ARC International: Trading Update and Outcome of Strategic Review

June 30, 2009 -- ARC International, (LSE: ARK), a leading provider of IP to OEM and semiconductor companies globally, provides an update on the completion of a strategic review of its operations, changes to its executive team and an update on trading.

Highlights

• Revenue for H1 2009 is in line with expectations
• Global restructuring of operations to be implemented to put ARC on a firmer strategic footing
• Restructuring actions to deliver significant cost savings estimated at £6m on an annualised basis and recognisable from H2 2009, achieved at a cash cost of £2.8m
• Positive cash flow and EBITDA from core business (excluding one-off rationalisation costs and discontinued operations) now expected in H2 2009
• Change of Chief Financial Officer
• New processor range to be announced in November 2009

Trading and Results of Strategic Review
The Board is pleased to announce that current trading remains in line with previously announced expectations, with revenues within the target range of £6.0m to £8.0m ($9.0m to $12.0m) for the six months ended 30 June 2009.  Whilst general trading conditions remain challenging, with lengthy sales cycles, we continue to sign deals and generate royalty revenues.

In addition, following the recent appointment of Dr Geoff Bristow as Chief Executive Officer on 5 May, a strategic review of all operations has been completed.  As a result of this review, which has encompassed all businesses within the group, the following changes are to be implemented with immediate effect:

• Focused development groups established

In order to enhance the Company’s focus on marketable technology developments, ARC will form an Advanced Software Group (‘ASG’) in St Petersburg (based on our wholly-owned subsidiary, Alarity Inc) to focus on new areas of IP as well as continuing its leading-edge Codec development.  In addition, an Advanced Technology Group (‘ATG’) will be established in our existing San Jose operation in order to focus on hardware development and systems IP.

• Further operational efficiencies identified

As previously announced, the Company continues to pay careful attention to costs and has identified areas where further efficiencies can be achieved.  As a result of this process, ARC will make an immediate transition to virtualization and teleworking, such that the Company’s premises will only consist of the ASG, ATG, and a network of sales offices in St Albans, Israel, Russia, Taiwan and elsewhere.  All other existing ARC sites will close.

Elsewhere, the Company’s five data centres will be rationalised into two resilient state-of-the-art computer centres, delivering an operational annualised cost saving of approximately £0.5m from H2 09.

Furthermore, a streamlining of overall operations will result in the loss of 35 staff worldwide. Following the restructuring, the group will employ 113 direct staff, excluding its Adaptive Chips joint venture in Hyderabad, India.

Board changes
After 3 years’ service with the Company, Victor Young has resigned from the Board as Chief Financial Officer with immediate effect to pursue other interests.  The Board wishes to thank Victor for his role in the transition of ARC to a solutions company.

Charles Rendell will become Chief Financial Officer and join the Board with immediate effect. Charles has been with ARC since its formation, initially in the role of Finance Director and subsequently as VP of Finance, and to date has been responsible for internal financial operations.  He is a Chartered Accountant with over 20 years’ experience in the UK commercial finance and technology sectors.  Steven Gunders, non-executive director since 2007 and Chairman of the Remuneration Committee has been appointed Senior Independent Director.

Strategic position strengthened
As a result of these operational changes, the Board believes that the Company will improve its ability to execute to its stated strategy, which will be further strengthened through the following realignments and actions:

• From “Sound to Silicon” to Solutions and Storage

The Company’s successful “Sound to Silicon” approach offers an integrated combination of software, extended CPUs and other design IP as a complete solution for customers requiring an audio subsystem on a chip.  This will be under the “Solutions to Silicon” brand.  A second such offering, “Storage to Silicon” will be launched in September, recognising the Company’s previously unsung achievement in the field of embedded memory controllers, where it already has a majority market share.

In addition, ARC will now be conducting two-way licensing deals with many of its customers and collaborators in a partnership strategy to be known as “IP-in/IP-out” in order to accelerate the time-to-market of ARC’s future Solutions to Silicon, whilst optimising cost effective development and expanding the product portfolio.

• Processor refresh

The Company’s ARC 600 processor range, which on average uses 25% less power than its nearest competitor for embedded subsystem applications, will be the basis of an instruction-set compatible new generation development aimed at a further halving of power-performance ratio.  The new processor range, to be named the ARC 6000, will be launched in November 2009.  Further announcements will be made in the same timeframe in relation to the ARC 700 series of processors.

• Sonic Focus

In response to strong customer demand, the advanced Sonic Focus audio enhancement software will now be offered on non-ARC platforms, as well as part of ARC’s Sound to Silicon solution. Whilst customers of the integrated ARC solution will continue to have the very best audio quality possible for consumer devices, whilst minimising the costs of speakers and earphones, the Board believes that it is important for the Sonic Focus brand to be more universally publicised and available.

In the interests of transparency, ARC will now adopt a policy of publishing results identifying the contribution of Sonic Focus.

Financial impact
As a result of the above operational and strategic changes, the Board considers that the financial outlook of the Company has been considerably improved as follows:

• Excluding Sonic Focus, one-off rationalisation costs and discontinued operations, the Board now expects that the EBITDA of the Company for the six months ended 31 December 2009 will be at least breakeven.

• The Sonic Focus business, which remains an early-stage software venture and is separately managed, is expected to make a loss before interest, tax, depreciation and amortisation of approximately £0.6m ($1m) for the six months ended 31 December 2009.

• The actions to realign the cost base of the business are expected to generate annualised cost savings of £6m ($10m), with benefits being immediately realised in the second half of 2009.

• The above actions are expected to result in rationalisation cash charges of approximately £2.8m ($4.6m), with the total cash cost in the current financial year not expected to exceed £2.1m ($3.5m).  The remainder of the rationalisation cost is to be incurred in the following 3 years.  The impact on intangible assets and adjustments for goodwill is expected to be significant and will be clarified at the results.

Richard Barfield, Chairman of ARC International, said:

“With the strategic realignment and reorganisation we have announced today, the Board of ARC is taking decisive steps to position the business to better serve its customers and markets. Whilst there remains a great deal of work to do, these actions will significantly improve operational performance and strengthen the company’s financial position and outlook.”

A presentation on ARC’s revised strategy and operations will be given at the interim results for the six months ended 30 June 2009 on Wednesday, 5 August 2009.

The following information is disclosed in relation to Charles Rendell's appointment in line with section 9.6.13 of the Listing Rules:

Full Name: Mr Charles Ian Rendell
Age: 43

There are no other details to be disclosed under the Listing Rules in respect of this appointment.