Arkle Res Regulatory News (ARK)

14 Feb 2007 07:01

Arc International PLC14 February 2007 Investor Contacts: Media Contact: Juliet Clarke Lee Garvin FlanaginFinancial Dynamics ARC International+44 20 7269 7288 +1 408 437 3433 ARC International plc 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 worldleader in configurable multimedia subsystems and CPU/DSP processor cores, todayannounced its unaudited financial results for the full year ended 31 December2006. Highlights from Year Ended 31 December 2006 (compared to financial year 2005): • Year of Record Growth o Revenue up 28% to a record high of £13.4 million; 47% increase for 2H 2006 compared to 2H 2005 o Royalties up 30% to £3.4 million o Bookings up 37% to £16.5 million o Backlog (including deferred revenue) up 69% to £4.3 million o Median deal sizes increased by 36% o Revenue from customers in Asia up 239% to £3.0 million • Net loss improved 74% to £1.1 million (2005: £4.3 million) o Loss before tax was reduced by 50% from £5.4 million to £2.7 million o Positive cash flow from operating activities; Closing cash and short term investments position of £31.6 million • Significant increase in new customers: now 137 o 25 new customers, 56% increase as compared to new customers in 2005 o 37 processor and subsystem contracts completed, up from 36 in 2005 o 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 o Released two new ARC(R) Media Subsystems • ARC Video Subsystem • ARC Sound Advanced Subsystem o Introduced the VRaptor(TM) Media Architecture, which will form the basis for future Media Subsystem development Commenting on the company's performance, Carl Schlachte, president and chiefexecutive officer, said, "2006 was a year of record growth for ARCInternational. ARC's revenue exceeded expectations and grew at a faster ratethan the overall market and its principal competitors by increasing 28 percentin financial year 2006, and 47 percent in the second half. Royalties increasedto a record high, and ARC's growing portfolio of Media Subsystems have quicklyevolved into the company's most-popular products and helped drive ASPs to theirhighest levels. We are pleased with the results and our leadership positionwithin 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 themanagement of costs and cash flow. We effectively streamlined the company'soutside consultants and better managed operations activities to increase overalleffectiveness. As we move toward breakeven these efforts will continue, and wewill implement focused programs and spending to drive the next stage of ourstrategy." Statement from the President and Chief Executive Officer Overview ARC's strategy of becoming the leading provider of configurable media subsystemsand processors helped make 2006 the strongest in its history, and a year thatmarked an important stage in the evolution of ARC as a global business andleader within the semiconductor industry. Revenues, royalties, bookings,backlog, and median deal size were significantly higher than in financial year2005. As expected, ARC's newer products comprised of 92 percent of processorlicense revenue, which bodes well for future royalty growth. Furthermore, ARC's strategy has solidly differentiated it from its principalcompetitors. ARC is the industry's only company providing a completeconfigurable intellectual property (IP) solution for the development of advancedsystem-on-chips (SoCs) targeting multimedia consumer applications. As a result,ARC completed contract agreements with 56 percent more new customers than in theprevious financial year, beating its principal competitors in overall embeddedmultimedia 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 moredifferentiated solutions at lower price points. Combined with ever-tighteningmarket windows, companies throughout the global chip industry are looking fornew ways to create next-generation SoCs to meet these stringent requirements. ARC's configurable Media Subsystems are satisfying this demand. They reduce theneed for SoC designers to select and integrate the disparate hardware IP andsoftware components that are typically found within today's consumer electronicdevices. This reduces overall development and chip costs and helps bringARC-Based(TM) SoCs to market more quickly. Increasingly global semiconductorcompanies are recognizing the value of ARC's configurable Media Subsystems andnow are actively evaluating and adopting our technology. The success of ARC's Media Subsystems also is reflected in the company'schanging