26th Jul 2007 07:01
ARM Holdings PLC26 July 2007 ARM HOLDINGS PLC REPORTS RESULTS FOR THE SECOND QUARTER AND HALF YEAR ENDED 30JUNE 2007 A Company presentation of these results and a conference call will be webcasttoday at 09:30 and 13:30 BST respectively at www.arm.com/ir. CAMBRIDGE, UK, 26 July 2007-ARM Holdings plc ((LSE: ARM); (Nasdaq: ARMHY))announces its unaudited financial results for the half-year and quarter ended 30June 2007 Highlights (US GAAP unless otherwise stated) • H1 dollar revenues at $258.4m, up 11% on H1 2006 o Normalised* H1 2007 PBT at £44.1m (US GAAP £24.7m)• Q2 dollar revenues at $129.2m, up 8% on Q2 2006 o Processor Division (PD) license revenue at $45.3m, up 26% on Q2 2006• Accelerating operating leverage with normalised* operating margin at 32.0% (US GAAP 16.0%), up from 30.3% (US GAAP 16.9%) in Q1 2007 and 29.0% (US GAAP 11.4%) in Q4 2006 despite weakening dollar• Normalised* Q2 PBT and EPS at £22.5m (US GAAP £12.0m) and 1.18p (US GAAP 0.64p) respectively o Normalised* Q2 EPS up 13% on Q2 2006 at constant currency• Improving balance sheet efficiency o Total cash returned of £33.6m in Q2 and £53.7m in H1 2007 (£20.2m in Q1 2007 and £36.0m in H1 2006) o 2007 interim dividend doubled to 0.8p per share• Increasing traction for ARM's leading-edge technologies o Three Cortex(TM) family licenses in Q2 o One further Graphics license o First license signed for 45nm physical IP with a non-foundry customer (non-Tier 1) Commenting on the results, Warren East, Chief Executive Officer, said: "We are encouraged to have grown dollar revenues 11% in the first half against achallenging industry backdrop, compared to overall semiconductor industryrevenues which grew less than 5%. A record quarter for licensing of ARM(R)processor technology in Q2 enhances our prospects for further penetrating mobileand non-mobile markets in the future. In addition, good revenue growth andcontinued cost discipline have enabled us to increase profitability despite thecontinued strong currency headwind. Overall, ARM is well-positioned to benefitfrom the generally-anticipated improvement in industry conditions in the secondhalf and we are confident of achieving full-year earnings in line withexpectations." Q2 2007 - Revenue Analysis Revenue ($M)*** Revenue (£M) -------------------------------------------------------- Q2 2007 Q2 2006 % Change Q2 2007 Q2 2006 % Change-------------------- --------------------------------------------------------PDLicensing 45.3 35.9 +26% 23.2 19.9 +17%Royalties 40.1 40.2 20.2 21.8 -7%Total PD 85.4 76.1 +12% 43.4 41.7 +4%PIPDLicensing 14.0 15.8 -11% 7.1 8.7 -18%Royalties 7.3(1) 7.9(1) -8% 3.6(1) 4.3(1) -16%Total PIPD 21.3 23.7 -10% 10.7 13.0 -18%Development Systems 14.1 12.9 +9% 7.1 7.1Services 8.4 7.0 +20% 4.3 3.9 +10%Total Revenue 129.2 119.7 +8% 65.5 65.7-------------------- -------------------------------------------------------- (1) Includes catch-up royalties in Q2 2007 of $0.6m (£0.3m) and in Q2 2006 of$1.1m (£0.6m). H1 2007 - Revenue Analysis Revenue ($M)*** Revenue (£M) -------------------------------------------------------- H1 2007 H1 2006 % Change H1 2007 H1 2006 % Change-------------------- --------------------------------------------------------PDLicensing 82.7 65.9 +25% 42.6 37.2 +15%Royalties 85.1 81.1(1) +5% 43.2 45.1 -4%Total PD 167.8 147.0 +14% 85.8 82.3 +4%PIPDLicensing 31.0 29.5 +5% 15.7 16.6 -5%Royalties 15.6(2) 16.3(2) -4% 7.9(2) 9.2(2) -14%Total PIPD 46.6 45.8 +2% 23.6 25.8 -9%Development Systems 27.7 26.8 +3% 14.1 15.0 -6%Services 16.3 13.0 +25% 8.5 7.3 +16%Total Revenue 258.4 232.6 +11% 132.0 130.4 +1%-------------------- -------------------------------------------------------- (1) Includes catch-up royalties in H1 2006 of $2.0m (£1.1m) (2) Includes catch-up royalties in H1 2007 of $2.1m (£1.1m) and in H1 2006 of $1.7m (£1.0m). Q2 2007 - Financial Summary £M US GAAP Normalised* US GAAP Reported ------------------------------------------------- Q2 2007 Q2 2006 % Change Q2 2007 Q2 2006 -------------------------- ------------------------------------------------- Revenue 65.5(1) 65.7 65.5 65.7 Income before income tax 22.5 23.0 -2% 12.0 19.0 Operating margin 32.0% 32.2% 16.0% 18.1% Earnings per share (pence) 1.18 1.22 -3% 0.64 1.00 ------------------ Net cash generation** 10.0 1.8 Effective fx rate ($/£) 1.97 1.82 -------------------------- ----------------------------- (1) Equivalent to £70.9m at Q2 2006 effective $/£ rate H1 2007 - Financial Summary £M US GAAP Normalised* US GAAP Reported ------------------------------------------------- H1 2007 H1 2006 % Change H1 2007 H1 2006 -------------------------- ------------------------------------------------- Revenue 132.0(1) 130.4 +1% 132.0 130.4 Income before income tax 44.1 47.7 -8% 24.7 35.1 Operating margin 31.1% 33.9% 16.5% 20.2% Earnings per share (pence) 2.32 2.50 -7% 1.34 1.85 ------------------ Net cash generation** 25.5 19.1 Effective fx rate ($/£) 1.96 1.78 -------------------------- ----------------------------- (1) Equivalent to £144.8m at H1 2006 effective $/£ rate Current trading and prospects The first half of 2007 has seen very strong licensing in the Processor Division,up 25% year-on-year, which will underpin ARM's growth in royalty revenues, bothin mobile and non-mobile markets, in future periods. In the short term, royaltyrevenues in both PD and PIPD have been impacted by normal seasonality, theindustry inventory correction and lower utilisation rates in the foundries.Despite this, group revenues have grown 11% in the first half compared to anoverall industry growth rate of less than 5%. As indicated in February, 2007 is expected to be a year of productivityenhancement and acceleration in operating leverage following a year of highinvestment in headcount in 2006. Normalised operating margin in Q2 2007 of 32.0%is up from 30.3% in Q1 2007 and 29.0% in Q4 2006, notwithstanding furtherweakening of the dollar against sterling. We enter the second half of 2007 with a strong order backlog and a healthylicensing sales opportunity pipeline across the business. Further, royaltyrevenues are expected to benefit from the generally-anticipated improvement inindustry conditions in the second half as the impact of the inventory correctionreduces, foundry utilisation rates increase and the momentum behind smart phonesales gathers pace. As a result, although the pace of improvement in industryconditions is uncertain, assuming the dollar/sterling exchange rate remainssimilar to the effective rate reported in Q2 2007, we are confident of achievingfull-year earnings in line with expectations. CONTACTS: Fiona Laffan/Pavla Shaw Tim Score/Bruce BeckloffBrunswick ARM Holdings plc+44 (0)207 404 5959 +44 (0)1628 427800 * Normalised figures are based on US GAAP, adjusted for acquisition-related,share-based remuneration and restructuring charges. For reconciliation of GAAPmeasures to normalised non-GAAP measures detailed in this document, see notes8.1 to 8.27. ** Before dividends and share buybacks, net cash flows from share optionexercises and acquisition consideration - see notes 8.14 to 8.18. *** 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) Total revenues Total dollar revenues in Q2 2007 were $129.2 million, up 8% on Q2 2006 and at asimilar level to last quarter. Sterling revenues of £65.5 million were flatyear-on-year after an 8% weakening of the dollar against sterling ($1.97 in Q22007 compared to $1.82 in Q2 2006). At the Q2 2006 effective rate, Q2 2007sterling revenues would have been £70.9 million. Half-year dollar revenues in 2007 amounted to $258.4 million, up 11% on H1 2006. License revenues Total dollar license revenues in Q2 2007 grew by 15% to $59.3 million,representing 46% of group revenues, compared to $51.7 million in Q2 2006.License revenues comprised $45.3 million from PD and $14.0 million from PIPD. Half-year dollar license revenues were up 19%, comprising 25% growth in PD and5% growth in PIPD. Royalty revenues Total dollar royalty revenues in Q2 2007 were down 1% at $47.4 million,representing 37% of group revenues, compared to $48.1 million in Q2 2006.Royalties in the quarter were affected by a combination of normal seasonality,the semiconductor industry inventory correction and lower foundry utilisationlevels. Royalty revenues comprised $40.1 million from PD and $7.3 million fromPIPD which included $0.6 million of "catch-up" royalties. Underlying royaltiesof $6.7 million for PIPD were broadly flat compared to underlying royalties inQ2 2006 while overall foundry industry revenue declined by approximately 15%over the same period, indicating encouraging market share gains. Half-year dollar royalty revenues in 2007 amounted to $100.7 million, up 3% on2006. Development Systems and Service revenues Sales of development systems in Q2 2007 were up 9% to $14.1 million,representing 11% of group revenues, compared to $12.9 million in Q2 2006.Service revenues in Q2 2007 were up 20% to $8.4 million, representing 6% ofgroup revenues, compared to $7.0 million in Q2 2006. Half-year Development Systems revenues were $27.7 million, up 3% on 2006.Services revenues were up by 25% to $16.3 million. Gross margins Gross margins in Q2 2007, excluding stock-based compensation charges of £0.3million (see below), were 89.7% compared to 89.5% in Q1 2007 and 89.1% in Q22006. Gross margins for the half year, excluding stock-based compensation charges of£0.5 million, were 89.6% compared to 89.0% in 2006. Operating expenses and operating margin Total operating expenses in Q2 2007 were £48.0 million (£46.4 million in Q22006) including amortisation of intangible assets and other acquisition-relatedcharges of £4.8 million (Q2 2006: £5.1 million) and £4.5 million (Q2 2006: £4.0million) in relation to stock-based compensation charges. The total stock-basedcompensation charges of £4.8 million in Q2 2007 are included within cost ofrevenues (£0.3 million), research and development (£2.8 million), sales andmarketing (£0.9 million) and general and administrative (£0.8 million). In Q22007, the Group closed one of its smaller design centres in the US, in order toconcentrate engineering activities in fewer sites, at a total cost of £0.8million. Normalised income statements for Q2 and H1 2007 and Q2 and H1 2006 areincluded in notes 8.24 to 8.27 below which reconcile US GAAP to the normalisednon-GAAP measures referred to in this earnings release. Operating expenses (excluding acquisition-related, stock-based compensation andrestructuring charges) in Q2 2007 were £37.8 million compared to £39.3 millionin Q1 2007 and £37.4 million in Q2 2006. The sequential decline in operatingexpenses arises as the current year cost impact of the increased headcountthrough 2006 is more than offset by the benefits of re-balancing the group'sresources between higher and lower cost areas, general rigorous management ofoperating expenses and a favourable foreign exchange impact. Further, followingthe significant investment in headcount in 2006, headcount remained broadly flatin the first half of 2007 (see People below). Normalised research and development expenses were £15.5 million in Q2 2007,representing 24% of revenues, compared to £16.6 million in Q1 2007 and £15.0million in Q2 2006. Normalised sales and marketing costs in Q2 2007 were £10.5million, being 16% of revenues, compared to £11.1 million in Q1 2007 and £9.8million in Q2 2006. Normalised general and administrative expenses in Q2 2007were £11.9 million, representing 18% of revenues, compared to £11.6 million inQ1 2007 and £12.6 million in Q2 2006. Normalised operating margin in Q2 2007 was 32.0% (8.1) compared to 30.3% (8.2)in Q1 2007 and 32.2% (8.3) in Q2 2006. Operating margins in Q2 2007 wereslightly lower than Q2 2006 due to the 8% weakening of the US dollar againststerling. At constant currencies, using the Q2 2006 effective rate of $1.82/£1,the operating margin for Q2 2007 would have been approximately 35%. Total operating expenses for the first six months of 2007 were £96.0 million,including acquisition-related, stock-based compensation and restructuringcharges of £9.9 million, £8.2 million and £0.8 million respectively. Excludingthese charges, operating expenses for the half-year were £77.1 million, comparedto £71.9 million in 2006. Half-year normalised research and development expenses were £32.1 million in2007, representing 24% of revenues. Half-year normalised sales and marketingexpenses were £21.6 million or 16% of revenues. Total normalised general andadministrative expenses were £23.5 million, representing 18% of revenues. Normalised operating margin for the first six months of 2007 was 31.1% (8.4)versus 33.9% (8.5) for 2006. Using ARM's 2006 half-year effective rate of $1.79,the normalised operating margin for H1 2007 would have been approximately 35%. Earnings and taxation Income before income tax in Q2 2007 was £12.0 million compared to £19.0 millionin Q2 2006. After adjusting for acquisition-related, stock-based compensationand restructuring charges, normalised income before income tax in Q2 2007 was£22.5 million (8.6) compared to £23.0 million (8.8) in Q2 2006. The group'seffective tax rate under US GAAP in Q2 2007 was 26%, reflecting the availabilityof research and development tax credits and taking into account the benefitsarising from the structuring of the Artisan(R) acquisition. In Q2 2007, fully diluted earnings per share prepared under US GAAP were 0.64pence (3.87 cents per ADS****) compared to earnings per share of 1.00 pence(5.57 cents per ADS****) in Q2 2006. Normalised fully diluted earnings per sharein Q2 2007 were 1.18 pence (8.19) per share (7.11 cents per ADS****) compared to1.22 pence (8.21) (6.78 cents per ADS****) in Q2 2006. Normalised fully dilutedearnings per share in Q2 2007 using the Q2 2006 $/£ effective rate of 1.82 wouldhave been 1.38 pence, up 13% on Q2 2006. Balance sheet Intangible assets at 30 June 2007 were £389.1 million, comprising goodwill of£341.0 million and other intangible assets of £48.1 million, compared to £349.2million and £56.0 million respectively at 31 December 2006. Total accounts receivable were £75.0 million at 30 June 2007, comprising £44.2million of trade receivables and £30.8 million of amounts recoverable oncontracts, compared to £67.0 million at 31 March 2007, comprising £39.1 millionof trade receivables and £27.9 million of amounts recoverable on contracts. Dayssales outstanding (DSOs) were 51 at 30 June 2007 compared to 41 at 31 March2007. Cash flow, share buyback programme and interim dividend Net cash at 30 June 2007 was £108.9 (8.11) million compared to £126.8 (8.12)million at 31 March 2007. Normalised cash generation in Q2 2007 was £10.0million (8.14). During the quarter, £33.6 million of cash was returned to shareholders, by wayof payment of the 2006 final dividend of £8.0 million and purchase of 18.4million own shares at a total cost of £25.6 million (up from £20.2 million in Q12007). It is anticipated that the buyback programme will resume after theannouncement of these results. In respect of the year to 31 December 2007, as indicated in the Company's Q1earnings release in April, the directors are declaring an interim dividend of0.80 pence per share, an increase of 100% over the 2006 interim dividend of 0.40pence per share. This interim dividend will be paid, out of the UK GAAPdistributable reserves of ARM Holdings plc, on 5 October 2007 to shareholders onthe register on 31 August 2007. International Financial Reporting Standards (IFRS) ARM reports results quarterly in accordance with US GAAP. At 30 June and 31December each year, in addition to the US GAAP results, ARM is also required topublish results under IFRS. The operating and financial review commentaryincluded in this release on the US GAAP numbers is for the most part applicableto the IFRS numbers and, in particular, revenues, dividends and share buybacksare recorded in the same way under both sets of accounting rules. A summary ofthe accounting differences between IFRS and US GAAP and reconciliations of IFRSand US GAAP profit and shareholders' equity are set out in note 7 to thefinancial tables below. Operating review Backlog The Group order backlog was approximately 5% lower at the end of Q2 compared tothe end of Q1 but remains at historically high levels. The maturity profile ofthe order backlog has improved with 46% of total backlog as at the end of Q2expected to be recognised as revenue over the next two quarters compared to 41%as at the end of Q1 2007. PD Licensing Q2 was a strong quarter for processor division licensing across the processorproduct portfolio. During the quarter 15 licenses were signed including threeCortex family licenses, four ARM11(TM) family licenses and one license (third intotal) for the Mali(TM) graphics processor. Q2 licensing activity underpinsfurther