A Company Presentation of These Results and a Conference Call Will be Webcast Today at 09:30 and 13:30 BST Respectively at www.arm.com/ir
Highlights (US GAAP unless otherwise stated)
- H1 dollar revenues at $258.4m, up 11% on H1 2006
- Normalised* H1 2007 PBT at GBP44.1m (US GAAP GBP24.7m)
- Q2 dollar revenues at $129.2m, up 8% on Q2 2006
- Processor Division (PD) license revenue at $45.3m, up 26% on Q2 2006
- Accelerating operating leverage with normalised* operating margin at 32.0% (US GAAP 16.0%), up from 30.3% (US GAAP 16.9%) in Q1 2007 and 29.0% (US GAAP 11.4%) in Q4 2006 despite weakening dollar
- Normalised* Q2 PBT and EPS at GBP22.5m (US GAAP GBP12.0m) and 1.18p (US GAAP 0.64p) respectively
- Normalised* Q2 EPS up 13% on Q2 2006 at constant currency
- Improving balance sheet efficiency
- Total cash returned of GBP33.6m in Q2 and GBP53.7m in H1 2007 (GBP20.2m in Q1 2007 and GBP36.0m in H1 2006)
- 2007 interim dividend doubled to 0.8p per share
- Increasing traction for ARM's leading-edge technologies
- Three Cortex(TM) family licenses in Q2
- One further Graphics license
- First license signed for 45nm physical IP with a non-foundry customer (non-Tier 1)
Commenting on the results, Warren East, Chief Executive Officer, said: "We are encouraged to have grown dollar revenues 11% in the first half against a challenging industry backdrop, compared to overall semiconductor industry revenues which grew less than 5%. A record quarter for licensing of ARM(R) processor technology in Q2 enhances our prospects for further penetrating mobile and non-mobile markets in the future. In addition, good revenue growth and continued cost discipline have enabled us to increase profitability despite the continued strong currency headwind. Overall, ARM is well-positioned to benefit from the generally-anticipated improvement in industry conditions in the second half and we are confident of achieving full-year earnings in line with expectations."
Q2 2007 - Revenue Analysis
Revenue ($M)*** Revenue (GBPM)
Q2 2007 Q2 2006 % Change Q2 2007 Q2 2006 % Change
PD
Licensing 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%
PIPD
Licensing 14.0 15.8 -11% 7.1 8.7 -18%
Royalties 7.3(1) 7.9(1) -8% 3.61 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 7.1
Services 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 (GBP0.3m) and in Q2 2006 of $1.1m (GBP0.6m).
H1 2007 - Revenue Analysis
Revenue ($M)*** Revenue (GBPM)
H1 2007 H1 2006 % Change H1 2007 H1 2006 % Change
PD
Licensing 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%
PIPD
Licensing 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 (GBP1.1m)
(2) Includes catch-up royalties in H1 2007 of $2.1m (GBP1.1m) and in H1 2006 of $1.7m (GBP1.0m).
Q2 2007 - Financial Summary
US GAAP Normalised* US GAAP Reported
GBPM
Q2 2007 Q2 2006 % Change Q2 2007 Q2 2006
Revenue 65.5 65.7 65.5 65.7
Income before income tax 22.5 23.0 -2% 12.0 19.0
Operating margin 32.0% 32.2% 16.0% 18.1%
Earnings per share (pence) 1.18 1.22 -3% 0.64 1.00
Net cash generation** 10.0 1.8
Effective fx rate ($/GBP) 1.97 1.82
Equivalent to GBP70.9m at Q2 2006 effective $/GBP rate
H1 2007 - Financial Summary
US GAAP Normalised* US GAAP Reported
GBPM
H1 2007 H1 2006 % Change H1 2007 H1 2006
Revenue 132.0 130.4 +1% 132.0 130.4
Income before income tax 44.1 47.7 -8% 24.7 35.1
Operating margin 31.1% 33.9% 16.5% 20.2%
Earnings per share (pence) 2.32 2.50 -7% 1.34 1.85
Net cash generation** 25.5 19.1
Effective fx rate ($/GBP) 1.96 1.78
Equivalent to GBP144.8m at H1 2006 effective $/GBP 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, both in mobile and non-mobile markets, in future periods. In the short term, royalty revenues in both PD and PIPD have been impacted by normal seasonality, the industry inventory correction and lower utilisation rates in the foundries. Despite this, group revenues have grown 11% in the first half compared to an overall industry growth rate of less than 5%.
As indicated in February, 2007 is expected to be a year of productivity enhancement and acceleration in operating leverage following a year of high investment 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 further weakening of the dollar against sterling.
We enter the second half of 2007 with a strong order backlog and a healthy licensing sales opportunity pipeline across the business. Further, royalty revenues are expected to benefit from the generally-anticipated improvement in industry conditions in the second half as the impact of the inventory correction reduces, foundry utilisation rates increase and the momentum behind smart phone sales gathers pace. As a result, although the pace of improvement in industry conditions is uncertain, assuming the dollar/sterling exchange rate remains similar to the effective rate reported in Q2 2007, we are confident of achieving full-year earnings in line with expectations.
* Normalised figures are based on US GAAP, adjusted for acquisition-related, share-based remuneration and restructuring charges. For reconciliation of GAAP measures to normalised non-GAAP measures detailed in this document, see notes 8.1 to 8.27.
** Before dividends and share buybacks, net cash flows from share option exercises and acquisition consideration - see notes 8.14 to 8.18.
*** Dollar revenues are based on the group's actual dollar invoicing, where applicable, and using the rate of exchange applicable on the date of the transaction for invoicing in currencies other than dollars. Approximately 95% of invoicing 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 a similar level to last quarter. Sterling revenues of GBP65.5 million were flat year-on-year after an 8% weakening of the dollar against sterling ($1.97 in Q2 2007 compared to $1.82 in Q2 2006). At the Q2 2006 effective rate, Q2 2007 sterling revenues would have been GBP70.9 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 and 5% 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 utilisation levels. Royalty revenues comprised $40.1 million from PD and $7.3 million from PIPD which included $0.6 million of "catch-up" royalties. Underlying royalties of $6.7 million for PIPD were broadly flat compared to underlying royalties in Q2 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% on 2006.
