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.
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
-- 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.
-- 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.
-- 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
-- Augusta Technology for next-generation mobile solutions
-- Fullhan Microelectronics for advanced multimedia products
-- NextWave Wireless for Mobile TV receivers
-- Qpixel Technology for video compression engines
-- VisionFlow for ultra low power H.264 media devices
-- Unnamed customer for multi-standard digital TV receivers
-- Customer Agreements for Medical Applications
-- CVRx for implantable blood pressure monitoring and treatment
systems
-- Unnamed customer for implantable pacemaker products
-- Unnamed customer for various implantable medical devices
-- Customer Agreements for Government/Security Applications
-- Edgewater Computer Systems for military aircraft
-- Unnamed customer for military and government products
-- Customer Agreements for Networking/Communications Applications
-- AD Technology for power line communications (PLC) chips
-- Crystal Media for VoIP solutions
-- iVivity for multi-protocol acceleration engines
-- SiConnect for PLC chips
-- Teranetics for advanced communications applications
-- Unnamed customer for peripheral devices
-- Customer Agreements for Other Applications
-- Phison Electronics for next-generation flash NAND drives
-- NemeriX for ultra low power GPS chipsets
-- Semtech for mixed-signal semiconductor products
-- 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 GBP 14.4 million, up 7% over the same period last year (2006: GBP 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 GBP 7.4 million (2006: GBP 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 GBP 2.12 million (2006: GBP 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 GBP 4.9 million (2006: GBP 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 GBP 1.44 million (2006: GBP 1.59 million). Gross margin increased to 90% (2006: 88%). Net operating expenses increased by 14% to GBP 18.3 million (2006: GBP 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 GBP 7.4 million (2006: GBP 6.7 million). Sales and marketing increased 10% to GBP 5.5 million (2006: GBP 5.0 million). General and administration costs increased 13% to GBP 3.7 million (2006: GBP 3.3 million). Other expenses, comprised of depreciation and amortization, increased to GBP 1.7 million (2006: GBP 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 GBP 1.6 million in 2007. Incremental amortization expenses associated with acquired technologies and intangible assets were GBP 0.5 million in 2007.
Interest
Interest income was down 3% to GBP 1.47 million (2006: GBP 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 GBP 2.5 million (2006: GBP 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 GBP 5.1 million (2006: GBP 1.7 million). Capital expenditure, including payments made for the three acquisitions and investments in associate, was GBP 8.1 million (2006: GBP 0.9 million). The movement in cash and short-term investments during the year was an outflow of GBP 10.4 million (2006: GBP 0.4 million). Total net assets at December 31, 2007 were GBP 30.3 million (2006: GBP 32.0 million), including cash and short-term investments of GBP 21.2 million (2006: GBP 31.6 million).
Dividend
No interim dividend payment will be made for the year ended December 31, 2007 (2006: GBP Nil).
Acquisitions
During the period ARC acquired the key assets of Teja Technologies for a total consideration of GBP 2.5 million, Tenison Technology EDA Limited for a total consideration of GBP 1.1 million, and Alarity Corporation, Inc. for a total consideration of GBP 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 GBP '000 GBP '000
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Revenue 14,401 13,411
Cost of sales (1,437) (1,591)
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Gross profit 12,964 11,820
Operating expenses 2 (18,305) (16,045)
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Operating loss (5,341) (4,225)
Finance income 1,470 1,509
Share of post-tax loss of associate (22) -
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Loss before income tax (3,893) (2,716)
Tax credit (net) 1,389 1,583
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Loss for the year attributable to equity
shareholders (2,504) (1,133)
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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 GBP '000 GBP '000
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Loss for the period (2,504) (1,133)
Currency translation difference 4 (54) (267)
Change in value of ESOP reserve 4 75 40
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Total recognised expense for the period (2,483) (1,360)
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Consolidated balance sheets
as at December 31, 2007
December 31 December 31
2007 2006
(unaudited) (audited)
Notes GBP '000 GBP '000
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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
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9,874 1,639
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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
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26,926 35,508
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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
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6,035 5,068
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Net current assets 20,891 30,440
Non-current liabilities
Other payables 126 -
Deferred tax liabilities 346 -
Provision 5 20 38
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492 38
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Net assets 30,273 32,041
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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)
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Total shareholders' equity 30,273 32,041
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Consolidated cash flow statements
for the year ended December 31, 2007
Year ended Year ended
December 31 December 31
2007 2006
(unaudited) (audited)
GBP '000 GBP '000
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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
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Net cash used in operating activities (2,749) 454
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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) -
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Net cash used in investing activities (5,747) (3,892)
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Cash flows from financing activities
Net proceeds from issue of ordinary shares 504 375
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Net cash generated from financing activities 504 375
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Effects of exchange rate changes (54) (267)
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Net decrease in cash and cash equivalents (8,046) (3,330)
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Cash and cash equivalents at January 1 18,146 21,476
----------------------------------------------------------------------
Cash and cash equivalents at December 31 10,100 18,146
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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)
GBP '000 GBP '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)
GBP '000 GBP '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
GBP '000 GBP '000 GBP '000 GBP '000 GBP '000 GBP '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
Non- Total
Current current provision
GBP '000s GBP '000s GBP '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 GBP 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 GBP 1,107,000, Alarity Corporation, Inc. on September 21, 2007 for a total consideration of GBP 3,048,000 and certain assets of Teja Technologies, Inc. on March 30, 2007 for GBP 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 GBP 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 GBP 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 GBP 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.
Contact:
Media:
ARC International
Lee Garvin Flanagin,
+1-408-437-3433
or
Investor:
Financial
Dynamics
Juliet Clarke/Matt Dixon, +1 44 20 7831 3113