5th Feb 2008 07:01
ARM Holdings PLC05 February 2008 ARM HOLDINGS PLC REPORTS RESULTS FOR THE FOURTH QUARTER AND FULL YEAR 31DECEMBER 2007 A presentation of the results will be webcast today at 09:00 at www.arm.com/ir. CAMBRIDGE, UK, 5 February 2008-ARM Holdings plc ((LSE: ARM); (Nasdaq: ARMHY))announces its unaudited financial results for the fourth quarter and full yearended 31 December 2007 Financial Highlights (US GAAP unless otherwise stated)• FY dollar revenues at $514.3m***, up 6% on 2006 o Growth rate approximately 2x that of the semiconductor industry o Q4 dollar revenues at $130.3m• Record bookings quarter in Q4 o Group order backlog up more than 30% sequentially to highest ever level o Backlog in all divisions higher than at end Q3• Continuing cost discipline o FY 2007 normalised* operating profit up 15% at constant currency (US GAAP up 25% at constant currency) (FY 2007 results translated at FY 2006 effective $/£ exchange rate) o FY 2007 normalised (and US GAAP) operating expenses held at FY 2006 level o FY 2007 normalised operating margin at 31.4% (US GAAP 16.5%) despite 8% weakening of $ vs £• £147m cash returned to shareholders in 2007 o £60m returned in Q4 via share buyback and dividend o FY 2007 dividend up 100% on 2006 o Net cash of £51.3m at end 2007 - in line with target• Ongoing focus on balance sheet efficiency Divisional HighlightsProcessor Division (PD)• FY license revenue up 18% on 2006• Q4 bookings at record level - less short-term revenue impact due to three long-term subscription deals where revenue is recognised over the life of license• Record royalties in Q4, up 15% sequentially to $48.8m on more than 800 million unitsPhysical IP Division (PIPD)• Simon Segars, ARM Holdings plc director, appointed GM of PIPD• FY revenues at $86.7m and Q4 revenues at $19.5m o Three further IDM licenses signed in Q4 o Q4 royalties up 9% sequentially o Q4 revenue impacted by internal restructuring activities to position PIPD for growth in 2008Development Systems• FY revenue at $55.6m with record revenue in Q4 at $15.5m Commenting on the results, Warren East, Chief Executive Officer, said: "We are pleased with ARM's performance in 2007 against a backdrop of slowergrowth in the semiconductor industry. Full year revenue growth at approximatelytwice the rate of the industry and strong licensing momentum in our ProcessorDivision throughout the year confirm our continuing market share gains. Although2007 was a challenging period for revenue in our Physical IP Division, ourreallocation of resources during the year towards the development ofleading-edge physical IP technology, together with changes to management andorganisational focus, positions the business well for growth in 2008. We enter 2008 with the group order backlog at its highest ever level, thephysical IP business better positioned to capitalise on the long-term growthopportunity and good royalty revenue momentum based on the ongoing proliferationof ARM technology into an ever-broader range of digital devices. Although weremain cautious about the short term industry outlook, we expect ARM to deliversignificant constant currency earnings growth in 2008 and believe the long-termgrowth opportunities for ARM are substantial." Q4 2007 - Revenue Analysis----------------------------------------------------------------------------------- Revenue ($M)*** Revenue (£M) -------------------------------------------------------- Q4 2007 Q4 2006 % Change Q4 2007 Q4 2006 % Change-----------------------------------------------------------------------------------Processor Division (PD) Licensing 38.4 37.4 +3% 19.3 19.5 -1% Royalties 48.8 42.8 +14% 23.7 22.2 +7% Total PD 87.2 80.2 +9% 43.0 41.7 +3% Physical IP Division (PIPD) Licensing 10.8 18.1 -40% 5.3 9.4 -44% Royalties 8.7(1) 9.6(1) -9% 4.3(1) 5.1(1) -16% Total PIPD 19.5 27.7 -30% 9.6 14.5 -34% Development Systems 15.5 14.1 +10% 7.7 7.3 +5%Services 8.1 8.3 -2% 4.0 4.5 -11% Total Revenue 130.3 130.3 64.3 68.0 -5%----------------------------------------------------------------------------------- (1) Includes catch-up royalties in Q4 2007 of $0.3m (£0.2m) and in Q4 2006 of $0.7m (£0.4m). FY 2007 - Revenue Analysis------------------------------------------------------------------------------- Revenue ($M)*** Revenue (£M) --------------------------------------------------------------- FY 2007 FY 2006 % Change FY 2007 FY 2006 % Change-------------------------------------------------------------------------------PD Licensing 163.5 138.3 +18% 83.4 75.7 +10% Royalties 176.5 164.1 +8% 88.0 88.7 -1% Total PD 340.0 302.4 +12% 171.4 164.4 +4% PIPD Licensing 54.4 64.2 -15% 27.3 34.9 -22% Royalties 32.3(1) 34.9(1) -7% 16.1(1) 19.1(1) -16% Total PIPD 86.7 99.1 -13% 43.4 54.0 -20% Development Systems 55.6 53.0 +5% 27.9 28.8 -3%Services 32.0 29.1 +10% 16.5 16.1 +2% Total Revenue 514.3 483.6 +6% 259.2 263.3 -2%------------------------------------------------------------------------------- (1) Includes catch-up royalties in FY 2007 of $2.7m (£1.4m) and in FY 2006 of $3.1m (£1.7m). Q4 2007 - Financial Summary----------------------------------------------------------------------------- US GAAP Normalised* US GAAP Reported ---------------------------------------------£M Q4 2007 Q4 2006 Q4 2007 Q4 2006------------------------------------------------------------------------------Revenue 64.3(1) 68.0 64.3 68.0Income before income tax 21.3 21.3 11.5 9.4Operating margin 31.5% 29.0% 16.3% 11.4%Earnings per share (pence) 1.25 1.49 0.74 0.87Net cash generation** 10.5 13.3Effective fx rate ($/£) 2.02 1.92------------------------------------------------------------------------------ (1) Equivalent to £68.0m at Q4 2006 effective $/£ rate YTD 2007 - Financial Summary------------------------------------------------------------------------------ US GAAP Normalised* US GAAP Reported ---------------------------------------------£M FY 2007 FY 2006 FY 2007 FY 2006------------------------------------------------------------------------------Revenue 259.2(1) 263.3 259.2 263.3Income before income tax 86.7 90.1 48.2 57.0Operating margin 31.4% 31.7% 16.5% 17.1%Earnings per share (pence) 4.67 5.08 2.70 3.22Net cash generation** 57.1 50.3 -------------------Effective fx rate ($/£) 1.98 1.84-------------------------------------------------------- (1) Equivalent to £279.9m at FY 2006 effective $/£ rate Current trading and prospects In the current uncertain macroeconomic environment, and at this early stage inthe year, we remain cautious on the outlook for the semiconductor industry for2008. Within ARM, we have continued to build on our market-leading position andconsequently we enter 2008 with the group order backlog at its highest everlevel, the physical IP business better positioned to capitalise on the long-termgrowth opportunity and good royalty revenue momentum based on the continuingproliferation of ARM technology into an ever-broader range of digital devices. Given this combination of a well-positioned business operating within uncertainindustry conditions, we expect dollar revenues in Q1 2008 to be broadly similarto Q4 2007 levels. Assuming no marked deterioration in the trading environment,we expect to increase dollar revenues in FY 2008 by at least the growth rateachieved in 2007. With the operating leverage inherent in ARM's business model,driven primarily by growth in high-margin royalty revenues, we expect constantcurrency earnings growth in FY 2008 to be significantly higher than revenuegrowth. CONTACTS: Fiona Laffan/Pavla Shaw Tim Score/Bruce BeckloffBrunswick ARM Holdings plc+44 (0)207 404 5959 +44 (0)1628 427800 * Normalised figures are based on US GAAP, adjusted for stock-based compensation charges, amortisation of intangible assets and other charges. For reconciliation of GAAP measures to normalised non-GAAP measures detailed in this document, see notes 7.1 to 7.27. ** Before dividends and share buybacks, net cash flows from share option exercises and acquisition consideration - see notes 7.14 to 7.18. *** Dollar revenues are based on the group's actual dollar invoicing, where applicable, and using the rate of exchange applicable on the date of the transaction for invoicing in currencies other than dollars. Approximately 95% of invoicing is in dollars. **** Each American Depositary Share (ADS) represents three shares. Financial review (US GAAP unless otherwise stated) Total revenues Total dollar revenues in Q4 2007 were $130.3 million, the same level as in Q42006. Sterling revenues of £64.3 million were down 5% year-on-year due to theweakening of the dollar against sterling ($2.02 in Q4 2007 compared to $1.92 inQ4 2006). At the Q4 2006 effective rate, Q4 2007 sterling revenues would havebeen £68.0 million. Full-year dollar revenues in 2007 were $514.3 million, up 6% on 2006. Full-yearsterling revenues were £259.2 million, down 2% on 2006 again due to theweakening of the dollar against the sterling for the full year ($1.98 in 2007compared to $1.84 in 2006). At the FY 2006 effective rate, FY 2007 sterlingrevenues would have been £279.9 million or 8% higher than actual reportedrevenue. License revenues Total dollar license revenues in Q4 2007 decreased by 11% to $49.2 million,representing 38% of group revenues, compared to $55.5 million in Q4 2006.License revenues comprised $38.4 million for PD and $10.8 million for PIPD. PD license revenues