revenue composition. Since their introduction two years ago, ARC'sMedia Subsystems have grown to comprise close to 50 percent of core licenserevenue in financial year 2006. This underscores the value customers see in oursubsystems 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: theARC Video and ARC Sound Advanced. ARC also introduced the VRaptor(TM) MediaArchitecture, from which all future ARC Media Subsystems will be based. Customers that announced they had taken licenses for ARC's Media Subsystems in2006 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 istheir adoption by industry leaders. In 2006 ARC announced a strategiccollaboration with Toshiba, the world's 4th largest semiconductor companyaccording to Gartner Dataquest. Under the terms of the agreement, Toshiba hastaken a multiyear license for the ARChitect(TM) Processor Configurator, and ARCand Toshiba will collaborate on the development of a next-generation version ofARChitect that is suited to Toshiba's Media embedded Processor (MeP).Throughout 2006 other "Tier 1" semiconductor companies also took licenses forARC's configurable Media Subsystems and processors. Customers that announced they had taken licenses for ARC's configurableprocessors 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(TM) solid state storage solutions. • Boston Circuits, Inc. - has taken a license for the ARC 750D configurable CPU for integration into Boston Circuits' gCORE(TM) 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 configurable 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 ofsemiconductor companies. To take advantage of this growing market opportunityand as part of the company's international expansion plan, in September of 2006ARC officially launched into China. Within a few months ARC already had itsfirst customer in China, which underscores the attractiveness of ARC'sconfigurable solutions to customers in that region. As a result of ARC's expansion and momentum in Asia, customers there contributeda record 26 percent of processor revenue in financial year 2006. Chinacomplements ARC's ongoing business operations in Asia in Japan, Korea, andTaiwan. ARC is considering expanding to other parts of Asia that would benefitfrom the company's configurable Media Subsystems and processors. Growing Ecosystem Supporting Configurability SoC design in the 21st century is complex and multifaceted. Many differenttypes of tools are required to complete an SoC, and having an ecosystem ofcompanies supporting ARC's configurable solutions is essential. Throughout 2006an increasing number of tools and solutions became available from companiessupporting ARC's configurable products. Composed of close to 30 companies suchas Microsoft, Dolby, DTS, Cadence Design Systems, this growing ecosystem isfurther evidence of the increasing adoption of configurability by thesemiconductor industry, and the trend of third party companies to provide designtools and solutions needed for advanced SoC design using configurability. Third party companies that announced support for ARC's patented configurablesolutions 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(R) Encounter(R) digital integrated circuit (IC) design platform into ARC's patented ARChitectTM 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 thefocused marketing programs it executed in key regions. In particular, ARC'sConfigCon(TM) Developer Conference series attracted more than 1,000 SoC designersfrom Taiwan, China, and Silicon Valley to learn about why configurability andARC's Media Subsystems are being rapidly adopted by companies around the world.ConfigCon also helped contribute to the revenue base in financial year 2006 andgoing forward. Another indicator of the effectiveness of ARC's worldwide marketing programs wasrecognition by Cadence Design Systems of ARC's "proactive and innovativemarketing campaigns that attracted industry-wide recognition." Accordingly, ARCwas presented the "Collaboration Award for Excellence in Joint Marketing" byCadence's chief executive officer after Cadence evaluated more than 200companies in its partner network. Embedded Systems Business Unit ARC's Embedded Systems Business products comprised 17 percent of overall revenuefor year 2006. ARC will now concentrate on enhancing these products for ARC'sMedia Subsystems as part of ARC's overall business, not as a separate businessunit. Board Transitions ARC's Chairman, Dr. Peter van Cuylenburg, has decided not to offer himself forre-election at the forthcoming