Final Results
Arc International PLC
14 February 2007
Investor Contacts: Media Contact:
Juliet Clarke Lee Garvin Flanagin
Financial Dynamics ARC International
+44 20 7269 7288 +1 408 437 3433
ARC International plc Announces Unaudited Preliminary Results
For the Year Ended 31 December 2006
ARC Exceeds Market Expectations and Generates Positive Cash Flow with 28%
Revenue Growth
ELSTREE, England, 14 February 2007 - ARC International (LSE: ARK), the world
leader in configurable multimedia subsystems and CPU/DSP processor cores, today
announced its unaudited financial results for the full year ended 31 December
2006.
Highlights from Year Ended 31 December 2006 (compared to financial year 2005):
• Year of Record Growth
o Revenue up 28% to a record high of £13.4 million; 47% increase for 2H
2006 compared to 2H 2005
o Royalties up 30% to £3.4 million
o Bookings up 37% to £16.5 million
o Backlog (including deferred revenue) up 69% to £4.3 million
o Median deal sizes increased by 36%
o Revenue from customers in Asia up 239% to £3.0 million
• Net loss improved 74% to £1.1 million (2005: £4.3 million)
o Loss before tax was reduced by 50% from £5.4 million to £2.7 million
o Positive cash flow from operating activities; Closing cash and short
term investments position of £31.6 million
• Significant increase in new customers: now 137
o 25 new customers, 56% increase as compared to new customers in 2005
o 37 processor and subsystem contracts completed, up from 36 in 2005
o Completed a multiyear license agreement expected to be valued in the
region of $11 million with one of the largest U.S.-based semiconductor
companies
• Industry leading provider of multimedia solutions
o Released two new ARC(R) Media Subsystems
• ARC Video Subsystem
• ARC Sound Advanced Subsystem
o Introduced the VRaptor(TM) Media Architecture, which will form the
basis for future Media Subsystem development
Commenting on the company's performance, Carl Schlachte, president and chief
executive officer, said, "2006 was a year of record growth for ARC
International. ARC's revenue exceeded expectations and grew at a faster rate
than the overall market and its principal competitors by increasing 28 percent
in financial year 2006, and 47 percent in the second half. Royalties increased
to a record high, and ARC's growing portfolio of Media Subsystems have quickly
evolved into the company's most-popular products and helped drive ASPs to their
highest levels. We are pleased with the results and our leadership position
within the industry, and the company is well positioned for continued growth."
Commenting on the financial results, Victor Young, chief financial officer,
said, "We are pleased with the top line results for financial year 2006, and the
management of costs and cash flow. We effectively streamlined the company's
outside consultants and better managed operations activities to increase overall
effectiveness. As we move toward breakeven these efforts will continue, and we
will implement focused programs and spending to drive the next stage of our
strategy."
Statement from the President and Chief Executive Officer
Overview
ARC's strategy of becoming the leading provider of configurable media subsystems
and processors helped make 2006 the strongest in its history, and a year that
marked an important stage in the evolution of ARC as a global business and
leader within the semiconductor industry. Revenues, royalties, bookings,
backlog, and median deal size were significantly higher than in financial year
2005. As expected, ARC's newer products comprised of 92 percent of processor
license revenue, which bodes well for future royalty growth.
Furthermore, ARC's strategy has solidly differentiated it from its principal
competitors. ARC is the industry's only company providing a complete
configurable intellectual property (IP) solution for the development of advanced
system-on-chips (SoCs) targeting multimedia consumer applications. As a result,
ARC completed contract agreements with 56 percent more new customers than in the
previous financial year, beating its principal competitors in overall embedded
multimedia design wins.
Configurable Media Subsystems: Hitting the Industry Sweet Spot
Advanced consumer devices, such as digital televisions and mobile media players,
are placing tremendous pressures on semiconductor companies to create more
differentiated solutions at lower price points. Combined with ever-tightening
market windows, companies throughout the global chip industry are looking for
new ways to create next-generation SoCs to meet these stringent requirements.
ARC's configurable Media Subsystems are satisfying this demand. They reduce the
need for SoC designers to select and integrate the disparate hardware IP and
software components that are typically found within today's consumer electronic
devices. This reduces overall development and chip costs and helps bring
ARC-Based(TM) SoCs to market more quickly. Increasingly global semiconductor
companies are recognizing the value of ARC's configurable Media Subsystems and
now are actively evaluating and adopting our technology.