were up 3% versus Q4 2006 but down sequentially 11%. Thiswas primarily due to the signing of three subscription deals in Q4 where revenueis recognised rateably over the life of the license. These licenses represent amajor strategic commitment to ARM's existing and future technology portfolio bythree of the world's leading semiconductor companies. PIPD license revenues were down 15% sequentially, being impacted by internalrestructuring and productivity improvement activities to position this businessfor growth in 2008. See the PIPD section in the Operational Review below. Full-year dollar license revenues were $217.9 million, up 8% on 2006. Royalty revenues Total dollar royalty revenues in Q4 2007 were up 10% versus Q4 2006 and up 14%sequentially at $57.5 million, representing 44% of group revenues. Royaltyrevenues comprised $48.8 million for PD, a 15% sequential increase, and $8.7million for PIPD (including $0.3 million of "catch-up" royalties), a 9%sequential increase. Underlying royalties of $8.4 million for PIPD were up 9%sequentially, consistent with higher foundry utilisation levels. Full-year dollar royalty revenues were $208.8 million, up 5% on 2006. Development Systems and Service revenues Sales of development systems in Q4 2007 were up 10% versus Q4 2006 and up 26%sequentially to a record level of $15.5 million, representing 12% of grouprevenues. Although development systems revenues are predominantly generated fromturns business, Q4 revenue included one significant deal of a size that is notexpected to recur regularly. We, therefore, expect development systems revenuein Q1 2008 to be lower than that achieved in Q4 2007. Service revenues in Q4 2007 were down 2% year-on-year at $8.1 million,representing 6% of group revenues, compared to $8.3 million in Q4 2006. Full-year development systems revenues were $55.6 million, up 5% on 2006.Service revenues were up by 10% to $32.0 million. Gross margins Gross margins in Q4 2007, excluding stock-based compensation charges of £0.2million (see below), were 89.4% compared to 89.0% in Q4 2006. Full-year gross margins, excluding stock-based compensation charges of £1.0million, were 89.6% compared to 88.7% in 2006. Operating expenses and operating margin Total operating expenses in Q4 2007 were £46.8 million (Q4 2006: £52.4 million)including stock-based compensation charges of £3.0 million (Q4 2006: £5.8million) and amortisation of intangible assets and other charges of £6.6 million(Q4 2006: £5.8 million). The total stock-based compensation charges of £3.2million in Q4 2007 are included within cost of revenues (£0.2 million), researchand development (£1.9 million), sales and marketing (£0.6 million) and generaland administrative (£0.5 million). Normalised Q4 and full-year income statementsfor 2007 and 2006 are included in notes 7.24 to 7.27 below which reconcile USGAAP to the normalised non-GAAP measures referred to in this earnings release. Operating expenses (excluding stock-based compensation, amortisation ofintangible assets and other charges) in Q4 2007 were £37.2 million compared to£36.5 million in Q3 2007 and £40.8 million in Q4 2006, a 9% reduction versus theprevious year. Q4 operating expenses benefited from the regional re-balancing ofthe group's resources (see People section below) and general rigorous managementof costs. Normalised research and development expenses were £15.1 million in Q4 2007,representing 23% of revenues, compared to £14.8 million in Q3 2007 and £18.2million in Q4 2006. Normalised sales and marketing costs in Q4 2007 were £11.1million, representing 17% of revenues, compared to £10.3 million in Q3 2007 and£11.4 million in Q4 2006. Normalised general and administrative expenses in Q42007 were £11.1 million, representing 17% of revenues, compared to £11.4 millionin Q3 2007 and £11.2 million in Q4 2006. Normalised operating margin in Q4 2007 was 31.5% (7.1) compared to 31.8% (7.2)in Q3 2007 and 29.0% (7.3) in Q4 2006. At constant currencies, using the Q4 2006effective rate of $1.92/£1, the operating margin for Q4 2007 would have beenapproximately 33%. Full-year operating expenses for 2007 were £188.4 million, including stock-basedcompensation charges of £15.4 million and amortisation of intangible assets andother charges of £22.2 million. Excluding these charges, operating expenses forthe full year were £150.8 million, compared to £150.1 million in 2006, anincrease of 0.5%. Normalised operating margin in the full year 2007 was 31.4% (7.4) compared to31.7% (7.5) in 2006. At constant currencies, using the 2006 effective rate of$1.84/£1, the normalised operating margin for 2007 would have been approximately34%. Earnings and taxation Income before income tax in Q4 2007 was £11.5 million compared to £9.4 millionin Q4 2006. After adjusting for stock-based compensation, amortisation ofintangibles and other charges, normalised income before income tax in Q4 2007was £21.3 million (7.6) compared to £21.3 million (7.7) in Q4 2006. The group'seffective tax rate under US GAAP for the full-year 2007 was 23.6%, reflectingthe availability of research and development tax credits and taking into accountthe benefits arising from the structuring of the Artisan(R) acquisition. In Q4 2007, fully diluted earnings per share prepared under US GAAP were 0.74pence (4.41 cents per ADS****) compared to earnings per share of 0.87 pence(5.13 cents per ADS****) in Q4 2006. Normalised fully diluted earnings per sharein Q4 2007 were 1.25 pence (7.19) per share (7.48 cents per ADS****) compared to1.49 pence (7.21) (8.73 cents per ADS****) in Q4 2006. The decline in earningsper share for the comparable period was due primarily to a non-recurring taxcredit in Q4 2006 arising from a tax-deductible foreign exchange loss. Full-year 2007 fully diluted earnings per share prepared under US GAAP were 2.70pence (16.10 cents per ADS****) compared to earnings per share of 3.22 pence(18.88 cents per ADS****) in 2006. Normalised fully diluted earnings per sharefor 2007 were 4.67 pence (7.22) per share (27.89 cents per ADS****) compared to5.08 pence (7.23) (29.85 cents per ADS****) in 2006. Balance sheet Intangible assets at 31 December 2007 were £384.0 million, comprising goodwillof £344.6 million and other intangible assets of £39.4 million, compared to£336.0 million and £43.1 million respectively at 30 September 2007. Total accounts receivable were £68.2 million at 31 December 2007, comprising£43.7 million of trade receivables and £24.5 million of amounts recoverable oncontracts, compared to £65.0 million at 30 September 2007, comprising £37.6million of trade receivables and £27.4 million of amounts recoverable oncontracts. Days sales outstanding (DSOs) were 49 at 31 December 2007 compared to39 at 30 September 2007 and 43 at 31 December 2006. Cash flow, share buyback programme and 2007 final dividend Net cash at 31 December 2007 was £51.3 million, in line with previous guidance,compared to £99.3 million at 30 September 2007. Normalised cash generation in Q42007 was £10.5 million(7.14). During the quarter, £60.1 million of cash was returned to shareholders via thepurchase of 38 million ARM shares at a cost of £49.6 million and the payment ofthe interim dividend of £10.5 million. The directors recommend payment of a final dividend in respect of 2007 of 1.20pence per share, which taken together with the interim dividend of 0.80 penceper share paid in October 2007, gives a total dividend in respect of 2007 of 2.0pence per share, an increase of 100% on the total dividend of 1.0 pence pershare in 2006. Subject to shareholder approval, the final dividend will be paidon 21 May 2008 to shareholders on the register on 2 May 2008. At the start of 2007, ARM announced its intention to reduce its cash balance toapproximately £50 million by the year end. In achieving this level of net cash,we have returned a total of £147 million to shareholders via both an acceleratedshare buyback programme and a dividend at twice the level of 2006. Given ARM'smarket leadership position and increasingly strong cash flows as the benefits ofthe licensing and royalty model bear fruit, we remain focused on balance sheetefficiency. International Financial Reporting Standards (IFRS) ARM reports results quarterly in accordance with US GAAP. At 30 June and 31December each year, in addition to the US GAAP results, ARM is also required topublish results under IFRS. The operating and financial review commentaryincluded in this release on the US GAAP numbers is for the most part applicableto the IFRS numbers and, in particular, revenues, dividends and share buybacksare recorded in the same way under both sets of accounting rules. A summary ofthe accounting differences between IFRS and US GAAP and reconciliations of IFRSand US GAAP profit and shareholders' equity are set out in note 6 to thefinancial tables below. Operating review Backlog In Q4 ARM achieved its highest bookings quarter ever, growing the backlog morethan 30% sequentially. All divisions achieved higher backlog compared to Q3 withthe Processor Division up more than 50% resulting from the three subscriptionlicenses that were signed in Q4. The revenue from these subscription licenseswill be recognised rateably over the life of the subscription agreements. PD Licensing - Equipping the Leading Semiconductor Companies with ARM ProcessorIP 2007 saw even broader