AGM. During his three and a half years asChairman, Peter has made an invaluable contribution to the turnaround andstrategic re-positioning of the company. I would like to thank Peter personallyfor all his support and guidance, and on behalf of the staff and shareholdersfor his contribution to the company. The Nomination Committee of the Board hasrecommended, following a selection process, that Richard Barfield be appointedto replace Dr. Peter van Cuylenburg after the AGM, and this has been approved bythe Board. Richard Barfield is a Chartered Accountant who has been anon-executive director at ARC for over three years and is currently the Chairmanof ARC's Audit Committee. Furthermore, Victor Young has been appointed to theBoard. Victor has successfully fulfilled the role of Chief Financial Officersince joining ARC in December of 2005, and his promotion to the Board is welldeserved. There are no details regarding Richard Barfield's or Victor Young'sappointments to the Board required to be disclosed under Rule 16.4 of theListing Rules of the UK Listing Authority. 2007 Outlook Due to the strengths of the multimedia market and the increasing demand forconfigurable technology, financial year 2006 was a year of record growth for ARCInternational. All key financial metrics improved, revenue exceeded marketexpectations with 28 percent growth, and the company generated positive cashflow 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, ARCwill continue to focus on enhancing its leadership in multimedia subsystems andconfigurable processor technology. ARC also will cultivate further the growingecosystem of optimized solutions provided by third party companies. CHIEF FINANCIAL OFFICER'S REVIEW Year ended 31 December 2006 Revenue Total revenue in 2006 was £13.4 million, up 28% over the same period last year(2005: £10.5 million). Prior to currency translation, with virtually all salesin US dollars, revenue was up 30% over 2005. License and engineering revenue was£7.9 million (2005: £6.1 million). Maintenance and service revenue was £2.1million (2005: £1.7 million). Royalties were £3.4 million (2005: £2.7 million). Sales in North America were 65% of total sales, Europe 13% and Asia 22%. Revenuein Asia increased 239% to £3.0 million in 2006 (2005: £0.9 million). From aproduct line perspective, 83% of revenue was from the SoC products and theremaining 17% was from the embedded software products. With the increase and growth in revenue, total revenue per average headcountimproved to £108k (2005: £82k). Costs Cost of revenue was down 3% to £1.6 million (2005: £1.6 million). Averageheadcount in the business for financial year 2006 was 124 employees comparedwith 128 for 2005. Research and development costs, net of amounts capitalised,were up 4% to £6.7 million (2005: £6.4 million); sales and marketing costs wereup 11% to £5.0 million (2005: £4.5 million), and general and administrationcosts were up 7% to £3.3 million (2005: 3.0 million). Operating expenses increased 1% to £17.6 million (2005: £17.4 million). Lossbefore interest, taxation, depreciation and amortisation improved 39% to £3.2million (2005: £5.2 million). Interest Interest income was £1.5 million (2005: £1.5 million). Net loss Net loss improved significantly to £1.1 million (2005: £4.3 million). Loss pershare improved to 0.78p (2005: 3.05p loss). Cash flow and balance sheet Cash used in operations was £1.7 million (2005: £4.3 million). Capitalexpenditure was £0.9 million (2005: £0.8 million). The outflow of cash andshort-term investment (cash held on deposit) was £0.4 million (2005: £1.5million). Net assets at 31 December 2006 were £32.0 million (2005: £32.8million), including cash and short-term investments of £31.6 million (2005:£32.0 million). Dividend No dividend payment will be made for the year ended 31 December 2006. Consolidated profit and loss account for the year ended 31 December 2006 Year ended Year ended 31 December 31 December 2006 2005 (unaudited) (audited) £ '000 £ '000 Revenue 13,411 10,494Net operating expenses (note 2) (17,636) (17,442) Operating loss (4,225) (6,948) Interest receivable 1,509 1,530 Loss before income tax (2,716) (5,418) Tax credit (note 3) 1,583 1,077 Loss for the year attributable to equity shareholders (1,133) (4,341) Basic and diluted loss per share (pence) (0.78) (3.05) Consolidated balance sheet as at 31 December 2006 31 December 31 December 2006 2005 (unaudited) (audited) £'000 £'000 AssetsNon current assetsIntangible assets 843 1,284Property, plant and equipment 