19th Jul 2005 07:00
ARM Holdings PLC19 July 2005 EMBARGOED UNTIL 7.00am BST 19 Jul 2005 ARM HOLDINGS PLC - RESULTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED 30 JUNE2005 First half 2005 dollar revenues up 22% year on year. Rolling share buybackprogramme announced CAMBRIDGE, UK, 19 July 2005-ARM Holdings plc ((LSE: ARM); (Nasdaq: ARMHY))announces its unaudited financial results for the second quarter and the sixmonths ended 30 June 2005 HIGHLIGHTS (US GAAP) Second quarter ended 30 June 2005 • Total revenues in Q2 2005 at £57.8 million, up from £55.0 million in Q1 2005. Total dollar revenues* in Q2 2005 at $105.5 million, up 21% on the aggregate revenues of $87.3 million(see note 7.14) reported by ARM and Artisan as independent companies in Q2 2004. The acquisition of Artisan was completed on 23 December 2004 • At $81.9 million, dollar revenues* from the original ARM business 25% ahead of Q2 2004. Licensing and royalty revenues up in dollar terms* 28% and 26% respectively on Q2 2004. 20 licenses for microprocessor cores signed in the quarter. Average royalty rate at 8.5 cents, up from 8.1 cents in Q1 2005 and 8.0 cents in Q4 2004 • At $23.6 million, dollar revenues* from the Physical Intellectual Property Division (PIPD), the former Artisan business, up 7% on Q2 2004. Licensing revenues of $17.9 million at record levels and 26% up on Q2 2004. PIPD royalty revenues at $5.7 million, down $2.1 million sequentially due primarily to lower catch-up royalties in Q2 2005 and lower foundry utilization levels in calendar Q1 2005 • Guidance for full year 2005 dollar revenue growth revised to 15-20%. Expectation for full year 2005 sterling revenues and profits unchanged • Operating margin, excluding acquisition-related charges of £6.2 million and other deferred stock-based compensation of £0.5 million, at 31.8% (7.1), comprising 32.1% in the original ARM business and 30.9% in PIPD • Income before income tax at £12.9 million, including acquisition-related charges of £6.2 million and other deferred stock-based compensation of £0.5 million. Income before income tax, excluding these charges, at £19.6 million • Consolidated cash position of £154.6 million(7.6) at 30 June 2005. Net cash generation of £18.6 million in the quarter before payment of the 2004 final dividend of £5.8 million • Earnings per fully diluted share in Q2 2005 of 0.7 pence (3.8 cents per ADS**). Earnings per fully diluted share, before acquisition-related charges of £6.2 million and other deferred stock-based compensation of £0.5 million, at 1.0 pence(7.9) (5.6 cents per ADS**) • Interim dividend of 0.34 pence per share declared, up 21% on 2004 interim dividend • Rolling share buyback programme announced, reflecting the strength of the Group's balance sheet and the anticipated strong cash flow generation going forward * 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%of invoicing is in dollars. ** Each American Depositary Share (ADS) represents three shares. Commenting on the results, Warren East, Chief Executive Officer, said: "We are pleased to report 22% growth in dollar revenues across our business inthe first half of 2005. Strong licensing activity in Q2, both in the traditionalARM(R) microprocessor business and in the Physical IP business, gives usincreased confidence in the potential for sustained growth in royalty revenuesinto the future." Tim Score, Chief Financial Officer, added: "Given the Group's strong balance sheet, healthy operating margins andconsistent cash flow generation, the Board has decided to supplement theprogressive dividend introduced in 2004 with the announcement of a rolling sharebuyback programme. The Group's commitment to revenue growth and investment ininnovative technology remains unchanged." Operating review Original ARM licensing and product development Licensing revenues in the original ARM business have grown sequentially over thelast nine quarters. With 20 licenses for microprocessor cores being signed inQ2, a total of 37 licenses for microprocessor cores were signed in the firsthalf of 2005, compared to 34 licenses in the first half of 2004. These 37licenses comprised 12 multi-use licenses and 25 per-use licenses. As well assigning licenses for some of our new technologies, our partners continue to signlicenses for ARM technology that has been available for a number of years. Ofthe 37 licenses signed in the first half, eight were for ARM7(TM) family products and 20 were for ARM9(TM) family products, demonstrating again the longevity of the ARM technology portfolio. 