18th Oct 2005 07:01
ARM Holdings PLC18 October 2005 ARM HOLDINGS PLC - RESULTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED 30SEPTEMBER 2005 CAMBRIDGE, UK, 18 October 2005-ARM Holdings plc ((LSE: ARM); (Nasdaq: ARMHY))announcesits unaudited financial results for the third quarter and for the nine monthsended 30 September 2005, showing year-to-date dollar revenue growth of 16% Financial Highlights £M Q305 Q304 (ARM standalone) Q205 Normalized*** US GAAP Normalized*** US GAAP Normalized*** US GAAP Revenue 56.7 56.7 39.4 39.4 57.8 57.8Incomebefore 19.1 12.0 13.6 13.3 19.6 12.9income taxOperatingmargin 31.3% 18.8% 29.7% 28.9% 31.8% 20.2%Earnings pershare 1.05p 0.68p 0.95p 0.92p 1.05p 0.70pNet cashgeneration**** 17.2 15.0 18.6 • Q3 total dollar revenues of $101.0m comprising ARM(R) licensing $30.9m (£17.3m), ARM royalties $32.1m (£18.0m), Development Systems $10.3m (£5.8m), Service revenues $6.5m (£3.6m), Physical IP division ("PIPD") $21.2m (licensing $15.2m, royalties $6.0m) (£12.0m) • Overall Q3 order backlog flat on Q2 with ARM processors and PIPD components of backlog up sequentially • Full year 2005 sterling earnings per share expectations in line with current market estimates. Expected full year 2005 dollar revenue growth of approximately 15% • £5.4m returned to shareholders in Q3 through rolling share buyback program Operational Highlights • Formal launch at the ARM Developers' Conference of the Cortex(TM)-A8 processor (formerly code-named "Tiger"), the industry's fastest processor for low-power mobile and consumer applications. Exceptional speed and power efficiency enabled by new ARM Artisan(R) libraries; first product to benefit from the technology synergies arising from the ARM and Artisan combination • Strong quarter for licensing of ARM's latest processor technology with five ARM11(TM) licenses and four Cortex licenses signed. Shipments of ARM microprocessors exceed 400 million units in a quarter for the first time • PIPD signed three more synergistic license deals, giving six year-to-date * Dollar revenues are based on the group's actual dollar invoicing, whereapplicable, and using the rate of exchange applicable on the date of thetransaction for invoicing in currencies other than dollars. Approximately 95% ofinvoicing is in dollars. ** Each American Depositary Share (ADS) represents three shares. *** Normalized figures are before acquisition-related charges and other deferredstock-based compensation charges. For reconciliation of GAAP measures tonormalized non-GAAP measures detailed in this document, see notes 4.1 to 4.24. **** Before dividends, share buybacks and acquisition consideration - see notes4.15 to 4.17. Commenting on the third quarter, Warren East, Chief Executive Officer, said:"There are several encouraging trends in these results. Despite some typicalthird quarter lumpiness in our licensing and Development Systems businesses, wehave seen strong licensing activity for our latest ARM11 and Cortexmicroprocessors and our Physical IP division is starting to deliver on itspromise with evidence of technology synergies between ARM and Artisan nowtranslating into products and a further three synergistic license deals beingsigned during the quarter." Tim Score, Chief Financial Officer, added: "Record royalty revenues and unit shipments illustrate the market leadership ofARM technologies across a broad spectrum of digital products. Operating marginsare consistently above 30% and our cash generation is strong, enabling us bothto invest in the innovative technologies that drive revenue growth and to returncash to shareholders via dividends and share buybacks." Current trading and prospects Having achieved year-to-date dollar revenue growth of 16%, ARM has again grownat a faster rate than the semiconductor industry as a whole. When announcing our half year results in July 2005, we indicated that full year2005 dollar revenues were expected to grow between 15-20% year-on-year comparedto combined ARM and Artisan revenues of $367 million in 2004, comprising ARMrevenues of $272 million and Artisan pro forma revenues of $95 million. Takinginto account the performance in the nine months to 30 September 2005 and theoutlook for Q4, our expectations are that year-on-year dollar revenue growthwill be approximately 15%. Full year 2005 normalized sterling earnings per shareis expected to be in line with current market estimates. Financial review(US GAAP unless otherwise stated) Third quarter ended 30 September 2005 Total revenuesTotal revenues for the third quarter of 2005 amounted