26th Jan 2005 07:01
ARM Holdings PLC26 January 2005 EMBARGOED UNTIL 7.00am GMT 26 JANUARY 2005 ARM HOLDINGS PLC - PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 32% growth in year-on-year dollar revenues. Strong bookings drive order backlogapproximately 30% higher at the end of 2004 compared to the end of 2003 CAMBRIDGE, UK, 26 January 2005-ARM Holdings plc ((LSE: ARM); (Nasdaq: ARMHY))announces its unaudited financial results for the fourth quarter and twelve months ended 31 December 2004 HIGHLIGHTS (Figures in US GAAP) Fourth quarter ended 31 December 2004 Note: The acquisition of Artisan Components, Inc. was completed on 23 December2004. The Q4 profit and loss account reported below does not include anymaterial trading results in respect of Artisan. However, the balance sheet at 31December 2004 does reflect the acquisition of Artisan. References to the orderbacklog at 31 December 2004 relate to legacy ARM business only. Comparisons inthis statement to Q3 2004, Q4 2003 and full year 2003 results are also to ARMlegacy business only. • Revenues at £41.5 million, up 5% sequentially from £39.4 million in Q3 2004 and up 22% year-on-year from £34.0 million in Q4 2003. Dollar revenues* up 7% sequentially to $74.7 million from $70.1 million in Q3 2004 and up 31% from $57.0 million in Q4 2003 • License revenues in Q4 increased to £16.2 million from £14.6 million in Q3 and in dollar terms* increased to $28.8 million compared to $25.6 million in Q3. 19 licenses for microprocessor cores signed in the quarter compared to 12 in Q3. Four new partners signed licenses in the quarter • ARM stand-alone order backlog up some 15% sequentially and up approximately 30% at the end of 2004 compared to the end of 2003 • Royalty revenues increased to £16.3 million with record shipments of 367 million units, up from £16.0 million and 341 million units in Q3 2004. Dollar royalties* were $29.4 million in Q4 compared to $28.6 million in Q3 • Total operating expenses in Q4 of £34.4 million, including total non-recurring and acquisition-related charges of £8.2 million, compared to £25.2 million in Q3 • Operating margin in Q4 of 8.2% compared to 3.5% in Q4 2003. Operating margin, excluding non-recurring and acquisition-related charges of £8.2 million, at 28.0%(see note 6.1) compared to 30.0%(6.2) in Q3 2004, before acquisition-related charges of £0.4 million, and 22.4%(6.3), before non-recurring and acquisition-related charges of £6.4 million, in Q4 2003 • Income before income tax at £5.3 million compared to £2.5 million in Q4 2003. Income before income tax, excluding non-recurring and acquisition- related charges of £8.2 million, at £13.5 million, compared to £13.7 million, excluding £0.4 million acquisition-related charges, in Q3 2004, and £8.9 million, before non-recurring and acquisition-related charges of £6.4 million, in Q4 2003 • Net cash generation*** in the quarter, before cash costs of £126.2 million related to the acquisition of Artisan, of £10.1 million(6.5). Consolidated cash position of £142.8 million(6.4) at 31 December 2004. Further fees and expenses related to the acquisition of Artisan of approximately £14 million are expected to be paid subsequent to 31 December 2004 giving an adjusted cash position of the enlarged group of £128.8 million (equivalent to $247 million at year end exchange rates) at the start of 2005 • Earnings per fully diluted share in Q4 of 0.4 pence (2.4 cents per ADS****) compared to a loss per share of 0.04 pence (loss of 0.2 cents per ADS****) in Q4 2003. Earnings per fully diluted share in Q4 2004, before non- recurring and acquisition-related charges of £8.2 million, at 1.2 pence(6.6) (6.8 cents per ADS****) (Q3 2004: 1.0 pence(6.7) and 5.2 cents) compared to 0.6 pence(6.8) (3.1 cents per ADS****), before non-recurring and acquisition-related charges of £6.4 million, in Q4 2003 Twelve months ended 31 December 2004 • Total reported revenues of £152.9 million, compared to £128.1 million in 2003. Dollar revenues* were $272.4 million in 2004, up 32% on 2003. At the 2003 average exchange rate of $1.64, the 2004 revenues would have been £166.1 million** • Income before income tax in 2004 at £38.5 million compared to £22.0 million in 2003. Income before income tax, excluding non-recurring and acquisition- related charges of £8.7 million, at £47.2 million, up from £28.4 million, before non-recurring and acquisition-related charges of £6.4 million, in 2003 • Earnings per fully diluted share in 2004 of 2.7 pence (15.4 cents per ADS****) compared to 1.3 pence (6.8 cents per ADS****) in 2003. Earnings per fully diluted share in 2004, before non-recurring and acquisition-related charges of £8.7 million, at 3.5 pence(6.9) (20.1 cents per ADS****) compared to 1.9 pence(6.10) (10.1 cents per ADS****), before non-recurring and acquisition-related charges of £6.4 million, in 2003 • Board recommends payment of a final dividend of 0.42 pence per share in respect of 2004, giving a full year dividend of 0.7 pence per share, up 17% on 0.6 pence per share in 2003 * Dollar revenues are based on the group's actual dollar invoicing, where applicable, and using the rate of exchange applicable on the date of the transaction for invoicing in currencies other than dollars. Approximately 90% of invoicing is in dollars. ** The actual average dollar exchange rates were $1.87 in Q4 2004 (compared to the effective average rate for ARM of $1.80), $1.82 in Q3 2004 and $1.64 in full year 2003 *** Net cash generation is the movement in cash, cash equivalents, short-term investments and long-term marketable securities as per the balance sheets at the beginning and end of the relevant periods **** Each American Depositary Share (ADS) represents three shares Commenting on the fourth quarter and full year results, Sir Robin Saxby,Chairman, said: "We are delighted that a year of strong operational performance for ARM wasconcluded with the completion of our merger with Artisan. I would like to thankthe management and employees of both companies who worked tirelessly to make themerger happen. The combination of ARM(R) microprocessor IP with the