31st Jan 2006 07:02
ARM Holdings PLC31 January 2006 ARM HOLDINGS PLC - RESULTS FOR THE FOURTH QUARTER AND YEAR ENDED 31 DECEMBER 2005 CAMBRIDGE, UK, 31 January 2006-ARM Holdings plc ((LSE: ARM); (Nasdaq: ARMHY))announces its unaudited financial results for the fourth quarter and for theyear ended 31 December 2005 showing full Q4 dollar revenues up 8% sequentiallyand strong profitability with a normalised operating margin of 35% Financial Highlights - FY 2005 • FY total dollar revenues* up 14% to $418.7m comprising Processor Division ("PD" - formerly expressed as "Original ARM") licensing $124.0m (up 19% year-on-year), PD royalties $131.1m (up 22%), Development Systems $46.5m (up 29%), Service revenues $26.5m (up 6%), Physical IP division ("PIPD") $90.6m (licensing $63.0m, royalties $27.6m) (up 9% on actual PIPD 2004 revenues of $83.1m; down 4% on pro forma PIPD 2004 revenues of $94.6m(see note 7.23)) • FY 2005 PIPD revenues 15% up on actual PIPD 2004 revenues excluding "catch-up" royalties from both years ($88.2m in 2005 compared to $76.5m in 2004) • FY normalised operating margin increased to 32.7% • FY normalised earnings per share up 24% year-on-year and full year dividend of 0.84p per share, up 20% on 2004 • £26.6m returned to shareholders in 2005 through dividends (£10.4m) and the rolling share buyback program initiated in July 2005 (£16.2m) Financial Highlights - Q4 2005 • Q4 total dollar revenues* up 8% sequentially to $109.0m comprising Processor Division ("PD") licensing $30.3m (£17.7m), PD royalties $36.2m (£20.7m), Development Systems $13.5m (£7.8m), Service revenues $7.2m (£4.1m), PIPD $21.8m (licensing $13.8m, royalties $8.0m including "catch-up" royalties of $1.6m) (£12.6m) • Total Group order backlog flat at end Q4 with PIPD component of backlog up more than 20% sequentially • Q4 normalised operating margin increased to 35.0% Operating Highlights • Strong processor licensing momentum continues in 2005, up 19% year-on-year • 71 processor licenses signed in 2005 bringing cumulative total to 398 • Record 499 million ARM Powered(R) products shipped • Rapid growth in non-mobile unit shipments, up 46% year-on-year • Seven synergistic deals signed in 2005 demonstrating early benefits from Artisan acquisition • 19 new physical IP licenses signed in 2005 bringing cumulative total to 176 Commenting on the fourth quarter and full year, Warren East, Chief ExecutiveOfficer, said: "2005 has been another successful year for ARM and we enter 2006 well placed tobuild on our market-leading position. Q4 was an excellent quarter for ourprocessor division with our new flagship Cortex(R)-A8 product winning fourhigh-profile industry awards and initial deliveries of the next two Cortexproducts being made to lead partners. These innovative products underpin licenserevenues in 2006. We have also made substantial progress in positioning thecombination of physical IP and processor IP in order to realise the anticipatedfinancial and technological benefits in 2006 and beyond." Tim Score, Chief Financial Officer, added: "We have grown revenues at twice the rate of the semiconductor industry,achieved operating margins healthily in excess of 30% and seen volumes of ARMPowered products grow by more than 30% year-on-year to 1.66 billion units.Notwithstanding the 20% increase in R&D expenditure to drive expected strongrevenue growth, a 24% increase in earnings per share has enabled us to returnmore cash to shareholders via our progressive dividend policy and the ongoingshare buyback program that we introduced during the year." Full year 2005 - financial summary £M Normalised*** US GAAP ---------------------------- ------------------- FY05 FY04 % FY05 FY04 (ARM change (ARM standalone) standalone)---------------- -------- -------- -------- --------- ---------Revenue 232.4 152.9 +52% 232.4 152.9---------------- -------- -------- -------- --------- ---------Income before 81.3 48.1 +69% 53.2 38.5income tax ---------------- -------- -------- -------- --------- ---------Operating margin 32.7% 26.9% 20.6% 20.6%---------------- -------- -------- -------- --------- ---------Earnings per share 4.28p 3.44p +24% 2.93p 2.67p---------------- -------- -------- -------- --------- ---------Net cash generation 65.0**** ---------------- -------- Q4 2005 - financial summary £M Normalised*** US GAAP ---------------------------- ------------------- Q405 Q305 Q404 Q405 Q305 Q404 (ARM (ARM standalone) standalone)Revenue 62.9 56.7 41.5 62.9 56.7 41.5--------------- -------- -------- -------- --------- --------- ---------Income before 23.7 19.1 14.1 15.8 12.0 5.3income tax --------------- -------- -------- -------- --------- --------- ---------Operating margin 35.0% 31.3% 29.4% 22.4% 18.8% 8.2%--------------- -------- -------- -------- --------- --------- ---------Earnings per 1.23p 1.05p 1.10p 0.91p 0.68p 0.42pshare --------------- -------- -------- -------- --------- --------- ---------Net cash 15.9 17.2generation**** --------------- -------- -------- * 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. *** Normalised figures are before acquisition-related charges and other deferredstock-based compensation charges and related payroll taxes. For reconciliationof GAAP measures to normalised non-GAAP measures detailed in this document, seenotes 7.1 to 7.23. **** Before dividends, share buybacks and acquisition consideration - see notes7.14 to 7.16. Current trading and prospects During 2005, we integrated Artisan into ARM and began to accelerate new productdevelopment in physical IP. We also brought three new processor designs tomarket, completed the acquisition of a microcontroller tools company and furtherinvested in research and development. As a result, ARM enters 2006 well placedto build on its market leadership position. A broad technology portfolio for licensing, increasing royalty momentum, growthin development systems sales and the prospect of more synergistic revenuesarising from the combination of processor IP and physical IP underpin confidencein another strong performance in 2006 in line with current market expectations. Financial review(US GAAP unless otherwise stated) Fourth quarter ended 31 December 2005 Total revenuesTotal revenues for the fourth quarter of 2005 amounted to £62.9 million. In USdollar terms*, fourth quarter revenues of $109.0 million were 8% upsequentially. The effective US dollar to sterling exchange rate for ARM in Q42005 was $1.73 compared to $1.78 in Q3 2005 and $1.80 in Q4 2004. License revenuesTotal license revenues in the fourth quarter were £25.7 million, representing41% of group revenues. License revenues comprised £17.7 million from PD and £8.0million from PIPD. In US dollar terms*, PD license revenues of $30.3 million inQ4 2005 were 5% up on Q4 2004. Royalty revenuesTotal royalty revenues in the fourth quarter were £25.3 million, representing40% of total group revenues. Royalty revenues comprised £20.7 million from PDand £4.6 million from PIPD. In US dollar terms*, PD royalty revenues of $36.2million in Q4 2005 were up 13% sequentially on Q3 2005 and were 23% up on Q42004. ARM partners shipped 499 million units in Q3 2005 (we report royalty revenuesone quarter in arrears) at an average royalty rate ("ARR") of 7.3 cents. The ARRwas down from 7.9 cents in Q3 due primarily to the strong growth in shipments oflow-cost handsets, hard disk drives and Wi-Fi chipsets. Of the 499 million unitshipments in Q4, 34% related to units based on ARM9TM family technology.Shipments of ARM926 processor-based product accounted for 8% of total shipments.The mobile and non-mobile segments accounted for 62% and 38% of total shipmentsrespectively in Q4, compared to 64% and 36% in Q3. A further six partners beganpaying royalties in Q4, bringing the total to 68 out of our 172 partners. Total PIPD royalties of $8.0 million included $1.6 million of catch-uproyalties. Underlying royalties of $6.4 million were up 7% sequentially. 