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% of group 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 GBP0.3 million (see below), were 89.7% compared to 89.5% in Q1 2007 and 89.1% in Q2 2006.
Gross margins for the half year, excluding stock-based compensation charges of GBP0.5 million, were 89.6% compared to 89.0% in 2006.
Operating expenses and operating margin
Total operating expenses in Q2 2007 were GBP48.0 million (GBP46.4 million in Q2 2006) including amortisation of intangible assets and other acquisition-related charges of GBP4.8 million (Q2 2006: GBP5.1 million) and GBP4.5 million (Q2 2006: GBP4.0 million) in relation to stock-based compensation charges. The total stock-based compensation charges of GBP4.8 million in Q2 2007 are included within cost of revenues (GBP0.3 million), research and development (GBP2.8 million), sales and marketing (GBP0.9 million) and general and administrative (GBP0.8 million). In Q2 2007, the Group closed one of its smaller design centres in the US, in order to concentrate engineering activities in fewer sites, at a total cost of GBP0.8 million. Normalised income statements for Q2 and H1 2007 and Q2 and H1 2006 are included in notes 8.24 to 8.27 below which reconcile US GAAP to the normalised non-GAAP measures referred to in this earnings release.
Operating expenses (excluding acquisition-related, stock-based compensation and restructuring charges) in Q2 2007 were GBP37.8 million compared to GBP39.3 million in Q1 2007 and GBP37.4 million in Q2 2006. The sequential decline in operating expenses arises as the current year cost impact of the increased headcount through 2006 is more than offset by the benefits of re-balancing the group's resources between higher and lower cost areas, general rigorous management of operating expenses and a favourable foreign exchange impact. Further, following the significant investment in headcount in 2006, headcount remained broadly flat in the first half of 2007 (see People below).
Normalised research and development expenses were GBP15.5 million in Q2 2007, representing 24% of revenues, compared to GBP16.6 million in Q1 2007 and GBP15.0 million in Q2 2006. Normalised sales and marketing costs in Q2 2007 were GBP10.5 million, being 16% of revenues, compared to GBP11.1 million in Q1 2007 and GBP9.8 million in Q2 2006. Normalised general and administrative expenses in Q2 2007 were GBP11.9 million, representing 18% of revenues, compared to GBP11.6 million in Q1 2007 and GBP12.6 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 were slightly lower than Q2 2006 due to the 8% weakening of the US dollar against sterling. At constant currencies, using the Q2 2006 effective rate of $1.82/GBP1, the operating margin for Q2 2007 would have been approximately 35%.
Total operating expenses for the first six months of 2007 were GBP96.0 million, including acquisition-related, stock-based compensation and restructuring charges of GBP9.9 million, GBP8.2 million and GBP0.8 million respectively. Excluding these charges, operating expenses for the half-year were GBP77.1 million, compared to GBP71.9 million in 2006.
Half-year normalised research and development expenses were GBP32.1 million in 2007, representing 24% of revenues. Half-year normalised sales and marketing expenses were GBP21.6 million or 16% of revenues. Total normalised general and administrative expenses were GBP23.5 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 GBP12.0 million compared to GBP19.0 million in Q2 2006. After adjusting for acquisition-related, stock-based compensation and restructuring charges, normalised income before income tax in Q2 2007 was GBP22.5 million (8.6) compared to GBP23.0 million (8.8) in Q2 2006. The group's effective tax rate under US GAAP in Q2 2007 was 26%, reflecting the availability of research and development tax credits and taking into account the benefits arising from the structuring of the Artisan(R) acquisition.
In Q2 2007, fully diluted earnings per share prepared under US GAAP were 0.64 pence (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 share in Q2 2007 were 1.18 pence (8.19) per share (7.11 cents per ADS****) compared to 1.22 pence (8.21) (6.78 cents per ADS****) in Q2 2006. Normalised fully diluted earnings per share in Q2 2007 using the Q2 2006 $/GBP effective rate of 1.82 would have been 1.38 pence, up 13% on Q2 2006.
Balance sheet
Intangible assets at 30 June 2007 were GBP389.1 million, comprising goodwill of GBP341.0 million and other intangible assets of GBP48.1 million, compared to GBP349.2 million and GBP56.0 million respectively at 31 December 2006.
Total accounts receivable were GBP75.0 million at 30 June 2007, comprising GBP44.2 million of trade receivables and GBP30.8 million of amounts recoverable on contracts, compared to GBP67.0 million at 31 March 2007, comprising GBP39.1 million of trade receivables and GBP27.9 million of amounts recoverable on contracts. Days sales outstanding (DSOs) were 51 at 30 June 2007 compared to 41 at 31 March 2007.
Cash flow, share buyback programme and interim dividend
Net cash at 30 June 2007 was GBP108.9 (8.11) million compared to GBP126.8 (8.12) million at 31 March 2007. Normalised cash generation in Q2 2007 was GBP10.0 million (8.14).
During the quarter, GBP33.6 million of cash was returned to shareholders, by way of payment of the 2006 final dividend of GBP8.0 million and purchase of 18.4 million own shares at a total cost of GBP25.6 million (up from GBP20.2 million in Q1 2007). It is anticipated that the buyback programme will resume after the announcement of these results.
In respect of the year to 31 December 2007, as indicated in the Company's Q1 earnings release in April, the directors are declaring an interim dividend of 0.80 pence per share, an increase of 100% over the 2006 interim dividend of 0.40 pence per share. This interim dividend will be paid, out of the UK GAAP distributable reserves of ARM Holdings plc, on 5 October 2007 to shareholders on the register on 31 August 2007.
International Financial Reporting Standards (IFRS)
ARM reports results quarterly in accordance with US GAAP. At 30 June and 31 December each year, in addition to the US GAAP results, ARM is also required to publish results under IFRS. The operating and financial review commentary included in this release on the US GAAP numbers is for the most part applicable to the IFRS numbers and, in particular, revenues, dividends and share buybacks are recorded in the same way under both sets of accounting rules. A summary of the accounting differences between IFRS and US GAAP and reconciliations of IFRS and US GAAP profit and shareholders' equity are set out in note 7 to the financial tables below.
