Final Results
Arc International PLC
20 February 2008
Media Contact: Investor Contact:
Lee Garvin Flanagin Juliet Clarke/Matt Dixon
ARC International Financial Dynamics
+1 408 437 3433 +1 44 20 7831 3113
ARC International plc Announces Unaudited Preliminary Results
For the Year Ended December 31, 2007
Dollar Revenue Increases 17%
Dollar Royalties Increase 54%
Strategic Acquisitions Position ARC for Continued Growth
SAN JOSE, Calif., and ST. ALBANS, England, February 20, 2008 - ARC International
(LSE: ARK), the world leader in multimedia subsystems and configurable CPU/DSP
cores, today announced its unaudited preliminary results for the full year ended
December 31, 2007.
Highlights from Year Ended December 31, 2007 (Compared to Financial Year 2006)
$ £ % Increase 2
Total Revenue 1 $28.9 million £14.4 million +17%
Royalty Revenue $9.7 million £4.9 million +54%
Bookings $37.3 million £18.7 million +23%
Total Backlog $16.6 million £8.3 million +96%
Licensing Revenue 1 $15.0 million £7.4 million +2%
1 Revenue of $28.9 million excluded an estimated $0.8 million of revenues from
an acquisition made during the year. As a result of the completion of
purchase accounting analysis these revenues have been offset against acquired
goodwill.
2 On a dollar basis
• 2007 closed with record highs in backlog and sales pipeline
• Net loss without acquisitions decreased 10% to £1.0 million. Net loss with
acquisitions increased to £2.5 million
• Closing cash and short term investment position remain strong at £21.2 million
• Completed and integrated strategic acquisitions
o Alarity, Teja, and Tenison establish ARC's ability to deliver vertically
integrated multimedia solutions to high value semiconductor companies
o Sonic Focus adds a new, complementary class of customer and revenue
channel through licensing its audio enhancement software directly to
OEMs
• New first-time royalty contributions; Increase in ARC-BasedTM unit shipments
o 6 post 2004 contracts contributed royalty revenues
• Total ARC customers now at 144
o 20+ customer contracts announced in 2007
o Intel signs new multi-year, royalty bearing licensing agreement
o Broadcom signed a new ten year licensing agreement
o $15 million agreement with one of the world's largest consumer
electronics companies
Commenting on the company's performance, Carl Schlachte, president and chief
executive officer, said, "2007 was a year of important achievements and solid
growth for ARC International. ARC's revenue growth again outpaced the
semiconductor market. Royalties increased to a record high and contracts
completed since 2004 began to contribute royalty revenue during the year. Two
of the largest customer agreements in the company's history were announced,
including Intel, and ARC enters 2008 with record highs in backlog and the sales
pipeline.
"Three acquisitions were completed and integrated in 2007, and already are
contributing to ARC's ability to build deeper relationships with a greater
number of high value semiconductor companies. The additions of Teja, Tenison,
and Alarity fill out ARC's technology. Management now is focusing on more
vertical solutions and adding new types of customers and revenue channels to
leverage the existing business with semiconductor companies. Sonic Focus is the
first such acquisition: For the first time in ARC's history the company will
derive licensing and royalty fees directly from OEMs, which typically are higher
than those obtained from chip firms and creating more demand for ARC-Based
products."
Commenting on the financial results, Victor Young, chief financial officer,
said, "We were particularly pleased with the strong growth in royalty revenue.
While the fourth quarter reflected softness some customers in North America were
experiencing as a result of economic conditions, management remains confident
about the market prospects for 2008 and the record highs in the sales pipeline
and backlog reflect this potential. Contracts that were delayed to 2008 from
the fourth quarter are expected to close within the first half of this year.
Cost savings have been realized as a result of integrating the acquired
companies, and we will look to maximize additional opportunities moving
forward."
Statement from the President and Chief Executive Officer
Overview
In 2007 ARC International continued to make good progress in expanding the use
of its products and brand. The company's revenue growth again outperformed the
semiconductor industry and many competitors. More high value customers took
licensing agreements in the year, including Intel, and three strategic
acquisitions were completed and integrated. ARC introduced several new
multimedia subsystems and configurable cores, and contracts completed since 2004
started to contribute to ARC's royalty stream as planned.
