SOURCE: ARM Holdings PLC

April 19, 2006 02:01 ET

Arm Holdings Plc - Results For The Quarter Ended 31 March 2006

Cambridge, UK -- (MARKET WIRE) -- April 19, 2006 --ARM HOLDINGS PLC - RESULTS FOR THE QUARTER ENDED 31 MARCH 2006

CAMBRIDGE, UK, 19 April 2006-ARM Holdings plc ((LSE: ARM); (Nasdaq: ARMHY)) announces its unaudited financial results for the first quarter ended 31 March 2006 with total sterling revenues up 17% and normalised EPS up 34% compared to Q1 2005.

Financial Highlights - Q1 2006

 
-   Total revenues GBP64.6m (Q1 2005: GBP55.0m) up 17%             
-   Record normalised operating margin 35.6% (Q1 2005: 32.4%)      
-   Normalised income before tax GBP24.7m (Q1 2005: GBP18.9m) up   
    31%                                                            
-   Normalised EPS 1.27p (Q1 2005: 0.95p) up 34%                   
-   GBP7m returned to shareholders via rolling share buyback       
    program

Operating Highlights - Q1 2006

 
-   Long-term technology agreement signed with TSMC for physical IP
    at leading-edge process nodes                                  
-   Record 572 million ARM Powered(R) products shipped, up 47% on  
    comparable period last year                                    
-   Unit growth in non-mobile segments at 68% continues to outpace 
    growth in mobile at 37%                                        
-   Record underlying PIPD royalties of GBP4.5 million             
-   15 processor and 9 physical IP licenses signed in the quarter  
-   Order backlog flat sequentially at quarter end                 
-   Order backlog today higher than at start of year following     
    early Q2 licensing activity                                    
-   Development Systems revenues up 38%                            

Commenting on the first quarter, Warren East, Chief Executive Officer, said:

"We have seen encouraging activity in both licensing and royalties this quarter. Interest in our new Cortex family of processors continues to grow with a further license signed in Q1 and a number of licensing discussions in progress. Our first license agreement for the most advanced (45nm) process technology has further strengthened our position as a leading provider of physical IP. We continued to extend our market penetration across the span of digital products with royalty units increasing 47% compared to the same period last year. Q1's result further underpins our confidence that ARM will achieve another strong performance in 2006 in line with current market expectations."

Tim Score, Chief Financial Officer, added:

"Year-on-year growth in revenue and earnings per share of 17% and 34% respectively has again yielded strong cash generation in the quarter. With royalty revenues continuing to grow as a proportion of total revenues, operating margin and cash flow are expected to increase, leaving us well-placed both to invest in the innovative technology that drives future growth in licensing revenue and to continue the return of cash to shareholders through share buybacks and dividends."

Q1 2006 - Financial Summary

 
                                     Normalised*  
---------------------------   --------------------------------
GBPM                           Q1 2006    Q1 2005    % Change   
---------------------------   --------    -------    ---------
Revenue                           64.6       55.0         +17% 
Income before income tax          24.7       18.9         +31% 
Operating margin                  35.6%      32.4%             
Earnings per share (pence)        1.27       0.95         +34% 
Net cash generation**             17.3        3.8        +356% 
---------------------------   --------    -------    ---------
 
                                             US GAAP
---------------------------   --------------------------------
GBPM                                     Q1 2006       Q1 2005
---------------------------   ------------------     ---------
Revenue                                     64.6          55.0  
Income before income tax                    16.1          12.5  
Operating margin                            22.3%         20.9% 
Earnings per share (pence)                  0.84          0.64  
Net cash generation**                                           
---------------------------   ------------------     ---------
 

Q1 2006 - Revenue Summary

 
                               Revenue (GBPM) 
--------------------    --------------------------------------
                        Q1 2006      Q1 2005          % Change
--------------------    -------      -------         ---------
Licensing                                                      
PD                         17.3         16.3               +6% 
PIPD                        7.9          8.4               -6% 
Total Licensing            25.2         24.7               +2% 
Royalties                                                      
PD                         23.2(1)      16.8(1)           +38% 
PIPD                        4.9(1)       4.1(1)           +19% 
Total Royalties            28.1         20.9              +35% 
Development Systems         7.9          5.8              +38% 
Services                    3.4          3.6               -7% 
Total Revenue              64.6         55.0              +17% 