19companies are paying royalties at the end of 2005. Development Systems and Service revenuesSales of development systems in Q4 2005 were £7.8 million, representing 12% oftotal group revenues, compared to £5.8 million in Q3 2005. In US dollar terms,Development Systems revenues were $13.5 million compared to $10.3 million in Q32005. The good momentum behind Development Systems revenues seen in the firsthalf of 2005 resumed in the quarter after a seasonally slow third quarter. Q4revenues also included the first contribution from Keil(R), our newmicrocontroller tools business acquired at the end of October 2005. Servicerevenues in Q4 2005 were £4.1 million, representing 7% of total group revenues.Dollar revenues of $7.2 million were up 11% sequentially and 21% ahead of lastyear. Gross marginsGroup gross margins for the fourth quarter were 90.6% compared to 87.7% in Q3.The increase arises primarily due to the increased proportion of royaltyrevenues earned in Q4 relative to Q3. Operating expenses and operating marginsTotal group operating expenses in Q4 2005 were £42.9 million, includingacquisition-related charges of £5.3 million and other deferred stock-basedcompensation and related payroll taxes of £2.6 million. Excluding these charges,operating expenses in the quarter were £35.0 million, comprising £29.3 millionfor the group excluding PIPD and £5.7 million for PIPD, compared to £32.0million in Q3 2005. Total research and development expenses were £15.6 million in Q4 2005,representing 25% of revenues, compared to £13.9 million or 25% of revenues in Q32005. Total sales and marketing costs in Q4 2005 were £9.1 million or 14% ofrevenues compared to £8.5 million or 15% of revenues in Q3 2005. Total generaland administrative expenses in Q4 2005 were £11.0 million representing 17% ofrevenues compared to £9.6 million or 17% of revenues in Q3 2005. Operating margin in Q4 2005 was 22.4% compared to 18.8% in Q3 2005. Normalisedoperating margin was 35.0%(7.1) in Q4 2005 compared to 31.3%(7.2) in Q3 2005.Normalised operating margin of 35.0% in Q4 2005 comprises 36.9% for the groupexcluding PIPD and 27.4% for PIPD. Interest receivableInterest receivable increased to £1.7 million in Q4 2005 compared to £1.4million in Q3 2005, due to higher average cash balances offsetting slightlylower interest rates. Earnings and taxationIncome before income tax in Q4 2005 was £15.8 million compared to £12.0 millionin Q3 2005. Normalised income before income tax was £23.7 million(7.6). Thegroup's effective tax rate under US GAAP in Q4 2005 was 17.8% bringing theeffective rate for the year to 21.3%, reflecting the availability of researchand development tax credits and taking into account the benefits arising fromthe structuring of the Artisan acquisition. Fourth quarter fully diluted earnings per share prepared under US GAAP were 0.9pence (4.7 cents per ADS**) compared to earnings per share of 0.7 pence (3.6cents per ADS**) in Q3 2005. Normalised earnings per fully diluted share in Q42005 were 1.23 pence(7.17) per share (6.3 cents per ADS**) compared to 1.05pence(7.18) (5.5 cents per ADS**) in Q3 2005. Year ended 31 December 2005 Revenues Total revenues for the year ended 31 December 2005 amounted to £232.4 million.In US dollar terms*, revenues of $418.7 million were 14% up on the aggregate proforma ARM and Artisan revenues of $367 million in 2004 and 18% up on theaggregate actual revenues of $355 million. The effective average dollar tosterling exchange rate in 2005 was $1.80 compared to $1.78 in 2004 for ARMstandalone. Total license revenues in 2005 were £104.2 million, being 45% of total revenues.Total royalty revenues were £87.8 million, representing 38% of total revenue.Sales of development systems were £25.7 million, being 11% of total revenues.Service revenues were £14.7 million, representing 6% of total revenues. Operating expenses and operating marginsTotal group operating expenses in 2005 were £159.2 million, includingacquisition-related charges of £23.2 million and other deferred stock-basedcompensation and related payroll taxes of £4.9 million. Excluding these charges,operating expenses in 2005 were £131.1 million, comprising £110.0 million forthe group excluding PIPD and £21.1 million for PIPD. Total research and development expenses were £60.1 million in 2005, representing26% of revenues. Total sales and marketing were £34.1 million or 15% ofrevenues. Total general and administrative expenses were £37.6 million,representing 16% of revenues.Operating margin in 2005 was 20.6% compared to 20.6% in the ARM standalonebusiness in 2004. Normalised operating margin was 32.7%(7.4) in 2005 compared to26.9%(7.5) in 2004. The 2005 normalised operating margin of 32.7% comprises33.2% for the group excluding PIPD and 30.9% in PIPD. Interest receivableInterest receivable was £5.3 million in 2005. EarningsIncome before income tax in 2005 was £53.2 million. Normalised income beforeincome tax was £81.3 million(7.9). Fully diluted earnings per share under US GAAP in 2005 were 2.9 pence (15.1cents per ADS**). Normalised earnings per fully diluted share were 4.28 pence(7.20) per share (22.0 cents per ADS**). Balance sheet and cash flowIntangible assets at 31 December 2005 were £457.9 million, comprising goodwillof £385.6 million and other intangible assets of £72.3 million, compared to£340.4 million and £74.6 million respectively at 31 December 2004. The increasein goodwill in 2005 is due primarily to foreign exchange movements, given thestrengthening of the US dollar against sterling from $1.92 at 31 December 2004to $1.72 at the end of 2005. Goodwill is no longer amortised under US GAAP butis subject to impairment review on at least an annual basis. A regular review ofthe carrying value of the assets arising on the acquisition of Artisan wasperformed as at 31 December 2005 and it was concluded that no impairment chargewas required. The movement in other intangible assets reflects the amortisationin the year of the intangible assets arising on the acquisitions of Artisan andAxys of £16.9 million and the addition of £8.7 million arising on theacquisition of Keil in October 2005. The other intangible assets are beingamortised through the