acceptance of our market-leading processor IP products bythe semiconductor industry. During the year we saw significant commitments bytier one semiconductor companies to our latest technology. We signed 14 furtherlicenses for CortexTM products, including 3 lead partners for thenext-generation Cortex-A9 processor, bringing the total number of Cortexlicenses to 37. This represents the fastest uptake of a microprocessor family inthe history of ARM. We were also very encouraged with the licensing activity ofour MaliTM 3D graphics technology, with the signing in Q4 of our fifth licensesince acquisition of that technology. Nine semiconductor companies are nowlicensed to design products using our graphics technology. The long-term commitment of our partners to ARM technology is further evidencedby the signing of 4 subscription licenses in 2007, 3 of which were signed in Q4.Of the original subscription licensees (NXP, ST and Samsung) all have renewedtheir long-term commitment to ARM technology. Further, in Q4 we signed a newsubscription license with a top five Japanese semiconductor company,significantly expanding the penetration of ARM technology into that region. Q4 2007 and Cumulative PD Licensing Analysis---------------------------------------------------------------------------- Multi-use Term Per-use -------------------------------------- Cumulative U D N U D N U D N Total Total----------------------------------------------------------------------------ARM7 1 1 2 153ARM9 3 2 1 6 239ARM11 3 1 1 1 6 64Cortex-M3 2 1 3 14Cortex-R4 10Cortex-A8 9Cortex-A9 4Mali 1 1 5Other 1 1 29---------------------------------------------------------------------------- Total 19 527----------------------------------------------------------------------------U: Upgrade D: Derivative N: New PD Royalties - Broadening the Usage of ARM Processor IP PD unit shipments in Q3 (our partners report royalties one quarter in arrears)increased 19% sequentially to a record 828 million units in the quarter. For thereported year, ARM partners shipped just under 3 billion units (2.9bn), up 18%on 2006 and are now at a run rate of approx 9 million units per day. We also reached a significant milestone in 2007 with our partners shipping the 10 billionth ARM microprocessor since ARM's inception in 1990. In the quarter, ARM9TM family shipments comprised 41% of total units, including20% relating to ARM926EJ-STM processor shipments. ARM11TM family shipments nowcomprise 2% of total shipments. In the quarter we received our first royaltiesfrom our Mali 3D graphics product and from the initial shipments of Cortexproducts. ARM unit shipments showed significant resilience in a year that was affected bythe industry-wide inventory correction which started in the second half of 2006.The proportion of shipments into the mobile and non-mobile segments during 2007remained broadly consistent with the proportion of mobile shipments edging upslightly in Q4 to 68%. The ARM content per phone continued to increase, reachingapproximately 1.7 cores per phone by year end. We continue to see strength in the embedded segment, rising to 13% of shipmentsin the quarter, in part due to the continued significant growth in MCU shipmentswith growth of 2.4x over 2006. MCUs are now the highest volume individualapplication after wireless handsets. PIPD Licensing - Extending the IP Outsourcing Model to ARM Physical IP PIPD signed a further 21 licenses in Q4, mostly for earlier generationtechnology. In the quarter, a further three IDMs (including one top 10semiconductor company) signed physical IP licenses, demonstrating the growingappetite for IDMs to complement their in-house physical IP development withoutsourced physical IP from ARM. This brings the total number of license dealswith IDMs to 7 in 2007. Although 2007 has been a challenging year for revenue, we made progress inpositioning the business for growth in 2008 and beyond. In 2007, we continued tofocus on the acceleration of the physical IP roadmap to includeleadership-standard, leading-edge physical IP. In 2007, we signed an additionalthree 45nm licenses, of which one was for our SOI technology, and ten 65nmlicenses. Of the 202 licenses signed since the acquisition of Artisan, 42licenses have been signed for technology that ARM has developed since theacquisition. As the business transitions from technology catch-up to a more business-as-usualstate for development of leading-edge technology, there is increased focus onimprovement in internal processes to drive increased productivity, betterresource management and improved product delivery to customers. In order toenable our partners to create the best physical implementations of their designsand for ARM to continue to be the industry leader in physical IP, we arestriving to ensure that PIPD is a leader in technology development, on-timedelivery, customer satisfaction and engineering efficiency. Simon Segars becamethe General Manager of PIPD in September 2007 to accelerate these activities.Simon joined ARM in 1991 and has been a member of the Board since 2004. He haspreviously held a number of positions fundamental to ARM's development,including VP of Engineering, EVP of Sales and EVP of Business Development. Enhanced engineering efficiency is being realised through the reorganisation ofthe business into dedicated design centres to align better the skill sets ofeach centre with the challenges of developing leading-edge technology as well asto define better the accountabilities and tasks of each engineering team. Thisreorganisation has resulted in the elimination in Q1 2008 of approximately 30positions within our Sunnyvale, CA facility as we align its skill base with theneeds of the organisation going forward. In order to capture the specific growth opportunities we see as we enter 2008,we are further focusing the business to concentrate on the high volume,mass-market opportunity represented by the traditional Artisan free librarybusiness model and on the high-value business of licensing physical IP to IDMsand large fabless customers, both for earlier generation and leading-edgetechnology. We have already achieved considerable success, having licensed theleading foundries through to the 45nm process node and having signed a further 7IDM licenses in 2007. In 2008, we expect growth to be generated from furtherpenetration of the foundries with ARM technology; expanding the number oflicenses to IDMs and large fabless customers for earlier generation technologyand securing the initial licenses for leading-edge physical IP technology withIDM and large fabless customers. Additionally, the research and development teams in PD and PIPD will continue tofocus on enabling our partners to create highly optimised physicalimplementations of their ARM processors, utilising processor-specific physicalIP. Q4 2007 and Cumulative PIPD Licensing Analysis------------------------------------------------------------------------------ Process Node Total (nm)------------------------------------------------------------------------------Platform Licenses ClassicTM 180 3 AdvantageTM 90 2------------------------------------------------------------------------------Standard Cell Libraries Advantage 90 1 MetroTM 180 3Memory Compilers Classic 180/130 4 Advantage 90 2 Metro 180 1VelocityTM PHYs 65 4------------------------------------------------------------------------------SOI Licenses 45 1------------------------------------------------------------------------------ Quarter Total 21------------------------------------------------------------------------------ Cumulative Total 350------------------------------------------------------------------------------ PIPD Royalties - Broadening the Usage of ARM Physical IP Underlying PIPD royalties were strong in Q4 2007, increasing 9% sequentially.ARM continued to expand market share in Q3 (our foundry partners reportroyalties one quarter in arrears) as underlying royalties were up by more thanthe improvement in utilisation rates at the foundries for earlier generationstechnology nodes, where ARM currently earns the majority of its royalties. People At 31 December 2007, ARM had 1,728 full-time employees, a net increase of 69 inthe year. Year-to-date headcount has increased by 89 in India with a netreduction of 20 in other regions, illustrating the ongoing regional re-balancingof ARM's resources. At the end of Q4, the group had 650 employees based in theUK, 523 in the US, 190 in Continental Europe, 292 in India and 73 in the AsiaPacific region. Legal matters ARM is involved in ongoing litigation proceedings with Nazomi Communications,Inc. and Technology Properties Limited, Inc. In both cases, a district court hasfound in favour of ARM and both cases are now pending before the Court ofAppeals for the Federal Circuit. Details are set out in the 2006 Annual Reporton Form 20-F filed with the Securities and Exchange Commission on 11 April 2007.Based on independent legal advice, ARM does not expect any significant liabilityto arise in respect of these proceedings. ARM Holdings plc Fourth Quarter and Annual Results - US GAAP Quarter Quarter Year Year ended ended ended ended 31 December 31 December 31 December 31 December 2007 2006 2007 2006 Unaudited Unaudited Unaudited Audited --------- --------- --------- --------- £'000 £'000 £'000 £'000RevenuesProduct revenues 60,297 63,582 242,726 