25th Jul 2006 07:01
ARM Holdings PLC25 July 2006 ARM - the architecture for the digital world ARM HOLDINGS PLC REPORTS SECOND QUARTER AND HALF YEAR 2006 RESULTS Company presentation of results to be webcast today at 9:30 am BST atwww.arm.com/ir CAMBRIDGE, UK, 25 July 2006-ARM Holdings plc ((LSE: ARM); (Nasdaq: ARMHY))announces its unaudited financial results for the second quarter and first halfended 30 June 2006 with total sterling revenues up 16% and normalised EPS up 25%for the first six months of 2006 compared to the same period in 2005 Financial Highlights - Q2 2006 Normalised* US GAAP £M Q2 2006 Q2 2005 % Change Q2 2006 Q2 2005------------------------- -------- -------- --------- -------- ---------Revenue 65.7 57.8 +14% 65.7 57.8Income before income tax 23.0 19.6 +17% 19.0 12.9Operating margin 32.2% 31.8% 18.1% 20.2%Earnings per share (pence) 1.22 1.05 +16% 1.0 0.7 Net cash generation** 1.8 16.7------------------------- -------- -------- --------- --------- --------- • £29m returned to shareholders via rolling share buyback program and dividend • Interim dividend of 0.40 pence per share declared, up 18% on 2005 Operating Highlights - Q2 2006 • Record bookings quarter • Group order backlog up more than 10% sequentially • 21 processor and 24 physical IP licenses signed in the quarter • 555 million ARM Powered(R) products shipped, up 50% vs the same period last year • Extended IP portfolio through acquisition of Falanx Microsystems, a 3D graphics IP company Commenting on the second quarter, Warren East, Chief Executive Officer, said: "We are encouraged by the licensing activity we have seen in Q2 which generateda record bookings quarter for the group. Strong licensing of our newestprocessors and physical IP has helped to generate sequential increases of morethan 15% in license revenues and more than 10% in the group's order backlog.With good first half results behind us and a robust opportunity pipeline forlicensing in the second half, we remain confident of achieving a year of stronggrowth for ARM in line with current market expectations" Tim Score, Chief Financial Officer, added: "Growth in revenue and earnings per share of 16% and 25% respectively in thefirst half of 2006 demonstrates again the long-term financial attractiveness ofthe ARM(R) business model. As well as investing organically in the quarter toaccelerate technology innovation, we have also acquired a 3D graphics IP companyand returned cash of £29m to shareholders via dividend and share buyback. Weincreased the amount spent on buying back ARM shares from £7m in Q1 to £22m inQ2 while retaining a robust balance sheet." Current trading and prospects Licensing activity has continued to gather momentum during the first half of2006 yielding a record bookings quarter in Q2. License deals are being signedfor products across our processor and physical IP portfolios. In Q2 alone, wesigned 7 licenses for ARM11(TM) products, 4 licenses for our new leading-edgeCortex(TM) products, and 5 physical IP platform licenses for nodes from 65nm to0.18 micron. After strong growth in revenues and profits in the first half, we enter thesecond half of the year with a healthy opportunity pipeline for licensing acrossthe portfolio and good momentum behind royalty revenues. Based on our first halfperformance and prospects for the second half, we remain confident of achievinga year of strong growth for ARM in line with current market expectations. CONTACTS: Tom Buchanan/Fiona Laffan Tim Score/Bruce BeckloffBrunswick ARM Holdings plc+44 (0) 207 404 5959 +44 (0)1628 427800 * Normalised figures are US GAAP before acquisition-related charges, othershare-based remuneration charges and profit on disposal of available-for-salesecurities. For reconciliation of GAAP measures to normalised non-GAAP measuresdetailed in this document, see notes 7.1 to 7.25. ** Before dividends and share buybacks, net cash flows from share optionexercises, acquisition consideration and proceeds from the disposal ofavailable-for-sale securities - see notes 7.14 to 7.18. *** Dollar revenues are based on the group's actual dollar invoicing, whereapplicable, and using the rate of exchange applicable on the date of thetransaction for invoicing in currencies other than dollars. Approximately 95% ofinvoicing is in dollars. **** Each American Depositary Share (ADS) represents three shares. Financial review(US GAAP unless otherwise stated) Second quarter ended 30 June 2006 Revenue (£M) Revenue ($M)*** Q2 2006 Q2 2005 % Change Q2 2006 Q2 2005 % ChangeLicensingPD 19.9 18.1 +10% 35.9 33.0 +9%PIPD 8.7 9.9 -12% 15.8 17.9 -12%Total Licensing 28.6 28.0 +2% 51.7 50.9 +2%RoyaltiesPD 21.8 17.0 +28% 40.2 31.2 +29%PIPD 4.3(1) 3.1(1) +39% 7.9(1) 5.7(1) +39%Total Royalties 26.1 20.1 +30% 48.1 36.9 +30%DevelopmentSystems 7.1 6.3 +13% 12.9 11.6 +11%Services 3.9 3.4 +15% 7.0 6.1 +15%Total Revenue 65.7 57.8 +14% 119.7 105.5 +13% (1) Includes catch-up royalties in Q2 2006 of £0.6m ($1.1m) (Q2 2005: nil). Total revenues Total revenues for the second quarter of 2006 amounted to £65.7 million, up 14%versus the same period in 2005. In US dollar terms***, second quarter revenueswere $119.7 million with an effective US dollar to sterling exchange rate in Q22006 of $1.82, the same effective rate as in Q2 2005. License revenues Total license revenues in the second quarter were £28.6 million, representing43% of group revenues, compared to £28.0 million in Q2 2005. License revenuescomprised £19.9 million from the Processor Division ("PD") and £8.7 million fromthe Physical IP Division ("PIPD"). Royalty revenues Total royalty revenues in Q2 2006 were £26.1 million, representing 40% of totalgroup revenues, compared to £20.1 million in Q2 2005, an increase of 30%.Royalty revenues comprised £21.8 million from PD and £4.3 million from PIPD.Total PIPD royalties of £4.3 million included £0.6 million of catch-uproyalties. Development Systems and Service revenues Sales of development systems in Q2 2006 were £7.1 million, representing 11% oftotal group revenue, compared to £6.3 million in Q2 2005, an increase of 13%.Service revenues in Q2 2006 were £3.9 million, representing 6% of total grouprevenues, compared to £3.4 million in Q2 2005. Gross margins Gross margins for the second quarter, excluding the FAS123(R) charge of £0.3million (see below), were 89.1% compared to 89.3% in Q2 2005. Operating expenses and operating margin Total operating expenses in Q2 2006 are £46.4 million compared to £40.0 millionin Q2 2005. Total operating expenses of £46.4 million in Q2 2006 includeamortisation of intangible assets of £5.1 million (Q2 2005: £4.6 million) and£3.9 million in relation to the fair value of share-based remuneration inaccordance with FAS123(R) - "Share-Based Payment". Included within amortisationof intangible assets is £0.5 million in respect of the write-off of in-processresearch and development arising in Q2 2006. As FAS123(R) was effective for thefirst time in Q1 2006 and as ARM is applying the standard on the "modifiedprospective" basis, there is no directly equivalent charge in Q2 2005. Totaloperating expenses of £40.0 million in Q2 2005 did, however, include a deferredstock-based compensation charge of £2.1 million. A pro forma income statement isset out in notes 7.24 and 7.25 below which reconciles US GAAP to the normalisednon-GAAP measures referred to in this earnings release. The total FAS123(R) charge of £4.2 million in Q2 2006 is included within cost ofrevenues (£0.3 million), research and development (£2.4 million), sales andmarketing (£0.8 million) and general and administrative (£0.7 million). The commentary on operating expenses below excludes amortisation and share-basedremuneration charges. Operating expenses in Q2 2006 were £37.4 million comparedto £34.5 million in Q1 2006 and £33.2 million in Q2 2005. Of the sequentialincrease of £2.9 million in Q2, approximately £2.0 million arises as a result offoreign exchange impacts. A net charge of £0.7 million relating to foreignexchange impacts in Q2 2006 compares to a net credit of £1.3 million in Q1 2006.Excluding these foreign exchange impacts, operating expenses have increased from£35.8 million in Q1 2006 to £36.7 