Strategic Direction and 2007 Acquisitions
The consumer electronics market continues to drive much of the semiconductor
industry. But many devices, such as camera-enabled cell phones and MP3 players,
still offer mediocre quality video and audio. Delivering the highest quality
multimedia experience to consumers - regardless of form factor - presents a
significant market opportunity and is a key part of ARC's strategy. I call this
"Enabling the YouTube Generation," which was outlined in my keynote presentation
at the ConfigConTM Silicon Valley developer conference December 2007. A
highlight video of the conference is available on ARC's Website.
To bolster ARC's multimedia products serving these opportunities in the
semiconductor market and to further increase revenues, ARC acquired Teja,
Tenison, and Alarity. These acquisitions were a cost-effective way for ARC to
obtain important tools and software, which combined with ARC's subsystems and
cores provide the basis for ARC to develop more of a vertically integrated
solution for chip designers. By offering more of the solution ARC can command a
higher premium on licensing fees. Customer feedback from these acquisitions has
been positive, and as a result ARC already is engaged with a greater number of
high value companies building chips for audio and video applications.
Management expects to be able to announce the first licensing agreements as a
result of these discussions within the next few quarters.
Entering Complementary Markets
ARC's ability to develop and deliver integrated multimedia solutions to the
semiconductor industry is established. Now ARC can target a new class of
customers and add new sources of revenue to complement ARC's existing
semiconductor licensing business. The acquisition of Sonic Focus in 2008 brings
these opportunities to ARC. Sonic Focus licenses its award-winning sound
enhancement software directly to OEMs. By obtaining royalties directly from the
OEM rather than semiconductor suppliers, Sonic Focus products can command much
higher per unit royalty revenue than semiconductor intellectual property (IP)
companies normally obtain.
Furthermore, the acquisition of Sonic Focus provides additional leverage for
ARC's traditional licensing business with chip designers. By having an OEM
select Sonic Focus's audio software to semiconductor firms, those semiconductor
suppliers looking to win business with that OEM are more motivated to adopt an
ARC solution for their chip design.
Announced acquisitions:
• Sonic Focus, Inc.
Sonic Focus, based in Northern California, provides award-winning audio
enhancement software, restoring natural surround sound to digitally compressed
stereo files. Sonic Focus has an established revenue stream and growing
customer list of leading OEMs. The company already has achieved design wins in
a number of desktop PCs, laptops, and a range of consumer electronics products.
Sonic Focus's artisans and engineers draw upon decades of close partnerships
with music icons and media companies.
• Alarity Corporation, Inc.
Alarity has a renowned team of specialists in multimedia software applications
based in St. Petersburg, Russia. Prior to the acquisition, Alarity was engaged
in select opportunities with larger ARC customers using ARC's multimedia
subsystems and configurable processors. The integration of Alarity will make
available its full set of software resources to a broader number of ARC
customers worldwide.
• Teja Technologies
Teja, located in Northern California, develops software used in the creation of
chips implementing multiple processors. Teja was founded in 1998 with funding
from venture firms such as the Mayfield Fund and Intel Capital. Their customer
list included companies such as Intel, Cisco Systems, Samsung, and Sun
Microsystems. Their multiprocessor technology will be instrumental to ARC's
future multimedia subsystems.
• Tenison Technology EDA, Ltd.
Tenison, located in Cambridge, England provides highly accurate simulation
models of processors and system-on-chips (SoCs). The acquisition includes key
members of Tenison's engineering team, patents, and products. Tenison's
customer list included companies such as Broadcom, Freescale, and Renesas. This
technology will be key to providing ARC's customers with accurate simulation
models of next-generation multimedia solutions.