physical IPprovided by Artisan accelerates ARM's momentum towards becoming the architecturefor the digital age. We also are pleased that the ARM Board has beenstrengthened by the appointment of 4 new directors; their knowledge andexperience will be invaluable assets." Warren East, Chief Executive Officer, added: "32% year-on-year growth in dollar revenues in 2004 and the positive trend inour order backlog indicate that the ARM stand-alone business is in robust shape.We look forward to 2005 with confidence as we start to realise the benefitsarising from the merger with Artisan at the end of last year. Against a likelyflatter trading environment in our industry, we expect dollar revenues in theunderlying businesses to grow by at least 20% in 2005." Tim Score, Chief Financial Officer, added: "Again in Q4, revenue growth and careful cost control have combined to yieldstrong cash generation from ARM's business. We were also particularly encouragedby the strong sequential improvement in licensing revenues, demonstrating thatARM continues to develop a broad range of new technologies which bring realbenefit to the ARM Connected Community and end customers." Operating review Market conditions, current trading and prospects After strong year-on-year growth for the semiconductor industry in 2004, currentexpectations for 2005 are that there will be little or no growth over 2004.Despite this likely flatter trading environment, we expect 2005 to be a year ofgrowth in dollar revenues for the company. Both the former ARM and Artisan stand-alone businesses enter 2005 with healthyorder backlogs and sales pipelines which underpin licensing revenues this year.In addition, both companies continue to enjoy good momentum in royalty revenuesbased on the increasing adoption of ARM and Artisan technology by semiconductorand OEM companies in recent years. The healthy order backlog and sales pipelineand strong momentum in royalty revenues gives confidence that dollar revenues inboth underlying businesses are capable of growing by at least 20% in 2005. The group remains exposed to any further weakening in the US dollar againststerling given that more than 90% of total group revenues are earned in USdollars. Following the acquisition of Artisan, approximately 45% of the group'scost base will be incurred in US dollars, compared to approximately 25% for ARMprior to the acquisition of Artisan. Licensing and product development Taking into account the 19 licenses for microprocessor cores that were signed inQ4 2004, a total of 65 licenses were signed in 2004 (compared to 51 licenses in2003), comprising 31 multi-use licenses and 34 per-use licenses. Of the 65licenses signed in 2004, 15 were for products in the ARM11(TM) family, 31 were for products in the ARM9TM family, 15 were for products in the ARM7 family, 3 were for next-generation ARM processors and one was an architecture license. 15companies became new ARM partners in the year, bringing the total number ofsemiconductor partners at the end of 2004 to 140. Of the 15 new partners signedin 2004, 2 took multi-use licenses and 13 took per-use licenses. Licensing activity in 2004 demonstrates both the breadth of ARM's technologyoffer as well as the longevity of the products. For example, our partners havenow been licensing products in the ARM7 family for more than 11 years, includingan incremental 13 ARM7 family licenses in 2004. We expect that licensing of ARM7family products will continue for some time, demonstrating the relevance ofhaving leading-edge technology at all performance points in the embeddedmicroprocessor space. Licensing of products in the ARM11 family continues to gather momentum with afurther 15 licenses being signed in 2004, making a total of 25 licenses signedto date. As ARM11 products move into the mainstream licensing phase, it isencouraging that licensing of the next generation of ARM technology hascommenced in 2004. We have now signed 3 lead partners for our "Tiger" product.Other new technologies planned for delivery in 2005 are now available forlicensing. Further details of these products will be disclosed later in 2005. The strong licensing performance has driven a further increase in the orderbacklog in the quarter, resulting in backlog at the end of Q4 being up some 15%sequentially and being approximately 30% higher than at the end of 2003. Revenues from licensing of products other than microprocessors comprised 18% oftotal license revenues in 2004, compared to 17% in 2003. Following the acquisition of Adelante Technologies N.V., now ARM Belgium, in2003, we formally announced the launch of our OptimoDETM embedded signalprocessing technology in May 2004. This new technology, having undergone aseries of rigorous benchmarking evaluations by our partners and potentialpartners, is now beginning to generate license revenues. In November 2004, weannounced that Thomson had licensed our OptimoDE Data Engine for the developmentof broadcast video processing integrated circuits (ICs) and in January 2005, weannounced that LG Electronics had licensed the OptimoDE solution for use in itsvideo encoding and decoding product lines, with the first LG product scheduledto benefit from the technology being an H.264 based high-definition digitaltelevision. ARM has introduced this disruptive technology to address theprocessing requirements of very data-intensive applications across all endmarkets, which are often outstripping the capabilities of general-purposedigital signal processors (DSPs). The OptimoDE product, which comprises aconfigurable data engine (signal processor) together with related IP and tools,will be deployed in systems alongside existing ARM microprocessor cores andother ARM technology, including the electronic system level (ESL) design toolsfrom Axys, acquired in August 2004. The acquisition of Axys, a provider of fast, accurate, integrated, processor andsystem modelling and simulation solutions, brings ESL expertise to our RealView(R) design tools portfolio. Axys' ESL products reduce overall system costs byallowing designs to be modelled early in the development