Interim Results

ARC International Plc ARC International plc Announces Unaudited Preliminary Results for the Six Months Ended 30 June 2006; ARC Gaining Market Share over Competition Driven by Increases in Revenue, Royalties, Bookings, and License Agreements ARC International (LSE:ARK), the world leader in configurable multimedia subsystems and CPU/DSP processor cores, today announced its unaudited financial results for the six months ended 30 June 2006. Highlights from the First Half of 2006 (Compared to 1H 2005): -- Good financial foundation -- Revenue up 10% to GBP 6.0 million -- Royalties up 32% to GBP 1.5 million -- Bookings up 31% to a record GBP 8.3 million -- Cash generated from operating activities was GBP 0.5 million; Net loss was GBP 1.7 million -- Processor license agreements up 18% -- 20 processor contracts closed in 1H 2006 bringing the total number of ARC(TM) licensees to 127 -- ARC(TM) Media Subsystems and the 600/700 family of cores contributed 95% of processor license revenues -- Lower value legacy products no longer appreciably contributing to turnover -- New ARC(TM) Video and ARC Sound Advanced Subsystems -- Launched in February, ARC Video Subsystem already licensed by 6 companies -- Introduced ARC Sound Advanced Subsystem; already licensed by 2 companies Commenting on the company's performance, Carl Schlachte, president and chief executive officer, said, "During the first half of 2006, the company delivered a good financial performance by closing the highest number of contracts in the company's recent history and aggressively selling our newest configurable subsystems and processors. ARC has a strong foundation that will support the company's continued growth into the future. "For the second half of 2006, ARC will focus on winning more tier 1 licensees while making strategic investments to boost our ongoing sales and marketing efforts in key regions. We are optimistic about the prospects for the company and confident about trading in the second half of this year." Commenting on the financial results, Victor Young, chief financial officer, said, "We are seeing increased opportunities and new business fuelled by our multimedia subsystems, as evidenced by the increase in backlog and sales pipeline. Costs were slightly ahead of plan, due to higher sales commissions related to the increase in revenues in Asia, increase in professional fees, and other investments made in growing ARC's subsystem offerings. Bookings in Asia increased by approximately four times compared to the same period a year ago. We look for continued revenue growth in the second half of 2006." Statement from the President and Chief Executive Officer Overview During the first half of 2006 ARC delivered a good financial performance and strengthened its position as the leader in configurable processor technology. The results were driven by twenty new processor license agreements for ARC's patented subsystems and cores that will be designed into a range of high-growth applications. ARC's licensee base now stands at 127 OEM and semiconductor companies -- many industry leaders. Our newest products continue to sell well and command higher per-agreement prices. Today the ARC(TM) 600 and 700 core families and ARC Media Subsystems contributed approximately 95 percent of total processor licence revenue, which completes the shift in revenue away from lower value legacy products that the management team set out to achieve starting in 2004. In 2006 the configurable ARC Video and ARC Sound Advanced Subsystems were introduced and licensed by companies for chips going into next-generation consumer devices. ARC launched ConfigCon(TM), a worldwide developers conference series designed to educate the semiconductor industry on configurable processor technology and increase the adoption of our configurable solutions. The first event in Taiwan surpassed expectations, with almost 400 attendees and close to 20 companies participating in the event. Licensee Adoption of Configurability ARC's patented configurable subsystems and processors help companies developing semiconductor chips to gain a competitive advantage by enabling the creation of highly differentiated, lower cost products. These are reasons why industry analysts forecast that chips based upon configurable solutions will grow more than five times faster than chips using "fixed architecture" alternatives. ARC is leading this trend and helping accelerate the adoption of configurability globally. During the first six months of 2006, companies that announced they took licenses for an ARC configurable subsystem or core included: -- Atmel Corporation -- has taken a license for the ARC Video Subsystem. It will be designed into Atmel's next generation products targeting consumer electronics multimedia applications. -- BiTMICRO Networks -- has taken a license for the ARC 700 family of configurable cores. BiTMICRO will use ARC's configurable processors to develop low cost, next-generation