profit and loss account over a weighted average period offive years. Accounts receivable increased to £55.5 million at 31 December 2005 from £52.2million at 30 September 2005. The allowance against receivables was £2.2 millionat the end of the year compared to £1.8 million at 30 September 2005. Deferredrevenues were £20.4 million at the end of the year compared to £23.2 million at30 September 2005. After net cash generation of £15.9 million(7.14) in Q4 2005, total net cashgeneration in 2005 amounted to £65.0 million(7.16) giving total cash, cashequivalents, short-term investments and marketable securities of £160.9 million(7.11) at 31 December 2005. Share buyback program and 2005 final dividend Since the share buyback program was initiated in July 2005, the Company haspurchased a total of 13.9 million shares at a total cost of £16.2 million. It isanticipated that the buyback program will resume after the announcement of theseresults. The directors recommend payment of a final dividend in respect of 2005 of 0.5pence per share, which taken together with the interim dividend of 0.34 penceper share paid in October 2005, gives a total dividend in respect of 2005 of0.84 pence per share, an increase of 20% on 0.7 pence per share in 2004. Subjectto shareholder approval, the final dividend will be paid on 5 May 2006 toshareholders on the register on 31 March 2006. Operating review Processor Division ("PD") licensing and product development11 licenses for microprocessors were signed in Q4 2005. Four new partners took atotal of five licenses, of which two were per-use licenses and two were termlicenses. The two per-use licenses comprised one license for the ARM7TDMI(R)processor and one license for the ARM922T(TM) processor. The two term licenseswere for the ARM926EJ-S processor and the ARM946E-S(TM) processor. The remaininglicense was for the ARM926EJ-S processor. A further six licenses were signed with five of our existing partners,comprising three derivative licenses and three upgrades. The derivative licensesconsisted of one term license for the ARM7TDMI-S(TM) processor, one term licensefor the ARM946E-S processor and one license for the ARM11(TM)MPCore(TM)processor. The upgrades consisted of one term license for the ARM926EJ-Sprocessor and two licenses to the ARM1176JZ-S(TM) processor, one of which was aterm license. Overall, group order backlog at the end of Q4 was similar to the level as at theend of Q3, with the PIPD component of backlog being up more than 20%sequentially. The PD component of the backlog, which was down sequentially, isexpected to build during 2006 as the Cortex portfolio of products becomeavailable for general licensing. Having grown license revenues by 27% and 19% in 2004 and 2005 respectively, ARMenters 2006 well placed to maintain momentum in processor licensing. Theportfolio of licensable products comprises a rich mix of well-proven ARMtechnology, such as the ARM7(TM) and ARM9 families of products, productsintroduced in recent years which are still in the early stages of theirlicensing life cycle, such as the ARM11 family of products, and the first threeCortex family products which have already been licensed by lead partners andwhich will be available for general licensing in 2006. In October 2005, we formally launched the Cortex-A8 processor, the industry'sfastest embedded processor to date and the first complete processing solutioncomprising a broad portfolio of ARM technology to reduce time-to-market. Theaward-winning Cortex-A8 processor is expected to revolutionise consumer andlow-power mobile devices, enabling the delivery of higher levels ofentertainment and innovation to end users. Its performance and power utilisationcharacteristics make it ideal for demanding consumer products runningmulti-channel video, audio and gaming applications. The exceptional speed andpower efficiency of the Cortex-A8 processor is enabled by new ARM Artisanlibraries supporting technologies such as Intelligent Energy Manager (IEM).Additionally, the new processor features ARM TrustZone(R) technology for securetransactions. The ARM TrustZone Software Application Program Interface (API) isgaining wide industry endorsement and quickly becoming a standard foundation forthe implementation of security functions such as digital rights management,device protection and payment. The attributes of the Cortex-A8 processor were recognised by the winning of fourhigh-profile industry awards: Electronic Products magazine's "Product of theYear"; Portable Design magazine's "Editor's Choice"; Electronic Designmagazine's "Best of Embedded 2005" and Microprocessor Report's "Analysts' ChoiceAward for the Best Processor-IP Core of 2005". The Cortex-M3 processor has been licensed to four lead partners to date. Initialproduct deliveries were successfully made to the lead partners in Q4 2005 andthe product is now available for mainstream licensing. Test silicon for theCortex-M3 processor has been received and is exhibiting higher performance andsmaller size characteristics than initially expected. The Cortex-M3 processor isspecifically designed to meet the requirement for high system performance inmicrocontrollers and other very cost-sensitive embedded applications such asautomotive products and white goods. The microcontroller market hastraditionally been serviced by 8- and 16-bit devices, but it has seen asubstantial increase in performance requirements as users demand greaterflexibility based in software, and as cost pressures drive the consolidation ofapplications on to a single device. The Cortex-M3 processor, with multipletechnologies to reduce memory use whilst delivering industry-leading power andperformance, provides an ideal platform both to accelerate the migration ofthousands of applications from legacy components to 32-bit microcontrollers andfor use in such products as ultra low-cost mobile handsets. The third Cortex family product available for mainstream licensing in 2006,currently code-named "ServalE", has been licensed by two lead partners to date.ARM's ServalE next-generation processor for deeply-embedded applications isexpected to be available for mainstream licensing in the first half of 2006.Taking into account the 11 licenses for microprocessor cores that were signed inQ4 2005, a total of 71 licenses were signed in 2005 compared to 65 licenses in2004 and 51 licenses in 2003. Of the 71 licenses signed in 2005, 12 were forproducts in the ARM11 family, 30 were for products in the ARM9 family, 23 werefor products in the ARM7 family, and six were for products in the Cortex groupof processors. 