cycle, decreasingtime-to-market and minimising design errors. In the second quarter 2004 we established an embedded software group within ARMto capitalise on the opportunities we see to generate revenues from software.This team will drive growth in embedded software revenue, building on the strongfoundation of the existing Jazelle(R) acceleration technology, IntelligentEnergy Manager (IEM) technology, TrustZoneTM security software and Swerve(co-developed with Superscape Group plc) technologies and bring more focus tothe development of enabling software technology to support further growth ofmicroprocessor and physical IP licensing, development systems and data enginesrevenues. Royalty revenues and unit shipments Royalty revenues have grown strongly in 2004. Royalty revenues earned in 2004were £59.6 million on 1,272 million units shipped compared to £44.3 million on782 million units shipped in 2003. Dollar royalty revenues earned in 2004 were$107.1 million, up 50% on 2003 compared to the increase in year-on-year unitshipments of 63%. Over the last 3 years average royalty rates per unit have been8.4 cents in 2004, 9.1 cents in 2003 and 8.3 cents in 2002, indicating thatwhilst average royalty rates may move up or down in the short term, they havetended to remain stable over a longer period. Royalty revenues recognised in the quarter ended 31 December 2004 (we receiveand report royalty data one quarter in arrears) were $29.4 million on 367million units shipped, up 37% and 56%, respectively, on the same period a yearago. The average royalty rate per unit reported in the fourth quarter was 8.0cents compared to 8.4 cents per unit in the third quarter. The sequentialreduction in average royalty rate is due to several of our partners shippinghigher volumes of more mature ARM7 and ARM9 family-based product in the thirdquarter. Of the total unit shipments reported in the fourth quarter, 24% relatedto units based on ARM9 family technology. As products based on the older ARM9family technologies have only been shipping for a relatively short period, anumber of our partners are moving through volume-related price breaks that ishaving an impact on the weighted average royalty rate. Unit shipments based onthe ARM926EJ-STM microprocessor accounted for approximately 3% of totalshipments in the quarter. The proportion of ARM926EJ-S processor-based devicesis expected to increase over the next several quarters. In 2004, the proportion of total unit shipments accounted for by the wirelesssegment was 68%, representing 868 million units. The 32% relating to theaggregate shipments in all sectors other than wireless represents 405 millionunits in 2004, more than triple the 119 million units shipped in 2002,demonstrating the increasing penetration of ARM technology in the full range ofdigital products. In 2004 unit shipments have grown strongly across all segmentswith particularly strong growth in the microcontroller, storage and consumersegments. Acquisition of Artisan Components, Inc. The acquisition of Artisan was completed on 23 December 2004. The combination ofARM and Artisan's complementary product portfolios, sales channels and customerbases allows the combined company to provide one of the broadest offerings ofsystem-on-chip (SoC) IP to their expanded customer base. The combination of ARMand Artisan's complementary and innovative business models is expected togenerate revenue benefits, some cost savings from the consolidation of selectedcorporate functions, an attractive margin structure and strong cash flowgeneration. From a technology standpoint, the combined company will seek to leverageArtisan's expertise in designing physical IP components, essential buildingblocks of ICs, with ARM's complementary expertise in designing microprocessors.As a result, alongside the physical IP available for use with third partymicroprocessors, the combined company will be able to develop IP components thatare highly optimised for use in and with ARM microprocessor cores. Theopportunities for tighter integration and finer tuning of the IP components withthe microprocessor cores has the potential to produce substantial benefits forend users, such as reduced power consumption and increased processor speed. The integration of the two businesses is proceeding as planned. The formerArtisan business now forms the Physical IP division of ARM, with one unifiedworldwide sales force being responsible for selling the full range of productsoffered by the combined company. ARM's office in Los Gatos, California willclose in March 2005, with employees relocating to Artisan's Sunnyvale facility,the new headquarters for ARM in the US. Good momentum was maintained in the Artisan business during the fourth quarterwith total bookings being consistent with the levels achieved in recentquarters. In anticipation of the acquisition of the company by ARM, Artisanelected to carry forward as much backlog as possible into 2005. Total revenuesin the quarter were $15 million, comprising license revenues of $7 million androyalty revenues of $8 million. A significant proportion of engineering effortin the quarter was directed towards research and development projects andtechnical marketing activity, rather than converting order backlog into revenue.As a result of the good bookings in the quarter and the decision not to convertbacklog into revenue, the backlog at 31 December is well ahead of the priorquarter. Board changes Mark Templeton and Lucio Lanza joined the Board on completion of the acquisitionof Artisan on 23 December 2004. Mark Templeton, the former Chief ExecutiveOfficer of Artisan, has become the General Manager of ARM's Physical IP divisionand an executive director of ARM Holdings plc. Lucio Lanza, the former Chairmanof Artisan, is serving as a non-executive director. On 4 January 2005, ARM announced the appointments of Simon Segars as anexecutive director and Philip Rowley as an independent non-executive director. Simon Segars joined ARM's engineering team in 1991. He has worked on many ARMCPU products and has held a number of engineering management positions. InJanuary 2002 he was