ARC International plc
ARC INTERNATIONAL PLC
RESULTS FOR THE THIRD QUARTER AND NINE MONTHS
ENDED 30 SEPTEMBER 2003
ARC International plc (LSE: ARK), a world leader in configurable System-On-Chip
(SoC) platform technologies, announces its unaudited financial results for the
third quarter and nine months ended 30 September 2003.
Financial and Operational Highlights:
Third Quarter ended 30 September 2003
-- Turnover up 5% sequentially to �2.5 million (Q2 2003: �2.4 million) and down
9% year on year (Q3 2002: �2.8 million)
-- Operating expenses before amortisation, depreciation and exceptional items
down by 2% sequentially to �6.7 million (Q2 2003: �6.8 million), down 9%
year on year (Q3 2002: �7.3 million)
-- Pre-exceptional net loss increased 3% sequentially to �5.8 million (Q2 2003:
�5.6 million) and increased by 10% year on year (Q3 2002: �5.3 million)
-- Quarterly cash burn at �4.4 million (Q2 2003: �3.4 million, Q3 2002: �3.8
million)
-- Record royalty income, up 40% sequentially to �0.5 million (Q2 2003: �0.4
million)
-- Introduced new products including a new processor architecture, 2 new USB
host products, the family of audio codecs, and several software products
including IPShield(TM) and ARCProtect(TM)
-- 9 new design licenses including 5 ARCtangent(TM) processor licenses and
sublicenses and 4 USB peripheral IP licensees
Nine months ended 30 September 2003
-- Turnover at �7.8 million flat at constant exchange rates, down 8% over the
same period in the prior year after currency impact (2002: �8.5 million)
-- Operating expenses before amortisation, depreciation and exceptional items
reduced by 7% to �20.7 million (2002: �22.2 million)
-- Pre-exceptional net loss increased by 1% to �15.8 million (2002: �15.7
million)
-- Cash burn (excluding the buyback) reduced by 5% to �12.2 million (2002:
�12.9 million)
-- Strong cash position; �40.5 million
-- 33 design licenses, 19 for USB peripherals products and 14 for the
ARCtangent processor and 23 new processor or USB customers won in the year
Commenting on the results, Mike Gulett, Chief Executive Officer, said:
"Traditionally, the third quarter is seasonally a quieter quarter for the
semiconductor industry and we saw a continuation of the contract deferrals which
have affected our business. Although we introduced a number of important
products later in the quarter, we expect shipments of these new products to have
greater impact in the upcoming periods.
A growing number of our customers have gone into production with
ARCtangent-based products this year and as a result, we achieved a record
royalty quarter with a 40% increase over the preceding quarter. Although
customers continue to delay new designs in North America, we have focused our
efforts on expanding business in Asia. As a result, ARC grew its Asian business
93% over the previous quarter to a record level.
We continue to focus on optimising our cost structure each quarter. This week we
implemented a further cost reduction programme to reduce operating expenses and
cash burn. We are also taking steps to restructure the business into three
Business Unit organizations, to better focus and align our resources."
For further information, please contact:
ARC International plc
Mike Gulett CEO, +44 (0) 20 8236 2800
Monica Johnson CFO, +44 (0) 20 8236 2800
Tulchan Communications
Julie Foster Consultant, +44 (0) 20 7353 4200
ARC will host a conference call for securities analysts today at 14:30, UK time.
The analyst presentation may be accessed on the Investor Relations section of
ARC's website at www.ARC.com from 14:00 UK time on 23 October. An audio
recording of this meeting will also be available on the ARC website.
Chief Executive's Review
Overview
In the first 9 months of 2003, ARC reported flat turnover at constant exchange
rates to �7.8 million, down 8% with currency impact from �8.5 million over the
same period last year. Operating expenses before exceptionals, amortisation and
depreciation were reduced by 7% to �20.7 million. Pre-exceptional net loss
increased by 1% to �15.8 million.
We booked 33 new design licenses including 14 for the ARCtangent processor and
19 licenses for USB in the first nine months of the year. We also continue to
license more than 50 different software customers each quarter.
Both income from royalties and the Asian operations achieved record levels and
have grown sequentially throughout all three quarters this year.