penetration of non-mobile markets as a high proportion of licensing inthe quarter was for applications outside of the mobile phone market. In thequarter two Cortex-M3 processors were licensed for use in high-volumemicrocontroller applications, one of which was taken by ToshibaMicroelectronics, a major MCU provider. The composition of Q2 licensing alsosupports the increasing ARM value per consumer transaction with furtherlicensing of the Cortex-A8 processor for high-end phone application processorsand the Mali processor license for enabling additional royalties beyond thetraditional microprocessor royalties. Further in Q2 a license agreement was signed that will enable the first entry ofan ARM11 family product into the ARM foundry program. The ARM1176JZ(F)-S(TM)processor is now available for licensing as a single use design license, therebyenabling the licensing of the ARM11 family by a wider range of customers. Q2 2007 and Cumulative PD Licensing Analysis Multi-use Term Per-use Cumulative -------------------------------- U D N U D N U D N Total Total---------------------------------------------------------------ARM7(TM) 1 2 3 151ARM9(TM) 2 2 4 227ARM11 1 3 4 57Cortex-M3 1 1 2 9Cortex-R4 9Cortex-A8 1 1 8Mali 1 1 3Other 27--------------------------------------------------------------- Total 15 491--------------------------------------------------------------- U:Upgrade D:Derivative N: New PD Royalties PD units shipments in Q1 (our partners report royalties one quarter in arrears)declined 10% sequentially to 648 million units, although this was an overallincrease of 17% versus Q2 2006. ARM9 shipments accounted for 40% of total units,including 17% relating to ARM926 shipments. ARM11 shipments again increasedsequentially, comprising over 1% of total shipments. Shipments were lower sequentially across a wide range of applications,reflecting the overall decline in the semiconductor industry in Q1 due to thecombined effect of the inventory correction and the normal post-holidayseasonality in consumer electronics. Specific areas of weakness were in WirelessHandset related applications (Wireless Handsets, Smart Cards, and Bluetooth), PCrelated applications (Hard Disk Drives and Printers) and consumer electronics(Portable Media Players and Digital Television). Notwithstanding short-termindustry conditions, shipments of ARM-based microcontrollers grew more than 10%sequentially and more than 140% versus Q2 2006. The embedded segment grew toover 11% of total shipments in the quarter from just over 10% in the previousquarter and just over 7% in Q2 2006. The proportion of shipments into the mobileand non-mobile segments remained consistent with shipments in Q4 at 66% and 34%of shipments, respectively. PIPD Licensing PIPD license revenue in Q2 2007 at $14.0 million compares to $16.9 million in Q12007 and $15.8 million in Q2 2006. Conversion of order backlog into revenue waslower in Q2 than in recent quarters due to a higher proportion of the physicalIP engineering effort being deployed on the development of leading-edgetechnology. The proportion to be deployed on conversion of order backlog isexpected to be higher in the second half. A significant milestone was achieved in the quarter with the signing of thefirst license for 45nm ARM physical IP with a non-foundry customer. Although thecustomer is not a Tier 1 IDM or large fabless customer, the license demonstratesthe growing market for physical IP outsourcing that ARM expects to penetrateover time. We continue to be engaged in technical and commercial discussionswith a range of customers over physical IP outsourcing and are confident ofachieving our long-term goal of a significant portion of the physical IP marketbeing outsourced to ARM over time. As we continue to accelerate the physical IP technology roadmap, two significantoperational milestones were achieved in the quarter. First, we had our firsttape out of a 65nm device based on ARM silicon on insulator (SOI) physical IP.The tape out was achieved through a collaboration with UMC and enables a widercustomer base access to SOI technology for their future designs. Secondly, ARMcompleted the first design using ARM's 45nm physical IP incorporating anARM1176. This represents a further important milestone in the development of ourphysical IP technology portfolio, as we position ARM as an attractiveoutsourcing option for the physical IP requirements of Tier 1 IDMs and largefabless companies. Q2 2007 PIPD Licensing Analysis Process Node Total (nm)---------------------------------------Platform LicensesAdvantage(TM) 65/90 2---------------------------------------Standard CellLibrariesClassic(TM) 90/180/250 3Metro(TM) 180 1Advantage 45/65/90 3---------------------------------------Memory CompilersClassic 180 1Metro 180 4Advantage 45/90 2---------------------------------------Velocity(TM) PHYs 90 1---------------------------------------Quarter Total 17---------------------------------------Cumulative Total 317--------------------------------------- PIPD Royalties Underlying PIPD royalties were strong in Q2 2007 against a backdrop ofsignificantly lower foundry utilisation during the period. Underlying royaltiesin Q2 2007 were $6.7 million, a similar level to Q2 2006, whilst overall foundryindustry revenue declined approximately 15% during the same period,demonstrating the continued increasing penetration and market share gains of ARMphysical IP into chip designs. People At 30 June 2007, ARM had 1,681 full-time employees, a net increase of 22 sincethe start of the year. Headcount increased by 48 in India and China anddecreased by 26 in ROW, illustrating the ongoing regional re-balancing of ARM'sresources. At the end of Q2, the group had 664 employees based in the UK, 535 inthe US, 178 in Continental Europe, 239 in India and 65 in the Asia Pacificregion. Legal matters ARM is currently involved in ongoing litigation proceedings with NazomiCommunications, Inc. and Technology Properties Limited, Inc. Details are set outin the 2006 Annual Report on Form 20-F filed with the Securities and ExchangeCommission on 11 April 2007. Based on independent legal advice, ARM does notexpect any significant liability to arise in respect of these proceedings. ARM Holdings plc Second Quarter and Six Months Results - US GAAP Quarter Quarter Six months Six months ended ended ended ended 30 June 30 June 30 June 30 June 2007 2006 2007 2006 Unaudited Unaudited Unaudited Unaudited --------- --------- --------- --------- £'000 £'000 £'000 £'000RevenuesProduct revenues 61,215 61,782 123,515 123,014Service revenues 4,317 3,948 8,509 7,350 --------- --------- --------- ---------Total revenues 65,532 65,730 132,024 130,364 --------- --------- --------- --------- Cost of revenuesProduct costs (5,421) (5,794) (11,059) (11,609)Service costs (1,636) (1,610) (3,226) (3,162) --------- --------- --------- ---------Total cost of revenues (7,057) (7,404) (14,285) (14,771) --------- --------- --------- --------- --------- --------- --------- ---------Gross profit 58,475 58,326 117,739 115,593 --------- --------- --------- --------- Research and development (18,460) (17,445) (37,457) (34,901)Sales and marketing (11,430) (10,609) (23,336) (20,800)General and administrative (12,659) (13,309) (25,121) (23,918)Restructuring costs (814) - (814) -Amortization of intangibles purchased through business combination (4,612) (5,086) (9,267) (9,673) --------- --------- --------- ---------Total operating expenses (47,975) (46,449) (95,995) (89,292) --------- --------- --------- --------- Income from operations 10,500 11,877 21,744 26,301Interest 1,520 1,819 2,977 3,492Profit on disposal of available-for-sale investment - 5,270 - 5,270 --------- --------- --------- ---------Income before income tax 12,020 18,966 24,721 35,063Provision for income taxes (3,173) (4,770) (6,297) (8,907) --------- --------- --------- ---------Net income 8,847 14,196 18,424 26,156 --------- --------- --------- --------- Earnings per share (assuming dilution)Shares outstanding ('000) 1,374,410 1,413,212 1,376,270 1,412,330Earnings per share - pence 0.6 1.0 1.3 1.9Earnings per ADS (assuming dilution)ADSs outstanding ('000) 458,137 471,071 458,757 470,777Earnings per ADS - cents 3.9 5.6 8.1 10.3 ARM Holdings plc Consolidated balance sheet - US GAAP 30 June 31 December 2007 2006 Unaudited Audited ----------- ----------- £'000 £'000AssetsCurrent assets:Cash and