6th Feb 2007 07:01
ARM Holdings PLC06 February 2007 ARM HOLDINGS PLC REPORTS RESULTS FOR THE FOURTH QUARTER AND FULL YEAR ENDED 31 DECEMBER 2006 Company presentation of the results will be webcast today at 09:30 GMT at www.arm.com/ir CAMBRIDGE, UK, 6 February 2007-ARM Holdings plc ((LSE: ARM); (Nasdaq: ARMHY))announces its unaudited financial results to 31 December 2006 Highlights (US GAAP unless otherwise stated) • Q4 and H2 dollar revenues both up 20% year-on-year • Physical IP Division (PIPD) Q4 revenues up 27% • Processor Division (PD) Q4 revenues up 21% • Record bookings quarter in Q4. Order backlog up c.20% sequentially • Strong licensing of latest technology across the Group in Q4 • Five CortexTM family licenses (including first license of next-generation Cortex processor) • 45nm physical IP licensed to IBM, Samsung and Chartered • First two licenses for new Graphics processor • Good momentum in FY 06 royalty revenues • PD up 25% to $164m on 2.45bn shipments • PIPD up 26% to $35m • Normalised* income before tax in Q4 of £21.3m (US GAAP £9.4m), after £1.3m of non-recurring net operating expenses • Normalised* EPS in Q4 of 1.49p (US GAAP 0.87p), benefiting from net tax credit in the quarter • FY 06 effective tax rate of 17% • FY 06 normalised* EPS up 19% (US GAAP EPS up by 10%) • Increasing cash returns to shareholders • 4.6% of issued share capital purchased by Company in 2006 for £76.5m • FY 2006 dividend up 19% Commenting on the results, Warren East, Chief Executive Officer, said: "2006 was another year of consistent execution and significant investment in ourbusiness, and we are encouraged to have grown revenues ahead of our targets. Wego into 2007 in good shape, with a strong portfolio of products and a recordlevel of order backlog. Last year the number of ARM(R) technology-basedelectronic products shipped grew by 47% to more than 2.4 billion." FY 2006 - Revenue Analysis Revenue ($M)*** Revenue (£M) --------------------------------------------------------------- FY 2006 FY 2005 % Change FY 2006 FY 2005 % Change-------------------------------------------------------------------------------PDLicensing 138.3 124.0 +12% 75.7 69.4 +9%Royalties 164.1 131.1 +25% 88.7 72.5 +22%Total PD 302.4 255.1 +19% 164.4 141.9 +16%PIPDLicensing 64.2 63.0 +2% 34.9 34.9 +0%Royalties 34.9(1) 27.6(1) +26% 19.1(1) 15.3(1) +25%Total PIPD 99.1 90.6 +9% 54.0 50.2 +8%DevelopmentSystems 53.0 46.5 +14% 28.8 25.6 +13%Services 29.1 26.5 +10% 16.1 14.7 +10%Total Revenue 483.6 418.7 +16% 263.3 232.4 +13%------------------------------------------------------------------------------- (1) Includes catch-up royalties in 2006 of $3.1m (£1.7m) and in 2005 of $2.4m (£1.3m). Q4 2006 - Revenue Analysis Revenue ($M)*** Revenue (£M) -------------------------------------------------------------- Q4 2006 Q4 2005 % Change Q4 2006 Q4 2005 % Change-------------------------------------------------------------------------------PDLicensing 37.4 30.3 +23% 19.5 17.7 +10%Royalties 42.8 36.2 +18% 22.2 20.7 +7%Total PD 80.2 66.5 +21% 41.7 38.4 +9%PIPDLicensing 18.1 13.8 +31% 9.4 8.0 +18%Royalties 9.6(1) 8.0(1) +20% 5.1(1) 4.6(1) +11%Total PIPD 27.7 21.8 +27% 14.5 12.6 +15%DevelopmentSystems 14.1 13.5 +4% 7.3 7.8 -6%Services 8.3 7.2 +15% 4.5 4.1 +10%Total Revenue 130.3 109.0 +20% 68.0 62.9 +8%------------------------------------------------------------------------------- (1) Includes catch-up royalties in Q4 2006 of $0.7m (£0.4m) and in Q4 2005 of $1.6m (£0.9m). FY 2006 - Financial Summary Normalised* US GAAP***** -----------------------------------------------------£M FY 2006 FY 2005 % Change FY 2006 FY 2005-------------------------------------------------------------------------------Revenue 263.3 232.4 +13% 263.3 232.4Income before income tax 90.1 81.3 +11% 57.0 53.2Operating margin 31.7% 32.7% 17.1% 20.6%Earnings per share (pence) 5.08 4.28 +19% 3.22 2.93 Net cash generation** 50.3 51.0Effective fx rate ($/£) 1.84 1.80------------------------------------------------------------------------------- Q4 2006 - Financial Summary Normalised* US GAAP -----------------------------------------------------£M Q4 2006 Q4 2005 % Change Q4 2006 Q4 2005-------------------------------------------------------------------------------Revenue 68.0(1) 62.9 +8% 68.0 62.9Income before income tax 21.3 23.7 -10% 9.4 15.8Operating margin 29.0% 35.0% 11.4% 22.4%Earnings per share (pence) 1.49 1.23 +21% 0.87 0.91 Net cash generation** 13.3 14.8Effective fx rate ($/£) 1.92 1.73------------------------------------------------------------------------------- (1) Equivalent to £75.2m at Q4 2005 effective $/£ rate * Normalised figures are based on US GAAP, adjusted for acquisition-relatedcharges and other share-based remuneration charges and profit on disposal ofavailable-for-sale securities. For reconciliation of GAAP measures to normalisednon-GAAP measures detailed in this document, see notes 7.1 to 7.27. ** Before dividends and share buybacks, net cash flows from share optionexercises, acquisition consideration and proceeds from the disposal ofavailable-for-sale securities - see notes 7.14 to 7.18. *** 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. ***** Comparative results under IFRS for FY 2006 are revenue £263.3m (2005:£232.4m), profit before tax £56.7m (2005: £40.5m), operating margin 19.0% (2005:15.1%) and fully diluted EPS 3.5p (2005: 2.1p). Current trading and prospects Based on a strong portfolio of products for licensing, an order backlog atrecord levels and the prospect of a full year's productivity from the investmentin new employees in 2006, we are confident of achieving full-year dollar revenuegrowth in 2007 in line with expectations. Given short-term industry conditions (including lower foundry utilization),which are generally anticipated to improve during the year, dollar revenues inQ1 2007 are expected to be at similar levels to Q4 2006. CONTACTS: Tom Buchanan/Fiona Laffan Tim Score/Bruce BeckloffBrunswick ARM Holdings plc+44 (0) 207 404 5959 +44 (0)1628 427800 Financial review(US GAAP unless otherwise stated) Total revenues Total dollar revenues in Q4 were $130.3 million, up 20% versus Q4 2005 and up 8%sequentially. Sterling revenues of £68.0 million were up 8% year-on-year afteran 11% weakening of the dollar against sterling ($1.92 in Q4 2006 compared to$1.73 in Q4 2005). At the Q4 2005 effective rate, Q4 2006 sterling revenueswould have been £75.2 million. Full-year dollar revenues in 2006 amounted to $483.6m, up 16% on 2005. License revenues Total dollar license revenues in Q4 2006 grew by 26% to $55.5 million,representing 43% of group revenues, compared to $44.1 million in Q4 2005.License revenues comprised $37.4 million from PD and $18.1 million from PIPD,representing the highest ever quarterly licensing revenue for that division. Full-year license revenues were up 8%, comprising 12% growth in PD and 2% growthin PIPD. Order backlog in both PD and PIPD was approximately 20% higher at theend of 2006 than at the end of 2005. Royalty revenues Total dollar royalty revenues in Q4 2006 grew by 19% to $52.4m, representing 40%of group revenues, compared to $44.2 million in Q4 2005. Royalty revenuescomprised $42.8 million from PD and $9.6 million from PIPD. Total PIPD royaltiesof $9.6 million included $0.7 million of catch-up royalties. PIPD underlyingroyalty revenues were up 39% in Q4 2006 compared to Q4 2005. Full-year dollar PD royalty revenues grew by 25% to $164.1 million on unitshipments of 2.449 billion, up 47% on 2005. Full-year PIPD royalty revenues grewby 26% to $34.9 million. Excluding catch-up royalties in both years, underlyingPIPD royalties also grew by 26%. Development Systems and Service revenues Sales of development systems in Q4 2006 were at a record level of $14.1 million,representing 11% of group revenue, compared to $13.5 million in Q4 2005. Servicerevenues in Q4 2006 were $8.3 million, representing 6% of group revenues,compared to $7.2 million in Q4 2005. Full-year Development Systems revenues were $53.0 million, up 14% on 2005.Service revenues were up by 10% to $29.1 million. Gross margins Gross margins in Q4 2006, excluding the FAS123(R) charge of £0.4 million (seebelow), were 89.0% compared to 87.7% in Q3 2006 and 90.6% in Q4 2005. Thesequential increase in gross margin arises from a lower allocation of PIPDengineering time to cost of sales in Q4 compared to Q3, reflecting a higherproportion of engineering effort being allocated to research and developmentactivities (treated as operating expenses) in Q4 as opposed to customizationwork carried out to convert order backlog into revenue (treated as cost ofsales). Gross margins for the year, excluding share-based remuneration charges of £1.1million, were 88.7% compared to 89.1% in 2005. Operating expenses and operating margin Total operating expenses in Q4 2006 were £52.4 million (£42.9 million in Q42005) and include amortisation of intangible assets and otheracquisition-related charges of £4.7 million (Q4 2005: £4.8 million) and £5.8million in relation to the fair value of share-based remuneration in accordancewith FAS123(R) - "Share-Based Payment". The total FAS123(R) charge of £6.2million in Q4 2006 is included within cost of revenues (£0.4 million), researchand development (£3.6 million), sales and marketing (£1.2 million) and generaland administrative (£1.0 million). As FAS123(R) was effective for the first timein Q1 2006 and as ARM is applying the standard on the "modified prospective"basis, there is no directly equivalent charge in Q4 2005. Total operatingexpenses of £42.9 million in Q4 2005 did, however, include a deferredstock-based compensation charge of £2.5 million as calculated under thepreviously applicable standard. Normalised income statements for Q4 2006, Q42005, FY 2006 and FY 2005 are set out in notes 7.24 through 7.27 below whichreconcile US GAAP to the normalised non-GAAP measures referred to in thisearnings release. The commentary on operating expenses below excludes acquisition-related andshare-based remuneration charges. Operating expenses in Q4 2006 were £40.8 million compared to £37.4 million in Q32006 and £35.0 million in Q4 2005. Operating expenses in Q4 2006 includenon-recurring expenses of £1.3 million. Excluding these, operating expenses inQ4 2006 were £39.5 million. In 2007, operating expenses will reflect a fullyear's cost for those employees who joined the Group during 2006. Research and development expenses were £18.2 million in Q4 2006, representing27% of revenues, compared to £15.5 million in Q3 2006 and £15.5 million in Q42005. Sales and marketing costs in Q4 2006 were £11.4 million, being 17% ofrevenues, compared to £10.0 million in Q3 2006 and £8.9 million in Q4 2005.General and administrative expenses in Q4 2006 were £11.2 million, representing16% of revenues, compared to £11.9 million in Q3 2006 and £10.6 million in Q42005. Normalised operating margin in Q4 2006 was 29.0% (7.1) compared to 30.1% (7.2)in Q3 2006 and 35.0% (7.3) in Q4 2005. Operating margins in Q4 2006 were lowerthan Q4 2005 due to the 11% weakening of the US dollar against sterling, theinvestment in headcount made in 2006 and the non-recurring expenses of £1.3million. Excluding the non-recurring expenses, the operating margin would havebeen 30.9% at the Q4 2006 effective exchange rate (equivalent to 34.2% at the Q42005 effective rate of 1.73). Total operating expenses in 2006 were £187.4 million, includingacquisition-related and share-based remuneration charges of £20.1 million and£17.2 million respectively. Excluding these charges, operating expenses in 2006were £150.1 million, compared to £131.1 million in 2005, reflecting the netaddition of 335 people to the Group during the year. Full-year research and development expenses were £63.8 million in 2006,representing 24% of revenues. Full year sales and marketing expenses were £40.5million or 15% of revenues. Total general and administrative expenses were £45.7million, representing 17% of revenues. Normalised operating margin for 2006 was 31.7% (7.4) versus 32.7% (7.5) for2005. At constant currencies (applying ARM's 2005 full-year effective rate of$1.80), the normalised operating margin for 2006 would have been 32.3%. Earnings and taxation Income before income tax in Q4 2006 was £9.4 million compared to £15.8 millionin Q4 2005. After adjusting for acquisition-related and share-based remunerationcharges, normalised income before income tax in Q4 2006 was £21.3 million (7.6)compared to £23.7 million (7.8) in Q4 2005. The Group's effective tax rate in 2006 is 17%, primarily due to a non-recurringtax credit in Q4 arising from a tax-deductible foreign exchange loss. Given theexpected distribution of the Group's profits, the Group's effective tax rate for2007 is expected to be approximately 28%. In Q4 2006, fully diluted earnings per share prepared under US GAAP were 0.9pence (5.1 cents per ADS****) compared to earnings per share of 0.9 pence (4.7cents per ADS****) in Q4 2005. Normalised fully diluted earnings per share in Q42006 were 1.49 pence (7.19, 7.24) per share (8.7 cents per ADS****) compared to1.23 pence (7.21, 7.25) (6.3 cents per ADS****) in Q4 2005. Full-year 2006 fully diluted earnings per share prepared under US GAAP were 3.2pence (18.9 cents per ADS****) compared to earnings per share of 2.9 pence (15.1cents per ADS****) in 2005. Normalised earnings per fully diluted share for 2006were 5.08 pence (7.22, 7.26) per share (29.9 cents per ADS****) compared to 4.28pence (7.23, 7.27) (22.0 cents per ADS****) in 2005. Balance sheet Intangible assets at 31 December 2006 were £405.3 million, comprising goodwillof £349.3 million and other intangible assets of £56.0 million, compared to£364.0 million and £58.6 million respectively at 30 September 2006. A regularreview of the carrying value of assets arising on acquisition was performed at31 December 2006 and it was concluded that no impairment charge was required. Total accounts receivable decreased to £69.6 million at 31 December 2006,comprising £45.8 million of trade receivables and £23.8 million of amountsrecoverable on contracts, from £73.1 million at 30 September 2006, comprising£46.6 million of trade receivables and £26.5 million of amounts recoverable oncontracts. Days sales outstanding (DSOs) reduced to 43 at 31 December 2006 from52 at 30 September 2006 and 54 at 31 December 2005. Cash flow, share buyback program and 2006 final dividend Net cash at 31 December 2006 was £128.5(7.11) million compared to £147.4(7.12)million at 30 September 2006. Normalised net cash generation in Q4 2006 was£13.3 million after taking into account £31.3 million returned to shareholdersby way of share buyback (£25.8 million) and dividend (£5.5 million) and a netcash outflow of £3.3 million in relation to acquisitions. Since introducing dividend payments in 2004 and commencing the Company's sharebuyback program in July 2005, £125 million has been returned to shareholders and77.5 million shares, being 5.6% of issued share capital, have been bought back.This has contributed to a net reduction in the fully diluted shares in issuefrom 1,431 million in Q4 2005 to 1,381 million in Q4 2006. It is anticipatedthat the share buyback program will resume after these results. The directors recommend payment of a final dividend in respect of 2006 of 0.60pence per share, which taken together with the interim dividend of 0.40 penceper share paid in October 2006, gives a total dividend in respect of 2006 of 1.0pence per share, an increase of 19% on the total dividend of 0.84 pence pershare in 2005. Subject to shareholder approval, the final dividend will be paidon 21 May 2007 to shareholders on the register on 4 May 2007. 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. The most significant difference between the two income statements arises on theaccounting for share-based payments, including related tax effects. Totaloperating expenses under IFRS include compensation charges in respect ofshare-based payments of £17.4 million in 2006 compared to £20.9 million in 2005.The decrease is primarily due to reduced compensation charges relating tooptions assumed on the Artisan acquisition which are reducing over time as thoseoptions vest, offset by increased charges on new schemes. Operating review Backlog Group order backlog at the end of Q4 was approximately 20% higher than at theend of Q3. Licensing in Q4 2006 was strong across the ARM business with thebacklog increasing in PD, PIPD and Development Systems. PD licensing In 2006, ARM continued to see significant demand for the full range of itsmicroprocessors with PD order backlog at the end of Q4 up approximately 30%sequentially. Having licensed Cortex family products to lead partners prior to2006, the current portfolio of three Cortex family products became available formore general licensing as the year progressed. In 2007, all three products willbe available for licensing for a full year for the first time. During 2006, 13Cortex family licenses were signed, with five being signed in Q4. This bringsthe accumulated total of Cortex family licenses to 23, signed by 18semiconductor companies. As well as being a year of gathering momentum forCortex family licensing, 2006 also saw the first Cortex-A8 processor-basedproducts being announced with the Texas Instruments' OMAP 3 line of products.ARM also received the first royalties for Cortex products following the rapiddeployment of the Cortex-M3 product by Luminary Microelectronics. In addition, 2006 continued to be a year of strong licensing of the ARM11TMfamily of products. In the year we signed 15 ARM11 family licenses bringing thetotal number to 52 from 36 semiconductor companies. This year signified