17 new companies joined the ARM partnership in the first half, including our first licensee in India, bringing the total number of semiconductor partners at the end of June 2005 to 157. Original ARM royalty revenues and unit shipments Royalty revenues earned in the original ARM business in the first half of 2005were $62.8 million on 758 million units shipped, up 28% and 34% respectively onthe first half of 2004. Royalty revenues recognized in Q2 2005 (we receive and report royalty data onequarter in arrears) were $31.2 million on 369 million units shipped, up 26% and29% respectively on the same period a year ago. The average royalty ratereported in the second quarter was 8.5 cents, up for the second successivequarter. Of the total reported unit shipments in Q2, 30% related to units basedon ARM9 family technology. The mobile segment accounted for 66% of unitshipments in the second quarter. Units shipped in segments other than mobileamounted to 124 million, up 44% on Q2 2004. The total number of partnersshipping ARM technology-based product at the end of Q2 is 62, with royaltiesbeing received from one of our partners in China for the first time in thequarter. PIPD revenues Total revenues earned by PIPD in Q2 2005 were $23.6 million, compared to $24.0million in Q1 2005 and $22.0 million in Q2 2004. Reported revenues in Q2 2005comprised record license revenues of $17.9 million and royalty revenues of $5.7million, compared to $16.2 million and $7.8 million respectively in Q1 2005. PIPD license revenues As well as being a record quarter for license revenues for PIPD, Q2 has seen anumber of important developments with regard to the adoption of physical IP fromARM. Having licensed PIPD technology to two traditional ARM semiconductorpartners in Q1, another ARM partner licensed technology from PIPD in Q2.Further, there have been some important announcements of success in thetraditional PIPD business. In May 2005, ARM and UMC announced that they hadsigned an agreement for ARM to provide its Artisan(R) Metro(TM) low-power IPplatform for UMC's advanced 130-nanometer process technology. Also in May, itwas announced that IBM and Chartered Semiconductor Manufacturing are offeringthe ARM Artisan Metro low-power platform and the ARM Artisan Velocity(TM)high-speed PHY series for their jointly developed 90-nanometer common processplatform. In June, it was announced that this collaborative development wasbeing extended in order to make the low-power platform available forIBM-Chartered's 65-nanometer low-power common process platform. It was alsoannounced in June that the ARM Artisan Metro low-power standard cell libraries,memory compilers and I/Os have been selected for IBM's newest 65-nanometer ASICproduct offering. PIPD royalty revenues As with the original ARM business, PIPD receives and reports royalty data onequarter in arrears. PIPD carries out an ongoing dialogue with its foundrypartners to ensure that royalty payments are accurate and up to date. Thisprocess includes regular audits being carried out by third party accountingfirms. As a result, reported quarterly royalty revenues will often includeamounts which relate to shipments made in prior periods ("catch-up" royalties).Such amounts are hard to forecast and have varied significantly from quarter toquarter. Royalty revenues in Q1 2005 of $7.8 million included approximately $0.8 millionof "catch-up" royalties, implying an underlying level of royalties of $7million. Royalty revenues in Q2 2005 of $5.7 million do not include anymeaningful "catch-up" royalties. Despite the market share gains made by PIPD inthe quarter, the combination of lower utilization levels and pricing pressure inthe foundries resulted in a sequential reduction of $1.3 million in theunderlying level of PIPD royalties. Underlying royalty revenues in Q2 2004,excluding "catch-up" royalties, were $5.4 million. Notwithstanding the sequential reduction in PIPD underlying royalty revenue inQ2, we remain confident that the medium term trend in PIPD royalties will beupwards based on the significant increase in the number of license downloads ofPIPD technology in the last 2 years (as with the original ARM business,royalties typically accrue between 2 and 4 years after a license has beensigned), the increase in the average royalty rate inherent in the majority offoundry license agreements signed in recent years and the increase in the numberof foundries that have taken licenses to manufacture PIPD technology-basedproducts. Market conditions, current trading and prospects Against the anticipated flatter trading environment in the semiconductorindustry in the first half of 2005, we are encouraged that dollar revenues havegrown in excess of 20% year on year. Taking into account the first half performance, the level of order backlog atthe end of June and the healthy sales opportunity pipeline going into the secondhalf, we are confident of achieving year on year dollar revenue growth for theGroup as a whole of between 15% and 20% in the full year 2005. The revision toour previous guidance for year on year dollar revenue growth of at least 20%(assuming a normalised base for PIPD revenues in calendar 2004 of approximately$95 million), takes into account the level of PIPD royalty revenues reported inthe first half of 2005 and the likely growth trajectory of PIPD royalties in thesecond half. Although we have revised guidance for dollar revenue growth our expectations forsterling revenues, assuming the current dollar/sterling FX rate persists throughthe second half of 2005, are unchanged. This is because approximately 95% of thegroup's invoicing is in dollars and