cash equivalents 92,924 90,743Short-term investments 5,273 18,600Marketable securities 10,741 19,151Accounts receivable, net of allowance of£1,815,000 in 2007 and £2,556,000 in 2006 74,986 69,552Inventory: finished goods 2,552 1,933Income taxes receivable 5,721 5,761Prepaid expenses and other assets 17,985 12,668 ----------- -----------Total current assets 210,182 218,408 Deferred income taxes 14,145 9,872Prepaid expenses and other assets 1,154 1,328Property and equipment, net 11,892 13,970Goodwill 340,988 349,243Other intangible assets 48,132 56,027Investments 3,311 3,855 ----------- -----------Total assets 629,804 652,703 ----------- ----------- Liabilities and shareholders' equityAccounts payable 6,005 1,826Income taxes payable 13,514 5,572Personnel taxes 1,840 1,408Accrued liabilities 25,377 33,021Deferred revenue 32,564 31,485 ----------- -----------Total current liabilities 79,300 73,312 Deferred income taxes 3,179 4,744 ----------- -----------Total liabilities 82,479 78,056 ----------- ----------- Shareholders' equityOrdinary shares 700 695Additional paid-in capital 461,620 446,005Treasury stock, at cost (88,716) (58,245)Retained earnings 197,228 197,874Accumulated other comprehensive income:Unrealized holding gain on available-for-sale securities, net of tax asset of £393,000 (2006:£231,000) 19 394Cumulative translation adjustment (23,526) (12,076) ----------- -----------Total shareholders' equity 547,325 574,647 ----------- ----------- Total liabilities and shareholders' equity 629,804 652,703 ----------- ----------- ARM Holdings plc Consolidated income statement - IFRS Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited ---------- ---------- ---------- £'000 £'000 £'000 (restated) (restated)RevenuesProduct revenues 123,515 123,014 247,194Service revenues 8,509 7,350 16,060 ---------- ---------- ----------Total revenues 132,024 130,364 263,254 ---------- ---------- ---------- Cost of revenuesProduct costs (11,059) (11,609) (24,156)Service costs (see note 2) (3,282) (3,145) (6,721) ---------- ---------- ----------Total cost of revenues (14,341) (14,754) (30,877) ---------- ---------- ---------- ---------- ---------- ----------Gross profit 117,683 115,610 232,377 ---------- ---------- ---------- Operating expensesResearch and development (see note 2) (42,944) (39,185) (84,884)Sales and marketing (see note 2) (27,845) (25,378) (53,291)General and administrative (see note 2) (26,013) (24,116) (50,224)Profit on disposal of available-for-sale security - 5,270 5,270 ---------- ---------- ----------Total net operating expenses (96,802) (83,409) (183,129) ---------- ---------- ---------- ---------- ---------- ----------Profit from operations 20,881 32,201 49,248Investment income 2,977 3,492 6,758 ---------- ---------- ----------Profit before tax 23,858 35,693 56,006Tax (6,452)* (11,060) (7,850) ---------- ---------- ----------Profit for the period 17,406 24,633 48,156 ---------- ---------- ---------- Dividends- final 2005 paid at 0.5 pence per share - 6,918 6,918- interim 2006 paid at 0.4 pence per share - - 5,449- final 2006 paid at 0.6 pence per share 8,013 - -- interim 2007 proposed at 0.8 pence per share 10,615 - - Earnings per shareBasic and diluted earnings 17,406 24,633 48,156 Number of shares ('000)Basic weighted average number of shares 1,334,892 1,377,117 1,366,816Effect of dilutive securities: Share options 33,882 33,777 35,145Diluted weighted average number of shares 1,368,774 1,410,894 1,401,961 Basic EPS 1.3p 1.8p 3.5pDiluted EPS 1.3p 1.7p 3.4p All activities relate to continuing operations. All of the profit for the period is attributable to the equity shareholders ofthe parent. * Tax comprises £7,135,000 of UK taxation and a credit of £683,000 of overseastaxation. ARM Holdings plc Consolidated balance sheet - IFRS 30 June 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited ---------- ---------- ---------- £'000 £'000 £'000 (restated) (restated)AssetsCurrent assets:Cash and cash equivalents 92,924 95,381 90,743Financial assets: Short-term investments 5,273 34,976 18,600 Short-term marketable securities 10,741 18,449 19,151 Fair value of currency exchange contracts 512 530 439Accounts receivable 74,986 72,049 69,552Prepaid expenses and other assets 17,473 17,571 12,229Current tax assets 5,721 - 5,761Inventories: finished goods 2,552 1,939 1,933 ---------- ---------- ----------Total current assets 210,182 240,895 218,408 ---------- ---------- ---------- Non-current assets:Financial assets: Available-for-sale investments 3,311 3,578 3,855Prepaid expenses and other assets 1,154 1,501 1,328Property, plant and equipment 8,765 9,320 10,296Goodwill 418,155 449,041 428,366Other intangible assets 53,908 72,696 62,913Deferred tax assets 22,377 12,064 20,279 ---------- ---------- ----------Total non-current assets 507,670 548,200 527,037 ---------- ---------- ---------- ---------- ---------- ----------Total assets 717,852 789,095 745,445 ---------- ---------- ---------- Liabilities and shareholders' equityCurrent liabilities:Accounts payable 6,005 3,718 1,826Current tax liabilities 13,514 13,897 5,572Accrued and other liabilities 30,001 30,642 39,586Deferred revenue 32,564 28,347 31,485 ---------- ---------- ----------Total current liabilities 82,084 76,604 78,469 ---------- ---------- ---------- ---------- ---------- ----------Net current assets 128,098 164,291 139,939 ---------- ---------- ---------- Non-current liabilities:Deferred tax liabilities 3,181 6,102 6,050 ---------- ---------- ----------Total liabilities 85,265 82,706 84,519 ---------- ---------- ---------- ---------- ---------- ----------Net assets 632,587 706,389 660,926 ---------- ---------- ---------- Capital and reserves attributable toequity holders of the CompanyShare capital 700 694 695Share premium account 454,699 447,901 449,195Share option reserve 61,474 61,474 61,474Retained earnings 141,419 173,391 161,453Revaluation reserve (945) (734) (544)Cumulative translation adjustment (24,760) 23,663 (11,347) ---------- ---------- ----------Total equity 632,587 706,389 660,926 ---------- ---------- ---------- ARM Holdings plc Consolidated cash flow statement - IFRS Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited --------- --------- --------- £'000 £'000 £'000 (restated) (restated)Operating activitiesProfit from operations 20,881 32,201 49,248Depreciation and amortisation of tangible and intangible assets 13,675 13,165 26,726Profit on disposal of available-for-sale security - (5,270) (5,270)Loss on disposal of property, plant and equipment 353 64 63Compensation charge in respect of share-based payments 8,611 7,496 17,437Provision for doubtful debts 265 66 932Provision for obsolescence of inventory 69 - 65Changes in working capital:Accounts receivable (6,830) (16,414) (18,986)Inventories (688) (449) (508)Prepaid expenses and other assets (3,571) (1,674) 1,015Fair value of currency exchange contracts (73) (2,238) (2,147)Accounts payable 4,179 1,467 (672)Deferred revenue 1,072 7,993 11,071Accrued and other liabilities (7,400) 1,107 5,373 --------- --------- ---------Cash generated by operations before tax 30,543 37,514 84,347Income taxes paid (3,519) (10,763) (21,147) --------- --------- ---------Net cash from operating activities 27,024 26,751 63,200 --------- --------- --------- Investing activitiesInterest received 3,041 3,250 6,636Purchases of property, plant and equipment (1,680) (3,471) (7,189)Proceeds on disposal of property, plant and equipment - 19 31Purchases of other intangible assets (1,557) (827) (1,370)Purchases of available-for-sale investments - (165) (165)Proceeds on disposal of available-for-sale investments - 5,567 5,567(Purchase) / maturity of short-term investments 21,737 (20,600) (4,926)Purchases of subsidiaries, net of cash acquired (3,307) (13,949) (17,270) --------- --------- ---------Net cash from / (used in) investing activities 18,234 (30,176) (18,686) --------- --------- --------- Financing activitiesIssue of shares 5,509 811 2,106Proceeds received on issuance of shares from treasury 6,486 12,348 15,754Purchase of own shares (45,736) (29,086) (76,519)Dividends paid to shareholders (8,013) (6,918) (12,367) --------- --------- ---------Net cash used in financing activities (41,754) (22,845) (71,026) --------- --------- --------- Net increase / (decrease) in cash and cash equivalents 3,504 (26,270) (26,512)Cash and cash equivalents at beginning of period 