appointed Executive Vice President, Engineering and inJanuary 2004 became Executive Vice President, Worldwide Sales. Philip Rowley is President and CEO of AOL Europe, the interactive services, webbrands, internet technologies and e-commerce provider. He is a qualifiedchartered accountant and was Group Finance Director of Kingfisher plc fromAugust 1998 to March 2001. Prior to that his roles have included Executive VicePresident and Chief Financial Officer of EMI Music Worldwide. These appointments recognise the valuable contribution that Simon is alreadymaking to the direction of the business and Philip's broad industry experiencewhich will further strengthen the non-executive team. People ARM had 1,171 full time employees at the end of 2004 including 347 employees whojoined the group as part of the Artisan acquisition. At the year-end, the grouphad 546 employees based in the UK, 454 in the US, 79 in Continental Europe, 51in India and 41 in the Asia Pacific region. Legal matters In May 2002, Nazomi Communications, Inc. filed suit against ARM alleging willfulinfringement of Nazomi's US Patent No. 6,332,215. ARM answered Nazomi'scomplaint in July 2002 denying infringement. ARM moved for summary judgement anda ruling that the accused technology does not infringe. In September 2003, theUnited States District Court of Northern California granted ARM's motion,holding that the accused technology does not infringe Nazomi's patent. Nazomiappealed the District Court's ruling. On 7 September 2004, the Court of Appealsfor the Federal Circuit heard the appeal and the decision of the Court isexpected in the first half of 2005. Based on legal advice received to date, ARMhas no cause to believe that the effect of the original ruling by the DistrictCourt will not be upheld. Financial review (US GAAP unless otherwise stated) Fourth quarter ended 31 December 2004 Total revenues Total revenues for the fourth quarter ended 31 December 2004 amounted to £41.5million, representing a 5% increase from £39.4 million in the third quarter of2004 and a 22% increase over fourth quarter 2003 revenues of £34.0 million. InUS dollar terms*, fourth quarter revenues of $74.7 million were 7% up on Q3 2004and 31% up on Q4 2003. The effective US dollar to sterling exchange rate for ARMin Q4 2004 was $1.80 compared to $1.78 in Q3 2004 and $1.68 in Q4 2003. License revenues License revenues amounted to £16.2 million representing 39% of revenues comparedto £14.6 million or 37% of revenues in the third quarter of 2004 and £12.9million or 38% of revenues in Q4 2003. In US dollar terms*, license revenues of$28.8 million in Q4 2004 were 13% ahead of the $25.6 million reported in Q32004. Nineteen licenses for microprocessor cores were signed in the fourth quarter of2004. Four new partners took a total of five per use licenses; four to theARM926EJ-S processor and one license to the ARM922TTM processor. Nine existing partners took licenses to a further 14 cores, comprising 3derivatives from the ARM7 family, 5 derivatives and 1 upgrade to the ARM9family, 3 upgrades to the ARM11 family and 2 upgrades to next-generation ARMcores. Royalty revenues Royalty revenues in the fourth quarter were £16.3 million accounting for 39% ofrevenues compared to £16.0 million or 40% of revenues in the third quarter of2004 and £12.8 million or 38% of revenues in Q4 2003. Development Systems and Service revenues Sales of development systems were £5.6 million, representing 14% of totalrevenues compared to £5.3 million or 14% of total revenues in the third quarterof 2004 and £4.0 million or 12% of revenues in the fourth quarter of 2003. In USdollar terms, development systems revenues were $10.4 million this quartercompared to $9.7 million in Q3. Service revenues were £3.4 million, representing8% of total revenues, comprising consulting fees of £0.2 million and support,maintenance and training fees of £3.2 million compared to total service revenuesof £3.5 million in the third quarter of 2004 and £4.3 million for thecorresponding period in 2003. Gross margins Gross margins for the fourth quarter were 91.0%, compared to 92.8% in Q3 2004and 90.6% in Q4 2003. The decrease from Q3 reflects the increased proportion oflicense revenues in the fourth quarter earned from our strategic relationshipwith Imagination Technologies for licensing of 3D graphics technology. Operating expenses Total operating expenses in the quarter were £34.4 million compared to £25.2million in the third quarter of 2004 and £29.6 million in Q4 2003. Operatingexpenses in Q4 2004 include total non-recurring and acquisition-related chargesof £8.2 million, being £3.3 million for the write-off of in-process research anddevelopment costs on the acquisitions of Artisan and Axys, £0.4 million relatedto the amortisation of intangible assets arising on acquisitions and £4.5million in respect of a technology license agreement (see below). Excludingnon-recurring and acquisition-related charges, total operating expenses in thequarter were £26.2 million. In November 2004, ARM entered into a technology license agreement whereby ARMwill pay $13.3 million in four equal, semi-annual installments over the next twoyears. The first installment of $3.3 million was paid in Q4 2004. For accountingpurposes, the agreement is deemed to comprise a retrospective element amountingto $8.6 million (£4.5 million), which has been charged to the profit and lossaccount as a non-recurring charge in Q4 2004, and a prospective elementamounting to $4.7 million (£2.4 million), which has been accounted for as aprepayment at 31 December 2004. Research and development expenses were £13.0 million in the fourth quarter of2004, representing 31% of revenues. This compares to £13.0 million or 33% ofrevenues in Q3 2004. Sales and marketing costs for the fourth quarter were £6.3million or 15% of revenues compared to £6.0 million or 15% of revenues in thethird quarter of 2004. General and administration expenses in Q4 2004 were £11.3million, including a non-recurring charge of £4.5 million in respect of atechnology licensing agreement. Excluding this non-recurring charge, general