247,194Service revenues 4,046 4,462 16,434 16,060 --------- --------- --------- ---------Total revenues 64,343 68,044 259,160 263,254 --------- --------- --------- --------- Cost of revenuesProduct costs (5,412) (5,933) (21,475) (24,156)Service costs (1,618) (1,946) (6,483) (6,721) --------- --------- --------- ---------Total cost of revenues (7,030) (7,879) (27,958) (30,877) --------- --------- --------- --------- --------- --------- --------- ---------Gross profit 57,313 60,165 231,202 232,377 --------- --------- --------- --------- Research anddevelopment (17,753) (22,868) (72,744) (75,498)Sales and marketing (11,786) (12,638) (46,393) (44,198)General and administrative (12,757) (12,189) (49,964) (48,643)Restructuring costs (138) - (1,037) -In-process research and development - - - (595) --------- --------- ---------Amortization ofintangibles purchasedthrough business combination (4,397) (4,700) (18,226) (18,423) --------- --------- --------- ---------Total operating expenses (46,831) (52,395) (188,364) (187,357) --------- --------- --------- --------- Income from operations 10,482 7,770 42,838 45,020Interest, net 1,047 1,581 5,402 6,758Profit on disposal ofavailable-for-saleinvestment - - - 5,270 --------- --------- --------- ---------Income before incometax and cumulativeeffect of change inaccounting policy 11,529 9,351 48,240 57,048Provision for income taxes (1,670) 2,712 (11,398) (9,438) --------- --------- --------- ---------Net income beforecumulative effect ofchange in accountingpolicy 9,859 12,063 36,842 47,610Cumulative effect ofchange in accountingpolicy, net of tax - - - (2,447) --------- --------- --------- ---------Net income 9,859 12,063 36,842 45,163 --------- --------- --------- --------- Earnings per share (assumingdilution)Shares outstanding ('000) 1,335,144 1,380,581 1,366,384 1,404,751Earnings per share - pence 0.7 0.9 2.7 3.2 Earnings per ADS (assumingdilution)ADSs outstanding('000) 445,048 460,194 455,461 468,250Earnings per ADS - cents 4.4 5.1 16.1 18.9 ARM Holdings plc Consolidated balance sheet - US GAAP 31 December 31 December 2007 2006 Unaudited Audited ----------- ----------- £'000 £'000Assets Current assets: Cash and cash equivalents 49,509 90,743 Short-term investments 232 18,600 Marketable securities 1,582 19,151 Accounts receivable, net of allowance of £1,503,000 in 2007 and £2,556,000 in 2006 68,232 69,552 Inventory: finished goods 2,339 1,933 Income taxes receivable 6,552 5,761 Prepaid expenses and other assets 13,089 12,668 ----------- ----------- Total current assets 141,535 218,408 Deferred income taxes 11,309 9,872 Prepaid expenses and other assets 2,860 1,328 Property and equipment, net 12,042 13,970 Goodwill 344,663 349,243 Other intangible assets 39,375 56,027 Investments 4,881 3,855 ----------- ----------- Total assets 556,665 652,703 ----------- ----------- Liabilities and shareholders' equity Accounts payable 2,230 1,826 Income taxes payable 3,704 5,572 Personnel taxes 1,751 1,408 Accrued liabilities 25,670 33,021 Deferred revenue 27,543 31,485 ----------- ----------- Total current liabilities 60,898 73,312 Deferred income taxes 2,027 4,744 ----------- ----------- Total liabilities 62,925 78,056 ----------- ----------- Shareholders' equity Ordinary shares 672 695 Additional paid-in capital 367,680 446,005 Treasury stock, at cost (90,000) (58,245) Retained earnings 234,455 197,874 Accumulated other comprehensive income: Unrealized holding gain/(loss) on available-for-sale securities, net of tax asset of £85,000 (2006: £231,000) (214) 394 Cumulative translation adjustment (18,853) (12,076) ----------- ----------- Total shareholders' equity 493,740 574,647 ----------- ----------- Total liabilities and shareholders' equity 556,665 652,703 ----------- ----------- ARM Holdings plc Consolidated income statement - IFRS Year Year ended ended 31 December 31 December 2007 2006 Unaudited Unaudited ---------- ---------- £'000 £'000 (restated)Revenues Product revenues 242,726 247,194 Service revenues 16,434 16,060 ---------- ----------Total revenues 259,160 263,254 ---------- ---------- Cost of revenues Product costs (21,475) (24,156) Service costs (see note 2) (6,630) (6,721) ---------- ----------Total cost of revenues (28,105) (30,877) ---------- ---------- ---------- ----------Gross profit 231,055 232,377 ---------- ---------- Operating expenses Research and development (see note 2) (83,977) (84,884) Sales and marketing (see note 2) (55,298) (53,291) General and administrative (see note 2) (52,086) (50,224) Profit on disposal of available-for-sale security - 5,270 ---------- ----------Total net operating expenses (191,361) (183,129) ---------- ---------- ---------- ----------Profit from operations 39,694 49,248Investment income 5,459 6,758Interest payable (57) - ---------- ----------Profit before tax 45,096 56,006Tax* (9,846) (7,850) ---------- ----------Profit for the period 35,250 48,156 ---------- ---------- Dividends - final 2005 paid (on 5 May 2006) at 0.5 pence per share - 6,918 - interim 2006 paid (on 6 October 2006) at 0.4 pence per share - 5,449 - final 2006 paid (on 21 May 2007) at 0.6 pence per share 8,013 - - interim 2007 paid (on 5 October 2007) at 0.8 pence per share 10,534 - Earnings per shareBasic and diluted earnings 35,250 48,156 Number of shares ('000)Basic weighted average number of shares 1,321,860 1,366,816Effect of dilutive securities 39,301 35,145Diluted weighted average number of shares 1,361,161 1,401,961 Basic EPS 2.7p 3.5pDiluted EPS 2.6p 3.4p All activities relate to continuing operations. All of the profit for the period is attributable to the equity shareholders ofthe parent. * Tax comprises £12.4m (2006: £7.1m) of UK taxation and a credit of £2.6m (2006:a charge of £0.7m) of overseas taxation. ARM Holdings plc Consolidated balance sheet - IFRS 31 December 31 December 2007 2006 Unaudited Unaudited ---------- ---------- £'000 £'000 (restated)AssetsCurrent assets:Cash and cash equivalents 49,509 90,743Financial assets: Short-term investments 232 18,600 Short-term marketable securities 1,582 19,151 Fair value of currency exchange contracts - 439Accounts receivable 68,232 69,552Prepaid expenses and other assets 13,089 12,229Current tax assets 6,552 5,761Inventories: finished goods 2,339 1,933 ---------- ----------Total current assets 141,535 218,408 ---------- ---------- Non-current assets:Financial assets: Available-for-saleinvestments 4,881 3,855Prepaid expenses and other assets 2,860 1,328Property, plant and equipment 9,336 10,296Goodwill 420,835 427,679Other intangible assets 44,264 62,913Deferred tax assets 19,233 19,708 ---------- ----------Total non-current assets 501,409 525,779 ---------- ---------- ---------- ----------Total assets 642,944 744,187 ---------- ---------- Liabilities and shareholders' equityCurrent liabilities:Accounts payable 2,230 1,826Current tax liabilities 3,704 5,572Accrued and other liabilities 28,174 39,586Financial liabilities: Fair value of currencyexchange contracts 496 -Deferred revenue 27,543 31,485 ---------- ----------Total current liabilities 62,147 78,469 ---------- ---------- ---------- ----------Net current assets 79,388 139,939 ---------- ---------- Non-current liabilities:Deferred tax liabilities 1,635 4,792 ---------- ----------Total liabilities 63,782 83,261 ---------- ---------- ---------- ----------Net assets 579,162 660,926 ---------- ---------- Capital and reserves attributable to equity holders ofthe CompanyShare capital 672 695Share premium account 351,578 449,195Share option reserve 61,474 61,474Retained earnings 185,125 161,453Revaluation reserve (214) (544)Cumulative translation adjustment (19,473) (11,347) ---------- ----------Total equity 579,162 660,926 ---------- ---------- ARM Holdings plc Consolidated statement of changes in shareholders' equity - IFRS Share Share Reval- Cumulative Share premium option Retained uation translation capital account reserve earnings reserve adjustment TotalUnaudited £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2007 (as reported) 695 449,195 61,474 163,731 (544) (11,347) 663,204Restatement - - - (2,278) - - (2,278)-------------------- ------ -------- ------ -------- ------ -------- --------At 1 January 2007 (as restated) 695 449,195 61,474 161,453 (544) (11,347) 660,926Dividends - - - (18,547) - - (18,547)Movement on tax arising on share options - - - 2,212 - - 2,212Purchase of own shares - - - (120,419) - - (120,419)Appropriation for futurecancellation of shares - - - (8,142) - - (8,142)Cancellation of shares (28) - - 28 - - -Cancellation of sharepremium account - (103,121) - 103,121 - - -Proceeds from sale of own shares - - - 13,383 - - 13,383Unrealised holding losses on available-for-sale investments (net ofdeferred tax of £146,000) - - - - 330 - 330Currency translationadjustment - - - - - (8,126) (8,126)-------------------- ------ -------- ------ -------- ------ -------- --------Total expense recogniseddirectly in equity on 2007 (28) (103,121) - (28,364) 330 (8,126) (139,309)Shares issued on exercise of options 5 5,504 - - - - 5,509Profit for the year - - - 35,250 - - 35,250Credit in respect ofemployee share schemes - - - 16,786 - - 16,786-------------------- ------ -------- ------ -------- ------ -------- --------At 31 December 2007 672 351,578 61,474 185,125 (214) (19,473) 579,162-------------------- ------ -------- ------ -------- ------ -------- -------- ARM Holdings plc Consolidated cash flow statement - IFRS Year Year ended ended 31 December 31 December 2007 2006 Unaudited Unaudited --------- --------- £'000 £'000 (restated)Operating activitiesProfit from operations 39,694 49,248Depreciation and amortisation of tangible andintangible assets 26,907 26,726Profit on disposal of available-for-sale security - (5,270)Loss on disposal of property, plant and equipment 319 63Compensation charge in respect of share-based payments 16,786 17,437Impairment of investments 2,100 -Provision for doubtful debts 215 932Provision for obsolescence of inventory 247 65Changes in working capital:Accounts receivable 260 (18,986)Inventories (653) (508)Prepaid expenses and other assets (3,291) 1,015Fair value of currency exchange contracts 935 (2,147)Accounts payable 404 (672)Deferred revenue (3,877) 11,071Accrued and other liabilities (7,954) 5,373 --------- ---------Cash generated by operations before tax 72,092 84,347Income taxes paid (12,265) (21,147) --------- ---------Net cash from operating activities 59,827 63,200 --------- --------- Investing activitiesInterest received 5,607 6,636Purchases of property, plant and equipment (4,664) (7,189)Proceeds on disposal of property, plant and equipment - 31Purchases of other intangible assets (3,332) (1,370)Purchases of available-for-sale investments (2,657) (165)Proceeds on disposal of available-for-sale investments - 5,567(Purchase) / maturity of short-term investments 35,937 (4,926)Purchases of subsidiaries, net of cash acquired (3,357) (17,270) --------- ---------Net cash from / (used in) investing activities 27,534 (18,686) --------- --------- Financing activitiesIssue of shares 5,509 2,106Proceeds received on issuance of shares from treasury 13,383 15,754Purchase of own shares (128,561) (76,519)Dividends paid to shareholders (18,547) (12,367) --------- ---------Net cash used in financing activities (128,216) (71,026) --------- --------- Net increase / (decrease) in cash and cash equivalents (40,855) (26,512)Cash and cash equivalents at beginning of period 90,743 128,077Effect of foreign exchange rate changes (379) (10,822) --------- ---------Cash and cash equivalents at end of period 49,509 90,743 --------- --------- Notes to the Financial Information (1) Basis of preparation US GAAP The financial information prepared in accordance with the Company's US GAAPaccounting policies comprises the consolidated balance sheets as of 31 December2007 and 31 December 2006 and related income statements for the periods thenended, together with related notes. In preparing this financial informationmanagement has used the principal accounting policies as set out in theCompany's annual financial statements and Form 20-F for the year ended 31December 2006, except in relation to accounting for sabbatical leave followingthe adoption of EITF 06-2 on 1 January 2007, whereby the related costs are nowaccrued over the requisite service period, and in relation to accounting forprovisioning for uncertain tax positions following the adoption of FIN 48 on 1 January 2007. International Financial Reporting Standards The financial information prepared in accordance with the Group's IFRSaccounting policies comprises the consolidated balance sheets as of 31 December2007 and 31 December 2006 and related consolidated statements of income, changesin shareholders' equity and cash flows for the periods then ended, together withrelated notes. This financial information has been prepared in accordance withthe Listing Rules of the Financial Services Authority. In preparing thisfinancial information management has used the principal accounting policies asset out in the Group's annual financial statements for the year ended 31December 2006. The 2006 results have been restated to harmonize the Group'streatment of accounting for provisions for sabbatical leave under IFRS and USGAAP following the adoption of EITF 06-2 under US GAAP. This has resulted inshareholders' equity at 31 December 2006 being reduced by £2.3 million and theprofit for the year ended 31 December 2006 reducing by £0.4 million. (2) Share-based compensation charges and acquisition-related expenses Included within the US GAAP income statement for the quarter ended 31 December2007 are share-based compensation charges of £3.1 million: £0.2 million in costof revenues, £1.8 million in research and development costs, £0.6 million insales and marketing costs and £0.5 million in general and administrative costs.Included within the US GAAP income statement for the year ended 31 December 2007are share-based compensation charges of £16.0 million: £1.0 million in cost ofrevenues, £9.3 million in research and development costs, £3.2 million in salesand marketing costs and £2.5 million in general and administrative costs. Included within the IFRS income statement for the year ended 31 December 2007are total share-based payment costs of £16.8 million (2006: £17.4 million),allocated £1.0 million (2006: £1.0 million) in cost of revenues, £9.7 million(2006: £10.1 million) in research and development costs, £3.4 million (2006:£3.5 million) in sales and marketing costs and £2.7 million (2006: £2.8 million)in general and administrative costs. Also included within IFRS operating costs for year ended 31 December 2007 isamortization of intangibles of £19.2 million (2006: £19.3 million), allocated£10.0 million (2006: £9.5 million) in research and development costs, £8.5million (2006: £9.1 million) in sales and marketing costs and £0.7 million(2006: £0.7 million) in general and administrative costs. (3) Accounts receivable Included within accounts receivable at 31 December 2007 are £24.5 million (2006:£23.8 million) of amounts recoverable on contracts. (4) Consolidated statement of changes in shareholders' equity (US GAAP) Share capital Additional Treasury stock Retained Unrealized Cumulative paid-in capital earnings holding translation £'000 gain/(loss) adjustment Total £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2007 695 446,005 (58,245) 197,874 394 (12,076) 574,647Shares issued on exercise of options 5 5,504 - - - - 5,509Net income - - - 36,842 - - 36,842Dividends - - - (18,547) - - (18,547)Cumulative effect as aresult of adopting EITF06-2, net of tax* - - - (2,278) - - (2,278)First-time adoption ofFIN48 - - - 838 - - 838Tax effect of optionexercises - 2,546 - - - - 2,546Amortization of deferred compensation - 15,350 - - - - 15,350Conversion of liabilityaward to equity award - 1,396 - - - - 1,396Issuance of shares fromtreasury - - 30,767 (17,384) - - 13,383Purchase of own shares - - (128,561) - - - (128,561)Cancellation of shares (28) - 66,039 (66,011) - - -Cancellation of sharepremium account - (103,121) - 103,121 - - -Other comprehensive income: Unrealized holding losses onavailable-for-sale securities (net of tax benefit of£146,000) - - - - (608) - (608)Currency translation adjustment - - - - - (6,777) (6,777)------------------ ------- ------- ------- ------- ------- -------- -------At 31 December 2007 672 367,680 (90,000) 234,455 (214) (18,853) 493,740------------------ ------- ------- ------- ------- ------- -------- ------- * In accordance with EITF 06-2, the cumulative provision for employee sabbaticalleave as at 1 January 2007 is charged directly to retained earnings (5) Consolidated statement of comprehensive income (US GAAP) Q4 2007 Q4 2006 FY 2007 FY 2006 £'000 £'000 £'000 £'000 Net income 9,859 12,063 36,842 45,163Realized gain onavailable-for-sale security, net of tax - - - (2,375)Unrealized holdings gains /(losses) on available-for-sale security, net of tax 237 (156) (608) (1,090)Currency translation adjustment 10,543 (25,290) (6,777) (68,128)--------------------------- ------- ------- ------- ------- -------Total comprehensive income/(loss) 20,639 (13,383) 29,457 (26,430)--------------------------- ------- ------- ------- ------- ------- (6) Summary of significant differences between US GAAP and IFRS Goodwill Under both IFRS and US GAAP, goodwill is not subject to amortisation,but is tested at least annually for impairment. As permitted by IFRS 1, theCompany's goodwill under IFRS has been frozen at the amount recorded under UKGAAP as at 1 January 2004. Under US GAAP, following the provisions of SFAS 142,"Goodwill and other intangible assets", the carrying value of goodwill wasfrozen at the amount recorded under previous US GAAP as at 1 January 2002. Underboth previous US GAAP and UK GAAP, goodwill was amortised over its usefuleconomic life. Thus, while ongoing accounting policies in respect of goodwillare similar under US GAAP and IFRS, the difference in the dates of transitionmeans that different amounts of goodwill are recorded. Under US GAAP, certain costs to be incurred on restructuring on businesscombination are treated as a fair value adjustment in the balance sheetacquired. Under IFRS, these costs are expensed post-acquisition. Additionally,under US GAAP, tax benefits arising from the exercise of options issued as partof the consideration for a business combination become a deduction to goodwill,only to the extent that those benefits do not exceed the fair value of theconsideration relating to those options at the appropriate tax rate. Any excesstax benefits are a deduction to equity. Under IFRS, the full tax benefit is adeduction to equity. Where provisional assessments of