Operating review
Backlog
The Group order backlog was approximately 5% lower at the end of Q2 compared to the end of Q1 but remains at historically high levels. The maturity profile of the order backlog has improved with 46% of total backlog as at the end of Q2 expected 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 processor product portfolio. During the quarter 15 licenses were signed including three Cortex family licenses, four ARM11(TM) family licenses and one license (third in total) for the Mali(TM) graphics processor. Q2 licensing activity underpins further penetration of non-mobile markets as a high proportion of licensing in the quarter was for applications outside of the mobile phone market. In the quarter two Cortex-M3 processors were licensed for use in high-volume microcontroller applications, one of which was taken by Toshiba Microelectronics, a major MCU provider. The composition of Q2 licensing also supports the increasing ARM value per consumer transaction with further licensing of the Cortex-A8 processor for high-end phone application processors and the Mali processor license for enabling additional royalties beyond the traditional microprocessor royalties.
Further in Q2 a license agreement was signed that will enable the first entry of an 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, thereby enabling 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 3 151
ARM9(TM) 2 2 4 227
ARM11 1 3 4 57
Cortex-M3 1 1 2 9
Cortex-R4 9
Cortex-A8 1 1 8
Mali 1 1 3
Other 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 overall increase of 17% versus Q2 2006. ARM9 shipments accounted for 40% of total units, including 17% relating to ARM926 shipments. ARM11 shipments again increased sequentially, 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 the combined effect of the inventory correction and the normal post-holiday seasonality in consumer electronics. Specific areas of weakness were in Wireless Handset related applications (Wireless Handsets, Smart Cards, and Bluetooth), PC related applications (Hard Disk Drives and Printers) and consumer electronics (Portable Media Players and Digital Television). Notwithstanding short-term industry conditions, shipments of ARM-based microcontrollers grew more than 10% sequentially and more than 140% versus Q2 2006. The embedded segment grew to over 11% of total shipments in the quarter from just over 10% in the previous quarter and just over 7% in Q2 2006. The proportion of shipments into the mobile and 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 Q1 2007 and $15.8 million in Q2 2006. Conversion of order backlog into revenue was lower in Q2 than in recent quarters due to a higher proportion of the physical IP engineering effort being deployed on the development of leading-edge technology. The proportion to be deployed on conversion of order backlog is expected to be higher in the second half.
A significant milestone was achieved in the quarter with the signing of the first license for 45nm ARM physical IP with a non-foundry customer. Although the customer is not a Tier 1 IDM or large fabless customer, the license demonstrates the growing market for physical IP outsourcing that ARM expects to penetrate over time. We continue to be engaged in technical and commercial discussions with a range of customers over physical IP outsourcing and are confident of achieving our long-term goal of a significant portion of the physical IP market being outsourced to ARM over time.
As we continue to accelerate the physical IP technology roadmap, two significant operational milestones were achieved in the quarter. First, we had our first tape 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 wider customer base access to SOI technology for their future designs. Secondly, ARM completed the first design using ARM's 45nm physical IP incorporating an ARM1176. This represents a further important milestone in the development of our physical IP technology portfolio, as we position ARM as an attractive outsourcing option for the physical IP requirements of Tier 1 IDMs and large fabless companies.
Q2 2007 PIPD Licensing Analysis
Process Node
(nm) Total
Platform Licenses
Advantage(TM) 65/90 2
Standard Cell Libraries
Classic(TM) 90/180/250 3
Metro(TM) 180 1
Advantage 45/65/90 3
Memory Compilers
Classic 180 1
Metro 180 4
Advantage 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 of significantly lower foundry utilisation during the period. Underlying royalties in Q2 2007 were $6.7 million, a similar level to Q2 2006, whilst overall foundry industry revenue declined approximately 15% during the same period, demonstrating the continued increasing penetration and market share gains of ARM physical IP into chip designs.
People
At 30 June 2007, ARM had 1,681 full-time employees, a net increase of 22 since the start of the year. Headcount increased by 48 in India and China and decreased by 26 in ROW, illustrating the ongoing regional re-balancing of ARM's resources. At the end of Q2, the group had 664 employees based in the UK, 535 in the US, 178 in Continental Europe, 239 in India and 65 in the Asia Pacific region. Legal matters
ARM is currently involved in ongoing litigation proceedings with Nazomi
Communications, Inc. and Technology Properties Limited, Inc. Details are set
out in the 2006 Annual Report on Form 20-F filed with the Securities and
Exchange Commission on 11 April 2007. Based on independent legal advice, ARM
does not expect 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
GBP'000 GBP'000 GBP'000 GBP'000
Revenues
Product revenues 61,215 61,782 123,515 123,014
Service revenues 4,317 3,948 8,509 7,350
Total revenues 65,532 65,730 132,024 130,364
Cost of revenues
Product 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 26,301
Interest 1,520 1,819 2,977 3,492
Profit on disposal of - 5,270 - 5,270
available-for-sale investment
Income before income tax 12,020 18,966 24,721 35,063
Provision 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 1,412,330
Earnings per share - pence 0.6 1.0 1.3 1.9
Earnings per ADS (assuming
dilution)
ADSs outstanding ('000) 458,137 471,071 458,757 470,777
Earnings 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
GBP'000 GBP'000
Assets
Current assets:
Cash and cash equivalents 92,924 90,743
Short-term investments 5,273 18,600
Marketable securities 10,741 19,151
Accounts receivable, net of allowance of
GBP1,815,000 in 2007 and GBP2,556,000 in 2006 74,986 69,552
Inventory: finished goods 2,552 1,933
Income taxes receivable 5,721 5,761
Prepaid expenses and other assets 17,985 12,668
Total current assets 210,182 218,408
Deferred income taxes 14,145 9,872
Prepaid expenses and other assets 1,154 1,328
Property and equipment, net 11,892 13,970
Goodwill 340,988 349,243
Other intangible assets 48,132 56,027
Investments 3,311 3,855
Total assets 629,804 652,703
Liabilities and shareholders' equity
Accounts payable 6,005 1,826
Income taxes payable 13,514 5,572
Personnel taxes 1,840 1,408
Accrued liabilities 25,377 33,021
Deferred 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' equity
Ordinary shares 700 695
Additional paid-in capital 461,620 446,005
Treasury stock, at cost (88,716) (58,245)
Retained earnings 197,228 197,874
Accumulated other comprehensive income:
Unrealized holding gain on available-for-sale
securities, net of tax asset of GBP393,000 (2006:
GBP231,000) 19 394
Cumulative 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
GBP'000 GBP'000 GBP'000
(restated) (restated)
Revenues
Product revenues 123,515 123,014 247,194
Service revenues 8,509 7,350 16,060
Total revenues 132,024 130,364 263,254
Cost of revenues
Product 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 expenses
Research 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 - 5,270 5,270
available-for-sale security
Total net operating expenses (96,802) (83,409) (183,129)
Profit from operations 20,881 32,201 49,248
Investment income 2,977 3,492 6,758
Profit before tax 23,858 35,693 56,006
Tax (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 - 6,918 6,918
share
- interim 2006 paid at 0.4 pence per - - 5,449
share
- final 2006 paid at 0.6 pence per 8,013 - -
share
- interim 2007 proposed at 0.8 pence 10,615 - -
per share
Earnings per share
Basic 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 1,366,816
Effect of dilutive securities: Share 33,882 33,777 35,145
options
Diluted weighted average number of 1,368,774 1,410,894 1,401,961
shares
Basic EPS 1.3p 1.8p 3.5p
Diluted 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 of the parent.