90,743 128,077 128,077Effect of foreign exchange rate changes (1,323) (6,426) (10,822) --------- --------- ---------Cash and cash equivalents at end of period 92,924 95,381 90,743 --------- --------- --------- Notes to the Financial Information (1) Basis of preparation US GAAP The financial information prepared in accordance with the Company's US GAAPaccounting policies comprises the consolidated balance sheets as of 30 June 2007and 31 December 2006 and related income statements for the periods then ended,together with related notes. In preparing this financial information managementhas used the principal accounting policies as set out in the Company's annualfinancial statements and Form 20-F for the year ended 31 December 2006, exceptin relation to accounting for sabbatical leave following the adoption of EITF06-2 on 1 January 2007, whereby the related costs are now accrued over therequisite service period. International Financial Reporting Standards The financial information prepared in accordance with the Group's IFRSaccounting policies comprises the consolidated balance sheets as of 30 June2007, 30 June 2006 and 31 December 2006 and related consolidated statements ofincome and cash flows for the periods then ended, together with related notes.This financial information has been prepared in accordance with the ListingRules of the Financial Services Authority. In preparing this financialinformation management has used the principal accounting policies as set out inthe Group's annual financial statements for the year ended 31 December 2006. The2006 results have been restated to harmonize the Group's treatment of accountingfor provisions for sabbatical leave under IFRS and US GAAP following theadoption of EITF 06-2 under US GAAP (as previously no provision for sabbaticalleave had been made under IFRS). This has resulted in shareholders' equity at 31 December 2006 being reduced by £2.3 million and the profit for the year ended 31 December 2006 reducing by £0.4 million. The impact on the six months ended 30 June 2007 is a reduction in profit for the period of £0.3 million and a corresponding reduction in shareholders' equity. The Group has chosen not to adopt IAS 34, 'Interim financial statements', in preparing its 2007 interim statements and, therefore, this interim financial information is not in compliance with IFRS. (2) Stock-based compensation charges and acquisition-related expenses Included within the US GAAP income statement for the quarter ended 30 June 2007are stock-based compensation charges of £4.8 million: £0.3 million in cost ofrevenues, £2.8 million in research and development costs, £0.9 million in salesand marketing costs and £0.8 million in general and administrative costs. Included within the IFRS income statement for the six months ended 30 June 2007are total share-based payment costs of £9.2 million (six months ended 30 June2006: £7.5 million; year ended 31 December 2006: £17.4 million), allocated £0.5million (30 June 2006: £0.5 million; 31 December 2006: £1.0 million) in cost ofrevenues, £5.4 million (30 June 2006: £4.3 million; 31 December 2006: £10.1million) in research and development costs, £1.8 million (30 June 2006: £1.5million; 31 December 2006: £3.5 million) in sales and marketing costs and £1.5million (30 June 2006: £1.2 million; 31 December 2006: £2.8 million) in generaland administrative costs. Also included within IFRS operating costs for the six months ended 30 June 2007is amortization of intangibles of £9.8 million (six months ended 30 June 2006:£9.5 million; year ended 31 December 2006: £19.3 million), allocated £5.1million (30 June 2006: £4.5 million; 31 December 2006: £9.5 million) in researchand development costs, £4.4 million (30 June 2006: £4.7 million; 31 December2006: £9.1 million) in sales and marketing costs and £0.3 million (30 June 2006:£0.3 million; 31 December 2006: £0.7 million) in general and administrativecosts. (3) Accounts receivable Included within accounts receivable at 30 June 2007 are £30.8 million (31 March2007: £27.9 million; 31 December 2006: £23.8 million) of amounts recoverable oncontracts. (4) Consolidated statement of changes in shareholders' equity (US GAAP) Additional Unrealized Cumulative Share paid-in Treasury Retained holding translation capital capital stock earnings gain adjustment Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2007 695 446,005 (58,245) 197,874 394 (12,076) 574,647Shares issued on exercise of options 5 5,504 - - - - 5,509Net income - - - 18,424 - - 18,424Dividends - - - (8,013) - - (8,013)Cumulative effect as a result of adopting EITF 06-2, net of tax* - - - (2,278) - - (2,278)Tax effect of option exercises - 740 - - - - 740Amortization of deferred compensation - 7,975 - - - - 7,975Conversion of liability award to equity award - 1,396 - - - - 1,396Issuance of shares from treasury - - 15,265 (8,779) - - 6,486Purchase of own shares - - (45,736) - - - (45,736)Other comprehensive income:Unrealized holding losses onavailable-for-sale securities (net of tax benefit of £162,000) - - - - (375) - (375)Currency translation adjustment - - - - - (11,450) (11,450)---------------------- ------- ------- ------- ------- ------- ------- -------At 30 June 2007 700 461,620 (88,716) 197,228 19 (23,526) 547,325---------------------- ------- ------- ------- ------- ------- ------- ------- * In accordance with EITF 06-2, the cumulative provision for employee sabbaticalleave as at 1 January 2007 is charged directly to retained earnings (5) Consolidated statement of comprehensive income (US GAAP) Q2 2007 Q1 2007 Q2 2006 H1 2007 H1 2006 £'000 £'000 £'000 £'000 £'000 Net income 8,847 9,577 14,196 18,424 26,156Realized gain on available-for-sale security, net of tax - - - - (2,375)Unrealized holding losses on available-for-sale security, net of tax (145) (230) 95 (375) (1,280)Currency translation adjustment (10,523) (927) (31,894) (11,450) (37,789)------------------------------------------------ -------- -------- -------- -------- --------Total comprehensive income / (loss) (1,821) 8,420 (17,603) 6,599 (15,288)------------------------------------------------ -------- -------- -------- -------- -------- (6) Consolidated statement of changes in shareholders' equity (IFRS) Share Share Reval- Cumulative Share premium option Retained -uation translation capital account reserve earnings reserve adjustment Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2007 (as reported) 695 449,195 61,474 163,731 (544) (11,347) 663,204Restatement - - - (2,278) - - (2,278)------------------ -------- -------- -------- -------- -------- -------- --------At 1 January 2007 (as restated) 695 449,195 61,474 161,453 (544) (11,347) 660,926Dividends - - - (8,013) - - (8,013)Movement on tax arising on share options - - - 1,212 - - 1,212Purchase of own shares - - - (37,593) - - (37,593)Appropriation for future cancellation of shares - - - (8,143) - - (8,143)Proceeds from sale of own shares - - - 6,486 - - 6,486Unrealised holding losses on available-for-saleinvestments (net of deferred tax of £162,000) - - - - (401) - (401)Currency translation adjustment - - - - - (13,413) (13,413)------------------ -------- -------- -------- -------- -------- -------- --------Total expense recognized directly in equity in 2007 - - - (46,051) (401) (13,413) (59,865)Shares issued on exercise of options 5 5,504 - - - - 5,509Profit for the period - - - 17,406 - - 17,406Credit in respect of employee share schemes - - - 8,611 - - 8,611------------------ -------- -------- -------- -------- -------- -------- --------At 30 June 2007 700 454,699 61,474 141,419 (945) (24,760) 632,587------------------ -------- -------- -------- -------- -------- -------- -------- (7) 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. Where provisional assessments of the fair values of assets and liabilitiesacquired on acquisition are refined, adjustments to fair values are recorded asprior year adjustments to goodwill under IFRS. Under US GAAP, such revisions arerecorded as amendments to goodwill in the subsequent year. Recognition and amortisation of intangibles The Company has taken advantage of the exemption under IFRS 1 not to apply IFRSretrospectively to business combinations occurring before 1 January 2004. Thismeans that for business combinations occurring before this date, the previouslyreported UK GAAP treatment has continued to be followed. Under previous