andadministration expenses in the quarter were £6.8 million or 16% of revenuescompared to £6.2 million or 16% of revenues, in the third quarter of 2004. Operating margins The operating margin in Q4 was 8.2% compared to 3.5% in Q4 2003. The operatingmargin, excluding non-recurring and acquisition-related charges of £8.2 million,was 28.0%(6.1) compared to 30.0%(6.2) in Q3 2004, before acquisition-relatedcharges of £0.4 million, and 22.4%(6.3), before non-recurring andacquisition-related charges of £6.4 million, in Q4 2003. Interest receivable Interest receivable in the fourth quarter was £1.9 million, the same level as inQ3, with the benefit of higher average cash balances being offset by the impactof monies being invested for shorter periods in anticipation of the payment ofthe cash consideration for the acquisition of Artisan at the end of the quarter. Earnings and taxation Income before income tax for the fourth quarter of 2004 was £5.3 millioncompared to £2.5 million in Q4 2003. Income before income tax, excludingnon-recurring and acquisition-related charges of £8.2 million, was £13.5 millionor 33% of revenues compared to £13.7 million, excluding £0.4 million ofacquisition-related charges, or 35% of revenues in the third quarter of 2004,and £8.9 million, before non-recurring and acquisition-related charges of £6.4million, or 26% of revenues in Q4 2003. Fourth quarter fully diluted earnings per share prepared under US GAAP were 0.4pence (2.4 cents per ADS****) compared to a loss per share of 0.04 pence (lossof 0.2 cents per ADS****) in Q4 2003. Earnings per fully diluted share in Q42004, before non-recurring and acquisition-related charges of £8.2 million, were1.2 pence(6.6) (6.8 cents per ADS****) (Q3 2004: 1.0 pence(6.7) and 5.2 cents)compared to 0.6 pence(6.8) (3.1 cents per ADS****), before non-recurring andacquisition-related charges of £6.4 million, in Q4 2003 Cash flow Net cash generation*** in the quarter, before cash costs of £126.2 millionrelated to the acquisition of Artisan, was £10.1 million(6.5). The consolidatedcash, cash equivalents, short-term investments and long-term marketablesecurities balance was £142.8 million(6.4) at 31 December 2004. Further fees andexpenses related to the acquisition of Artisan of approximately £14 million areexpected to be paid subsequent to 31 December 2004 giving an adjusted openingcash, cash equivalents, short-term investments and long-term marketablesecurities balance of the enlarged group of £128.8 million (equivalent to $247million at year end exchange rates) at the start of 2005. Twelve months ended 31 December 2004 Revenues Total revenues for the twelve months ended 31 December 2004 amounted to £152.9million, an increase of 19% over total revenues of £128.1 million in the twelvemonths ended 31 December 2003. The actual average dollar exchange rate in 2004was $1.83 (with an effective average exchange rate for ARM of $1.78) compared to$1.64 in 2003. This has had the effect of reducing total reported revenues byapproximately £13.2 million. Licensing revenues in 2004 were £59.4 million, being 39% of total revenues,compared to £50.8 million or 40% of total revenues in 2003. Royalty revenues in2004 were £59.7 million, representing 39% of total revenues, compared to £44.3million or 34% of total revenues in 2003. Sales of development systems in 2004were £19.7 million, being 13% of total revenues, compared to £17.9 million or14% of total revenues in 2003. Service revenues, which include consultingservices and revenues from support, maintenance and training, were £14.2 millionin 2004, representing 9% of total revenues, compared to £15.1 million or 12% oftotal revenues in 2003. Gross margins Gross margins for the twelve months to 31 December 2004 were 92.3% compared to91.4% in 2003. Operating expenses Total operating expenses in the twelve months to 31 December 2004 were £109.6million compared to £99.8 million in 2003. Operating expenses in 2004 includetotal non-recurring and acquisition-related charges of £8.7 million, being £3.6million for the write-off of in-process research and development costs on theacquisitions of Artisan and Axys, £0.6 million related to the amortisation ofintangible assets arising on acquisitions and £4.5 million in respect of atechnology license agreement. Excluding non-recurring and acquisition-relatedcharges, total operating expenses in 2004 were £100.9 million. Research and development expenses were £50.1 million in 2004, representing 33%of revenues. This compares to £48.1 million or 38% of revenues in 2003. Salesand marketing costs in 2004 were £23.9 million or 16% of revenues compared to£23.0 million or 18% of revenues in 2003. General and administration expenses in2004 were £31.3 million, including a non-recurring charge of £4.5 million inrespect of a technology licensing agreement. Excluding this non-recurringcharge, general and administration expenses in 2004 were £26.8 million or 18% ofrevenues compared to £22.3 million or 17% of revenues, before a non-recurringcharge of £6.4 million, in 2003. Operating margins The operating margin in 2004 was 20.6% compared to 13.5% in 2003. The operatingmargin in 2004, excluding non-recurring and acquisition-related charges of £8.7million, was 26.3%(6.11) compared to 18.5%(6.12), before non-recurring andacquisition-related charges of £6.4 million, in 2003. Interest receivable Interest receivable was £6.9 million for the twelve months to 31 December 2004compared to £4.8 million in 2003, reflecting the benefit of higher average cashbalances and higher interest rates in 2004. Earnings and taxation Income before income tax in 2004 was £38.5 million compared to £22.0 million in2003. Income before income tax in 2004, excluding non-recurring andacquisition-related charges of £8.7 million, was £47.2 million or 31% ofrevenues compared to £28.4 million, before non-recurring and acquisition-relatedcharges of £6.4 million, or 22% of revenues in 2003. The group's taxation rate under US GAAP in 2004 was 27.2% compared to 40.7% in2003. The reduction is due primarily to the lower level of disallowable itemsand increased