* Tax comprises GBP7,135,000 of UK taxation and a credit of GBP683,000 of
overseas taxation.
ARM Holdings plc
Consolidated balance sheet - IFRS
30 June 30 June 31 December
2007 2006 2006
Unaudited Unaudited Audited
GBP'000 GBP'000 GBP'000
(restated) (restated)
Assets
Current assets:
Cash and cash equivalents 92,924 95,381 90,743
Financial assets: Short-term 5,273 34,976 18,600
investments
Short-term marketable securities 10,741 18,449 19,151
Fair value of currency exchange
contracts
512 530 439
Accounts receivable 74,986 72,049 69,552
Prepaid expenses and other assets 17,473 17,571 12,229
Current tax assets 5,721 - 5,761
Inventories: 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 3,311 3,578 3,855
investments
Prepaid expenses and other assets 1,154 1,501 1,328
Property, plant and equipment 8,765 9,320 10,296
Goodwill 418,155 449,041 428,366
Other intangible assets 53,908 72,696 62,913
Deferred 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' equity
Current liabilities:
Accounts payable 6,005 3,718 1,826
Current tax liabilities 13,514 13,897 5,572
Accrued and other liabilities 30,001 30,642 39,586
Deferred 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 to
equity holders of the Company
Share capital 700 694 695
Share premium account 454,699 447,901 449,195
Share option reserve 61,474 61,474 61,474
Retained earnings 141,419 173,391 161,453
Revaluation 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
GBP'000 GBP'000 GBP'000
(restated) (restated)
Operating activities
Profit from operations 20,881 32,201 49,248
Depreciation and amortisation of
tangible and intangible assets
13,675 13,165 26,726
Profit on disposal of available-for-sale - (5,270) (5,270)
security
Loss on disposal of property, plant and 353 64 63
equipment
Compensation charge in respect of 8,611 7,496 17,437
share-based payments
Provision for doubtful debts 265 66 932
Provision for obsolescence of inventory 69 - 65
Changes in working capital:
Accounts receivable (6,830) (16,414) (18,986)
Inventories (688) (449) (508)
Prepaid expenses and other assets (3,571) (1,674) 1,015
Fair value of currency exchange (73) (2,238) (2,147)
contracts
Accounts payable 4,179 1,467 (672)
Deferred revenue 1,072 7,993 11,071
Accrued and other liabilities (7,400) 1,107 5,373
Cash generated by operations before tax 30,543 37,514 84,347
Income taxes paid (3,519) (10,763) (21,147)
Net cash from operating activities 27,024 26,751 63,200
Investing activities
Interest received 3,041 3,250 6,636
Purchases of property, plant and (1,680) (3,471) (7,189)
equipment
Proceeds on disposal of property, plant - 19 31
and equipment
Purchases of other intangible assets (1,557) (827) (1,370)
Purchases of available-for-sale - (165) (165)
investments
Proceeds on disposal of - 5,567 5,567
available-for-sale investments
(Purchase) / maturity of short-term 21,737 (20,600) (4,926)
investments
Purchases of subsidiaries, net of cash (3,307) (13,949) (17,270)
acquired
Net cash from / (used in) investing 18,234 (30,176) (18,686)
activities
Financing activities
Issue of shares 5,509 811 2,106
Proceeds received on issuance of shares 6,486 12,348 15,754
from treasury
Purchase 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 3,504 (26,270) (26,512)
cash equivalents
Cash and cash equivalents at beginning 90,743 128,077 128,077
of period
Effect of foreign exchange rate changes (1,323) (6,426) (10,822)
Cash and cash equivalents at end of 92,924 95,381 90,743
period
Notes to the Financial Information
(1) Basis of preparation
US GAAP
The financial information prepared in accordance with the Company's US GAAP accounting policies comprises the consolidated balance sheets as of 30 June 2007 and 31 December 2006 and related income statements for the periods then ended, together with related notes. In preparing this financial information management has used the principal accounting policies as set out in the Company's annual financial statements and Form 20-F for the year ended 31 December 2006, except in relation to accounting for sabbatical leave following the adoption of EITF 06-2 on 1 January 2007, whereby the related costs are now accrued over the requisite service period.
International Financial Reporting Standards
The financial information prepared in accordance with the Group's IFRS accounting policies comprises the consolidated balance sheets as of 30 June 2007, 30 June 2006 and 31 December 2006 and related consolidated statements of income and cash flows for the periods then ended, together with related notes. This financial information has been prepared in accordance with the Listing Rules of the Financial Services Authority. In preparing this financial information management has used the principal accounting policies as set out in the Group's annual financial statements for the year ended 31 December 2006. The 2006 results have been restated to harmonize the Group's treatment of accounting for provisions for sabbatical leave under IFRS and US GAAP following the adoption of EITF 06-2 under US GAAP (as previously no provision for sabbatical leave had been made under IFRS). This has resulted in shareholders' equity at 31 December 2006 being reduced by GBP2.3 million and the profit for the year ended 31 December 2006 reducing by GBP0.4 million. The impact on the six months ended 30 June 2007 is a reduction in profit for the period of GBP0.3 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 2007 are stock-based compensation charges of GBP4.8 million: GBP0.3 million in cost of revenues, GBP2.8 million in research and development costs, GBP0.9 million in sales and marketing costs and GBP0.8 million in general and administrative costs.
