ARC International plc Announces Preliminary Results For The Year Ended 31 December 2004

Record Growth in Processor Licenses Drives Highest Annual Revenue

ELSTREE, UK, February 9, 2005 – ARC International (LSE: ARK), the world leader in configurable CPU/DSP processor cores and application subsystems, today announces its unaudited financial results for the six months and full year ended 31 December 2004.

Highlights:

Six months ended 31 December 2004:

Turnover up 9% in sterling and 20% in dollars: £6.0 million ($10.9 million) up from £5.5million ($9.1 million) in 2H 2003

Operating costs before share based award expense, exceptional items, amortisation and depreciation £8.0 million: reduced by 39% over 2H 2003 (2H 2003: £13.1 million)

Pre-exceptional net loss £3.0 million: improved 72% over 2H 2003 (2H 2003: £10.7 million)

Net loss for the period of £1.8 million, improved 88% over 2H 2003 (2H 2003: £14.9 million)

Operating cash outflow of £3.2 million: reduced 60% year over year (2H 2003: £8.0 million); year end cash at £34.1 million

Received additional proceeds of £0.5 million from the sale of USB business

21 new processor licenses signed, including 10 new licenses for the ARC™ 600 and ARC 700 cores

Twelve months ended 31 December 2004:

Turnover up 13% in sterling and 26% in US Dollars: £12.2 million ($22.2 million) up from £10.7 million ($17.6 million) in 2003

Operating costs before share-based award expense, exceptional items, amortisation and depreciation £18.4 million: reduced 32% (2003: £27.1 million)

Pre-exceptional net loss of £7.0 million: improved 66% on prior year (2003: £20.7million)

Net loss for the period of £5.1, improved 79% over 2004 (2004: 24.6 million)

Net cash outflow of £3.1 million: reduced 80% (2003: £15.7 million, excluding share buyback)

Sale of USB business to TransDimension Inc completed in June 2004; received total cash proceeds of £3.1 million and recognized a net gain of £2.6 million

32 new processor licenses signed, increasing the total system-on-chip (SoC) customers to 96

Commenting on the results, Carl Schlachte, President and Chief Executive Officer, said:
"2004 was a successful year for ARC International, and one that marked a significant turnaround for the company. Record revenues were driven by strong demand for multi-use and core family licenses of our configurable processors. We sold fifteen new licenses for the recently introduced ARC 600 and ARC 700 cores, and our overall base of licensees grew to 96 companies.

During 2005, we intend to expand our global customer base and deepen partner relationships to help further increase revenues. Additional application-specific subsystems currently in development will strengthen our competitive advantage and grow ARC's share of design starts in high-volume consumer markets."

Commenting on the financial results, Monica Johnson, Chief Financial Officer, added:
"In the second half of 2004, turnover from ongoing operations grew 62 percent in US Dollars from the first half of 2004, as licensing revenue from our SoC product line reached an all-time high. Operating costs (before share based award expense, exceptional items, amortisation and deprecation) reduced 39 percent as our net loss narrowed to £1.8 million during the second half of 2004. Moving forward, we will maintain cost controls while continuing to ensure ARC's competitive position within the semiconductor IP industry."

Statement from the President and Chief Executive Officer:

Overview
For 2004, ARC International posted strong financial and operating results and grew at more than twice the rate of the overall semiconductor market. Our SoC product line drove ARC's results with 32 new processor licenses. Today we are close to adding our 100th SoC customer, which will be a major company milestone and one that few semiconductor IP companies have achieved in such a short period of time.

The strategic redirection announced last year is complete, including the sale of the peripherals business and reduction in overhead costs. These changes reduced 2004 operating costs (before share based award expense, exceptional items, amortisation and depreciation) by 32% over 2003 and narrowed our net loss to £5.1 million, an improvement of 79%. Cash usage in 2004 decreased significantly to £3.1 million. Simultaneously, by focusing on core competencies and strategically partnering with select companies, ARC strengthened its product portfolio with two new processors and the ARCsound™ subsystem.

SoC Solutions
The SoC business grew its contribution to ARC's overall revenue and represented 79% of turnover in 2004. Three new products – the ARC 600 and ARC 700 cores and the ARCsound subsystem – delivered on our promise to address a greater part of our customers' SoC design challenges. The two processor core families are the foundation of our future CPU and DSP product roadmaps, and are helping ARC further penetrate high-growth markets while diversifying its SoC customer base.

The ARC 700 core extends our reach into high-end, operating system-based devices such as digital televisions and digital set-top boxes. It offers best-in-class performance at the industry's smallest die size. This reduces our customers' end-product costs, making their ARC-Based™ products more competitive in the digital consumer marketplace.