to £56.7 million. In USdollar terms*, third quarter revenues of $101.0 million were 6% up on theaggregate ARM and Artisan revenues of $95.3 million(4.23) in Q3 2004. Theeffective US dollar to sterling exchange rate for ARM in Q3 2005 was $1.78compared to $1.82 in Q2 2005 and $1.78 in Q3 2004. License revenuesTotal license revenues in the third quarter were £25.9 million, representing 46%of group revenues. License revenues comprised £17.3 million from the originalARM business and £8.6 million from PIPD. In US dollar terms*, license revenuesfrom the original ARM business of $30.9 million in Q3 2005 were 21% up on Q32004. PIPD license revenues of $15.2 million compared to $15.6 million in Q32004. Overall, group order backlog at the end of Q3 was at the same level as atthe end of Q2, with the ARM processors and PIPD components of backlog both beingup sequentially. 23 licenses for microprocessors were signed in Q3 2005. 11 new partners took atotal of 16 licenses, of which eight were per-use licenses and four were termlicenses. The eight per-use licenses comprised five licenses for the ARM7TDMI(R)processor, one license for the ARM922T(TM) processor and two licenses for theARM926EJ(TM) processor. The four term licenses were for the ARM7TDMI processor,the ARM7TDMI-S(TM) processor, the SC100(TM) processor and the Cortex-M3processor. The remaining four licenses comprised one license for the ARM946E-S(TM) processor, two licenses for the ARM1136J(F)-S(TM) processor and onelicense for the ARM11 MPCore(TM) processor. A further seven licenses were signed with six of our existing partners. Thesecomprised two derivative licenses to ARM7(TM) products, one derivative and oneupgrade license to ARM11 products, one Cortex-M3 processor derivative license,one upgrade to the Cortex "ServalE" processor to be launched in 2006 and oneupgrade to the Cortex-A8 processor. Royalty revenuesTotal royalty revenues in the third quarter were £21.4 million, representing 38%of total group revenues. Royalty revenues comprised £18.0 million from theoriginal ARM business and £3.4 million from PIPD. In US dollar terms*, ARMroyalty revenues of $32.1 million in Q3 2005 were up 3% sequentially on Q2 2005and were 12% up on Q3 2004. At $6.0 million, PIPD royalties were 5% upsequentially. Development Systems and Service revenuesSales of Development Systems in Q3 2005 were £5.8 million, representing 10% oftotal group revenues, compared to £6.3 million in Q2 2005. In US dollar terms,Development Systems revenues were $10.3 million this quarter, 7% up on Q3 2004.Service revenues in Q3 2005 were £3.6 million representing 6% of total grouprevenues. Gross marginsGroup gross margins for the third quarter were 88%, comprising 92% for theoriginal ARM business and 72% for PIPD. Operating expenses and operating marginsTotal group operating expenses in Q3 2005 were £39.1 million, includingacquisition-related charges of £5.7 million and other deferred stock-basedcompensation of £1.4 million. Excluding these charges, operating expenses in thequarter were £32.0 million, comprising £27.0 million related to the original ARMbusiness and £5.0 million to PIPD, compared to £33.2 million in Q2 2005.Operating expenses are lower in Q3 due primarily to the partial reversal ofprovisions for employee bonuses made in the first half. Total research and development expenses were £13.9 million in Q3 2005,representing 25% of revenues, compared to £15.8 million or 27% of revenues in Q22005. Total sales and marketing costs in Q3 2005 were £8.5 million or 15% ofrevenues compared to £8.3 million or 14% of revenues in Q2 2005. Total generaland administrative expenses in Q3 2005 were £9.6 million, representing 17% ofrevenues compared to £9.2 million or 16% of revenues in Q2 2005. Operating margin in Q3 2005 was 18.8% compared to 20.2% in Q2 2005. Operatingmargin, excluding acquisition-related charges of £5.7 million and other deferredstock-based compensation of £1.4 million, was 31.3%(4.1) in Q3 2005 compared to31.8%(4.2), excluding non-recurring and acquisition-related charges of £6.2million and other deferred stock-based compensation of £0.5 million, in Q2 2005.Operating margin of 31.3% in Q3 2005 comprises 31.5% in the original ARMbusiness and 30.4% in PIPD. Interest receivableInterest receivable increased to £1.4 million in Q3 2005 compared to £1.2million in Q2 2005, due to higher average cash balances offsetting slightlylower interest rates. Earnings and taxationIncome before income tax in Q3 2005 was £12.0 million compared to £12.9 millionin Q2 2005. Income before income