424 329Trade and other receivables 372 - 1,639 1,613 Current assetsInventory 203 -Trade and other receivables 2,959 3,679Current corporation tax receivable 700 -Short term investments 13,500 10,534Cash and cash equivalents 18,146 21,476 35,508 35,689 Total assets 37,147 37,302LiabilitiesCurrent liabilitiesTrade and other payables (note 5) 4,762 4,009Other liabilities - 218Provision (note 6) 306 77 5,068 4,304 Net current assets 30,440 31,385Non-current liabilitiesProvision (note 6) 38 209 38 209 Net assets 32,041 32,789 Shareholders' equityOrdinary shares 151 149Share premium 3,256 2,923Capital redemption reserve 162 162Merger reserve 107 107Other reserves 60,482 60,205Cumulative translation adjustment (457) (190)Retained earnings (31,660) (30,567) Total shareholders' equity 32,041 32,789 Consolidated cash flow statement for the year ended 31 December 2006 Year ended Year ended 31 December 31 December 2006 2005 (unaudited) (audited) £'000 £'000 Cash flows from operating activitiesCash used in operations (note 4) (1,678) (4,330)Interest received 1,474 1,535Taxes paid (97) (83)Tax refund 755 1,059 Net cash generated/(used) in operating activities 454 (1,819) Cash flows from investing activitiesPurchase of property, plant and equipment (353) (220)Purchase of intangible assets (552) (466)Capitalisation of R&D assets (21) (96)Movements on short term investments (2,966) (1,834)Proceeds from sale of business - 327 Net cash used in investing activities (3,892) (2,289) Cash flows from financing activitiesNet proceeds from issue of ordinary shares 375 727Finance lease principal payments - (4) Net cash generated from financing activities 375 723 Effects of exchange rate changes (267) 29 Net decrease in cash and cash equivalents (3,330) (3,356) Cash and cash equivalents at 1 January 21,476 24,832 Cash and cash equivalents at 31 December 18,146 21,476 Statement of changes in shareholders' equity Capital Cumulative Share Share Merger redemption Other translation Retained Group capital premium reserve reserve reserves adjustment earnings Total(unaudited) £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2006 149 2,923 107 162 60,205 (190) (30,567) 32,789Shares issued 2 333 335Change in value of ESOP 40 40reserveShare based award reserve 277 277Exchange loss (267) (267)Loss for the year (1,133) (1,133)At 31 December 2006 151 3,256 107 162 60,482 (457) (31,660) 32,041 1 Basis of preparation The Preliminary Report is unaudited and does not constitute statutory accountswithin the meaning of s240 of the Companies Act 1985. The statutory accountsfor the year ended 2005 have been delivered to the Registrar of Companies. Theauditors' opinion on these accounts was unqualified and did not contain astatement made under s237 (2) or s237 (3) of the Companies Act 1985. The consolidated financial statements of ARC International plc have beenprepared in accordance with the EU Endorsed International Financial ReportingStandards (IFRS), IFRIC interpretations and the Companies Act 1985 applicable tocompanies reporting under IFRS. The consolidated financial statements have beenprepared under the historical cost convention, except in respect of certainfinancial instruments. The preparation of financial statements in conformity with IFRS requires the useof certain critical accounting estimates. It also requires management toexercise its judgment in the process of applying the Group's accountingpolicies. Although these estimates are based on management's best knowledge ofthe amount, event or actions, actual results ultimately may differ from thoseestimates. 2 Summary of operating expenses Year ended Year ended 31 December 31 December 2006 2005 (unaudited) (audited) £ '000 £ '000 Operating expensesCost of sales (1,591) (1,638)Research and development (6,716) (6,432)Sales and marketing (5,023) (4,523)General and administrative (3,254) (3,033)Other expenses (1,052) (1,816) Net operating expenses (17,636) (17,442) Year ended Year ended 31 December 31 December 2006 2005 (unaudited) (audited) £ '000 £ '000 Loss before interest, taxation, depreciation and amortisation (3,173) (5,236)Depreciation (229) (318)Amortisation (823) (1,199)Impairment of goodwill - (195) Operating loss (4,225) (6,948) 3 Tax credit for the period Year ended Year ended 31 December 31 December 2006 2005 (unaudited) (audited) £'000 £'000UK Adjustments in respect of prior periods (researchand development credit) (1,673) (1,166)Foreign tax On profits for the period 2 60 Irrecoverable withholding tax 88 29 (1,583) (1,077) The research and development tax credit of £1,673,000 in 2006 includes the claimfor 2003 and 2004 (2005: £1,166,000 included the credit for 2002). The claim for2004, £700,000, is included in amounts receivable as it was outstanding at 31December 2006 (2005: nil). 