the fair values of assets and liabilitiesacquired on acquisition are refined, adjustments to fair values are recorded asprior year adjustments to goodwill under IFRS. Under US GAAP, such revisions arerecorded as amendments to goodwill in the subsequent year. Recognition and amortisation of intangibles The Company has taken advantage ofthe exemption under IFRS 1 not to apply IFRS retrospectively to businesscombinations occurring before 1 January 2004. This means that for businesscombinations occurring before this date, the previously reported UK GAAPtreatment has continued to be followed. Under previous UK GAAP, intangibleassets were recognised separately from goodwill only where they could be soldseparately without disposing of a business of the entity. This separabilitycriterion does not apply under either IFRS or US GAAP. Thus, a number ofintangible assets which are required to be recognised separately from goodwillunder both IFRS 3 and SFAS 142, were subsumed within goodwill under UK GAAP.Under both US GAAP and IFRS, such intangible assets are amortised over theiruseful economic lives. Except in relation to in-process research and development(see below), there is no difference in accounting policy for intangible assetsrecognised as a result of business combinations entered into after 1 January2004. In-process research and development Under IFRS, in-process research anddevelopment projects purchased as part of a business combination may meet thecriteria set out in IAS 38, "Intangible assets", for recognition as intangibleassets other than goodwill and are amortised over their useful economic livescommencing when the asset is brought into use. Under US GAAP, in-processresearch and development is immediately written-off to the income statement.This accounting policy difference gives rise to an associated difference indeferred tax. Valuation of consideration on business combination Under both IFRS and US GAAP,the fair value of consideration in a business combination includes the fairvalue of both equity issued and any share options granted as part of thatcombination. Under IFRS, any equity issued is valued at the fair value as of thedate of completion, whilst under US GAAP, the equity is valued at the date theterms of the combination were agreed to and announced. For options, under USGAAP, the fair value is based upon the total number of options granted, bothvested and unvested, whilst under IFRS the fair value only includes those thathave vested, together with a pro-rata value for partially vested options.Furthermore, where there is contingent consideration for an acquisition, underIFRS this is recognised as part of the purchase consideration if the contingentconditions are expected to be satisfied, whilst under US GAAP it is onlyrecognised if the conditions have actually been met, other than to the extentnecessary to eliminate any potential negative goodwill under US GAAP. Deferred compensation Under US GAAP, the intrinsic value of unvested stockoptions issued by an acquirer as part of a business combination in exchange forunvested share options of the acquiree is recorded as a debit balance withinshareholders' funds. This amount is charged to the income statement over thevesting period of the share options in accordance with FIN 28. Under IFRS, nosuch adjustment to shareholders' funds is made on acquisition. In accordancewith FAS No. 123 (revised 2004) (FAS 123(R)), "Share-based payment", theunamortised balance has been transferred to additional paid-in capital. Compensation charge in respect of share-based payments The Company issuesequity-settled share-based payments to certain employees. In accordance withIFRS 2, equity-settled share-based payments are measured at fair value at thedate of grant, using the Black-Scholes pricing model. The fair value, determinedat the grant date of the equity-settled share-based payments, is expensed on astraight-line basis over the vesting period, based on the Company's estimate ofthe number of shares that will eventually vest. Under US GAAP, the Company also expenses share-based payments, includingemployee stock-options, based on their fair value in accordance with FAS 123(R).Some awards made by the Company are liability-classified awards under FAS 123(R)as either: (i) there is an obligation to settle a fixed monetary amount in avariable number of shares; or (ii) the award is indexed to a factor other thanperformance, market or service condition. The fair value of these awards isremeasured at each period end until the award has vested. Once the award hasvested, or for (i) above when number of shares becomes fixed, the award becomesequity-classified. Deferred tax on UK and US share options In the US and the UK, the Company isentitled to a tax deduction for the amount treated as employee compensationunder US and UK tax rules on exercise of certain employee share options. Thecompensation is equivalent to the difference between the option exercise priceand the fair market value of the shares at the date of exercise. Under IFRS, deferred tax assets are recognised and are calculated by comparingthe estimated amount of tax deduction to be obtained in the future (based on theCompany's share price at the balance sheet date) with the cumulative amount ofcompensation expense recorded in the income statement. If the amount ofestimated future tax deduction exceeds the cumulative amount of compensationexpense at the statutory tax rate, the excess is recorded directly in equity,against retained earnings. In accordance with the transitional provisions ofIFRS 2, no compensation charge is recorded in respect of options granted before7 November 2002 or in respect of those options which have been exercised or havelapsed before 31 December 2004. Nevertheless, tax deductions have arisen andwill continue to arise on these options. The tax effects arising in relation tothese options are recorded directly in equity, against retained earnings. Under US GAAP, deferred tax assets are recognised by multiplying thecompensation expense recorded by the prevailing tax rate in the relevant taxjurisdiction. Where, on exercise of the relevant option, the tax benefitobtained exceeds the deferred tax asset in relation to the relevant options, theexcess is recorded in additional paid-in capital. Where the tax benefit is lessthan the deferred tax asset, the write-down of the deferred tax asset isrecorded against additional paid-in capital to the extent of previous excess taxbenefits recorded in this account, with any remainder recorded in the incomestatement. Employer taxes on share-based remuneration Under IFRS, employer's taxes that arepayable on the exercise or vesting of share-based remuneration are provided forover the vesting period of the related option or award. Under US GAAP, suchtaxes are accounted for when the option or award is exercised or vestsrespectively. Accrued legal costs Under IFRS, future legal fees that the Company is expectingto incur on current cases are accrued when the obligating event giving rise tothe legal costs has occurred. Under US GAAP, such costs are charged to theincome statement in the period in which the costs are incurred. Sabbatical leave The Company has adopted EITF 06-2 from 1 January 2007 inaccounting for its provisions for employee sabbatical leave. To harmonize theaccounting treatment under both GAAPs, the Company has also provided forsabbatical leave under IFRS. EITF 06-2 requires the opening provision at thebeginning of the year to be charged directly to reserves, whilst under IFRS, theprior year results have been restated. FIN48 adoption On 1 January 2007, the Company adopted FIN 48, "Accounting forUncertainty in Income Taxes". Under US GAAP, the transitional changes inprovisions are charged against retained earnings. Available-for-sale investment impairment Accounting for impairments toavailable-for-sale investments is similar under both US GAAP and IFRS. However,because the relevant standards were applied to different accounting periods, aninvestment which was deemed to have suffered an other-than-temporary impairmentin a prior period under US GAAP (with a corresponding charge being recognized inthe income statement) was accounted for as a temporary impairment under IFRS(with the corresponding charge being recognized directly in reserves). In 2007,a further other-than-temporary impairment was made under both GAAPs with theresult that the cumulative other-than-temporary impairments are now equal.Consequently a greater charge was made through the current year IFRS incomestatement, as the current year charge under IFRS includes the amount previouslydeemed to be temporary under IFRS but other-than-temporary under US GAAP. Reconciliation of IFRS profit to US GAAP net income Year Year ended ended 31 December 31 December 2007 2006 Unaudited Unaudited --------- --------- £'000 £'000 (restated) Profit for financial period as reported under IFRS 35,250 48,156Adjustments for:Amortisation of intangibles 969 914Write-off of in-process research and development - (595)Deduct : US GAAP compensation charge in respect ofall share-based payments (15,979) (21,787)Add: IFRS compensation charge in respect of allshare-based payments 16,786 17,437Employer's taxes on share-based remuneration 855 8Provision for legal costs, net of tax (609) 715Provisions against available-for-sale