million in Q2 2006. Operating expenses alsorose in Q2 as a result of a net increase in headcount of 100 in the quarter,including 36 new employees who joined the group through acquisition. Research and development expenses were £15.0 million in Q2 2006, representing23% of revenues, compared to £15.1 million in Q1 2006 and £15.8 million in Q22005. Sales and marketing costs in Q2 2006 were £9.8 million, being 15% ofrevenues, compared to £9.4 million in Q1 2006 and £8.3 million in Q2 2005.General and administrative expenses in Q2 2006 were £12.6 million, representing19% of revenues, compared to £10.0 million in Q1 2006 and £9.2 million in Q22005. The sequential increase in operating expenses of £2.0 million arising fromforeign exchange impacts described above falls within general and administrativeexpenses. Normalised operating margin in Q2 2006 was 32.2%(7.1) compared to 35.6%(7.2) inQ1 2006 and 31.8%(7.3) in Q2 2005. Interest receivable Interest receivable increased to £1.8 million in Q2 2006 compared to £1.2million in Q2 2005, due to higher average cash balances and interest rates. Earnings and taxation Income before income tax in Q2 2006 was £19.0 million compared to £12.9 millionin Q2 2005. After adjusting for amortisation of intangibles, stock-basedcompensation and the profit arising on the disposal of an available-for-salesecurity, normalised income before income tax in Q2 2006 was £23.0 million(7.6)compared to £19.6 million(7.8) in Q2 2005, an increase of 17%. The group'seffective tax rate under US GAAP in Q2 2006 was 25.2% reflecting theavailability of research and development tax credits and taking into account thebenefits arising from the structuring of the Artisan(R) acquisition. Second quarter fully diluted earnings per share prepared under US GAAP were 1.0pence (5.6 cents per ADS****) compared to earnings per share of 0.7 pence (3.8cents per ADS****) in Q2 2005. Normalised earnings per fully diluted share in Q22006 were 1.22 pence(7.19,7.24) per share (6.8 cents per ADS****) compared to1.05 pence(7.21,7.25) (5.6 cents per ADS****) in Q2 2005, an increase of 16%. Balance sheet, cash flow, share buyback and interim dividend Intangible assets at 30 June 2006 were £431.4 million, comprising goodwill of£366.6 million and other intangible assets of £64.8 million, compared to £381.7million and £66.9 million respectively at 31 March 2006. Goodwill and intangibleassets of £8.3 million and £6.2 million respectively arose as a result of theacquisition of Falanx Microsystems AS ("Falanx") in the quarter(1). Goodwill isno longer amortised under US GAAP, but is subject to review for impairment on atleast an annual basis. The intangible assets from acquisition are beingamortised through the profit and loss account over a weighted average period offive years. Total accounts receivable increased to £72.0 million at 30 June 2006, comprising£47.2 million of trade receivables and £24.8 million of amounts recoverable oncontracts, compared to £61.0 million at 31 March 2006, comprising £38.5 millionof trade receivables and £22.5 million of amounts recoverable on contracts. Theallowance against trade receivables was £2.2 million at 30 June 2006 compared to£2.5 million at 31 March 2006. Days sales outstanding (DSOs) were 49 at 30 June2006 compared to 45 at 31 March 2006 and 54 at 31 December 2005. The increase inDSOs in Q2 is due primarily to the higher proportion of invoicing carried out inJune compared to March. Deferred revenues were £28.3 million at 30 June 2006compared to £25.2 million at 31 March 2006. Net cash at 30 June 2006 was £148.8(7.11) million compared to £182.3(7.12)million at 31 March 2006. During the quarter, £29.0 million of cash was returnedto shareholders by way of the payment of the 2005 final dividend of £6.9 millionand via purchase of own shares amounting to £22.1 million (up from £7.0 millionin Q1 2006). Total cash consideration of £13.9 million was paid for acquisitionsin Q2 with proceeds of £5.6 million arising from the disposal ofavailable-for-sale investments. Pro forma cash generation of £1.8 million in thequarter was lower than usual due to the timing of working capital flows whichare expected to reverse going forward and the impact of a weaker US dollar onperiod end cash balances. In Q2 2006, the Company purchased 18.1 million shares at a total cost of £22.1million. It is anticipated that the buyback program will resume after theannouncement of these results. In respect of the year to 31 December 2006, the directors are declaring aninterim dividend of 0.40 pence per share, an increase of 18% over the 2005interim dividend of 0.34 pence per share. This interim dividend will be paid on6 October 2006 to shareholders on the register on 1 September 2006. Six months ended 30 June 2006 Revenues Total revenues for the half year ended 30 June 2006 amounted to £130.4 million,up 16% over the first half of 2005. In US dollar terms***, revenues of $232.6million were up 11% versus the same period in 2005. The effective average dollarto sterling exchange rate in the first half of 2006 was $1.78 compared to $1.85in the first half of 2005. Total license revenues in the first half of 2006 were £53.8 million, being 41%of total revenues. Total royalty revenues were £54.2 million, representing 42%of total revenue. Sales of development systems were £15.0 million, being 11% oftotal revenues. Service revenues were £7.3 million, representing 6% of totalrevenues. Operating expenses and operating margins Total operating expenses in the first half of 2006 are £89.3 million compared to£77.2 million in the same period in 2005. Total operating expenses of £89.3million in H1 2006 include amortisation of intangible assets of £9.7 million (H12005: £8.6 million) and £7.7 million in relation to the fair value ofshare-based remuneration in accordance with FAS123(R) - "Share-Based Payment"(H1 2005: Deferred stock-based compensation charge of £4.5 million). The total FAS123(R) charge of £8.2 million in H1 2006 is included within cost ofrevenues (£0.5 million), research and development (£4.8 million), sales andmarketing (£1.6 million) and general and administrative (£1.3 million). Thecommentary on operating expenses below excludes amortisation and share-basedremuneration charges. Operating expenses in H1 2006 were £71.9 million compared to £64.1 million in H12005. Research and development expenses were £30.1 million in H1 2006,representing 23% of revenues. Sales and marketing costs in H1 2006 were £19.2million, being 15% of revenues. General and administrative expenses in H1 2006were £22.6 million, representing 17% of revenues. Normalised operating margin inH1 2006 was 33.9%(7.4) compared to 32.1%(7.5) in H1 2005. Interest receivable Interest receivable was £3.5 million in H1 2006, up from £2.2 million in H12005. Earnings Income before income tax in the first half of 2006 was £35.1 million. Normalisedincome before income tax was £47.7 million(7.9), up 24% on the £38.5 millionreported in H1 2005. Fully diluted earnings per share under US GAAP in the first half of 2006 were1.9 pence (10.3 cents per ADS****). Normalised earnings per fully diluted sharewere 2.50 (7.22) pence per share (13.9 cents per ADS****), an increase of 25%versus the same period in 2005. International Financial Reporting Standards (IFRS) ARM reports results quarterly in accordance with US GAAP. At 30 June and 31December each year, in addition to the US GAAP results, ARM also disclosesresults under IFRS. The operating and financial review commentary above on theUS GAAP numbers is for the most part applicable to the IFRS numbers. A summaryof the accounting differences between IFRS and US GAAP and reconciliations ofIFRS and US GAAP profit and shareholders' equity are set out in note 6 to thefinancial statements below. Total operating expenses under IFRS includecompensation charges in respect of share-based payments of £7.5 million in thefirst half of 2006 compared to £11.9 million in the same period in 2005. Thereduction is primarily due to the compensation charges relating to optionsassumed on the Artisan acquisition which are reducing over time as those optionsvest. Operating review Backlog Q2 