a shiftin ARM11 family licensing activity from the traditional first-mover mobilecompanies with the majority of the licenses being taken for applications outsideof the mobile segment. Based on the opportunity pipeline, we expect ARM11 familylicensing to continue to be a meaningful contributor to license revenues in2007. As part of the Cortex family licensing in Q4 2006, we signed our first leadpartner for the next-generation Cortex microprocessor. Although, as usual, wewould expect to sign a small number of lead licensees for this product, we donot expect it to be available for mainstream licensing until 2008. Q4 2006 PD Licensing Analysis - 463 cumulative processor licenses Multi-use Term Per-use -------------------------------------------------- U D N U D N U D N Total---------------------------------------------------------------------------ARM7 1 1 2ARM9 1 1 1 1 1 5ARM11 1 1 1 3Cortex-A8 1 1 2Cortex-R4 1 1 2Next Gen 1 1--------------------------------------------------------------------------- Total 15 -------------- U:Upgrade D:Derivative N: New PD royalties In 2006, ARM achieved a significant milestone with more than 2 billion ARMtechnology-based products being shipped in the year. Total shipments were 2.45billion, up 47% year-on-year. Total Q3 shipments of 700 million units (ourpartners report royalties one quarter in arrears) equate to 7.6 million unitsbeing shipped every day. ARM continued to benefit from significant growth in themobile segment (which includes mobile handsets, Bluetooth devices and portablemedia players, such as the Apple iPod), with this segment accounting for 66% ofthe units shipped by the ARM partnership. We also saw significant growth acrossa myriad of applications outside of the mobile segment including smartcards,microcontrollers, automotive, connectivity devices, hard disk drives and manyothers. Total non-mobile shipments in 2006 were 838 million units, higher thantotal shipments into all applications as recently as 2003, illustrating ARM'sincreasing penetration across the full range of consumer electronics products. ARM's royalties are typically based on a percentage of the average selling price(ASP) of the chips which incorporate our technology. As the penetration of ARMtechnology-based chips grows across a wide range of end-market applications, therange of ASPs gets wider. The average royalty rate (ARR) earned by ARM in anyone reporting period is dependent on the mix of the ASPs of the chips shipped inthat period. In 2006, significant unit volume growth was driven by productswhich incorporate chips with lower ASPs including ultra low cost handsets,smartcards, microcontrollers and Bluetooth chips. As a result, the ARR in 2006was 6.7 cents compared to 7.9 cents in 2005. For ARM, unit volume growth morethan compensated for the reduction in ARR and royalty revenues grew by 25%year-on-year. Irrespective of the ARR, all royalty revenues earned areeffectively at 100% margin and thus represent incremental return on thedevelopment cost of the ARM technology on which the royalty is earned. In Q4, we continued to see an increase in the proportion of royalties earnedfrom newer ARM technology. The ARM9(TM) family of products accounted for 40% ofunit shipments with the ARM926EJ-S(TM) product accounting for 15% of totalshipments. Although, ARM11 technology-based shipments continued to grow, theystill comprise less than 1% of total shipments. The continued strength of ARM7(TM) family shipments demonstrates the long revenue-earning lifespan of ARMtechnology with approximately 70% of units shipped in 2006 being earned fromlicenses that were signed before 2001. PIPD licensing ARM continued to make progress in 2006 towards achieving the long term strategicgoal of providing our physical IP to leading Integrated Device Manufacturer(IDM) and Fabless semiconductor companies. Licensing momentum for our 65nmphysical IP products grew, with 12 new licenses signed in the year. By the endof 2006, we had signed a total of 22 65nm licenses to 10 companies, includingTSMC, UMC, Fujitsu, IBM, Chartered and Samsung. Further, we also signed sevenlicenses for physical IP with four foundries (TSMC, IBM, Samsung, and Chartered)at the most advanced process of 45nm. With acceleration of technology development progressing in PIPD, we continueregularly to sign synergistic licenses that we believe have been enabled by thecombination of ARM and Artisan technologies. Synergistic licenses signed in 2006included those for leading-edge technology with Fujitsu and Samsung, whereby thephysical IP licensed can be used both as part of their foundry activities and intheir internal chip development activities, and with UMC the license was takento satisfy a physical IP design win with a large fabless semiconductor company. Q4 PIPD Licensing Analysis - 287 cumulative physical IP licenses 180nm 130nm 90nm 65nm 45nm Total----------------------------------------------------------------------------Platform LicensesClassic(TM) 1 1Metro(TM) 1 1 3 5Advantage(TM) 1 1 3 5----------------------------------------------------------------------------Standard Cell LibrariesClassic 2 2Metro 3 3Advantage 3 3----------------------------------------------------------------------------Memory CompilersClassic 2 2 4----------------------------------------------------------------------------Velocity PHYs 1 1---------------------------------------------------------------------------- Total 24 -------------- PIPD royalties PIPD continued to see strong momentum in royalties with a 26% growth in bothtotal and underlying royalties. Sales at the 130nm and 90nm process nodescontinued to be the fastest growing segments for PIPD, although more than halfof royalties received in 2006 came from older geometries. Total catch-up royalties in 2006 were $3.1 million, 30% up on 2005. Sinceestablishing an enhanced process internally in mid 2005 to improve thetimeliness and visibility of PIPD royalty revenues, we have seen catch-uproyalties being reported on a regular basis. Whilst we expect this process toimprove the quality of royalty reporting over time, there is still much work todo and we would expect catch-up royalties to continue to be reported in 2007. Development Systems Q4 was a record quarter for Development Systems both in terms of revenue andbookings, with continued strong bookings reflecting the desire of a growingnumber of customers to enter into long-term commercial and technicalrelationships for Development Systems products. For example, during the year ARMsaw a 65% increase in the bookings for Electronic System Level (ESL) tools thatwere derived from the acquisition of Axys in 2004, reflecting the increasingimportance that our partners are attaching to the fast-growing ESL tools market. Emerging Business Units Today, ARM generates most of its revenues from PD, PIPD, Development Systems andServices. We are, however, also investing in four emerging business units -Fabric, Graphics, Data Engines and Embedded Software - which we believe arecomplementary to our more developed businesses and in each case offeropportunity for profitable growth in the medium term. In 2006, these businessunits generated a small proportion of total group revenues but accounted inaggregate for some 10% of total group costs. By 2010, we anticipate that thesebusinesses will generate more than 10% of total group revenues. In 2006, a number of significant milestones were reached in these businessunits. In the Data Engines group, Toshiba announced that they had licensed ourOptimode technology and Broadcom introduced a new line of Bluetooth productsincorporating ARM AudioDE IP. In the Fabric IP division, Broadcom and Toshibalicensed our Fabric IP solutions, reinforcing AMBA as the world's leadinginterconnect standard. In the Embedded Software group, our TrustZone(R)technology was licensed by Texas Instruments and it was announced that Samsunghad licensed and would incorporate Jazelle in their first commercially availableBlue-Ray disc players. Further, in Q4 we signed the first two licenses for thegraphics IP derived from the acquisition of Falanx Microsystems in May 2006. Weunderstand that one of these licenses is intended for use in mobileapplications, the other in non-mobile applications. People 2006 has been a year of investment in headcount for ARM, with a net increase of335 employees in the year. The focus of our investment has been in PIPD, wherewe have invested in engineering resources in order to accelerate the developmentof leading-edge physical IP products, and in our emerging business units (seeabove). We anticipate headcount growth will be lower in 2007 as our investmentin people in 2006 yields productivity benefits. At the end of 2006 we had 1,659full time employees compared to 1,324 at 31 December 2005. The group had 671employees based in the UK, 582 in the US, 