Arkle Res Regulatory News (ARK)

20 Feb 2008 07:00

Arc International PLC20 February 2008 Media Contact: Investor Contact:Lee Garvin Flanagin Juliet Clarke/Matt DixonARC International Financial Dynamics+1 408 437 3433 +1 44 20 7831 3113 ARC International plc Announces Unaudited Preliminary Results For the Year Ended December 31, 2007 Dollar Revenue Increases 17% Dollar Royalties Increase 54% Strategic Acquisitions Position ARC for Continued Growth SAN JOSE, Calif., and ST. ALBANS, England, February 20, 2008 - ARC International(LSE: ARK), the world leader in multimedia subsystems and configurable CPU/DSPcores, today announced its unaudited preliminary results for the full year endedDecember 31, 2007. Highlights from Year Ended December 31, 2007 (Compared to Financial Year 2006) $ £ % Increase 2Total Revenue 1 $28.9 million £14.4 million +17%Royalty Revenue $9.7 million £4.9 million +54%Bookings $37.3 million £18.7 million +23%Total Backlog $16.6 million £8.3 million +96%Licensing Revenue 1 $15.0 million £7.4 million +2% 1 Revenue of $28.9 million excluded an estimated $0.8 million of revenues from an acquisition made during the year. As a result of the completion of purchase accounting analysis these revenues have been offset against acquired goodwill. 2 On a dollar basis • 2007 closed with record highs in backlog and sales pipeline • Net loss without acquisitions decreased 10% to £1.0 million. Net loss with acquisitions increased to £2.5 million • Closing cash and short term investment position remain strong at £21.2 million • Completed and integrated strategic acquisitions o Alarity, Teja, and Tenison establish ARC's ability to deliver vertically integrated multimedia solutions to high value semiconductor companies o Sonic Focus adds a new, complementary class of customer and revenue channel through licensing its audio enhancement software directly to OEMs • New first-time royalty contributions; Increase in ARC-BasedTM unit shipments o 6 post 2004 contracts contributed royalty revenues • Total ARC customers now at 144 o 20+ customer contracts announced in 2007 o Intel signs new multi-year, royalty bearing licensing agreement o Broadcom signed a new ten year licensing agreement o $15 million agreement with one of the world's largest consumer electronics companies Commenting on the company's performance, Carl Schlachte, president and chiefexecutive officer, said, "2007 was a year of important achievements and solidgrowth for ARC International. ARC's revenue growth again outpaced thesemiconductor market. Royalties increased to a record high and contractscompleted since 2004 began to contribute royalty revenue during the year. Twoof the largest customer agreements in the company's history were announced,including Intel, and ARC enters 2008 with record highs in backlog and the salespipeline. "Three acquisitions were completed and integrated in 2007, and already arecontributing to ARC's ability to build deeper relationships with a greaternumber of high value semiconductor companies. The additions of Teja, Tenison,and Alarity fill out ARC's technology. Management now is focusing on morevertical solutions and adding new types of customers and revenue channels toleverage the existing business with semiconductor companies. Sonic Focus is thefirst such acquisition: For the first time in ARC's history the company willderive licensing and royalty fees directly from OEMs, which typically are higherthan those obtained from chip firms and creating more demand for ARC-Basedproducts." Commenting on the financial results, Victor Young, chief financial officer,said, "We were particularly pleased with the strong growth in royalty revenue.While the fourth quarter reflected softness some customers in North America wereexperiencing as a result of economic conditions, management remains confidentabout the market prospects for 2008 and the record highs in the sales pipelineand backlog reflect this potential. Contracts that were delayed to 2008 fromthe fourth quarter are expected to close within the first half of this year.Cost savings have been realized as a result of integrating the acquiredcompanies, and we will look to maximize additional opportunities moving forward." Statement from the President and Chief Executive Officer Overview In 2007 ARC International continued to make good progress in expanding the useof its products and brand. The company's revenue growth again