was a strong quarter for licensing for both PD and PIPD with both mature andnewer technology being widely licensed. This high level of activity gave riseboth to sequential license revenue growth of more than 15% and a sequentialincrease in group order backlog of more than 10%. Backlog grew across the groupwith PIPD backlog again exceeding the record levels reported at the end of Q12006. The backlog in PIPD is now more than 30% higher than the then record levelwhen ARM acquired Artisan at the end of 2004. PD licensing 21 processor licenses were signed in Q2 2006 bringing the total cumulativenumber of licenses signed to 434. The mix of licenses signed in the quartershows a further strengthening of demand for Cortex processors as well as anotherstrong performance from the ARM11 family. In addition to the processor licenses,one existing partner took a ARMv7 architecture license. Nine of the 21 licenses signed were with new partners each taking one licenseand 12 licenses were signed with existing partners. Seven of the licenses werefor ARM11 family processors (three of which were term licenses), three licenseswere for Cortex-M3 processor (two term) and one license was for Cortex-A8processor. The remaining ten licenses were for ARM7(TM) and ARM9(TM) familyprocessors of which two were term and four were per-use licenses. In addition to the 21 processor licenses described above, one partner gainedaccess to the Cortex-M3 processor through an existing subscription license. PD royalties ARM partners shipped 555 million units in Q1 2006 (we report royalties onequarter in arrears), up 50% on the comparable period last year. Of those unitshipments, 36% related to units based on ARM9 family technology, including 11%relating to shipments of ARM926 processor-based products, up from 9% in theprevious quarter. By the end of Q1 2006, six partners were shipping ARM11family-based product, yielding a 75% sequential increase in unit shipments. Fournew partners started shipping ARM technology-based products in Q2 bringing thetotal number of shippers, after accounting for consolidation amongst the ARMpartnership, to 69. The mobile and non-mobile segments accounted for 67% and 33% of total shipmentsrespectively in Q2 2006, compared to 65% and 35% in Q2 2005 and 63% and 37% inQ1 2006. The increase in the proportion of mobile shipments this quarter, whichis counter to the long term trend of faster growth in non-mobile shipments, isdue to the strong growth in shipments of smarter phones which invariablyincorporate more than one ARM processor. There was a 4% sequential increase inmobile shipments in the quarter, including an 18% sequential increase in thenumber of ARM926 and ARM11 family-based phones shipped by OEMs. Outside of mobile, the Embedded Solutions segment grew strongly with a 122%increase in shipments versus the same period in 2005. Specifically in thequarter, there was a 30% sequential increase in the level of MCU shipments.There was some post-Christmas seasonality seen in certain application areas suchas printers, WiFi, DVDs, DTVs, portable audio and smartcards. The average royalty rate in Q2 was 7.2 cents, the same level as in Q1 2006. PIPD licensing In Q2, ARM signed a further 24 licenses for physical IP bringing the totalnumber of licenses to 243. Of the 24 licenses, five were for platform licensesto four foundries and one IDM (Integrated Device Manufacturer) consisting of two65nm Advantage(TM) Platforms, one 130nm Classic Platform, one 130nm Metro(TM)Platform and one 180nm Classic Platform. This brings the total number ofphysical IP platforms licensed to foundries and IDMs to 75. The remaining 19 licenses were end-user licenses consisting of seven standardcell libraries (one Advantage at 90nm, two Classic and three Metro at 130nm, andone Metro at 180nm), eight memory compilers (three Advantage and one Metro at90nm, three Classic at 130nm, and one Classic at 250nm), and four Velocity(TM)high speed PHYs (two at 90nm and two at 65nm). This brings the total number ofend-user licensees for these technologies to 168. PIPD royalties PIPD royalties in Q2 were $7.9 million compared to $5.7 million in Q2 2005 and$8.4 million in Q1 2006. Q2 royalties included catch-up royalties ofapproximately $1 million giving underlying royalties in the quarter of $6.9million compared to $7.8 million last quarter. The sequential decrease was duepartly to lower utilisation levels in the semiconductor foundries in Q1 after avery strong Q4 and partly to the impact of a specific end user transitioning toa new process node. The effect of the lower underlying royalties was offset by an increase in thequarter in catch-up royalties. We continue to benefit from the increasedinvestment in royalty analysis and reconciliation. We expect some level ofcatch-up royalties to continue in future quarters, but quantum and frequency aredifficult to forecast. Development Systems Development Systems sales in Q2 2006 were £7.1 million, compared to £7.9 millionin Q1 2006 and £6.3 million in Q2 2005. Development Systems sales in H1 2006were 13% ahead of the same period last year. The first half of 2006 also saw twomajor product launches of our market-leading tools technology: the ARM RealView(R) Development Suite version 3.0 for end-to-end pre-silicon development and theRealView Microcontroller Development Kit, combining the technology acquired withKeil(R) in October 2005 with the traditional ARM tools technology. Initialfeedback on the new products has been positive and we expect sales momentum togrow in the second half of 2006 as market awareness of the new productsincreases. Based on the positive impact of these product introductions and the increasingtraction of both our electronic system-level design tools and ourmicrocontroller tools we expect the growth trajectory seen in our DevelopmentSystems business in recent years to continue, notwithstanding the impact ofoccasional quarterly lumpiness and seasonality. Acquisitions In May 2006, ARM acquired Falanx Microsystems AS, a 3D Graphics IP companyheadquartered in Trondheim, Norway. Falanx develops graphics accelerator IP andsoftware for semiconductor system-on-chip (SoC) vendors that deliverhigh-quality multimedia images without compromising performance, powerconsumption or system cost. The acquisition enhances ARM's ability to enableindustry-leading 3D graphics solutions on mobile phones, portable media players,set-top boxes, handheld gaming devices and infotainment systems (includingautomotive), providing us with full control over the development of our future3D graphics solutions. In June 2006, ARM acquired the assets and trade of PowerEscape, a privatecompany based in France and the US. The PowerEscape team, which will beintegrated into our Development Systems business, will focus on addinginnovative profiling and analysis features to our portfolio of market-leadingdevelopment tools. People At 30 June 2006 we had 1,471 full time employees compared to 1,371 at the end ofQ1 2006. Of the net increase in headcount of 100 in Q2, 29 arose as a result ofthe continued expansion of our Bangalore Design Centre and 36 were added throughthe acquisitions of Falanx and PowerEscape. At 30 June 2006, the group had 610employees based in the UK, 523 in the US, 127 in Continental Europe, 162 inIndia and 49 in the Asia Pacific Region. Board change Mark Templeton, who joined the Board in December 2004 following the combinationof ARM and Artisan, has informed the Board that he plans to take up a full-timeexecutive role in the US as Chief Executive of a start-up company. It has beenagreed therefore that he will retire from his position as a non-executivedirector of ARM with immediate effect. The Board is grateful to Mark for hiscontribution to the successful integration of ARM and Artisan. Legal matters There has been no update on the foregoing legal matter in Q2 2006. In May 2002,Nazomi Communications, Inc. ("Nazomi") 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 judgment anda ruling that the technology does not infringe Nazomi's patent. The UnitedStates District Court for the Northern District of California granted ARM'smotion, and Nazomi appealed the District