system-on-chip (SoC) devices for their state-of-the-art E-Disk(TM) storage solutions. -- RF Microdevices -- has signed a license agreement for the configurable ARC, 600 core family, which will power future products in RFMD's fast-growing product line of programmable RF radios. -- SMSC -- has taken a license for the ARC 600 family of configurable processors for computing applications. The ARC 605 core is an optimal replacement for legacy 8-bit microcontrollers, while the ARC 610D and 625D cores are cost effective 32-bit CPUs/DSPs ideal for a wide range of general purpose embedded applications. -- TTPCom -- has taken a license for a configurable ARC 700 core. TTPCom has combined the ARC 700-class processor with its proven baseband technology to develop a highly optimized SoC design for its 3G Cellular Baseband Engine (CBEmacro) product. -- Undisclosed aerospace company -- has taken a license for the configurable ARC 725D core for use in a government satellite application. The ARC processor will enable the company's designers to create a chip that is ideally suited to the rigorous operating environment of space. ARC's Configurable Multimedia Subsystems ARC is the only company to provide configurable subsystems specifically designed to meet the requirements of multimedia applications. The ARC Media Subsystem family offers a range of audio, video, and imaging solutions as a single integrated, configurable platform. Each ARC Media Subsystem includes the necessary hardware, software, and development tools needed to complete an ARC-Based design and get to market quickly. -- ARC Video Subsystem -- In February of 2006 the ARC Video Subsystem was introduced. Within less than five months, six companies took licenses for the product for chips that will be designed into a range of multimedia consumer devices. This is the fastest rate of adoption of any of ARC's standalone microprocessor offerings. -- ARC Sound Advanced Subsystem -- In March 2006 ARC introduced the latest in its line of configurable multimedia subsystems: ARC Sound Advanced. Ideal for devices needing high definition audio capability, the ARC Sound Advanced Subsystem consumes low power and is programmable to enable licensees' differentiation to be added to the platform. Licensees include Oki Electric of Japan, which adopted the ARC Sound Advanced Subsystem for in-car audio applications. Expansion in Asia Asia represents one of the fastest growing markets for ARC's patented configurable subsystems and processors. Throughout 2006, ARC strengthened its position in this region through strategic sales and marketing investments, and design wins with industry leaders and high-growth start-up companies. As a result, revenue from companies in Asia represented close to 30 percent of revenue for the first half, a record high and up from less than five percent in the same period of 2005. Companies in Asia that announced they have taken licenses for ARC's solutions during the first six months of 2006 included: -- AVID Electronics Corporation -- has taken a license for the ARC Video Subsystem, which will enable AVID's design team to create leading-edge multimedia solutions that offer single- to high-definition audio and video functionality. This will help AVID expand into complementary markets with highly differentiated devices using a single ARC subsystem, thereby lowering their overall development cost. -- Oki Electric Industry Co., Ltd. -- has taken a license for the new ARC Sound Advanced Subsystem. Oki plans to incorporate the ARC Sound Advanced Subsystem into an ASSP targeting next generation in-car audio applications. -- Skymedi Corporation -- has taken a license for the ARC Video Subsystem to create a fully integrated SoC targeting the burgeoning multimedia player market. The new ARC-Based SoC will complement Skymedi's growing portfolio of flash memory products, and will enable system OEMs and ODMs to develop handheld multimedia players rapidly and inexpensively using Skymedi's solution. -- Taifatech -- has taken a license for a configurable ARC 700 core to develop ARC-Based SoCs for next-generation consumer devices. Taifatech's pioneering design will leverage ARC's configurable 700 CPU family to eliminate inflexible hardwired logic and consume less power in their SoC than is possible using fixed architecture processors. -- Toshiba Corporation -- has entered into a strategic collaboration with ARC that is intended to grow the worldwide semiconductor industry's adoption of configurable technology. Under the terms of the agreement, Toshiba Corporation has taken a multiyear license for ARC's ARChitect(TM) processor configurator, which offers a comprehensive set of design tools and resources. The companies will also collaborate on development of a next generation version of ARChitect that is more closely suited to the Media embedded Processor (MeP), Toshiba's proprietary configurable core. -- VXIS Technology Corporation -- has taken a license for