153 in Continental Europe, 203 inIndia and 50 in the Asia Pacific Region. We were delighted that the efforts of our people have been recognised recentlywith the Company winning three prestigious awards available to businesses fromall sectors. In November 2006, ARM was chosen as UK Business of the Year at theNational Business Awards, an award taking account of market leadership,innovation, growth and financial return. In January 2007, ARM was recognised asEuropean Business of the Year, competing against the other national awardwinners within the European Union. Further, at the Management Today awards inNovember 2006 for Britain's Most Admired Companies, ARM was recognised as thecompany with the "greatest capacity to innovate." Whilst these awards were forcompanies with headquarters in the UK or the European Union, they recognise theefforts of all ARM employees worldwide. Legal matters Nazomi In May 2002, Nazomi Communications, Inc. ("Nazomi") filed suit against ARMalleging wilful infringement of Nazomi's US Patent No. 6,332,215 ("'215Patent"). ARM answered Nazomi's complaint in July 2002 denying infringement.ARM moved for summary judgment and a ruling that the technology does notinfringe Nazomi's patent. The United States District Court for the NorthernDistrict of California granted ARM's motion, and Nazomi appealed the DistrictCourt's ruling. In September 2004, the Court of Appeals for the Federal Circuitheard the appeal and issued its decision in April 2005. Because, in the opinionof the Court of Appeals for the Federal Circuit, the District Court did notconstrue the disputed claim term in sufficient detail for appellate review, theCourt of Appeals for the Federal Circuit remanded the dispute back to theDistrict Court for further analysis. A supplementary "Markman" hearing washeld in October 2005 to decide the construction of a fundamental term in the'215 Patent and a decision on claim construction was delivered on 6 September2006. The decision emphatically supports ARM's construction of the relevant termand consequently strongly supports ARM's non-infringement arguments. In December2006, ARM filed a renewed motion for summary judgement and a ruling that theaccused technology does not infringe the '215 patent. On 17 January 2007 Nazomifiled a response to ARM's renewed motion for summary judgement in which theystipulated that, based on the claim construction delivered by the DistrictCourt, the ARM technology accused in the suit does not infringe the '215 patentbut also objected to the claim construction delivered by the District Court andindicated their intention to appeal the claim construction to the Court ofAppeals for the Federal Circuit. TPL Group In October 2005, Technology Properties Limited, Inc. ("TPL") filed suit, in theUnited States District Court for the Eastern District of Texas (MarshallDivision), against certain companies in the Fujitsu, Matsushita, NEC and Toshibagroups of companies alleging infringement of TPL's US Patents Nos. 5,809,336;5,784,584 and 6,598,148 (the "Litigation"). All of the defendants are licenseesof various ARM technologies. It was revealed as part of the preliminaryinfringement contentions in the Litigation, filed in July 2006, that certain ARMtechnology is alleged to infringe a single claim in US Patent No. 5,784,584 (the"'584 Patent"). In September 2006 ARM filed a motion to intervene in theLitigation and that motion has been granted. ARM is now a defendant party in theLitigation. The claim construction (or "Markman") hearing is scheduled for May2007 and the trial date is scheduled for November 2007. Based on legal adviceand written opinions received from external counsel, ARM is confident that theaccused ARM technology does not infringe any of the claims of the '584 Patent orthat the patent is invalid. ARM has voluntarily joined as a party to theLitigation to proactively defend its technology against ill conceived and falseinfringement allegations and fully expects to prove the case fornon-infringement or invalidity in the course of the Litigation. 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 2006 2005 2006 2005 Unaudited Unaudited Unaudited Audited --------- --------- --------- --------- £'000 £'000 £'000 £'000RevenuesProduct revenues 63,582 58,828 247,194 217,711Service revenues 4,462 4,065 16,060 14,728 --------- --------- --------- ---------Total revenues 68,044 62,893 263,254 232,439 --------- --------- --------- --------- Cost of revenuesProduct costs (5,933) (4,313) (24,156) (19,265)Service costs (1,946) (1,579) (6,721) (6,093) --------- --------- --------- ---------Total cost of revenues (7,879) (5,892) (30,877) (25,358) --------- --------- --------- --------- --------- --------- --------- ---------Gross profit 60,165 57,001 232,377 207,081 --------- --------- --------- --------- Research and development (22,868) (15,613) (75,498) (60,051)Sales and marketing (12,638) (9,061) (44,198) (34,102)General and administrative (12,189) (10,959) (48,643) (37,558)Deferred stock-basedcompensation - (2,465) - (9,727)Amortization of intangibles purchased through business combination (4,700) (4,809) (19,018) (17,726) --------- --------- --------- ---------Total operating expenses (52,395) (42,907) (187,357) (159,164) --------- --------- --------- --------- Income from operations 7,770 14,094 45,020 47,917Interest 1,581 1,684 6,758 5,317Profit on disposal ofavailable-for-salesecurity - - 5,270 - --------- --------- --------- ---------Income before incometax and cumulativeeffect of accountingchange 9,351 15,778 57,048 53,234Provision for incometaxes 2,712 (2,801) (9,438) (11,354) --------- --------- --------- ---------Net income beforecumulative effect ofaccounting change 12,063 12,977 47,610 41,880Cumulative effect ofaccounting change, netof tax - - (2,447) - --------- --------- --------- ---------Net income aftercumulative effect ofaccounting change 12,063 12,977 45,163 41,880 --------- --------- --------- ---------Other comprehensive income:Foreign currency adjustments (25,290) 16,538 (68,128) 58,561Unrealized holdinggain/(loss) onavailable-for-salesecurities, net of taxbenefit of £66,000 (Q42005: charge £236,000;FY 2006: £476,000; FY2005: £981,000) (156) 452 (1,090) (2,316) --------- --------- --------- ---------Total comprehensiveincome / (loss) (13,383) 29,967 (24,055) 98,125 --------- --------- --------- --------- Earnings per share (assumingdilution)Shares outstanding ('000) 1,380,581 1,431,084 1,404,751 1,427,036Earnings per share - pence 0.9 0.9 3.2 2.9Earnings per ADS (assumingdilution)ADSs outstanding ('000) 460,194 477,028 468,250 475,679Earnings per ADS - cents 5.1 4.7 18.9 15.1 ARM Holdings plc Consolidated balance sheet - US GAAP 31 December 31 December 2006 2005 Unaudited Audited ----------- ----------- £'000 £'000AssetsCurrent assets:Cash and cash equivalents 90,743 128,077Short-term investments 18,600 23,990Marketable securities 19,151 8,835Accounts receivable, net of allowance of£2,556,000 in 2006 and £2,173,000 in 2005 69,552 55,518Inventory: finished goods 1,933 1,490Income taxes receivable 5,761 -Prepaid expenses and other assets 12,668 12,567 ----------- -----------Total current assets 218,408 230,477 Deferred income taxes 9,872 4,422Prepaid expenses and other assets 1,328 1,674Property and equipment, net 13,970 12,803Goodwill 349,243 385,572Other intangible assets 56,027 72,345Investments 3,855 8,800 ----------- -----------Total assets 652,703 716,093 ----------- ----------- Liabilities and shareholders' equityAccounts payable 1,826 2,221Income taxes payable 5,572 10,826Personnel taxes 1,408 1,329Accrued liabilities 33,021 25,024Deferred revenue 31,485 20,354 ----------- -----------Total current liabilities 73,312 59,754 Deferred income taxes 4,744 7,289 ----------- -----------Total liabilities 78,056 67,043 ----------- -----------Shareholders' equityOrdinary shares 694 693Additional paid-in capital 444,711 425,252Deferred compensation - (4,404)Treasury stock, at cost (55,363) (16,315)Retained earnings 196,287 183,913Accumulated other comprehensive income:Unrealized holding gain on available-for-salesecurities, net of tax of £230,000 (2005:£1,096,000) 394 3,859Cumulative translation adjustment (12,076) 56,052 ----------- -----------Total shareholders' equity 574,647 649,050 ----------- -----------Total liabilities and shareholders' equity 652,703 716,093 ----------- ----------- ARM Holdings plc Consolidated income statement - IFRS Year Year ended ended 31 December 31 December 2006 2005 Unaudited Audited ----------- ----------- £'000 £'000RevenuesProduct revenues 247,194 217,711Service revenues 16,060 14,728 ----------- -----------Total revenues 263,254 232,439 ----------- ----------- Cost of revenuesProduct costs (24,156) (19,265)Service costs (see note 2) (6,669) (7,345) ----------- -----------Total cost of revenues (30,825) (26,610) ----------- ----------- ----------- -----------Gross profit 232,429 205,829 ----------- ----------- Operating expensesResearch and development (see note 2) (84,494) (80,273)Sales and marketing (see note 2) (53,180) (47,389)General and administrative (see note 2) (50,127) (43,010)Profit on disposal of available-for-sale security 5,270 - ----------- -----------Total net operating expenses (182,531) (170,672) ----------- ----------- ----------- -----------Profit from operations 49,898 35,157Investment income 6,758 5,317 ----------- -----------Profit before tax 56,656 40,474Tax* (8,068) (10,827) ----------- -----------Profit for the year 48,588 29,647 ----------- ----------- Dividends- final 2004 paid (on 6 May 2005) at 0.42 pence per share - 5,759- interim 2005 paid (on 7 October 2005) at 0.34 pence per share - 4,677- 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 - Earnings per shareBasic and diluted earnings 48,588 29,647 Number of shares ('000)Basic weighted average number of shares 1,366,816 1,369,335Effect of dilutive securities:Share options 35,145 55,027Diluted weighted average number of shares 1,401,961 1,424,362 Basic EPS 3.6p 2.2pDiluted EPS 3.5p 2.1p All activities relate to continuing operations. All of the profit for the period is attributable to the equity shareholders ofthe parent. * Tax comprises £7.2 million of UK taxation and a credit of £0.9 million ofoverseas taxation. ARM Holdings plc Consolidated balance sheet - IFRS 31 December 31 December 2006 2005 Unaudited Audited ---------- ---------- £'000 £'000AssetsCurrent assets:Cash and cash equivalents 90,743 128,077Financial assets: Short-term investments 18,600 23,990Short-term marketable securities 19,151 8,835Fair value of currency exchange contracts 439 -Accounts receivable 69,552 55,518Prepaid expenses and other assets 12,229 12,567Current tax assets 5,761 -Inventories: finished goods 1,933 1,490 ---------- ----------Total current assets 218,408 230,477 ---------- ---------- Non-current assets:Financial assets: Available-for-sale investments 3,855 8,800Prepaid expenses and other assets 1,328 1,674Property, plant and equipment 10,296 8,990Goodwill 428,366 474,430Other intangible assets 62,913 79,743Deferred tax assets 19,090 13,633 ---------- ----------Total non-current assets 525,848 587,270 ---------- ---------- ---------- ----------Total assets 744,256 817,747 ---------- ----------Liabilities and shareholders' equityCurrent liabilities:Accounts payable 1,826 2,221Current tax liabilities 5,572 10,826Accrued and other liabilities 36,119 26,598Financial liabilities: Fair value of currencyexchange contracts - 1,708Deferred revenue 31,485 20,354 ---------- ----------Total current liabilities 75,002 61,707 ---------- ---------- ---------- ----------Net current assets 143,406 168,770 ---------- ----------Non-current liabilities:Deferred tax liabilities 6,050 9,193 ---------- ----------Total liabilities 81,052 70,900 ---------- ---------- ---------- ----------Net assets 663,204 746,847 ---------- ----------Capital and reserves attributable to equity holders ofthe CompanyShare capital 694 693Share premium account 447,901 447,091Share option reserve 61,474 61,474Retained earnings 165,026 166,656Revaluation reserve (544) 2,921Cumulative translation adjustment (11,347) 68,012 ---------- ----------Total equity 663,204 746,847 ---------- ---------- ARM Holdings plc Consolidated cash flow statement - IFRS Year Year ended ended 31 December 31 December 2006 2005 Unaudited Audited ---------- ---------- £'000 £'000Operating activitiesProfit from operations 49,898 35,157Depreciation and amortisation of tangible andintangible assets 26,726 28,608Profit on disposal of available-for-sale security (5,270) -Loss on disposal of property, plant and equipment 63 16Impairment of available-for sale investments - 337Compensation charge in respect of share-basedpayments 17,437 20,863Provision for doubtful debts 255 722Provision for obsolescence of inventory 65 22Changes in working capital:Accounts receivable (18,082) (21,247)Inventories (508) (519)Prepaid expenses and other assets 1,015 (61)Fair value of currency exchange contracts (2,147) 3,382Accounts payable (672) (1,931)Deferred revenue 10,844 (2,043)Accrued and other liabilities 4,723 (7,199) ---------- ----------Cash generated by operations before tax 84,347 56,107Income taxes paid (21,147) (14,447) ---------- ----------Net cash from operating activities 63,200 41,660 ---------- ---------- Investing activitiesInterest received 6,636 5,444Purchases of property, plant and equipment (7,189) (5,492)Proceeds on disposal of property, plant andequipment 31 37Purchases of other intangible assets (1,370) (572)Purchases of available-for-sale investments (165) (274)Proceeds on disposal of available-for-saleinvestments 5,567 96Purchase of short-term investments (4,926) (599)Purchases of subsidiaries, net of cash acquired (17,270) (20,304) ---------- ----------Net cash used in investing activities (18,686) (21,664) ---------- ---------- Financing activitiesIssue of shares 811 13,921Purchase of own shares (76,519) (16,211)Issue of treasury shares 17,049 -Dividends paid to shareholders (12,367) (10,436) ---------- ----------Net cash used in financing activities (71,026) (12,726) ---------- ---------- Net (decrease) / increase in cash and cashequivalents (26,512) 7,270Cash and cash equivalents at beginning of year 128,077 110,561Effect of foreign exchange rate changes (10,822) 10,246 ---------- ----------Cash and cash equivalents at end of year 90,743 128,077 ---------- ---------- Notes to the Financial Information (1) Basis of preparation US GAAP The financial information prepared in accordance with the Group's US GAAPaccounting policies comprises the consolidated balance sheets as of 31 December2006 and 31 December 2005 and related income statements for the years thenended, together with related notes. In preparing this financial informationmanagement has used the principal accounting policies as set out in the Group'sannual financial statements and form 20-F for the year ended 31 December 2005,except in relation to changes in respect of accounting for share-based paymentsfollowing the adoption of FAS123(R) on 1 January 2006. The Group has elected touse the modified prospective methodology in its application of this standard. In order to aid comparability, the 2005 income statement caption "Deferredstock-based compensation" has not been re-analysed between the functionalexpenses categories in this press release. In the Group's financial statementson form 20-F, it is expected that this item will be re-analysed as follows: £4.4million within cost of sales, £1.4 million within research and developmentcosts, £1.6 million within sales and marketing costs and £2.3 million withingeneral and administrative costs. International Financial Reporting Standards The financial information prepared in accordance with the Group's IFRSaccounting policies comprises the consolidated balance sheets as of 31 December2006 and 31 December 2005 and related consolidated statements of income and cashflows for the years then ended, together with related notes. This financialinformation has been prepared in accordance with the Listing Rules of theFinancial Services Authority. In preparing this financial information managementhas used the principal accounting policies as set out in the Group's annualfinancial statements for the year ended 31 December 2005. (2) Share-based compensation charges and acquisition-related expenses Included within the US GAAP income statement for the quarter ended 31 December2006 are share-based compensation charges of £6.2 million: £0.4 million in costof revenues, £3.6 million in research and development costs, £1.2 million insales and marketing costs and £1.0 million in general and administrative costs. Included within the US GAAP income statement for the year ended 31 December 2006are share-based compensation charges of £21.8 million: £1.1 million in cost ofrevenues, £10.6 million in research and development costs, £3.7 million in salesand marketing costs, £2.9 million in general and administrative costs and £3.5million within the cumulative effect of accounting change. This charge onaccounting change arises as a re-measurement adjustment for liability-classifiedawards on cumulative share-based compensation for earlier years on adoption ofFAS123(R). Included within the IFRS income statement for the year ended 31 December 2006are total share-based payment costs of £17.4 million (year ended 31 December2005: £20.9 million), allocated £1.0 million (2005: £1.3 million) in cost ofrevenues, £10.1 million (2005: £12.1 million) in research and development costs,£3.5 million (2005: £4.2 million) in sales and marketing costs and £2.8 million(2005: £3.3 million) in general and administrative costs. Also included