Court's ruling. On 7 September 2004,the Court of Appeals for the Federal Circuit heard the appeal and issued itsdecision on 11 April 2005. Because, in the opinion of the Court of Appeals forthe Federal Circuit, the District Court did not construe the disputed claim termin sufficient detail for appellate review, the Court of Appeals for the FederalCircuit remanded the dispute back to the District Court for further analysis. Asupplementary "Markman" hearing was held on 11 October 2005 and we are presentlyawaiting the ruling of the District Court. Based on legal advice received todate, ARM has no cause to believe that the effect of the original ruling by theDistrict Court will not be upheld. ARM Holdings plc Second Quarter and Six Months Results - US GAAP Quarter Quarter Six months Six months Six months ended ended ended ended ended 30 June 30 June 30 June 30 June 30 June 2006 2005 2006 2005 2006(1) Unaudited Unaudited Unaudited Unaudited Unaudited -------- -------- -------- -------- --------- £'000 £'000 £'000 £'000 $'000RevenuesProduct revenues 61,782 54,485 123,014 105,857 227,527Service revenues 3,948 3,362 7,350 7,007 13,594 -------- -------- -------- -------- ---------Total revenues 65,730 57,847 130,364 112,864 241,121 -------- -------- -------- -------- --------- Cost of revenuesProduct costs (5,794) (4,548) (11,609) (9,461) (21,472)Service costs (1,610) (1,638) (3,162) (3,048) (5,848) -------- -------- -------- -------- ---------Total cost ofrevenues (7,404) (6,186) (14,771) (12,509) (27,320) -------- -------- -------- -------- --------- -------- -------- -------- -------- ---------Gross profit 58,326 51,661 115,593 100,355 213,801 -------- -------- -------- -------- --------- Research anddevelopment (17,445) (15,787) (34,901) (30,510) (64,553)Sales andmarketing (10,609) (8,305) (20,800) (16,589) (38,472)General andadministrative (13,309) (9,157) (23,918) (16,994) (44,239)Deferredstock-based compensation - (2,142) - (4,502) -Amortisation ofintangibles purchased throughbusinesscombination (5,086) (4,608) (9,673) (8,575) (17,891) -------- -------- -------- -------- ---------Total operatingexpenses (46,449) (39,999) (89,292) (77,170) (165,155) -------- -------- -------- -------- ---------Income fromoperations 11,877 11,662 26,301 23,185 48,646Interest, net 1,819 1,230 3,492 2,239 6,459Profit on disposalof available-for-salesecurity 5,270 - 5,270 9,747 -------- -------- -------- -------- ---------Income beforeincome tax 18,966 12,892 35,063 25,424 64,852Provision forincome taxes (4,770) (2,852) (8,907) (6,305) (16,474) -------- -------- -------- -------- ---------Net income 14,196 10,040 26,156 19,119 48,378 -------- -------- -------- -------- --------- Othercomprehensiveincome:Foreign currencyadjustments (31,894) 26,886 (37,789) 35,630 (69,895)Unrealised holdinggain/(loss) onavailable-for-salesecurities, net oftax of £39,000 (Q22005: £863,000; 1H2006: £560,000; 1H2005: £1,555,000) 95 (1,980) (1,280) (3,594) (2,367) -------- -------- -------- -------- ---------Total comprehensiveincome / (loss) (17,603) 34,946 (12,913) 51,155 (23,884) -------- -------- -------- -------- --------- Earnings per share(assuming dilution)Shares outstanding('000) 1,413,212 1,426,944 1,412,330 1,425,572Earnings pershare - pence 1.0 0.7 1.9 1.3Earnings per ADS(assuming dilution)ADSs outstanding('000) 471,071 475,648 470,777 475,191Earnings per ADS- cents 5.6 3.8 10.3 7.2 (1) US dollar amounts have been translated from sterling at the 30 June 2006closing rate of $1.8496=£1 (see note 1) ARM Holdings plc Consolidated balance sheet - US GAAP 30 June 31 December 30 June 2006 2005 2006 (1) Unaudited Audited Unaudited --------- --------- ----------- £'000 £'000 $'000AssetsCurrent assets:Cash and cash equivalents 95,381 128,077 176,417Short-term investments 34,976 23,990 64,692Marketable securities 18,449 8,835 34,123Accounts receivable, net of allowance of£2,174,000 in 2006 and £2,173,000 in2005 72,049 55,518 133,262Inventory: finished goods 1,939 1,490 3,586Prepaid expenses and other assets 18,101 12,567 33,479 --------- --------- -----------Total current assets 240,895 230,477 445,559 Deferred income taxes 4,726 4,422 8,741Prepaid expenses and other assets 1,501 1,674 2,776Property and equipment, net 13,427 12,803 24,835Goodwill 366,632 385,572 678,123Other intangible assets 64,754 72,345 119,769Investments 3,578 8,800 6,618 --------- --------- -----------Total assets 695,513 716,093 1,286,421 --------- --------- ----------- Liabilities and shareholders' equityAccounts payable 3,718 2,221 6,877Income taxes payable 13,897 10,826 25,704Personnel taxes 1,335 1,329 2,469Accrued liabilities 24,353 25,024 45,043Deferred revenue 28,347 20,354 52,431 --------- --------- -----------Total current liabilities 71,650 59,754 132,524 Deferred income taxes 2,587 7,289 4,785 --------- --------- -----------Total liabilities 74,237 67,043 137,309 --------- --------- ----------- Shareholders' equityOrdinary shares 694 693 1,284Additional paid-in capital 459,674 425,252 850,213Deferred compensation (27,657) (4,404) (51,154)Treasury stock, at cost (19,543) (16,315) (36,147)Retained earnings 189,641 183,913 350,760Accumulated other comprehensive income:Unrealised holding gain onavailable-for-sale securities,net of tax of £313,000 (2005: £1,096,000) 204 3,859 377Cumulative translation adjustment 18,263 56,052 33,779 --------- --------- -----------Total shareholders' equity 621,276 649,050 1,149,112 --------- --------- -----------Total liabilities and shareholders'equity 695,513 716,093 1,286,421 --------- --------- ----------- (1) US dollar amounts have been translated from sterling at the 30 June 2006 closing rate of $1.8496=£1 (see note 1) ARM Holdings plc Consolidated income statement - IFRS Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited ---------- ---------- ---------- £'000 £'000 £'000RevenuesProduct revenues 123,014 105,857 217,711Service revenues 7,350 7,007 14,728 ---------- ---------- ----------Total revenues 130,364 112,864 232,439 ---------- ---------- ---------- Cost of revenuesProduct costs (11,609) (9,461) (19,265)Service costs (see note 2) (3,119) (3,765) (7,345) ---------- ---------- ----------Total cost of revenues (14,728) (13,226) (26,610) ---------- ---------- ---------- ---------- ---------- ----------Gross profit 115,636 99,638 205,829 ---------- ---------- ---------- Operating expensesResearch and development (see note 2) (38,990) (41,486) (80,273)Sales and marketing (see note 2) (25,323) (23,289) (47,389)General and administrative (see note 2) (24,067) (19,675) (43,010)Profit on disposal of available-for-salesecurity 5,270 - - ---------- ---------- ----------Total net operating expenses (83,110) (84,450) (170,672) ---------- ---------- ---------- ---------- ---------- ----------Profit from operations 32,526 15,188 35,157Investment income 3,492 2,239 5,317 ---------- ---------- ----------Profit before tax 36,018 17,427 40,474Tax (11,169)* (5,965) (10,827) ---------- ---------- ----------Profit for the period 24,849 11,462 29,647 ---------- ---------- ---------- Dividends - final 2004 paid at 0.42 pence per share - 5,759 5,759 - interim 2005 paid at 0.34 pence per share - - 4,677 - final 2005 paid at 0.5 pence per share 6,918 - - - interim 2006 proposed at 0.4 pence per share 5,481 - - Earnings per shareBasic and diluted earnings 24,849 11,462 29,647 Number of shares ('000)Basic weighted average number of shares 1,377,117 1,366,672 1,369,335Effect of dilutive securities:Share options 33,777 58,212 55,027Diluted weighted average number of shares 1,410,894 1,424,884 1,424,362 Basic EPS 1.8p 0.8p 2.2pDiluted EPS 1.8p 0.8p 2.1p All activities relate to continuing operations. All of the profit for the period is attributable to the equity shareholders ofthe parent. * Tax comprises £13,274,000 of UK taxation and a credit of £2,105,000 ofoverseas taxation. ARM Holdings plc Consolidated balance sheet - IFRS 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited ---------- ---------- ---------- £'000 £'000 £'000AssetsCurrent assets:Cash and cash equivalents 95,381 121,646 128,077Financial assets: Short-term investments 34,976 10,437 23,990Short-term marketable