ARC International 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

• Revenue up 28% to a record high of £13.4 million; 47% increase for 2H 2006 compared to 2H 2005
• Royalties up 30% to £3.4 million
• Bookings up 37% to £16.5 million
• Backlog (including deferred revenue) up 69% to £4.3 million
• Median deal sizes increased by 36%
• Revenue from customers in Asia up 239% to £3.0 million

• Net loss improved 74% to £1.1 million (2005: £4.3 million)

• Loss before tax was reduced by 50% from £5.4 million to £2.7 million
• Positive cash flow from operating activities; Closing cash and short term investments position of £31.6 million

• Significant increase in new customers: now 137

• 25 new customers, 56% increase as compared to new customers in 2005
• 37 processor and subsystem contracts completed, up from 36 in 2005
• 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
• Released two new ARC® Media Subsystems
• ARC Video Subsystem
• ARC Sound Advanced Subsystem
• Introduced the VRaptor™ 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™ 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™ 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™ 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™ solid state storage solutions.

• Boston Circuits, Inc. - has taken a license for the ARC 750D configurable CPU for integration into Boston Circuits' gCORE™ 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 confi¤í §­ÿÿÿÿlZb gurable 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® Encounter® digital integrated circuit (IC) design platform into ARC's patented ARChitect™ 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™ 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. 

Financial tables

Click here to read financial tables