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
----------------------------------------------------------------------
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
----------------------------------------------------------------------
Loss for the year attributable to equity
shareholders (2,504) (1,133)
----------------------------------------------------------------------
Basic and diluted loss per share (pence) (1.69) (0.78)