securities 18,449 22,553 8,835Fair value of currency exchange contracts 530 - -Accounts receivable 72,049 49,660 55,518Prepaid expenses and other assets 17,571 15,486 12,567Inventories: finished goods 1,939 1,830 1,490 ---------- ---------- ----------Total current assets 240,895 221,612 230,477 ---------- ---------- ---------- Non-current assets:Financial assets: Available-for-saleinvestments 3,578 6,741 8,800Prepaid expenses and other assets 1,501 1,847 1,674Property, plant and equipment 9,320 11,030 8,990Goodwill 449,041 446,721 474,430Other intangible assets 72,696 77,248 79,743Deferred tax assets 10,984 5,041 13,633 ---------- ---------- ----------Total non-current assets 547,120 548,628 587,270 ---------- ---------- ---------- ---------- ---------- ----------Total assets 788,015 770,240 817,747 ---------- ---------- ---------- Liabilities and shareholders' equityCurrent liabilities:Accounts payable 3,718 4,996 2,221Current tax liabilities 13,897 11,045 10,826Accrued and other liabilities 27,500 24,659 26,598Financial liabilities: Fair value ofcurrency exchange contracts - 1,450 1,708Deferred revenue 28,347 20,438 20,354 ---------- ---------- ----------Total current liabilities 73,462 62,588 61,707 ---------- ---------- ---------- ---------- ---------- ----------Net current assets 167,433 159,024 168,770 ---------- ---------- ----------Non-current liabilities:Deferred tax liabilities 6,102 - 9,193 ---------- ---------- ----------Total liabilities 79,564 62,588 70,900 ---------- ---------- ---------- ---------- ---------- ----------Net assets 708,451 707,652 746,847 ---------- ---------- ---------- Shareholders' equityShare capital 694 691 693Share premium account 447,901 445,416 447,091Share option reserve 61,474 61,474 61,474Retained earnings 175,453 157,199 166,656Revaluation reserve (734) 1,643 2,921Cumulative translation adjustment 23,663 41,229 68,012 ---------- ---------- ----------Total equity 708,451 707,652 746,847 ---------- ---------- ---------- ARM Holdings plc Consolidated cash flow statement - IFRS Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited --------- --------- --------- £'000 £'000 £'000Operating activitiesProfit from operations 32,526 15,188 35,157Depreciation and amortisation of tangibleand intangible assets 13,165 14,244 28,608Profit on disposal of available-for-sale security (5,270) - -Loss on disposal of property, plant and equipment 64 53 16Impairment of available-for sale investments - 337 337Compensation charge in respect ofshare-based payments 7,496 11,944 20,863Provision for doubtful debts 66 35 722Provision for obsolescence of inventory - - 22Changes in working capital:Accounts receivable (16,414) (15,348) (21,247)Inventories (449) (933) (519)Prepaid expenses and other assets (1,674) (316) (61)Fair value of currency exchange contracts (2,238) 3,124 3,382Accounts payable 1,467 886 (1,931)Deferred revenue 7,993 (1,959) (2,043)Accrued and other liabilities 782 (4,772) (7,199) --------- --------- ---------Cash generated by operations before tax 37,514 22,483 56,107Income taxes paid (10,763) (7,069) (14,447) --------- --------- ---------Net cash from operating activities 26,751 15,414 41,660 --------- --------- --------- Investing activitiesInterest received 3,250 2,292 5,444Purchases of property, plant and equipment (3,471) (2,747) (5,492)Proceeds on disposal of property, plant andequipment 19 37 37Purchases of other intangible assets (827) (389) (572)Purchases of available-for-sale investments (165) (132) (274)Proceeds on disposal of available-for-saleinvestments 5,567 96 96(Purchase) / maturity of short-term investments (20,600) (699) (599)Purchases of subsidiaries, net of cash acquired (13,949) (14,350) (20,304) --------- --------- ---------Net cash used in investing activities (30,176) (15,892) (21,664) --------- --------- --------- Financing activitiesIssue of shares 811 11,406 13,921Purchase of own shares (29,086) - (16,211)Issue of treasury shares 12,348 - -Dividends paid to shareholders (6,918) (5,759) (10,436) --------- --------- ---------Net cash (used in) / from financing activities (22,845) 5,647 (12,726) --------- --------- --------- Net increase / (decrease) in cash and cashequivalents (26,270) 5,169 7,270Cash and cash equivalents at beginning of period 128,077 110,561 110,561Effect of foreign exchange rate changes (6,426) 5,916 10,246 --------- --------- ---------Cash and cash equivalents at end of period 95,381 121,646 128,077 --------- --------- --------- 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 30 June 2006 of$1.8496=£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. International Financial Reporting Standards The financial information prepared in accordance with the Group's IFRSaccounting policies comprises the consolidated balance sheets as of 30 June 2006and 30 June 2005 and related consolidated interim statements of income and cashflows for the six months then ended, together with related notes. This financialinformation has been prepared in accordance with the Listing Rules of theFinancial Services Authority. In preparing this financial information managementhas used the principal accounting policies as set out in the Group's annualfinancial statements for the year ended 31 December 2005. The Group has chosennot to adopt IAS 34, 'Interim financial statements', in preparing its 2006interim statements and, therefore, this interim financial information is not incompliance with IFRS. (2) Share-based compensation charges and acquisition-related expenses Included within the US GAAP income statement for the quarter ended 30 June 2006are share-based compensation charges of £4.2 million: £0.3 million in cost ofrevenues, £2.4 million in research and development costs, £0.8 million in salesand marketing costs and £0.7 million in general and administrative costs. Included within the IFRS income statement for the six months ended 30 June 2006are total share-based payment costs of £7.5 million (six months ended 30 June2005: £11.9 million; year ended 31 December 2005: £20.9 million), allocated £0.5million (six months ended 30 June 2005: £0.7 million; year ended 31 December2005: £1.3 million) in cost of revenues, £4.3 million (30 June 2005: £6.9million; 31 December 2005: £12.1 million) in research and development costs,£1.5 million (30 June 2005: £2.3 million; 31 December 2005: £4.2 million) insales and marketing costs and £1.2 million (30 June 2005: £2.0 million; 31December 2005: £3.3 million) in general and administrative costs. Also included within IFRS operating costs for the six months ended 30 June 2006is amortisation of intangibles of £9.5 million (six months ended 30 June 2005:£8.6 million; year ended 31 December 2005: £17.9 million), allocated £4.5million (30 June 2005: £4.0 million; 31 December 2005: £8.1 million) in researchand development costs, £4.7 million (30 June 2005: £4.3 million; 31 December2005: £9.1 million) in sales and marketing costs and £0.3 million (30 June 2005:£0.3 million; 31 December 2005: £0.7 million) in general and administrativecosts. (3) Accounts receivable Included within accounts receivable at 30 June 2006 are £24.8 million (2005:£20.5 million) of amounts recoverable on contracts. (4) Consolidated statement of changes in shareholders' equity (US GAAP) Additional Unrealised Cumulative Share paid-in Deferred Treasury Retained holding translation capital capital compensation stock earnings gain adjustment Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2006 693 425,252 (4,404) (16,315) 183,913 3,859 56,052 649,050Shares issued on exercise of options 1 810 - - - - - 811Net income - - - - 26,156 - - 26,156Dividends - - - - (6,918) - - (6,918)Realised gain onavailable-for-sale security - - - - - (2,375) - (2,375)Unrealised holding losses onavailable-for-salesecurities - - - - - (1,280) - (1,280)Tax effect of optionexercises - 2,148 - - - - 2,148Deferred compensationarising onshare schemes - 31,464 (31,464) - - - - -Amortisation of deferred compensation - - 8,211 - - - - 8,211Issuance of shares - - - 25,858 (13,510) - - 12,348Purchase of own shares - - - (29,086) - - - (29,086)Currency translationadjustment - - - - - - (37,789) (37,789)---------------------- ------- -------- --------- --------- -------- --------- --------- --------At 30 June 2006 694 459,674 (27,657) (19,543) 189,641 204 18,263 621,276---------------------- ------- -------- --------- --------- -------- --------- --------- -------- (5) Consolidated statement of changes in shareholders' equity (IFRS) Share Share Cumulative Share premium option Retained Revaluation translation capital account reserve earnings reserve reserve Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2006 693 447,091 61,474 166,656 2,921 68,012 746,847Shares issued on exercise of options 1 810 - - - - 811Profit for the period - - - 24,849 - - 24,849Dividends - - - (6,918) - - (6,918)Credit in respect ofemployee share schemes - - - 7,496 - - 7,496Movement on deferred taxarising on outstandingshare options - - - 108 - - 108Purchase of own shares - - - (29,086) - - (29,086)Proceeds from sale of ownshares - - - 12,348 - - 12,348Realised gain onavailable-for-sale security - - - - (2,375) - (2,375)Unrealised holding losseson available-for-sale investments (net of deferred tax of £560,000) - - - - (1,280) - (1,280)Currency translation adjustment - - - - - (44,349) (44,349)---------------------------- ------ --------- -------- -------- --------- --------- ---------At 30 June 2006 694 447,901 61,474 175,453 (734) 23,663 708,451---------------------------- ------ --------- -------- -------- --------- --------- --------- (6) Summary of significant differences between US GAAP and IFRS Goodwill Under both IFRS and US GAAP, goodwill is not subject to amortisation,but is tested at least annually for impairment. As permitted by IFRS 1, theCompany's goodwill under IFRS has been frozen at the amount recorded under UKGAAP as at 1 January 2004. Under US GAAP, following the provisions of SFAS 142,"Goodwill and other intangible assets", the carrying value of goodwill wasfrozen at the amount recorded under previous US GAAP as at 1 January 2002. Underboth previous US GAAP and UK GAAP, goodwill was amortised over its usefuleconomic life. Thus, while ongoing accounting policies in respect of goodwillare similar under US GAAP and IFRS, the difference in the dates of transitionmeans that different amounts of goodwill are recorded. Under US GAAP, certain costs to be incurred on restructuring on businesscombination are treated as a fair value adjustment in the balance sheetacquired. Under IFRS, these costs are expensed post-acquisition. Additionally,under US GAAP, tax benefits arising from the exercise of options issued as partof the consideration for a business combination become a deduction to goodwill,only to the extent that those benefits do not exceed the fair value of theconsideration relating to those options at the appropriate tax rate. Any excesstax benefits are a deduction to equity. Under IFRS, the full tax benefit is adeduction to equity. The 2004 annual report included a provisional assessment of the fair values ofassets and liabilities acquired on acquisition of Artisan Components Inc. on 23December 2004. Where these provisional values were amended as estimates wererefined in 2005, adjustments to fair values were recorded as prior yearadjustments to goodwill for IFRS purposes in 2004. Under US GAAP, these wererecorded as amendments to goodwill in 2005. Recognition and amortisation of intangibles The Company has taken advantage 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 Company isrequired, effective as of 1 January 2006, to adopt SFAS No. 123 (revised 2004)(SFAS No. 123R), "Share-based payment". SFAS No. 123R requires the Company toexpense share-based payments, including employee stock-options, based on theirfair value. The Company has elected to utilise the "modified prospective" methodof adoption, such that compensation cost is recognised beginning with theeffective date (i) based on the requirements of SFAS No. 123R for allshare-based payments granted after the effective date and (ii) based on therequirements of SFAS No. 123, "Accounting for stock-based compensation", for allawards granted to employees prior to the effective date of SFAS No. 123R thatremain unvested on the effective date. In 2005 under US GAAP, the company had elected to use the intrinsic value-basedmethod to account for all its employee stock-based compensation plans, under therecognition and measurement principles of APB Opinion No. 25, "Accounting forstock issued to employees", and related interpretations. Thus no compensationexpense was recorded in 2005 where the exercise price of the option was equal tothe share price on the date of grant. In 2005 under US GAAP, the Company recognised a compensation charge in respectof the UK SAYE plans. The compensation charge was calculated as the differencebetween the market price of the shares at the date of grant and the exerciseprice of the option and was recorded on a straight-line basis over the savingsperiod. In addition, certain options attracted a charge under variable planaccounting under US GAAP. Under IFRS, this charge is calculated in the samemanner as other share-based payments, as detailed above. In 2005 under US GAAP, the Company followed variable plan accounting for grantsunder the Company's LTIP, measuring compensation expense as the differencebetween the exercise price and the fair market value of the shares at eachperiod end over the vesting period of the options. Increases in fair marketvalue of the shares resulted in a charge and decreases in fair market value ofthe shares resulted in a credit, subject to the cumulative amount previouslyexpensed. Under IFRS, this charge is calculated in the same manner as othershare-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 compensationexpense at the statutory tax rate, the excess is recorded directly in equity,against the profit and loss reserve. In accordance with the transitionalprovisions of IFRS 2, no compensation charge is recorded in respect of optionsgranted before 7 November 2002 or in respect of those options which have beenexercised or have lapsed before 31 December 2004. Nevertheless, tax deductionshave arisen and will continue to arise on these options. The tax effects arisingin relation to these options are recorded directly in equity, against retainedearnings. Under US GAAP, deferred tax assets are recognised by multiplying thecompensation expense recorded by the prevailing tax rate in the relevant taxjurisdiction. Where, on exercise of the relevant option, the tax benefitobtained exceeds the deferred tax asset in relation to the relevant options, theexcess is recorded in additional paid-in capital. Where the tax benefit is lessthan the deferred tax asset, the write-down of the deferred tax asset isrecorded against additional paid-in capital to the extent of previous excess taxbenefits recorded in this account, with any remainder recorded in the incomestatement. Employer taxes on share options Under IFRS, employer's taxes that are payable onthe 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 income Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited --------- --------- --------- £'000 £'000 £'000 Profit for financial period as reportedunder IFRS 24,849 11,462 29,647Adjustments for:Amortisation of intangibles 398 358 548Write-off of in-process research anddevelopment (540) (335) (335)Deduct: US GAAP compensation charge inrespect of LTIP - (611) (3,814)Deduct : US GAAP compensation charge inrespect of SAYE schemes - (186) (417)Deduct : US GAAP deferred stock-basedcompensation re acquisition - (3,706) (5,496)Deduct : US GAAP compensation charge inrespect of all share-based payments (8,211) - -Add: IFRS compensation charge in respectof all share-based payments 7,496 11,944 20,863Employer's taxes on share options (2) - 3Utilisation of restructuring provision - 533 1,368Foreign exchange on contingentconsideration (97) - 40Tax on UK and US share options - - (370)Tax difference on amortisation ofintangibles (165) (164) (248)Tax difference on share-based payments 2,428 (176) 91 --------- --------- ---------Net income as reported under US GAAP 26,156 19,119 41,880 --------- --------- --------- Reconciliation of shareholders' equity from IFRS to US GAAP 