tax, excluding acquisition-related charges of£5.7 million and other deferred stock-based compensation of £1.4 million, was£19.1 million(4.6). The group's effective tax rate under US GAAP in Q3 2005 was19% bringing the effective rate for the nine months to 23%, reflecting theavailability of research and development tax credits in the UK and the US andtaking into account further benefits arising from the structuring of the Artisanacquisition. Third quarter fully diluted earnings per share prepared under US GAAP were 0.7pence (3.6 cents per ADS**) compared to earnings per share of 0.7 pence (3.8cents per ADS**) in Q2 2005. Earnings per fully diluted share in Q3 2005, beforeacquisition-related charges of £5.7 million and other deferred stock-basedcompensation of £1.4 million, were 1.0 pence(4.18) per share (5.5 cents per ADS**) compared to 1.0 pence(4.19) (5.6 cents per ADS**) in Q2 2005, beforenon-recurring and acquisition-related charges of £6.2 million and other deferredstock-based compensation of £0.5 million. Nine months ended 30 September 2005 RevenuesTotal revenues for the nine months ended 30 September 2005 amounted to £169.5million. In US dollar terms*, revenues of $309.7 million in the first ninemonths were 16% up on the aggregate ARM and Artisan revenues of $266.2 million(4.24) in the first nine months of 2004. The effective average dollar tosterling exchange rate in the first nine months of 2005 was $1.83 compared to$1.78 in the first nine months of 2004 for ARM standalone. Total license revenues in the first nine months of 2005 were £78.5 million,being 46% of total revenues. Total royalty revenues were £62.4 million,representing 37% of total revenue. Sales of development systems were £17.9million, being 11% of total revenues. Service revenues were £10.7 million in thefirst nine months of 2005, representing 6% of total revenues. Gross marginsGroup gross margins year-to-date were 89%, comprising 93% for the original ARMbusiness and 73% for PIPD. Operating expenses and operating marginsTotal group operating expenses year-to-date 2005 were £116.3 million, includingacquisition-related charges of £17.9 million and other deferred stock-basedcompensation of £2.2 million. Excluding these charges, operating expenses in thefirst nine months were £96.1 million, comprising £80.7 million related to theoriginal ARM business and £15.4 million to PIPD. Total research and development expenses were £44.4 million year to date 2005,representing 26% of revenues. Total sales and marketing costs year to date 2005were £25.0 million or 15% of revenues. Total general and administrative expensesin year to date 2005 were £26.6 million, representing 16% of revenues.Operating margin in the first nine months of 2005 was 19.9% compared to 25.2% inthe ARM standalone business in the first three quarters of 2004. Operatingmargin, excluding acquisition-related charges of £17.9 million and otherdeferred stock-based compensation of £2.2 million, was 31.9%(4.4) year-to-date2005 compared to 26.0%(4.5), excluding acquisition-related charges of £0.5million and other deferred stock-based compensation of £0.4 million, for thesame period in 2004. The operating margin of 31.9% year-to-date 2005 comprises31.8% in the original ARM business and 32.1% in PIPD. Interest receivableInterest receivable was £3.6 million for the first nine months of 2005. EarningsIncome before income tax year-to-date 2005 was £37.5 million. Income beforeincome tax, excluding acquisition-related charges of £17.9 million and otherdeferred stock-based compensation of £2.2 million, was £57.6 million(4.9). Year-to-date fully diluted earnings per share under US GAAP were 2.0 pence (10.7cents per ADS**). Earnings per fully diluted share year-to-date 2005, beforeacquisition-related charges of £17.9 million and other deferred stock-basedcompensation of £2.2 million, were 3.0 pence(4.21) per share (16.2 cents per ADS**). Balance sheet and cash flowIntangible assets at 30 September 2005 were £436.3 million, comprising goodwillof £369.1 million and other intangible assets of £67.2 million, compared to£362.9 million and £71.4 million respectively at 30 June 2005. The increase ingoodwill in Q3 2005 is due primarily to foreign exchange movements. Goodwill isno longer amortized under US GAAP but is subject to impairment on at least anannual basis. The other intangible assets are being amortized through the profitand loss account over a weighted average period of five years. Accounts receivable increased to £52.2 million at 30 September 2005 from £49.7million at 30 