ARC International Results for the First Quarter Ended 31 March 2003

April 23, 2003 - ARC International plc (LSE: ARK), a world leader in semiconductor and software technology licensing, announces its unaudited financial results for the first quarter ended 31 March 2003.

Financial and Operational Highlights:

First Quarter ended 31 March 2003:

• Turnover up 6% in the quarter on prior year quarter and down 10% sequentially to £2.9 million (Q1 2002: £2.7m, Q4 2002: £3.2m)
• Pre-exceptional net loss of £4.4m (including an £0.8 million tax refund), a 19% year on year improvement (Q1 2002: £5.4m)
• 7 new design licences won for the ARCtangent™ processor
• Strong performance on USB Now™ product sales, booked 7 licenses
• Software and development tools products shipped to more than 50 customers
• Asia accounted for 8% of revenues

Commenting on the results, Mike Gulett, Chief Executive Officer, said:

“Despite the continued uncertainty in our markets and the deferral of several licensing deals into the second quarter, we booked 14 licenses for our ARCtangent and USB products combined. These deals were signed with companies such as Altek, Conexant, and ST Microelectronics. We also announced that LSI Logic has licensed ARC’s USB High-Speed On-the-Go (OTG) technology.

An increasing number of ARC’s products are being put into production across a diverse range of markets. In the Digital Still Camera space, ARC’s technology is used in Fujifilm, Axiz, HP, Logitech, Polaroid, Radio Shack, RCA and Toshiba products. Emerging markets for our technology include biometrics, storage devices and industrial control. We expect our customers in those areas to begin shipping products this year.

Looking ahead, we do not anticipate any significant changes in market conditions over the next quarter. We are confident that our strategy of providing a total system solution will help to drive the business towards profitability and create a sustainable long-term business. ”

Chief Executive Officer’s Review

Overview

In the first quarter of 2003, ARC reported a 6% increase in turnover to £2.9 million, up from £2.7 over the same quarter last year but down 10% quarter on quarter (Q4 2002: £3.2 million). At constant exchange rates, this represents an 18% increase year over year and a sequential decline of 9%. Despite ongoing, challenging market conditions, tight management of costs resulted in a pre-exceptional net loss of £4.4 million, which is down 19%, (Q1 2002: £5.4 million). Operating expenses before exceptionals, amortisation and depreciation year on year were also reduced by 4% to £7.1 million.

Many of our current and prospective customers continue to delay new product development, which deferred the signing of new licenses for our products into the second quarter. During the first quarter, we booked 14 new design licenses including 7 customers for the ARCtangent processor and 7 licenses for USB. We are pleased with the development of our Asian business, a market that presents us with significant opportunities for the future. Sales in Asia during the first quarter accounted for 8% of total revenue.

Share Buyback

We continue to remain on track for the share buyback programme. Earlier this month, we received the necessary court approval and the tender offer is on schedule to be launched in early May.

Product Strategy and Customer Focus

The clearest indication of the success of ARC’s “total system solution” is reflected in our revenue diversity; 35% of revenues came from processor cores, 31% from toolsets and software and 34% from peripherals.

Our SoC customers are divided across the consumer, networking and computing sectors and we are strong in semiconductors for wired and wireless communications as well as consumer electronics. On the software side, increasingly ARC’s technology is being licensed by companies in industrial control, broadband networking and digital imaging.

This quarter we secured licenses with Altek Labs, Inc, Conexant and ST Microelectronics, among others. Altek is one of the world’s leading manufacturers of digital still cameras. Conexant is a worldwide leader in semiconductor solutions that facilitate communications worldwide through wireline voice and data networks. ST Microelectronics is a leader in developing and delivering semiconductor solutions across the spectrum of microelectronics applications. We are also on track to unveil the details of several new products later in the year, which will continue to strengthen our market position.

USB NOW TM

Our USB 2.0 products continue to be among our most popular products. Of the thirteen licenses previously announced in 2002, seven are in development, with two of those expecting to reach the manufacturing stage during the first half of the year. An eighth company has completed development of the product and is ready to prototype in May. We announced our relationship with LSI Logic, a leading designer and manufacturer of communications, consumer and storage semiconductors. LSI Logic will integrate ARC’s USB technology into its CoreWare® library of intellectual property, making it available to a much larger audience.

Our earlier USB products are equally popular, especially among vendors of digital still cameras and multi-function printers. Our technology is currently found in digital still cameras made or marketed by Agfa, Axia, Casio, Concord, Kodak, Minolta, Ricoh, Samsung , and Toshiba, among others.

We are currently introducing a full line of class driver software for our USB family.

ARCtangentTM Processor

The ARCtangent processors are being used in a number of innovative new products including: a DVD Player being shipped by AMLogic, Video on Demand by Xiran, and a Fingerprint Scanner by ST Microelectronics. These products have been designed with the ARCtangent as their core processor.