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited --------- --------- --------- £'000 £'000 £'000 Shareholders' equity as reported underIFRS 708,451 707,652 746,847Adjustments for:Employer's taxes on share options 28 27 30Utilisation of restructuring provision 1,368 533 1,368Cumulative difference on amortisation ofgoodwill 2,713 2,713 2,713Cumulative difference on amortisation ofintangibles 840 251 441Cumulative write-off of in-processresearch and development (4,637) (4,097) (4,097)Cumulative difference on deferred tax (429) (178) (263)Valuation of equity consideration onacquisition (82,435) (82,435) (82,435)Valuation of option consideration onacquisition 17,476 17,476 17,476Deferred compensation on acquisition (9,579) (9,579) (9,579)Deferred tax on share-based payments (4,307) (7,899) (8,775)Portion of tax benefit arising on exerciseof options issued on acquisition taken togoodwill under US GAAP (4,844) (3,928) (4,844)Foreign exchange on valuation ofintangible assets and deferred tax (3,312) (5,678) (9,872)Foreign exchange on valuation ofcontingent consideration (57) - 40 --------- --------- ---------Shareholders' equity as reported under USGAAP 621,276 614,858 649,050 --------- --------- --------- Reconciliation of goodwill from IFRS to US GAAP 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Unaudited --------- --------- --------- £'000 £'000 £'000 Goodwill as reported under IFRS 449,041 446,721 474,430Adjustments for:Valuation of restructuring provision onacquisition 1,235 1,117 1,235Cumulative difference on amortisation ofgoodwill 2,713 2,713 2,713Cumulative write-off of in-processresearch and development (150) (150) (150)Separately identifiable intangible assets (302) (302) (302)Deferred tax on capitalised in-processresearch and (1,570) (1,570) (1,570)developmentPortion of tax benefit arising on exerciseof options issued on (4,248) (3,928) (4,248)acquisition taken to goodwill under US GAAPValuation of equity consideration onacquisition (82,435) (82,435) (82,435)Valuation of option consideration onacquisition 17,476 17,476 17,476Deferred compensation on acquisition (9,579) (9,579) (9,579)Contingent consideration (1,864) (1,665) (1,864)Foreign exchange on revaluation ofgoodwill (3,685) (5,485) (10,134) --------- --------- ---------Goodwill as reported under US GAAP 366,632 362,913 385,572 --------- --------- --------- (7) Non-GAAP measures The following non-GAAP measures, including reconciliations to the US GAAPmeasures, have been used in this earnings release. These measures have beenpresented as they allow a clearer comparison of operating results that excludeone-off non-recurring charges, acquisition-related charges and profit ondisposal of available-for-sale securities. All figures in £'000 unless otherwisestated. (7.1) (7.2) (7.3) (7.4) (7.5) Q2 2006 Q1 2006 Q2 2005 H1 2006 H1 2005Income from operations (USGAAP) 11,877 14,424 11,662 26,301 23,185Acquisition-related charge -amortisation of intangibles 5,086 4,587 4,608 9,673 8,575Acquisition-related charge -deferred stock-basedcompensation - - 1,640 - 3,706Other stock-basedcompensation and relatedpayroll taxes 4,223 3,988 502 8,211 796----------------------------- ------- ------- ------- ------- -------Pro forma income fromoperations 21,186 22,999 18,412 44,185 36,262----------------------------- ------- ------- ------- ------- -------As % of revenue 32.2% 35.6% 31.8% 33.9% 32.1% (7.6) (7.7) (7.8) (7.9) (7.10) Q2 2006 Q1 2006 Q2 2005 H1 2006 H1 2005Income before income tax (USGAAP) 18,966 16,097 12,892 35,063 25,424Acquisition-related charge -amortisation of intangibles 5,086 4,587 4,608 9,673 8,575Acquisition-related charge -deferred stock-basedcompensation - - 1,640 - 3,706Other stock-basedcompensation and relatedpayroll taxes 4,223 3,988 502 8,211 796Profit on disposal ofavailable-for-sale security (5,270) - - (5,270) ------------------------------ ------- ------- ------- ------- -------Pro forma income beforeincome tax 23,005 24,672 19,642 47,677 38,501----------------------------- ------- ------- ------- ------- ------- (7.11) (7.12) (7.13) 30 June 31 March 31 December 2006 2006 2005 Cash and cash equivalents 95,381 143,431 128,077Short-term investments 34,976 34,625 23,990Short-term marketablesecurities 18,449 4,226 8,835--------------------------------------- ------- ------- --------Pro forma cash 148,806 182,282 160,902--------------------------------------- ------- ------- -------- (7.14) (7.15) (7.16) (7.17) (7.18) Q2 2006 Q1 2006 Q2 2005 H1 2006 H1 2005Pro forma cash atend of period (as above) 148,806 182,282 154,636 148,806 154,636Less: Pro forma cash at beginning of period (182,282) (160,902) (141,785) (160,902) (142,817)Add back: Cash outflow from acquisitions (netof cash acquired) 13,949 - 90 13,949 14,350Add back: Cash outflow from payment of dividends 6,918 - 5,759 6,918 5,759Add back: Cash outflow frompurchase of own shares 22,129 6,957 - 29,086 -Less: Cash inflow from exercise of share options (2,152) (11,007) (1,981) (13,159) (11,406)Less: Cash inflow from disposal of available-for-salesecurity (5,567) - - (5,567) ------------------------------ ------- ------- ------- ------- -------Pro forma cash generation 1,801 17,330 16,719 19,131 20,522----------------------------- ------- ------- ------- ------- ------- (7.19) (7.20) (7.21) (7.22) (7.23) Q2 2006 Q1 2006 Q2 2005 H1 2006 H1 2005 Net income (US GAAP) 14,196 11,960 10,040 26,156 19,119Acquisition-related charge - amortisation ofintangibles 5,086 4,587 4,608 9,673 8,575Acquisition-related charge-deferredstock-basedcompensation - - 1,640 - 3,706Other stock-basedcompensation andrelated payrolltaxes 4,223 3,988 502 8,211 796Profit on disposal ofavailable-for-salesecurity (5,270) - - (5,270) -Estimated taximpact of abovecharges (972) (2,464) (1,875) (3,436) (3,706)---------------------------- --------- --------- --------- --------- ---------Pro forma net income 17,263 18,071 14,915 35,334 28,490---------------------------- --------- --------- --------- --------- ---------Dilutive shares ('000) 1,413,212 1,420,175 1,426,944 1,412,330 1,425,572Pro forma diluted EPS 1.22p 1.27p 1.05p 2.50p 2.00p (7.24) Pro forma income statement for Q2 2006 Pro Stock-based Intangible Investment forma compensation amortisation* disposal US GAAP ------- --------- --------- -------- --------- £'000 £'000 £'000 £'000 £'000RevenuesProduct revenues 61,782 - - - 61,782Service revenues 3,948 - - - 3,948 -------- --------- --------- -------- ---------Total revenues 65,730 - - - 65,730 -------- --------- --------- -------- --------- Cost of revenuesProduct costs (5,794) - - - (5,794)Service costs (1,356) (254) - - (1,610) -------- --------- --------- -------- ---------Total cost ofrevenues (7,150) (254) - - (7,404) -------- --------- --------- -------- --------- -------- --------- --------- -------- ---------Gross profit 58,580 (254) - - 58,326 -------- --------- --------- -------- --------- Research anddevelopment (14,996) (2,449) - - (17,445)Sales andmarketing (9,765) (844) - - (10,609)General andadministrative (12,633) (676) - - (13,309)Amortisationof intangibles purchasedthrough businesscombination - - (5,086) - (5,086) -------- --------- --------- -------- ---------Total operatingexpenses (37,394) (3,969) (5,086) - (46,449) -------- --------- --------- -------- --------- Income fromoperations 21,186 (4,223) (5,086) - 11,877Interest, net 1,819 - - - 1,819Profit ondisposal ofavailable-for-sale security - - - 5,270 5,270 -------- --------- --------- -------- ---------Income beforeincome tax 23,005 (4,223) (5,086) 5,270 18,966Provision forincome taxes (5,742) 645 1,790 (1,463) (4,770) -------- --------- --------- -------- ---------Net income 17,263 (3,578) (3,296) 3,807 14,196 -------- --------- --------- -------- --------- Earnings pershare (assumingdilution)Shares outstanding('000) 1,413,212 1,413,212Earnings pershare - pence 1.22 1.00Earnings per ADS(assuming dilution)ADSs outstanding('000) 471,071 471,071Earnings perADS - cents 6.78 5.57 * intangible amortisation includes £540,000 of in-process research anddevelopment write-off (7.25) Pro forma income statement for Q2 2005 Pro Stock-based Intangible forma compensation amortisation* US