June 2005. The allowance against receivables increased to £1.8million at the end of September from £1.5 million at 30 June 2005. Deferredrevenues were £23.2 million at the end of September 2005 compared to £20.4million at 30 June 2005. Net cash generation in Q3 2005 was £17.2 million(4.15), before paying out £5.4million on the share buyback program announced in July, giving total cash, cashequivalents, short-term investments and marketable securities of £164.7 million(4.11) at 30 September 2005. Operating review Original ARM licensing and product developmentARM's processor technology portfolio represents a rich mix of newly developedtechnology and more mature processors, which continue to be licensed many yearsafter their introduction, demonstrating the very long life cycle of ARMtechnology. Licensing activity in Q3 illustrates the breadth of the technologyportfolio, with the 23 licenses signed in the quarter including five for ARM11products and four for Cortex products. At the second ARM Developers' Conference in early October, we formally launchedthe Cortex-A8 processor (code-named "Tiger"), which has already been licensed byfive of the world's leading semiconductor companies, including Freescale,Matsushita, Samsung and Texas Instruments. The Cortex-A8 processor is theindustry's fastest processor to date and the first complete processing solutioncomprising a broad portfolio of ARM technology to reduce time-to-market,including software development tools and models, debug and trace technology andsoftware library support. The Cortex-A8 processor is expected to revolutionizeconsumer and low-power mobile devices, enabling the delivery of higher levels ofentertainment and innovation to end users. Its performance and power utilizationcharacteristics make it ideal for demanding consumer products runningmulti-channel video, audio and gaming applications. The exceptional speed andpower efficiency of the Cortex-A8 processor is enabled by new ARM Artisanlibraries supporting our latest technology ingredients such as IntelligentEnergy Manager (IEM) technology. Additionally, the new processor features ARMTrustZone(R) technology for secure transactions. The ARM TrustZone SoftwareApplication Program Interface (API) is gaining wide industry endorsement andquickly becoming a standard foundation for the implementation of securityfunctions such as digital rights management, device protection and payment. In addition, ARM7 and ARM9(TM) family products continue to be popular with ourpartners with a total of a further 13 licenses being signed in Q3. 28 newcompanies have joined the ARM partnership year-to-date, bringing the totalnumber of semiconductor partners at the end of September 2005 to 165. Original ARM royalty revenues and unit shipmentsARM partners shipped 405 million units in Q2 2005 (we report royalty revenuesone quarter in arrears), the first time that shipments have exceeded 400 millionunits in a quarter. Year-to-date total shipments are now 1.163 billion, up 29%on the same period in 2004 with mobile shipments growing by 24% and non-mobileshipments growing by 39%. We are reporting record royalty revenues of $32.1 million in Q3 2005 at anaverage royalty rate ("ARR") of 7.9 cents, within the range seen over the lastfour years between 7.2 and 9.2 cents. The ARR fluctuates quarterly based on themix of products shipped in a given quarter. Of the total reported unit shipmentsin Q3, 31% related to units based on ARM9 family technology. The mobile segmentaccounted for 64% of unit shipments, compared to 66% last quarter. Growth innon-mobile markets has been broadly spread with particularly good progress beingmade in hard disk drives, digital TV's, set-top boxes and microcontrollers. Thetotal number of partners shipping ARM technology-based product at the end of Q3is 62. PIPD licensingPIPD reported license revenues of $15.2 million compared to $17.9 million lastquarter and $15.6 million a year ago. Although Q3 is typically seasonally weakfor licensing, there was an encouraging mix of bookings activity. As well aslicensing a range of products to existing and new foundries, a number oflicenses were signed as a result of the combination of ARM and Artisan. Wereported three instances of ARM partners licensing physical IP from the Group inthe first half; one of these companies licensed more IP in Q3. In addition, afourth existing ARM partner licensed physical IP in Q3. Also this quarter, wesaw the first instance of processor IP and physical IP being licensed by a newARM partner as part of the same transaction. The