Interim Results
ARC International plc
ARC INTERNATIONAL PLC
RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2004
ARC International plc (LSE: ARK), a world leader in configurable processor cores
and application platforms for digital media, consumer and communications devices
announces its unaudited financial results for the six months ended 30 June 2004.
Highlights:
-- Turnover £6.2 million ($11.3 million) from £5.3million ($8.5 million) in 1H
2003, up 18% in sterling and 33% in dollars.
-- Operating costs before exceptionals, amortisation and depreciation £10.3
million: reduced by 26% over 1H'03 (1H 2003: £14.0 million)
-- Pre-exceptional net loss £4.1 million: improved 59% over 1H 2003 (1H 2003:
£10.0 million)
-- Net loss including exceptionals £3.3 million, improved 66% over 1H 2003 (1H
2003: £9.7 million)
-- Operating cash outflow £5.2 million: reduced 45% year over year (1H 2003:
£9.5 million); year end cash at £36.2 million
-- 11 new processor licenses signed, including 5 new licenses for the ARC
600(TM) core
-- Strengthened top management team with 3 new appointments
-- Completed sale of peripherals business to TransDimension, Inc. for £3.6
million resulting in a provisional net gain of £1.9 million and initial cash
proceeds of £2.5 million in this period
Commenting on the results, Carl Schlachte, President and CEO, said:
"We are encouraged by several significant improvements in ARC's business in the
first half of 2004. Our processor license revenue improved with the addition of
11 new licenses, including 5 for the ARC 600 processor core. Additionally, we
had record royalties and shipments of products based on ARC processors.
We have sold our USB business, which reduces our stated restructuring charge and
contributes to working capital. Our turnover is up, costs and headcount are down
and our pre-exceptional net loss has reduced by 59%, year-on-year. In the second
half, our focus will be on completing our restructuring plan and adding new
partners and licensees for our recent product offerings."
For further information, please contact:
ARC International plc
Carl Schlachte Chief Executive Officer, +44 (0) 20 8236 2800
Monica Johnson Chief Financial Officer, +44 (0) 20 8236 2800
Tulchan Communications
Julie Foster Consultant, +44 (0) 20 7353 4200
Tim Lynch Consultant, +44 (0) 20 7353 4200
CEO's Statement
Overview
The first half of 2004 has seen a major improvement in ARC's performance.
Revenues in US dollars grew 25% sequentially and 33% year on year. After the
impact of currency fluctuations, sequential revenue growth in sterling was 14%
and 18% year on year. Royalty income reached a further record level as did
overall shipments of ARC processor-based products.
The pre-exceptional net loss for 1H 2004 was significantly reduced to £4.1
million. The steps taken to reduce operating expenses, excluding exceptionals,
amortisation and depreciation, within the business delivered a 21% reduction
sequentially and 26% over the same period last year. In addition, operating cash
outflow was down 45% year on year to £5.2 million.
Across our product areas of processors and peripherals, we won 24 new designs
during the first half of the year, including 11 new processor and 13 new
peripheral licenses. Given our focus on new processor products, we have been
encouraged by the first 5 new licenses closed for the ARC 600 processor core.
Additionally, we recently launched the newest processor, the ARC 700 processor
core, which is now the lowest silicon area 400 MhZ processor in its class. We
are also pleased to have completed sale of our USB business to TransDimension
Inc. and look forward to a successful partnership to provide our customers with
an integrated USB and processor solution.
Management
There were several management changes during the first half of the year,
beginning with the appointment of Carl Schlachte as the new CEO in February.
Carl brings a strong background in semiconductor IP, with over 20 years in the
industry at companies including ARM and Motorola.
Other more recent additions to the management team include the following:
Andy Jaros (41) - Vice President, North America Sales. Andy has over 15 years of
experience in the semiconductor industry. Prior to joining ARC, he was the
Director of Strategic Partner Sales for ARM Ltd. Before his key
revenue-generating roles at ARM, Andy worked at Motorola in Sales.
Derek Meyer (44) - Vice President, Marketing. Derek joins ARC with 20 years in
semiconductor, embedded systems and software experience, including over 10 years
in Semiconductor IP. He was most recently VP of Business Development and
Strategy at Ceva and prior to that spent 6 years at MIPS Technologies as VP of
Marketing & Sales and later VP of Field Operations.