 
                               Revenue ($M)***   
--------------------    --------------------------------------
                        Q1 2006      Q1 2005          % Change
--------------------    -------      -------         ---------
Licensing                                                      
PD                         30.0         30.0                0% 
PIPD                       13.7         16.2              -15% 
Total Licensing            43.7         46.2               -5% 
Royalties                                                      
PD                         40.9         31.6              +29% 
PIPD                        8.4          7.8               +8% 
Total Royalties            49.3         39.4              +25% 
Development Systems        13.9         11.0              +27% 
Services                    6.0          6.6               -9% 
Total Revenue             112.9        103.2               +9% 



(1)  Includes catch-up royalties in Q1 2006 of GBP1.1m in PD 
     (Q1 2005: nil) and GBP0.4m in PIPD (Q1 2005: GBP0.4m).

Current trading and prospects

During Q1, we have continued to see strong interest across the range of products in our technology portfolio, including the new processor and physical IP technology that ARM is bringing to market. As well as signing a strategically important long-term technology license for 65nm and 45nm processes with TSMC, we also signed a significant number of license agreements for a wide range of processor cores. With a healthy sales pipeline for licensing across the business, ongoing momentum in royalties and continued growth in development systems sales, we remain confident in achieving another strong performance in 2006 in line with current market expectations.

 

CONTACTS:

Tom Buchanan/Fiona Laffan        Tim Score/Bruce Beckloff
Brunswick                        ARM Holdings plc
+44 (0) 207 404 5959             +44 (0)1628 427800

* Normalised figures are before acquisition-related charges and other share-based remuneration charges. For reconciliation of GAAP measures to normalised non-GAAP measures detailed in this document, see notes 5.1 to 5.18.

** Before dividends, net cash inflow from share option exercises and share buybacks and acquisition consideration - see notes 5.11 to 5.14.

*** 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)

First quarter ended 31 March 2006

Total revenues

Total revenues for the first quarter of 2006 amounted to GBP64.6 million, up 17% versus the same period in 2005. In US dollar terms***, first quarter revenues were $112.9 million with an effective US dollar to sterling exchange rate in Q1 2006 of $1.75 compared to $1.88 in Q1 2005.

License revenues

Total license revenues in the first quarter were GBP25.2 million, representing 39% of group revenues, compared to GBP24.7 million in Q1 2005. License revenues comprised GBP17.3 million from the Processor Division ("PD") and GBP7.9 million from the Physical IP Division ("PIPD").

Royalty revenues

Total royalty revenues in Q1 2006 were GBP28.1 million, representing 44% of total group revenues, compared to GBP20.9 million in Q1 2005, an increase of 35%. Royalty revenues comprised GBP23.2 million from PD and GBP4.9 million from PIPD. Within the total of GBP23.2 million for PD royalties, there was approximately GBP1.1 million of catch-up royalties, giving underlying royalties of GBP22.1 million (approximately $39 million). Total PIPD royalties of GBP4.9 million included GBP0.4 million of catch-up royalties.

Development Systems and Service revenues

Sales of development systems in Q1 2006 were GBP7.9 million, representing 12% of total group revenue, compared to GBP5.8 million in Q1 2005, an uplift of 38%. Service revenues in Q1 2006 were GBP3.4 million, representing 5% of total group revenues, compared to GBP3.6 million in Q1 2005.

Gross margins

Gross margins for the first quarter, excluding the FAS123® charge of GBP0.2 million (see below), were 89.0% compared to 88.5% in Q1 2005. The positive impact on gross margin arising from the higher proportion of total revenues made up by royalties (44% in Q1 2006 compared to 38% in Q1 2005) is partially offset by the higher proportion of revenues represented by development systems and by the higher proportion of total PIPD costs charged to cost of revenues in Q1 2006.

Operating expenses and operating margin

Total operating expenses in Q1 2006 are GBP42.8 million compared to GBP37.2 million in Q1 2005. Total operating expenses of GBP42.8 million in Q1 2006 include amortisation of intangible assets of GBP4.6 million (Q1 2005: GBP4.0 million) and GBP3.8 million in relation to the fair value of share-based remuneration in accordance with FAS123® - "Share-Based Payment". As FAS123® is effective for the first time in Q1 2006 and as ARM is applying the standard on the "modified prospective" basis, there is no directly equivalent charge in Q1 2005. Total operating expenses of GBP37.2 million in Q1 2005 did, however, include a deferred stock-based compensation charge of GBP2.4 million.