Market Adoption of ARC(R) Multimedia Subsystem and Configurable Cores
During 2007 ARC announced licensing agreements with over 20 semiconductor
companies located in Asia, North America, and Europe. In particular, ARC
announced one of the largest agreements in the history of the semiconductor IP
industry and a new agreement with long-time customer Intel. While not all of
the 20-plus contracts were completed during the trading period, the quantity
reflects the ongoing appeal of ARC's multimedia subsystems and configurable
cores for a variety of growing end markets.
• Agreements with High Value Companies
o Intel - signed a new multi-year, royalty bearing licensing agreement
that includes several ARC products. Additionally, ARC provides comprehensive
support and training to Intel development centers in North America.
o Unnamed Consumer Electronics Company - signed a $15 million multi-year
licensing agreement. The customer's identity is confidential, but is one of the
largest consumer electronics companies in the world.
o Broadcom - extended its existing ARC relationship with a new ten year
licensing agreement. Broadcom has standardized on ARC's configurable technology
for high-volume audio or video devices.
• Customer Agreements for Multimedia Applications
o Augusta Technology for next-generation mobile solutions
o Fullhan Microelectronics for advanced multimedia products
o NextWave Wireless for Mobile TV receivers
o Qpixel Technology for video compression engines
o VisionFlow for ultra low power H.264 media devices
o Unnamed customer for multi-standard digital TV receivers
• Customer Agreements for Medical Applications
o CVRx for implantable blood pressure monitoring and treatment systems
o Unnamed customer for implantable pacemaker products
o Unnamed customer for various implantable medical devices
• Customer Agreements for Government/Security Applications
o Edgewater Computer Systems for military aircraft
o Unnamed customer for military and government products
• Customer Agreements for Networking/Communications Applications
o AD Technology for power line communications (PLC) chips
o Crystal Media for VoIP solutions
o iVivity for multi-protocol acceleration engines
o SiConnect for PLC chips
o Teranetics for advanced communications applications
o Unnamed customer for peripheral devices
• Customer Agreements for Other Applications
o Phison Electronics for next-generation flash NAND drives
o NemeriX for ultra low power GPS chipsets
o Semtech for mixed-signal semiconductor products
o Unnamed leading smart card provider for high volume security
applications
Board Changes
Steven Gunders was appointed to the Board of Directors as Non-Executive Director
in June, 2007. He became Chairman of the Remuneration Committee and a member of
the Audit Committee.
Outlook
ARC enters 2008 with the strongest backlog and sales pipeline in the company's
history. This is a reflection of the increasing market recognition and adoption
of ARC's vertically integrated multimedia solutions for growing end markets.
The acquisition of Sonic Focus announced February 12, 2008 adds a new,
higher-value revenue channel and complementary customer base to ARC. This and
the continuing strength of the business give management confidence about the
trading prospects for the year.
CHIEF FINANCIAL OFFICER'S REVIEW
For the year ended December 31, 2007
Revenue
Total revenue in 2007 in U.S. dollars was up 17% to $28.9 million (2006: $24.8
million). Total revenue in sterling was £14.4 million, up 7% over the same
period last year (2006: £13.4 million). License and engineering revenue in U.S.
dollars was up 2% to $15.0 million (2006: $14.7 million). In sterling, with
effects of currency translation, license and engineering revenue was down 6% at
£7.4 million (2006: £7.9 million). Maintenance and service revenue in U.S.
dollars was up 11% to $4.2 million (2006: $3.8 million). In sterling,
maintenance and service revenue was up 2% at £2.12 million (2006: £2.07
million). In U.S. dollars, royalty revenue was up by 54% to $9.7 million (2006:
$6.3 million). In sterling, royalty revenue increased 44% to £4.9 million (2006:
£3.4 million). (Royalty income in 2007 includes advance non-refundable payments
which represented 18% of the total royalties for the period).
Sales in Europe were 20% (2006: 13%) of total sales, North America 65% (2006:
65%) and Asia 15% (2006: 22%).
Costs
Cost of sales decreased 10% to £1.44 million (2006: £1.59 million). Gross margin
increased to 90% (2006: 88%). Net operating expenses increased by 14% to £18.3
million (2006: £16.0 million).