Craig Slayter (53) - Vice President, Embedded Software. Craig brings over
twenty-five years of experience as a successful high-technology start-up
entrepreneur. Prior to joining ARC International, he co-founded oDesk
Corporation and was a founding board member and vice president of Sales at
Intacct Corporation. Previously, he was CEO of RealChip Communications, a
fabless semiconductor company and a senior vice president for Phoenix
Technologies.
Strategic Redirection
The company has made significant progress in the strategic redirection of the
business announced in February. The cost reductions are on track, as evidenced
by the 21% reduction in sequential operating costs, excluding exceptionals,
amortisation and depreciation.
Although we had previously announced the closure of our Nashua site with the
completion of USB product development, we were able to achieve a much more
successful outcome with the sale of the business to TransDimension, Inc. The
sale generated a purchase price of £3.6 million ($6.65 million) and net cash
proceeds of £2.5 million ($4.6 million) in this period, allowing the company to
avoid a large portion of the restructuring charges that would have otherwise
resulted from the closure. The recognition of future proceeds of £0.9 million
($1.65 million), which will be receivable through the period to June 2005, has
been deferred. The company will use the proceeds to fund the working capital
requirements for the second half of the year.
As announced in February, ARC's strategy is to focus R&D efforts on processor
development while partnering for related technology. Progress in this area was
marked by the announcement of several new partnership agreements as described
below.
Once the remainder of the structural changes have been implemented, ARC's
half-yearly cost structure (excluding depreciation and amortisation) is on track
to decrease by 40% from the Q4 2003 run rate of £12.6 million to the £7.6
million range by the end of 2004. Once that cost level has been reached, modest
revenue growth should allow the company to reach breakeven.
As a result of the changes announced and the sale of the USB business, the
company has taken an exceptional charge of £1.1 million in the first half
related to severance, facility and equipment charges. This charge is
significantly less than the previous estimate due to the sale of the USB
business and favourable restructuring initiatives.
SoC Solutions Business
This business generated 78% of ARC's revenues in the first half of 2004 through
sales of processor, USB and ARC processor-based software products.
The ARC processor lies at the center of the SoC Solutions Business. ARC
processors are synthesizable, configurable and extendible, enabling users to
fully optimize the architecture for their specific applications. The ARC 600
CPU/DSP is an easy-to-use RISC processor core that enables customers to
implement a low power, low cost solution while meeting their performance
requirements. At the heart of the ARC 600 is a 32-bit five-stage RISC
architecture. By combining RISC and DSP functions within a single core, the ARC
600 can replace a dual processor system and dramatically reduce area and power.
The next generation of ARC's processor family, the ARC 700, was announced in
Nuremberg, Germany on February 17th at the Embedded World trade show. The ARC(TM)
700 CPU/DSP is a 7 stage 32-bit scalar RISC architecture that is ideally suited
for high data rate applications. While capable of high clock rates, the ARC 700
has been carefully crafted to not make large tradeoffs in area for performance.
As a result, the ARC 700 is one of the smallest processors in its performance
class. We are encouraged by the interest received by both new and existing
customers.
Embedded System Software Business
This business segment consists of embedded system software products used to
provide the application platform in embedded systems. The system tools along
with ARC's real-time operating system (RTOS), called MQX, is well-accepted by
embedded system designers using Motorola and other processors, along with its
protocol and security software stacks.
The embedded software business represented 22% of the revenue for the first half
of the year. Although the revenue was slightly below expectations, we have made
adjustments to the cost structure and appointed a new General Manager with
extensive software industry experience to focus on this business segment.
Customers
ARC sold 11 licenses to new and repeat customers during the first half of 2004
including the following:
Digeo(TM), - a leading provider of media center software and services, licensed the
ARC 600 core and ARC's MetaWare tools for use in its media center chipset.
Digeo's X-Stream(TM) Chipset features the industry's highest level of integration
and dramatically cuts cost for media center devices. The chipset combines the
functions of over two-dozen chips, resulting in power and space savings as well
as increased reliability.
Tektronix, Inc. (NYSE: TEK), - a leading worldwide provider of test, measurement
and monitoring instrumentation equipment, licensed the ARC 600 core, the ARC
MQX(TM) RTOS, MetaWare tools.
SanDisk Corporation, - the world's largest supplier of flash storage products,
licensed the ARC 600 processor core and MetaWare development tools for use in
their next generation of flash storage products. SanDisk designs, manufactures
and markets digital imaging and audio storage products using its patented high
density flash memory and controller technology. These products are sold under
the SanDisk label and by OEMs for use in products ranging from portable music
players and digital cameras to smart phones and handheld computers.