The ARCsound subsystem has created a new technology category within the semiconductor IP space. It is the first configurable, application-specific platform for audio-intensive consumer devices. Our first customer was signed just six weeks after the product was introduced, a rarity in the IP market and a positive sign of the technology's appeal to customers. Moving forward, ARC's subsystem strategy will be the basis for our strategic R&D investments. We will add other optimized subsystems that focus on key areas of the high-growth digital consumer market.

Embedded Systems Software
ARC's second operational product line provides embedded operating systems and development tools. During the past twelve months, the Embedded Systems Business Unit (ESBU) contributed 21% percent of total revenue. We continue to assess the overall strength of this business and the leverage it provides on our core processor business.

Customers
During 2004, the digital consumer electronics market was the key driver of design starts within the semiconductor industry. Key factors for success in this market are the abilities to lower the end product cost, maximize differentiation and speed time-to-market parameters. As the leader in configurable technology, ARC's CPU, DSP and application-specific subsystems meet these design requirements. Key customers who joined the ARC team included:

Broadcom – one of the world's leading semiconductor companies, signed a comprehensive licensing agreement that included the ARC 600 and ARC 700 cores and MetaWare® development tools. Broadcom will use its ARC licenses to develop leading-edge SoCs for high-growth consumer applications.

Conexant – announced its license for a configurable ARC processor core for use in the company's multi-function peripheral products. Conexant provides solutions for broadband communications, enterprise networks and the digital home.

Digeo – a leading provider of media center software and services, took a license for the ARC 600 core and ARC's MetaWare tools for use in its media center chipset. Digeo's X-Stream™ Chipset features the industry's highest level of integration and dramatically cuts costs for media center devices. X-Stream combines the functions of over two-dozen chips onto one device, resulting in power and space savings as well as increased reliability.

Fujitsu Microelectronics Europe – announced it standardized upon ARC's technology for next generation consumer applications. Already an ARC licensee, the announcement of a license for an ARC 700 core signals a deepening relationship with Fujitsu Microelectronics Europe. It also underscores the increasing number of industry leaders that are leveraging ARC's configurable cores for high-volume applications.

Infineon Technologies – strengthened its commitment to ARC by taking a license for an ARC 700 processor core for wireless access applications. Since 2001, Infineon has relied upon ARC for a range of consumer networking products. By upgrading to the ARC 700 technology, Infineon's designers can create SoCs that simultaneously perform the functions of host and applications processing in a single core. This will greatly reduce overall design complexity and silicon cost.

LeapFrog Enterprises – a provider of award-winning learning systems, announced it has taken a license for an ARC processor to develop chips for the company's Leapster™ multimedia device. Announced in October 2003, Leapster was named one of the hottest toys for Christmas according to industry experts.

QPixel – a Silicon Valley company, selected the ARCsound audio subsystem to develop a fully integrated H.264 audio/video chip. Qpixel's design requires an extremely efficient audio platform to deliver the highest audio fidelity without consuming large amounts of system power or silicon area. The ARCsound subsystem meets these challenges and easily integrates with Qpixel's video technology, accelerating their time-to-market parameters.

SanDisk – the world's largest supplier of flash storage products, purchased a license for the ARC 600 processor core and MetaWare development tools for use in their next generation of flash storage products. SanDisk designs, manufactures and markets digital imaging and audio storage products using its patented high density flash memory and controller technology. These products are sold under the SanDisk label and by OEMs for use in products ranging from portable music players and digital cameras to smart phones and handheld computers.

Siano Mobile Silicon – a provider of innovative technology to the mobile digital TV marketplace, has taken a license for a configurable ARC 610D processor core with ARC's XY Advanced DSP subsystem. Siano Mobile Silicon will use its ARC license to develop a new SMS1000 mobile digital TV receiver chip, which is scheduled for introduction later this year and is targeted at a range of products delivering mobile TV services to consumers.

Tektronix – a leading worldwide provider of test, measurement and monitoring instrumentation equipment, took a license for the ARC 600 core, the ARC MQX™ RTOS and MetaWare tools.

TTPCom – an independent supplier of digital wireless technology to many of the world's largest cellular handset manufacturers, has partnered with ARC to deliver low-cost digital cellular engines to the growing handset market. Under the terms of a wide-ranging licensing agreement, TTPCom has implemented ARC's configurable processor cores in its latest cellular baseband engine (CBEmacro). Other terms of the agreement include marketing and sales activities.

Partnerships with Best-in-Class Companies
To help ensure ARC provides more of a total solution to customers without dramatically increasing our research and development costs, ARC is working with industry leaders within the electronic design automation (EDA), embedded software tools and consumer applications industries.