availability of research and development tax credits in the UK in2004 compared to 2003. The group's taxation rate under UK GAAP in 2004 is 24.1%,reduced from 34.3% in 2003. The difference in the group's tax rate under US andUK GAAP arises primarily from tax deductions arising on the exercise of employeeshare options being included in the tax charge under UK GAAP but being recordedas an increase in shareholders' funds under US GAAP. Fully diluted earnings per share prepared under US GAAP in 2004 were 2.7 pence(15.4 cents per ADS****) compared to 1.3 pence (6.8 cents per ADS****) in 2003.Earnings per fully diluted share in 2004, before non-recurring andacquisition-related charges of £8.7 million, were 3.5 pence(6.9) (20.1 cents perADS****) compared to 1.9 pence(6.10) (10.1 cents per ADS****), beforenon-recurring and acquisition-related charges of £6.4 million, in 2003. Balance sheet and cash flow Intangible assets at 31 December 2004 were £414.3 million compared to £10.1million at 31 December 2003, comprising goodwill of £339.7 million and otherintangible assets of £74.6 million. Goodwill is no longer amortised under USGAAP but is subject to impairment on at least an annual basis. The otherintangible assets will be amortised through the profit and loss account over aweighted average period of 5 years. Goodwill and intangible assets arising onthe acquisition of Artisan amounted to £330.7 million and £70.1 millionrespectively. Accounts receivable at 31 December 2004 were £34.3 million, including £14.0million relating to Artisan, compared to £20.6 million at 30 September 2004 and£17.3 million at 31 December 2003. The allowance against receivables was £1.5million at 31 December 2004. Deferred revenues were £21.4 million at 31 December2004, including £7.3 million relating to Artisan, compared to £12.6 million atthe end of Q3 2004 and £11.1 million at the end of 2003. The consolidated cash, cash equivalents, short-term investments and long-termmarketable securities balance was £142.8 million(6.4) at 31 December 2004compared to £159.8 million(6.13) at 31 December 2003. In 2004, £122.3 millionwas paid as the cash element of the consideration for the acquisition ofArtisan, £3.9 million of fees and expenses were paid in respect of theacquisition of Artisan prior to 31 December 2004 and net cash, cash equivalents,short-term investments and long-term marketable securities amounting to £82.6million were acquired on completion of the Artisan transaction. A further £14million of fees and expenses related to the Artisan transaction are expected tobe paid subsequent to 31 December 2004. Reconciliation of US and UK GAAP Profit for the year to 31 December 2004 under US GAAP is £28.0 million comparedto £32.0 million when measured under UK GAAP. The difference arises primarily asa result of in-process research and development costs of £3.6 million arising onacquisition being written off under US GAAP but not under UK GAAP. A detailed reconciliation of profit for the year and shareholders' funds at 31December 2004 between US and UK GAAP is set out below. Dividend The directors recommend payment of a final dividend in respect of 2004 of 0.42pence per share, which taken together with the interim dividend of 0.28 penceper share paid in October 2004, gives a total dividend in respect of 2004 of 0.7pence per share, an increase of 17% over 0.6 pence per share in 2003. Subject toshareholder approval, the final dividend will be paid on 6 May 2005 toshareholders on the register on 1 April 2005. CONTACTS:Sarah Marsland/James Melville-Ross/Juliet Clarke Tim ScoreFinancial Dynamics ARM Holdings plc+44 (0) 20 7831 3113 +44 (0)1223 400 432 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 2004 2003 2004 2003 2004 (1) Unaudited Unaudited Unaudited Audited Unaudited £'000 £'000 £'000 £'000 $'000Revenues Product revenues 38,150 29,697 138,732 112,958 266,365 Service revenues 3,385 4,255 14,165 15,112 27,197Total revenues 41,535 33,952 152,897 128,070 293,562 Cost of revenues Product costs (2,558) (2,082) (6,735) (6,171) (12,931) Service costs (1,168) (1,098) (5,064) (4,851) (9,723)Total cost of revenues (3,726) (3,180) (11,799) (11,022) (22,654) Gross profit 37,809 30,772 141,098 117,048 270,908 Research and development (13,030) (11,395) (50,133) (48,131) (96,255) Sales and marketing (6,342) (6,046) (23,935) (22,960) (45,955) General and administration (11,308) (12,132) (31,331) (28,652) (60,156) In-process research and development (3,256) - (3,612) - (6,935) Amortization of intangibles purchased through business combination (456) (25) (576) (42) (1,106)Total operating expenses (34,392) (29,598) (109,587) (99,785) (210,407) Income from operations 3,417 1,174 31,511 17,263 60,501 Interest 1,917 1,339 6,944 4,801 13,333Minority interest - - - (105) -Income before income tax 5,334 2,513 38,455 21,959 73,834Provision for income taxes (825) (2,944) (10,478) (8,943) (20,118) Net income / (loss) 4,509 (431) 27,977 13,016 53,716 Net income / (loss) 4,509 (431) 27,977 13,016 53,716Other comprehensive income Foreign currency adjustments (183) (1,331) (421) (1,425) (808) Unrealized holding gain / (loss) onavailable-for-sale securities, net of 1,954 (909) 4,196 1,979 8,056tax Total comprehensive income / (loss) 6,280 (2,671) 31,752 13,570 60,964Earnings per share (assuming dilution)Shares outstanding ('000) 1,071,645 1,042,674 1,049,768 1,033,307Earnings / (loss) per share - pence 0.4 (0.0) 2.7 1.3Earnings per ADS (assuming dilution)ADSs outstanding ('000) 357,215 347,558 349,923 344,436Earnings / (loss) per ADS - cents 2.4 (0.2) 15.4 6.8 (1) US dollar amounts have been translated from sterling at the 31 December2004 closing rate of $1.92=£1 (see note 1) ARM Holdings plc Consolidated balance sheet-US GAAP 31 December 31 December 31 December 2004 2003 2004 (1) Unaudited Audited Unaudited £'000 £'000 $'000Assets Current assets: Cash and cash equivalents 110,561 130,722 212,277 Short-term investments and marketable securities 26,818 29,064 51,491 Accounts receivable, net of allowance of £1,451,000 in 2004 and £1,115,000 in 2003 34,347 17,320 65,946 Inventory: finished