Highlights from Year Ended December 31, 2007 (Compared to Financial
Year 2006)
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$ GBP % Increase (2)
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Total Revenue (1) $28.9 million GBP 14.4 million +17%
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Royalty Revenue $9.7 million GBP 4.9 million +54%
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Bookings $37.3 million GBP 18.7 million +23%
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Total Backlog $16.6 million GBP 8.3 million +96%
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Licensing Revenue (1) $15.0 million GBP 7.4 million +2%
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(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 GBP 1.0 million. Net
loss with acquisitions increased to GBP 2.5 million
-- Closing cash and short term investment position remain strong at
GBP 21.2 million
-- Completed and integrated strategic acquisitions
-- Alarity, Teja, and Tenison establish ARC's ability to deliver
vertically integrated multimedia solutions to high value
semiconductor companies
-- 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-Based(TM)
unit shipments
-- 6 post 2004 contracts contributed royalty revenues
-- Total ARC customers now at 144
-- 20+ customer contracts announced in 2007
-- Intel signs new multi-year, royalty bearing licensing
agreement
-- Broadcom signed a new ten year licensing agreement
-- $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 ConfigCon(TM) 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.