Partnerships
ARC's strategic shift in focus, as announced in February, included an emphasis
on partnering with external companies who provide additional components for SoC
designs in those same markets. As evidence of progress on this shift, ARC
announced a number of new partnerships:
GreenHills - a recognized market leader in embedded software development tools
and royalty-free real-time operating systems (RTOS). Through this partnership
with ARC, Green Hills Software, Inc. will retarget its MULTI(R) Integrated
Development Environment (IDE), debug and emulation tools to support ARC's
configurable processors, including the ARCtangent(TM)-A4, the ARC 600 and ARC 700
processors.
On2 Technologies, Inc - a leading supplier of video compression software.
Through this relationship, On2 will port their VP6 video codec to the ARC
processor core. VP6 is On2's latest video compression software and it is used on
PCs, set-top boxes, games and wireless consumer electronics products.
Emulation and Verification Engineering (EVE) - offers innovative intellectual
property (IP) and hardware-assisted verification solutions and services. EVE
will integrate ARC's MetaWare debugger into ZeBu, its verification system. The
resulting verification system will allow customers to download ARC IP into their
FPGA-based hardware development system and achieve fast simulation times and
efficient system debug.
Outlook
We are encouraged by the results we achieved in the first half of the year. Our
processor business grew both in new licenses and in royalties from products
shipping for previous license sales. The sale of the USB business will allow the
company to fund working capital from the sale rather than the current cash
balance. Cost reductions are on track, and when combined with the revenue growth
achieved, enabled measurable progress in closing the gap towards profitability.
In the second half, our focus will be on completing our restructuring plan and
adding new partners and licensees for our recent product offerings.
Financial Review
Six months ended 30 June 2004
Turnover
Total turnover at £6.2 million was up 33% at constant exchange rates and up 18%
from the same period in the previous year with currency impact (2003: £5.3
million). License income was £3.8 million (2003: £3.8 million). Maintenance and
service income was £0.9 million (2003: £1.0 million) and royalty income was £1.5
million (2003: £0.5 million). 78% of the revenue was generated by SoC products
and the remaining 22% by embedded software products. Within the SoC segment,
£1.3 million was generated by peripheral products that represent the business
sold to TransDimension.
Costs
Cost of sales was £0.9 million (2003: £0.8 million), resulting in a gross margin
of 85% (2003: 85%). Total operating expenses (excluding exceptional costs,
amortisation of goodwill and depreciation) decreased 26% to £10.3 million (2003:
£14.0 million).
Total headcount in the business at 30 June 2004 was 129 employees compared with
205 at 30 June 2003. Research and development costs were down 28% to £4.7
million (2003: £6.5 million), sales and marketing costs were down 45% to £2.6
million (2003: £4.7 million) and general and administrative costs were up 6% to
£2.2 million due to one time charges (2003: £2.1 million).
Interest
Interest income decreased 59% to £0.7 million (2003: £1.7 million) due to lower
cash balances.
Net loss
The net loss before exceptional items was £4.1 million (2003: £10.0 million).
Net loss including exceptional items was £3.3 million (2003: £9.7 million).
Exceptional items are comprised of restructuring provision charges of £1.1
million relating to reductions in workforce announced in February 2004 and
onerous leases and a provisional net gain of £1.9 million on the sale of the USB
business. The provisional net gain represents the initial net cash proceeds
received less associated fees and asset transfers. Two additional payments are
outstanding including £0.5 million due on 31/12/04 and £0.4 million due on
15/6/05. Both payments will be recognised as and when they fall due.
Cash flow and balance sheet
The net cash outflow from operations was £5.2 million (2003: £9.5 million).
Capital expenditure was £0.4 million (2003: £1.5 million). Net assets at 30 June
2004 were £37.3 million (30 June 2003: £55.5 million), including net funds £36.2
million (30 June 2003: £44.9 million).
Dividend
No interim dividend payment will be made in respect of the six months ended 30
June 2004.