Included within the IFRS income statement for the six months ended 30 June 2007 are total share-based payment costs of GBP9.2 million (six months ended 30 June 2006: GBP7.5 million; year ended 31 December 2006: GBP17.4 million), allocated GBP0.5 million (30 June 2006: GBP0.5 million; 31 December 2006: GBP1.0 million) in cost of revenues, GBP5.4 million (30 June 2006: GBP4.3 million; 31 December 2006: GBP10.1 million) in research and development costs, GBP1.8 million (30 June 2006: GBP1.5 million; 31 December 2006: GBP3.5 million) in sales and marketing costs and GBP1.5 million (30 June 2006: GBP1.2 million; 31 December 2006: GBP2.8 million) in general and administrative costs.
Also included within IFRS operating costs for the six months ended 30 June 2007 is amortization of intangibles of GBP9.8 million (six months ended 30 June 2006: GBP9.5 million; year ended 31 December 2006: GBP19.3 million), allocated GBP5.1 million (30 June 2006: GBP4.5 million; 31 December 2006: GBP9.5 million) in research and development costs, GBP4.4 million (30 June 2006: GBP4.7 million; 31 December 2006: GBP9.1 million) in sales and marketing costs and GBP0.3 million (30 June 2006: GBP0.3 million; 31 December 2006: GBP0.7 million) in general and administrative costs.
(3) Accounts receivable
Included within accounts receivable at 30 June 2007 are GBP30.8 million (31 March 2007: GBP27.9 million; 31 December 2006: GBP23.8 million) of amounts recoverable on contracts.
(4) Consolidated statement of changes in shareholders' equity (US GAAP)
Additional Unrealized
Share paid-in Treasury Retained holding
capital capital stock earnings gain
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2007 695 446,005 (58,245) 197,874 394
Shares issued on
exercise of options 5 5,504 - - -
Net income - - - 18,424 -
Dividends - - - (8,013) -
Cumulative effect as a
result of adopting
EITF 06-2, net of tax* - - (2,278) - -
Tax effect of option
exercises - 740 - - -
Amortization of deferred
compensation - 7,975 - - -
Conversion of liability
award to equity award - 1,396 - - -
Issuance of shares from
treasury - - 15,265 (8,779) -
Purchase of own shares - - (45,736) - -
Other comprehensive income:
Unrealized holding losses
on available-for-sale
securities (net of tax
benefit of GBP162,000) - - - - (375)
Currency translation
Adjustment - - - - -
At 30 June 2007 700 461,620 (88,716) 197,228 19
Cumulative Total
translation
adjustment
GBP'000 GBP'000
At 1 January 2007 (12,076) 574,647
Shares issued on
exercise of options - 5,509
Net income - 18,424
Dividends - (8,013)
Cumulative effect as a
result of adopting
EITF 06-2, net of tax* - (2,278)
Tax effect of option
Exercises - 740
Amortization of deferred
Compensation - 7,975
Conversion of liability
award to equity award - 1,396
Issuance of shares from
treasury - 6,486
Purchase of own shares - (45,736)
Other comprehensive income:
Unrealized holding losses on
available-for-sale securities
(net of tax benefit of GBP162,000) - (375)
Currency translation adjustment (11,450) (11,450)
At 30 June 2007 (23,526) 547,325
* In accordance with EITF 06-2, the cumulative provision for employee sabbatical leave 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
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Net income 8,847 9,577 14,196 18,424 26,156
Realized 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 Share Retained Reval- Cumulative Total
Capital premium option earnings uation translation
account reserve reserve adjustment
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January
2007
(as reported) 695 449,195 61,474 163,731 (544) (11,347) 663,204
Restatement - - - (2,278) - - (2,278)
At 1 January 2007
(as restated) 695 449,195 61,474 161,453 (544) (11,347) 660,926
Dividends - - - (8,013) - - (8,013)
Movement on tax
arising on share
options - - - 1,212 - - 1,212
Purchase 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 - - 6,486
Unrealised holding
losses on
available-for-sale
investments
(net of deferred
tax of GBP162,000) - - - - (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 - - - - 5,509
Profit for the
period - - - 17,406 - - 17,406
Credit 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, the Company's goodwill under IFRS has been frozen at the amount recorded under UK GAAP as at 1 January 2004. Under US GAAP, following the provisions of SFAS 142, "Goodwill and other intangible assets", the carrying value of goodwill was frozen at the amount recorded under previous US GAAP as at 1 January 2002. Under both previous US GAAP and UK GAAP, goodwill was amortised over its useful economic life. Thus, while ongoing accounting policies in respect of goodwill are similar under US GAAP and IFRS, the difference in the dates of transition means that different amounts of goodwill are recorded.
Under US GAAP, certain costs to be incurred on restructuring on business combination are treated as a fair value adjustment in the balance sheet acquired. Under IFRS, these costs are expensed post-acquisition. Additionally, under US GAAP, tax benefits arising from the exercise of options issued as part of 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 the consideration relating to those options at the appropriate tax rate. Any excess tax benefits are a deduction to equity. Under IFRS, the full tax benefit is a deduction to equity.
Where provisional assessments of the fair values of assets and liabilities acquired on acquisition are refined, adjustments to fair values are recorded as prior year adjustments to goodwill under IFRS. Under US GAAP, such revisions are recorded 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 IFRS retrospectively to business combinations occurring before 1 January 2004. This means that for business combinations occurring before this date, the previously reported UK GAAP treatment has continued to be followed. Under previous UK GAAP, intangible assets were recognised separately from goodwill only where they could be sold separately without disposing of a business of the entity. This separability criterion does not apply under either IFRS or US GAAP. Thus, a number of intangible assets which are required to be recognised separately from goodwill under 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 their useful economic lives. Except in relation to in-process research and development (see below), there is no difference in accounting policy for intangible assets recognised as a result of business combinations entered into after 1 January 2004.