The success of ARC's Media Subsystems also is reflected in the company's
changing revenue composition. Since their introduction two years ago, ARC's
Media Subsystems have grown to comprise close to 50 percent of core license
revenue in financial year 2006. This underscores the value customers see in our
subsystems and how they are helping transform ARC into the "solution of choice"
for multimedia consumer applications.
In 2006 ARC released 2 new configurable subsystems to meet market demand: the
ARC Video and ARC Sound Advanced. ARC also introduced the VRaptor(TM) Media
Architecture, from which all future ARC Media Subsystems will be based.
Customers that announced they had taken licenses for ARC's Media Subsystems in
2006 included:
• Atmel Corporation - has taken a license for the ARC Video Subsystem, which
was selected after Atmel evaluated several alternatives because it found
the ARC Video Subsystem met the necessary criteria of low-cost and small
size, while observing Atmel's tight power budget.
• AVID Electronics - has taken a license for the ARC Video Subsystem, which
AVID will use to create multimedia, multi-formatted solutions that offer
single- to high-definition audio and video functionality.
• Oki Electric Industry Co. - has taken a license for the ARC Sound Advanced
Subsystem, which Oki plans to incorporate into an application specific
standard product (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.
• VXIS Technology - has taken a license for the ARC Video Subsystem, which
VXIS will use to create SoCs for the high-growth portable digital TV
market.
"Tier 1" Leaders Adopting ARC and Configurability
Another important indicator of the success of ARC's configurable solutions is
their adoption by industry leaders. In 2006 ARC announced a strategic
collaboration with Toshiba, the world's 4th largest semiconductor company
according to Gartner Dataquest. Under the terms of the agreement, Toshiba has
taken a multiyear license for the ARChitect(TM) Processor Configurator, and ARC
and Toshiba will collaborate on the development of a next-generation version of
ARChitect that is suited to Toshiba's Media embedded Processor (MeP).
Throughout 2006 other "Tier 1" semiconductor companies also took licenses for
ARC's configurable Media Subsystems and processors.
Customers that announced they had taken licenses for ARC's configurable
processors in 2006 included:
• Unnamed industry leader - one of the largest U.S.-based semiconductor
companies has taken a multiyear license expected to be valued in the region
of $11 million for ARC's patented multimedia subsystems and configurable
processors.
• Abilis Systems - adopted the configurable ARC 605 processor for the
development of a single-chip TV receiver solution targeted at mobile TV
terminals.
• 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 SoC devices for their state-of-the-art
E-Disk(TM) solid state storage solutions.
• Boston Circuits, Inc. - has taken a license for the ARC 750D configurable
CPU for integration into Boston Circuits' gCORE(TM) family of multi-core
processors.
• Honeywell - has taken a license for the configurable ARC 725D core, which
Honeywell will incorporate into a satellite application that requires
semiconductor chips with high levels of security and reliability, as well
as the ability to consume as little power as possible over extended periods
of time.
• Motorola (formerly known as TTPCom Limited) - has taken a license for a
configurable ARC 700 family core. Motorola has incorporated an ARC 700
processor together with TTPCom's proven baseband technology to develop a
highly optimized SoC design for the 3G Cellular Baseband Engine (CBEmacro)
product.
• RF Micro Devices - has signed a license agreement for the configurable
ARC 600 core family, which will power future products in RFMD's
fast-growing product line
• SMSC - has taken a license for the ARC 600 family of configurable
processors for computing applications.
• 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 a member from ARC's patented configurable 700 CPU
family to eliminate inflexible hardwired logic and consume less power than
is possible using fixed architecture processors.
Expansion in Asia
China has one of the world's largest and fastest growing communities of
semiconductor companies. To take advantage of this growing market opportunity
and as part of the company's international expansion plan, in September of 2006
ARC officially launched into China. Within a few months ARC already had its
first customer in China, which underscores the attractiveness of ARC's
configurable solutions to customers in that region.
As a result of ARC's expansion and momentum in Asia, customers there contributed
a record 26 percent of processor revenue in financial year 2006. China
complements ARC's ongoing business operations in Asia in Japan, Korea, and
Taiwan. ARC is considering expanding to other parts of Asia that would benefit
from the company's configurable Media Subsystems and processors.
