English
ARC International plc Announces Preliminary Results For The Year Ended 31 December 2004
Record Growth in Processor Licenses Drives Highest Annual Revenue
ELSTREE, UK, February 9, 2005 – ARC International (LSE: ARK), the world leader in configurable CPU/DSP processor cores and application subsystems, today announces its unaudited financial results for the six months and full year ended 31 December 2004.
Highlights:
Six months ended 31 December 2004:
Twelve months ended 31 December 2004:
Commenting on the results, Carl Schlachte, President and Chief Executive Officer, said:
"2004 was a successful year for ARC International, and one that marked a significant turnaround for the company. Record revenues were driven by strong demand for multi-use and core family licenses of our configurable processors. We sold fifteen new licenses for the recently introduced ARC 600 and ARC 700 cores, and our overall base of licensees grew to 96 companies.
During 2005, we intend to expand our global customer base and deepen partner relationships to help further increase revenues. Additional application-specific subsystems currently in development will strengthen our competitive advantage and grow ARC's share of design starts in high-volume consumer markets."
Commenting on the financial results, Monica Johnson, Chief Financial Officer, added:
"In the second half of 2004, turnover from ongoing operations grew 62 percent in US Dollars from the first half of 2004, as licensing revenue from our SoC product line reached an all-time high. Operating costs (before share based award expense, exceptional items, amortisation and deprecation) reduced 39 percent as our net loss narrowed to £1.8 million during the second half of 2004. Moving forward, we will maintain cost controls while continuing to ensure ARC's competitive position within the semiconductor IP industry."
Statement from the President and Chief Executive Officer:
Overview
For 2004, ARC International posted strong financial and operating results and grew at more than twice the rate of the overall semiconductor market. Our SoC product line drove ARC's results with 32 new processor licenses. Today we are close to adding our 100th SoC customer, which will be a major company milestone and one that few semiconductor IP companies have achieved in such a short period of time.
The strategic redirection announced last year is complete, including the sale of the peripherals business and reduction in overhead costs. These changes reduced 2004 operating costs (before share based award expense, exceptional items, amortisation and depreciation) by 32% over 2003 and narrowed our net loss to £5.1 million, an improvement of 79%. Cash usage in 2004 decreased significantly to £3.1 million. Simultaneously, by focusing on core competencies and strategically partnering with select companies, ARC strengthened its product portfolio with two new processors and the ARCsound™ subsystem.
SoC Solutions
The SoC business grew its contribution to ARC's overall revenue and represented 79% of turnover in 2004. Three new products – the ARC 600 and ARC 700 cores and the ARCsound subsystem – delivered on our promise to address a greater part of our customers' SoC design challenges. The two processor core families are the foundation of our future CPU and DSP product roadmaps, and are helping ARC further penetrate high-growth markets while diversifying its SoC customer base.
The ARC 700 core extends our reach into high-end, operating system-based devices such as digital televisions and digital set-top boxes. It offers best-in-class performance at the industry's smallest die size. This reduces our customers' end-product costs, making their ARC-Based™ products more competitive in the digital consumer marketplace.
The ARCsound subsystem has created a new technology category within the semiconductor IP space. It is the first configurable, application-specific platform for audio-intensive consumer devices. Our first customer was signed just six weeks after the product was introduced, a rarity in the IP market and a positive sign of the technology's appeal to customers. Moving forward, ARC's subsystem strategy will be the basis for our strategic R&D investments. We will add other optimized subsystems that focus on key areas of the high-growth digital consumer market.
Embedded Systems Software
ARC's second operational product line provides embedded operating systems and development tools. During the past twelve months, the Embedded Systems Business Unit (ESBU) contributed 21% percent of total revenue. We continue to assess the overall strength of this business and the leverage it provides on our core processor business.
Customers
During 2004, the digital consumer electronics market was the key driver of design starts within the semiconductor industry. Key factors for success in this market are the abilities to lower the end product cost, maximize differentiation and speed time-to-market parameters. As the leader in configurable technology, ARC's CPU, DSP and application-specific subsystems meet these design requirements. Key customers who joined the ARC team included:
Partnerships with Best-in-Class Companies
To help ensure ARC provides more of a total solution to customers without dramatically increasing our research and development costs, ARC is working with industry leaders within the electronic design automation (EDA), embedded software tools and consumer applications industries.
Outlook
The management team is pleased with ARC's accomplishments throughout 2004. Our revenue achieved record-high levels based on strong growth in SoC customers, and we maintained effective cost controls that reduced overall expenses.
Looking ahead to 2005, we believe the digital consumer market will continue to drive many of the industry's design starts. Our unique subsystem technology and optimized CPU and DSP core products are especially suited to meet the demands of this market, and we will work to ensure ARC International further increases its share of the consumer and other high-growth areas globally.
Financial Review
Six months ended 31 December 2004
Turnover
Total turnover in 2H 2004 was £6.0 million up 9% over the same period last year (2H 2003: £5.5 million) including the effect of the peripherals disposal. Prior to currency translation, with virtually all sales in US dollars, underlying turnover was up 20% over 2H 2003. License income increased 15% from the same period last year at £3.8 million (2H 2003: £3.3 million). Maintenance and service income was down 17% from 2H 2003 at £0.8 million due to the sale of the peripherals business. The increase in the number of designs being shipped by our customers contributed to a 12% increase in royalties to £1.4 million (2H 2003: £1.3 million).
Sales in Europe were 33% of total sales, North America 63% and Asia 4%. From a business unit perspective, 78% of revenue was from the SoC business with the remaining 22% delivered by the embedded software business unit. Within the SoC segment, £1.4 million in 2H 2003 was generated by peripheral products that represented the business sold to TransDimension Inc. Removing this revenue from the relevant comparisons, year on year revenue growth in 2H 2004 was 46% in sterling and 62% in US dollars.