ARC International plc
Consolidated profit and loss account
for the six months ended 30 June 2004
6 months ended 6 months ended
30 June 30 June
2004 2003
(unaudited) (unaudited)
£ '000 £ '000
Turnover 6,210 5,285
Operating costs
---------------------------------------------------------------------------------
Goodwill amortisation (408) (1,936)
Exceptional (costs)/gain (5) (1,058) 296
Other operating costs (11,451) (15,854)
---------------------------------------------------------------------------------
(12,917) (17,494)
Operating loss (6,707) (12,209)
Exceptional gain - on business disposal (4) 1,855 -
---------------- -------------------
Loss on ordinary activities before interest
& tax (4,852) (12)
Interest receivable and similar income 684 1,683
---------------- -------------------
Loss on ordinary activities before tax (4,168) (11)
Tax credit on loss on ordinary activities 885 822
---------------- -------------------
Retained loss for the period (3,283) (9,704)
---------------- -------------------
Basic loss per share (2.37)p (3.63)p
Diluted loss per share (2.37)p (3.63)p
Pre-exceptional loss per share (2.95)p (3.74)p
Summary of operating expenses
Operating costs
Costs of sales (925) (780)
Research & development (4,672) (6,493)
Sales & marketing (2,556) (4,664)
General & administrative (2,167) (2,053)
Depreciation of fixed assets (1,131) (1,864)
Amortisation of goodwill (408) (1,936)
Exceptional costs - provision release 0 536
Exceptional costs - restructuring
provision (1,058) (240)
---------------- -------------------
Total operating expenses (12,917) (17,494)
---------------- -------------------
ARC International plc
Consolidated balance sheet
as at 30 June 2004
30 June 30 June 31 December
2004 2003 2003
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Fixed assets
Intangibles assets 638 5,830 1,048
Tangible assets 2,509 5,914 3,697
------------------------------------
3,147 11,744 4,745
------------------------------------
Current assets
Stock - 86 22
Debtors 3,219 3,841 3,174
Investments-bank deposits 31,244 42,900 34,579
Cash at bank and in hand 4,921 1,983 2,579
------------------------------------
39,384 48,810 40,354
Creditors-amounts fully due within one
year (3,968) (3,947) (3,792)
------------------------------------
Net current assets 35,416 44,863 36,562
Total assets less current liabilities 38,563 56,607 41,307
Provision for liabilities and charges
(5) (1,312) (1,144) (918)
------------------------------------
Net assets 37,251 55,463 40,389
------------------------------------
Capital and reserves
Called-up share capital 144 144 144
Share premium account 1,456 1,355 1,450
Exchangeable shares 673 751 673
Capital redemption reserve 162 162 162
Merger reserve 107 107 107
Other reserves 59,230 60,524 59,230
Profit and loss account (24,521) (7,580) (21,377)
------------------------------------
Total shareholders' funds 37,251 55,463 40,389
------------------------------------
ARC International plc
Consolidated cash flow statement
for the six months ended 30 June 2004
6 months 6 months
ended ended
30 June 2004 30 June 2003
(unaudited) (unaudited)
£'000 £'000
Net cash outflow from operating
activities (3) (5,233) (9,510)
Returns on investments, servicing of
finance
Taxes paid (54) (44)
Tax refund 1,275 871
Interest received 590 1,892
Bank interest paid (1) (1)
--------------------------
1,810 2,718
Capital expenditure and financial
investment
Purchase of tangible fixed assets (362) (1,529)
Disposal of tangible fixed assets 0 170
Share buyback 0 (48,280)
--------------------------
(362) (49,639)
Acquisitions and disposals
Proceeds from sale of business (4) 2,539 0
--------------------------
Net cash outflow before management of
liquid resources
& financing (1,246) (56,431)
--------------------------
Management of liquid resources
Movement on term deposits 3,335 55,164
--------------------------
Financing
Financing - issue of ordinary share
capital to satisfy share option
exercises 6 308
Capital element of finance lease
rentals 0 (1)
-------------
Net cash inflow from financing 6 307
--------------------------
Increase/(Decrease) in cash during the period (2) 2,095 (960)
--------------------------
(1) Reconciliation of net cash flow to movement in
net funds
6 months 6 months
ended ended
30 June 2004 30 June 2003
(unaudited) (unaudited)
£'000 £'000
Increase/(Decrease) in cash in the
period 2,095 (960)
Cash outflow from increase in liquid resources (3,335) (55,164)
--------------------------
(1,240) (56,124)
Exchange movements 247 22
--------------------------
Movement in net funds (993) (56,102)
Net funds at beginning of period 37,158 100,985
--------------------------
Net funds at end of period 36,165 44,883
--------------------------
Cash at bank
(2) Analysis of net funds and in hand Investments Total
(unaudited) (unaudited) (unaudited)
£'000 £'000 £'000
As at 1 January 2004 2,579 34,579 37,158
Exchange 247 - 247
Cash flow 2,095 (3,335) (1,240)
--------------------------------------
At 30 June 2004 4,921 31,244 36,165
--------------------------------------