Codito Technologies – provides software stacks, customized development tools and operating systems, communication protocol stacks and embedded application software. Codito's ARC-Based Linux and GNU development work offers ARC customers the combination of a low cost processor supported by an industry standard and royalty-free operating system for their next generation devices.

Dolby Laboratories – develops and delivers products and technologies that make the entertainment experience more realistic and immersive. Dolby has certified the ARCsound audio subsystem for 5.1-channel Dolby Digital consumer decoder (AC-3) technology.

Green Hills Software – is a recognized market leader in embedded software development tools and royalty-free real-time operating systems (RTOS). Through this partnership, ARC now can license its processor cores to customers that prefer Green Hills' MULTI® Integrated Development Environment.

Microsoft – certified the ARCsound audio subsystem for Microsoft Windows Media Audio decoder. Already shipping to customers, the ARCsound audio subsystem enables system OEMs and semiconductor companies to get to market quickly with an optimized, preconfigured audio platform that eliminates the need for specialized hardware.

Magma – develops software for electronic design automation, enabling integrated circuit designers to meet critical time-to-market objectives. Magma announced the availability of a validated reference methodology for their EDA software in conjunction ARC 600 family of configurable microprocessor cores. The reference methodology, available from Magma, has been implemented in a 0.13-micron design flow and was instrumental in helping a mutual customer surpass many of their design goals in less than one week.

On2 Technologies – is a leading supplier of video compression software. Through this relationship, On2 will port their VP6 video codec to ARC processors. VP6 is On2's latest video compression software, and it is used on PCs, set-top boxes, games and wireless consumer electronics products.

Emulation and Verification Engineering (EVE) – offers innovative intellectual property and hardware-assisted verification solutions and services. EVE will integrate ARC's MetaWare debugger into EVE's ZeBu verification system. The resulting verification system will allow customers to download ARC's configurable cores into their FPGA-based hardware development system and achieve fast simulation times and efficient system debug.

Outlook

The management team is pleased with ARC's accomplishments throughout 2004. Our revenue achieved record-high levels based on strong growth in SoC customers, and we maintained effective cost controls that reduced overall expenses.

Looking ahead to 2005, we believe the digital consumer market will continue to drive many of the industry's design starts. Our unique subsystem technology and optimized CPU and DSP core products are especially suited to meet the demands of this market, and we will work to ensure ARC International further increases its share of the consumer and other high-growth areas globally.

Financial Review

Six months ended 31 December 2004

Turnover
Total turnover in 2H 2004 was £6.0 million up 9% over the same period last year (2H 2003: £5.5 million) including the effect of the peripherals disposal. Prior to currency translation, with virtually all sales in US dollars, underlying turnover was up 20% over 2H 2003. License income increased 15% from the same period last year at £3.8 million (2H 2003: £3.3 million). Maintenance and service income was down 17% from 2H 2003 at £0.8 million due to the sale of the peripherals business. The increase in the number of designs being shipped by our customers contributed to a 12% increase in royalties to £1.4 million (2H 2003: £1.3 million).

Sales in Europe were 33% of total sales, North America 63% and Asia 4%. From a business unit perspective, 78% of revenue was from the SoC business with the remaining 22% delivered by the embedded software business unit. Within the SoC segment, £1.4 million in 2H 2003 was generated by peripheral products that represented the business sold to TransDimension Inc. Removing this revenue from the relevant comparisons, year on year revenue growth in 2H 2004 was 46% in sterling and 62% in US dollars.

Costs
Cost of sales of £0.7 million was flat year over year (2H 2003: £0.7 million). Gross margin in 2H 2004 increased to 88% (2H 2003: 87%). Total operating expenses (excluding share based award expense, exceptional items, amortisation of goodwill and depreciation) decreased by 39% year-over-year to £8.0 million (2H 2003: £13.1 million).

The Company had 131 employees at 31December 2004 compared with 133 at 30 June 2004. Research and development costs decreased 41% year over year to £3.5 million (2H 2003: £5.9 million). Sales and marketing costs decreased 42% year over year to £2.2 million (2H 2003: £3.8 million). General and administration costs before share based award expense of £1.6 million were down 41% year over year (2H 2003: £2.7 million). Including the share based award expense charge of £0.3 million, overall general and administration costs were £1.9 million

Interest
Interest income was up 5% year over year at £0.8 million.

Net loss
The net loss prior to exceptional items was £3.0 million representing an improvement of 72% year-over-year (2H 2003: £10.7 million). Loss per share prior to exceptional items improved to 2.13p (2H 2003: 7.74p). Net loss was £1.8 million (2H 2003: £14.9 million).