consequently our sterling reported revenuesbenefit from the strengthening dollar. Financial review(US GAAP unless otherwise stated) Second quarter ended 30 June 2005 Total revenues Total revenues for the second quarter of 2005 amounted to £57.8 million. In USdollar terms*, second quarter revenues of $105.5 million were 21% up on theaggregate ARM and Artisan revenues of $87.3 million(7.14) in Q2 2004. Theeffective US dollar to sterling exchange rate for ARM in Q2 2005 was $1.82compared to $1.875 in Q1 2005 and $1.77 in Q2 2004. License revenues Total license revenues in the second quarter were £28.0 million representing 48%of group revenues. License revenues comprised £18.1 million from the originalARM business and £9.9 million from PIPD. In US dollar terms*, license revenuesfrom the original ARM business of $33.0 million in Q2 2005 were 10% ahead of Q12005 and 30% up on Q2 2004. License revenues in PIPD of $17.9 million in Q2 2005were 10% up on Q1 2005 and 26% up on Q2 2004. 20 licenses for microprocessor cores were signed in the second quarter of 2005.Nine new partners took a total of nine per use licenses; two for the ARM7TDMI(R)processor, five for the ARM926EJ(TM) processor, one for the ARM946E(TM)processor and one for the ARM922T(TM) processor. A further 11 licenses were signed with 11 of our existing partners. Thesecomprised one derivative and one upgrade to the ARM7 family, three derivativesand two upgrades to the ARM9 family, one derivative to the ARM11(TM) family, onederivative and one upgrade to the SecurCore(TM) family and one upgrade to theCortex(TM)-M3 processor. The Group order backlog at the end of Q2 was approximately 5% down on the levelat the end of Q1 as the 20 licenses for microprocessor cores signed in thesecond quarter comprised for the most part licenses for more mature products.The sales pipeline represents a more typical blend of opportunities for bothnewer and more mature products which underpins our confidence that order backlogwill trend upwards in the medium term. Royalty revenues Total royalty revenues in the second quarter were £20.1 million representing 35%of total group revenues. Royalty revenues comprised £17.0 million from theoriginal ARM business and £3.1 million from PIPD. In US dollar terms*, royaltyrevenues from the original ARM business of $31.2 million in Q2 2005 were at asimilar level to Q1 2005, notwithstanding the impact of seasonality in mobileshipments, and were 25% up on Q2 2004. Development Systems and Service revenues Sales of development systems in Q2 2005 were £6.3 million, representing 11% oftotal group revenues, up from £5.7 million in Q1. In US dollar terms,development systems revenues were $11.6 million this quarter, 33% up on Q2 2004.Service revenues in Q2 2005 were £3.4 million representing 6% of total grouprevenues. Gross margins Group gross margins for the second quarter were 89%, comprising 94% for theoriginal ARM business and 73% for PIPD. Operating expenses and operating margins Total group operating expenses in Q2 2005 were £40.0 million, includingacquisition-related charges of £6.2 million and other deferred stock-basedcompensation of £0.5 million. Excluding these charges, operating expenses in thequarter were £33.2 million, comprising £27.3 million related to the original ARMbusiness and £5.9 million to PIPD, compared to £30.9 million in Q1 2005. Total research and development expenses were £15.8 million in Q2 2005,representing 27% of revenues, compared to £14.7 million or 27% of revenues in Q12005. Total sales and marketing costs in Q2 2005 were £8.3 million or 14% ofrevenues compared to £8.3 million or 15% of revenues in Q1 2005. Total generaland administrative expenses in Q2 2005 were £9.2 million, representing 16% ofrevenues compared to £7.8 million or 14% of revenues in Q1 2005. Of the netsequential increase in general and administrative expenses of £1.4 million in Q22005, £1.0 million relates to the net impact of foreign exchange movements. Operating margin in Q2 2005 was 20.2% compared to 20.9% in Q1 2005. Operatingmargin, excluding acquisition-related charges of £6.2 million and other deferredstock-based compensation of £0.5 million, was 31.8%(7.1) in Q2 2005 compared to32.4%(7.2), excluding non-recurring and acquisition-related charges of £6.0million and other deferred stock-based compensation of £0.3 million, in Q12005. Operating margin of 31.8% in Q2 2005 comprises 32.1% in the original ARMbusiness and 30.9% in PIPD. Interest receivable Interest receivable increased to £1.2 million in Q2 2005 compared to £1.0million in the first quarter, due to higher average cash balances. Earnings and taxation Income before income tax in Q2 2005 was £12.9 million compared to £12.5 millionin Q1 2005. Income before income tax, excluding acquisition-related charges of£6.2 million and other deferred stock-based compensation of £0.5 million, was£19.6 million. The group's effective tax rate under US GAAP in Q2 2005 was22.1%, reflecting the availability of research and development tax credits inthe UK and the US and certain benefits flowing from the structuring