the ARC Video Subsystem, which VXIS will use to create SoCs for the high-growth portable digital TV market. Investing for ARC's Future To help drive future growth in ARC's licensing business, the company is making strategic investments that will foster continued expansion of our licensee base and provide new, high value configurable solutions that complement our existing patented subsystems and processors. -- ConfigCon(TM) Developers Conference Series -- With industry leaders and DigiTimes Publications of Taiwan, ARC International launched the industry's first-ever developers conference dedicated to educating the semiconductor industry on configurability. Entitled "ConfigCon," the series will take place in some of the hottest markets for ARC's patented configurable solutions: Hsinchu, Taiwan, Shanghai, China, and Silicon Valley, United States. The first event in Taiwan "How Configurable SoC Technology is Enabling the Multimedia Market" received an overwhelmingly positive response. Close to 400 attendees listened to over 20 product and technology presentations from ARC and our partners. ConfigCon Shanghai will take place September 19, and ConfigCon Silicon Valley will take place October 31 and November 1. -- ARC's Taiwan Training Center -- ARC International has opened the industry's first comprehensive training center for configurable processor technology. Based in Hsinchu, Taiwan the training center features senior instructors from ARC and partner companies who will guide licensees and prospects in Greater China on the development of lower cost, highly differentiated chips using ARC's patented configurable products and third party technologies. -- ARC's Multimedia Subsystem Family -- To ensure ARC continues to meet the demand of licensees developing products for next-generation consumer applications, we are accelerating the development of the next two in ARC's multimedia subsystem family. The ARC Video Advanced and ARC Video HD (high definition) Subsystems are now under development by our UK-based engineering team and will be introduced over the next twelve to eighteen months. They will complement ARC's existing subsystem offerings and help maintain our leadership in the field of configurable platform solutions. Outlook for the Second Half of 2006 The management team is pleased with ARC's results for the first half of 2006. The company delivered a good financial performance, increased its licensee base, and continued to experience rapid adoption of our patented configurable subsystems and processors. ARC has a strong financial foundation that will support the company's continued growth into the future. For the second half of 2006, ARC will focus on winning more tier 1 licensees while making strategic investments to boost our ongoing sales and marketing efforts in key regions. We are optimistic about the prospects for the company and confident about trading in the second half of this year. CHIEF FINANCIAL OFFICER'S REVIEW Six months ended 30 June 2006 Revenue Total revenue in 1H 2006 was GBP 6.0 million, up 10% over the same period last year (1H 2005: GBP 5.4 million). Prior to currency translation, with virtually all sales in US dollars, revenue was up 6%. License and engineering income was up 2% at GBP 3.5 million (1H 2005: GBP 3.4 million). Maintenance and service income was up 15% at GBP 1.0 million (1H 2005: GBP 0.8 million). Royalty income increased 32% to GBP 1.5 million (1H 2005: GBP 1.2 million). Royalty income in 1H 2005 includes an advance non-refundable payment which represented 46% of the total royalties for the period. Sales in Europe were 18% of total sales, North America 55% and Asia 27%. From a product line perspective, 80% of revenue was from the SoC products with the remaining 20% delivered by the embedded software products. Costs Cost of sales of GBP 0.9 million increased 26% year over year (1H 2005: GBP 0.7 million). Gross margin decreased slightly to 85% (1H 2005: 87%). Net operating expenses including cost of sales increased by 5% to GBP 9.1 million (1H 2005: GBP 8.7 million). The company had 123 employees at 30 June 2006 compared with 129 at 30 June 2005. Research and development costs were flat year-over-year at GBP 3.2 million (1H 2005: GBP 3.2 million). Sales and marketing costs increased 30% to GBP 2.7 million (1H 2005: GBP 2.1 million). General and administration costs were flat year-over-year at GBP 1.6 million (1H 2005: GBP 1.6 million). Interest Interest income was down 8% year over year at GBP 0.7 million (1H 2005: GBP 0.8 million) due to a lower cash balance, and a decrease in the average interest rate on investments. Net loss Net loss was GBP 1.7 million (1H 2005: GBP 1.4 million). Loss per share increased to 1.17p (1H 2005: 0.97p). Cash flow and balance sheet The net cash outflow from operations was GBP 1.0 million (1H 2005: GBP 2.6 million). Capital expenditure was GBP 0.4 million (1H 2005: GBP 0.4 million). The movement in cash and short-term investments