Product Strategy and Customer Focus
Providing vertically integrated products continues to be a primary focus for
ARC. Many of our customers are developing innovative consumer electronics
applications. Products such as the audio codecs, provide them with the
technology that helps them get to market more quickly by reducing the number of
IP vendors necessary to complete designs. Applications that can use one or more
of our codecs include: digital still cameras, cell phones and personal video
recorders.
ARC has also made progress in reducing the number of IP vendors our networking
customers need to complete designs. In August, ARC introduced IPShield(TM) and
ARCProtect(TM) two new security software products for embedded networking
applications. With these two products, ARC provides designers with the ability
to incorporate Internet Security to their network connected devices.
Major semiconductor companies are continuing to adopt ARC's technology. In the
third quarter ARC expanded its business relationships in Asia with:
Kawasaki Microelectronics, with world-wide design centers, licensed the
ARCtangent(TM) processor, ARC's class leading audio codecs and the MetaWare(TM)
Tool Suite.
MSILICON Electronics, located in Hsin Chu, Taiwan, is the first Asian-based
company to license ARC's High-Speed USB 2.0 On-the-Go technology. They will
integrate ARC's USB 2.0 OTG into a development platform for multimedia storage
devices.
Sony Semiconductor Kyushu licensed the ARCtangent processor, for a variety of
projects, because it delivers more computational power, but draws less power
than other combined RISC/DSP implementations. The relationship with Sony
broadens ARC's presence in Japan's consumer electronics market.
ARC's technology has also been employed in some innovative digital media
applications this past quarter.
SandVideo, of Andover, MA, a recognized expert in motion video compression
semiconductor technology, plans to integrate multiple ARCtangent processors into
its next generation video compression codecs, because the flexibility of the
cores enables them to respond more rapidly to changing industry specifications
ViewAhead Technology, a long time ARC customer, introduced the
ViewFleX500(TM) the first USB Now(TM)-based product to reach the
market. ViewAhead integrated ARC's USB Now into its digital imaging
print controller for the personal document imaging market, because the
integration provided by USB Now allowed ViewAhead to spend its time
and silicon budget on application-specific innovation. The ViewFleX500
began shipping in the third quarter.
Sandisk Corporation, the world's largest supplier of flash memory data storage
card products, introduced a new family of compact flash controllers in August.
SanDisk selected the ARCtangent processor core for its Ultra II Compact Flash
and Ultra II SD card because it enables very high bandwidth data transfer from
the host bus to the NAND memory and reduces to a minimum the processing
overhead.
ARC 600(TM) and USB
ARC 600 Processor
ARC introduced a new configurable processor architecture for power-sensitive
embedded systems at the Microprocessor Forum on 15 October 2003. The ARC 600,
the industry's smallest and lowest power 32-bit RISC/DSP, targets
high-performance multimedia-intensive applications and lends itself to
multiprocessing designs. With the ARC 600 architecture's configurability and
extendibility, designers have the necessary tools to balance the processor's
speed, area and power to develop an optimal solution for their specific
application.
USB Host Controllers
ARC extended its leadership position within the USB IP market with the
introduction of a new family of host-specific USB products in September.
Host-only functionality is critical as a large number of USB applications are in
the process of migrating from exclusively USB full speed to a combination of
full- and high-speed ports. The new family of host controllers is targeted at
"PC-less" printing. They are optimized for set-top boxes, high-end video gaming
systems, residential gateway devices and printer applications.
Audio Codecs
In keeping with our platform approach to decreasing development risk for our
customers, ARC introduced a family of digital audio codecs this quarter. These
codecs are optimized for use on the ARCtangent(TM)-A5 processor. Like the
previously introduced VoIP codecs, these devices leverage the DSP extension
instructions of the A5 to deliver high performance audio decoding and encoding.
In a matter of minutes, designers can easily create a microprocessor tailored
for their voice or audio needs, dramatically reducing development time and cost.
Software and Development Tools
Security for Embedded Applications
Early in the third quarter, ARC introduced two products aimed at satisfying the
crucial requirements for transmitting sensitive information over the Internet.