32 companies became new ARM partners in the year, bringing thetotal number of semiconductor partners at the end of 2005 to 172. PD royalty revenues and unit shipmentsTotal unit shipments in 2005 of 1.662 billion were 31% up on 2004. Unitshipments in the mobile segment grew by 23% year-on-year with unit shipments inthe non-mobile segments growing by 46%. Growth in the non-mobile segments wasachieved across a broad range of product applications including hard diskdrives, games consoles, smart cards, printers, DVD players, flash memoryproducts, digital still cameras, Wi-Fi chipsets and automotive products. Total PD royalty revenues in 2005 were $131.1 million, 22% up on the $107.1million reported in 2004. The average royalty rate ("ARR") of 7.9 cents in 2005compares to 8.4 cents in 2004. The ARR in a given period is based on a number ofvariables, including the ASPs of the chips shipped, the applicable royalty ratepayable to ARM and the mix of unit shipments by ARM product family. Whenevaluating the ARR trend in 2006, the key positive variables are likely to bethe increased proportion of ARM9 family-based products, particularly in smartermobile phones, and the ramp-up of ARM11 family-based products. However, there islikely to be continued strong growth in microcontroller shipments whichtypically have lower ASPs. In 2005, 31% of shipments were based on ARM9technology. By the end of Q3 four partners were shipping products based on ARM11technology with the first ARM11 family-based handsets now being shipped inJapan. The proportion of ARM11 family-based shipments is expected to growmeaningfully in 2006. Physical IP Division ("PIPD") licensing and product developmentPIPD achieved its second highest bookings quarter ever in Q4 2005, giving riseto an order backlog up more than 20% sequentially and at a record level at theend of the year. PIPD reported license revenues of $13.8 million in Q4 comparedto $15.2 million last quarter. In Q4, PIPD licensed five physical IP platforms to two further foundries and oneintegrated device manufacturer ("IDM"). One foundry licensed both the Metro andAdvantage platforms for their 90nm process and the other licensed both the Metroand Advantage platforms for their 65nm process. The IDM licensed the Advantageplatform for their 65nm process. This follows other physical IP platformannouncements made earlier in the year including IBM licensing the Metroplatform for their 65nm ASIC process, IBM-Chartered licensing the Metro platformfor their common 65nm process, UMC licensing the Metro platform for their 130nmprocess and most recently Grace Semiconductor licensing the Classic platform forboth their 180nm and 130nm processes. This brings the total number of physicalIP platforms licensed to foundries and IDM's to 67. In addition to platformlicenses, PIPD licensed its cell libraries, memory compilers and high speed PHYsto a further 15 end user licensees. This brings the total number of end userlicensees for these technologies to 143. In Q4, PIPD made the first productdeliveries of the Metro, Advantage and VelocityTM products for 65nm to bothfoundry licensees and design partners. 2005 has also seen the first synergistic benefits from the combination of ARMand Artisan, both in terms of revenue and technology collaboration. One furthersynergistic revenue deal was signed in Q4, bringing the total in 2005 to seven.Synergistic deals include both instances of physical IP being licensed to ARMpartners and instances of contracts being won against the competition due toboth processor and physical IP being available from ARM. As well as the Cortex-A8 processor, we are already developing other productswhich benefit from the integration of processor and physical IP. In January2006, we unveiled a ground-breaking high performance implementation of theARM1176JZF-S processor, enhanced with the ARM Artisan Advantage cell library andmemories, which achieves a frequency of more than 750 MHz in a high-performance90nm foundry process while occupying less than 2.4 mm2 of silicon area. Thisrepresents a significant performance increase through a combination ofcollaborative design, advanced physical IP and process technology. The optimisedimplementation delivers an industry-leading performance for existingapplications and operating systems without the need for expensive softwarere-design or re-compilation. Further, the ongoing collaboration between PIPD andARM's Fabric IP business unit yielded fruit in Q4 with the first 130nm test chipwith combined DDR and PrimeCell(R) peripherals being received back from the faband working first time. PIPD royalty revenuesAs with PD royalties, PIPD receives and reports royalty data one quarter inarrears. Total royalties of $8.0 million in Q4 2005 included "catch-up"royalties of $1.6 million. These catch-up royalties represent the initial yieldfrom an enhanced process of internal analysis and external audit to ensure thatARM receives all royalties when due. Underlying royalties of $6.4 millioncompared to $6.0 million in Q3 2005 and $5.7 million in Q2 2005. Underlyingroyalties (excluding catch-up) are up 1% year-on-year compared to an overalldecline in foundry revenue of some 3% over the same period. Development SystemsDevelopment Systems revenues have grown 29% in 2005 to $46.5m. This growth hasbeen generated by working with customers on longer term relationships for thesupply of RealView(R) Developer tools for software development, continuedmomentum behind the RealView Create tools for Electronic System Level designtools ("ESL") customers and a buoyant market place for tools to support thebroad portfolio of ARM microprocessors. Development Systems has entered intomore multi-year contracts for larger product volumes which improves thevisibility of business going forward and builds a good customer base from whichto drive new innovation. Keil, a supplier of microcontroller tools, was acquiredin October 2005. This acquisition enables ARM to benefit even further from theaccelerating growth in the 32-bit microcontroller market and providesDevelopment Systems access to a well-developed channel through which to sellmicrocontroller toolkits in order to address the much larger customer baseassociated with this market. In 2006, growth is expected to be generated from new products launched into themicrocontroller tools market that bring together technology from ARM and Keil,the launch of RealView Developer Suite 3.0 and RealView ICE 3.0 and the increasein the number of customers adopting ESL as a design methodology. DevelopmentSystems will also continue to increase the value provided to key customers withthe RealView product line by strengthening the link between hardware andsoftware development in order to provide a complete solution to the challengesof hardware and software co-design and by putting in place more long termagreements for the supply of RealView tools. PeopleAt 31 December 2005 we had 1,324 full time employees compared to 1,272 at theend of Q3 2005 and 1,171 at the end of 2004. At 31 December 2005, the Group had576 employees based in the UK, 486 in the US, 101 in Continental Europe, 116 inIndia and 45 in the Asia Pacific region. Legal matters In May 2002, Nazomi Communications, Inc. ("Nazomi") filed suit against ARMalleging willful infringement of Nazomi's US Patent No. 6,332,215. ARM answeredNazomi's complaint in July 2002 denying infringement. ARM moved for summaryjudgment and a ruling that the technology does not infringe Nazomi's patent. TheUnited States District Court for the Northern