outperformed thesemiconductor industry and many competitors. More high value customers tooklicensing agreements in the year, including Intel, and three strategicacquisitions were completed and integrated. ARC introduced several newmultimedia subsystems and configurable cores, and contracts completed since 2004started to contribute to ARC's royalty stream as planned. Strategic Direction and 2007 Acquisitions The consumer electronics market continues to drive much of the semiconductorindustry. But many devices, such as camera-enabled cell phones and MP3 players,still offer mediocre quality video and audio. Delivering the highest qualitymultimedia experience to consumers - regardless of form factor - presents asignificant market opportunity and is a key part of ARC's strategy. I call this"Enabling the YouTube Generation," which was outlined in my keynote presentationat the ConfigConTM Silicon Valley developer conference December 2007. Ahighlight video of the conference is available on ARC's Website. To bolster ARC's multimedia products serving these opportunities in thesemiconductor market and to further increase revenues, ARC acquired Teja,Tenison, and Alarity. These acquisitions were a cost-effective way for ARC toobtain important tools and software, which combined with ARC's subsystems andcores provide the basis for ARC to develop more of a vertically integratedsolution for chip designers. By offering more of the solution ARC can command ahigher premium on licensing fees. Customer feedback from these acquisitions hasbeen positive, and as a result ARC already is engaged with a greater number ofhigh value companies building chips for audio and video applications.Management expects to be able to announce the first licensing agreements as aresult of these discussions within the next few quarters. Entering Complementary Markets ARC's ability to develop and deliver integrated multimedia solutions to thesemiconductor industry is established. Now ARC can target a new class ofcustomers and add new sources of revenue to complement ARC's existingsemiconductor licensing business. The acquisition of Sonic Focus in 2008 bringsthese opportunities to ARC. Sonic Focus licenses its award-winning soundenhancement software directly to OEMs. By obtaining royalties directly from theOEM rather than semiconductor suppliers, Sonic Focus products can command muchhigher per unit royalty revenue than semiconductor intellectual property (IP)companies normally obtain. Furthermore, the acquisition of Sonic Focus provides additional leverage forARC's traditional licensing business with chip designers. By having an OEMselect Sonic Focus's audio software to semiconductor firms, those semiconductorsuppliers looking to win business with that OEM are more motivated to adopt anARC solution for their chip design. Announced acquisitions: • Sonic Focus, Inc.Sonic Focus, based in Northern California, provides award-winning audioenhancement software, restoring natural surround sound to digitally compressedstereo files. Sonic Focus has an established revenue stream and growingcustomer list of leading OEMs. The company already has achieved design wins ina number of desktop PCs, laptops, and a range of consumer electronics products.Sonic Focus's artisans and engineers draw upon decades of close partnershipswith music icons and media companies. • Alarity Corporation, Inc.Alarity has a renowned team of specialists in multimedia software applicationsbased in St. Petersburg, Russia. Prior to the acquisition, Alarity was engagedin select opportunities with larger ARC customers using ARC's multimediasubsystems and configurable processors. The integration of Alarity will makeavailable its full set of software resources to a broader number of ARCcustomers worldwide. • Teja TechnologiesTeja, located in Northern California, develops software used in the creation ofchips implementing multiple processors. Teja was founded in 1998 with fundingfrom venture firms such as the Mayfield Fund and Intel Capital. Their customerlist included companies such as Intel, Cisco Systems, Samsung, and SunMicrosystems. Their multiprocessor technology will be instrumental to ARC'sfuture multimedia subsystems. • Tenison Technology EDA, Ltd.Tenison, located in Cambridge, England provides highly accurate simulationmodels of processors and system-on-chips (SoCs). The acquisition includes keymembers of Tenison's engineering