Costs
Cost of sales of £0.7 million was flat year over year (2H 2003: £0.7 million). Gross margin in 2H 2004 increased to 88% (2H 2003: 87%). Total operating expenses (excluding share based award expense, exceptional items, amortisation of goodwill and depreciation) decreased by 39% year-over-year to £8.0 million (2H 2003: £13.1 million).
The Company had 131 employees at 31December 2004 compared with 133 at 30 June 2004. Research and development costs decreased 41% year over year to £3.5 million (2H 2003: £5.9 million). Sales and marketing costs decreased 42% year over year to £2.2 million (2H 2003: £3.8 million). General and administration costs before share based award expense of £1.6 million were down 41% year over year (2H 2003: £2.7 million). Including the share based award expense charge of £0.3 million, overall general and administration costs were £1.9 million
Interest
Interest income was up 5% year over year at £0.8 million.
Net loss
The net loss prior to exceptional items was £3.0 million representing an improvement of 72% year-over-year (2H 2003: £10.7 million). Loss per share prior to exceptional items improved to 2.13p (2H 2003: 7.74p). Net loss was £1.8 million (2H 2003: £14.9 million).
Exceptional items in 2H 2004 are comprised of the release of restructuring provision charges of £0.4 million relating to onerous leases and a gain of £0.7 million on the sale of the USB business. The gain represents the net cash proceeds received in 2H 2004 and deferred profit in respect of deferred revenue of £184,000 from TransDimension Inc in 2H 2004.
Cash flow and balance sheet
The net cash outflow from operations was £3.2 million (2H 2003: £8.0 million). Capital expenditure was £0.1 million. The movement in net funds during the six months was an outflow of £2.1 million. Net assets at 31 December 2004 were £35.6 million, including net cash of £34.1 million, of which £0.2 million was used to secure a letter of credit issued to our landlord (see note 3).
Dividend
No interim dividend payment will be made for the six months ended 31 December 2004.
Twelve months ended 31 December 2004
Turnover
Total turnover at £12.2 million was up 26% at constant exchange rates and up 13% from the previous year with currency impact (2003: £10.7 million) including the effect of the peripherals disposal. License income was £7.6 million (2003: £7.0 million). Maintenance and service income was £1.7 million (2003: £1.9 million). Royalties were £2.9 million (2003: £1.8 million).
Sales in Europe were 26% of total sales, North America 67% and Asia 7%. From a business unit perspective, 79% of revenue was from the SoC business and the remaining 21% was from the embedded software business unit. Within the SoC business, £2.8 million in 2003 and £1.3 million in 2004 revenue was generated by peripheral products that represented the business sold to TransDimension Inc. Removing this revenue from the comparisons, year on year revenue growth in 2004 was 36% in sterling and 62% in US dollars.
Costs
Cost of sales was £1.7 million (2003: £1.5 million), resulting in a gross margin of 86% (2003: 86%). Total operating expenses (excluding share based award expense, exceptional items, amortisation of goodwill and depreciation) decreased 32% to £18.4 million (2003: £27.1 million).
Total headcount in the business at 31 December 2004 was 131 employees compared with 174 at 31 December, 2003. Research and development costs were down 34% to £8.2 million (2003: £12.4 million), sales and marketing costs were down 44% to £4.7 million (2003: £8.5 million) and general and administration costs were down 21% to £3.8 million (2003: £4.7 million) before the 2004 share-based award expense charge of £0.3 million.
Interest
Interest income was £1.4 million (2003: £2.4 million) due to reduction of cash balance as a result of share buy back in 2003.
Net loss
The net loss before exceptional items was £7.0 million (2003: £20.7 million). Exceptional items are comprised of restructuring provision charges of £0.6 million relating to reductions in workforce announced in February 2004, onerous leases and a gain of £2.6 million on the sale of the USB business. The gain represents the net cash proceeds received less associated fees and asset transfers. Under the terms of the agreement, a further £0.3 million is due on 15 June 2005. The receipt of this will be recognised upon the earlier receipt of the funds or when collectibility is determined to be reasonably assured.
Cash flow and balance sheet
The net cash outflow from operations was £8.4 million (2003: £17.5 million). Capital expenditure was £0.4 million (2003: £2.7 million). The outflow of net funds was £3.3 million (2003: £15.7 million excluding the share buyback). Net assets at 31 December 2004 were £35.6 million (31 December, 2003: £40.4 million), including net cash of £34.1 million, of which £0.2 million was used to secure a letter of credit issued to our landlord (see note 3).
Dividend
No dividend payment will be made for the year ended 31 December 2004.
International Financial Reporting Standards
We are on track to commence reporting on accounts in accordance with International Financial Reporting Standards from our interim results for the period ending 30 June 2005. We have completed preliminary assessments of the major areas of impact.
View the ARC 2004 Earnings Annoucement Presentation Slides
About ARC International plc
ARC International is the world leader in low-power, high-performance 32-bit configurable CPU/DSP processor cores, subsystems, real-time operating systems and development tools for embedded system design. ARC's configurable and extendible cores assist customers in the development of next generation digital media, consumer and communications devices, resulting in lower cost, higher performance SoC products.
ARC International maintains a worldwide presence with corporate offices in San Jose, Calif., USA and Elstree, UK. 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).
ARC, ARC logo and ARC-Based are trademarks or registered trademarks of ARC International. All other brands or product names contained herein are the property of their respective owners. This press release may contain certain "forward-looking statements" that involve risks and uncertainties. For factors that could cause actual results to differ, visit the company's website as well as the listing particulars filed with the United Kingdom Listing Authority and the Registrar of Companies in England and Wales.
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