business was won primarily dueto the availability of both physical and processor IP from ARM, in contrast tothe competitive processor IP offerings. PIPD royalty revenuesAs with processor royalties, PIPD receives and reports royalty data one quarterin arrears. Royalties of $6.0 million were 5% up on last quarter. There were nomeaningful "catch-up" royalties in either the Q3 or Q2 reported royaltyrevenues. Overall capacity utilization in the foundries was a little higher inQ2 than Q1, however wafer pricing was down more than 6% sequentially. BoardMark Templeton, who joined the ARM Board as an executive director in December2004 on completion of the acquisition of Artisan, becomes a non-executivedirector of the company. The Board looks forward to continuing to benefit fromMark's strategic insight and in-depth knowledge of the global semiconductorindustry. PeopleAt 30 September 2005 we had 1,272 full time employees compared to 1,223 at theend of Q2. At 30 September 2005, the Group had 564 employees based in the UK,473 in the US, 86 in Continental Europe, 107 in India and 42 in the Asia Pacificregion. Following a review of the remuneration arrangements for senior executives, it isproposed that share options will be replaced by other forms of share-basedremuneration. Formal approval for the proposed changes will be sought at theAnnual General Meeting of the Company in April 2006. Legal mattersIn May 2002, Nazomi Communications, Inc. ("Nazomi") filed suit against ARMalleging willful infringement of Nazomi's US Patent No. 6,332,215. ARM answeredNazomi's complaint in July 2002 denying infringement. ARM moved for summaryjudgment and a ruling that the technology does not infringe Nazomi's patent. TheUnited States District Court for the Northern District of California grantedARM's motion, and Nazomi appealed the District Court's ruling. On September 7,2004, the Court of Appeals for the Federal Circuit heard the appeal and issuedits decision on April 11, 2005. Because, in the opinion of the Court of Appealsfor the Federal Circuit, the District Court did not construe the disputed claimterm in sufficient detail for appellate review, the Court of Appeals for theFederal Circuit remanded the dispute back to the District Court for furtheranalysis. The Court of Appeals' decision does not reverse the original decisionof the District Court. It was previously reported that a supplementary "Markman"hearing to assist in a more detailed claim construction analysis was set for 16September 2005 but because the District Court had scheduling difficulties thishearing was postponed to 11 October 2005. The supplementary "Markman" hearingwas held on 11 October 2005 and we are presently awaiting the ruling of theDistrict Court. Based on legal advice received to date, ARM has no cause tobelieve that the effect of the original ruling by the District Court will not beupheld. CONTACTS:Tom Buchanan/Fiona Laffan Tim Score/Bruce BeckloffBrunswick ARM Holdings plc+44 (0) 207 404 5959 +44 (0)1628 427800 ARM Holdings plc Third Quarter and Nine Months Results - US GAAP Quarter Quarter Nine months Nine months Nine months ended ended ended ended ended 30 September 30 September 30 September 30 September 30 September 2005 2004 2005 2004 2005 (1) Unaudited Unaudited Unaudited Unaudited Unaudited -------- -------- -------- -------- --------- £'000 £'000 £'000 £'000 $'000RevenuesProductrevenues 53,026 35,904 158,883 100,582 281,080Servicerevenues 3,656 3,530 10,663 10,780 18,864 -------- -------- -------- -------- ---------Total revenues 56,682 39,434 169,546 111,362 299,944 -------- -------- -------- -------- --------- Cost ofrevenuesProduct (5,491) (1,538) (14,952) (4,177) (26,452)costsService (1,466) (1,308) (4,514) (3,896) (7,986)costs -------- -------- -------- -------- ---------Total cost ofrevenues (6,957) (2,846) (19,466) (8,073) (34,438) -------- -------- -------- -------- --------- -------- -------- -------- -------- ---------Gross profit 49,725 36,588 150,080 103,289 265,506 -------- -------- -------- -------- --------- Research anddevelopment (13,929) (13,004) (44,438) (37,459) (78,615)Sales andmarketing (8,451) (6,006) (25,041) (17,593) (44,300)General andadministrative (9,605) (5,852) (26,599) (19,272) (47,056)Deferredstock-based (2,760) 105 (7,262) (395) (12,847)compensation -------- -------- --------Amortizationof intangibles (4,342) (426) (12,917) (476) (22,852)purchasedthroughbusinesscombination -------- -------- -------- -------- ---------Totaloperatingexpenses (39,087) (25,183) (116,257) (75,195) (205,670) -------- -------- -------- -------- --------- Income