IPShield(TM) software, is an Internet security solution providing embedded
designers with the ability to build security into their network-connected
systems. ARCProtect(TM) is a hardware-acceleration, within the ARCtangent, of
IPShield algorithms. These products are intended for applications such as small
office/home office routers, xDSL/cable modems and security equipment.
Strategic Alliances
Metrowerks, a division of Motorola(R), and ARC continue to strengthen
their strategic relationship. In August, the two companies joined
forces to announce support for Motorola(R) ColdFire(TM) MPC852T Power
QUICC I processor. The resulting product, the MPC852 Evaluation
System, which includes ARC's software suite, provides an easy-to-use,
cost-effective prototyping solution for embedded system engineers
developing MPC852T processor-based networking and communications
applications.
Partnering with Samsung, ARC has released a robust software support solution for
Samsung's high performance, cost-effective, ARM-based S3C25xx communications
processors. ARC is offering its MQX RTOS, RTCS TCP/IP networking stack, a
variety of networking protocols, security software and USB device stack for
engineers developing S3C25xx-based networking and communications applications
for the router, WLAN and firewall markets.
Organization Update
This week, we announced a re-organisation of the workforce to better focus our
resources and increase efficiencies. The business will be restructured into
three separate Business Units: the Processor Business Unit, Peripherals Business
Unit and Software Business Unit. In conjunction with these changes, we have
announced a 10% reduction in our workforce. This will impact approximately 20
jobs. To this end, we expect to take a nominal charge in the fourth quarter.
Outlook
We introduced a number of new products across the processor, peripheral and
software business units in Q3 and we expect shipments of these new products to
have greater impact in the upcoming periods.
Our cost reduction efforts implemented this week will further optimize our cost
structure. We are pleased with the increases in royalty and Asia income and
expect to maintain the momentum in these segments alongside any improvements in
the overall industry.
Financial Review
Three months ended 30 September 2003
Turnover
Total turnover for the third quarter was �2.5 million, up 5% from the second
quarter turnover of �2.4 million and down 9% year over year (Q3 2002: �2.8
million). Prior to currency translation, with virtually all sales in US$,
underlying turnover was up 3% sequentially and down 6% over Q3 2002. License
income was 2% lower than the previous quarter at �1.5 million (Q2 2003: �1.5
million). Maintenance and service income was 5% lower than the previous quarter
at �0.5 million (Q2 2003: �0.5 million). The number of designs being shipped by
our customers and contributing to royalties increased significantly resulting in
a 40% increase in royalties to �0.5 million (Q2 2003: �0.4million).
Costs
Cost of sales of �0.3 million decreased 22% sequentially and increased 26% year
over year (Q2 2003: �0.4 million, Q3 2002: �0.2 million) which, combined with
the turnover increase, resulted in a gross margin of 88% (Q2 2003: 84%). Total
operating expenses (excluding exceptional costs, amortisation of goodwill and
depreciation) decreased by 2% sequentially and 9% year over year to � 6.7
million (Q2 2003: �6.8 million, Q3 2002: �7.3 million).
The Company had 201 employees at 30 September 2003 compared with 205 at 30 June
2003. Research and development costs were increased 1% sequentially and
decreased 14% year over year at �3.1 million (Q2 2003: �3.1 million, Q3 2002:
�3.6 million). Sales and marketing costs decreased 2% sequentially and 1% year
over year to �2.2 million (Q2 2003: �2.2 million, Q3 2002: �2.2 million).
General and administration costs at �1.1 million were down 4% sequentially and
down 16% year over year (Q2 2003: �1.1 million, Q3 2002: �1.3 million).
Interest
Interest income decreased 47% sequentially and 66% year over year to �0.4
million (Q2 2003: �0.7 million, Q3 2002: �1.1 million) due to lower cash
balances from operations and the share buyback.
Net Loss
The net loss prior to exceptional items was �5.8 million representing a
sequential increase of 3% and a 10% increase year over year (Q2 2003: �5.6
million, Q3 2002: �5.3 million). Loss per share prior to exceptional items
increased to (4.2) p (Q2 2003: (2.4) p, Q3 2002: (1.8) p) primarily as a result
of the significant reduction in share count following the share buyback. During
the share buy back, the Company purchased 162,413,705 shares resulting in
144,132,864 shares outstanding as of 30 September 2003. Net loss, including
exceptional items, improved by 2% sequentially and 23% year over year at
�5.8million (Q2 2003: �5.9 million, Q3 2002: �7.5 million).