UK GAAP,intangible assets were recognised separately from goodwill only where they couldbe sold separately without disposing of a business of the entity. Thisseparability criterion does not apply under either IFRS or US GAAP. Thus, anumber of intangible assets which are required to be recognised separately fromgoodwill under both IFRS 3 and SFAS 142, were subsumed within goodwill under UKGAAP. Under both US GAAP and IFRS, such intangible assets are amortised overtheir useful economic lives. Except in relation to in-process research anddevelopment (see below), there is no difference in accounting policy forintangible assets recognised as a result of business combinations entered intoafter 1 January 2004. In-process research and development Under IFRS, in-process research and development projects purchased as part of abusiness combination may meet the criteria set out in IAS 38, "Intangibleassets", for recognition as intangible assets other than goodwill and areamortised over their useful economic lives commencing when the asset is broughtinto use. Under US GAAP, in-process research and development is immediatelywritten-off to the income statement. This accounting policy difference givesrise to an associated difference in deferred tax. Valuation of consideration on business combination Under both IFRS and US GAAP, the fair value of consideration in a businesscombination includes the fair value of both equity issued and any share optionsgranted as part of that combination. Under IFRS, any equity issued is valued atthe fair value as of the date of exchange, whilst under US GAAP, the equity isvalued at the date the terms of the combination were agreed to and announced.For options, under US GAAP, the fair value is based upon the total number ofoptions granted, both vested and unvested, whilst under IFRS the fair value onlyincludes those that have vested, together with a pro-rata value for partiallyvested options. Furthermore, where there is contingent consideration for anacquisition, under IFRS this is recognized as part of the purchase considerationif the contingent conditions are expected to be satisfied, whilst under US GAAPit is only recognised if the conditions have actually been met, other than tothe extent necessary to eliminate any potential negative goodwill under US GAAP. Deferred compensation Under US GAAP, the intrinsic value of unvested stock options issued by anacquirer as part of a business combination in exchange for unvested shareoptions of the acquiree is recorded as a debit balance within shareholders'funds. This amount is charged to the profit and loss account over the vestingperiod of the share options in accordance with FIN 28. Under IFRS, no suchadjustment to shareholders' funds is made on acquisition. Following the adoptionof FAS No. 123 (revised 2004) (FAS 123(R)), "Share-based payment", theunamortised balance has been transferred to additional paid-in capital. Compensation charge in respect of share-based payments The Company issues equity-settled share-based payments to certain employees. Inaccordance with IFRS 2, equity-settled share-based payments are measured at fairvalue at the date of grant, using the Black-Scholes pricing model. The fairvalue determined at the grant date of the equity-settled share-based payments isexpensed on a straight-line basis over the vesting period, based on theCompany's estimate of the number of shares that will eventually vest. Under USGAAP, the Company is required, effective as of 1 January 2006, to adopt FAS123(R). FAS 123(R) requires the Company to expense share-based payments,including employee stock-options, based on their fair value. The Company haselected to utilize the "modified prospective" method of adoption, such thatcompensation cost is recognized beginning with the effective date (i) based onthe requirements of FAS 123(R) for all share-based payments granted after theeffective date and (ii) based on the requirements of FAS 123(R) for all awardsgranted to employees prior to the effective date of FAS 123(R) that remainunvested on the effective date. Some awards made by the Company are liability-classified awards under FAS123(R)as either: (i) there is an obligation to settle a fixed monetary amount in avariable number of shares; or (ii) the award is indexed to a factor other thanperformance, market or service condition. The fair value of these awards isremeasured at each period end until the award has vested. Once the award hasvested, or for (i) above when number of shares becomes fixed, the award becomesequity-classified. Deferred tax on UK and US share options In the US and the UK, the Company is entitled to a tax deduction for the amounttreated as employee compensation under US and UK tax rules on exercise ofcertain employee share options. The compensation is equivalent to the differencebetween the option exercise price and the fair market value of the shares at thedate of exercise. Under IFRS, deferred tax assets are recognised and are calculated by comparingthe estimated amount of tax deduction to be obtained in the future (based on theCompany's share price at the balance sheet date) with the cumulative amount ofthe compensation expense recorded in the income statement. If the amount ofestimated future tax deduction exceeds the cumulative amount of the remunerationexpense at the statutory tax rate, the excess is recorded directly in equity,against the profit and loss reserve. In accordance with the transitionalprovisions of IFRS 2, no compensation charge is recorded in respect of optionsgranted before 7 November 2002 or in respect of those options which have beenexercised or have lapsed before 31 December 2004. Nevertheless, tax deductionshave arisen and will continue to arise on these options. The tax effects arisingin relation to these options are recorded directly in equity, against retainedearnings. Under US GAAP, deferred tax assets are recognised by multiplying thecompensation expense recorded by the prevailing tax rate in the relevant taxjurisdiction. Where, on exercise of the relevant option, the tax benefitobtained exceeds the deferred tax asset in relation to the relevant options, theexcess is recorded in additional paid-in capital. Where the tax benefit is lessthan the deferred tax asset, the write-down of the deferred tax asset isrecorded against additional paid-in capital to the extent of previous excess taxbenefits recorded in this account, with any remainder recorded in the incomestatement. Employer taxes on share-based remuneration Under IFRS, employer's taxes that are payable on the exercise or vesting ofshare-based remuneration are provided for over the vesting period of the relatedoption or award. Under US GAAP, such taxes are accounted for when the option oraward is exercised or vests respectively. Accrued legal costs Under IFRS, future legal fees that the Company is expecting to incur on currentcases are accrued when the obligating event giving rise to the legal costs hasoccurred. Under US GAAP, such costs are charged to the income statement in theperiod in which the costs are incurred. Enactment of tax rate changes Under IFRS, when a change in statutory corporate tax rate occurs, the impact ondeferred tax balances which are expected to reverse after the rate has changedis accounted for when the change has been substantially enacted. Under US GAAP,the impact is accounted for once the rate change has been fully enacted. Sabbatical leave The Company has adopted EITF 06-2 from 1 January 2007 in accounting for itsprovisions for employee sabbatical leave. To harmonize the accounting treatmentunder both GAAPs, the Company has also provided for sabbatical leave under IFRS.EITF 06-2 requires the opening provision at the beginning of the year to becharged directly to reserves, whilst under IFRS, the prior year results havebeen restated. Reconciliation of IFRS profit to US GAAP net income Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited --------- --------- --------- £'000 £'000 £'000 (restated) (restated) Profit for financial period as reported under IFRS 17,406 24,633 48,156Adjustments for:Amortisation of intangibles 491 398 914Write-off of in-process research and development - (540) (595)Deduct : US GAAP compensation charge in respect of all share-based payments (8,504) (8,211) (21,787)Add: IFRS compensation charge in respect of all share-based payments 8,611 7,496 