team, patents, and products. Tenison'scustomer list included companies such as Broadcom, Freescale, and Renesas. Thistechnology will be key to providing ARC's customers with accurate simulationmodels of next-generation multimedia solutions. Market Adoption of ARC(R) Multimedia Subsystem and Configurable Cores During 2007 ARC announced licensing agreements with over 20 semiconductorcompanies located in Asia, North America, and Europe. In particular, ARCannounced one of the largest agreements in the history of the semiconductor IPindustry and a new agreement with long-time customer Intel. While not all ofthe 20-plus contracts were completed during the trading period, the quantityreflects the ongoing appeal of ARC's multimedia subsystems and configurablecores for a variety of growing end markets. • Agreements with High Value Companies o Intel - signed a new multi-year, royalty bearing licensing agreementthat includes several ARC products. Additionally, ARC provides comprehensivesupport and training to Intel development centers in North America. o Unnamed Consumer Electronics Company - signed a $15 million multi-yearlicensing agreement. The customer's identity is confidential, but is one of thelargest consumer electronics companies in the world. o Broadcom - extended its existing ARC relationship with a new ten yearlicensing agreement. Broadcom has standardized on ARC's configurable technologyfor high-volume audio or video devices. • Customer Agreements for Multimedia Applications o Augusta Technology for next-generation mobile solutionso Fullhan Microelectronics for advanced multimedia productso NextWave Wireless for Mobile TV receiverso Qpixel Technology for video compression engineso VisionFlow for ultra low power H.264 media deviceso Unnamed customer for multi-standard digital TV receivers • Customer Agreements for Medical Applications o CVRx for implantable blood pressure monitoring and treatment systemso Unnamed customer for implantable pacemaker productso Unnamed customer for various implantable medical devices • Customer Agreements for Government/Security Applications o Edgewater Computer Systems for military aircrafto Unnamed customer for military and government products • Customer Agreements for Networking/Communications Applications o AD Technology for power line communications (PLC) chipso Crystal Media for VoIP solutionso iVivity for multi-protocol acceleration engineso SiConnect for PLC chipso Teranetics for advanced communications applicationso Unnamed customer for peripheral devices • Customer Agreements for Other Applications o Phison Electronics for next-generation flash NAND driveso NemeriX for ultra low power GPS chipsetso Semtech for mixed-signal semiconductor productso Unnamed leading smart card provider for high volume securityapplications Board Changes Steven Gunders was appointed to the Board of Directors as Non-Executive Directorin June, 2007. He became Chairman of the Remuneration Committee and a member ofthe Audit Committee. Outlook ARC enters 2008 with the strongest backlog and sales pipeline in the company'shistory. This is a reflection of the increasing market recognition and adoptionof 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 andthe continuing strength of the business give management confidence about thetrading 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: $24.8million). Total revenue in sterling was £14.4 million, up 7% over the sameperiod last year (2006: £13.4 million). License and engineering revenue in U.S.dollars was up 2% to $15.0 million (2006: $14.7 million). In sterling, witheffects of currency translation, license and engineering revenue was down 6% at£7.4 million (2006: £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 £2.12 million (2006: £2.07million). 