The Financial Director interview - Keeping score

For an FD who particularly enjoys the public aspects of a publicly quoted company, Tim Score’s first days at ARM Holdings could hardly have been better. He joined barely two months ago, on Friday 1 March, and on the following Monday he was in Los Angeles for a Morgan Stanley semiconductor conference, doing presentations to investors and some one-on-one meetings.

“The first week was rather glamorous,” he says, “compared with the balance.”

Of course, Score had managed to get in some preparatory work between the December announcement of his appointment and his official first day at ARM, including attending the annual results meeting at the end of January.

In fact, the press cuttings say the analysts were “queuing up” to see the new FD. “That’s a slight exaggeration but there was an element of that,” he says.

Okay, so the truth is? “I think their main interest is not my view of the company, particularly,” is Score’s somewhat surprising answer. “It is, do I have two arms and two legs and do I look as though I can continue in the vein of Jonathan Brooks (Score’s predecessor as FD)? He obviously had a good track record (the company has beaten market expectations 16 quarters in a row), he had a good relationship with the City. To some extent I was an unknown quantity to a number of people who follow this sector. They just kind of wanted reassurance that I was just a regular guy.” He adds that US investors typically have greater understanding of the market in which ARM operates than do UK investors.

HEADHUNTERS
The road to Score’s appointment at ARM began, as these things do, with a phone call about a “sort of IT and £3bn market cap” company that a headhunter thought he might be interested in. “It didn’t take a rocket scientist to take a quick cursory glance at the market caps, so I went along to the first meeting effectively knowing who it was.” The surprising thing about this was that the incumbent FD, Brooks, was just 45 but, after seven years of “crunching the quarters” (as Score puts it), wanted to do something else. And Brooks was on the first-round interview panel. “You assume they’re going to find someone who is technically able to do the job,” Score says, “but I think they were interested in ‘fit’. As Jonathan was an integral part of the team, he could identify potential fit (with the board). I think that’s why he led the front end of the process.”

When Brooks’s departure – and Score’s appointment – was finally announced to the markets in mid-December last year, the ARM share price reacted by dropping 4% to 353p. The price had already fallen from a 2000 peak of more than £9 per share, but even so was still valued at something like 20 times sales, keeping it pegged in the FTSE-100 long after companies such as Marconi had been booted out.

That sort of share price must be a little intimidating for an incoming FD. “The most challenging aspect of the job is the act you’re following and the pressures that kind of valuation brings,” he says. “But that certainly wasn’t something that was going to make me shy away from the challenge. It didn’t faze me.”

So what was the key attraction of ARM? “It is a global business with a strong market position in a market that matters and is important for the future,” Score says. “When I met the team I understood why they got where they were and why they could continue to progress.” And, of course, it was a quoted company, enabling Score to return to the public arena he briefly left after leaving struggling Marks & Spencer supplier, William Baird, to join venture capital-backed software group, Rebus.

We have the advantage with this interview – which took place less than four weeks into the job – to ask Score what his short-term objectives are, how he will make a difference to the business over the coming weeks and months. He says that from the “bread-and-butter” standpoint, ARM’s finance function is in good shape, so nothing needs to be changed radically.

“In most new CFO jobs,” he says, “you’re going in because there needs to be a systems overhaul or a finance structure overhaul – something has gone wrong and you’re brought in to put it right.” So instead, with ARM, part of his contribution will be to “bring new views to things like cost structures, for example. The culture here regarding cost is a good one in the sense that, although it’s a fast-growing company, it has its eyes on margins and profitability – it’s not just about growing revenue. But coming in cold you look at things afresh. What are we spending our marketing on? What is our G&A (general and administrative cost spend)? Is this the appropriate percentage?”

SCORE’S TARGETS
Score’s main role at ARM will be to work with the management team in developing strategy. His background will help: after spending almost 10 years with Arthur Andersen, where he qualified, Score’s first industry role was as group chief accountant, rising to group financial controller at BTR, working under FD Kathleen O’Donovan just as the conglomerate was acquiring Hawker Siddeley. His next job was at Lucas as it was merging with US group Varity.

Both experiences are proving valuable to Score as he looks at ARM’s strategy – but not because of any merger plans. Instead, he says that putting two big companies together and starting with a clean sheet of paper helps him make plans for the much bigger company that ARM’s continuing rapid growth will turn it into. Those merger experiences, he says, equip him to ask such questions as, “What is the blueprint for this combined company, starting with a clean sheet? What does the head office look like? What does the strategy look like for each of these combined divisions?” “That type of thinking is actually quite useful when you’re looking at a company that is probably going to double and triple in size again,” he says.

One particularly interesting line item in the profit and loss account is research and development which, at almost £40m, clocks in at about 26% of sales. It’s a big slice of revenue, but it’s nowhere near as risky an investment as it would be, say, in the pharmaceutical industry, where it can take 12 years to go from a test tube of molecules to a commercial drug. Most of ARM’s R&D expenditure, in fact, is spent on working with clients – businesses such as Intel, Texas Instruments and Motorola – on developing technology for their clients’ products.