District of California grantedARM's motion, and Nazomi appealed the District Court's ruling. On September 7,2004, the Court of Appeals for the Federal Circuit heard the appeal and issuedits decision on April 11, 2005. Because, in the opinion of the Court of Appealsfor the Federal Circuit, the District Court did not construe the disputed claimterm in sufficient detail for appellate review, the Court of Appeals for theFederal Circuit remanded the dispute back to the District Court for furtheranalysis. A supplementary "Markman" hearing was held on 11 October 2005 and weare presently awaiting the ruling of the District Court. Based on legal advicereceived to date, ARM has no cause to believe that the effect of the originalruling by the District Court will not be upheld. CONTACTS:Tom Buchanan/Fiona Laffan Tim Score/Bruce BeckloffBrunswick ARM Holdings plc +44 (0) 207 404 5959 +44 (0)1628 427800 ARM Holdings plc Fourth Quarter and Annual Results - US GAAP Quarter Quarter Year Year Year ended ended ended ended ended 31 December 31 December 31 December 31 December 31 December 2005 2004 2005 2004 2005 (1) Unaudited Unaudited Unaudited Audited Unaudited -------- -------- -------- -------- --------- £'000 £'000 £'000 £'000 $'000RevenuesProductrevenues 58,828 38,150 217,711 138,732 373,766Servicerevenues 4,065 3,385 14,728 14,165 25,285 -------- -------- -------- -------- ---------Total revenues 62,893 41,535 232,439 152,897 399,051 -------- -------- -------- -------- --------- Cost ofrevenuesProduct (4,313) (2,558) (19,265) (6,735) (33,074)costsService (1,579) (1,168) (6,093) (5,064) (10,460)costs -------- -------- -------- -------- ---------Total cost ofrevenues (5,892) (3,726) (25,358) (11,799) (43,534) -------- -------- -------- -------- --------- -------- -------- -------- -------- ---------Gross profit 57,001 37,809 207,081 141,098 355,517 -------- -------- -------- -------- --------- Research anddevelopment (15,613) (13,030) (60,051) (50,133) (103,096)Sales andmarketing (9,061) (6,342) (34,102) (23,935) (58,546)General andadministrative (10,959) (10,743) (37,558) (30,371) (64,480)Deferredstock-based (2,465) (565) (9,727) (960) (16,699)compensation -------- -------- --------Amortisationof intangibles (4,809) (3,712) (17,726) (4,188) (30,432)purchasedthroughbusinesscombination -------- -------- -------- -------- ---------Totaloperatingexpenses (42,907) (34,392) (159,164) (109,587) (273,253) -------- -------- -------- -------- --------- Income fromoperations 14,094 3,417 47,917 31,511 82,264Interest, 1,684 1,917 5,317 6,944 9,128net -------- -------- -------- -------- ---------Income beforeincome tax 15,778 5,334 53,234 38,455 91,392Provision forincome taxes (2,801) (825) (11,354) (10,478) (19,492) -------- -------- -------- -------- ---------Net income 12,977 4,509 41,880 27,977 71,900 -------- -------- -------- -------- --------- Net income 12,977 4,509 41,880 27,977 71,900Othercomprehensiveincome:Foreigncurrencyadjustments 16,538 (183) 58,561 (421) 100,537Unrealisedholdinggain/(loss) onavailable-for-salesecurities,net of tax of£236,000 (Q42004:£837,000; FY2005:£981,000; FY2004:£1,631,000) 452 1,954 (2,316) 4,196 (3,976) -------- -------- -------- -------- ---------Totalcomprehensiveincome 29,967 6,280 98,125 31,752 168,461 -------- -------- -------- -------- --------- Earnings pershare(assumingdilution)Sharesoutstanding('000) 1,431,084 1,071,645 1,427,013 1,049,768Earnings pershare - pence 0.9 0.4 2.9 2.7Earnings perADS (assumingdilution)ADSsoutstanding('000) 477,028 357,215 475,671 349,923Earnings perADS - cents 4.7 2.4 15.1 15.4 (1) US dollar amounts have been translated from sterling at the 31 December2005 closing rate of $1.7168=£1 (see note 1) ARM Holdings plcConsolidated balance sheet - US GAAP 31 December 31 December 31 December 2005 2004 2005 (1) Unaudited Audited Unaudited --------- --------- ----------- £'000 £'000 $'000AssetsCurrent assets:Cash and cashequivalents 128,077 110,561 219,883Short-terminvestments 23,990 5,307 41,186Marketablesecurities 8,835 21,511 15,168Accounts receivable, net of allowanceof £2,173,000 in 2005 and£1,451,000 in 2004 55,518 34,347 95,313Inventory:finished goods 1,490 897 2,558Prepaidexpenses andother assets 12,567 16,001 21,575 --------- --------- -----------Total currentassets 230,477 188,624 395,683 Long-termmarketablesecurities - 5,438 -Deferredincome taxes 4,422 2,529 7,591Prepaidexpenses andother assets 1,674 - 2,874Property andequipment, net 12,803 14,117 21,980Goodwill 385,572 340,416 661,950Otherintangibleassets 72,345 74,578 124,202Investments 8,800 12,235 15,108 --------- --------- -----------Total assets 716,093 637,937 1,229,388 --------- --------- ----------- Liabilities and shareholders' equityAccountspayable 2,221 4,110 3,813Income taxespayable 10,826 6,345 18,586Personneltaxes 1,329 1,123 2,282Accruedliabilities(see note 2) 25,024 38,600 42,961Deferredrevenue 20,354 21,355 34,944 --------- --------- -----------Total currentliabilities 59,754 71,533 102,586 Accruedliabilities - 1,732 -Deferredincome taxes 7,289 12,345 12,513 --------- --------- -----------Totalliabilities 67,043 85,610 115,099 --------- --------- ----------- Shareholders' equityOrdinaryshares 693 675 1,190Additionalpaid-incapital 425,252 414,133 730,073Deferredcompensation (4,404) (12,083) (7,561)Treasurystock, at cost (16,315) (7,485) (28,010)Retainedearnings 183,913 153,421 315,742Accumulated other comprehensive income: Unrealisedholding gain onavailable-for-sale securities,net of tax of£1,096,000(2004:£2,077,000) 3,859 6,175 6,625Cumulativetranslationadjustment 56,052 (2,509) 96,230 --------- --------- -----------Totalshareholders'equity 649,050 552,327 1,114,289 --------- --------- ----------- Totalliabilitiesandshareholders'equity 716,093 637,937 1,229,388 --------- --------- ----------- (1) US dollar amounts have been translated from sterling at the 31 December 2005 closing rate of $1.7168=£1 (see note 1) ARM Holdings plcConsolidated income statement - IFRS Year Year ended ended 31 December 31 December 2005 2004 Unaudited Unaudited ---------- ---------- £'000 £'000 RevenuesProduct revenues 217,711 138,732Service revenues 14,728 14,165 ---------- ----------Total revenues 232,439 152,897 ---------- ---------- Cost of revenuesProduct costs (19,265) (6,735)Service costs (see note 4) (7,345) (5,505) ---------- ----------Total cost of revenues (26,610) (12,240) ---------- ---------- ---------- ----------Gross profit 205,829 140,657 ---------- ---------- Operating expensesResearch and development (see note 4) (80,273) (54,674)Sales and marketing (see note 4) (47,389) (25,546)General and administrative (see note 4) (43,010) (32,108) ---------- ----------Total operating expenses (170,672) (112,328) ---------- ---------- Profit from operations 35,157 28,329Investment income 5,317 6,944 ---------- ----------Profit before tax 40,474 35,273Tax (10,827) (9,398) ---------- ----------Profit for the year 29,647 25,875 ---------- ---------- Dividends- final 2003 paid at 0.6 pence per share - 6,118- interim 2004 paid at 0.28 pence per share - 