of theArtisan acquisition. Second quarter fully diluted earnings per share prepared under US GAAP were 0.7pence (3.8 cents per ADS**) compared to earnings per share of 0.6 pence (3.6cents per ADS**) in Q1 2005. Earnings per fully diluted share in Q2 2005, beforeacquisition-related charges of £6.2 million and other deferred stock-basedcompensation of £0.5 million, were 1.0(7.9) pence per share (5.6 cents per ADS**) compared to 1.0 pence(7.10) (5.4 cents per ADS**) in Q1 2005, beforenon-recurring and acquisition-related charges of £6.0 million and other deferredstock-based compensation of £0.3 million. People At 30 June 2005 we had 1,223 full time employees compared to 1,179 at the end ofQ1. At 30 June 2005, the Group had 541 employees based in the UK, 463 in the US,85 in Continental Europe, 90 in India and 44 in the Asia Pacific region. Of thenet headcount increase in the quarter of 44, 31 people joined the design centrein Bangalore. Legal matters In May 2002, Nazomi Communications, Inc. ("Nazomi") filed suit against ARMalleging willful infringement of Nazomi's US Patent No. 6,332,215. ARM answeredNazomi's complaint in July 2002 denying infringement. ARM moved for summaryjudgment and a ruling that the technology does not infringe Nazomi's patent.The United States District Court for the Northern District of California grantedARM's motion, and Nazomi appealed the District Court's ruling. On September 7,2004, the Court of Appeals for the Federal Circuit heard the appeal and issuedits decision on April 11, 2005. Because, in the opinion of the Court of Appealsfor the Federal Circuit, the District Court did not construe the disputed claimterm in sufficient detail for appellate review, the Court of Appeals for theFederal Circuit remanded the dispute back to the District Court for furtheranalysis. The Court of Appeals' decision does not reverse the original decisionof the District Court. A supplementary Markman hearing to assist in a moredetailed claim construction analysis is set for 16 September 2005. Based onlegal advice received to date, ARM has no cause to believe that the effect ofthe original ruling by the District Court will not be upheld. Six months ended 30 June 2005 Revenues Total revenues for the six months ended 30 June 2005 amounted to £112.9 million.In US dollar terms*, first half revenues of $208.7 million were 22% up on theaggregate ARM and Artisan revenues of $170.9 million(7.15) in H1 2004. Theeffective average dollar to sterling exchange rate in the first half of 2005 was$1.85 compared to $1.77 in the first half of 2004. Total license revenues in the first half of 2005 were £52.8 million, being 47%of total revenues. Total royalty revenues were £41.0 million, representing 36%of total revenue. Sales of development systems were £12.1 million, being 11% oftotal revenues. Service revenues were £7.0 million in the first half of 2005,representing 6% of total revenues. Gross margins Group gross margins for the first half of 2005 were 89%, comprising 93% for theoriginal ARM business and 74% for PIPD. Operating expenses and operating margins Total group operating expenses in H1 2005 were £77.2 million, includingacquisition-related charges of £12.3 million and other deferred stock-basedcompensation of £0.8 million. Excluding these charges, operating expenses in thefirst half were £64.1 million, comprising £53.3 million related to the originalARM business and £10.8 million to PIPD. Total research and development expenses were £30.5 million in H1 2005,representing 27% of revenues. Total sales and marketing costs in H1 2005 were£16.6 million or 15% of revenues. Total general and administrative expenses inH1 2005 were £17.0 million, representing 15% of revenues. Operating margin in H1 2005 was 20.5% compared to 23.2% in the ARM standalonebusiness in the first half of 2004. Operating margin, excludingacquisition-related charges of £12.3 million and other deferred stock-basedcompensation of £0.8 million, was 32.1%(7.4) in H1 2005 compared to 24.0%(7.5),excluding acquisition-related charges of £0.1 million and other deferredstock-based compensation of £0.5 million, in H1 2004. The operating margin of32.1% in H1 2005 comprises 31.9% in the original ARM business and 32.9% in PIPD. Interest receivable Interest receivable was £2.2 million for the first six months of 2005. Earnings and taxation Income before income tax in H1 2005 was £25.4 million. Income before income tax,excluding acquisition-related charges of £12.3 million and other deferredstock-based compensation of £0.8 million, was £38.5 million. The group'seffective tax rate under US GAAP in H1 2005 was 24.8%, reflecting theavailability of research and development tax credits in the UK and the US andcertain benefits flowing from the structuring of the Artisan acquisition. First half fully diluted earnings per share prepared under US GAAP were 1.3pence (7.2 cents per ADS). Earnings per fully diluted share in H1 2005, beforeacquisition-related charges of £12.3 million and other deferred stock-basedcompensation of £0.8 million, were 2.0(7.12) pence per share (10.7 cents