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 IPShieldTM and ARCProtectTM
• 9 new design licenses including 5 ARCtangentTM processor licenses and sublicenses and 4 USB peripheral IP licensees

• 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 IPShieldTM and ARCProtectTM 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 ARCtangentTM processor, ARC’s class leading audio codecs and the MetaWareTM 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 ViewFleX500TM the first USB NowTM-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 600TM 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 ARCtangentTM-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. IPShieldTM software, is an Internet security solution providing embedded designers with the ability to build security into their network-connected systems. ARCProtectTM 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®, and ARC continue to strengthen their strategic relationship. In August, the two companies joined forces to announce support for Motorola® ColdFire™ 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.

Financial Tables

Click here to read the financial tables

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.