The company had 196 employees at December 31, 2007 compared with 126 at December
31, 2006. The 58% growth in headcount was due to the three acquisitions.
Research and development costs increased 11% to £7.4 million (2006: £6.7
million). Sales and marketing increased 10% to £5.5 million (2006: £5.0
million). General and administration costs increased 13% to £3.7 million (2006:
£3.3 million). Other expenses, comprised of depreciation and amortization,
increased to £1.7 million (2006: £1.1 million) due to additional amortization of
intangibles purchased from the acquisitions. The incremental operating expenses
excluding amortization as a result of the three acquisitions during the year
were £1.6 million in 2007. Incremental amortization expenses associated with
acquired technologies and intangible assets were £0.5 million in 2007.
Interest
Interest income was down 3% to £1.47 million (2006: £1.51 million) due to a
decrease in the average cash balance offset by an increase in the interest rate
on investments.
Net loss
Net loss was £2.5 million (2006: £1.1 million). Loss per share increased to
1.69p (2006: 0.78p).
Cash flow and balance sheet
The net cash outflow from operations increased to £5.1 million (2006: £1.7
million). Capital expenditure, including payments made for the three
acquisitions and investments in associate, was £8.1 million (2006: £0.9
million). The movement in cash and short-term investments during the year was an
outflow of £10.4 million (2006: £0.4 million). Total net assets at December 31,
2007 were £30.3 million (2006: £32.0 million), including cash and short-term
investments of £21.2 million (2006: £31.6 million).
Dividend
No interim dividend payment will be made for the year ended December 31, 2007
(2006: £Nil).
Acquisitions
During the period ARC acquired the key assets of Teja Technologies for a total
consideration of £2.5 million, Tenison Technology EDA Limited for a total
consideration of £1.1 million, and Alarity Corporation, Inc. for a total
consideration of £3.0 million. See note 6 for details.
Consolidated income statements
for the year ended December 31, 2007
Year ended Year ended
December 31 December 31
2007 2006
(unaudited) (audited)
Note £ '000 £ '000
Revenue 14,401 13,411
Cost of sales (1,437) (1,591)
Gross profit 12,964 11,820
Operating expenses 2 (18,305) (16,045)
Operating loss (5,341) (4,225)
Finance income 1,470 1,509
Share of post-tax loss of associate (22) -
Loss before income tax (3,893) (2,716)
Tax credit (net) 1,389 1,583
Loss for the year attributable to equity shareholders (2,504) (1,133)
Basic and diluted loss per share (pence) (1.69) (0.78)
Consolidated statements of recognized income and expense
for the year ended December 31, 2007
Year ended Year ended
December 31 December 31
2007 2006
(unaudited) (audited)
Notes £'000 £'000
Loss for the period (2,504) (1,133)
Currency translation difference 4 (54) (267)
Change in value of ESOP reserve 4 75 40
Total recognised expense for the period (2,483) (1,360)
Consolidated balance sheets
as at December 31, 2007
December 31 December 31
2007 2006
(unaudited) (audited)
Notes £'000 £'000
Assets
Non current assets
Intangible assets 7,506 843
Property, plant and equipment 1,537 424
Investment in associate 414 -
Trade and other receivables 417 372
9,874 1,639
Current assets
Inventory 72 203
Trade and other receivables 4,241 2,959
Current corporation tax receivable 1,368 700
Short term investments 11,145 13,500
Cash and cash equivalents 10,100 18,146
26,926 35,508
Total assets 36,800 37,147
Liabilities
Current liabilities
Trade and other payables 5,729 4,762
Deferred tax liabilities 143 -
Provision 5 163 306
6,035 5,068
Net current assets 20,891 30,440
Non-current liabilities
Other payables 126 -
Deferred tax liabilities 346 -
Provision 5 20 38
492 38
Net assets 30,273 32,041
Shareholders' equity
Ordinary shares 4 153 151
Share premium 4 3,683 3,256
Other reserves 4 61,037 60,751
Cumulative translation adjustment 4 (511) (457)
Retained earnings 4 (34,089) (31,660)
Total shareholders' equity 30,273 32,041
Consolidated cash flow statements
for the year ended December 31, 2007
Year ended Year ended
December 31 December 31
2007 2006
(unaudited) (audited)
£'000 £'000
Cash flows from operating activities
Cash used in operations (note 3) (5,058) (1,678)