investment 938 -Foreign exchange on contingent consideration 61 (104)Provision for sabbatical leave, net of tax - 432Tax on UK and US share options (3,708) (2,204)Tax difference on amortisation of intangibles (400) (378)Tax difference on share-based remuneration 3,517 2,569Other tax differences (838) - --------- ---------Net income as reported under US GAAP 36,842 45,163 --------- --------- Reconciliation of shareholders' equity from IFRS 31 December 31 Decemberto US GAAP 2007 2006 Unaudited Unaudited --------- --------- £'000 £'000 (restated) Shareholders' equity as reported under IFRS 579,162 660,926Adjustments for:Employer's taxes on share-based remuneration 1,277 38Utilisation of restructuring provision 1,368 1,368Provision for legal costs, net of tax 106 715Liability-classified share awards (1,649) (2,416)Provision for sabbatical leave, net of tax - 2,278Cumulative difference on amortisation of goodwill 2,713 2,713Cumulative difference on amortisation ofintangibles 2,324 1,355Cumulative write-off of in-process research anddevelopment (4,692) (4,692)Cumulative difference on deferred tax (1,426) (642)Valuation of equity consideration on acquisition (82,435) (82,435)Valuation of option consideration on acquisition 17,476 17,476Deferred compensation on acquisition (9,579) (9,579)Deferred tax on share-based payments (8,768) (8,911)Portion of tax benefit arising on exercise ofoptions issued on acquisition taken to goodwillunder US GAAP (4,844) (4,844)Foreign exchange on valuation of intangible assetsand deferred tax 2,707 1,358Foreign exchange on valuation of contingentconsideration - (61) --------- ---------Shareholders' equity as reported under US GAAP 493,740 574,647 --------- --------- Reconciliation of goodwill from IFRS to US GAAP 31 December 31 December 2007 2006 Unaudited Unaudited --------- --------- £'000 £'000 Goodwill as reported under IFRS 420,835 427,679Adjustments for:Amendments to provisional fair values 687Valuation of restructuring provision on acquisition 1,235 1,235Cumulative difference on amortisation of goodwill 2,713 2,713Cumulative write-off of in-process research anddevelopment (150) (150)Separately identifiable intangible assets (302) (302)Deferred tax on capitalised in-process research and development (1,570) (1,570)Portion of tax benefit arising on exercise ofoptions issued on acquisition taken to goodwill under US GAAP (4,248) (4,248)Valuation of equity consideration on acquisition (82,435) (82,435)Valuation of option consideration on acquisition 17,476 17,476Deferred compensation on acquisition (9,579) (9,579)Contingent consideration (1,339) (3,117)Foreign exchange on revaluation of goodwill 2,027 854 --------- ---------Goodwill as reported under US GAAP 344,663 349,243 --------- --------- (7) 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 excludeacquisition-related charges, stock-based compensation and restructuring chargesand profit on disposal and impairment of available-for-sale investments. Allfigures in £'000 unless otherwise stated. (7.1) (7.2) (7.3) (7.4) (7.5) Q4 2007 Q3 2007 Q4 2006 FY 2007 FY 2006 Income from operations (USGAAP) 10,482 10,612 7,770 42,838 45,020Restructuring costs 138 85 - 1,037 -Acquisition-related charge -amortization of intangibles 4,397 4,562 4,700 18,226 19,018Acquisition-related charge -other payments 857 272 1,057 1,735 1,057Stock-based compensation andrelated payroll taxes 3,230 4,432 6,177 16,341 18,292Impairment of available-for-sale security 1,162 - - 1,162 ---------------------------- ------- ------- ------- ------- -------Normalised income fromoperations 20,266 19,963 19,704 81,339 83,387--------------------------- ------- ------- ------- ------- -------As % of revenue 31.5% 31.8% 29.0% 31.4% 31.7% (7.6) (7.7) (7.8) (7.9) (7.10) Q4 2007 Q3 2007 Q4 2006 FY 2007 FY 2006 Income before income tax (USGAAP) 11,529 11,990 9,351 48,240 57,048Restructuring costs 138 85 - 1,037 -Acquisition-related charge -amortization of intangibles 4,397 4,562 4,700 18,226 19,018Acquisition-related charge -other payments 857 272 1,057 1,735 1,057Stock-based compensation andrelated payroll taxes 3,230 4,432 6,177 16,341 18,292Impairment of available-for-saleinvestment 1,162 - - 1,162 -Profit on sale of available-for-sale investment - - - - (5,270)--------------------------- ------- ------- ------- ------- -------Normalised income beforeincome tax 21,313 21,341 21,285 86,741 90,145--------------------------- ------- ------- ------- ------- ------- (7.11) (7.12) (7.13) 31 December 30 September 31 December 2007 2007 2006 Cash and cash equivalents 49,509 90,291 90,743Short-term investments 232 232 18,600Short-term marketable securities 1,582 8,761 19,151--------------------------- -------- -------- --------Net cash 51,323 99,284 128,494--------------------------- -------- -------- -------- (7.14) (7.15) (7.16) (7.17) (7.18) Q4 2007 Q3 2007 Q4 2006 FY 2007 FY 2006 Net cash at end ofperiod (as above) 51,323 99,284 128,494 51,323 128,494Less: Net cash atbeginning of period (99,284) (108,938) (147,419) (128,494) (160,902)Add back: Cash outflow fromacquisitions (net of cash acquired) 100 2,607 3,305 6,014 17,270Add back: Cash outflow frompayment of dividends 10,534 - 5,449 18,547 12,367Add back: Cash outflow frompurchase of own shares 49,568 33,257 25,840 128,561 76,519Less: Cash inflow from exercise of share options (1,740) (5,157) (2,349) (18,892) (17,860)Less: Cash inflow from saleof available-for-saleinvestments - - - - (5,567)--------------------------- ------- ------- ------- ------- -------Normalised cash generation 10,501 21,053 13,320 57,059 50,321--------------------------- ------- ------- ------- ------- ------- (7.19) (7.20) (7.21) (7.22) (7.23) Q4 2007 Q3 2007 Q4 2006 FY 2007 FY 2006 Net income (US GAAP) 9,859 8,559 12,063 36,842 45,163Restructuring costs 138 85 - 1,037 -Acquisition-related charge -amortization of intangibles 4,397 4,562 4,700 18,226 19,018Acquisition-related charge - other payments 857 272 1,057 1,735 1,057Stock-based compensation andrelated payroll taxes 3,230 4,432 6,177 16,341 21,788Impairment of available-for-saleinvestment 1,162 - - 1,162 -Profit on sale of available-for-sale investment - - - - (5,270)Estimated tax impact of abovecharges (2,928) (2,687) (3,477) (11,523) (10,336)--------------------------- ------- ------- ------- ------- -------Normalised net income 16,715 15,223 20,520 63,820 71,420--------------------------- ------- ------- ------- ------- -------Dilutive shares ('000) 1,335,144 1,362,614 1,380,581 1,366,384 1,404,751Normalised diluted EPS 1.25p 1.12p 1.49p 4.67p 5.08p (7.24) Normalised income statement for Q4 2007 Normalised Stockbased Intangible Other Investment Restruct- US GAAP compensation amortisation acquisition impairment -uring -related charges charges -------- ------ ------ ------ ------- ------ -------- £'000 £'000 £'000 £'000 £'000 £'000 £'000 -------- ------ ------ ------ ------- ------ -------- Revenues Product revenues 60,297 - - - - - 60,297 Service revenues 4,046 - - - - - 4,046 -------- ------ ------ ------ ------- ------ --------Total revenues 64,343 - - - - - 64,343 -------- ------ ------ ------ ------- ------ -------- Cost of revenues Product costs (5,412) - - - - - (5,412) Service costs (1,432) (186) - - - - (1,618) -------- ------ ------ ------ ------- ------ --------Total cost ofrevenues (6,844) (186) - - - - (7,030) -------- ------ ------ ------ ------- ------ -------- -------- ------ ------ ------ ------- ------ --------Gross profit 57,499 (186) - - - - 57,313 -------- ------ ------ ------ ------- ------ -------- Research and development (15,050) (1,884) - (819) - - (17,753) Sales and marketing (11,115) (641) - (30) - - (11,786) General and administrative (11,068) (519) - (8) (1,162) - (12,757) Restructuring costs - - - - - (138) (138) -------- ------ ------ ------ ------- ------ Amortization of intangibles purchased through business combination - - (4,397) - - - (4,397) -------- ------ ------ ------ ------- ------ --------Total operatingexpenses (37,233) (3,044) (4,397) (857) (1,162) (138) (46,831) -------- ------ ------ ------ ------- ------ -------- Income fromoperations 20,266 (3,230) (4,397) (857) (1,162) (138) 10,482Interest 1,047 - - - - - 1,047 -------- ------ ------ ------ ------- ------ --------Income beforeincome tax 21,313 (3,230) (4,397) (857) (1,162) (138) 11,529Provision forincome taxes (4,598) 586 1,694 266 327 55 (1,670) -------- ------ ------ ------ ------- ------ --------Net income 16,715 (2,644) (2,703) (591) (835) (83) 9,859 -------- ------ ------ ------ ------- ------ -------- Earnings per share(assuming dilution)Shares outstanding('000) 1,335,144 1,335,144Earnings pershare - pence 1.25 0.74Earnings per ADS (assuming dilution)ADSs outstanding('000) 445,048 445,048Earnings per ADS - cents 7.48 4.41 (7.25) Normalised income statement for Q4 2006 Normalised Stock-based Intangible Other US GAAP compensation amortisation acquisition related charges -------- ------- ------- ------- -------- £'000 £'000 £'000 £'000 £'000Revenues Product revenues 63,582 - - - 63,582 Service revenues 4,462 - - - 4,462 -------- ------- ------- ------- --------Total revenues 68,044 - - - 68,044 -------- ------- ------- ------- -------- Cost of revenues Product costs (5,933) - - - (5,933) Service costs (1,575) (371) - - (1,946) -------- ------- ------- ------- --------Total cost ofrevenues (7,508) (371) - - (7,879) -------- ------- ------- ------- -------- -------- ------- ------- ------- --------Gross profit 60,536 (371) - - 60,165 -------- ------- ------- ------- -------- Research and development (18,242) (3,582) - (1,044) (22,868) Sales and marketing (11,403) (1,235) - - (12,638) General and administrative (11,187) (989) - (13) (12,189) -------- ------- ------- ------- Amortization of intangibles purchased through business combination - - (4,700) - (4,700) -------- ------- ------- ------- --------Total operatingexpenses (40,832) (5,806) (4,700) (1,057) (52,395) -------- ------- ------- ------- -------- Income fromoperations 19,704 (6,177) (4,700) (1,057) 7,770Interest 1,581 - - - 1,581 -------- ------- ------- ------- --------Income beforeincome tax 21,285 (6,177) (4,700) (1,057) 9,351Provision forincome taxes (765) 1,256 1,819 402 2,712 -------- ------- ------- ------- --------Net income 20,520 (4,921) (2,881) (655) 12,063 -------- ------- ------- ------- -------- Earnings per share (assuming dilution)Shares outstanding('000) 1,380,581 1,380,581Earnings pershare - pence 1.49 0.87Earnings perADS (assumingdilution) ADSsoutstanding('000) 460,194 460,194Earnings perADS - cents 8.73 5.13 (7.26) Normalised income statement for FY 2007 -------- ------- ------- ------- ------- ------- ------- Normalised Stock-based Intangible Other Investment Restruct- US GAAP compensation amortisation acquisition impairment uring charges related charges -------- ------- ------- ------- ------- ------- ------- £'000 £'000 £'000 £'000 £'000 £'000 £'000 -------- ------- ------- ------- ------- ------- ------- Revenues Product revenues 242,726 - - - - - 242,726 Service revenues 16,434 - - - - - 16,434 -------- ------- ------- ------- ------- ------- -------Total revenues 259,160 - - - - - 259,160 -------- ------- ------- ------- ------- ------- ------- Cost of revenues Product costs (21,475) - - - - - (21,475) Service costs (5,514) (969) - - - - (6,483) -------- ------- ------- ------- ------- ------- -------Total cost ofrevenues (26,989) (969) - - - - (27,958) -------- ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- ------- -------Gross profit 232,171 (969) - - - - 231,202 -------- ------- ------- ------- ------- ------- ------- Research and development (61,872) (9,498) - (1,374) - - (72,744) Sales and marketing (43,038) (3,259) - (96) - - (46,393) General and administrative (45,922) (2,615) - (265) (1,162) - (49,964) Restructuring costs - - - - - (1,037) (1,037) -------- ------- ------- ------- ------- ------- Amortization of intangibles purchased through business combination - - (18,226) - - - (18,226) -------- ------- ------- ------- ------- ------- -------Total operatingexpenses (150,832) (15,372) (18,226) (1,735) (1,162) (1,037) (188,364) -------- ------- ------- ------- ------- ------- ------- Income fromoperations 81,339 (16,341) (18,226) (1,735) (1,162) (1,037) 42,838Interest 5,402 - - - - - 5,402 -------- ------- ------- ------- ------- ------- -------Income beforeincome tax 86,741 (16,341) (18,226) (1,735) (1,162) (1,037) 48,240Provision forincome taxes (22,921) 3,205 7,027 549 327 415 (11,398) -------- ------- ------- ------- ------- ------- -------Net income 63,820 (13,136) (11,199) (1,186) (835) (622) 36,842 -------- ------- ------- ------- ------- ------- ------- Earnings pershare (assumingdilution)Shares outstanding('000) 1,366,384 1,366,384Earnings pershare - pence 4.67 2.70Earnings perADS (assumingdilution) ADSsoutstanding('000) 455,461 455,461Earnings perADS - cents 27.89 16.10 (7.27) Normalised income statement for FY 2006 Normalised Stock-based Intangible Other Investment US GAAP compensation amortisation acquisition- disposal related charges -------- ------- ------- ------- ------- -------- £'000 £'000 £'000 £'000 £'000 £'000Revenues Product revenues 247,194 - - - - 247,194 Service revenues 16,060 - - - - 16,060 -------- ------- ------- ------- ------- --------Total revenues 263,254 - - - - 263,254 -------- ------- ------- ------- ------- -------- Cost of revenues Product costs (24,156) - - - - (24,156) Service costs (5,623) (1,098) - - - (6,721) -------- ------- ------- ------- ------- --------Total cost ofrevenues (29,779) (1,098) - - - (30,877) -------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- --------Gross profit 233,475 (1,098) - - - 232,377 -------- ------- ------- ------- ------- -------- Research and development (63,845) (10,609) - (1,044) - (75,498) Sales and marketing (40,540) (3,658) - - - (44,198) General and administrative (45,703) (2,927) - (13) - (48,643) -------- ------- ------- ------- ------- Amortization of intangibles purchased through business combination - - (19,018) - - (19,018) -------- ------- ------- ------- ------- --------Total operatingexpenses (150,088) (17,194) (19,018) (1,057) - (187,357) -------- ------- ------- ------- ------- -------- Income fromoperations 83,387 (18,292) (19,018) (1,057) - 45,020Interest 6,758 - - - - 6,758Profit ondisposal ofavailable-for-sale investment - - - - 5,270 5,270 -------- ------- ------- ------- ------- --------Income beforeincome taxbeforecumulativeeffect ofchange inaccountingpolicy 90,145 (18,292) (19,018) (1,057) 5,270 57,048Provision forincome taxes (18,725) 3,132 7,216 402 (1,463) (9,438) -------- ------- ------- ------- ------- --------Net incomebeforecumulativeeffect ofchange inaccountingpolicy 71,420 (15,160) (11,802) (655) 3,807 47,610Cumulativeeffect ofchange inaccountingpolicy, net oftax - (2,447) - - - (2,447) -------- ------- ------- ------- ------- --------Net income 71,420 (17,607) (11,802) (655) 3,807 45,163 -------- ------- ------- ------- ------- -------- Earnings pershare (assumingdilution)Sharesoutstanding('000) 1,404,751 1,404,751Earnings pershare - pence 5.08 3.22Earnings perADS (assumingdilution) ADSsoutstanding('000) 468,250 468,250Earnings perADS - cents 29.85 18.88 Note The results shown for Q4 2007, Q3 2007, Q4 2006 and FY 2007 are unaudited. TheUS GAAP results shown for FY 2006 are audited. The financial informationcontained in this announcement does not constitute statutory accounts within themeaning of Section 240(3) of the Companies Act 1985. Statutory accounts of theCompany in respect of the financial year ended 31 December 2006, upon which theCompany's auditors have given a report which was unqualified and did not containa statement under Section 237(2) or Section 237(3) of that Act, have beendelivered to the Registrar of Companies. The results for ARM for Q4 2007 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 2006 and in the Annual Report on Form 20-F for thefiscal year ended 31 December 2006, except in relation to accounting forsabbatical leave in accordance with EITF 06-2 and provisioning for uncertain taxpositions in accordance with FIN 48. 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 asforward-looking statements. It is believed that the expectations reflected inthese statements are reasonable, but they may be affected by a number ofvariables, many of which are beyond our control. These variables could causeactual results or trends to differ materially and include, but are not limitedto: failure to realise the benefits of our recent acquisitions, unforeseenliabilities arising from our recent acquisitions, price fluctuations, actualdemand, the availability of software and operating systems compatible with ourintellectual property, the continued demand for products including ARM'sintellectual property, delays in the design process or delays in a customer'sproject that uses ARM's technology, the success of our semiconductor partners,loss of market and industry competition, exchange and currency fluctuations, anyfuture strategic investments or acquisitions, rapid technological change,regulatory developments, ARM's ability to negotiate, structure, monitor andenforce agreements for the determination and payment of royalties, actual orpotential litigation, changes in tax laws, interest rates and access to capitalmarkets, political, economic and financial market conditions in variouscountries and regions 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 2006 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. About ARM ARM designs the technology that lies at the heart of advanced digital products,from mobile, home and enterprise solutions to embedded and emergingapplications. ARM's comprehensive product offering includes 16/32-bit RISCmicroprocessors, data engines, graphics processors, digital libraries, embeddedmemories, peripherals, software and development tools, as well as analogfunctions and high-speed connectivity products. Combined with the company'sbroad Partner community, they provide a total system solution that offers afast, reliable path to market for leading electronics companies. Moreinformation on ARM is available at http://www.arm.com. ARM is a registered trademark of ARM Limited. ARM7, ARM9, ARM926EJ-S, ARM11,Cortex, Mali, Classic, Advantage, Metro and Velocity are trademarks of ARMLimited. 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 Germany GmbH, ARM KK,ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS, ARM Consulting (Shanghai) Co.Ltd., ARM Belgium NV., ARM Embedded Technologies Pvt. Ltd., Keil ElektronikGmbH, and ARM Norway AS. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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