Growing Ecosystem Supporting Configurability
SoC design in the 21st century is complex and multifaceted. Many different
types of tools are required to complete an SoC, and having an ecosystem of
companies supporting ARC's configurable solutions is essential. Throughout 2006
an increasing number of tools and solutions became available from companies
supporting ARC's configurable products. Composed of close to 30 companies such
as Microsoft, Dolby, DTS, Cadence Design Systems, this growing ecosystem is
further evidence of the increasing adoption of configurability by the
semiconductor industry, and the trend of third party companies to provide design
tools and solutions needed for advanced SoC design using configurability.
Third party companies that announced support for ARC's patented configurable
solutions in 2006 included:
• Azuro, Inc. - announced that its PowerCentric low power methodology now is
available for ARC licensees designing audio- or video-centric digital
chips for embedded applications.
• Cadence Design Systems - has integrated the Cadence(R) Encounter(R) digital
integrated circuit (IC) design platform into ARC's patented ARChitectTM
Processor Configuration tool. ARC also joined Cadence's OpenChoice IP
Program and became one of Cadence's featured intellectual property (IP)
partners.
• Semiconductor Manufacturing International Corporation (SMIC) - one of the
leading semiconductor foundries in the world, SMIC entered into a strategic
partnership that will help bring the benefits of ARC's patented
configurable technology to mainland China.
• Tenison Design Automation - Tenison's VTOC products will be integrated into
the ARChitect Processor Configurator. This will enable ARC customers to
generate SystemC cycle accurate models of ARC's configurable processors and
subsystems earlier in the SoC design process, thereby enabling creation of
optimized software for ARC-Based SoC implementations.
Marketing Excellence
An important element of ARC's achievements in financial year 2006 was the
focused marketing programs it executed in key regions. In particular, ARC's
ConfigCon(TM) Developer Conference series attracted more than 1,000 SoC designers
from Taiwan, China, and Silicon Valley to learn about why configurability and
ARC's Media Subsystems are being rapidly adopted by companies around the world.
ConfigCon also helped contribute to the revenue base in financial year 2006 and
going forward.
Another indicator of the effectiveness of ARC's worldwide marketing programs was
recognition by Cadence Design Systems of ARC's "proactive and innovative
marketing campaigns that attracted industry-wide recognition." Accordingly, ARC
was presented the "Collaboration Award for Excellence in Joint Marketing" by
Cadence's chief executive officer after Cadence evaluated more than 200
companies in its partner network.
Embedded Systems Business Unit
ARC's Embedded Systems Business products comprised 17 percent of overall revenue
for year 2006. ARC will now concentrate on enhancing these products for ARC's
Media Subsystems as part of ARC's overall business, not as a separate business
unit.
Board Transitions
ARC's Chairman, Dr. Peter van Cuylenburg, has decided not to offer himself for
re-election at the forthcoming AGM. During his three and a half years as
Chairman, Peter has made an invaluable contribution to the turnaround and
strategic re-positioning of the company. I would like to thank Peter personally
for all his support and guidance, and on behalf of the staff and shareholders
for his contribution to the company. The Nomination Committee of the Board has
recommended, following a selection process, that Richard Barfield be appointed
to replace Dr. Peter van Cuylenburg after the AGM, and this has been approved by
the Board. Richard Barfield is a Chartered Accountant who has been a
non-executive director at ARC for over three years and is currently the Chairman
of ARC's Audit Committee. Furthermore, Victor Young has been appointed to the
Board. Victor has successfully fulfilled the role of Chief Financial Officer
since joining ARC in December of 2005, and his promotion to the Board is well
deserved. There are no details regarding Richard Barfield's or Victor Young's
appointments to the Board required to be disclosed under Rule 16.4 of the
Listing Rules of the UK Listing Authority.
2007 Outlook
Due to the strengths of the multimedia market and the increasing demand for
configurable technology, financial year 2006 was a year of record growth for ARC
International. All key financial metrics improved, revenue exceeded market
expectations with 28 percent growth, and the company generated positive cash
flow from operations. Today ARC International increasingly is seen as the "
solution of choice" for SoC designs targeting multimedia consumer devices.
In 2007 ARC sees continued strength in the multimedia market. As a result, ARC
will continue to focus on enhancing its leadership in multimedia subsystems and
configurable processor technology. ARC also will cultivate further the growing
ecosystem of optimized solutions provided by third party companies.