per ADS**). Balance sheet and cash flow Intangible assets at 30 June 2005 were £434.3 million, comprising goodwill of£362.9 million and other intangible assets of £71.4 million, compared to £348.8million and £71.0 million respectively at 31 March 2005. The increase ingoodwill in Q2 2005 is due primarily to foreign exchange movements. Goodwill isno longer amortized under US GAAP but is subject to impairment on at least anannual basis. The other intangible assets are being amortized through the profitand loss account over a weighted average period of five years. Accounts receivable increased to £49.7 million at 30 June 2005 from £43.9million at 31 March 2005. The increase in receivables at the end of Q2 comparedto the end of Q1 is due primarily to the strengthening of the dollar againststerling and to a lesser extent to the higher revenues reported in Q2. Theallowance against receivables increased to £1.5 million at the end of June from£1.2 million at 31 March 2005. Deferred revenues were £20.4 million at the endof June 2005 compared to £21.8 million at 31 March 2005. Net cash generation in Q2 2005 was £18.6 million, before payment of the 2004final dividend of £5.8 million in the quarter, giving total cash, cashequivalents, short-term investments and marketable securities of £154.6 millionat 30 June 2005. Share buyback programme and interim dividend It has been ARM's practice to maintain a strong balance sheet, both to underpinongoing investment in research and development (typically around 30% ofrevenues) and to retain a cash buffer to enable bolt-on acquisitions. Thispractice remains unchanged. However, the enlarged ARM group is expected toremain strongly cash generative going forward, producing cash on an ongoingbasis which is surplus to our investment requirements. We intend, therefore, to supplement the payment of dividends to shareholders,initiated in 2004, with the commencement of a rolling share buyback programmeunder the shareholder authority conferred on the company at the Annual GeneralMeeting. The quantum and frequency of share purchases is not predetermined butwill take into account prevailing market conditions, the short to medium termcash needs of the business and the level of employee share-based remunerationgoing forward. Share purchases will be made only if the directors believe thatit is in the best interests of shareholders generally and will increase earningsper share. The company intends to hold such shares as treasury shares. In respect of the year to 31 December 2005, the directors are declaring aninterim dividend of 0.34 pence per share, an increase of 21% over the 2004interim dividend of 0.28 pence per share. This interim dividend will be paid on7 October 2005 to shareholders on the register on 2 September 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 has historicallyalso disclosed results under UK GAAP. Following the introduction of IFRS witheffect from 1 January 2005, ARM will continue to report quarterly results underUS GAAP but will now disclose results additionally under IFRS at 30 June and 31December each year. IFRS results for the six month periods to 30 June 2005 and30 June 2004, together with balance sheets as at 30 June 2005, 31 December 2004and 30 June 2004 are included below. The operating and financial review commentary above on the US GAAP numbers isfor the most part applicable to the IFRS numbers. The principal impact on ARM'sresults of the introduction of IFRS in place of UK GAAP arises from theintroduction of IFRS 2 ("Share-based Payment"), whereby the fair value ofemployee stock options issued after 7 November 2002 and outstanding at 31December 2004 is charged to the profit and loss account. Under UK GAAP the fairvalue of stock options was not charged to the profit and loss account. The fairvalue of employee stock options charged to the profit and loss accounts for thesix months to 30 June 2005 and 30 June 2004 is £11.9 million and £3.6 millionrespectively. The first half 2005 charge of £11.9 million includes £6.7 millionrelating to the fair value of the Artisan employee stock options which wereunvested at the time of the acquisition. The total fair value attributed tothese unvested options of £17.5 million will be substantially charged to theprofit and loss account over a period of 3 years. The total intrinsic value ofthese unvested options of £9.6 million is already being charged as deferredstock-based compensation under US GAAP, with £6.1 million expected to be chargedin 2005. Based on product development to date, research and development expenditure hasbeen written off to the profit and loss account as incurred under IFRS. Goodwilland other intangible assets are reported differently under IFRS than under UKGAAP, with goodwill being capitalized but not amortized and separatelyidentifiable intangible assets being capitalized on acquisition and amortizedover their estimated useful lives. The IFRS treatment is similar to the currenttreatment under US GAAP. CONTACTS: James Melville-Ross/ Juliet Clarke Tim Score/Bruce BeckloffFinancial Dynamics ARM Holdings plc+44 (0) 207 831 3113 +44 (0)1628 427800 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 2005 2004 2005 2004 2005 (1) Unaudited Unaudited Unaudited Unaudited Unaudited £'000 £'000 £'000 £'000 $'000Revenues Product revenues 54,485 33,296 105,857 64,678 189,696 Service revenues 3,362 3,644 7,007 7,250 12,556 Total revenues 57,847 36,940 112,864 71,928 202,252 Cost of revenues Product costs (4,548) (1,261) (9,461) (2,639) (16,954) Service costs (1,638) (1,266) (3,048) (2,588) (5,462) Total cost of revenues (6,186) (2,527) (12,509) (5,227) (22,416) Gross profit 51,661 34,413 100,355 66,701 179,836 Research and development (15,787) (12,356) (30,510) (24,455) (54,674) Sales and marketing (8,305) (5,883) (16,589) (11,587) (29,727) General and administrative (9,157) (7,129) (16,994) (13,420) (30,453) Deferred stock-based compensation (2,142) (242) (4,502) (500) (8,068) Amortization of intangibles purchased through business combination (4,608) (25) (8,575) (50) (15,366) Total operating expenses (39,999) (25,635) (77,170) (50,012) (138,288) Income from operations 11,662 8,778 23,185 16,689 41,548Interest, net 1,230 1,638 2,239 3,142 4,012 Income before income tax 12,892 10,416 25,424 19,831 45,560Provision for income taxes (2,852) (3,114) (6,305) (5,896) (11,299) Net income 10,040 7,302 19,119 13,935 34,261 Net income 10,040 7,302 19,119 13,935 34,261Other comprehensive income: Foreign currency adjustments 26,886 127 35,630 (122) 63,849 Unrealized holding gain /(loss) on available-for-sale securities, net of tax of £863,000 (Q2 2004: £555,000; 1H 2005: £1,555,000; 1H 2004: £706,000) (1,980) 1,294 (3,594) 1,647 (6,440) Total comprehensive income 34,946 8,723 51,155 15,460 91,670 Earnings per share (assuming dilution)Shares outstanding ('000) 1,426,944 1,043,053 1,425,572 1,042,691Earnings per share - pence 0.7 0.7 1.3 1.3Earnings per ADS (assuming dilution)ADSs outstanding ('000) 475,648 347,684 475,191 347,564Earnings per ADS - cents 3.8 3.8 7.2 7.3 (1) US dollar amounts have been translated from sterling at the 30 June 2005 closing rate of $1.792=£1 (see note 1) ARM Holdings plc Consolidated balance sheet - US GAAP 30 June 31 December 30 June 2005 2004 2005 (1) Unaudited Audited Unaudited £'000 £'000 $'000Assets Current assets: Cash and cash equivalents 121,646 110,561 217,990 Short-term investments 10,437 5,307 18,703 Marketable securities 22,553 21,511 40,415 Accounts receivable, net of allowance of £1,486,000 in 2005 and £1,451,000 in 2004 49,660 34,347 88,991 Inventory: finished goods 1,830 897 3,279 Prepaid expenses and other assets 14,036 16,001 25,152 Total current assets 220,162 188,624 394,530 Long-term marketable securities - 5,438 - Deferred income taxes 4,206 2,529 7,537 Prepaid expenses and other assets 1,847 - 3,310 Property and equipment, net 13,300 14,117 23,834 Goodwill 362,913 340,416 650,340 Other intangible assets 71,363 74,578 127,882 Investments 6,741 12,235 12,080 Total assets 680,532 637,937 1,219,513 Liabilities and shareholders' equity Accounts payable 4,996 4,110 8,953 Income taxes payable 11,045 6,345 19,792 Personnel taxes 1,324 1,123 2,373 Accrued liabilities (see note 2) 22,298 38,600 39,958 Deferred revenue 20,438 21,355 36,625 Total current liabilities 60,101 71,533 107,701 Accrued liabilities - 1,732 - Deferred income taxes 5,573 12,345 9,987 Total liabilities 65,674 85,610 117,688 Shareholders' equity Ordinary shares 691 675 1,238 Additional paid-in capital 426,662 414,133 764,578 Deferred compensation (7,493) (12,083) (13,428) Treasury stock, at cost (7,485) (7,485) (13,413) Retained earnings 166,781 153,421 298,872 Accumulated other comprehensive income: Unrealized holding gain on available-for-sale securities, net of tax of £521,000 (2004: £2,077,000) 2,581 6,175 4,625 Cumulative translation adjustment 33,121 (2,509) 59,353 Total shareholders' equity 614,858 552,327 1,101,825 Total liabilities and shareholders' equity 680,532 637,937 1,219,513 (1) US dollar amounts have been translated from sterling at the 30 June 2005 closing rate of $1.792=£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 2005 2004 2004 Unaudited Unaudited Unaudited £'000 £'000 £'000 Revenues Product revenues 105,857 64,678 138,732 Service revenues 7,007 7,250 14,165 Total revenues 112,864 71,928 152,897 Cost of revenues Product costs (9,461) (2,639) (6,735) Service costs (see note 4) (3,765) (2,792) (5,505) Total cost of revenues (13,226) (5,431) (12,240) Gross profit 99,638 66,497 140,657 Operating expenses Research and development (see note 4) (41,486) (26,428) (54,674) Sales and marketing (see note 4) (23,289) (12,216) (25,546) General and administrative (see note 4) (19,675) (14,197) (32,108) Total operating expenses (84,450) (52,841) (112,328) Profit from operations 15,188 13,656 28,329Investment income 2,239 3,142 6,944 Profit before tax 17,427 16,798 35,273Tax (5,965) (5,450) (9,398) Profit for the period 11,462 11,348 25,875 Dividends- final 2003 paid at 0.6 pence per share - 6,118 6,118- interim 2004 paid at 0.28 pence per share - - 2,857- final 2004 paid at 0.42 pence per share 5,759 - -- interim 