2,857- final 2004 paid at 0.42 pence per share 5,759 -- interim 2005 paid at 0.34 pence per share 4,677 - Earnings per shareBasic and diluted earnings 29,647 25,875 Number of shares ('000)Basic weighted average number of shares 1,369,335 1,026,890Effect of dilutive securities:Share options 55,027 22,179Diluted weighted average number of shares 1,424,362 1,049,069 Basic EPS 2.2p 2.5pDiluted EPS 2.1p 2.5p All activities relate to continuing operations. All of the profit for the period is attributable to the equity shareholders ofthe parent. ARM Holdings plcConsolidated balance sheet - IFRS 31 December 31 December 2005 2004 Unaudited Unaudited ---------- ---------- £'000 £'000 AssetsCurrent assets:Cash and cash equivalents 128,077 110,561Short-term investments 23,990 5,307Marketable securities 8,835 21,511Financial assets - fair value of currencycontracts - 1,674Accounts receivable 55,518 34,347Prepaid expenses and other assets 12,567 14,327Inventories: finished goods 1,490 897 ---------- ----------Total current assets 230,477 188,624 ---------- ---------- Non-current assets:Financial assets- Long-term marketable securities - 5,438- Available-for-sale investments 8,800 12,235Prepaid expenses and other assets 1,674 -Property, plant and equipment 8,990 9,096Goodwill 474,430 419,174Other intangible assets 79,743 84,037Deferred tax assets 13,633 2,396 ---------- ----------Total non-current assets 587,270 532,376 ---------- ---------- ---------- ----------Total assets 817,747 721,000 ---------- ---------- Liabilities and shareholders' equityCurrent liabilities:Accounts payable 2,221 4,110Current tax liabilities 10,826 7,081Accrued and other liabilities 26,598 42,049Financial liabilities - fair value of currencycontracts 1,708 -Deferred revenue 20,354 21,355 ---------- ----------Total current liabilities 61,707 74,595 ---------- ---------- ---------- ----------Net current assets 168,770 114,029 ---------- ---------- Non-current liabilities:Deferred tax liabilities 9,193 2,135Other non-current liabilities - 1,732 ---------- ----------Total liabilities 70,900 78,462 ---------- ---------- ---------- ----------Net assets 746,847 642,538 ---------- ---------- Shareholders' equityShare capital 693 675Share premium account 447,091 434,026Share option reserve 61,474 61,474Retained earnings 166,656 140,291Revaluation reserve 2,921 5,237Cumulative translation adjustment 68,012 835 ---------- ----------Total equity 746,847 642,538 ---------- ---------- ARM Holdings plcConsolidated cash flow statement - IFRS Year Year ended ended 31 December 31 December 2005 2004 Unaudited Unaudited --------- --------- £'000 £'000 Operating activitiesProfit from operations 35,157 28,329Depreciation and amortisation of tangible andintangible assets 28,608 13,059Loss on disposal of property, plant and equipment 16 20Impairment of available-for sale investments 337 -Compensation charge in respect of share-basedpayments 20,863 7,855Provision for doubtful debts 722 (321)Accounts receivable converted toavailable-for-sale investments - (112)Changes in working capital:Accounts receivable (21,247) (1,358)Inventories (497) 34Prepaid expenses and other assets 1,613 (3,659)Accounts payable (1,931) 1,176Deferred revenue (2,043) 3,013Accrued liabilities and other creditors (5,491) 2,811 --------- ---------Cash generated by operations before tax 56,107 50,847Income taxes paid (14,447) (11,601) --------- ---------Net cash from operating activities 41,660 39,246 --------- --------- Investing activitiesInterest received 5,444 7,233Purchases of property, plant and equipment (5,492) (2,723)Proceeds on disposal of property, plant andequipment 37 23Purchases of other intangible assets (572) (2,672)Purchases of available-for-sale investments (274) (50)Proceeds on disposal of available-for-saleinvestments 96 -(Purchase) / maturity of short-term investments (599) 24,677Purchases of subsidiaries, net of cash acquired (20,304) (77,899) --------- ---------Net cash used in investing activities (21,664) (51,411) --------- --------- Financing activitiesIssue of shares 13,921 1,313Expenses of issuing share capital - (360)Purchase of own shares (16,211) -Dividends paid to shareholders (10,436) (8,975) --------- ---------Net cash used in financing activities (12,726) (8,022) --------- --------- Net increase / (decrease) in cash and cashequivalents 7,270 (20,187)Cash and cash equivalents at beginning of year 110,561 130,722Effect of foreign exchange rate changes 10,246 26 --------- ---------Cash and cash equivalents at end of year 128,077 110,561 --------- --------- Notes to the Financial Statements (1) Basis of preparation - reporting currencyThe Group prepares and reports its financial statements in UK sterling. Purelyfor the convenience of the reader, the US GAAP income statement and balancesheet have been translated from sterling at the closing rate on 31 December 2005of $1.7168=£1. Such translations should not be construed as representations thatthe sterling amounts represent, or have been or could be so converted into USdollars at that or at any other rate. (2) Accrued liabilitiesAccrued liabilities under US GAAP of £25.0 million (2004: £38.6 million)includes: £nil million (2004: £14.3 million) for acquisition-related expenses,£0.7 million (2004: £4.4 million) for staff costs and £0.7 million (2004: £2.8million) representing the fair value of embedded derivatives. (3) Consolidated statement of changes in shareholders' equity (US GAAP) Share capital Additional Deferred Treasury Retained Unrealised Cumulative Total paid-in compensation stock earnings holding gain translation capital adjustment £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000At 1 January2005 675 414,133 (12,083) (7,485) 153,421 6,175 (2,509) 552,327Shares issuedon exercise ofoptions 18 13,065 - - - - - 13,083Net income - - - - 41,880 - - 41,880Dividends - - - - (10,436) - - (10,436)Unrealisedholding losseson available-for-salesecurities - - - - - (2,316) - (2,316)Deferredcompensationarising on - 3,290 (3,290) - - - - -shareschemesTax benefitson exercise ofoptions issued - 1,227 - - - - - 1,227as partconsiderationfor a businesscombinationTax effect ofdisqualifyingdispositions - 370 - - - - - 370Amortisationof deferredcompensation - - 9,727 - - - - 9,727Reversal ofdeferredcompensation - (1,242) 1,242 - - - - -Issuance ofshares - (5,591) - 7,381 (952) - - 838Purchase ofown shares - - - (16,211) - - - (16,211)Currencytranslationadjustment - - - - - - 58,561 58,561------------ ------ ---------- --------- ------- ------- ------- -------- --------At 31 December2005 693 425,252 (4,404) (16,315) 183,913 3,859 56,052 649,050------------ ------ ---------- --------- ------- ------- ------- -------- -------- (4) IFRS operating expenses Included within the IFRS income statement for the year ended 31 December 2005are total share-based payment costs of £20.9 million (2004: £7.9 million),allocated £1.3 million (2004: £0.4 million) in cost of revenues, £12.1 million(2004: £4.3 million) in research and development costs, £4.2 million (2004: £1.5million) in sales