Cash flow and balance sheet
The net cash outflow from operations was �4.9 million (Q2 2003: �4.1 million, Q3
2002: �4.5 million). Capital expenditure was �0.7 million. The movement in net
funds during the quarter was an outflow of �4.4 million. Net assets at 30
September 2003 were �51.3 million, including net cash of �40.5 million.
Nine months ended 30 September 2003
Turnover
Total turnover at �7.8 million was flat at constant exchange rates and down 8%
from the previous year with currency impact (2002: �8.5 million). License income
was �5.2 million (2002: �6.6 million). Maintenance and service income was �1.5
million (2002: �1.6 million) and royalties increased by 235% to �1.1 million
(2002: �0.3 million).
Costs
Cost of sales was �1.1 million (2002: �1.0 million), resulting in a gross margin
of 86% (2002: 88%). Total operating expenses (excluding exceptional costs,
amortisation of goodwill and depreciation) decreased 7% to �20.7 million (2002:
�22.2 million).
Total headcount in the business at 30 September 2003 was 201 employees compared
with 200 at 30 September 2002. Research and development costs were down 1% to
�9.6 million (2002: �9.8 million), sales and marketing costs were down 9% to
�6.9 million (2002: �7.5 million) and general and administration costs were down
21% to �3.1 million (2002: �3.9 million).
Interest
Interest income was �2.1 million (2002: �3.4 million).
Net loss
The net loss before exceptional costs was �15.8 million (2002: �15.7 million).
Cash flow and balance sheet
The net cash outflow from operations was �14.4 million (2002: �15.3 million).
Capital expenditure was �2.2 million (2002: �1.7 million). The movement in net
funds during the year was a �60.8 million outflow, �48.3 million was related to
the share buy back. On 2 April 2003 the court approved the reduction in share
capital resulting in the cancellation of the share premium account, write-off of
the accumulated deficit on the profit and loss account, creation of a
distributable reserve of �73.5 million and the balance credited to a special
reserve. Net assets at 30 September 2003 were �51.3 million (30 September 2002:
�119.1 million), including net cash of �40.5 million.
Dividend
No interim dividend payment will be made in respect of the nine months ended 30
September 2003.
ARC International plc
Consolidated profit and loss account
for the nine months ended 30 September 2003
----------------------
3 months 3 months 9 months 9 months
ended ended ended ended
30 30 30 30
September September September September
2003 2002 2003 2002
(unaudited)(unaudited) (unaudited) (unaudited)
�'000 �'000 �'000 �'000
Turnover 2,503 2,764 7,788 8,507
Operating costs
---------------------------------------------- ----------- -----------
Goodwill
amortisation (968) (1,024) (2,904) (3,069)
Exceptional costs - (2,240) 296 (2,101)
Other operating
costs (7,711) (8,117) (23,565) (24,477)
---------------------------------------------- ----------- -----------
(8,679) (11,381) (26,173) (29,647)
Loss before interest
and tax (6,176) (8,617) (18,385) (21,140)
Interest receivable and
similar income 381 1,113 2,067 3,355
Interest payable and
similar charges - - (3) -
---------------------- ----------- -----------
Loss on ordinary
activities before tax (5,795) (7,504) (16,321) (17,785)
Tax on loss on ordinary
activities - - 822 -
---------------------- ----------- -----------
Retained loss for the
period (5,795) (7,504) (15,499) (17,785)
====================== =========== ===========
Basic loss per share (4.20)p (2.53)p (6.93)p (5.99)p
Diluted loss per share (4.20)p (2.53)p (6.93)p (5.99)p
Pre-exceptional loss
per share (4.20)p (1.77)p (7.06)p (5.28)p
----------------------
Summary of operating expenses
Operating costs
Cost of sales (308) (244) (1,088) (980)
Research and development (3,126) (3,617) (9,619) (9,766)
Sales and marketing (2,184) (2,196) (6,848) (7,502)
General and administration (1,085) (1,291) (3,138) (3,950)
Depreciation of fixed assets (1,008) (769) (2,872) (2,279)
Amortisation of goodwill (968) (1,024) (2,904) (3,069)
Exceptional costs - Provision
release - 160 536 299
Exceptional costs -
Restructuring - (2,400) (240) (2,400)