within IFRS operating costs for the year ended 31 December 2006 isamortization of intangibles acquired on acquisition of £19.3 million (year ended31 December 2005: £17.9 million), allocated £9.5 million (2005: £8.1 million) inresearch and development costs, £9.1 million (2005: £9.1 million) in sales andmarketing costs and £0.7 million (2005: £0.7 million) in general andadministrative costs. (3) Accounts receivable Included within accounts receivable at 31 December 2006 are £23.8 million (2005:£20.5 million) of amounts recoverable on contracts. (4) Consolidated statement of changes in shareholders' equity (US GAAP) Additional Deferred Unrealized Cumulative Share paid-in compen- Treasury Retained holding translation capital capital -sation stock earnings gain adjustment Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2006 693 425,252 (4,404) (16,315) 183,913 3,859 56,052 649,050Shares issued on exercise of options 1 810 - - - - - 811Net income - - - - 45,163 - - 45,163Dividends - - - - (12,367) - - (12,367)Realized gain on available-for-sale security - - - - - (2,375) - (2,375)Unrealized holding losses onavailable-for-sale securities - - - - - (1,090) - (1,090)Tax effect of option exercises - 3,682 - - - - - 3,682Netting of deferred compensation* - (4,404) 4,404 - - - - -Amortization of deferred compensation - 19,371 - - - - - 19,371Issuance of shares - - - 37,471 (20,422) - - 17,049Purchase of own shares - - - (76,519) - - - (76,519)Currency translation adjustment - - - - - - (68,128) (68,128)-----------------------------------------------------------------------------------------------------------------------At 31 December 2006 694 444,711 - (55,363) 196,287 394 (12,076) 574,647----------------------------------------------------------------------------------------------------------------------- * FAS123(R) requires that deferred stock-based compensation on the date ofadoption be netted against additional paid-in capital. (5) Consolidated statement of changes in shareholders' equity (IFRS) Share Share Reval- Cumulative Share premium option Retained -uation translation capital account reserve earnings reserve reserve Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2006 693 447,091 61,474 166,656 2,921 68,012 746,847Shares issued on exercise of options 1 810 - - - - 811Profit for the period - - - 48,588 - - 48,588Dividends - - - (12,367) - - (12,367)Credit in respect of employee shareschemes - - - 17,437 - - 17,437Movement on deferred tax arising onoutstanding share options - - - 4,182 - - 4,182Purchase of own shares - - - (76,519) - - (76,519)Proceeds from sale of own shares - - - 17,049 - - 17,049Realized gain on available-for-sale security - - - - (2,375) - (2,375)Unrealized holding losses onavailable-for-sale investments (netof deferred tax of £477,000) - - - - (1,090) - (1,090)Currency translation adjustment - - - - - (79,359) (79,359)-----------------------------------------------------------------------------------------------------------------At 31 December 2006 694 447,901 61,474 165,026 (544) (11,347) 663,204----------------------------------------------------------------------------------------------------------------- (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. The 2004 annual report included a provisional assessment of the fair values ofassets and liabilities acquired on acquisition of Artisan Components Inc. on 23December 2004. Where these provisional values were amended as estimates wererefined in 2005, adjustments to fair values were recorded as prior yearadjustments to goodwill for IFRS purposes in 2004. Under US GAAP, these wererecorded as amendments to goodwill in 2005. Recognition and amortisation of intangibles The Company has taken advantage of the exemption under IFRS 1 not to apply IFRS retrospectively to business combinations occurring before 1 January 2004. This means that for business combinations occurring before this date, the previously reported UK GAAP treatment has continued to be followed. Under previous UK GAAP, intangible assets were recognised separately from goodwill only where they could be sold separately without disposing of a business of the entity. This separability criterion does not apply under either IFRS or US GAAP. Thus, a number of intangible assets which are required to be recognised separately from goodwill under 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 their useful economic lives. Except in relation to in-process research and development (see below), there is no difference in accounting policy for intangible assets recognised as a result of business combinations entered into after 1 January 2004. In-process research and development Under IFRS, in-process research and development projects purchased as part of a business combination may meet the criteria set out in IAS 38, "Intangibleassets", for recognition as intangible assets other than goodwill and areamortised over their useful economic lives commencing when the asset is broughtinto use. Under US GAAP, in-process research and development is immediatelywritten-off to the income statement. This accounting policy difference givesrise to an associated difference in deferred taxation. Valuation of consideration on business combination Under both IFRS and US GAAP, the fair value of consideration in a businesscombination includes the fair value of both equity issued and any share optionsgranted as part of that combination. Under IFRS, any equity issued is valued atthe fair value as of the date of completion, whilst under US GAAP, the equity isvalued at the date the terms of the combination were agreed to and announced.For options, under US GAAP, the fair value is based upon the total number ofoptions granted, both vested and unvested, whilst under IFRS the fair value onlyincludes those that have vested, together with a pro-rata value for partiallyvested options. Furthermore, where there is contingent consideration for anacquisition, under IFRS this is recognized as part of the purchase considerationif the contingent conditions are expected to be satisfied, whilst under US GAAPit is only recognised if the conditions have actually been met, other than tothe extent to eliminate any potential negative goodwill under US GAAP. Deferred compensation Under US GAAP, the intrinsic value of unvested stock options issued by anacquirer as part of a business combination in exchange for unvested shareoptions of the acquiree is recorded as a debit balance within shareholders'funds. This amount is charged to the profit and loss account over the vestingperiod of the share options in accordance with FIN 28. Under IFRS, no suchadjustment to shareholders' funds is made on acquisition. Following the adoptionof FAS123(R), the unamortised balance has been transferred to additional paid-incapital. Compensation charge in respect of share-based payments The Company issues equity-settled share-based payments to certain employees. Inaccordance with IFRS 2, equity-settled share-based payments are measured at fairvalue at the date of grant, using the Black-Scholes pricing model. The fairvalue determined at the grant date of the equity-settled share-based payments isexpensed on a straight-line basis over the vesting period, based on theCompany's estimate of the number of shares that will eventually vest. Under USGAAP, the Company is required, effective as of 1 January 2006, to adopt FAS No.123 (revised 2004) (FAS123(R)), "Share-based payment". FAS123(R) requires theCompany to expense share-based payments, including employee stock-options, basedon their fair value. The Company has elected to utilize the "modifiedprospective" method of adoption, such that compensation cost is recognizedbeginning with the effective date (i) based on the requirements of FAS123(R) forall share-based payments granted after the effective date and (ii) based on therequirements of FAS123(R) for all awards granted to employees prior to theeffective date of FAS123(R) that remain unvested on the effective date. Some awards made by the Company are liability-classified awards under FAS123(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 isre-measured 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. In 2005 under US GAAP, the company had elected to use the intrinsic value-basedmethod to account for all its employee stock-based compensation plans, under therecognition and measurement principles of APB Opinion No. 25, "Accounting forstock issued to employees", and related interpretations. Thus no compensationexpense was recorded in 2005 where the exercise price of the option was equal tothe share price on the date of grant. In 2005 under US GAAP, the Company recognised a compensation charge in respectof the UK SAYE plans. The compensation charge was calculated as the differencebetween the market price of the shares at the