The total FAS123® charge of GBP4.0 million in Q1 2006 is included within cost of revenues (GBP0.2 million), research and development (GBP2.3 million), sales and marketing (GBP0.8 million) and general and administrative (GBP0.7 million). The commentary on operating expenses below excludes amortisation and share-based remuneration charges.

Operating expenses in Q1 2006 were GBP34.5 million compared to GBP35.0 million in Q4 2005 and GBP30.8 million in Q1 2005. The sequential reduction is partly due to a net gain arising from foreign exchange impacts in Q1 2006 compared to a net loss in Q4 2005.

Research and development expenses were GBP15.1 million in Q1 2006, representing 23% of revenues, compared to GBP14.7 million or 27% of revenues in Q1 2005. Sales and marketing costs in Q1 2006 were GBP9.4 million, being 15% of revenues, compared to GBP8.3 million or 15% of revenues in Q1 2005. General and administrative expenses in Q1 2006 were GBP10.0 million, representing 15% of revenues, compared to GBP7.8 million or 14% of revenues in Q1 2005.

Record normalised operating margin was achieved in Q1 2006 at 35.6%(5.1) compared to 32.4%(5.3) in Q1 2005.

Interest receivable

Interest receivable increased to GBP1.7 million in Q1 2006 compared to GBP1.0 million in Q1 2005, due to higher average cash balances.

Earnings and taxation

Income before income tax in Q1 2006 was GBP16.1 million compared to GBP12.5 million in Q1 2005. Normalised income before income tax in Q1 2006 was GBP24.7 million(5.5) compared to GBP18.9 million(5.7) in Q1 2005. The group's effective tax rate under US GAAP in Q1 2006 was 25.7% reflecting the availability of research and development tax credits and taking into account the benefits arising from the structuring of the Artisan acquisition.

First quarter fully diluted earnings per share prepared under US GAAP were 0.8 pence (4.4 cents per ADS****) compared to earnings per share of 0.6 pence (3.6 cents per ADS****) in Q1 2005. Normalised earnings per fully diluted share in Q1 2006 were 1.27 pence(5.15) per share (6.6 cents per ADS****) compared to 0.95 pence(5.17) (5.4 cents per ADS****) in Q1 2005.

Balance sheet and cash flow

Intangible assets at 31 March 2006 were GBP448.6 million, comprising goodwill of GBP381.7 million and other intangible assets of GBP66.9 million, compared to GBP385.6 million and GBP72.3 million respectively at 31 December 2005. Goodwill is no longer amortised under US GAAP, but is subject to review for impairment on at least an annual basis. The intangible assets from acquisition are being amortised through the profit and loss account over a weighted average period of five years.

Accounts receivable increased to GBP61.0 million at 31 March 2006 from GBP55.5 million at 31 December 2005. The allowance against receivables was GBP2.5 million at 31 March 2006 compared to GBP2.2 million at 31 December 2005. Deferred revenues were GBP25.2 million at 31 March 2006 compared to GBP20.4 million at 31 December 2005.

After net cash generation of GBP17.3 million(5.11) in Q1 2006, total cash, cash equivalents, short-term investments and marketable securities amounted to GBP182.3 million(5.9) at 31 March 2006.

Share buyback program

In Q1 2006, the Company purchased 5,150,000 shares at a total cost of GBP7.0 million. It is anticipated that the buyback program will resume after the announcement of these results.

Operating review

Backlog

At the end of Q1 2006, group order backlog was flat sequentially with the PIPD portion of the backlog up again on the record level reported at the end of last quarter. Due to licensing activity early in Q2, including an additional license being signed for the Cortex-A8 product, group order backlog is now higher than at the beginning of the year. Whilst a small proportion of the revenue from the Cortex-A8 processor license will be recognisable in Q2, the majority will be recognised in future quarters.

PD licensing

15 licenses for microprocessors were signed in Q1 2006 bringing the total cumulative number of licenses signed to 413. The mix of licenses signed in the quarter demonstrated a healthy demand for our technologies across the portfolio of processor cores, from the ARM7™ family to our latest technology, the Cortex family. Of the 15 licenses, five new partners took one license each: one per-use license for the ARM7TDMI® processor, two per-use licenses for the ARM946E-S™ processor and two licenses for the ARM926EJ-S™ processor.