and marketing costs and £3.3 million (2004: £1.7 million) ingeneral and administrative costs. Also included within operating costs is amortisation of intangibles of £17.9million (2004: £0.6 million), allocated £8.1 million (2004 £0.3 million) inresearch and development costs, £9.1 million (2004 £0.2 million) in sales andmarketing costs and £0.7 million (2004 £0.1 million) in general andadministrative costs. (5) Consolidated statement of changes in shareholders' equity (IFRS) Share Share Share Retained Revaluation Cumulative Total capital premium option earnings reserve translation account reserve reserve £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2005 675 434,026 61,474 140,291 5,237 835 642,538Shares issued on exercise of options 18 13,065 - - - - 13,083Profit for theperiod - - - 29,647 - - 29,647Dividends - - - (10,436) - - (10,436)Credit inrespect ofemployee shareschemes - - - 20,863 - - 20,863Movement ondeferred taxarising onoutstandingshare options - - - (4,408) - - (4,408)Tax benefits on exercise of options issued as partconsiderationfor a business - - - 6,072 - - 6,072combinationPurchase ofown shares - - - (16,211) - - (16,211)Proceeds fromsale of ownshares - - - 838 - - 838Unrealised holding losses on - - - - (2,316) - (2,316)available-for-saleinvestments (netof deferred tax of£981,000)Currencytranslationadjustment - - - - - 67,177 67,177---------------- ------- -------- -------- ------- -------- -------- -------At 31 December2005 693 447,091 61,474 166,656 2,921 68,012 746,847---------------- ------- -------- -------- ------- -------- -------- ------- (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 annually for impairment. As permitted by IFRS 1, the Company'sgoodwill under IFRS has been frozen at the amount recorded under UK GAAP as at 1January 2004. Under US GAAP, following the provisions of SFAS 142, "Goodwill andother intangible assets", the carrying value of goodwill was frozen at theamount recorded under previous US GAAP as at 1 January 2002. Under both previousUS GAAP and UK GAAP, goodwill was amortised over its useful economic life. Thus,while ongoing accounting policies in respect of goodwill are similar under USGAAP and IFRS, the difference in the dates of transition means that differentamounts 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 the acquisition of Artisan Components Inc. on23 December 2004. Where these provisional values have been amended as estimateshave been refined in 2005, adjustments to fair values have been recorded asprior year adjustments to goodwill for IFRS purposes. Under US GAAP, these arerecorded as amendments to goodwill in the current period. 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 taxation. 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. 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 profit and loss account overthe vesting period of the share options in accordance with FIN 28. Under IFRS,no such adjustment to shareholders' funds is made on acquisition. 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 Companyaccounts for share option compensation expense under APB 25, and thus nocompensation expense is recorded where the exercise price of the option is equalto the share price on the date of grant. Under US GAAP, the Company recognises a compensation charge in respect of UKSAYE plans. The compensation charge is calculated as the difference between themarket price of the shares at the date of grant and the exercise price of theoption and is recorded on a straight-line basis over the savings period. Inaddition, certain options attract a charge under variable plan accounting underUS GAAP. Under IFRS, this charge is calculated in the same manner as othershare-based payments, as detailed above. Under US GAAP, the Company follows variable plan accounting for LTIP grants,measuring compensation expense as the difference between the exercise price andthe fair market value of the shares at each period end over the vesting periodof the options. Increases in fair market value of the shares result in a chargeand decreases in fair market value of the shares result in a credit, subject tothe cumulative amount previously expensed. Under IFRS, this charge is calculatedin the same manner as other share-based payments, as detailed above. 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 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 1 January 2005. 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's taxes on share options Under IFRS, employer's taxes that are payableon the exercise of share options are provided for over the vesting period of theoptions. Under US GAAP, such taxes are accounted for when the options areexercised. Reconciliation of IFRS profit to US GAAP net Year Yearincome ended ended 31 December 31 December 2005 2004 Unaudited Unaudited --------- --------- £'000 £'000 Profit for financial period as reported under IFRS 29,647 25,875Adjustments for:Amortisation of intangibles 548 (65)Write-off of in-process research and development (335) (3,612)US GAAP compensation charge in respect of LTIP (3,814) (619)US GAAP compensation charge in respect of SAYEschemes (417) (341)US GAAP deferred stock-based compensation reacquisition (5,496) -IFRS compensation charge in respect of allshare-based payments 20,863 7,855Employer's taxes on share options 3 (36)Utilisation of restructuring provision 1,368 -Foreign exchange on contingent consideration 40 -Tax on UK and US share options (370) (515)Tax difference on amortisation of intangibles (248) (14)Tax difference on share-based payments 91 (551) --------- ---------Net income as reported under US GAAP 41,880 27,977 --------- --------- Reconciliation of shareholders' equity from IFRS 31 December 31 Decemberto US GAAP 2005 2004 Unaudited Unaudited --------- --------- £'000 £'000 Shareholders' equity as reported under IFRS 746,847 642,538Adjustments for:Employer's taxes on share options 30 27Utilisation of restructuring provision 1,368 -Cumulative difference on amortisation of goodwill 2,713 2,713Cumulative difference on amortisation ofintangibles 441 (107)Cumulative write-off of in-process research anddevelopment (4,097) (3,762)Cumulative difference on deferred tax (263) (14)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 (8,775) (13,274)Portion of tax benefit arising on exercise ofoptions issued on acquisition taken to goodwillunder US GAAP (4,844) -Foreign exchange on valuation of intangible assetsand deferred tax (9,872) (1,256)Foreign exchange on valuation of contingentconsideration 40 - --------- ---------Shareholders' equity as reported under US GAAP 649,050 552,327 --------- --------- Reconciliation of goodwill from IFRS to US GAAP 31 December 31 December 2005 2004 Unaudited Unaudited --------- --------- £'000 £'000 Goodwill as reported under IFRS 474,430 419,174Adjustments for:Amendments to provisional fair values 1,235 (2,831)Cumulative difference on amortisation of goodwill 2,713 2,713Cumulative write-off of in-process research anddevelopment (150) (150)Amendment following revised intangible