date of grant and the exerciseprice of the option and was recorded on a straight-line basis over the savingsperiod. In addition, certain options attracted a charge under variable planaccounting under US GAAP. Under IFRS, this charge is calculated in the samemanner as other share-based payments, as detailed above. In 2005 under US GAAP, the Company followed variable plan accounting for theLTIP grants, measuring compensation expense as the difference between theexercise price and the fair market value of the shares at each period end overthe vesting period of the options. Increases in fair market value of the sharesresulted in a charge and decreases in fair market value of the shares resultedin a credit, subject to the cumulative amount previously expensed. Under IFRS,this charge is calculated in the same manner as other share-based payments, asdetailed above. Deferred tax on UK and US share options In the US and the UK, the Company is entitled to a tax deduction for the amounttreated as employee compensation under US and UK tax rules on exercise ofcertain employee share options. The compensation is equivalent to the differencebetween the option exercise price and the fair market value of the shares at thedate 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 ofthe compensation expense recorded in the income statement. If the amount ofestimated future tax deduction exceeds the cumulative amount of the remunerationexpense at the statutory tax rate, the excess is recorded directly in equity,against the profit and loss reserve. In accordance with the transitionalprovisions of IFRS 2, no compensation charge is recorded in respect of optionsgranted before 7 November 2002 or in respect of those options which have beenexercised or have lapsed before 31 December 2004. Nevertheless, tax deductionshave arisen and will continue to arise on these options. The tax effects arisingin relation to these options are recorded directly in equity, against retainedearnings. 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 options Under IFRS, employer's taxes that are payable on the exercise of share options are provided for over the vesting period of the options. Under US GAAP, such taxes are accounted for when the options are exercised. Provisions for legal costs Under IFRS, future legal fees that the Company is expecting to incur on current cases are accrued when the obligating event giving rise to the legal costs has occurred. Under US GAAP, such costs are charged to the income statement in the period in which the costs are incurred. Reconciliation of IFRS profit to US GAAP net income Year ended Year ended 31 December 31 December 2006 2005 Unaudited Audited --------- --------- £'000 £'000 Profit for financial period as reported under IFRS 48,588 29,647Adjustments for:Amortisation of intangibles 914 548Write-off of in-process research and development (595) (335)Deduct: US GAAP compensation charge in respect ofLTIP - (3,814)Deduct : US GAAP compensation charge in respect ofSAYE schemes - (417)Deduct : US GAAP deferred stock-based compensationre acquisition - (5,496)Deduct : US GAAP compensation charge in respect ofall share-based payments (21,787) -Add: IFRS compensation charge in respect of allshare-based payments 17,437 20,863Employer's taxes on share options 8 3Utilisation of restructuring provision - 1,368Provision for legal costs (net of tax) 715 -Foreign exchange on contingent consideration (104) 40Tax on share option exercises (2,204) (370)Tax difference on amortisation of intangibles (378) (248)Tax difference on share-based payments 2,569 91 --------- ---------Net income as reported under US GAAP 45,163 41,880 --------- --------- Reconciliation of shareholders' equity from IFRS 31 December 31 Decemberto US GAAP 2006 2005 Unaudited Audited --------- --------- £'000 £'000 Shareholders' equity as reported under IFRS 663,204 746,847Adjustments for:Employer's taxes on share options 38 30Utilisation of restructuring provision 1,368 1,368Provision for legal costs (net of tax) 715 -Liability-classified share awards (2,416) -Cumulative difference on amortisation of goodwill 2,713 2,713Cumulative difference on amortisation ofintangibles 1,355 441Cumulative write-off of in-process research anddevelopment (4,692) (4,097)Cumulative difference on deferred tax (642) (263)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 (8,911) (8,775)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 1,358 (9,872)Foreign exchange on valuation of contingentconsideration (61) 40 --------- ---------Shareholders' equity as reported under US GAAP 574,647 649,050 --------- --------- Reconciliation of goodwill from IFRS to US GAAP 31 December 31 December 2006 2005 Unaudited Audited --------- --------- £'000 £'000 Goodwill as reported under IFRS 428,366 474,430Adjustments for:Valuation of restructuring provision onacquisition 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 researchand development (1,570) (1,570)Portion of tax benefit arising on exercise ofoptions issued on (4,248) (4,248)acquisition taken to goodwill under US GAAPValuation 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 (3,117) (1,864)Foreign exchange on revaluation of goodwill 854 (10,134) --------- ---------Goodwill as reported under US GAAP 349,243 385,572 --------- --------- (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 excludeone-off non-recurring charges, acquisition-related charges and profit ondisposal of available-for-sale investments. All figures in £'000 unlessotherwise stated. (7.1) (7.2) (7.3) (7.4) (7.5) Q4 2006 Q3 2006 Q4 2005 FY 2006 FY 2005 Income from operations (US GAAP) 7,770 10,949 14,094 45,020 47,917Acquisition-related charge - amortization of intangibles 4,700 4,645 4,809 19,018 17,726Acquisition-related charge - deferred stock-based compensation - - 479 - 5,496Acquisition-related charge - other payments 1,057 - - 1,057 -Other stock-based compensation and related payroll taxes 6,177 3,904 2,628 18,292 4,873--------------------------------------------------------------------------------------------------Normalised income from operations 19,704 19,498 22,010 83,387 76,012--------------------------------------------------------------------------------------------------As % of revenue 29.0% 30.1% 35.0% 31.7% 32.7% (7.6) (7.7) (7.8) (7.9) (7.10) Q4 2006 Q3 2006 Q4 2005 FY 2006 FY 2005 Income before income tax (US GAAP) 9,351 12,634 15,778 57,048 53,234Acquisition-related charge - amortization of intangibles 4,700 4,645 4,809 19,018 17,726Acquisition-related charge - deferred stock-based compensation - - 479 - 5,496Acquisition-related charge - other payments 1,057 - - 1,057 -Other stock-based compensation and related payroll taxes 6,177 3,904 2,628 18,292 4,873Profit on sale of available-for-sale investment - - - (5,270) ---------------------------------------------------------------------------------------------------Normalised income before income tax 21,285 21,183 23,694 90,145 81,329-------------------------------------------------------------------------------------------------- (7.11) (7.12) (7.13) 31 30 31 December September December 2006 2006 2005 Cash and cash equivalents 90,743 103,472 128,077Short-term investments 18,600 26,427 23,990Short-term marketable securities 19,151 17,520 8,835--------------------------------------------------------------------------------------------------Normalised cash 128,494 147,419 160,902-------------------------------------------------------------------------------------------------- (7.14) (7.15) (7.16) (7.17) (7.18) Q4 2006 Q3 2006 Q4 2005 FY 2006 FY 2005 Normalised cash at end of period (as above) 128,494 147,419 160,902 128,494 160,902Less: Normalised cash at beginning of period (147,419) (148,806) (164,737) (160,902) (142,817)Add back: Cash outflow from acquisitions (net of cash acquired) 3,305 16 4,264 17,270 20,304Add back: Cash outflow from payment of dividends 5,449 - 4,677 12,367 10,436Add back: Cash outflow from purchase of own shares 25,840 21,593 10,773 76,519 16,211Less: Cash inflow from exercise of share options (2,349) (2,352) (1,033) (17,860) (13,921)Less: Cash inflow from sale of available-for-sale investments - - - (5,567) (96)--------------------------------------------------------------------------------------------------Normalised cash generation 13,320 17,870 14,846 50,321 51,019-------------------------------------------------------------------------------------------------- (7.19) (7.20) (7.21) (7.22) (7.23) Q4 2006 Q3 2006 Q4 2005 FY 2006 FY 2005 Net income (US GAAP) 12,063 9,391 12,977 45,163 41,880Acquisition-related charge - amortization of intangibles 4,700 4,645 4,809 19,018 17,726Acquisition-related charge - deferred stock-based compensation - - 479 - 5,496Acquisition-related charge - other payments 1,057 - - 1,057 -Other stock-based compensation and related