In-process research and development
Under IFRS, in-process research and development projects purchased as part of a business combination may meet the criteria set out in IAS 38, "Intangible assets", for recognition as intangible assets other than goodwill and are amortised over their useful economic lives commencing when the asset is brought into use. Under US GAAP, in-process research and development is immediately written-off to the income statement. This accounting policy difference gives rise 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 business combination includes the fair value of both equity issued and any share options granted as part of that combination. Under IFRS, any equity issued is valued at the fair value as of the date of exchange, whilst under US GAAP, the equity is valued 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 of options granted, both vested and unvested, whilst under IFRS the fair value only includes those that have vested, together with a pro-rata value for partially vested options. Furthermore, where there is contingent consideration for an acquisition, under IFRS this is recognized as part of the purchase consideration if the contingent conditions are expected to be satisfied, whilst under US GAAP it is only recognised if the conditions have actually been met, other than to the 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 an acquirer as part of a business combination in exchange for unvested share options of the acquiree is recorded as a debit balance within shareholders' funds. This amount is charged to the profit and loss account over the vesting period of the share options in accordance with FIN 28. Under IFRS, no such adjustment to shareholders' funds is made on acquisition. Following the adoption of FAS No. 123 (revised 2004) (FAS 123(R)), "Share-based payment", the unamortised 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. In accordance with IFRS 2, equity-settled share-based payments are measured at fair value at the date of grant, using the Black-Scholes pricing model. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company's estimate of the number of shares that will eventually vest. Under US GAAP, the Company is required, effective as of 1 January 2006, to adopt FAS 123(R). FAS 123(R) requires the Company to expense share-based payments, including employee stock-options, based on their fair value. The Company has elected to utilize the "modified prospective" method of adoption, such that compensation cost is recognized beginning with the effective date (i) based on the requirements of FAS 123(R) for all share-based payments granted after the effective date and (ii) based on the requirements of FAS 123(R) for all awards granted to employees prior to the effective date of FAS 123(R) that remain unvested 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 a variable number of shares; or (ii) the award is indexed to a factor other than performance, market or service condition. The fair value of these awards is remeasured at each period end until the award has vested. Once the award has vested, or for (i) above when number of shares becomes fixed, the award becomes equity-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 amount treated as employee compensation under US and UK tax rules on exercise of certain employee share options. The compensation is equivalent to the difference between the option exercise price and the fair market value of the shares at the date of exercise.
Under IFRS, deferred tax assets are recognised and are calculated by comparing the estimated amount of tax deduction to be obtained in the future (based on the Company's share price at the balance sheet date) with the cumulative amount of the compensation expense recorded in the income statement. If the amount of estimated future tax deduction exceeds the cumulative amount of the remuneration expense at the statutory tax rate, the excess is recorded directly in equity, against the profit and loss reserve. In accordance with the transitional provisions of IFRS 2, no compensation charge is recorded in respect of options granted before 7 November 2002 or in respect of those options which have been exercised or have lapsed before 31 December 2004. Nevertheless, tax deductions have arisen and will continue to arise on these options. The tax effects arising in relation to these options are recorded directly in equity, against retained earnings.
Under US GAAP, deferred tax assets are recognised by multiplying the compensation expense recorded by the prevailing tax rate in the relevant tax jurisdiction. Where, on exercise of the relevant option, the tax benefit obtained exceeds the deferred tax asset in relation to the relevant options, the excess is recorded in additional paid-in capital. Where the tax benefit is less than the deferred tax asset, the write-down of the deferred tax asset is recorded against additional paid-in capital to the extent of previous excess tax benefits recorded in this account, with any remainder recorded in the income statement.
Employer taxes on share-based remuneration
Under IFRS, employer's taxes that are payable on the exercise or vesting of share-based remuneration are provided for over the vesting period of the related option or award. Under US GAAP, such taxes are accounted for when the option or award is exercised or vests respectively.
Accrued legal costs
Under IFRS, future legal fees that the Company is expecting to incur on current cases are accrued when the obligating event giving rise to the legal costs has occurred. Under US GAAP, such costs are charged to the income statement in the period in which the costs are incurred.
Enactment of tax rate changes
Under IFRS, when a change in statutory corporate tax rate occurs, the impact on deferred tax balances which are expected to reverse after the rate has changed is 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 its provisions for employee sabbatical leave. To harmonize the accounting treatment under 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 be charged directly to reserves, whilst under IFRS, the prior year results have been 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
GBP'000 GBP'000 GBP'000
(restated) (restated)
Profit for financial period as
reported under IFRS 17,406 24,633 48,156
Adjustments for:
Amortisation of intangibles 491 398 914
Write-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 17,437
Employer's taxes on share-based
remuneration 620 (2) 8
Provision for legal costs, net of tax (238) - 715
Foreign exchange on contingent
Consideration (14) (97) (104)
Provision for sabbatical leave, net of tax - 216 432
Tax 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 2,569
Other tax differences based on enacted
rates 397 - -
Net income as reported under US GAAP 18,424 26,156 45,163
Reconciliation of shareholders' equity 30 June 30 June 31 December
from IFRS to US GAAP 2007 2006 2006
Unaudited Unaudited Audited
GBP'000 GBP'000 GBP'000
(restated) (restated)
Shareholders' equity as reported under
IFRS 632,587 706,389 660,926
Adjustments for:
Employer's taxes on share-based 658 28 38
remuneration
Utilisation of restructuring provision 1,368 1,368 1,368