valuationon acquisition, net of deferred tax - 500Separately identifiable intangible assets (302) (302)Deferred tax on capitalised in-process researchand development (1,570) (1,318)Portion of tax benefit arising on exercise ofoptions issued on (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 (1,864) (1,665)Foreign exchange on revaluation of goodwill (10,134) (1,167) --------- ---------Goodwill as reported under US GAAP 385,572 340,416 --------- --------- (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 and acquisition-related charges. All figures in£'000 unless otherwise stated. (7.1) (7.2) (7.3) (7.4) (7.5) Q4 2005 Q3 2005 Q4 2004 FY 2005 FY 2004Income from operations 14,094 10,638 3,417 47,917 31,511Non-recurring charge -technology license agreement - - 4,510 - 4,510Acquisition-related charge -amortisation of intangibles 4,809 4,342 3,712 17,726 4,188Acquisition-related charge -deferred stock-basedcompensation 479 1,311 - 5,496 -Other deferred stock-basedcompensation and relatedpayroll taxes 2,628 1,449 565 4,873 960--------------------------- ------- ------- -------- -------- --------Pro forma income fromoperations 22,010 17,740 12,204 76,012 41,169--------------------------- ------- ------- -------- -------- --------As % of revenue 35.0% 31.3% 29.4% 32.7% 26.9% (7.6) (7.7) (7.8) (7.9) (7.10) Q4 2005 Q3 2005 Q4 2004 FY 2005 FY 2004Income before income tax 15,778 12,032 5,334 53,234 38,455Non-recurring charge -technology license agreement - - 4,510 - 4,510Acquisition-related charge -amortisation of intangibles 4,809 4,342 3,712 17,726 4,188Acquisition-related charge -deferred stock-basedcompensation 479 1,311 - 5,496 -Other deferred stock-basedcompensation and relatedpayroll taxes 2,628 1,449 565 4,873 960--------------------------- ------- ------- -------- -------- --------Pro forma income beforeincome tax 23,694 19,134 14,121 81,329 48,113--------------------------- ------- ------- -------- -------- -------- (7.11) (7.12) (7.13) 31 December 2005 30 September 2005 31 December 2004Cash and cash equivalents 128,077 137,856 110,561Short-term investments 23,990 5,000 5,307Short-term marketablesecurities 8,835 21,881 21,511Long-term marketablesecurities - - 5,438--------------------------- ------- ------- --------Pro forma cash 160,902 164,737 142,817--------------------------- ------- ------- -------- (7.14) (7.15) (7.16) Q4 2005 Q3 2005 FY 2005Pro forma cash at end of period (as above) 160,902 164,737 160,902Less: Pro forma cash at beginning ofperiod (as above) (164,737) (154,636) (142,817)Add back: Cash outflow from acquisitions(net of cash acquired) 4,264 1,690 20,304Add back: Cash outflow from payment ofdividends 4,677 - 10,436Add back: Cash outflow from purchase ofown shares 10,773 5,438 16,211--------------------------- ------- -------- --------Pro forma cash generation 15,879 17,229 65,036--------------------------- ------- -------- -------- (7.17) (7.18) (7.19) (7.20) (7.21) Q4 2005 Q3 2005 Q4 2004 FY 2005 FY 2004Net income (USGAAP) 12,977 9,784 4,509 41,880 27,977Non-recurringcharge -technology licenseagreement - - 4,510 - 4,510Acquisition-related charge -amortisation ofintangibles 4,809 4,342 3,712 17,726 4,188Acquisition-related charge -deferredstock-basedcompensation 479 1,311 - 5,496 -Other deferredstock-basedcompensation 2,628 1,449 565 4,873 960Estimated taximpact of abovecharges (3,346) (1,860) (1,525) (8,912) (1,543)---------------------- ------- -------- -------- -------- --------Pro forma netincome 17,547 15,026 11,771 61,063 36,092---------------------- ------- -------- -------- -------- --------Dilutive shares('000) 1,431,084 1,437,448 1,071,645 1,427,013 1,049,768Pro forma dilutedEPS 1.23p 1.05p 1.10p 4.28p 3.44p (7.22) (7.23) Q4 2004 FY 2004 $'000 $'000Artisan actual reported dollar revenues 14,609 83,090Artisan pro forma dollar revenue adjustment 11,500 11,500---------------------- ------- --------Pro forma Artisan dollar revenues 26,109 94,590---------------------- ------- -------- Note The results shown for Q4 2005, Q4 2004, FY 2005 and IFRS FY 2004 are unaudited.The US GAAP results shown for FY 2004 are audited. The results for ARM for Q4 2005 and previous quarters as shown reflect theaccounting policies as stated in Note 1 to the US GAAP financial statements inthe Annual Report and Accounts filed with Companies House in the UK for thefiscal year ended 31 December 2004 and in the Annual Report on Form 20-F for thefiscal year ended 31 December 2004. The IFRS results have been prepared usingthe accounting policies detailed in the 2005 Interim Report. These IFRS policieshave not been formally agreed as audited but no significant changes are expectedto those in the audited financial statements for the year. 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 2004 including (without limitation) under the captions,"Risk Factors" and "Management's Discussion and Analysis of Financial Conditionand Results of Operations," which is on file with the Securities and ExchangeCommission (the "SEC") and available at the SEC's website at www.sec.gov. The financial information contained in this announcement does not constitutestatutory accounts within the meaning of Section240 (3) of the Companies Act1985. Statutory accounts of the Company in respect of the financial year ended31 December 2004 have been delivered to the Registrar of Companies, upon whichthe Company's auditors have given a report which was unqualified and did notcontain a statement under Section 237(2) or Section 237(3) of that Act. About ARMARM designs the technology that lies at the heart of advanced digital products,from wireless, networking and consumer entertainment solutions to imaging,automotive, security and storage devices. ARM's comprehensive product offeringincludes 16/32-bit RISC microprocessors, data engines, 3D processors, digitallibraries, embedded memories, peripherals, software and development tools, aswell as analog functions and high-speed connectivity products. Combined with thecompany's broad Partner community, they provide a total system solution thatoffers a fast, reliable path to market for leading electronics companies. Moreinformation on ARM is available at http://www.arm.com/ ARM, ARM Powered, RealView, TrustZone, Keil and ARM7TDMI are registeredtrademarks of ARM Limited. ARM7, ARM7TDMI-S, ARM9, ARM922T, ARM926E-S,,ARM946E-S, ARM11 ,ARM1176JZ-S, Cortex and MPCore are trademarks of ARM Limited.Artisan Components and Artisan are registered trademarks of ARM Physical IP,Inc., a wholly owned subsidiary of ARM. All other brands or product names arethe property of their respective holders. ARM refers to ARM Holdings plc (LSE:ARM and Nasdaq: ARMHY) together with its subsidiaries including ARM Limited, ARMInc., ARM Physical IP Inc., Axys Design Automation Inc., Axys GmbH, ARM KK, ARMKorea Ltd, ARM Taiwan Ltd, ARM France SAS, ARM Consulting (Shanghai) Co. Ltd.,ARM Belgium NV., ARM Embedded Technologies Pvt. Ltd. and ARM Physical IP, Inc. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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