The remaining 10 licenses were signed with 8 of our existing partners, comprising four upgrade licenses and six derivative licenses. The four upgrade licenses comprised one per-use license for the ARM922T™ , one term license for the ARM968E-S™ processor, one license for the ARM1176JZ(F)-S™ processor, and one term license for our latest Cortex technology, code named "Serval-E". The six derivative licenses consisted of one per-use license for the ARM7TDMI processor, one license for the ARM7TDMI-S™ processor, two term licenses for the ARM926EJ-S processor, one license for the ARM11TM MPCore™ processor and one license for the ARM1176JZ(F)-S processor.

During the quarter, two significant announcements were made by ARM partners introducing new lines of products based on our Cortex family of processors. Firstly, at 3GSM, Texas Instruments introduced their OMAP™ 3 line of application processors that incorporate the Cortex-A8 processor (Texas Instruments New OMAP™ 3 Architecture Will Spark Development of a New Class of Mobile Phone, 14 Feb 2006). This represents the first announced product to use the Cortex-A8 processor. It is expected to sample before the end of the year with volume production commencing in 2007. Secondly, Luminary Micro's announcement of their Stellaris™ family of 32-bit microcontrollers (Luminary Micro Announces 32-bit Microcontrollers for $1 - First to Launch Products Based on the ARM Cortex-M3 Processor, 27 Mar 2006), represents the first product to be announced using the Cortex-M3 processor. Products within the Stellaris family are available today and address the needs of low cost embedded applications migrating to 32-bit technology.

PD royalties

ARM partners shipped 572 million units in Q4 2005 (we report royalties one quarter in arrears), up 47% on the comparable period last year. Of those unit shipments, 35% related to units based on ARM9™ family technology and 2% related to products based on the SecurCoreTM family of processors. Shipments of ARM926 processor-based product accounted for 9% of total shipments. By the end of Q4 2005 more than 2 million ARM11-based products had been shipped, representing the newest ARM technology to ship in any meaningful volume. Shipments of ARM11 family-based products are expected to increase gradually throughout 2006. One new partner commenced shipping ARM technology-based products in Q4 2005 bringing the total number of shippers to 69.

The mobile and non-mobile segments accounted for 63% and 37% of total shipments respectively in Q1 2006, compared to 67% and 33% in Q1 2005. Non-mobile growth of 68% versus the same period in 2005 continues to outpace the growth of mobile shipments due primarily to increased shipments of applications such as hard disk drives, home networking devices, printers, smartcards and microcontrollers. The average royalty rate ("ARR") of 7.2 cents was marginally down on the 7.3 cents reported in Q4 2005 due to strong growth in certain lower cost product categories including low cost mobile handsets and Bluetooth products as well as smartcards and microcontrollers.

PIPD licensing

In Q1, ARM signed a further nine licenses for Physical IP bringing the total number of licenses to 219. Of the nine licenses, three were for platform licenses to two foundries consisting of a 130nm Classic Platform and a long-term technology agreement for physical IP on the leading edge 65nm and 45nm processes with Taiwan Semiconductor Manufacturing Company (TSMC). This represents a significant milestone, being the first announcement of a foundry planning to offer ARM Physical IP for the 45nm processor node. It also serves to enhance the long term commercial relationship between ARM and TSMC. This brings the total number of physical IP platforms licensed to foundries and IDMs to 70.

The remaining six licenses were end-user licenses consisting of one 250nm Classic memory compiler, one 180nm Metro™ cell library, two 130nm Metro™ cell libraries and two 90nm Velocity high speed PHYs. This brings the total number of end-user licensees for these technologies to 149.

PIPD royalties

Record underlying royalties of GBP4.5 million (approximately $7.8 million) were up 22% sequentially (Q4 2005: GBP3.7m). This further sequential growth in underlying royalty revenues results both from the strengthening trend in wafer pricing and capacity in Q4 2005 and the growing number of designs being manufactured by our foundry partners.

Development Systems

In Q1 2006, we introduced the first synergistic product combining the technology acquired with Keil in Q4 2005 with our existing tools technology. The ARM RealView® Microcontroller Development Kit (RVMDK) was launched to facilitate the migration of microcontroller development from 8-bit to ARM technology-based 32-bit microcontrollers. In the quarter, there were approximately 10,000 downloads of the free trial version of the product, giving us confidence that incremental sales will accrue in future quarters.