2005 proposed at 0.34 pence per share 4,670 - - Earnings per shareBasic and diluted earnings 11,462 11,348 25,875 Number of shares ('000)Basic weighted average number of shares 1,366,672 1,019,198 1,026,890Effect of dilutive securities: Share options 58,212 22,644 22,179Diluted weighted average number of shares 1,424,884 1,041,842 1,049,069 Basic EPS 0.8p 1.1p 2.5pDiluted EPS 0.8p 1.1p 2.5p All activities relate to continuing operations. All of the profit for the period is attributable to the equity shareholders ofthe parent. ARM Holdings plc Consolidated balance sheet - IFRS 30 June 30 June 31 December 2005 2004 2004 Unaudited Unaudited Unaudited £'000 £'000 £'000 AssetsCurrent assets:Cash and cash equivalents 121,646 100,256 110,561Short-term investments 10,437 66,041 5,307Marketable securities 22,553 - 21,511Accounts receivable 49,660 25,251 34,347Inventories: finished goods 1,830 1,025 897Prepaid expenses and other assets 14,036 9,978 16,001 Total current assets 220,162 202,551 188,624 Non-current assets:Long-term marketable securities - - 5,438Prepaid expenses and other assets 1,847 - -Property, plant and equipment 11,030 8,466 9,096Goodwill 446,721 2,091 417,079Other intangible assets 77,248 8,528 84,037Available-for-sale investments 6,741 8,543 12,235Deferred tax assets 5,041 6,189 2,396 Total non-current assets 548,628 33,817 530,281 Total assets 768,790 236,368 718,905 Liabilities and shareholders' equityCurrent liabilities:Accounts payable 4,996 2,813 4,110Current tax liabilities 11,045 6,252 6,345Accrued and other liabilities 24,659 14,809 42,049Deferred revenue 20,438 12,632 21,355 Total current liabilities 61,138 36,506 73,859 Net current assets 159,024 166,045 114,765 Non-current liabilities:Deferred tax liabilities - - 776Long-term other payables - - 1,732 Total liabilities 61,138 36,506 76,367 Net assets 707,652 199,862 642,538 Shareholders' equityShare capital 691 513 675Share premium account 445,416 82,326 434,026Share option reserve 61,474 - 61,474Retained earnings 157,199 114,457 140,291Revaluation reserve 1,643 2,688 5,237Cumulative translation adjustment 41,229 (122) 835 Total equity 707,652 199,862 642,538 ARM Holdings plc Consolidated cash flow statement - IFRS Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 Unaudited Unaudited Unaudited £'000 £'000 £'000 Operating activitiesProfit from operations 15,188 13,656 28,329Depreciation and amortisation of tangible and intangibleassets 14,244 6,793 13,059Loss on disposal of property, plant and equipment 53 2 20Impairment of available-for sale investments 337 - -Compensation charge in respect of share-based payments 11,944 3,618 7,855Provision for doubtful debts 35 (85) (321)Accounts receivable converted to available-for-saleinvestments - (112) (112)Changes in working capital:Accounts receivable (15,348) (7,846) (1,358)Inventories (933) (94) 34Prepaid expenses and other assets 2,808 554 (3,659)Accounts payable 886 122 1,176Deferred revenue (1,959) 1,500 3,013Accrued liabilities and other creditors (4,772) (3,213) 2,811 Cash generated by operations before tax 22,483 14,895 50,847Income taxes paid (7,069) (4,739) (11,601) Net cash from operating activities 15,414 10,156 39,246 Investing activitiesInterest received 2,292 3,155 7,233Purchases of property, plant and equipment (2,747) (1,090) (2,732)Proceeds on disposal of property, plant and equipment 37 17 23Purchases of other intangible assets (389) (716) (2,663)Purchases of available-for-sale investments (132) - (50)Proceeds on disposal of available-for-sale investments 96 - -(Purchase) / maturity of short-term investments (699) (36,977) 24,677Purchases of subsidiaries, net of cash acquired (14,350) - (77,899) Net cash used in investing activities (15,892) (35,611) (51,411) Financing activitiesIssue of shares 11,406 1,192 1,313Expenses of issuing share capital - - (360)Dividends paid to shareholders (5,759) (6,118) (8,975) Net cash from / (used in) financing activities 5,647 (4,926) (8,022) Net increase / (decrease) in cash and cash equivalents 5,169 (30,381) (20,187)Cash and cash equivalents at beginning of period 110,561 130,722 130,722Effect of foreign exchange rate changes 5,916 (85) 26 Cash and cash equivalents at end of period 121,646 100,256 110,561 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 2005 of$1.792=£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 Accrued liabilities under US GAAP of £22.3 million (2004: £38.6 million)includes: £nil million (2004: £14.3 million) for acquisition-related expenses,£2.3 million (2004: £4.4 million) for staff costs and £1.2 million (2004: £2.8million) representing the fair value of embedded derivatives. (3) Consolidated statement of changes in shareholders' equity (US GAAP) Additional Deferred Share capital paid-in capital compensation Treasury stock £'000 £'000 £'000 £'000 At 1 January 2005 675 414,133 (12,083) (7,485)Shares issued on exercise of options 16 11,390 - -Net income - - - -Dividends - - - -Unrealized holding losses on available-for-sale securities - - - -Deferred compensation arising on share schemes - 73 (73) -Tax benefits