goods 897 931 1,722 Prepaid expenses and other assets 16,001 8,924 30,722 Total current assets 188,624 186,961 362,158 Long-term marketable securities 5,438 - 10,441 Deferred income taxes 18,755 3,139 36,009 Property and equipment, net 14,117 16,583 27,105 Goodwill 339,717 4,352 652,257 Other intangible assets 74,578 5,716 143,190 Investments 12,235 6,246 23,491 Total assets 653,464 222,997 1,254,651 Liabilities and shareholders' equity Accounts payable 4,110 2,691 7,891 Income taxes payable 6,345 3,140 12,182 Personnel taxes 1,123 1,047 2,156 Accrued liabilities (see note 2) 37,901 16,912 72,770 Deferred revenue 21,355 11,132 41,002 Total current liabilities 70,834 34,922 136,001 Accrued liabilities 1,732 - 3,326 Deferred income taxes 28,571 - 54,856 Total liabilities 101,137 34,922 194,183 Shareholders' equity Ordinary shares 675 512 1,296 Additional paid in capital 414,133 63,321 795,135 Deferred compensation (12,083) (2,499) (23,199) Treasury stock, at cost (7,485) (7,569) (14,371) Retained earnings 153,421 134,419 294,568 Other comprehensive income: Unrealized holding gain on available-for-sale securities, net of tax 6,175 1,979 11,856 Cumulative translation adjustment (2,509) (2,088) (4,817) Total shareholders' equity 552,327 188,075 1,060,468 Total liabilities and shareholders' equity 653,464 222,997 1,254,651 (1) US dollar amounts have been translated from sterling at the 31 December 2004 closing rate of $1.92=£1 (see note 1) ARM Holdings plc Results for the Year Ended 31 December 2004 - UK GAAP Consolidated profit and loss account Year ended Year ended 31 December 2004 31 December 2003 Unaudited Audited £'000 £'000 Turnover 152,897 128,070Cost of sales (11,799) (11,022)Gross profit 141,098 117,048Operating expenses:Research and development (50,133) (48,131)Sales and marketing (23,899) (23,007)Administrative expenses (31,845) (27,471)Total operating expenses (105,877) (98,609)Operating profit 35,221 18,439Interest receivable, net 6,944 4,801Profit on ordinary activities before taxation 42,165 23,240Tax on profit on ordinary activities (10,153) (7,977)Profit on ordinary activities after taxation 32,012 15,263Minority interest - (105)Profit for the year 32,012 15,158Dividends paid and proposed (8,542) (6,106)Retained profit for the year 23,470 9,052 Basic earnings per share (pence) 3.1 1.5Fully diluted earnings per share (pence) 3.1 1.5 All activities relate to continuing activities. The acquisition of ArtisanComponents Inc. was completed on 23 December 2004, and, since trading resultsbetween 24 December 2004 and 31 December 2004 are not material, no separatedisclosure has been made. In August 2004, the Group acquired Axys DesignAutomation Inc. The post-acquisition results of Axys are not material and sohave not been separately disclosed on the face of the profit and loss account. Consolidated balance sheet 31 December 31 December 2004 2003 Unaudited Audited £'000 £'000 Intangible fixed assets (see note 3) 461,709 7,547Tangible fixed assets 14,117 16,583Investments 10,751 4,759 486,577 28,889Stocks 897 931Debtors (including £6,385,000 long-term deferred tax asset) 71,627 29,829Short-term investments 59,186 129,663Cash at bank and in hand 78,193 30,123 209,903 190,546Creditors: amounts falling due within 1 year (76,193) (38,937)Net current assets 133,710 151,609Total assets less current liabilities 620,287 180,498Creditors: amounts falling due after 1 year (1,732) -Provisions for liabilities and charges (27) (63)Net assets 618,528 180,435 Equity shareholders' funds (see note 4) 618,528 180,435 Consolidated cash flow statement Year ended Year ended 31 December 2004 31 December 2003 Unaudited Audited £'000 £'000 Net cash inflow from operating activities 50,753 43,740Returns on investments and servicing of finance 7,233 4,930Taxation (11,601) (9,925)Capital expenditure and financial investment (5,422) (4,821)Acquisitions (88,317) (3,390)Equity dividends paid (8,975) -Management of liquid resources 102,965 (3,650)Financing 1,313 255Increase in cash 47,949 27,139 Notes to the Financial Statements (1) Basis of preparation - reporting currency The 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 2004of $1.92=£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 liabilities - US GAAP Accrued liabilities under US GAAP of £37.9 million (2003: £16.9 million)includes: £13.8 million (2003: £nil) for acquisition-related expenses; £nil(2003: £6.4 million) for the Herodion settlement; and £2.8 million (2003: £2.1million) for the FAS 133 accrual. (3) Summary intangible fixed asset note - UK GAAP Goodwill Other intangibles Total £'000 £'000 £'000 Net book value at 1 January 2004 2,091 5,456 7,547Acquisition of Artisan and Axys 459,164 - 459,164Other additions - 160 160Amortisation in the year (2,103) (2,621) (4,724)Exchange differences (438) - (438)Net book value at 31 December 2004 458,714 2,995 461,709 (4) Summary reserve note and reconciliation of shareholders' funds - UK GAAP Share Foreign Profit Equity Share premium Merger exchange Other and loss shareholders' capital account reserve reserve reserve account funds £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2004 512 81,137 - (2,088) - 100,874 180,435Exercise of share options 1 1,310 - - - - 1,311Acquisition of Artisan 162 - 351,579 - 61,474 - 413,215Shares allocated to satisfy SAYE - - - - - 12 12exercisesCredit in respect of employee share - - - - - 495 495awardsExchange differences on consolidation - - - (410) - - (410)Retained profit for the year - - - - - 23,470 23,470At 31 December 2004 675 82,447 351,579 (2,498) 61,474 124,851 618,528 (5) Summary of significant differences between UK Generally Accepted AccountingPrinciples ("UK GAAP") and United States Generally Accepted AccountingPrinciples ("US GAAP") The principal differences between the Group's accounting policies under UK GAAPand those that would have been followed had the financial information beenprepared under US GAAP are set out below. Goodwill Under UK GAAP, goodwill is amortised on a straight-line basis over anestimate of the time that the Group is expected to benefit from it. This wasalso