payroll taxes 6,177 3,904 2,628 21,788 4,873Profit on sale of available-for-sale investment - - - (5,270) -Estimated tax impact of above charges (3,477) (2,375) (3,346) (10,336) (8,912)--------------------------------------------------------------------------------------------------Normalised net income 20,520 15,565 17,547 71,420 61,063--------------------------------------------------------------------------------------------------Dilutive shares ('000) 1,380,581 1,395,642 1,431,084 1,404,751 1,427,036Normalised diluted EPS 1.49p 1.12p 1.23p 5.08p 4.28p (7.24) Normalised income statement for Q4 2006 Stock- Other based Intangible acquisition compens- amortisa- - related Normalised ation tion charges US GAAP ---------- -------- ------- -------- ------- £'000 £'000 £'000 £'000 £'000RevenuesProductrevenues 63,582 - - - 63,582Servicerevenues 4,462 - - - 4,462 -------- ------- ------- ------- --------Total revenues 68,044 - - - 68,044 -------- ------- ------- ------- -------- Cost ofrevenuesProduct 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 anddevelopment (18,242) (3,582) - (1,044) (22,868)Sales andmarketing (11,403) (1,235) - - (12,638)General andadministrative (11,187) (989) - (13) (12,189) -------- ------- ------- ------- --------Amortizationof intangibles purchasedthroughbusinesscombination - - (4,700) - (4,700) -------- ------- ------- ------- --------Totaloperatingexpenses (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 pershare(assumingdilution)Sharesoutstanding('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 (7.25) Normalised income statement for Q4 2005 Stock-based Intangible Normalised compensation amortisation US GAAP ---------- --------- --------- --------- £'000 £'000 £'000 £'000RevenuesProduct revenues 58,828 - - 58,828Service revenues 4,065 - - 4,065 -------- --------- --------- ---------Total revenues 62,893 - - 62,893 -------- --------- --------- --------- Cost of revenuesProduct costs (4,313) - - (4,313)Service costs (1,579) - - (1,579) -------- --------- --------- ---------Total cost of revenues (5,892) - - (5,892) -------- --------- --------- --------- -------- --------- --------- ---------Gross profit 57,001 - - 57,001 -------- --------- --------- ---------Research and development (15,454) (159) - (15,613)Sales and marketing (8,925) (136) - (9,061)General and administrative (10,612) (347) - (10,959)Deferred stock-based compensation - (2,465) - (2,465) -------- --------- --------- ---------Amortizationof intangibles purchased through businesscombination - - (4,809) (4,809) -------- --------- --------- ---------Total operating expenses (34,991) (3,107) (4,809) (42,907) -------- --------- --------- ---------Income from operations 22,010 (3,107) (4,809) 14,094Interest 1,684 - - 1,684 -------- --------- --------- ---------Income before income tax 23,694 (3,107) (4,809) 15,778Provision for income taxes (6,147) 1,434 1,912 (2,801) -------- --------- --------- ---------Net income 17,547 (1,673) (2,897) 12,977 -------- --------- --------- ---------Earnings per share (assumingdilution)Shares outstanding ('000) 1,431,084 1,431,084Earnings per share - pence 1.23 0.91Earnings per ADS (assumingdilution)ADSs outstanding ('000) 477,028 477,028Earnings per ADS - cents 6.32 4.67 (7.26) Normalised income statement for FY 2006 Stock- Other based Intangible acquisition compens- amortisa- related Investment Normalised ation tion* charges disposal US GAAP --------- ------- ------- ------- ------- -------- £'000 £'000 £'000 £'000 £'000 £'000RevenuesProduct revenues 247,194 - - - - 247,194Service revenues 16,060 - - - - 16,060 -------- ------- ------- ------- ------- --------Total revenues 263,254 - - - - 263,254 -------- ------- ------- ------- ------- -------- Cost of revenuesProduct 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 anddevelopment (63,845) (10,609) - (1,044) - (75,498)Sales andmarketing (40,540) (3,658) - - - (44,198)General andadministrative (45,703) (2,927) - (13) - (48,643) -------- ------- ------- ------- ------- --------Amortizationof intangibles purchasedthroughbusinesscombination - - (19,018) - - (19,018) -------- ------- ------- ------- ------- --------Totaloperatingexpenses (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 security - - - - 5,270 5,270 -------- ------- ------- ------- ------- --------Income beforeincome taxbeforecumulativeeffect ofaccountingchange 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 ofaccountingchange 71,420 (15,160) (11,802) (655) 3,807 47,610Cumulativeeffect ofaccountingchange, net oftax - (2,447) - - - (2,447) -------- ------- ------- ------- ------- --------Net incomeaftercumulativeeffect ofaccountingchange 71,420 (17,607) (11,802) (655) 3,807 45,163 -------- ------- ------- ------- ------- -------- Earnings pershare(assuming dilution)Shares outstanding('000) 1,404,751 1,404,751Earnings pershare - pence 5.08 3.22Earnings perADS (assumingdilution)ADSs outstanding('000) 468,250 468,250Earnings perADS - cents 29.85 18.88 * intangible amortisation includes £595,000 of in-process research anddevelopment write-off (7.27) Normalised income statement for FY 2005 Stock-based Intangible Normalised compensation amortisation* US GAAP ---------- --------- --------- --------- £'000 £'000 £'000 £'000RevenuesProduct revenues 217,711 - - 217,711Service revenues 14,728 - - 14,728 -------- --------- --------- ---------Total revenues 232,439 - - 232,439 -------- --------- --------- ---------Cost of revenuesProduct costs (19,265) - - (19,265)Service costs (6,093) - - (6,093) -------- --------- --------- ---------Total cost of revenues (25,358) - - (25,358) -------- --------- --------- --------- -------- --------- --------- ---------Gross profit 207,081 - - 207,081 -------- --------- --------- --------- Research and development (59,892) (159) - (60,051)Sales and marketing (33,966) (136) - (34,102)General and administrative (37,211) (347) - (37,558)Deferred stock-based compensation - (9,727) - (9,727) -------- --------- --------- --------Amortization of intangibles purchased through businesscombination - - (17,726) (17,726) -------- --------- --------- ---------Total operating expenses (131,069) (10,369) (17,726) (159,164) -------- --------- --------- ---------Income from operations 76,012 (10,369) (17,726) 47,917Interest 5,317 - - 5,317 -------- --------- --------- ---------Income before income tax 81,329 (10,369) (17,726) 53,234Provision for income taxes (20,266) 1,992 6,920 (11,354) -------- --------- --------- ---------Net income 61,063 (8,377) (10,806) 41,880 -------- --------- --------- --------- Earnings per share(assuming dilution)Shares outstanding ('000) 1,427,036 1,427,036Earnings per share - pence 4.28 2.93Earnings per ADS (assumingdilution)ADSs outstanding ('000) 475,679 475,679Earnings per ADS - cents 22.04 15.12 * intangible amortisation includes £335,000 of in-process research anddevelopment write-off Note The results shown for Q4 2006, Q3 2006, Q4 2005 and FY 2006 are unaudited. Theresults shown for FY 20005 are audited. The financial information contained inthis announcement does not constitute statutory accounts within the meaning ofSection 240(3) of the Companies Act 1985. Statutory accounts of the Company inrespect of the financial year ended 31 December 2005, upon which the Company'sauditors have given a report which was unqualified and did not contain astatement under Section 237(2) or Section 237(3) of that Act, have beendelivered to the Registrar of Companies. Except for changes in accounting policy on the adoption of new accountingstandards, as disclosed, the results for ARM for Q4 2006 and previous quartersas shown reflect the accounting policies as stated in Note 1 to the US GAAPfinancial statements in the Annual Report and Accounts filed with CompaniesHouse in the UK for the fiscal year ended 31 December 2005 and in the Annual Report on Form 20-F for the fiscal year ended 31 December2005. 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 2005 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, Jazelle and TrustZone are registered trademarks of ARM Limited. ARM7, ARM9,ARM926EJ-S, ARM11, Cortex, Advantage, Classic, Metro and Velocity are trademarksof ARM Limited. Artisan Components and Artisan are registered trademarks of ARMPhysical IP, Inc., a wholly owned subsidiary of ARM. All other brands or productnames are the property of their respective holders. ARM refers to ARM Holdingsplc (LSE: ARM and Nasdaq: ARMHY) together with its subsidiaries including ARMLimited, ARM Inc., ARM Physical IP Inc., Axys Design Automation Inc., ARMGermany GmbH, ARM KK, ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS, Soisic SA,ARM Consulting (Shanghai) Co. Ltd., ARM Belgium NV., ARM Embedded TechnologiesPvt. Ltd., Keil Elektronik GmbH and ARM Norway AS. 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