during the six months was an inflow of GBP 0.2 million (1H 2005: outflow of GBP 0.5 million). Total assets at 30 June 2006 were GBP 36.3 million (1H 2005: GBP 39.2 million), including cash and short-term investments of GBP 32.2 million (1H 2005: GBP 33.0 million). Dividend No interim dividend payment will be made for the six months ended 30 June 2006 (1H 2005: GBP Nil). Consolidated Income statement For the six months ended 30 June 2006 6 months 6 months 12 months ended ended ended 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) Notes GBP '000 GBP '000 GBP '000 ---------------------------------------------------------------------- Revenue 5,973 5,418 10,494 Net operating expenses 2 (9,141) (8,723) (17,442) ---------------------------------------------------------------------- Operating loss (3,168) (3,305) (6,948) Interest receivable 717 780 1,530 ---------------------------------------------------------------------- Loss before tax (2,451) (2,525) (5,418) Tax credit 763 1,152 1,077 ---------------------------------------------------------------------- Loss for the period (1,688) (1,373) (4,341) ---------------------------------------------------------------------- Basic and diluted loss per share - pence (1.17) (0.97) (3.05) Consolidated Statement of recognised income and expense For the six months ended 30 June 2006 6 months 6 months 12 months ended ended ended 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) Notes GBP '000 GBP '000 GBP '000 ---------------------------------------------------------------------- Loss for the period (1,688) (1,373) (4,341) Currency translation difference 4 (56) 29 36 Change in value of ESOP reserve 4 27 94 117 ---------------------------------------------------------------------- Total recognised expense for the period (1,717) (1,250) (4,188) ---------------------------------------------------------------------- Consolidated Balance sheets As at 30 June 2006 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) Notes GBP '000 GBP '000 GBP '000 ---------------------------------------------------------------------- Non-current assets Intangible assets 992 1,397 1,284 Property, plant and equipment 394 345 329 ---------------------------------------------------------------------- 1,386 1,742 1,613 Current assets Inventory 110 - - Trade and other receivables 2,573 4,393 3,679 Short term investments 19,539 13,798 10,534 Cash and cash equivalents 12,665 19,245 21,476 ---------------------------------------------------------------------- 34,887 37,436 35,689 Total assets 36,273 39,178 37,302 Current liabilities Obligations under finance leases - 3 - Trade and other payables 4,438 3,086 4,009 Other liabilities 151 218 218 Provisions 5 77 154 77 ---------------------------------------------------------------------- 4,666 3,461 4,304 Net current assets 30,221 33,975 31,385 Non-current liabilities Other payables 35 - - Provisions 5 170 248 209 ---------------------------------------------------------------------- 205 248 209 Net assets 31,402 35,469 32,789 Shareholders' equity Ordinary shares 150 148 149 Share premium 3,081 2,810 2,923 Exchangeable shares - 40 - Capital redemption reserve 162 162 162 Merger reserve 107 107 107 Other reserves 60,369 60,014 60,205 Cumulative translation adjustment (239) (190) (190) Retained earnings (32,228) (27,622) (30,567) ---------------------------------------------------------------------- Total Equity 4 31,402 35,469 32,789 ---------------------------------------------------------------------- Consolidated Cash flow statements For the six months ended 30 June 2006 6 months 6 months 12 months ended ended ended 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) Notes GBP '000 GBP '000 GBP '000 ---------------------------------------------------------------------- Cash flows from operating activities Cash used in operations 3 (1,024) (2,616) (4,330) Interest received 851 699 1,535 Taxes paid (59) (13) (83) Tax refund 755 1,059 1,059 ---------------------------------------------------------------------- Net cash generated (used) in operating activities 523 (871) (1,819) Cash flows from investing activities Purchase of property, plant and equipment (162) (103) (220) Purchase of intangible assets (264) (224) (466) Capitalisation of R&D assets (21) (62) (96) Movements on short term investments (9,005) (5,098) (1,834) Proceeds from sale of business - 108 327 ---------------------------------------------------------------------- Net cash (used) in investing activities (9,452) (5,379) (2,289) Cash flows from financing activities Net proceeds from issue of ordinary shares and ESOP reserve 186 630 727 Finance lease principal payments - (1) (4) ---------------------------------------------------------------------- Net cash generated in financing activities 186 629 723 Effects of exchange rate changes (68) 34 29 ---------------------------------------------------------------------- Net (decrease) in cash and cash equivalents (8,811) (5,587) (3,356) Cash and cash equivalents at 1 January 21,476 24,832 24,832 ---------------------------------------------------------------------- Cash and cash equivalents at end of period 12,665 19,245 21,476 ---------------------------------------------------------------------- NOTES TO THE ACCOUNTS 1. Basis of preparation These consolidated interim financial statements have been prepared in accordance with the accounting policies set out in the Annual Report of ARC International plc for the year ended 31 December 2005. The prior year comparatives are derived from audited financial information for ARC International plc as set out in the Annual Report for the year ended 31 December 2005 and the unaudited financial information in the interim financial statements for the six months ended 30 June 2005. These consolidated interim financial statements have been prepared under the historical cost convention, except in respect to certain financial instruments. In addition, these consolidated interim financial statements do not comply with all the disclosures in IAS 34 on interim financial reporting and are therefore not in full compliance with International Financial Reporting Standards. The consolidated accounts incorporate the accounts of the company and of each of its subsidiaries for the period to 30 June 2006. The consolidated interim financial statements for the six months ended 30 June 2006 are unaudited but have been reviewed by the auditors. The consolidated interim financial statements for the six months ended 30 June 2006 were approved by the directors on 1 August 2006. The financial information contained in this interim statement does not constitute accounts as defined by Section 240 of the Companies Act 1985. The statutory accounts for 2005 have been delivered to the Registrar of Companies. The auditors' opinion on those accounts was unqualified and did not contain a statement under 237 of the Companies Act 1985. 2. Summary of net operating expenses 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) GBP '000 GBP '000 GBP '000 ---------------------------------------------------------------------- Cost of sales (870) (690) (1,638) Research and development (3,240) (3,246) (6,432) Sales and marketing (2,684) (2,067) (4,523) General and administrative (1,599) (1,608) (3,033) Other expenses (748) (1,112) (1,816) ---------------------------------------------------------------------- Net operating expenses (9,141) (8,723) (17,442) ---------------------------------------------------------------------- 3. Reconciliation of net loss for the period to net cash outflow from operating activities 6 months 6 months 12 months ended ended ended 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) GBP '000 GBP '000 GBP '000 ---------------------------------------------------------------------- Net loss (1,688) (1,373) (4,341) Adjustments for: Gain on business disposal - (83) (327) Interest receivable (717) (780) (1,530) Tax credit (763) (1,152) (1,077) Amortisation 471 578 1,199 Depreciation 107 175 318 Goodwill impairment - 195 195 Share based award expense 171 247 431 (Increase) in inventories (110) - - (Increase) decrease in trade and other receivables 974 (821) (56) Increase in trade and other payables 570 520 1,096 (Decrease) in provisions (39) (122) (238) ---------------------------------------------------------------------- Cash used in operations (1,024) (2,616) (4,330) ---------------------------------------------------------------------- 4. Statement of changes in shareholders' equity Exchange- Capital Share Share able Merger redemption capital premium shares reserve reserve GBP '000 GBP '000 GBP '000 BP '000 GBP '000 ---------------------------------------------------------------------- At 1 January 2005 145 1,674 643 107 162 ---------------------------------------------------------------------- Shares issued 2 534 Exchangeable shares exercised 1 602 (603) Change in value of ESOP reserve Share based award reserve Exchange gain (Loss) for the period ---------------------------------------------------------------------- At 30 June 2005 148 2,810 40 107 162 ---------------------------------------------------------------------- Shares issued 1 73 Exchangeable shares exercised 40 (40) Change in value of ESOP reserve Share based award reserve Exchange gain (Loss) for the period ---------------------------------------------------------------------- At 31 December 2005 149 2,923 0 107 162 ---------------------------------------------------------------------- Shares issued 1 158 Change in value of ESOP reserve Share based award reserve Exchange (loss) (Loss) for the period ---------------------------------------------------------------------- At 30 June 2006 150 3,081 0 107 162 ---------------------------------------------------------------------- Cumulative Retained Other translation Profit/ reserves adjustment (loss) Total GBP '000 GBP '000 GBP '000 GBP '000 ---------------------------------------------------------------------- At 1 January 2005 59,767 (219) (26,343) 35,936 ---------------------------------------------------------------------- Shares issued 536 Exchangeable shares exercised 0 Change in value of ESOP reserve 94 94 Share based award reserve 247 247 Exchange gain 29 29 (Loss) for the period (1,373) (1,373) ---------------------------------------------------------------------- At 30 June 2005 60,014 (190) (27,622) 35,469 ---------------------------------------------------------------------- Shares issued 74 Exchangeable shares exercised 0 Change in value of ESOP reserve 23 23 Share based award reserve 184 184 Exchange gain 7 7 (Loss) for the period (2,968) (2,968) ---------------------------------------------------------------------- At 31 December 2005 60,198 (183) (30,567) 32,789 ---------------------------------------------------------------------- Shares issued 159 Change in value of ESOP reserve 27 27 Share based award reserve 171 171 Exchange (loss) (56) (56) (Loss) for the period (1,688) (1,688) ---------------------------------------------------------------------- At 30 June 2006 60,369 (239) (32,228) 31,402 ---------------------------------------------------------------------- 5. Provisions Total Short term Long term provision GBP '000s GBP '000s GBP '000s ---------------------------------------------------------------------- At 1 January 2005 237 287 524 Utilised (122) - (122) Reclassified from long term to short term 39 (39) - ---------------------------------------------------------------------- At 30 June 2005 154 248 402 ---------------------------------------------------------------------- Utilised (116) - (116) Reclassified from long term to short term 39 (39) - ---------------------------------------------------------------------- At 31 December 2005 77 209 286 ---------------------------------------------------------------------- Utilised (39) - (39) Reclassified from long term to short term 39 (39) - ---------------------------------------------------------------------- At 30 June 2006 77 170 247 ---------------------------------------------------------------------- The provision for restructuring costs represents onerous lease commitment for the Elstree, UK facility. Management anticipates utilisation of these provisions in 2007. About ARC International plc ARC International is the world leader in configurable subsystems and CPU/DSP processors that are used by semiconductor companies worldwide for next-generation system-on-chip (SoC) design. ARC's patented configurable processor technology enables the development of consumer, networking, mass storage and other cost-sensitive devices that are smaller and provide a higher degree of differentiation over what can be created using "fixed architecture" core alternatives. ARC International maintains a worldwide presence with corporate and research and development offices in California and Elstree, UK. For more information visit www.ARC.com. ARC International is listed on the London Stock Exchange as ARC International plc (LSE:ARK). ARC, ARC-Based, and the ARC logo are trademarks or registered trademarks of ARC International. All other brands or product names contained herein are the property of their respective owners. This release may contain "forward-looking statements" including statements concerning plans, future events or performance and underlying assumptions and other statements that are other than statements of historical fact. ARC's actual results for future periods may differ materially from those expressed in any forward-looking statements made by or on behalf of ARC. The factors that could cause actual results to differ materially include, without limitation, general economic and business conditions; potential for fluctuations in and unpredictability of ARC's quarterly results; assumptions regarding ARC's future business strategy; the ability of semiconductor partners to manufacture and market microprocessors based on the ARC(R) architecture; the acceptance of ARC technology by systems companies; the availability of development tools, systems software and operating systems; the rapid change in technology in the semiconductor industry and ARC's ability to develop new products in a timely manner; competition from other architectures; ARC's ability to protect its intellectual property; regulatory policies adopted by governmental authorities; risks associated with ARC's international operations; management of ARC's growth; ARC's ability to attract and retain employees; and other uncertainties that are discussed in the "Investment Considerations" section of ARC's listing particulars dated 28 September 2000 filed with the United Kingdom Listing Authority and the Registrar of Companies in England and Wales. CONTACT: ARC International Lee Garvin Flanagin, 408-437-3433 (Media) or Tulchan Communications Julie Foster, +44 20 7353 4200 (Investors)

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