(3) Reconciliation of operating loss to net cash flow from
operating activities
6 months ended 6 months ended
30 June 2004 30 June 2003
(unaudited) (unaudited)
£'000 £'000
------------------------------------------------------------------------------------------
Operating loss (6,707) (12,209)
Depreciation 1,131 1,864
Amortisation of goodwill 408 1,936
Loss on disposal of fixed assets 206 -
(Increase)/decrease in stocks (16) 2
(Increase)/decrease in debtors (2) 949
(Decrease) in creditors (647) (630)
Increase/(decrease) in provisions 394 (1,422)
----------------------------
Net cash outflow from operating activities (5,233) (9,510)
----------------------------
(4) Exceptional gain - on sale of 6 months
business ended
30 June
2004
(unaudited)
£ '000
Cash consideration received 2,539
Less costs of disposal (453)
Write down of goodwill (2)
Stock disposed (38)
Net tangible assets disposed of (190)
Foreign exchange (1)
-------------
Gain on sale of business 1,855
-------------
On 30 June 2004, the Company completed an agreement to sell the
peripherals business and certain associated assets and liabilities
to TransDimension, Inc for a purchase price of £3.6 million ($6.65
million). Net cash consideration of £2.5 million ($4.6 million) was
received in the period. The remainder of the consideration is in
the form of a promissory note for $1.65 million. This note is
payable in two instalments, $1 million is payable on 31 December
2004 and $650,000 is payable on 15 June 2005. The note also accrues
interest at a fixed rate of 5% per annum.
The amounts under the promissory note have not been recognised
within the above gain on sale as of 30 June 2004. These amounts
will be recognised as and when they fall due.
(5) Provisions for liabilities and
charges 6 months ended
30 June
2004
(unaudited)
Restructuring costs £ '000
At 1 January 2004 918
Provided in period 1,058
Utilised (671)
Other 7
--------------
At 30 June 2004 1,312
--------------
(6) Basis of Consolidation
The consolidated accounts incorporate the accounts of the Company and
of each of its subsidiaries for the period to 30 June 2004. The
results of disposed business are included in the Group profit and loss
account up to the date of disposal.
About ARC
ARC International is a world leader in low-power, high-performance 32-bit
RISC/DSP user-customizable processor cores, real-time operating systems and
development tools for embedded system design. ARC's configurable, extendible
cores assist customers in their rapid development of next generation wireless,
networking and consumer electronics systems, resulting in exceptionally
competitive system-on-chip products.
ARC International maintains a worldwide presence with corporate offices in
Elstree, UK and San Jose, California, USA. The Company has research and
development offices located in England and the United States. For more
information please visit the ARC website at: www.ARC.com. ARC International is
listed on the London Stock Exchange as ARC International plc (LSE:ARK).
Statements made in this press release that are not historical facts include
forward-looking statements that involve risks and uncertainties. Important
factors that could cause actual results to differ from those indicated by such
forward-looking statements include, among others, market acceptance of the ARC
technology; fluctuations in and unpredictability of the Company's quarterly
results; general economic and business conditions; regulatory policies adopted
by governmental authorities; assumptions regarding the Company's future business
strategy; changes in technology; competition; ability to attract and retain
qualified personnel; risks associated with the Company's international
operations; and other uncertainties that are discussed in the "Investment
Considerations" section of the Company's listing particulars dated 28 September
2000 filed with the United Kingdom Listing Authority and the Registrar of
Companies in England and Wales. The Company disclaims any intention or
obligation to update any forward-looking statements as a result of developments
occurring after the date such statement was first made. In view of the many
applications in which its Licensees may use the ARC products, ARC cannot warrant
that those applications do not infringe the patents of others. ARC strongly
encourages its Licensees to become familiar with the policies governing the use
and licensing of intellectual property established by any organization whose
standards the Licensee wishes to follow, and to review the list most
standards-promulgating organizations publish, of entities that claim to have
patents relating to the relevant standards or underlying technology.
ARC, the ARC logo, ARCtangent, ARCangel, ARCompact, ARChitect, ARCform, CASSEIA,
High C, High C/C++, SeeCode, MetaDeveloper, MetaWare, Precise Solution,
Precise/BlazeNet, Precise/EDS, Precise/MFS, Precise/MQX, Precise/MQXsim,
Precise/RTCS, Precise/RTCSsim are trademarks of ARC International. All other
brands or product names are the property of their respective holders.