Provision for legal costs, net of tax 477 - 715
Liability-classified share awards (1,549) - (2,416)
Provision for sabbatical leave, net of tax - 2,062 2,278
Cumulative difference on amortisation of
goodwill 2,713 2,713 2,713
Cumulative difference on amortisation of
intangibles 1,846 840 1,355
Cumulative 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 17,476
Deferred 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 to goodwill under US
GAAP (4,844) (4,844) (4,844)
Foreign exchange on valuation of
intangible assets and deferred tax 3,322 (3,312) 1,358
Foreign 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 30 June 30 June 31 December
US GAAP 2007 2006 2006
Unaudited Unaudited Audited
GBP'000 GBP'000 GBP'000
Goodwill as reported under IFRS 418,155 449,041 428,366
Adjustments for:
Valuation of restructuring provision on
acquisition 1,235 1,235 1,235
Cumulative difference on amortisation of
goodwill 2,713 2,713 2,713
Cumulative 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 17,476
Deferred 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 GAAP measures, have been used in this earnings release. These measures have been presented as they allow a clearer comparison of operating results that exclude acquisition-related charges, stock-based compensation and restructuring charges and profit on disposal of available-for-sale investments. All figures in GBP'000 unless 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 26,301
Restructuring costs 814 - - 814 -
Acquisition-related charge
- amortization of
intangibles 4,612 4,655 5,086 9,267 9,673
Acquisition-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 35,063
Restructuring costs 814 - - 814 -
Acquisition-related charge
- amortization of
intangibles 4,612 4,655 5,086 9,267 9,673
Acquisition-related charge
- other payments 209 397 - 606 -
Stock-based compensation
and related payroll taxes 4,807 3,872 4,223 8,679 8,211
Profit 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 90,743
Short-term investments 5,273 19,069 18,600
Short-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) 108,938 126,781 148,806 108,938 148,806
Less: 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 13,949
Add back: Cash outflow from
payment of dividends 8,013 - 6,918 8,013 6,918
Add back: Cash outflow
from purchase of own
shares 25,577 20,159 22,129 45,736 29,086
Less: 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 26,156
Restructuring costs 814 - - 814 -
Acquisition-related charge
- amortization of
intangibles 4,612 4,655 5,086 9,267 9,673
Acquisition-related charge
- other payments 209 397 - 606 -
Stock-based compensation
and related payroll taxes 4,807 3,872 4,223 8,679 8,211
Profit 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 1,412,330
Normalised diluted EPS 1.18p 1.14p 1.22p 2.32p 2.50p
(8.24) Normalised income statement for Q2 2007
Normalised Stock-based Intangible Other
compensation amortisation acquisition
related
charges
GBP'000 GBP'000 GBP'000 GBP'000
Revenues
Product revenues 61,215 - - -
Service revenues 4,317 - - -
Total revenues 65,532 - - -
Cost of revenues
Product costs (5,421) - - -
Service costs (1,351) (285) - -
Total cost of revenues(6,772) (285) - -
Gross profit 58,760 (285) - -
Research and
development (15,469) (2,796) - (195)
Sales and
marketing (10,472) (958) - -
General and
administrative (11,877) (768) - (14)
Restructuring
costs - - - -
Amortization
of intangibles
purchased
through business
combination - - (4,612) -
Total
operating
expenses (37,818) (4,522) (4,612) (209)
Income from 20,942 (4,807) (4,612) (209)
operations
Interest 1,520 - - -
Income before 22,462 (4,807) (4,612) (209)
income tax
Provision for (6,231) 887 1,778 68
income taxes
Net income 16,231 (3,920) (2,834) (141)
Earnings per
share
(assuming
dilution)
Shares outstanding
('000) 1,374,410
Earnings per
share - pence 1.18
Earnings per
ADS (assuming
dilution)
ADSs 458,137
outstanding
('000)
Earnings per
ADS - cents 7.11
Restructuring charges US GAAP
GBP'000 GBP'000
Revenues
Product revenues - 61,215
Service revenues - 4,317
Total revenues - 65,532
Cost of revenues
Product costs - (5,421)
Service costs - (1,636)
Total cost of revenues - (7,057)
Gross profit - 58,475
Research and
development - (18,460)
Sales and
Marketing - (11,430)
General and
administrative - (12,659)
Restructuring
costs (814) (814)
Amortization
of intangibles
purchased
through business
combination - (4,612)
Total
operating
expenses (814) (47,975)
Income from
Operations (814) 10,500
Interest - 1,520
Income before
income tax (814) 12,020
Provision for
income taxes 325 (3,173)
Net income (489) 8,847
Earnings per
share
(assuming
dilution)
Shares outstanding 1,374,410
Earnings per
share - pence 0.64
ADSs
outstanding
('000) 458,137
Earnings per
ADS - cents 3.87
(8.25) Normalised income statement for Q2 2006
Normalised Stock-based Intangible Investment US GAAP
compensation amortisation disposal
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Revenues
Product revenues 61,782 - - - 61,782
Service revenues 3,948 - - - 3,948
Total revenues 65,730 - - - 65,730
Cost of revenues
Product costs (5,794) - - - (5,794)
Service costs (1,356) (254) - - (1,610)
Total cost of (7,150) (254) - - (7,404)
revenues
Gross profit 58,580 (254) - - 58,326
Research and (14,996) (2,449) - - (17,445)
development
Sales and (9,765) (844) - - (10,609)
marketing
General and (12,633) (676) - - (13,309)
administrative
Amortization of
intangibles
purchased through
business
combination - - (5,086) - (5,086)
Total operating (37,394) (3,969) (5,086) - (46,449)
expenses
Income from 21,186 (4,223) (5,086) - 11,877
operations
Interest 1,819 - - - 1,819
Profit on disposal
of
available-for-sale
investment - - - 5,270 5,270
Income before
income tax 23,005 (4,223) (5,086) 5,270 18,966
Provision 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
(assuming
dilution)
Shares outstanding
('000) 1,413,212 1,413,212
Earnings per share 1.22 1.00
- pence
Earnings per ADS
(assuming
dilution)
ADSs outstanding
('000) 471,071 471,071
Earnings per ADS -
cents 6.78 5.57
(8.26) Normalised income statement for 1H 2007
Normalised Stock-based Intangible Other
compensation amortisation acquisition
related
charges
GBP'000 GBP'000 GBP'000 GBP'000
Revenues
Product
revenues 123,515 - - -
Service
revenues 8,509 - - -
Total revenues 132,024 - - -
Cost of revenues
Product costs (11,059) - - -
Service costs (2,709) (517) - -
Total cost of
Revenues (13,768) (517) - -
Gross profit 118,256 (517) - -
Research and)
Development (32,058) (5,042) - (357
Sales and
marketing (21,604) (1,732) - -
General and
administrative (23,484) (1,388) - (249)
Restructuring
costs - - - -
Amortization
of intangibles
purchased
through
business
combination - - (9,267) -
Total
operating
expenses (77,146) (8,162) (9,267) (606)
Income from
Operations 41,110 (8,679) (9,267) (606)
Interest 2,977 - - -
Income before
income tax 44,087 (8,679) (9,267) (606)
Provision for
income taxes (12,204) 1,824 3,574 184
Net income 31,883 (6,855) (5,693) (422)
Earnings per
share
(assuming
dilution)
Shares
outstanding
('000) 1,376,270
Earnings per
share - pence
Earnings per
ADS (assuming
dilution) 2.32
ADSs
outstanding
('000) 458,757
Earnings per