on exercise of options issued as part consideration for a business combination - 1,227 - -Amortization of deferred compensation - - 4,502 -Reversal of unearned compensation - (161) 161 -Currency translation adjustment - - - -At 30 June 2005 691 426,662 (7,493) (7,485) Cumulative Retained earnings Unrealized translation holding gain adjustment Total £'000 £'000 £'000 £'000 At 1 January 2005 153,421 6,175 (2,509) 552,327Shares issued on exercise of options - - - 11,406Net income 19,119 - - 19,119Dividends (5,759) - - (5,759)Unrealized holding losses on available-for-sale securities - (3,594) - (3,594)Deferred compensation arising on share schemes - - - -Tax benefits on exercise of options issued as part consideration for a business combination - - - 1,227Amortization of deferred compensation - - - 4,502Reversal of unearned compensation - - - -Currency translation adjustment - - 35,630 35,630At 30 June 2005 166,781 2,581 33,121 614,858 (4) IFRS operating expenses Included within the IFRS income statement for the six months ended 30 June 2005are share-based payment costs of £0.7m (six months ended 30 June 2004: £0.2m;year ended 31 December 2004: £0.4) in cost of revenues, £6.9m (30 June 2004:£2.0m; 31 December 2004: £4.3m) in research and development costs, £2.3m (30June 2004: £0.6m; 31 December 2004: £1.5m) in sales and marketing costs and£2.0m (30 June 2004: £0.8m; 31 December 2004: £1.7m) in general andadministrative costs. Also included within operating costs is amortization of intangibles of £4.0m (30June 2004: £nil; 31 December 2004 £0.3m) in research and development costs,£4.3m (30 June 2004: £nil; 31 December 2004 £0.2m) in sales and marketing costsand £0.3m (30 June 2004: £nil; 31 December 2004 £0.1m) in general andadministrative costs. (5) Consolidated statement of changes in shareholders' equity (IFRS) Share premium Share option Retained Share capital account reserve earnings £'000 £'000 £'000 £'000 At 1 January 2005 675 434,026 61,474 140,291Shares issued on exercise of options 16 11,390 - -Profit for the period - - - 11,462Dividends - - - (5,759)Credit in respect of employee share - - - 11,944schemesMovement on deferred tax arising on outstanding share options - - - (5,551)Tax benefits on exercise of options issued as part consideration for a business combination - - - 4,812Unrealized holding losses on available-for-sale investments (net of deferred tax of £1,556,000) - - - -Currency translation adjustment - - - -At 30 June 2005 691 445,416 61,474 157,199 Cumulative Revaluation translation reserve reserve Total £'000 £'000 £'000 At 1 January 2005 5,237 835 642,538Shares issued on exercise of options - - 11,406Profit for the period - - 11,462Dividends - - (5,759)Credit in respect of employee share - - 11,944schemesMovement on deferred tax arising on outstanding share options - - (5,551)Tax benefits on exercise of options issued as part consideration for a business combination - - 4,812Unrealized holding losses on available-for-sale investments (net of deferred tax of £1,556,000) (3,594) - (3,594)Currency translation adjustment - 40,394 40,394At 30 June 2005 1,643 41,229 707,652 (6) Summary of significant differences between US GAAP and IFRS Goodwill Under both IFRS and US GAAP, goodwill is not subject to amortisation,but is tested annually for impairment. As permitted by IFRS 1, the Company'sgoodwill under IFRS has been frozen at the amount recorded under UK GAAP as at 1January 2004. Under US GAAP, following the provisions of SFAS 142, "Goodwilland other intangible assets", the carrying value of goodwill was frozen at theamount recorded under previous US GAAP as at 1 January 2002. Under bothprevious US GAAP and UK GAAP, goodwill was amortised over its useful economiclife. Thus, while ongoing accounting policies in respect of goodwill aresimilar under US GAAP and IFRS, the difference in the dates of transition meansthat 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 have been amended as estimateshave been refined in 2005, adjustments to fair values have been recorded asprior year adjustments to goodwill for IFRS purposes. Under US GAAP, these arerecorded as amendments to goodwill in the current period. Recognition and amortisation of intangibles The Company has taken advantage ofthe exemption under IFRS 1 not to apply IFRS retrospectively to businesscombinations occurring before 1 January 2004. This means that for businesscombinations occurring before this date, the previously reported UK GAAPtreatment has continued to be followed. Under previous UK GAAP, intangibleassets were recognised separately from goodwill only where they could be soldseparately without disposing of a business of the entity. This separabilitycriterion does not apply under either IFRS or US GAAP. Thus, a number ofintangible assets which are required to be recognised separately from goodwillunder both IFRS 3 and SFAS 142, were subsumed within goodwill under UK GAAP.Under both US GAAP and IFRS, such intangible assets are amortised over theiruseful economic lives. Except in relation to in-process research andRelated Shares:
ARM.L