This week we unveiled our multimedia strategy at the Embedded Systems Conference in San Francisco. The product family will include ARCtangent-specific software codecs for the most popular consumer electronics applications, which will enable ARC to provide a more complete solution, opening up new vertical market opportunities.

Software and Development Tools

Our software team continues to experience successes across all product lines. In January, we introduced the ARC OS-Changer, which allows software engineers to transfer their application software from third party operating systems to the ARC/MQX Real Time Operating System. This opens up additional market opportunities for us.

Our relationship with Metrowerks/Motorola continues to strengthen. This week we announced the availability of our MetaWare/CodeWarrior bundle for Motorola®'s ColdFire™ MCF5282 Processor. It is currently being demonstrated at the Embedded Systems Conference (ESC) in San Francisco. This processor is targeted at medical instrumentation, food service equipment, home automation, industrial control networking, security and lighting control applications. It has been generating a high level of interest from our customers and is only just starting to ship in production quantities.

Operational changes

The company continues to assess its cost base with respect to the business environment. Based on a review of current business levels, the company expects to take a nominal restructuring charge to cover severance payments for a 7% reduction of the workforce that was implemented in the current quarter.

Outlook

Looking ahead, we do not anticipate any significant changes in market conditions over the next quarter and the SARS epidemic may affect the speed of our Asian expansion.

We are confident that our strategy of providing a total system solution will help to drive the business towards profitability and create a sustainable long-term business. The management team we put in place last year is having a positive impact on the company’s efficiency and we are in now in a much stronger position to benefit from any upturn in the economy.

Financial Review

First Quarter ended 31 March 2003

Turnover

Total turnover for the first quarter was £2.9 million, up 6% year over year and down 10% sequentially (Q4 2002: £3.2 million, Q1 2002: £2.7 million). Prior to currency translation with virtually all sales denominated in US dollars, turnover was up 18% year over year and down 9% sequentially. License income was down by 11% over the previous quarter at £2.2 million (Q4 2002: £2.5 million) while maintenance and service income stayed the same at £0.5 million (Q4 2002: £0.5 million). Royalty income was unchanged at £0.2 million (Q4 2002: £0.2 million).

Within the turnover base, 22% of sales were in Europe, 70% in North America and the remaining 8% in Asia. From a product perspective, 35% were processor shipments, Software sales represented 31% and the remaining 34% was peripheral sales.

Costs

Cost of sales of £0.4 million increased 13% sequentially (Q4 2002: £0.3 million, Q1 2002: £0.4 million), which resulted in a gross margin of 87% (Q4 2002: 89%, Q1 2002: 85%). Total operating expenses (excluding exceptional costs, amortisation of goodwill and depreciation) of £7.1 million were down 1% over the previous quarter and 4% year over year (Q4 2002: £7.2 million, Q1 2002: £7.5 million).

Research and development costs of £3.4 million increased 3% sequentially and increased 13% year over year (Q4 2002: £3.3 million, Q1 2002: £3.0 million). The increase was related to the development of recent product launches. Sales and marketing costs of £2.4 million decreased 5% sequentially and decreased 11% year over year (Q4 2002: £2.6 million, Q1 2002: £2.7 million). General and administration costs of £0.9 million decreased 5% sequentially and decreased 29% year over year (Q4 2002: £1.0 million, Q1 2002: £1.3 million).

The Company had 209 employees at 31 March 2003 compared with 225 at 31 March 2002 and 198 at 31 December 2002.

Interest

Interest income remained the same as the prior quarter at £1.0 million and decreased by £0.1 million year over year based on the lower cash balance (Q4 2002: £1.0 million, Q1 2002: £1.1 million).

Net loss

The net loss prior to exceptional items was £4.4 million representing a sequential improvement of 11% and a 19% improvement year over year (Q4 2002: £4.9 million, Q1 2002: £5.4 million). The net loss number includes an R&D related tax refund of £0.8 million. Loss per share prior to exceptional items decreased to (1.45) p (Q4 2002: (1.63) p, Q1 2002: (1.90) p). Net loss including exceptional items was £3.8 million (Q4 2002: £4.3 million, Q1 2002: £5.4 million). The £0.5 million exceptional item relates to the release of a provision for the Ottawa restructuring following the executed lease termination in Q12003.

Cash flow and balance sheet

The net cash outflow from operations was £5.4 million (Q4 2002: £4.3 million, Q1 2002: £6.0 million). Capital expenditure was £0.9 million. The movement in net funds during the quarter was an outflow of £4.4 million. Net assets at 31 March 2003 were £111 million, including net cash of £96.5 million.

Please click here to view the financial tables