Interest received 1,636 1,474
Taxes paid (28) (97)
Tax credits received 701 755
Net cash used in operating activities (2,749) 454
Cash flows from investing activities
Purchase of property, plant and equipment (1,502) (353)
Purchase of intangible assets (195) (552)
Capitalization of R&D assets (272) (21)
Movements on short term investments 2,355 (2,966)
Investment in associate (286) -
Purchase of Alarity (2,299) -
Purchase of Tenison (1,087) -
Purchase of Teja Technologies (2,461) -
Net cash used in investing activities (5,747) (3,892)
Cash flows from financing activities
Net proceeds from issue of ordinary shares 504 375
Net cash generated from financing activities 504 375
Effects of exchange rate changes (54) (267)
Net decrease in cash and cash equivalents (8,046) (3,330)
Cash and cash equivalents at January 1 18,146 21,476
Cash and cash equivalents at December 31 10,100 18,146
NOTES
1. Basis of presentation
The preliminary results are unaudited and do not constitute statutory accounts
within the meaning of s240 of the Companies Act 1985. The statutory accounts for
the year ended 2006 have been delivered to the Registrar of Companies. The
auditors' opinion on these accounts was unqualified and did not contain a
statement made under s237 (2) or s237 (3) of the Companies Act 1985.
The preliminary results of ARC International plc have been prepared in
accordance with the EU Endorsed International Financial Reporting Standards
(IFRS), IFRIC interpretations and the
Companies Act 1985 applicable to companies reporting under IFRS. These have
been prepared in accordance with the Listing Rules of the Financial Services
Authority. In preparing the preliminary results, management have used the
principal accounting policies as set out in the Group's annual report and
accounts for the year ended December 31, 2006. The preliminary results have
been prepared under the historical cost convention, except in respect of certain
financial instruments.
The preliminary results incorporate the accounts of the Company and each of its
subsidiaries for the period to December 31, 2007. All new acquisitions are
accounted for under the purchase method from the date of acquisition.
The preparation of the preliminary results in conformity with IFRSs requires the
use of certain critical accounting estimates. It also requires management to
exercise its judgment in the process of applying the Group's accounting
policies. Although these estimates are based on management's best knowledge of
the amount, event or actions, actual results ultimately may differ from those
estimates.
2. Summary of operating expenses
Year ended Year ended
December 31 December 31
2007 2006
(unaudited) (audited)
£ '000 £ '000
Operating expenses
Research and development (7,423) (6,716)
Sales and marketing (5,518) (5,023)
General and administrative (3,678) (3,254)
Other expenses (1,686) (1,052)
Net operating expenses (18,305) (16,045)
3. Cash used in operations
Year ended Year ended
December 31 December 31
2007 2006
(unaudited) (audited)
£'000 £'000
Net loss for the year (2,504) (1,133)
Adjustments for:
Interest receivable (1,470) (1,509)
Tax credit (1,389) (1,583)
Amortization 1,211 823
Depreciation 475 229
Loss on disposal of property, plant and equipment 20 5
Share based award expense 286 277
Share loss from associate 22 -
(Increase) in inventories 153 (203)
(Increase)/decrease in trade and other receivables (477) 393
Increase/(decrease) in trade and other payables (1,224) 965
Increase/(decrease) in provisions (161) 58
Cash used in operations (5,058) (1,678)
4. Statement of changes in shareholders' equity
Cumulative
Share Share Other translation Retained
Group capital premium reserves adjustment earnings Total
£'000 £'000 £'000 £'000 £'000 £'000
At January 1, 2006 (audited) 149 2,923 60,474 (190) (30,567) 32,789
Shares issued 2 333 335
Change in value of ESOP reserve 40 40
Share based award reserve 277 277
Exchange loss (267) (267)
Loss for the year (1,133) (1,133)
At December 31, 2006 (audited) 151 3,256 60,751 (457) (31,660) 32,041
Shares issued 2 427 429
Change in value of ESOP reserve 75 75
Share based award reserve 286 286
Exchange loss (54) (54)
Loss for the year (2,504) (2,504)
At December 31, 2007 (unaudited) 153 3,683 61,037 (511) (34,089) 30,273