17,437Employer's taxes on share-based remuneration 620 (2) 8Provision for legal costs, net of tax (238) - 715Foreign exchange on contingent consideration (14) (97) (104)Provision for sabbatical leave, net of tax - 216 432Tax on UK and US share options (851) - (2,204)Tax difference on amortisation of intangibles (203) (165) (378)Tax difference on share-based remuneration 709 2,428 2,569Other tax differences based on enacted rates 397 - - --------- --------- ---------Net income as reported under US GAAP 18,424 26,156 45,163 --------- --------- --------- Reconciliation of shareholders' equity from IFRS to US GAAP 30 June 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited --------- --------- --------- £'000 £'000 £'000 (restated) (restated) Shareholders' equity as reported under IFRS 632,587 706,389 660,926Adjustments for:Employer's taxes on share-based remuneration 658 28 38Utilisation of restructuring provision 1,368 1,368 1,368Provision for legal costs, net of tax 477 - 715Liability-classified share awards (1,549) - (2,416)Provision for sabbatical leave, net of tax - 2,062 2,278Cumulative difference on amortisation of goodwill 2,713 2,713 2,713Cumulative difference on amortisation of intangibles 1,846 840 1,355Cumulative write-off of in-process research and development (4,692) (4,637) (4,692)Cumulative difference on deferred tax (616) (429) (642)Valuation of equity consideration on acquisition (82,435) (82,435) (82,435)Valuation of option consideration on acquisition 17,476 17,476 17,476Deferred compensation on acquisition (9,579) (9,579) (9,579)Deferred tax on share-based payments (9,331) (4,307) (8,911)Portion of tax benefit arising on exercise of options issued on acquisition taken togoodwill under US GAAP (4,844) (4,844) (4,844)Foreign exchange on valuation of intangible assets and deferred tax 3,322 (3,312) 1,358Foreign exchange on valuation of contingent consideration (76) (57) (61) --------- --------- ---------Shareholders' equity as reported under US GAAP 547,325 621,276 574,647 --------- --------- --------- Reconciliation of goodwill from IFRS to US GAAP 30 June 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited --------- --------- --------- £'000 £'000 £'000 Goodwill as reported under IFRS 418,155 449,041 428,366Adjustments for:Valuation of restructuring provision on acquisition 1,235 1,235 1,235Cumulative difference on amortisation of goodwill 2,713 2,713 2,713Cumulative write-off of in-process research and development (150) (150) (150)Separately identifiable intangible assets (302) (302) (302)Deferred tax on capitalised in-process research and development (1,570) (1,570) (1,570)Portion of tax benefit arising on exercise of options issued on acquisition taken to goodwill under US GAAP (4,248) (4,248) (4,248)Valuation of equity consideration on acquisition (82,435) (82,435) (82,435)Valuation of option consideration on acquisition 17,476 17,476 17,476Deferred compensation on acquisition (9,579) (9,579) (9,579)Contingent consideration (3,088) (1,864) (3,117)Foreign exchange on revaluation of goodwill 2,781 (3,685) 854 --------- --------- ---------Goodwill as reported under US GAAP 340,988 366,632 349,243 --------- --------- --------- (8) 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 excludeacquisition-related charges, stock-based compensation and restructuring chargesand profit on disposal of available-for-sale investments. All figures in £'000unless otherwise stated. (8.1) (8.2) (8.3) (8.4) (8.5) Q2 2007 Q1 2007 Q2 2006 1H 2007 1H 2006 Income from operations (US GAAP) 10,500 11,244 11,877 21,744 26,301Restructuring costs 814 - - 814 -Acquisition-related charge - amortization of intangibles 4,612 4,655 5,086 9,267 9,673Acquisition-related charge - other payments 209 397 - 606 -Stock-based compensation and related payroll taxes 4,807 3,872 4,223 8,679 8,211--------------------------------- ------- ------- ------- ------- -------Normalised income from operations 20,942 20,168 21,186 41,110 44,185--------------------------------- ------- ------- ------- ------- ------- As % of revenue 32.0% 30.3% 32.2% 31.1% 33.9% (8.6) (8.7) (8.8) (8.9) (8.10) Q2 2007 Q1 2007 Q2 2006 1H 2007 1H 2006 Income before income tax (US GAAP) 12,020 12,701 18,966 24,721 35,063Restructuring costs 814 - - 814 -Acquisition-related charge - amortization of intangibles 4,612 4,655 5,086 9,267 9,673Acquisition-related charge - other payments 209 397 - 606 -Stock-based compensation and related payroll taxes 4,807 3,872 4,223 8,679 8,211Profit on sale of available-for-sale investment - - (5,270) - (5,270)--------------------------------- ------- ------- ------- ------- -------Normalised income before income tax 22,462 21,625 23,005 44,087 47,677--------------------------------- ------- ------- ------- ------- ------- (8.11) (8.12) (8.13) 30 June 31 March 31 December 2007 2007 2006 Cash and cash equivalents 92,924 92,595 90,743Short-term investments 5,273 19,069 18,600Short-term marketable securities 10,741 15,117 19,151--------------------------------- ------- ------- -------Normalised cash 108,938 126,781 128,494--------------------------------- ------- ------- ------- (8.14) (8.15) (8.16) (8.17) (8.18) Q2 2007 Q1 2007 Q2 2006 1H 2007 1H 2006 Normalised cash at end of period (as above) 108,938 126,781 148,806 108,938 148,806Less: Normalised cash at beginning of period (126,781) (128,494) (182,282) (128,494) (160,902)Add back: Cash outflow from acquisitions (net of cash acquired) 689 2,618 13,949 3,307 13,949Add back: Cash outflow from payment of dividends 8,013 - 6,918 8,013 6,918Add back: Cash outflow from purchase of own shares 25,577 20,159 22,129 45,736 29,086Less: Cash inflow from exercise of share options (6,486) (5,509) (2,152) (11,995) (13,159)Less: Cash inflow from sale of available-for-sale investments - - (5,567) - (5,567)--------------------------------- ------- ------- ------- ------- -------Normalised cash generation 9,950 15,555 1,801 25,505 19,131--------------------------------- ------- ------- ------- ------- ------- (8.19) (8.20) (8.21) (8.22) (8.23) Q2 2007 Q1 2007 Q2 2006 1H 2007 1H 2006 Net income (US GAAP) 8,847 9,577 14,196 18,424 26,156Restructuring costs 814 - - 814 -Acquisition-related charge - amortization of intangibles 4,612 4,655 5,086 9,267 9,673Acquisition-related charge - other payments 209 397 - 606 -Stock-based compensation and related payroll taxes 4,807 3,872 4,223 8,679 8,211Profit on sale of available-for-sale investment - - (5,270) - (5,270)Estimated tax impact of above charges (3,058) (2,849) (972) (5,907) (3,436)--------------------------------- ------- ------- ------- ------- -------Normalised net income 16,231 15,652 17,263 31,883 35,334--------------------------------- ------- ------- ------- ------- ------- Dilutive shares ('000) 1,374,410 1,377,589 1,413,212 1,376,270 1,412,330Normalised diluted EPS 1.18p 1.14p 1.22p 2.32p 2.50p (8.24) Normalised income statement for Q2 2007 Other acquisition Restruct- Stock-based Intangible related -uring Normalised compensation amortisation charges charges US GAAP -------- ------- ------- ------- ------- ------- £'000 £'000 £'000 £'000 £'000 £'000RevenuesProduct revenues 61,215 - - - - 61,215Service revenues 4,317 - - - - 4,317 -------- ------- ------- ------- ------- --------Total revenues 65,532 - - - - 65,532 -------- ------- ------- ------- ------- -------- Cost of revenuesProduct costs (5,421) - - - - (5,421)Service costs (1,351) (285) - - - (1,636) -------- ------- ------- ------- ------- --------Total cost of revenues (6,772) (285) - - - (7,057) -------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- --------Gross profit 58,760 (285) - - - 58,475 -------- ------- ------- ------- ------- -------- Research and development (15,469) (2,796) - (195) - (18,460)Sales and marketing (10,472) (958) - - - (11,430)General and administrative (11,877) (768) - (14) - (12,659)Restructuring costs - - - - (814) (814)Amortization of intangibles purchased through businesscombination - - (4,612) - - (4,612) -------- ------- ------- ------- ------- --------Total operating expenses (37,818) (4,522) (4,612) (209) (814) (47,975) -------- ------- ------- ------- ------- -------- Income from operations 20,942 (4,807) (4,612) (209) (814) 10,500Interest 1,520 - - - - 1,520 -------- ------- ------- ------- ------- --------Income before income tax 22,462 (4,807) (4,612) (209) (814) 12,020Provision for income