February 5, 2003 - ARC International plc (LSE: ARK), a world leader in semiconductor and software technology licensing, announces its unaudited financial results for the fourth quarter and full year ended 31 December 2002.
Financial and Operational Highlights:
Fourth Quarter ended 31 December 2002:
- Turnover up 41% quarter on prior year quarter and 16% sequentially to £3.2 million (Q4 2001: £2.3m, Q3 2002: £2.8m)
- Pre-exceptional net loss of £4.9m, a 22% year on year improvement (Q42001: £6.2m) and a 8% sequential improvement (Q3 2002: £5.3m)
- Completed strategic review and announced £50m share repurchase
- 6 new design licences and 4 new customers won for ARCtangent™ processor
- Strong performance on USB Now™ product sales, booked 6 licenses
- Software and development tools products shipped to more than 50 customers
- Successful launch into Asia
Twelve months ended 31 December 2002:
- Turnover up 7% at constant exchange rates and 2% after currency impact to £11.7m (2001: £11.4m)
- Operating expenses before exceptionals, amortisation and depreciation reduced by 18% to £29.3 m (2001: £35.8m)
- Pre-exceptional net loss reduced by 16% to £20.5m (2001: £24.4m)
- Cash burn down 20% to £20m, (2001: £25m)
- Expanded customer base: 29 design wins, 20 new ARCtangent customers and 13 new USB customers
- Successfully diversified product offering with USB On-the-Go and WLAN launches
- Recruitment of management team complete
Commenting on the results, Mike Gulett, Chief Executive Officer, said:
"2002 was a year of achievement for ARC and we reported the highest annual turnover in the Company's history. Despite the very challenging conditions being experienced by the worldwide semiconductor industry, we performed strongly and grew revenues in the fourth quarter by 41% year on year.
It was also an important transitional year. Under the leadership of a new, experienced management team, we refocused the business and product strategies, completed a major restructuring and accelerated the launch of important new products to expand our customer base beyond our traditional markets.
Our growth in 2003 will be driven by new products and by expansion into Asia. Our customer activity has significantly increased over the past year and we are working with a record number of prospective new customers. We believe that this will lead to continued organic growth as we convert prospective licensees into new, valued customers.
Looking ahead, we do not anticipate any significant changes in market conditions in the near term. However, with our expanded product offering and renewed focus, we believe that we are well positioned to enhance our market position and to benefit from any upturn in demand.
Chief Executive Officer's Review
2002 was a year of achievement for ARC and we reported the highest turnover in the Company's history at £11.7m from £11.4m in 2001. At constant exchange rates, this represented a 7% increase. Despite very challenging market conditions, tight management of costs resulted in a pre-exceptional net loss of £20.5m, down 16% (2001: £24.4m). Operating expenses before exceptionals, amortisation and depreciation were also reduced by 18% to £29.3m.
Many of our current and prospective customers continue to delay new product development, which delays the signing of new licensees for our products. Set against this, we performed strongly in the fourth quarter of 2002, reporting a 41% increase in turnover year on year and a 16% sequential increase to £3.2m. Pre-exceptional net loss reduced by 22% to £4.9m. During the fourth quarter, we secured 6 new design licences and 4 customers for the ARCtangent processor and reported 6 licenses for USB. We were pleased with our performance in Asia, a market which presents us with significant opportunities for the future. Sales in Asia, during the fourth quarter, accounted for 6% of total revenue.
2002 was an important transitional year, and under the leadership of a new, experienced management team, the Company has recently completed a major restructuring. In November 2002, WestLB Panmure Ltd was appointed as joint corporate broker and financial adviser to the Company. They contributed in a review to address the capital requirements of the business that was underway. The review showed that ARC had sufficient working capital funding to bring the Company to profitability on the basis of reasonably prudent assumptions and we announced the intention to repurchase £50m of ARC's stock, thereby optimising shareholders' potential for future returns. Once the process is concluded, we will still have a strong balance sheet with sufficient cash resources, as well as the flexibility to make complimentary acquisitions where appropriate.