Further, at the end of Q1, we introduced the next generation of our market-leading tools technology, the ARM RealView Development Suite version 3.0 for end-to-end pre-silicon development. Version 3.0 incorporates many enhancements which we expect to serve as a catalyst for both existing ARM customers to upgrade their ARM development tools and for new customers to engage with ARM. We have also seen increasing traction for our Electronic System Level ("ESL") design tools illustrated by the announcement in Q1 that Renesas has adopted ARM ESL tools for system-on-chip ("SoC") development.

People

At 31 March 2006 we had 1,371 full time employees compared to 1,324 at the end of 2005. Of the net increase in headcount of 47 in Q1, 20 occurred in our Bangalore Design Centre. At 31 March 2006, the group had 588 employees based in the UK, 499 in the US, 101 in Continental Europe, 136 in India and 47 in the Asia Pacific Region.

Legal matters

In May 2002, Nazomi Communications, Inc. ("Nazomi") filed suit against ARM alleging willful infringement of Nazomi's US Patent No. 6,332,215. ARM answered Nazomi's complaint in July 2002 denying infringement. ARM moved for summary judgment and a ruling that the technology does not infringe Nazomi's patent. The United States District Court for the Northern District of California granted ARM's motion, and Nazomi appealed the District Court's ruling. On 7 September 2004, the Court of Appeals for the Federal Circuit heard the appeal and issued its decision on 11 April 2005. Because, in the opinion of the Court of Appeals for the Federal Circuit, the District Court did not construe the disputed claim term in sufficient detail for appellate review, the Court of Appeals for the Federal Circuit remanded the dispute back to the District Court for further analysis. A supplementary "Markman" hearing was held on 11 October 2005 and we are presently awaiting the ruling of the District Court. Based on legal advice received to date, ARM has no cause to believe that the effect of the original ruling by the District Court will not be upheld.

                            ARM Holdings plc     

                        First Quarter Results - US GAAP  


                                                                  
                                   Quarter     Quarter    Quarter   
                                     ended       ended      ended     
                                  31 March    31 March   31 March  
                                      2006        2005   2006 (1)  
                                 Unaudited   Unaudited  Unaudited 
                                  --------    --------    --------  
                                   GBP'000     GBP'000      $'000  
Revenues                                                           
Product revenues                    61,232      51,372    106,213  
Service revenues                     3,402       3,645      5,901  
                                    --------    --------   --------
Total revenues                      64,634      55,017    112,114  
                                    --------    --------   --------
                                                                   
Cost of revenues                                                   
Product costs                       (5,815)     (4,913)   (10,087) 
Service costs                       (1,552)     (1,410)    (2,692) 
                                    --------    --------   --------
Total cost of revenues              (7,367)     (6,323)   (12,779) 
                                    --------    --------   --------
                                                                   
                                    --------    --------   --------
Gross profit                        57,267      48,694     99,335  
                                    --------    --------   --------
                                                                   
Research and development           (17,456)    (14,723)   (30,279) 
Sales and marketing                (10,191)     (8,284)   (17,677) 
General and administrative         (10,609)     (7,837)   (18,402) 
Deferred stock-based                     -      (2,360)         -  
compensation                                                       
Amortisation of intangibles                                        
purchased                           (4,587)     (3,967)    (7,957) 
                                    --------    --------   --------
                                                                   
through business combination                                       
Total operating expenses           (42,843)    (37,171)   (74,315) 
                                    --------    --------   --------
                                                                   
Income from operations              14,424      11,523     25,020  
Interest, net                        1,673       1,009      2,902  
                                                                   
                                    --------    --------   --------
Income before income tax            16,097      12,532     27,922  
Provision for income taxes          (4,137)     (3,453)    (7,176) 
                                                                   
                                    --------    --------   --------
Net income                          11,960       9,079     20,746  
                                    --------    --------   --------
                                                                   
Net income                          11,960       9,079     20,746  
Other comprehensive income:                                        
Foreign currency adjustments        (5,895)      8,744    (10,225) 
Unrealised holding loss on                                         
available-for-sale securities,                                     
net of tax                            
of GBP301,000 (2005: GBP692,000)      (680)     (1,614)    (1,180)  
                                    --------    --------   --------
Total comprehensive income           5,385      16,209      9,341  
                                    --------    --------   --------
                                                                   