taxes (6,231) 887 1,778 68 325 (3,173) -------- ------- ------- ------- ------- --------Net income 16,231 (3,920) (2,834) (141) (489) 8,847 -------- ------- ------- ------- ------- -------- Earnings per share (assumingdilution)Shares outstanding ('000) 1,374,410 1,374,410Earnings per share - pence 1.18 0.64Earnings per ADS (assumingdilution)ADSs outstanding ('000) 458,137 458,137Earnings per ADS - cents 7.11 3.87 (8.25) Normalised income statement for Q2 2006 Stock-based Intangible Investment Normalised 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 of revenues (7,150) (254) - - (7,404) -------- ------- ------- ------- -------- -------- ------- ------- ------- --------Gross profit 58,580 (254) - - 58,326 -------- ------- ------- ------- -------- Research and development (14,996) (2,449) - - (17,445)Sales and marketing (9,765) (844) - - (10,609)General and administrative (12,633) (676) - - (13,309)Amortization of intangibles purchased through businesscombination - - (5,086) - (5,086) -------- ------- ------- ------- --------Total operating expenses (37,394) (3,969) (5,086) - (46,449) -------- ------- ------- ------- -------- Income from operations 21,186 (4,223) (5,086) - 11,877Interest 1,819 - - - 1,819Profit on disposal of available-for-saleinvestment - - - 5,270 5,270 -------- ------- ------- ------- --------Income before income tax 23,005 (4,223) (5,086) 5,270 18,966Provision for income taxes (5,742) 645 1,790 (1,463) (4,770) -------- ------- ------- ------- --------Net income 17,263 (3,578) (3,296) 3,807 14,196 -------- ------- ------- ------- -------- Earnings per share (assumingdilution)Shares outstanding ('000) 1,413,212 1,413,212Earnings per share - pence 1.22 1.00Earnings per ADS (assumingdilution)ADSs outstanding ('000) 471,071 471,071Earnings per ADS - cents 6.78 5.57 (8.26) Normalised income statement for 1H 2007 Other acquisition Restruct- Stock-based Intangible related -uring Normalised compensation amortisation charges charges US GAAP -------- ------- ------- ------- ------- ------- £'000 £'000 £'000 £'000 £'000 £'000RevenuesProduct revenues 123,515 - - - - 123,515Service revenues 8,509 - - - - 8,509 -------- ------- ------- ------- ------- --------Total revenues 132,024 - - - - 132,024 -------- ------- ------- ------- ------- -------- Cost of revenuesProduct costs (11,059) - - - - (11,059)Service costs (2,709) (517) - - - (3,226) -------- ------- ------- ------- ------- --------Total cost of revenues (13,768) (517) - - - (14,285) -------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- --------Gross profit 118,256 (517) - - - 117,739 -------- ------- ------- ------- ------- -------- Research and development (32,058) (5,042) - (357) - (37,457)Sales and marketing (21,604) (1,732) - - - (23,336)General and administrative (23,484) (1,388) - (249) - (25,121)Restructuring costs - - - - (814) (814)Amortization of intangibles purchased through businesscombination - - (9,267) - - (9,267) -------- ------- ------- ------- ------- --------Total operating expenses (77,146) (8,162) (9,267) (606) (814) (95,995) -------- ------- ------- ------- ------- -------- Income from operations 41,110 (8,679) (9,267) (606) (814) 21,744Interest 2,977 - - - - 2,977 -------- ------- ------- ------- ------- --------Income before income tax 44,087 (8,679) (9,267) (606) (814) 24,721Provision for income taxes (12,204) 1,824 3,574 184 325 (6,297) -------- ------- ------- ------- ------- --------Net income 31,883 (6,855) (5,693) (422) (489) 18,424 -------- ------- ------- ------- ------- -------- Earnings per share (assumingdilution)Shares outstanding ('000) 1,376,270 1,376,270Earnings per share - pence 2.32 1.34Earnings per ADS (assumingdilution)ADSs outstanding ('000) 458,757 458,757Earnings per ADS - cents 13.94 8.06 (8.27) Normalised income statement for 1H 2006 Stock-based Intangible Investment Normalised compensation amortisation disposal US GAAP -------- ------- ------- ------- -------- £'000 £'000 £'000 £'000 £'000RevenuesProduct revenues 123,014 - - - 123,014Service revenues 7,350 - - - 7,350 -------- ------- ------- ------- --------Total revenues 130,364 - - - 130,364 -------- ------- ------- ------- -------- Cost of revenuesProduct costs (11,609) - - - (11,609)Service costs (2,669) (493) - - (3,162) -------- ------- ------- ------- --------Total cost of revenues (14,278) (493) - - (14,771) -------- ------- ------- ------- -------- -------- ------- ------- ------- --------Gross profit 116,086 (493) - - 115,593 -------- ------- ------- ------- -------- Research and development (30,139) (4,762) - - (34,901)Sales and marketing (19,158) (1,642) - - (20,800)General and administrative (22,604) (1,314) - - (23,918)Amortization of intangibles purchased through businesscombination - - (9,673) - (9,673) -------- ------- ------- ------- --------Total operating expenses (71,901) (7,718) (9,673) - (89,292) -------- ------- ------- ------- -------- Income from operations 44,185 (8,211) (9,673) - 26,301Interest 3,492 - - - 3,492Profit on disposal of available-for-saleinvestment - - - 5,270 5,270 -------- ------- ------- ------- --------Income before income tax 47,677 (8,211) (9,673) 5,270 35,063Provision for income taxes (12,343) 1,288 3,611 (1,463) (8,907) -------- ------- ------- ------- --------Net income 35,334 (6,923) (6,062) 3,807 26,156 -------- ------- ------- ------- -------- Earnings per share (assumingdilution)Shares outstanding ('000) 1,412,330 1,412,330Earnings per share - pence 2.50 1.85Earnings per ADS (assumingdilution)ADSs outstanding ('000) 470,777 470,777Earnings per ADS - cents 13.88 10.28 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 2007 which comprise the IFRS consolidated interimbalance sheet as at 30 June 2007 and the related IFRS consolidated interimstatements of income and cash flows for the six months then ended and relatednotes. We have read the other information contained in the interim report andconsidered whether it contains any apparent misstatements or materialinconsistencies 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 Financial Services Authority 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 2007. PricewaterhouseCoopers LLPChartered AccountantsLondon26 July 2007 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 2007, Q1 2007, Q2 2006, H1 2007 and H1 2006 areunaudited. The results shown for FY 2006 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 2006, 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 2007 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 2006 and in the AnnualReport on Form 20-F for the fiscal year ended 31 December 2006. 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 2006 including (without limitation) under the captions,"Risk Factors" and "Management's Discussion and Analysis of Financial Conditionand Results of Operations," which is on file with the Securities and ExchangeCommission (the "SEC") and available at the SEC's website at www.sec.gov. About ARM ARM designs the technology that lies at the heart of advanced digital products,from mobile, home and enterprise solutions to embedded and emergingapplications. ARM's comprehensive product offering includes 16/32-bit RISCmicroprocessors, data engines, graphics processors, digital libraries, embeddedmemories, peripherals, software and development tools, as well as analogfunctions and high-speed connectivity products. Combined with the company'sbroad Partner community, they provide a total system solution that offers afast, reliable path to market for leading electronics companies. Moreinformation on ARM is available at http://www.arm.com. ARM is a registered trademaks of ARM Limited. ARM7, ARM9, ARM926EJ-S, ARM11, ARM1176JZ(F)-S, Cortex, Mali, Advantage, Classic, Velocity and Metro are trademarksof ARM Limited. Artisan Components and Artisan are registered trademarks of ARM,Inc., a wholly owned subsidiary of ARM. All other brands or product names arethe property of their respective holders. ARM refers to ARM Holdings plc (LSE:ARM and Nasdaq: ARMHY) together with its subsidiaries including ARM Limited, ARMInc.,ARM Germany GmbH, ARM KK, ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS,ARM Consulting (Shanghai) Co. Ltd., ARM Belgium NV., ARM Embedded TechnologiesPvt. Ltd., Keil Elektronik GmbH, and ARM Norway AS. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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