------- -------- -------- --------
Total operating expenses (8,679) (11,381) (26,173) (29,647)
------- -------- -------- --------
ARC International plc
Consolidated balance sheet
as at 30 September 2003
30 30
September September
2003 2002
(unaudited) (unaudited)
�'000 �'000
Fixed assets
Intangible assets 4,861 9,289
Tangible assets 5,580 5,984
Investments 1,660 -
----------- -----------
12,101 15,273
----------- -----------
Current assets
Stock 96 154
Debtors 3,479 4,556
Investments - bank deposits 39,567 105,265
Cash at bank and in hand 940 2,690
----------- -----------
44,082 112,665
Creditors - amounts fully due within one year (3,864) (4,731)
----------- -----------
Net current assets 40,218 107,934
Total assets less current liabilities 52,319 123,207
Creditors - amounts fully due after more than
one year - (2)
Provisions for liabilities and charges (1,050) (4,137)
----------- -----------
Net assets 51,269 119,068
=========== ===========
Capital and reserves
Called up share capital 144 296
Share premium account 1,384 152,448
Exchangeable shares 744 4,040
Capital Redemption Reserve 162 -
Merger reserve 107 107
Other reserves 60,475 24,582
Profit and loss account (11,747) (62,405)
----------- -----------
Total shareholders' funds 51,269 119,068
=========== ===========
ARC International plc
Consolidated cash flow statement
for the nine months ended 30 September 2003
----------- -----------
3 months 3 months 9 months 9 months
ended ended ended ended
30 30 30 30
September September September September
2003 2002 2003 2002
(unaudited) (unaudited) (unaudited) (unaudited)
�'000 �'000 �'000 �'000
Net cash outflow from
operating activities (4,872) (4,529) (14,382) (15,321)
Returns on investments
and servicing of
finance
Taxes paid (1) - (45) 3,177
Tax refund 62 - 933 -
Interest received 1,127 933 3,019 -
Bank interest paid - - (1) -
----------- ----------- ----------- -----------
1,188 933 3,906 3,177
----------- ----------- ----------- -----------
Capital expenditure
and financial
investment
Purchase of tangible
fixed assets (673) (227) (2,202) (1,732)
Disposal of intangible
fixed assets (2) - -
Disposal of tangible
fixed assets - - 168 -
Investment in own
shares (49) - (48,329) -
----------- ----------- ----------- -----------
(724) (227) (50,363) (1,732)
----------- ----------- ----------- -----------
Net cash outflow
before management of
liquid resources and
financing (4,408) (3,823) (60,839) (13,876)
----------- ----------- ----------- -----------
Management of liquid
resources
Movement on term
deposits 3,333 4,714 58,497 14,136
----------- ----------- ----------- -----------
Financing
Financing - issue of
ordinary share
capital to satisfy
share option
exercises 22 163 330 1,184
Capital element of
finance lease rentals - (1) (1) (5)
----------- ----------- ----------- -----------
Net cash inflow from
financing 22 162 329 1,179
----------- ----------- ----------- -----------
(Decrease)/Increase in
cash during the
period (1,053) 1,053 (2,013) 1,439
----------- ----------- ----------- -----------
Notes
About ARC International
ARC International is a world leader in SoC and embedded software design and
development minimizing risk for customers developing next generation wireless,
networking, industrial control, storage, and consumer electronics products. ARC
introduced the industry's first user-customizable 32-bit RISC/DSP processor
core, the industry's first USB Hi-speed On-the-Go IP and today supplies turnkey
embedded solutions that combine a real-time operating system, development tools
and peripheral hardware and software that enable developers to better design
optimization and performance. ARC provides a single source for the major SoC and
embedded software building blocks reducing the number of suppliers, reducing
cost, reducing risk and reducing time-to-market.
ARC International employs approximately 200 people in research and development,
sales and marketing offices across North America, Europe and Asia. Full details
of the company's locations and other information are available on the company's
website, 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.