanding of the level of residual risk and gave a greater level of assurance.  It also enabled a better comparison with the risks that are applicable to comparable companies. The Board was able to conclude from this that the steps being taken to mitigate risk are appropriate and that the level of residual risk is at an acceptable level;
 
 
·  
reviewing the 2011 internal and external audit plans and reports including overseas subsidiaries;
 
 
·  
considering and approving the assumptions in the annual impairment review, prior to approval by the full Board;
 
 
·  
reviewing the status of Sarbanes-Oxley compliance and testing
 
 
·  
approval of the non-audit services policy;
 
 
·  
reviewing the external auditors’ performance, effectiveness, independence and fees; and
 
 
·  
undertaking an assessment of the effectiveness of the Audit Committee (which took place early in 2012).
 
The Committee’s responsibilities include:
 
 
·  
monitoring the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance and reviewing any significant financial reporting judgments contained therein;
 
 
·  
reviewing the effectiveness of the Company’s internal control over financial reporting;
 
 
·  
providing oversight of the Company’s risk management systems;
 
 
·  
making recommendations to the Board in relation to the appointment, remuneration and resignation or dismissal of the Company’s external auditors;
 
 
·  
assessing the external auditors’ independence and objectivity and the effectiveness of the audit process;
 
 
·  
developing and implementing policy on the engagement of the external auditors to supply non-audit services and assessing their nature, extent and cost effectiveness; and
 
 
·  
considering compliance with legal requirements, accounting standards, the Listing Rules of the Financial Services Authority and the requirements of the SEC.
 
PricewaterhouseCoopers LLP have been the Company’s auditors since it listed on the London Stock Exchange in April 1998. The external auditors are required to rotate the audit partner responsible for the Company and subsidiary audits every fifth year end. The audit partner rotation took place in accordance with this timetable after the conclusion of the 2011 year-end audit. The Audit Committee considers that the relationship with the auditors is working well and remains satisfied with their effectiveness. This view was supported by a review of the effectiveness of the external audit process which was undertaken early in 2012 involving the Audit Committee, the executive team and senior managers who interact with the auditors. It looked at robustness of audit, quality of delivery and quality of people and service and concluded that the services provided by the auditors and their mode of delivery are effective. Accordingly, the audit committee has not considered it necessary to date to require the firm to tender for the audit work.
 
Auditor independence
 
The auditors are required to communicate with the Audit Committee at least annually whether there are any threats to their independence and objectivity and, if there are, what safeguards have been applied.   The Committee
 
 
has also reviewed the auditors’ Transparency Report, paying particular attention to the sections covering internal controls, independence policies and the results of external regulator reviews.  Having reviewed the safeguards in place, and the contents of the Transparency Report, as well as noting the regular rotation of the audit partner, the Committee is satisfied that the auditors’ procedures are sufficient to maintain their independence and objectivity.  The Committee has also considered the level of non-audit fees and believes that these are at a level which does not compromise their independence in any way.
 
There are no contractual obligations restricting the Company’s choice of external auditor. The Committee also keeps under review the value for money of the audit.
 
Policy on auditors providing non-audit services
 
To avoid the possibility of the auditors’ objectivity and independence being compromised, there is an agreed policy
 
in place on the provision of non-audit services by the auditors, which sets out arrangements for approving:
 
 
·  
services that have general pre-approval by the audit committee;
 
 
·  
services that require specific pre-approval by the audit committee before work commences; and
 
 
·  
services that cannot be provided by the auditors.
 
 
The Company’s tax advisory work is carried out by the auditors only in cases where they are best suited to perform the work in a cost effective manner, given their familiarity with the Company’s business. In other cases, the Company has engaged another independent firm of accountants to perform tax advisory work. The Company does not normally award general consulting work to the auditors. From time to time, however, the Company will engage the auditors to perform work on matters relating to benchmarking of the internal audit function, human resources, and royalty audits. A breakdown of fees paid to the auditors can be found in note 5 to the financial statements.
 
Remuneration Committee
 
The table below sets out membership of the committee during the year:
 
Name of Director
 
 
Position
 
 
Meetings Attended
Philip Rowley
 
Independent non-executive director (appointed January 25, 2011) (Committee Chairman from January 31, 2011)
 
3/3
Andy Green
 
Independent non-executive director (appointed February 25, 2011)
 
2/2
Larry Hirst
 
Independent non-executive director (appointed January 25, 2011)
 
3/3
Young Sohn
 
Independent non-executive director