fromoperations 10,638 11,405 33,823 28,094 59,836Interest, 1,394 1,885 3,633 5,027 6,427net -------- -------- -------- -------- ---------Income beforeincome tax 12,032 13,290 37,456 33,121 66,263Provision forincome taxes (2,248) (3,757) (8,553) (9,653) (15,131) -------- -------- -------- -------- ---------Net income 9,784 9,533 28,903 23,468 51,132 -------- -------- -------- -------- --------- Net income 9,784 9,533 28,903 23,468 51,132Othercomprehensiveincome:Foreigncurrencyadjustments 6,760 (116) 42,023 (238) 74,343Unrealizedholdinggain/(loss) onavailable-for-salesecurities,net of tax of£339,000 (Q32004:£255,000; 9m2005:£1,217,000; 9m2004:£793,000) 826 595 (2,768) 2,242 (4,897) -------- -------- -------- -------- ---------Totalcomprehensiveincome 17,370 10,012 68,158 25,472 120,578 -------- -------- -------- -------- --------- Earnings pershare(assumingdilution)Sharesoutstanding('000) 1,437,448 1,039,329 1,428,444 1,041,174Earnings pershare - pence 0.7 0.9 2.0 2.3Earnings perADS (assumingdilution)ADSsoutstanding('000) 479,149 346,443 476,148 347,058Earnings perADS - cents 3.6 5.0 10.7 12.2 (1) US dollar amounts have been translated from sterling at the 30 September2005 closing rate of $1.7691=£1 (see note 1) ARM Holdings plcConsolidated balance sheet - US GAAP 30 September 31 December 30 September 2005 2004 2005 (1) Unaudited Audited Unaudited --------- --------- ----------- £'000 £'000 $'000AssetsCurrent assets:Cash and cashequivalents 137,856 110,561 243,881Short-terminvestments 5,000 5,307 8,845Marketablesecurities 21,881 21,511 38,710Accounts receivable, net of allowanceof£1,779,000 in2005 and£1,451,000 in2004 52,208 34,347 92,361Inventory:finished goods 1,444 897 2,555Prepaidexpenses andother assets 16,439 16,001 29,082 --------- --------- -----------Total currentassets 234,828 188,624 415,434 Long-termmarketablesecurities - 5,438 -Deferredincome taxes 3,914 2,529 6,924Prepaidexpenses andother assets 1,761 - 3,115Property andequipment, net 12,760 14,117 22,574Goodwill 369,109 340,416 652,991Otherintangibleassets 67,185 74,578 118,857Investments 8,014 12,235 14,178 --------- --------- -----------Total assets 697,571 637,937 1,234,073 --------- --------- ----------- Liabilities and shareholders' equityAccountspayable 4,244 4,110 7,508Income taxespayable 12,107 6,345 21,418Personneltaxes 1,292 1,123 2,286Accruedliabilities(see note 2) 21,451 38,600 37,949Deferredrevenue 23,189 21,355 41,024Dividendspayable 4,677 - 8,274 --------- --------- -----------Total currentliabilities 66,960 71,533 118,459 Accruedliabilities - 1,732 -Deferredincome taxes 4,624 12,345 8,180 --------- --------- -----------Totalliabilities 71,584 85,610 126,639 --------- --------- ----------- Shareholders' equityOrdinaryshares 692 675 1,224Additionalpaid-incapital 425,479 414,133 752,715Deferredcompensation (8,080) (12,083) (14,294)Treasurystock, at cost (6,879) (7,485) (12,169)Retainedearnings 171,854 153,421 304,027Accumulated other comprehensive income: Unrealizedholding gainonavailable-for-salesecurities,net of tax of£860,000(2004:£2,077,000) 3,407 6,175 6,027Cumulativetranslationadjustment 39,514 (2,509) 69,904 --------- --------- -----------Totalshareholders'equity 625,987 552,327 1,107,434 --------- --------- ----------- Totalliabilitiesandshareholders'equity 697,571 637,937 1,234,073 --------- --------- ----------- (1) US dollar amounts have been translated from sterling at the 30 September 2005 closing rate of $1.7691=£1 (see note 1) Notes to the Financial Statements (1) Basis of preparation - reporting currencyThe Group prepares and reports its financial statements in UK sterling. Purelyfor the convenience of the reader, the US GAAP income statement and balancesheet have been translated from sterling at the closing rate on 30 September2005 of $1.7691=£1. Such translations should not be construed as representationsthat the sterling amounts represent, or have been or could be so converted intoUS dollars at that or at any other rate. (2) Accrued liabilitiesAccrued liabilities under US GAAP of £21.5 million (2004: £38.6 million)includes: £nil million (2004: £14.3 million) for acquisition-related expenses,£0.5 million (2004: £4.4 million) for staff costs and £0.9 million (2004: £2.8million) representing the fair value of embedded derivatives. (3) Consolidated statement of changes in shareholders' equity (US GAAP) Share Additional Deferred Treasury Retained Unrealized Cumulative Total capital paid-in compensation stock earnings holding translation capital gain adjustment £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2005 675 414,133 (12,083) (7,485) 153,421 6,175 (2,509) 552,327Shares issued on exercise of options 17 12,452 - - - - - 12,469Net income - - - - 28,903 - - 28,903Dividends - - - - (10,436) - - (10,436)Unrealized holding losses onavailable-for-sale securities - - - - - (2,768) - (2,768)Deferred compensationarising onshare schemes - 3,872 (3,872) - - - - -Tax benefits on exercise of options issued as partconsideration for a business combination - 1,227 - - - - - 1,227Amortization of deferredcompensation - - 7,261 - - - - 7,261Reversal ofunearnedcompensation - (614) 614 - - - - -Issuance of shares - (5,591) - 6,044 (34) - - 419Purchase of own shares - - - (5,438) - - - (5,438)Currency translationadjustment - - - - - - 42,023 42,023 -------- -------- -------- -------- -------- -------- -------- --------At 30 September 2005 692 425,479 (8,080) (6,879) 171,854 3,407 39,514 625,987 -------- -------- -------- -------- -------- -------- -------- -------- (4) Non-GAAP measures The following non-GAAP measures, including reconciliations to the US GAAPmeasures, have been used in this earnings release. These measures have beenpresented as they allow a clearer comparison of operating results that excludeone-off non-recurring charges and acquisition-related charges. All figures in£'000 unless otherwise stated. (4.1) (4.2) (4.3) (4.4) (4.5) Q3 2005 Q2 2005 Q3 2004 9M 2005 9M 2004Income from 10,638 11,662 11,405 33,823 28,094operationsAcquisition-relatedcharge - 4,342 4,608 426 12,917 476amortization ofintangiblesAcquisition-relatedcharge -deferred stock-based 1,311 1,640 - 5,017 -compensationOther deferredstock-based 1,449 502 (105) 2,245 395compensation ----------- ----------- ----------- ----------- ----------- -----------Pro forma incomefrom 17,740 18,412 11,726 54,002 28,965operations ----------- ----------- ----------- ----------- ----------- -----------As % of revenue 31.3% 31.8% 29.7% 31.9% 26.0% (4.6) (4.7) (4.8) (4.9) (4.10) Q3 2005 Q2 2005 Q3 2004 9M 2005 9M 2004Income before income 12,032 12,892 13,290 37,456 33,121taxAcquisition-relatedcharge - 4,342 4,608 426 12,917 476amortization ofintangiblesAcquisition-relatedcharge -deferred stock-based 1,311 1,640 - 5,017 -compensationOther deferredstock-based 1,449 502 (105) 2,245 395compensation ----------- ----------- ----------- ----------- ----------- -----------Pro forma incomebefore 19,134 19,642 13,611 57,635 33,992income tax ----------- ----------- ----------- ----------- ----------- ----------- (4.11) (4.12) (4.13) (4.14) 30 September 30 June 2005 31 March 2005 31 December 2005 2004Cash and cashequivalents 137,856 121,646 93,816 110,561Short-terminvestments 5,000 10,437 24,956 5,307Short-termmarketablesecurities 21,881 22,553 21,975 21,511Long-termmarketablesecurities - - 1,038 5,438------------ ------------ ------------ ------------ ------------Pro forma cash 164,737 154,636 141,785 142,817------------ ------------ ------------ ------------ ------------ (4.15) (4.16) (4.17) Q3 2005 Q2 2005 Q3 2004Pro forma cash at end of period 164,737 154,636 174,550(as above)Less: Pro forma cash atbeginning of (154,636) (141,785) (166,297)period (as above)Add back: Cash outflow from 1,690 - 6,796acquisitionsAdd back: Cash outflow frompayment of - 5,759 -dividendsAdd back: Cash outflow frompurchase of 5,438 - -own shares --------------- --------------- ------------------------------Pro forma cash generation 17,229 18,610 15,049--------------- --------------- --------------- --------------- (4.18) (4.19) (4.20) (4.21) (4.22) Q3 2005 Q2 2005 Q3 2004 9M 2005 9M 2004Net income (USGAAP) 9,784 10,040 9,533 28,903 23,468Acquisition-related charge -amortization ofintangibles 4,342 4,608 426 12,917 476Acquisition-related charge -deferredstock-basedcompensation 1,311 1,640 - 5,017 -Other deferredstock-basedcompensation 1,449 502 (105) 2,245 395Estimated taximpact of abovecharges (1,860) (1,875) (18) (5,566) (18)----------- ----------- ----------- ----------- ----------- -----------Pro forma netincome 15,026 14,915 9,836 43,516 24,321----------- ----------- ----------- ----------- ----------- -----------Dilutive shares('000) 1,437,448 1,426,944 1,039,329 1,428,444 1,041,174Pro forma dilutedEPS 1.0p 1.0p 0.9p 3.0p 2.3p (4.23) (4.24) Q3 2004 9M 2004 $'000 $'000ARM reported dollar revenues 70,125 197,721Artisan reported dollar revenues 25,140 68,481------------------- ------------------- -------------------Aggregate ARM and Artisan dollar 95,265 266,202revenues ------------------- -------------------------------------- NoteThe