the Group's accounting policy under US GAAP prior to 1 January 2002, onwhich date, following the provisions of SFAS 142 ('Goodwill and other IntangibleAssets'), the carrying value of goodwill was frozen and became subject to annualimpairment reviews. No write-offs of goodwill have arisen as a result of theGroup's initial or annual impairment reviews. Amortisation of intangibles Under UK GAAP, intangible assets purchased as partof a business combination are included within the goodwill balance unless theasset can be identified and sold separately without disposing of the business asa whole. Under US GAAP, such intangible assets may meet the criteria set out inSFAS 142 for categorisation as intangible assets other than goodwill and areamortised over their useful economic lives. A deferred tax liability arises onthe intangible assets, and is credited to the profit and loss accountproportionately to the amortisation of the related intangible assets. Under USGAAP, payments made to purchase intangible assets that are still in developmentare charged directly to the profit and loss account. Thus differences arise inthe amounts of goodwill recognised, the associated amortisation charge and theassociated deferred tax liability and income statement credit. Valuation of consideration on business combination Under both US and UK 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, which are then used in the goodwill calculation. Under UK GAAP,any equity issued is valued at the fair value as of the date of completion,whilst under US GAAP, the equity is valued at the date the terms of thecombination were agreed to and announced. For options, under US GAAP, the fairvalue is based upon the total number of options granted, both vested andunvested, whilst under UK GAAP the fair value only includes those that havevested, together with a pro-rata value for partially vested options.Furthermore, where there is contingent consideration for an acquisition, underUK GAAP this is recognised as part of the purchase consideration if thecontingent conditions are expected to be satisfied, whilst under US GAAP it isonly recognised if the conditions have actually been met. Deferred stock-based compensation Under US GAAP, the intrinsic value of unvestedstock options issued by an acquirer as part of a business combination inexchange for unvested share options of the acquiree is recorded as a debitbalance within shareholders' funds and as a reduction in goodwill. This amountis charged to the profit and loss account over the vesting period of the shareoptions in accordance with FIN 28 "Accounting for Stock Appreciation Rights andOther Variable Stock Option or Award Plans". Under UK GAAP, no such adjustmentto goodwill and shareholders' funds is made on acquisition. Although the samecharge as under US GAAP is subsequently made to the profit and loss account, itis written back through reserves rather than offset against goodwill. Fair values of assets and liabilities acquired The conventions under which thefair value of assets acquired and liabilities assumed in a purchase businesscombination is determined differ between UK and US GAAP, for example, inrelation to the valuation of deferred revenue and related costs. In addition,US GAAP permits, in accordance with EIF 95-3 "Recognition of Liabilities inConnection with a Purchase Business Combination", the recognition in theacquired company's opening balance sheet of a provision for costs to exit anactivity of an acquired company. UK GAAP does not permit the recognition ofsuch liabilities where they result from the acquirer's intentions or futureactions. Marketable securities Under US GAAP, investments in available-for-salesecurities are marked-to-market where the market value is readily determinableand gains and losses, net of deferred taxation, are recorded in othercomprehensive income. Where an impairment is considered to be other thantemporary, the security is written down to a new cost basis represented by thefair value of the security on the date the impairment was determined. Under UKGAAP, the Group's accounting policy is to carry such investments at cost lessany provisions for impairment. Long Term Incentive Plan ("LTIP") Under UK GAAP, the fair value of the sharesawarded under the LTIP is charged to compensation cost over the period inrespect of which performance conditions apply. To the extent the award isadjusted by virtue of performance conditions being met or not met, thecompensation cost is adjusted in line with this. Under US GAAP, the Groupfollows variable plan accounting for these grants, measuring compensationexpense as the difference between the exercise price and the fair market valueof the shares at each period end over the vesting period of the options.Increases in fair market value of the shares result in a charge and decreases infair market value of the shares result in a credit, subject to the cumulativeamount previously expensed. Save As You Earn ('SAYE') plans Under UK GAAP, the Group has utilised theexemption provided by UITF 17 ('Employee Share Schemes') not to recognise anycompensation charge in respect of options granted under SAYE plans. Under USGAAP, the Group follows the requirements of EITF 00-23, which does not permitsuch an exemption in respect of plans where the savings period is in excess of27 months, as is the case with the Group's Inland Revenue approved UK SAYEplans. EITF 00-23 applies only to new offers made since 24 January 2002. Thecompensation charge made under US GAAP is calculated as the difference betweenthe market price of the shares at the date of grant and the exercise price ofthe option and is recorded on a straight-line basis over the savings period. Inaddition, certain options attract a charge under variable plan accounting underUS GAAP. Employer taxes on share options Under UK GAAP, 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. Tax on UK and US share options In the US, the Group is entitled to a taxdeduction for the amount treated as compensation under US tax rules for certainRelated Shares:
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