CHIEF FINANCIAL OFFICER'S REVIEW
Year ended 31 December 2006
Revenue
Total revenue in 2006 was £13.4 million, up 28% over the same period last year
(2005: £10.5 million). Prior to currency translation, with virtually all sales
in US dollars, revenue was up 30% over 2005. License and engineering revenue was
£7.9 million (2005: £6.1 million). Maintenance and service revenue was £2.1
million (2005: £1.7 million). Royalties were £3.4 million (2005: £2.7 million).
Sales in North America were 65% of total sales, Europe 13% and Asia 22%. Revenue
in Asia increased 239% to £3.0 million in 2006 (2005: £0.9 million). From a
product line perspective, 83% of revenue was from the SoC products and the
remaining 17% was from the embedded software products.
With the increase and growth in revenue, total revenue per average headcount
improved to £108k (2005: £82k).
Costs
Cost of revenue was down 3% to £1.6 million (2005: £1.6 million). Average
headcount in the business for financial year 2006 was 124 employees compared
with 128 for 2005. Research and development costs, net of amounts capitalised,
were up 4% to £6.7 million (2005: £6.4 million); sales and marketing costs were
up 11% to £5.0 million (2005: £4.5 million), and general and administration
costs were up 7% to £3.3 million (2005: 3.0 million).
Operating expenses increased 1% to £17.6 million (2005: £17.4 million). Loss
before interest, taxation, depreciation and amortisation improved 39% to £3.2
million (2005: £5.2 million).
Interest
Interest income was £1.5 million (2005: £1.5 million).
Net loss
Net loss improved significantly to £1.1 million (2005: £4.3 million). Loss per
share improved to 0.78p (2005: 3.05p loss).
Cash flow and balance sheet
Cash used in operations was £1.7 million (2005: £4.3 million). Capital
expenditure was £0.9 million (2005: £0.8 million). The outflow of cash and
short-term investment (cash held on deposit) was £0.4 million (2005: £1.5
million). Net assets at 31 December 2006 were £32.0 million (2005: £32.8
million), including cash and short-term investments of £31.6 million (2005:
£32.0 million).
Dividend
No dividend payment will be made for the year ended 31 December 2006.
Consolidated profit and loss account
for the year ended 31 December 2006
Year ended Year ended
31 December 31 December
2006 2005
(unaudited) (audited)
£ '000 £ '000
Revenue 13,411 10,494
Net operating expenses (note 2) (17,636) (17,442)
Operating loss (4,225) (6,948)
Interest receivable 1,509 1,530
Loss before income tax (2,716) (5,418)
Tax credit (note 3) 1,583 1,077
Loss for the year attributable to equity shareholders (1,133) (4,341)
Basic and diluted loss per share (pence) (0.78) (3.05)
Consolidated balance sheet
as at 31 December 2006
31 December 31 December
2006 2005
(unaudited) (audited)
£'000 £'000
Assets
Non current assets
Intangible assets 843 1,284
Property, plant and equipment 424 329
Trade and other receivables 372 -
1,639 1,613
Current assets
Inventory 203 -
Trade and other receivables 2,959 3,679
Current corporation tax receivable 700 -
Short term investments 13,500 10,534
Cash and cash equivalents 18,146 21,476
35,508 35,689
Total assets 37,147 37,302
Liabilities
Current liabilities
Trade and other payables (note 5) 4,762 4,009
Other liabilities - 218
Provision (note 6) 306 77
5,068 4,304
Net current assets 30,440 31,385
Non-current liabilities
Provision (note 6) 38 209
38 209
Net assets 32,041 32,789
Shareholders' equity
Ordinary shares 151 149
Share premium 3,256 2,923
Capital redemption reserve 162 162
Merger reserve 107 107
Other reserves 60,482 60,205
Cumulative translation adjustment (457) (190)
Retained earnings (31,660) (30,567)
Total shareholders' equity 32,041 32,789
Consolidated cash flow statement
for the year ended 31 December 2006
Year ended Year ended
31 December 31 December
2006 2005
(unaudited) (audited)
£'000 £'000
Cash flows from operating activities
Cash used in operations (note 4) (1,678) (4,330)
Interest received 1,474 1,535
Taxes paid (97) (83)
Tax refund 755 1,059
Net cash generated/(used) in operating activities 454 (1,819)
Cash flows from investing activities
Purchase of property, plant and equipment (353) (220)
Purchase of intangible assets (552) (466)
Capitalisation of R&D assets (21) (96)
Movements on short term investments (2,966) (1,834)
Proceeds from sale of business - 327
Net cash used in investing activities (3,892) (2,289)
Cash flows from financing activities
Net proceeds from issue of ordinary shares 375 727
Finance lease principal payments - (4)
Net cash generated from financing activities 375 723
Effects of exchange rate changes (267) 29
Net decrease in cash and cash equivalents (3,330) (3,356)
Cash and cash equivalents at 1 January 21,476 24,832
Cash and cash equivalents at 31 December 18,146 21,476
Statement of changes in shareholders' equity
Capital Cumulative
Share Share Merger redemption Other translation Retained
Group capital premium reserve reserve reserves adjustment earnings Total
(unaudited) £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 1 January 2006 149 2,923 107 162 60,205 (190) (30,567) 32,789
Shares issued 2 333 335
Change in value of ESOP 40 40
reserve
Share based award reserve 277 277
Exchange loss (267) (267)
Loss for the year (1,133) (1,133)
At 31 December 2006 151 3,256 107 162 60,482 (457) (31,660) 32,041
1 Basis of preparation
The Preliminary Report is unaudited and does not constitute statutory accounts
within the meaning of s240 of the Companies Act 1985. The statutory accounts
for the year ended 2005 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 consolidated financial statements 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. The consolidated financial statements have been
prepared under the historical cost convention, except in respect of certain
financial instruments.
