Chief Executive Officer’s review of operations

In last year’s annual report, I wrote about the important role that ARM plays in the development of an increasingly digital world. As we celebrate our tenth year as a public company, our goal remains the same as it was a decade ago – to generate returns for our shareholders by providing the technology at the heart of the digital world to the leading semiconductor companies. Today, people’s lives are being made easier, safer and more efficient through the increasing use of digital electronics in everyday products.

ARM has a unique position in the global semiconductor industry. We are the leading intellectual property (IP) provider, designing processor and physical IP and related technology that is used by most of the chip manufacturers in the world. As a whole, the industry has annual revenues of nearly $300 billion and in 2007 grew at about 3%. Over the medium term, because of ARM’s position and unique business model, we expect to maintain revenue growth at a multiple of the industry.

ARM is in your mobile phone

ARM technology is at the heart of 90% of the world’s mobile phones. In some developing countries low-cost phones can be purchased for as little as $25, thereby helping to drive the number of subscribers to more than three billion globally. ARM is enabling the technology that allows the wireless communications, the user interface and the audio to run on a single semiconductor chip thus significantly lowering the cost of producing the phone itself.

Mobile phones are becoming an essential everyday device for increasing numbers of people everywhere, yet billions of people still do not have access to a mobile phone. This number is likely to diminish rapidly as mobile networks expand and cost of the technology reduces, bringing mobile technology to an ever wider audience.

The growing momentum behind more intelligent phones has accelerated in 2007, with the arrival of a new generation of highly sophisticated smartphones that contain even more features, such as graphics, video and connectivity to WiFi and GPS, turning the mobile phone into a mobile internet device (MID). These devices can contain five or more separate ARM products.

Technology in the high-end smartphone quickly spreads into the rest of the market. The average mobile phone is already becoming more feature-rich and personalised. You can now choose your phone based on the camera specifications, audio and video playback quality, gaming, or on design for elegance, coolness or fun – all being enabled by technology from ARM.

ARM’s success in mobile devices has been accelerated through the ecosystem we have developed to remove cost and complexity from the development process. One of the major areas for new product development is the MID. To enable the MID ecosystem, we work with leading semiconductor companies such as Broadcom, Marvell, Qualcomm, Samsung and Texas Instruments to ensure that they can maximise the performance of the ARM processors in their chips. We work with software companies such as Adobe and Microsoft to ensure that their software runs efficiently on ARM technology-based chips. We also work with content providers such as Disney, Google and Electronic Arts so that the end-product, the mobile phone, gives a superb user experience. ARM believes that only through working together with the industry leaders is it possible to create a truly mobile internet. No one company can do this alone.

ARM is in your other digital products

ARM technology is ideally suited to act as the brain of a broad range of electronic devices beyond mobile phones. Since ARM technology can enable chips that are low cost to develop and consume less power, we are enabling many more products to become “intelligent”.

The fastest growing market for ARM is in microcontrollers that go into a wide range of electronic devices from washing machines to air-conditioning units to toys. ARM processors have been used in microcontrollers for many years, but the recent drive to make household devices more energy efficient has required increased intelligence to be built into many more products in the home. For example, a modern intelligent washing machine can use less than 50% of the energy of an older model. Intelligent lighting systems can save 40% of the energy consumed. With many ARM technology-based chips making the home a more intelligent and efficient place, ARM is seeing its royalty revenue increase as a result.

The use of ARM technology-based chips in cars is increasing. In Europe and the US, most cars sold today already contain at least one ARM processor, probably more. ARM is used in 60% of anti-lock braking systems, 40% of airbags and 40% of intelligent batteries. ARM processors are also used in many other components throughout the car including dashboard display, chassis control and engine management systems. On average, every car sold in 2007 contained 1.6 ARM processors – that is nearly 100 million ARM technology-based chips.

Toys are also becoming increasingly interactive and therefore need the intelligence to be able to respond to their play mates. Ugobe’s Pleo dinosaur is a recent example of an autonomous toy that learns, explores and even develops its own personality through interaction with its environment. Pleo has two ARM technology-based chips embedded within it enabling Pleo to think, sense and move.

Physical IP Division – expanding the ARM business model

ARM’s physical IP is a key technology that allows the chip’s design to be implemented in the manufacturing process. It enables our customers to build low cost, highly-efficient chips.

ARM obtained the Physical IP Division (PIPD) through the acquisition of Artisan at the end of 2004. Prior to acquisition, Artisan mainly provided physical IP to the many small companies that did not have the capability to develop physical IP in-house. ARM’s vision for PIPD is to extend the market breadth to include ARM’s traditional customers – the largest semiconductor manufacturers in the world. These companies are always pushing the boundaries of modern manufacturing capability. This is very expensive and ARM saw the opportunity for them to out-source some of the development of their physical IP.

Over the last three years ARM has evolved the PIPD business and product portfolio to become a viable IP provider to the market leaders. We have developed new technology and products for the latest manufacturing processes for our customers to evaluate. In 2007, we have already seen orders from our target customers and we expect this to accelerate in 2008.

When ARM acquired Artisan we stated that it would take four to seven years before the market- leading semiconductor companies would be regularly licensing physical IP from ARM. We remain on track to achieve this.

The future

After a decade as a public company, ARM is looking forward to the next ten years with confidence. We have established a strong position as a supplier into the large and growing mobile phone industry. We are using that base to develop the business further in the growing number of markets for digital products where intelligence is becoming increasingly important. PIPD is now well positioned to achieve profitable growth as the largest semiconductor companies increasingly look to out-source the development of physical IP. The Company’s market-leading position, broad technology portfolio and cash- generative business model make ARM a unique investment opportunity.

Warren East
Chief Executive Officer

Of the 13 billion microprocessor-based chips shipped in 2007, nearly three billion contained ARM processors.

In 2007, nearly two billion ARM technology-based chips were shipped inside mobile phones.

There are an average of 1.7 ARM processors per mobile phone.