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ARC International plc - Results for the six months ended 30 June 2004July 21, 2004 - ARC International plc (LSE: ARK), a world leader in configurable processor cores and application platforms for digital media, consumer and communications devices announces its unaudited financial results for the six months ended 30 June 2004. Highlights:
Commenting on the results, Carl Schlachte, President and CEO, said: “We are encouraged by several significant improvements in ARC’s business in the first half of 2004. Our processor license revenue improved with the addition of 11 new licenses, including 5 for the ARC 600 processor core. Additionally, we had record royalties and shipments of products based on ARC processors. We have sold our USB business, which reduces our stated restructuring charge and contributes to working capital. Our turnover is up, costs and headcount are down and our pre-exceptional net loss has reduced by 59%, year-on-year. In the second half, our focus will be on completing our restructuring plan and adding new partners and licensees for our recent product offerings.” CEO’s Statement Overview The first half of 2004 has seen a major improvement in ARC’s performance. Revenues in US dollars grew 25% sequentially and 33% year on year. After the impact of currency fluctuations, sequential revenue growth in sterling was 14% and 18% year on year. Royalty income reached a further record level as did overall shipments of ARC processor-based products. The pre-exceptional net loss for 1H 2004 was significantly reduced to £4.1 million. The steps taken to reduce operating expenses, excluding exceptionals, amortisation and depreciation, within the business delivered a 21% reduction sequentially and 26% over the same period last year. In addition, operating cash outflow was down 45% year on year to £5.2 million. Across our product areas of processors and peripherals, we won 24 new designs during the first half of the year, including 11 new processor and 13 new peripheral licenses. Given our focus on new processor products, we have been encouraged by the first 5 new licenses closed for the ARC 600 processor core. Additionally, we recently launched the newest processor, the ARC 700 processor core, which is now the lowest silicon area 400 MhZ processor in its class. We are also pleased to have completed sale of our USB business to TransDimension Inc. and look forward to a successful partnership to provide our customers with an integrated USB and processor solution. Management There were several management changes during the first half of the year, beginning with the appointment of Carl Schlachte as the new CEO in February. Carl brings a strong background in semiconductor IP, with over 20 years in the industry at companies including ARM and Motorola. Other more recent additions to the management team include the following:
Strategic Redirection The company has made significant progress in the strategic redirection of the business announced in February. The cost reductions are on track, as evidenced by the 21% reduction in sequential operating costs, excluding exceptionals, amortisation and depreciation. Although we had previously announced the closure of our Nashua site with the completion of USB product development, we were able to achieve a much more successful outcome with the sale of the business to TransDimension, Inc. The sale generated a purchase price of £3.6 million ($6.65 million) and net cash proceeds of £2.5 million ($4.6 million) in this period, allowing the company to avoid a large portion of the restructuring charges that would have otherwise resulted from the closure. The recognition of future proceeds of £0.9 million ($1.65 million), which will be receivable through the period to June 2005, has been deferred. The company will use the proceeds to fund the working capital requirements for the second half of the year. As announced in February, ARC’s strategy is to focus R&D efforts on processor development while partnering for related technology. Progress in this area was marked by the announcement of several new partnership agreements as described below. Once the remainder of the structural changes have been implemented, ARC’s half-yearly cost structure (excluding depreciation and amortisation) is on track to decrease by 40% from the Q4 2003 run rate of £12.6 million to the £7.6 million range by the end of 2004. Once that cost level has been reached, modest revenue growth should allow the company to reach breakeven. As a result of the changes announced and the sale of the USB business, the company has taken an exceptional charge of £1.1 million in the first half related to severance, facility and equipment charges. This charge is significantly less than the previous estimate due to the sale of the USB business and favourable restructuring initiatives. SoC Solutions Business This business generated 78% of ARC’s revenues in the first half of 2004 through sales of processor, USB and ARC processor-based software products. The ARC processor lies at the center of the SoC Solutions Business. ARC processors are synthesizable, configurable and extendible, enabling users to fully optimize the architecture for their specific applications. The ARC 600 CPU/DSP is an easy-to-use RISC processor core that enables customers to implement a low power, low cost solution while meeting their performance requirements. At the heart of the ARC 600 is a 32-bit five-stage RISC architecture. By combining RISC and DSP functions within a single core, the ARC 600 can replace a dual processor system and dramatically reduce area and power. The next generation of ARC’s processor family, the ARC 700, was announced in Nuremberg, Germany on February 17th at the Embedded World trade show. The ARC™ 700 CPU/DSP is a 7 stage 32-bit scalar RISC architecture that is ideally suited for high data rate applications. While capable of high clock rates, the ARC 700 has been carefully crafted to not make large tradeoffs in area for performance. As a result, the ARC 700 is one of the smallest processors in its performance class. We are encouraged by the interest received by both new and existing customers. Embedded System Software Business This business segment consists of embedded system software products used to provide the application platform in embedded systems. The system tools along with ARC’s real-time operating system (RTOS), called MQX, is well-accepted by embedded system designers using Motorola and other processors, along with its protocol and security software stacks. The embedded software business represented 22% of the revenue for the first half of the year. Although the revenue was slightly below expectations, we have made adjustments to the cost structure and appointed a new General Manager with extensive software industry experience to focus on this business segment. Customers ARC sold 11 licenses to new and repeat customers during the first half of 2004 including the following:
Partnerships ARC’s strategic shift in focus, as announced in February, included an emphasis on partnering with external companies who provide additional components for SoC designs in those same markets. As evidence of progress on this shift, ARC announced a number of new partnerships:
Outlook We are encouraged by the results we achieved in the first half of the year. Our processor business grew both in new licenses and in royalties from products shipping for previous license sales. The sale of the USB business will allow the company to fund working capital from the sale rather than the current cash balance. Cost reductions are on track, and when combined with the revenue growth achieved, enabled measurable progress in closing the gap towards profitability. In the second half, our focus will be on completing our restructuring plan and adding new partners and licensees for our recent product offerings. Financial Review Six months ended 30 June 2004 Turnover Total turnover at £6.2 million was up 33% at constant exchange rates and up 18% from the same period in the previous year with currency impact (2003: £5.3 million). License income was £3.8 million (2003: £3.8 million). Maintenance and service income was £0.9 million (2003: £1.0 million) and royalty income was £1.5 million (2003: £0.5 million). 78% of the revenue was generated by SoC products and the remaining 22% by embedded software products. Within the SoC segment, £1.3 million was generated by peripheral products that represent the business sold to TransDimension. Costs Cost of sales was £0.9 million (2003: £0.8 million), resulting in a gross margin of 85% (2003: 85%). Total operating expenses (excluding exceptional costs, amortisation of goodwill and depreciation) decreased 26% to £10.3 million (2003: £14.0 million). Total headcount in the business at 30 June 2004 was 129 employees compared with 205 at 30 June 2003. Research and development costs were down 28% to £4.7 million (2003: £6.5 million), sales and marketing costs were down 45% to £2.6 million (2003: £4.7 million) and general and administrative costs were up 6% to £2.2 million due to one time charges (2003: £2.1 million). Interest Interest income decreased 59% to £0.7 million (2003: £1.7 million) due to lower cash balances. Net loss The net loss before exceptional items was £4.1 million (2003: £10.0 million). Net loss including exceptional items was £3.3 million (2003: £9.7 million). Exceptional items are comprised of restructuring provision charges of £1.1 million relating to reductions in workforce announced in February 2004 and onerous leases and a provisional net gain of £1.9 million on the sale of the USB business. The provisional net gain represents the initial net cash proceeds received less associated fees and asset transfers. Two additional payments are outstanding including £0.5 million due on 31/12/04 and £0.4 million due on 15/6/05. Both payments will be recognised as and when they fall due. Cash flow and balance sheet The net cash outflow from operations was £5.2 million (2003: £9.5 million). Capital expenditure was £0.4 million (2003: £1.5 million). Net assets at 30 June 2004 were £37.3 million (30 June 2003: £55.5 million), including net funds £36.2 million (30 June 2003: £44.9 million). Dividend No interim dividend payment will be made in respect of the six months ended 30 June 2004. About ARC ARC International maintains a worldwide presence with corporate offices in Elstree, UK and San Jose, California, USA. 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). Statements made in this press release that are not historical facts include forward-looking statements that involve risks and uncertainties. Important factors that could cause actual results to differ from those indicated by such forward-looking statements include, among others, market acceptance of the ARC technology; fluctuations in and unpredictability of the Company’s quarterly results; general economic and business conditions; regulatory policies adopted by governmental authorities; assumptions regarding the Company’s future business strategy; changes in technology; competition; ability to attract and retain qualified personnel; risks associated with the Company’s international operations; and other uncertainties that are discussed in the “Investment Considerations” section of the Company’s listing particulars dated 28 September 2000 filed with the United Kingdom Listing Authority and the Registrar of Companies in England and Wales. The Company disclaims any intention or obligation to update any forward-looking statements as a result of developments occurring after the date such statement was first made. In view of the many applications in which its Licensees may use the ARC products, ARC cannot warrant that those applications do not infringe the patents of others. ARC strongly encourages its Licensees to become familiar with the policies governing the use and licensing of intellectual property established by any organization whose standards the Licensee wishes to follow, and to review the list most standards-promulgating organizations publish, of entities that claim to have patents relating to the relevant standards or underlying technology. ARC, the ARC logo, ARCtangent, ARCangel, ARCompact, ARChitect, ARCform, CASSEIA, High C, High C/C++, SeeCode, MetaDeveloper, MetaWare, Precise Solution, Precise/BlazeNet, Precise/EDS, Precise/MFS, Precise/MQX, Precise/MQXsim, Precise/RTCS, Precise/RTCSsim are trademarks of ARC International. All other brands or product names are the property of their respective holders.
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