4 Cash used in operations Year ended Year ended 31 December 31 December 2006 2005 (unaudited) (audited) £'000 £'000 Net loss for the year (1,133) (4,341)Adjustments for:Gain on business disposal - (327)Interest receivable (1,509) (1,530)Tax credit (1,583) (1,077)Amortisation 823 1,199Depreciation 229 318Goodwill impairment - 195Loss on disposal of property, plant and equipment 5 -Share based award expense 277 431(Increase) in inventories (203) -(Increase)/decrease in trade and other receivables 393 (56)Increase in trade and other payables 965 1,096Increase/(decrease) in provisions 58 (238) Cash used in operations (1,678) (4,330) 5 Trade and other payables-current 31 December 31 December 2006 2005 (unaudited) (audited) £'000 £'000 Trade payables 768 611Other taxes and social security costs 122 158Accruals 2,038 2,013Deferred revenue 1,834 1,227 Trade and other payables-current 4,762 4,009 6 Provisions Current Non-current Total provision (unaudited) £'000s £'000s £'000s At 1 January 2006 77 209 286 Utilised (77) - (77) Reclassified from non-current to current 209 (209) - Charges to the income statement 97 38 135 At 31 December 2006 306 38 344 The utilisation of the provisions in 2006 relates to onerous lease commitmentsin Elstree, UK. A provision of £135,000 was established for the onerous leasecommitment in Santa Cruz, USA, as the facility was closed in January 2007. Thebalance of the provision £209,000 represents an onerous lease commitment and theassociated restoration costs for the Elstree, UK facility. Managementanticipates the utilisation of the Elstree provision over the next year, as thelease terminates in July 2007, and the Santa Cruz provision over the next twoyears, as the lease terminates in May 2008. About ARC International plc ARC International is the world leader in configurable subsystems and CPU/DSPprocessors that are used by semiconductor companies worldwide fornext-generation system-on-chip (SoC) design. ARC's patented configurableprocessor technology enables the development of consumer, networking, massstorage and other cost-sensitive devices that are smaller and provide a higherdegree of differentiation over what can be created using "fixed architecture"core alternatives. ARC International maintains a worldwide presence with corporate and research anddevelopment offices in California, USA, and Elstree, UK. For more informationvisit www.ARC.com. ARC International is listed on the London Stock Exchange asARC International plc (LSE: ARK). ARC, ARC-Based, ARChitect, and the ARC logo are trademarks or registeredtrademarks of ARC International. All other brands or product names containedherein are the property of their respective owners. This release may contain "forward-looking statements" including statements concerning plans, future eventsor performance and underlying assumptions and other statements that are otherthan statements of historical fact. ARC's actual results for future periods maydiffer materially from those expressed in any forward-looking statements made byor on behalf of ARC. The factors that could cause actual results to differmaterially include, without limitation, general economic and businessconditions; potential for fluctuations in and unpredictability of ARC'squarterly results; assumptions regarding ARC's future business strategy; theability of semiconductor partners to manufacture and market microprocessorsbased on the ARC(R) architecture; the acceptance of ARC technology by systemscompanies; the availability of development tools, systems software and operatingsystems; the rapid change in technology in the semiconductor industry and ARC'sability to develop new products in a timely manner; competition from otherarchitectures; ARC's ability to protect its intellectual property; regulatorypolicies adopted by governmental authorities; risks associated with ARC'sinternational operations; management of ARC's growth; ARC's ability to attractand retain employees; and other uncertainties that are discussed in the "Investment Considerations" section of ARC's listing particulars dated 28September 2000 filed with the United Kingdom Listing Authority and the Registrarof Companies in England and Wales. 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