Earnings per share (assuming                                       
dilution)                                                          
Shares outstanding ('000)        1,420,175   1,424,612             
Earnings per share - pence             0.8         0.6             
Earnings per ADS (assuming                                         
dilution)                                                          
ADSs outstanding ('000)            473,392     474,871             
Earnings per ADS - cents               4.4         3.6             


(1)  US dollar amounts have been translated from sterling at the 
     31 March 2006 closing rate of $1.7346=GBP1 (see note 1)



                        ARM Holdings plc

               Consolidated balance sheet - US GAAP

 

 
                               31 March 31 December    31 March   
                                   2006        2005    2006 (1)   
                              Unaudited     Audited   Unaudited  
                                --------  ---------   ---------  
                                GBP'000     GBP'000       $'000  
Assets                                                           
Current assets:                                                  
Cash and cash equivalents       143,431     128,077     248,795  
Short-term investments           34,625      23,990      60,061  
Marketable securities             4,226       8,835       7,330  
Accounts receivable, net of                                      
allowance of                                                     
GBP2,461,000 (2005:              61,026      55,518     105,856  
GBP2,173,000) (see note 3)                                       
Inventory: finished goods         1,844       1,490       3,199  
Prepaid expenses and other       12,313      12,567      21,358  
assets                           
                                 --------   ---------   ---------
Total current assets            257,465     230,477     446,599  
                                                                 
Deferred income taxes             3,556       4,422       6,168  
Prepaid expenses and other        1,587       1,674       2,753  
assets                                                           
Property and equipment, net      12,987      12,803      22,527  
Goodwill                        381,669     385,572     662,043  
Other intangible assets          66,920      72,345     116,080  
Investments                       7,798       8,800      13,526  
                                 --------   ---------   ---------
Total assets                    731,982     716,093   1,269,696  
                                 --------   ---------   ---------
                                                                 
                                                                 
Liabilities and shareholders'                                    
equity                                                           
Accounts payable                  4,343       2,221       7,533
Income taxes payable             12,960      10,826      22,481  
Personnel taxes                   1,277       1,329       2,215  
Accrued liabilities              21,614      25,024      37,492  
Deferred revenue                 25,225      20,354      43,755  
Dividends payable                 6,918           -      12,000  
                                 --------   ---------   ---------
Total current liabilities        72,337      59,754     125,476  
                                                                 
Deferred income taxes             4,090       7,289       7,094  
                                 --------   ---------   ---------
Total liabilities                76,427      67,043     132,570  
                                 --------   ---------   ---------
                                                                 
Shareholders' equity                                             
Ordinary shares                     693         693       1,202  
Additional paid-in capital      444,084     425,252     770,308  
Deferred compensation           (19,248)     (4,404)    (33,387) 
Treasury stock, at cost          (2,005)    (16,315)     (3,478) 
Retained earnings               178,695     183,913     309,964  
Accumulated other comprehensive                                  
income:                                                          
Unrealised holding gain on                                       
available-for-sale                                               
securities, net of tax of         3,179       3,859       5,514  
GBP795,000 (2005:                                                
GBP1,096,000)                                                    
Cumulative translation           50,157      56,052      87,003  
adjustment                       --------   ---------   ---------
Total shareholders' equity      655,555     649,050   1,137,126  
                                 --------   ---------   ---------
                                                                 
Total liabilities and           731,982     716,093   1,269,696  
shareholders' equity             --------   ---------   ---------
                                                                 

 
(1) US dollar amounts have been translated from sterling at the 31
    March 2006 closing rate of $1.7346=GBP1 (see note 1)          

Notes to the Financial Statements

(1) Basis of preparation - reporting currency

The Group prepares and reports its financial statements in UK sterling. Purely for the convenience of the reader, the US GAAP income statement and balance sheet have been translated from sterling at the closing rate on 31 March 2006 of $1.7346=GBP1. Such translations should not be construed as representations that the sterling amounts represent, or have been or could be so converted into US dollars at that or at any other rate.

(2) Share-based compensation charges

Included within the income statement shown above are share-based compensation charges of GBP4.0 million: GBP0.2 million in cost of revenues, GBP2.3 million in research and development costs, GBP0.8 million in sales and marketing costs and GBP0.7 million in general and administrative costs.