ARM is paid an up-front licence by its customers for the right to manufacture microprocessors that use its technology. The chips are then used in things like mobile phones and personal digital assistants (PDAs), and ARM earns a royalty based on the number of chip-carrying products that the end-client makes, typically using a formula geared to market prices for chips. Licence income makes up just over half of the company’s revenue, and royalties about a fifth, so the key is to get clients to buy into ARM microprocessor technology. Hence, development expenditure is generally in partnership with the licence-paying client.

The bulk of R&D expenditure is engineers. “These people aren’t boffins in a back office. They are working closely with partners to make sure the products we’re developing have a very high percentage likelihood of being taken up on a wide basis. It’s not a trial-and-error game. So it’s not really a cost that you have to look at and say, are we being wasteful here? If you recruit the best people then your 25% of sales is being well spent,” Score says.

Fast-growing companies present particular management and strategy problems, not least in trying to forecast growth. But, Score says, he has greater visibility of future earnings at ARM than he had when he was at the textile business, William Baird. “When we’re getting seriously engaged in a conversation with a potential customer, it usually ends up in a deal. It’s just a question of when and its exact shape,” he says. “They’re talking to ARM because they want to use ARM architecture. Therefore you probably have more visibility in the pipeline than you do in some other businesses.”

The quarterly reporting requirements of being listed on both techMARK and Nasdaq add an extra discipline. “It focuses the organisation on deliverables and doing things in a disciplined way in a certain time-frame,” Score says. “To successfully manage the market means the numbers are working well, which means the business is working well. It all comes down to numbers.” Typically, ARM can give guidance on earnings two quarters ahead.

ARM’S LENGTH
But Score wants the business to increasingly try to look further ahead: two, three, even ten years. “The trick is in balancing the short-, medium- and long-term,” he says. “The challenge is to have the right balance of people looking beyond the quarters.”

Score will also be getting involved in some of the more “client-facing” issues, such as negotiating contracts. “The structure of a big architectural licence can be very complex,” he says. “It can have big revenue-recognition implications. Or we can be doing business with a number of new start-up companies where it’s important to understand their business model and their financing arrangements.”

Talking of financing arrangements, ARM Holdings has got over £100m cash in the balance sheet – but it’s no war chest. “Technically, that’s not the most efficient balance sheet – but, for example, we’re not going to go and do larger acquisitions just for the sake of it,” Score says. Neither is there much demand from investors for dividends or share buybacks, not while ARM is continuing to grow – though he notes the cash may be useful in a downturn.

ARM Holdings is Score’s second group FD job in a quoted company. The other was at William Baird – a £500m-turnover business that looked very attractive until Marks and Spencer started slashing its orders by 20% and more. “We had lots of strategic discussion with M&S about how this thing was going to play out,” Score says, “but my conclusion was that, whichever way it went, M&S was going to be in the doldrums for a longer period than was my tolerance level to be FD of William Baird: I didn’t want to become a textiles person. So I upped sticks after two-and-a-half years.” At that point, Score had been approached to join a small venture capital-backed software operation, Rebus. “These things are always slightly opportunistic because I was sitting there (at William Baird) thinking, I’m either going to go for a bigger PLC or private equity – and an attractive opportunity came along before I’d really thought through what my next step was going to be,” he says.

Score’s own CV is expertly compiled, detailing his main achievements in each role he’s had. So what will he hope to add to his CV when he updates it, say, three years from now?

“You mean, how many new jobs will I have on it?” he jokes. “I do intend to be at ARM for a while,” he says, just in case we’d thought he’d been serious. “I hope to have presided over continued growth in excess of market expectation and to have successfully contributed to managing a company that will have significantly grown in size by that point. It’s too early (into this job) for me to say what specifics one might have achieved, but in three years’ time if I’m looking back on another 12 quarters of beating expectations I’ll be happy.”

CURRICULUM VITAE

Name: Tim Score
Age: 41
Qualification: ACA (1985)
Career: 2001-: CFO, ARM Holdings plc
1999-2000: Group FD, Rebus Group Limited
1997-1999: Group FD, William Baird plc
1996-1997: Director/group controller, Lucas Industries plc/Lucasvarity plc
1992-1995: Group financial controller, BTR plc
1991-1992: Group chief accountant, BTR plc
1982-1991: Arthur Andersen

Biggest challenge: “Continuing to beat expectations.”

Biggest hassle: “Probably the same answer, actually. To be honest, I don’t view it as a hassle but managing the (investment) community is the biggest issue.”

ARM AT A GLANCE

Sales: £146.3m (2001); £100.7m (2002)
Pre-tax profit: £50.6m (2001); £35.5m (2002)
Market cap: £2,678m (16 April)
Auditor: PwC
Financial adviser: Hoare Govett, Morgan Stanley
Listed: London, Nasdaq
Sector; indices: IT Hardware; FTSE-100, techMARK 100, FTSE4Good.