ADS - cents 13.94
Restructuring charges US GAAP
GBP'000 GBP'000
Revenues
Product revenues - 123,515
Service revenues - 8,509
Total revenues - 132,024
Cost of revenues
Product costs - (11,059)
Service costs - (3,226)
Total cost of revenues - (14,285)
Gross profit - 117,739
Research and development - (37,457)
Sales and Marketing - (23,336)
General and administrative - (25,121)
Restructuring costs (814) (814)
Amortization
of intangibles
purchased
through business
combination - (9,267)
Total operating expenses (814) (95,995)
Income from Operations (814) 21,744
Interest - 2,977
Income before income tax (814) 24,721
Provision for income taxes 325 (6,297)
Net income (489) 18,424
Earnings per
share
(assuming
dilution)
Shares outstanding 1,376,270
Earnings per
share - pence 1.34
ADSs
outstanding
('000) 458,757
Earnings per
ADS - cents 8.06
(8.27) Normalised income statement for 1H 2006
Normalised Stock-based Intangible Investment US GAAP
compensation amortisation disposal
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Revenues
Product revenues 123,014 - - - 123,014
Service revenues 7,350 - - - 7,350
Total revenues 130,364 - - - 130,364
Cost of revenues
Product 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
business
combination - - (9,673) - (9,673)
Total operating
Expenses (71,901) (7,718) (9,673) - (89,292)
Income from
operations 44,185 (8,211) (9,673) - 26,301
Interest 3,492 - - - 3,492
Profit on disposal
of
available-for-sale
investment - - - 5,270 5,270
Income before
income tax 47,677 (8,211) (9,673) 5,270 35,063
Provision 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
(assuming
dilution)
Shares outstanding
('000) 1,412,330 1,412,330
Earnings per share
- pence 2.50 1.85
Earnings per ADS
(assuming
dilution)
ADSs outstanding
('000) 470,777 470,777
Earnings 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 for the six months ended 30 June 2007 which comprise the IFRS consolidated interim balance sheet as at 30 June 2007 and the related IFRS consolidated interim statements of income and cash flows for the six months then ended and related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information.
Directors' responsibilities
The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed.
This interim report has been prepared in accordance with the basis set out in Note 1.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the disclosed accounting policies have been applied. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in 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 the company for the purpose of the Listing Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Review conclusion
On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2007.
Notes:
(a) The maintenance and integrity of the ARM Holdings plc web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the web site.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.
Note
The results shown for Q2 2007, Q1 2007, Q2 2006, H1 2007 and H1 2006 are unaudited. The results shown for FY 2006 are audited. The financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 240(3) of the Companies Act 1985. Statutory accounts of the Company in respect of the financial year ended 31 December 2006, upon which the Company's auditors have given a report which was unqualified and did not contain a statement under Section 237(2) or Section 237(3) of that Act, have been delivered to the Registrar of Companies.
Except for changes in accounting policy on the adoption of new accounting standards, as disclosed, the results for ARM for Q2 2007 and previous quarters as shown reflect the accounting policies as stated in Note 1 to the US GAAP financial statements in the Annual Report and Accounts filed with Companies House in the UK for the fiscal year ended 31 December 2006 and in the Annual Report on Form 20-F for the fiscal year ended 31 December 2006.
This document contains forward-looking statements as defined in section 102 of the Private Securities Litigation Reform Act of 1995. These statements are subject to risk factors associated with the semiconductor and intellectual property businesses. When used in this document, the words "anticipates", "may", "can", "believes", "expects", "projects", "intends", "likely", similar expressions and any other statements that are not historical facts, in each case as they relate to ARM, its management or its businesses and financial performance and condition are intended to identify those assertions as forward-looking statements. It is believed that the expectations reflected in these statements are reasonable, but they may be affected by a number of variables, many of which are beyond our control. These variables could cause actual results or trends to differ materially and include, but are not limited to: failure to realise the benefits of our recent acquisitions, unforeseen liabilities arising from our recent acquisitions, price fluctuations, actual demand, the availability of software and operating systems compatible with our intellectual property, the continued demand for products including ARM's intellectual property, delays in the design process or delays in a customer's project that uses ARM's technology, the success of our semiconductor partners, loss of market and industry competition, exchange and currency fluctuations, any future strategic investments or acquisitions, rapid technological change, regulatory developments, ARM's ability to negotiate, structure, monitor and enforce agreements for the determination and payment of royalties, actual or potential litigation, changes in tax laws, interest rates and access to capital markets, political, economic and financial market conditions in various countries and regions and capital expenditure requirements.
More information about potential factors that could affect ARM's business and financial results is included in ARM's Annual Report on Form 20-F for the fiscal year ended 31 December 2006 including (without limitation) under the captions, "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is on file with the Securities and Exchange Commission (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 emerging applications. ARM's comprehensive product offering includes 16/32-bit RISC microprocessors, data engines, graphics processors, digital libraries, embedded memories, peripherals, software and development tools, as well as analog functions and high-speed connectivity products. Combined with the company's broad Partner community, they provide a total system solution that offers a fast, reliable path to market for leading electronics companies. More information 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 trademarks of ARM Limited. Artisan Components and Artisan are registered trademarks of ARM, Inc., a wholly owned subsidiary of ARM. All other brands or product names are the property of their respective holders. ARM refers to ARM Holdings plc (NASDAQ: ARMHY) together with its subsidiaries including ARM Limited, ARM Inc.,ARM Germany GmbH, ARM KK, ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS, ARM Consulting (Shanghai) Co. Ltd., ARM Belgium NV., ARM Embedded Technologies Pvt. Ltd., Keil Elektronik GmbH, and ARM Norway AS.