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 £4.9 million (2006:£3.4 million). (Royalty income in 2007 includes advance non-refundable paymentswhich 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 £1.44 million (2006: £1.59 million). Gross marginincreased to 90% (2006: 88%). Net operating expenses increased by 14% to £18.3million (2006: £16.0 million). The company had 196 employees at December 31, 2007 compared with 126 at December31, 2006. The 58% growth in headcount was due to the three acquisitions.Research and development costs increased 11% to £7.4 million (2006: £6.7million). Sales and marketing increased 10% to £5.5 million (2006: £5.0million). General and administration costs increased 13% to £3.7 million (2006:£3.3 million). Other expenses, comprised of depreciation and amortization,increased to £1.7 million (2006: £1.1 million) due to additional amortization ofintangibles purchased from the acquisitions. The incremental operating expensesexcluding amortization as a result of the three acquisitions during the yearwere £1.6 million in 2007. Incremental amortization expenses associated withacquired technologies and intangible assets were £0.5 million in 2007. Interest Interest income was down 3% to £1.47 million (2006: £1.51 million) due to adecrease in the average cash balance offset by an increase in the interest rateon investments. Net loss Net loss was £2.5 million (2006: £1.1 million). Loss per share increased to1.69p (2006: 0.78p). Cash flow and balance sheet The net cash outflow from operations increased to £5.1 million (2006: £1.7million). Capital expenditure, including payments made for the threeacquisitions and investments in associate, was £8.1 million (2006: £0.9million). The movement in cash and short-term investments during the year was anoutflow of £10.4 million (2006: £0.4 million). Total net assets at December 31,2007 were £30.3 million (2006: £32.0 million), including cash and short-terminvestments of £21.2 million (2006: £31.6 million). Dividend No interim dividend payment will be made for the year ended December 31, 2007(2006: £Nil). Acquisitions During the period ARC acquired the key assets of Teja Technologies for a totalconsideration of £2.5 million, Tenison Technology EDA Limited for a totalconsideration of £1.1 million, and Alarity Corporation, Inc. for a totalconsideration of £3.0 million. See note 6 for details. Consolidated income statementsfor the year ended December 31, 2007 Year ended Year ended December 31 December 31 2007 2006 (unaudited) (audited) Note £ '000 £ '000 Revenue 14,401 13,411Cost of sales (1,437) (1,591)Gross profit 12,964 11,820Operating expenses 2 (18,305) (16,045)Operating loss (5,341) (4,225)Finance income 1,470 1,509Share of post-tax loss of associate (22) -Loss before income tax (3,893) (2,716)Tax credit (net) 1,389 1,583Loss for the year attributable to equity shareholders (2,504) (1,133) Basic and diluted loss per share (pence) (1.69) (0.78) Consolidated statements of recognized income and expensefor the year ended December 31, 2007 Year ended Year ended December 31 December 31 2007 2006 (unaudited) (audited) Notes £'000 £'000Loss for the period (2,504) (1,133)Currency translation difference 4 (54) (267)Change in value of ESOP reserve 4 75 40Total recognised expense for the period (2,483) (1,360) Consolidated balance sheetsas at December 31, 2007 December 31 December 31 2007 2006 (unaudited) (audited) Notes £'000 £'000 AssetsNon current assetsIntangible assets 7,506 843Property, plant and equipment 1,537 424Investment in associate 414 -Trade and other receivables 417 372 9,874 1,639 Current assetsInventory 72 203Trade and other receivables 4,241 2,959Current corporation tax receivable 1,368 700Short term investments 11,145 13,500Cash and cash equivalents 10,100 18,146 26,926 35,508 Total assets 36,800 37,147LiabilitiesCurrent liabilitiesTrade and other payables 5,729 4,762Deferred tax liabilities 143 -Provision 5 163 306 6,035 5,068Net current assets 20,891 30,440 Non-current liabilitiesOther payables 126 -Deferred tax liabilities 346 -Provision 5 20 38 492 38Net assets 30,273 32,041 Shareholders' equityOrdinary shares 4 153 151Share premium 4 3,683 3,256Other reserves 4 61,037 60,751Cumulative translation adjustment 4 (511) (457)Retained earnings 4 (34,089) (31,660)Total shareholders' equity 30,273 32,041 Consolidated cash flow statementsfor the year ended December 31, 2007 Year ended Year ended December 31 December 31 2007 2006 (unaudited) (audited) £'000 £'000 Cash flows from operating activitiesCash used in operations (note 3) (5,058) (1,678)Interest received 1,636 1,474Taxes paid (28) (97)Tax credits received 701 755Net cash used in operating activities (2,749) 454 Cash flows from investing activitiesPurchase of property, plant and equipment (1,502) (353)Purchase of intangible assets (195) (552)Capitalization of R&D assets (272) (21)Movements on short term investments 2,355 (2,966)Investment in associate (286) -Purchase of Alarity (2,299) -Purchase of Tenison (1,087) -Purchase of Teja Technologies (2,461) -Net cash used in investing activities (5,747) (3,892) Cash flows from financing activitiesNet proceeds from issue of ordinary shares 504 375Net cash generated from financing activities 504 375 Effects of exchange rate changes (54) (267)Net decrease in cash and cash equivalents (8,046) (3,330)Cash and cash equivalents at January 1 18,146 21,476Cash and cash equivalents at December 31 10,100 18,146 NOTES 1. Basis of presentation The preliminary results are unaudited and do not constitute statutory accountswithin the meaning of s240 of the Companies Act 1985. The statutory accounts forthe year ended 2006 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 preliminary results of ARC International plc have been prepared inaccordance with the EU Endorsed International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 1985 applicable to companies reporting under IFRS. These havebeen prepared in accordance with the Listing Rules of the Financial ServicesAuthority. In preparing the preliminary results, management have used theprincipal accounting policies as set out in the Group's annual report andaccounts for the year ended December 31, 2006. The preliminary results havebeen prepared under the historical cost convention, except in respect of certainfinancial instruments. The preliminary results incorporate the accounts of the Company and each of itssubsidiaries for the period to December 31, 2007. All new acquisitions areaccounted for under the purchase method from the date of acquisition. The preparation of the preliminary results in conformity with IFRSs requires theuse of 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 December 31 December 31 2007 2006 (unaudited) (audited) £ '000 £ '000 Operating expensesResearch and development (7,423) (6,716)Sales and marketing (5,518) (5,023)General and administrative (3,678) (3,254)Other expenses (1,686) (1,052)Net operating expenses (18,305) (16,045) 3. Cash used in operations Year ended Year ended December 31 December 31 2007 2006 (unaudited) (audited) £'000 £'000 Net loss for the year (2,504) (1,133)Adjustments for:Interest receivable (1,470) (1,509)Tax credit (1,389) (1,583)Amortization 1,211 823Depreciation 475 229Loss on disposal of property, plant and equipment 20 5Share based award expense 286 277Share loss from associate 22 -(Increase) in inventories 153 (203)(Increase)/decrease in trade and other receivables (477) 393Increase/(decrease) in trade and other payables (1,224) 965Increase/(decrease) in provisions (161) 58Cash used in operations (5,058) (1,678) 4. Statement of changes in shareholders' equity Cumulative Share Share Other translation Retained Group capital premium reserves adjustment earnings Total £'000 £'000 £'000 £'000 £'000 £'000At January 1, 2006 (audited) 149 2,923 60,474 (190) (30,567) 32,789Shares issued 2 333 335Change in value of ESOP reserve 40 40Share based award reserve 277 277Exchange loss (267) (267)Loss for the year (1,133) (1,133)At December 31, 2006 (audited) 151 3,256 60,751 (457) (31,660) 32,041Shares issued 2 427 429Change in value of ESOP reserve 75 75Share based award reserve 286 286Exchange loss (54) (54)Loss for the year (2,504) (2,504)At December 31, 2007 (unaudited) 153 3,683 61,037 (511) (34,089) 30,273 5. Provisions Current Non-current Total provision £'000s £'000s £'000s At January 1, 2006 (audited) 77 209 286Utilised (77) - (77)Reclassified from non-current to current 209 (209) -Charges to the income statement 97 38 135At December 31, 2006 (audited) 306 38 344Utilised (181) - (181)Reclassified from non-current to current 38 (38) -Charges to the income statement - 20 20At December 31, 2007 (unaudited) 163 20 183 The utilisation of the provisions in 2007 relates to onerous lease commitmentsin Elstree, UK and for the onerous lease commitment in Santa Cruz, USA. Thebalance of the provision of £183,000 represents the restoration costs for theElstree, UK facility. The Elstree lease terminated in July 2007 and there isuncertainty as to the timing and amount of the restoration payments 6. Acquisitions The group purchased Tenison Technology EDA Limited on June 14, 2007 for a totalconsideration of £1,107,000, Alarity Corporation, Inc. on September 21, 2007 fora total consideration of £3,048,000 and certain assets of Teja Technologies,Inc. on March 30, 2007 for £2,461,000. All intangible assets were recognized at their respective fair values. Theresidual excess over