Exceptional items in 2H 2004 are comprised of the release of restructuring provision charges of £0.4 million relating to onerous leases and a gain of £0.7 million on the sale of the USB business. The gain represents the net cash proceeds received in 2H 2004 and deferred profit in respect of deferred revenue of £184,000 from TransDimension Inc in 2H 2004.

Cash flow and balance sheet
The net cash outflow from operations was £3.2 million (2H 2003: £8.0 million). Capital expenditure was £0.1 million. The movement in net funds during the six months was an outflow of £2.1 million. Net assets at 31 December 2004 were £35.6 million, including net cash of £34.1 million, of which £0.2 million was used to secure a letter of credit issued to our landlord (see note 3).

Dividend
No interim dividend payment will be made for the six months ended 31 December 2004.

Twelve months ended 31 December 2004

Turnover
Total turnover at £12.2 million was up 26% at constant exchange rates and up 13% from the previous year with currency impact (2003: £10.7 million) including the effect of the peripherals disposal. License income was £7.6 million (2003: £7.0 million). Maintenance and service income was £1.7 million (2003: £1.9 million). Royalties were £2.9 million (2003: £1.8 million).

Sales in Europe were 26% of total sales, North America 67% and Asia 7%. From a business unit perspective, 79% of revenue was from the SoC business and the remaining 21% was from the embedded software business unit. Within the SoC business, £2.8 million in 2003 and £1.3 million in 2004 revenue was generated by peripheral products that represented the business sold to TransDimension Inc. Removing this revenue from the comparisons, year on year revenue growth in 2004 was 36% in sterling and 62% in US dollars.

Costs
Cost of sales was £1.7 million (2003: £1.5 million), resulting in a gross margin of 86% (2003: 86%). Total operating expenses (excluding share based award expense, exceptional items, amortisation of goodwill and depreciation) decreased 32% to £18.4 million (2003: £27.1 million).

Total headcount in the business at 31 December 2004 was 131 employees compared with 174 at 31 December, 2003. Research and development costs were down 34% to £8.2 million (2003: £12.4 million), sales and marketing costs were down 44% to £4.7 million (2003: £8.5 million) and general and administration costs were down 21% to £3.8 million (2003: £4.7 million) before the 2004 share-based award expense charge of £0.3 million.

Interest
Interest income was £1.4 million (2003: £2.4 million) due to reduction of cash balance as a result of share buy back in 2003.

Net loss
The net loss before exceptional items was £7.0 million (2003: £20.7 million). Exceptional items are comprised of restructuring provision charges of £0.6 million relating to reductions in workforce announced in February 2004, onerous leases and a gain of £2.6 million on the sale of the USB business. The gain represents the net cash proceeds received less associated fees and asset transfers. Under the terms of the agreement, a further £0.3 million is due on 15 June 2005. The receipt of this will be recognised upon the earlier receipt of the funds or when collectibility is determined to be reasonably assured.

Cash flow and balance sheet
The net cash outflow from operations was £8.4 million (2003: £17.5 million). Capital expenditure was £0.4 million (2003: £2.7 million). The outflow of net funds was £3.3 million (2003: £15.7 million excluding the share buyback). Net assets at 31 December 2004 were £35.6 million (31 December, 2003: £40.4 million), including net cash of £34.1 million, of which £0.2 million was used to secure a letter of credit issued to our landlord (see note 3).

Dividend
No dividend payment will be made for the year ended 31 December 2004.

International Financial Reporting Standards
We are on track to commence reporting on accounts in accordance with International Financial Reporting Standards from our interim results for the period ending 30 June 2005. We have completed preliminary assessments of the major areas of impact.

View the ARC 2004 Earnings Annoucement Presentation Slides

About ARC International plc
ARC International is the world leader in low-power, high-performance 32-bit configurable CPU/DSP processor cores, subsystems, real-time operating systems and development tools for embedded system design. ARC's configurable and extendible cores assist customers in the development of next generation digital media, consumer and communications devices, resulting in lower cost, higher performance SoC products.
ARC International maintains a worldwide presence with corporate offices in San Jose, Calif., USA and Elstree, UK. The Company has research and development offices located in England and the United States. For more information please visit the ARC website at: www.ARC.com. ARC International is listed on the London Stock Exchange as ARC International plc (LSE: ARK).

ARC, ARC logo and ARC-Based are trademarks or registered trademarks of ARC International. All other brands or product names contained herein are the property of their respective owners. This press release may contain certain "forward-looking statements" that involve risks and uncertainties. For factors that could cause actual results to differ, visit the company's website as well as the listing particulars filed with the United Kingdom Listing Authority and the Registrar of Companies in England and Wales.

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