5. Provisions
Current Non-current Total provision
£'000s £'000s £'000s
At January 1, 2006 (audited) 77 209 286
Utilised (77) - (77)
Reclassified from non-current to current 209 (209) -
Charges to the income statement 97 38 135
At December 31, 2006 (audited) 306 38 344
Utilised (181) - (181)
Reclassified from non-current to current 38 (38) -
Charges to the income statement - 20 20
At December 31, 2007 (unaudited) 163 20 183
The utilisation of the provisions in 2007 relates to onerous lease commitments
in Elstree, UK and for the onerous lease commitment in Santa Cruz, USA. The
balance of the provision of £183,000 represents the restoration costs for the
Elstree, UK facility. The Elstree lease terminated in July 2007 and there is
uncertainty as to the timing and amount of the restoration payments
6. Acquisitions
The group purchased Tenison Technology EDA Limited on June 14, 2007 for a total
consideration of £1,107,000, Alarity Corporation, Inc. on September 21, 2007 for
a total consideration of £3,048,000 and certain assets of Teja Technologies,
Inc. on March 30, 2007 for £2,461,000.
All intangible assets were recognized at their respective fair values. The
residual excess over the net assets acquired is recognized as goodwill in the
financial statements. The fair values are subject to adjustments in respect of
achieving specified net asset amounts, which affect intangible assets for
developed core technology, net tangible assets, deferred tax, and goodwill.
Fair values assigned to the acquiree's identifiable assets and liabilities have
been determined provisionally. Any adjustments to these provisional values as a
result of completing work on the fair values of the assets and liabilities
acquired will be recognised within 12 months of the acquisition date and
recognised as if they occurred as at the date of acquisition.
Tenison Technology EDA Limited
ARC International acquired 100% of the voting shares in Tenison Technology EDA
Limited.
The fair value of the acquisition is for the net assets and includes intangible
assets for developed core technology.
Goodwill of £992,000 represents the value of synergies and assembled work force.
Teja Technologies
In the Teja purchase, only key assets were acquired. The acquisition includes
Teja's software products, key customer contracts, its engineering team, and
patents for Teja's award-winning technology.
The fair value of the acquisition is predominantly for intangible developed core
technology, and to a lesser extent, customer relationships, trade receivables,
and deferred revenue.
Goodwill of £478,000 represents the value of synergies and assembled work force.
Alarity Corporation, Inc.
ARC International acquired 100% of the voting shares in Alarity Corporation,
Inc.
The fair value of the acquisition is for the net assets and for intangible
developed core technology.
Goodwill of £1,944,000 represents the value of synergies and assembled work
force.
About ARC International plc
ARC International is the world leader in multimedia subsystems and configurable
CPU/DSP processors. Used by over 140 companies worldwide, ARC's configurable
solutions enable the creation of highly differentiated system-on-chips (SoCs)
that ship in hundreds of millions of devices annually. ARC's patented
subsystems and cores are smaller, consume less power, and are less expensive to
manufacture than competing products.
ARC International maintains a worldwide presence with corporate and research and
development offices in San Jose and Lake Tahoe, Calif., St. Albans, England, and
St. Petersburg, Russia. 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, ARChitect, and the ARC logo, ConfigCon, and Sonic Focus and the
Sonic Focus 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 the development, implementation, and release of features described
herein, statements concerning plans, future events or performance and underlying
assumptions and other statements that are other than statements of historical
fact. These are at the sole discretion of ARC International. 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 September 28, 2000 filed with the United Kingdom Listing
Authority and the Registrar of Companies in England and Wales.
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