(3) Accounts receivable

Included within accounts receivable at 31 March 2006 are GBP22.5 million (2005: GBP20.5 million) of amounts recoverable on contracts.

(4) Consolidated statement of changes in shareholders' equity (US GAAP)

 
                      Share Additional     Deferred  Treasury 
                    capital   paid-in  compensation     stock    
                              capital                           
                    GBP'000   GBP'000       GBP'000   GBP'000  
At 1 January                                                   
2006                   693    425,252        (4,404)  (16,315) 
Net income               -          -             -         -  
Dividends                -          -             -         -  
Unrealised holding       -          -             -         -  
losses on                                                      
available-for-sale                                             
securities                                                     
Deferred                                                       
compensation                                                   
arising on                                                     
share schemes            -     18,832       (18,832)        -  
Amortisation                                                   
of deferred                                                    
compensation             -          -         3,988         -  
Issuance of                                                    
shares                   -          -             -    21,267  
Purchase of                                                    
own shares               -          -             -    (6,957) 
Currency                 -          -             -         -  
translation         
adjustment                                                     
-------------       -------- ----------    ----------  --------
At 31 March                                                    
2006                   693    444,084       (19,248)   (2,005) 
-------------       -------- ----------    ----------  --------

 

 
                 Retained  Unrealised   Cumulative      Total  
                 earnings     holding  translation            
                                 gain   adjustment             
                  GBP'000     GBP'000      GBP'000    GBP'000   
At 1 January                                                   
2006              183,913       3,859       56,052    649,050  
Net income         11,960           -            -     11,960  
Dividends          (6,918)          -            -     (6,918) 
Unrealised                                                     
holding losses                                                 
on                                                             
available-for-                                                 
sale                                                           
securities              -        (680)           -       (680) 
Deferred                -           -            -          -  
compensation                                                   
arising on share                                               
schemes                                                        
Amortisation                                                   
of deferred                                                    
compensation            -           -            -      3,988  
Issuance of                                                    
shares            (10,260)          -            -     11,007  
Purchase of                                                    
own shares              -           -            -     (6,957) 
Currency                                                       
translation                                                    
adjustment              -           -       (5,895)    (5,895) 
-------------      --------   ---------    ---------   --------
At 31 March                                                    
2006              178,695       3,179       50,157    655,555  
-------------      --------   ---------    ---------   --------

(5) 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 share-based compensation charges and acquisition-related charges. All figures in GBP'000 unless otherwise stated.

                                  (5.1)    (5.2)    (5.3)    (5.4)   
                                                                    
                                Q1 2006  Q4 2005  Q1 2005  FY 2005 
Income from                                                         
operations                       14,424   14,094   11,523   47,917  
Acquisition-rel                                                     
ated charge -                                                       
amortisation of                                                     
intangibles                       4,587    4,809    3,967   17,726  
Acquisition-related 
charge -                                                       
deferred                                                            
stock-based                                                         
compensation                          -      479    2,066    5,496  
Other                                                               
stock-based                                                         
compensation                                                        
and related                                                         
payroll taxes                     3,988    2,628      294    4,873  
---------------------             -------  -------  -------  -------
Pro forma                                                           
income from                                                         
operations                       22,999   22,010   17,850   76,012  
---------------------             -------  -------  -------  -------
As % of revenue                    35.6%    35.0%    32.4%    32.7% 

 



 

                                  (5.5)    (5.6)    (5.7)    (5.8)   
                                                                    
                                Q1 2006  Q4 2005  Q1 2005  FY 2005 
Income before                                                       
income tax                       16,097   15,778   12,532   53,234  
Acquisition-relat                                                   
ed charge -                                                         
amortisation of                                                     
intangibles                       4,587    4,809    3,967   17,726  
Acquisition-related 
charge -                                                         
deferred                                                            
stock-based                                                         
compensation                          -      479    2,066    5,496  
Other stock-based                                                   
compensation and                                                    
related payroll                                                     
taxes                             3,988    2,628      294    4,873  
---------------------             -------  -------  -------  -------
Pro forma income                                                    
before income tax                24,672   23,694   18,859   81,329  
---------------------             -------  -------  -------  -------



 

                                             (5.9)     (5.10)    
                                                               