results shown for Q3 2005, Q3 2004, 9M 2005 and 9M 2004 are unaudited. The results for ARM for Q3 2005 and previous quarters as shown reflect theaccounting policies as stated in Note 1 to the US GAAP financial statements inthe Annual Report and Accounts filed with Companies House in the UK for thefiscal year ended 31 December 2004 and in the Annual Report on Form 20-F for thefiscal year ended 31 December 2004. This document contains forward-looking statements as defined in section 102 ofthe Private Securities Litigation Reform Act of 1995. These statements aresubject to risk factors associated with the semiconductor and intellectualproperty businesses. When used in this document, the words "anticipates", "may","can", "believes", "expects", "projects", "intends", "likely", similarexpressions and any other statements that are not historical facts, in each caseas they relate to ARM, its management or its businesses and financialperformance and condition are intended to identify those assertions as forward-looking statements. It is believed that the expectations reflected in thesestatements are reasonable, but they may be affected by a number of variables,many of which are beyond our control. These variables could cause actual resultsor trends to differ materially and include, but are not limited to: failure torealize the benefits of our recent acquisitions, unforeseen liabilities arisingfrom our recent acquisitions, price fluctuations, actual demand, theavailability of software and operating systems compatible with our intellectualproperty, the continued demand for products including ARM's intellectualproperty, delays in the design process or delays in a customer's project thatuses ARM's technology, the success of our semiconductor partners, loss of marketand industry competition, exchange and currency fluctuations, any futurestrategic investments or acquisitions, rapid technological change, regulatorydevelopments, ARM's ability to negotiate, structure, monitor and enforceagreements for the determination and payment of royalties, actual or potentiallitigation, changes in tax laws, interest rates and access to capital markets,political, economic and financial market conditions in various countries andregions and capital expenditure requirements. More information about potential factors that could affect ARM's business andfinancial results is included in ARM's Annual Report on Form 20-F for the fiscalyear ended 31 December 2004 including (without limitation) under the captions,"Risk Factors" and "Management's Discussion and Analysis of Financial Conditionand Results of Operations," which is on file with the Securities and ExchangeCommission (the "SEC") and available at the SEC's website at www.sec.gov. The financial information contained in this announcement does not constitutestatutory accounts within the meaning of Section240 (3) of the Companies Act1985. Statutory accounts of the Company in respect of the financial year ended31 December 2004 have been delivered to the Registrar of Companies, upon whichthe Company's auditors have given a report which was unqualified and did notcontain a statement under Section 237(2) or Section 237(3) of that Act. About ARM 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 offeringincludes 16/32-bit RISC microprocessors, data engines, 3D processors, digitallibraries, embedded memories, peripherals, software and development tools, aswell as analog functions and high-speed connectivity products. Combined with thecompany's broad Partner community, they provide a total system solution thatoffers a fast, reliable path to market for leading electronics companies. Moreinformation on ARM is available at http://www.arm.com/ ARM and ARM7TDMI are registered trademarks of ARM Limited. ARM7, ARM7TDMI-S,ARM9, ARM922T, ARM926EJ, ARM946E-S, ARM11,ARM1136J(F)-S, SC100, Cortex andMPCore are trademarks of ARM Limited. Artisan Components and Artisan areregistered trademarks of ARM Physical IP, Inc., a wholly owned subsidiary ofARM. All other brands or product names are the property of their respectiveholders. ARM refers to ARM Holdings plc (LSE: ARM and Nasdaq: ARMHY) togetherwith its subsidiaries including ARM Limited, ARM Inc., ARM Physical IP Inc.,Axys Design Automation Inc., Axys GmbH; ARM KK, ARM Korea Ltd, ARM Taiwan Ltd,ARM France SAS, ARM Consulting (Shanghai) Co. Ltd.; ARM Belgium NV.; and ARMEmbedded Technologies Pvt. Ltd.; and ARM Physical IP, Inc. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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