The preparation of financial statements in conformity with IFRS 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
31 December 31 December
2006 2005
(unaudited) (audited)
£ '000 £ '000
Operating expenses
Cost of sales (1,591) (1,638)
Research and development (6,716) (6,432)
Sales and marketing (5,023) (4,523)
General and administrative (3,254) (3,033)
Other expenses (1,052) (1,816)
Net operating expenses (17,636) (17,442)
Year ended Year ended
31 December 31 December
2006 2005
(unaudited) (audited)
£ '000 £ '000
Loss before interest, taxation, depreciation and amortisation (3,173) (5,236)
Depreciation (229) (318)
Amortisation (823) (1,199)
Impairment of goodwill - (195)
Operating loss (4,225) (6,948)
3 Tax credit for the period
Year ended Year ended
31 December 31 December
2006 2005
(unaudited) (audited)
£'000 £'000
UK
Adjustments in respect of prior periods (research
and development credit) (1,673) (1,166)
Foreign tax
On profits for the period 2 60
Irrecoverable withholding tax 88 29
(1,583) (1,077)
The research and development tax credit of £1,673,000 in 2006 includes the claim
for 2003 and 2004 (2005: £1,166,000 included the credit for 2002). The claim for
2004, £700,000, is included in amounts receivable as it was outstanding at 31
December 2006 (2005: nil).
4 Cash used in operations
Year ended Year ended
31 December 31 December
2006 2005
(unaudited) (audited)
£'000 £'000
Net loss for the year (1,133) (4,341)
Adjustments for:
Gain on business disposal - (327)
Interest receivable (1,509) (1,530)
Tax credit (1,583) (1,077)
Amortisation 823 1,199
Depreciation 229 318
Goodwill impairment - 195
Loss on disposal of property, plant and equipment 5 -
Share based award expense 277 431
(Increase) in inventories (203) -
(Increase)/decrease in trade and other receivables 393 (56)
Increase in trade and other payables 965 1,096
Increase/(decrease) in provisions 58 (238)
Cash used in operations (1,678) (4,330)
5 Trade and other payables-current
31 December 31 December
2006 2005
(unaudited) (audited)
£'000 £'000
Trade payables 768 611
Other taxes and social security costs 122 158
Accruals 2,038 2,013
Deferred revenue 1,834 1,227
Trade and other payables-current 4,762 4,009
6 Provisions
Current Non-current Total provision
(unaudited) £'000s £'000s £'000s
At 1 January 2006 77 209 286
Utilised (77) - (77)
Reclassified from non-current to current 209 (209) -
Charges to the income statement 97 38 135
At 31 December 2006 306 38 344
The utilisation of the provisions in 2006 relates to onerous lease commitments
in Elstree, UK. A provision of £135,000 was established for the onerous lease
commitment in Santa Cruz, USA, as the facility was closed in January 2007. The
balance of the provision £209,000 represents an onerous lease commitment and the
associated restoration costs for the Elstree, UK facility. Management
anticipates the utilisation of the Elstree provision over the next year, as the
lease terminates in July 2007, and the Santa Cruz provision over the next two
years, as the lease terminates in May 2008.
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, USA, 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, ARChitect, 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.
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