GAAP ------- --------- --------- --------- £'000 £'000 £'000 £'000RevenuesProduct revenues 54,485 - - 54,485Service revenues 3,362 - - 3,362 -------- --------- --------- ---------Total revenues 57,847 - - 57,847 -------- --------- --------- --------- Cost of revenuesProduct costs (4,548) - - (4,548)Service costs (1,638) - - (1,638) -------- --------- --------- ---------Total cost of revenues (6,186) - - (6,186) -------- --------- --------- --------- -------- --------- --------- ---------Gross profit 51,661 - - 51,661 -------- --------- --------- --------- Research and development (15,787) - - (15,787)Sales and marketing (8,305) - - (8,305)General and administrative (9,157) - - (9,157)Deferred stock-based compensation - (2,142) - (2,142)Amortisationof intangibles purchased through businesscombination - - (4,608) (4,608) -------- --------- --------- ---------Total operating expenses (33,249) (2,142) (4,608) (39,999) -------- --------- --------- --------- Income from operations 18,412 (2,142) (4,608) 11,662Interest, net 1,230 - - 1,230 -------- --------- --------- ---------Income beforeincome tax 19,642 (2,142) (4,608) 12,892Provision for income taxes (4,727) 176 1,699 (2,852) -------- --------- --------- ---------Net income 14,915 (1,966) (2,909) 10,040 -------- --------- --------- --------- Earnings per share(assuming dilution)Shares outstanding('000) 1,426,944 1,426,944Earnings pershare - pence 1.05 0.70Earnings per ADS (assumingdilution)ADSs outstanding ('000) 475,648 475,648Earnings per ADS - cents 5.62 3.78 * intangible amortisation includes £335,000 of in-process research anddevelopment write-off Independent review report to ARM Holdings plc Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2006 which comprises the consolidated interimbalance sheet as at 30 June 2006 and the related consolidated interim statementsof income, cash flows and changes in shareholders' equity for the six monthsthen ended and related notes. We have read the other information contained inthe interim report and considered whether it contains any apparent misstatementsor material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The Listing Rulesof the London Stock Exchange require that the accounting policies andpresentation applied to the interim figures should be consistent with thoseapplied in preparing the preceding annual accounts except where any changes, andthe reasons for them, are disclosed. This interim report has been prepared in accordance with the basis set out inNote 1. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for thecompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. PricewaterhouseCoopers LLPChartered AccountantsCambridge25 July 2006 Notes: (a) The maintenance and integrity of the ARM Holdings plc web site is theresponsibility of the directors; the work carried out by the auditors does notinvolve consideration of these matters and, accordingly, the auditors accept noresponsibility for any changes that may have occurred to the interim reportsince it was initially presented on the web site. (b) Legislation in the United Kingdom governing the preparation anddissemination of financial information may differ from legislation in otherjurisdictions. Note The results shown for Q2 2006, Q1 2006, Q2 2005, H1 2006 and H1 2005 areunaudited. The results shown for FY 20005 are audited. The financial informationcontained in this announcement does not constitute statutory accounts within themeaning of Section 240(3) of the Companies Act 1985. Statutory accounts of theCompany in respect of the financial year ended 31 December 2005, upon which theCompany's auditors have given a report which was unqualified and did not containa statement under Section 237(2) or Section 237(3) of that Act, have beendelivered to the Registrar of Companies. Except for changes in accounting policy on the adoption of new accountingstandards, as disclosed, the results for ARM for Q2 2006 and previous quartersas shown reflect the accounting policies as stated in Note 1 to the US GAAPfinancial statements in the Annual Report and Accounts filed with CompaniesHouse in the UK for the fiscal year ended 31 December 2005 and in the Annual Report on Form 20-F for the fiscal year ended 31 December 2005. This document contains forward-looking statements as defined in section 102 ofthe Private Securities Litigation Reform Act of 1995. These statements aresubject to risk factors associated with the semiconductor and intellectualproperty businesses. When used in this document, the words "anticipates", "may","can", "believes", "expects", "projects", "intends", "likely", similarexpressions and any other statements that are not historical facts, in each caseas they relate to ARM, its management or its businesses and financialperformance and condition are intended to identify those assertions asforward-looking statements. It is believed that the expectations reflected inthese statements are reasonable, but they may be affected by a number ofvariables, many of which are beyond our control. These variables could causeactual results or trends to differ materially and include, but are not limitedto: failure to realise the benefits of our recent acquisitions, unforeseenliabilities arising from our recent acquisitions, price fluctuations, actualdemand, the availability of software and operating systems compatible with ourintellectual property, the continued demand for products including ARM'sintellectual property, delays in the design process or delays in a customer'sproject that uses ARM's technology, the success of our semiconductor partners,loss of market and industry competition, exchange and currency fluctuations, anyfuture strategic investments or acquisitions, rapid technological change,regulatory developments, ARM's ability to negotiate, structure, monitor andenforce agreements for the determination and payment of royalties, actual orpotential litigation, changes in tax laws, interest rates and access to capitalmarkets, political, economic and financial market conditions in variouscountries and regions and capital expenditure requirements. More information about potential factors that could affect ARM's business andfinancial results is included in ARM's Annual Report on Form 20-F for the fiscalyear ended 31 December 2005 including (without limitation) under the captions,"Risk Factors" and "Management's Discussion and Analysis of Financial Conditionand Results of Operations," which is on file with the Securities and ExchangeCommission (the "SEC") and available at the SEC's website at www.sec.gov. About ARM ARM designs the technology that lies at the heart of advanced digital products,from mobile, home and enterprise solutions to embedded and emergingapplications. ARM's comprehensive product offering includes 16/32-bit RISCmicroprocessors, data engines, 3D processors, digital libraries, embeddedmemories, peripherals, software and development tools, as well as analogfunctions and high-speed connectivity products. Combined with the company'sbroad Partner community, they provide a total system solution that offers afast, reliable path to market for leading electronics companies. Moreinformation on ARM is available at http://www.arm.com. ARM, ARM Powered, RealView and Keil are registered trademarks of ARM Limited.ARM7, ARM9, ARM11, Cortex, Advantage, Metro and Velocity are trademarks of ARMLimited. Artisan Components and Artisan are registered trademarks of ARMPhysical IP, Inc., a wholly owned subsidiary of ARM. All other brands or productnames are the property of their respective holders. ARM refers to ARM Holdingsplc (LSE: ARM and Nasdaq: ARMHY) together with its subsidiaries including ARMLimited, ARM Inc., ARM Physical IP Inc., Axys Design Automation Inc., Axys GmbH,ARM KK, ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS, ARM Consulting (Shanghai)Co. Ltd., ARM Belgium NV., ARM Embedded Technologies Pvt. Ltd.; Keil ElektronikGmbH and Falanx Microsystems AS. -------------------------- (1) Goodwill and intangibles arising on the Falanx acquisition are provisionaluntil the fair value assessment has been completed This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
ARM.L