                                          31 March 31 December
                                              2006       2005      
Cash and cash equivalents                  143,431    128,077  
Short-term investments                      34,625     23,990  
Short-term marketable securities             4,226      8,835  
---------------------------                  -------   --------
Pro forma cash                             182,282    160,902  
---------------------------                  -------   --------


 

 
                              (5.11)    (5.12)    (5.13)    (5.14)   
                                                                     
                              Q1 2006   Q4 2005   Q1 2005   FY 2005  
Pro forma cash                                                       
at end of                                                            
period (as                                                           
above)                        182,282   160,902   141,785   160,902  
Less: Pro                                                            
forma cash at                                                        
beginning of                                                         
period (as                                                           
above)                       (160,902) (164,737) (142,817) (142,817)
                                                                     
Add back: Cash                                                       
outflow from                                                         
acquisitions                                                         
(net of cash                                                         
acquired)                           -     4,264    14,260    20,304  
Add back: Cash                                                       
outflow from                                                         
payment of                                                           
dividends                           -     4,677         -    10,436  
Add back: Cash                                                       
outflow from                                                         
purchase of                                                          
own shares                      6,957    10,773         -    16,211  
Less: Cash                                                           
inflow from                                                          
exercise of                                                          
share options                 (11,007)   (1,033)   (9,425)  (13,083) 
-------------------             -------   -------   -------   -------
Pro forma cash                                                       
generation                     17,330    14,846     3,803    51,953  
-------------------             -------   -------   -------   -------


 

                          (5.15)      (5.16)      (5.17)      (5.18)     
                                                                       
                          Q1 2006     Q4 2005     Q1 2005     FY 2005    
Net income                 11,960      12,977       9,079      41,880  
Acquisition-related 
charge -                                                         
amortisation                                                           
of intangibles              4,587       4,809       3,967      17,726  
Acquisition-related 
charge -                                                         
deferred                                                               
stock-based                                                            
compensation                    -         479       2,066       5,496  
Other                                                                  
stock-based
compensation                                                           
and related                                                            
payroll taxes               3,988       2,628         294       4,873  
Estimated tax                                                          
impact of                                                              
above charges              (2,464)     (3,346)     (1,831)     (8,912) 
---------------------       -------     -------     -------     -------
Pro forma net                                                          
income                     18,071      17,547      13,575      61,063  
---------------------       -------     -------     -------     -------
Dilutive                                                               
shares ('000)           1,420,175   1,431,084   1,424,612   1,427,013  
Pro forma                                                              
diluted EPS                  1.27p       1.23p       0.95p       4.28p 

Note

The results shown for Q1 2006, Q4 2005, and Q1 2005 are unaudited. The results shown for FY 2005 are audited. The financial information contained in this announcement does not constitute statutory accounts within the meaning of Section240 (3) of the Companies Act 1985. Statutory accounts of the Company in respect of the financial year ended 31 December 2005, 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, are available on ARM's website at www.arm.com and are in the process of being filed with the Registrar of Companies.

The results for ARM for Q1 2006 and previous quarters as shown reflect the accounting policies as stated in Note 1 to the US GAAP financial statements in the Statutory accounts of the company for the fiscal year ended 31 December 2005 and in the Annual Report on Form 20-F for the fiscal year ended 31 December 2004.

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 2004 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 wireless, networking and consumer entertainment solutions to imaging, automotive, security and storage devices. ARM's comprehensive product offering includes 16/32-bit RISC microprocessors, data engines, 3D 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, ARM Powered, RealView, SecurCore, TrustZone, Keil and ARM7TDMI are registered trademarks of ARM Limited. ARM7, ARM7TDMI-S, ARM9, ARM922T, ARM926E-S,, ARM946E-S, ARM11, ARM1176JZ-S, Cortex and MPCore are trademarks of ARM Limited. Artisan Components and Artisan are registered trademarks of ARM Physical IP, 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 (LSE: ARM and Nasdaq: ARMHY) together with its subsidiaries including ARM Limited, ARM Inc., ARM Physical IP Inc., Axys Design Automation Inc., Axys GmbH, ARM KK, ARM Korea Ltd, ARM Taiwan Ltd, ARM France SAS, ARM Consulting (Shanghai) Co. Ltd., ARM Belgium NV., ARM Embedded Technologies Pvt. Ltd. and Keil Elektronik GmbH.

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