the net assets acquired is recognized as goodwill in thefinancial statements. The fair values are subject to adjustments in respect ofachieving specified net asset amounts, which affect intangible assets fordeveloped core technology, net tangible assets, deferred tax, and goodwill. Fair values assigned to the acquiree's identifiable assets and liabilities havebeen determined provisionally. Any adjustments to these provisional values as aresult of completing work on the fair values of the assets and liabilitiesacquired will be recognised within 12 months of the acquisition date andrecognised as if they occurred as at the date of acquisition. Tenison Technology EDA Limited ARC International acquired 100% of the voting shares in Tenison Technology EDALimited. The fair value of the acquisition is for the net assets and includes intangibleassets for developed core technology. Goodwill of £992,000 represents the value of synergies and assembled work force. Teja Technologies In the Teja purchase, only key assets were acquired. The acquisition includesTeja's software products, key customer contracts, its engineering team, andpatents for Teja's award-winning technology. The fair value of the acquisition is predominantly for intangible developed coretechnology, and to a lesser extent, customer relationships, trade receivables,and deferred revenue. Goodwill of £478,000 represents the value of synergies and assembled work force. Alarity Corporation, Inc. ARC International acquired 100% of the voting shares in Alarity Corporation,Inc. The fair value of the acquisition is for the net assets and for intangibledeveloped core technology. Goodwill of £1,944,000 represents the value of synergies and assembled workforce. About ARC International plcARC International is the world leader in multimedia subsystems and configurableCPU/DSP processors. Used by over 140 companies worldwide, ARC's configurablesolutions enable the creation of highly differentiated system-on-chips (SoCs)that ship in hundreds of millions of devices annually. ARC's patentedsubsystems and cores are smaller, consume less power, and are less expensive tomanufacture than competing products. ARC International maintains a worldwide presence with corporate and research anddevelopment offices in San Jose and Lake Tahoe, Calif., St. Albans, England, andSt. Petersburg, Russia. For more information visit www.ARC.com. ARCInternational is listed on the London Stock Exchange as ARC International plc(LSE: ARK). ARC, ARC-Based, ARChitect, and the ARC logo, ConfigCon, and Sonic Focus and theSonic Focus logo are trademarks or registered trademarks of ARC International.All other brands or product names contained herein are the property of theirrespective owners. This release may contain "forward-looking statements"including the development, implementation, and release of features describedherein, statements concerning plans, future events or performance and underlyingassumptions and other statements that are other than statements of historicalfact. These are at the sole discretion of ARC International. ARC's actualresults for future periods may differ materially from those expressed in anyforward-looking statements made by or on behalf of ARC. The factors that couldcause actual results to differ materially include, without limitation, generaleconomic and business conditions; potential for fluctuations in andunpredictability of ARC's quarterly results; assumptions regarding ARC's futurebusiness strategy; the ability of semiconductor partners to manufacture andmarket microprocessors based on the ARC(R) architecture; the acceptance of ARCtechnology by systems companies; the availability of development tools, systemssoftware and operating systems; the rapid change in technology in thesemiconductor industry and ARC's ability to develop new products in a timelymanner; competition from other architectures; ARC's ability to protect itsintellectual property; regulatory policies adopted by governmental authorities;risks associated with ARC's international operations; management of ARC'sgrowth; ARC's ability to attract and retain employees; and other uncertaintiesthat are discussed in the "Investment Considerations" section of ARC's listingparticulars dated September 28, 2000 filed with the United Kingdom ListingAuthority and the Registrar of Companies in England and Wales. 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