A shareholder circular will be sent out shortly, setting out details of a reduction of capital and a tender offer. The circular will convene an extraordinary meeting of shareholders to vote on the proposals and following this ARC will apply to the Court for a reduction in the capital of the company. We previously stated that the repurchase of stock would be complete within the first half of 2003 and remain on track to deliver this.
Product Strategy and Customer Focus
Our goal is to be the leading supplier of embedded systems technology. We have reduced the number of intellectual property (IP) vendors that our customers need, which reduces their design risk, their development time and their costs. Unlike our competitors in the IP space, ARC can ensure that all the key hardware and software components, for a specific design, will work together because we provide most of the technology.
During 2002, we maintained a diversified product offering; 47% of revenues came from processor cores, 20% from peripherals and 33% from software products. This diversification resulted in the expansion of our customer base and we have begun actively targeting the larger semiconductor and systems businesses. In the last year, we won 29 new ARCtangent processor design wins and 16 peripheral licensees. In addition, we shipped software and development tools to more than 50 customers in each quarter.
Our customers continue to develop products for our traditional markets of wired and wireless communications as well as consumer electronics, but our new systems-level approach opened opportunities in comput er security and encryption, as well as the rapidly growing storage area network market.
Last year, we announced relationships with Intel Microelectronics Services, Oak Technologies, Hifn, Amlogic, Synopsys, Mentor Graphics and others. In early 2003 we will announce the details of our relationships with several other companies. We are developing products that expand our capability in consumer electronics, wired and wireless communications, and some new markets including computer security, encryption and storage area networking.
ARCtangent TM Processor
ARC was the first company to introduce a user-customisable RISC/DSP processor. The ARCtangent is sythesizable, configurable and extensible, so users can readily modify and extend the architecture for their specific applications. ARC currently provides two families of ARCtangent processor cores, the A4 and the A5. We are on target to introduce two more processor families in 2003. ARC is the world leader in delivering user -customisable RISC/DSP processors – we have secured more than 120 design wins since this product was introduced.
The Company achieved 29 new design licenses for the ARCtangent processor in 2002; 20 of these licensees were new customers.
In October 2002, ARC introduced the ARCtangent -A5 that is targeted at those designers developing communications and consumer electronic products with design cycles of six months or less. This product integrates a single-software development chain and application-specific extensions with the ARCtangent -A5 processor.
USB Now TM
In June 2002, ARC introduced the world's first USB 2.0 high-speed On-The-Go controller and as of today, we are the only supplier of this vital new technology. In the fourth quarter, we added six licensees for this product, for a six-month total of thirteen. According to InStat, an industry analyst firm, the market for Universal Serial Bus (USB) in non-PC applications is growing twice as fast as demand in the PC market. ARC's USB On-the-Go (USB -OTG) product is strategically positioned to leverage the growing demand for mobility. USB -OTG eliminates the need to connect peripherals through a PC.
WLAN Now TM
With the broadening acceptance of 802.11 as the wireless LAN technology of choice, there is rapidly increasing market demand to enable all electronic devices with wireless technology. This includes, but is not limited to, PDA's, consumer electronics (audio, video, games), wireless terminals, home networking devices, and broadband gateways (DSL, cable, set top boxes). Existing products are served with 802.11 chipsets. These chipsets are too expensive, require too much power and occupy too much area to be used effectively within consumer, handheld and embedded products.
ARC launched WLAN Now™, the 802.11 multi protocol MAC and baseband product, in early 2003.This is a low cost, small footprint, low power technology offering, that is suitable for integration at the chip level into consumer, handheld and embedded products.
Other New Products
ARC is on target to introduce several additional products during the rest of 2003. ARC will continue to innovate in an ongoing effort to make it easy for our customers to create embedded systems, by simplifying the complexity of designing, verifying and producing integrated circuits and the software that runs on these integrated circuits.
Asia Sales Expansion
Asia offers a huge opportunity for ARC. Through strategic alliances and partnerships ARC is bringing its entire portfolio of intellectual property to the Asian market. In May, we hired a sales manager for Asia. In July, we established a partnership with e-MDT and Hynix Semiconductor to provide full turnkey design services for products based on our products in China and Korea. In August, we signed EDOM Technology as the distributor of ARC's products in Taiwan and China. In November, we announced the opening of our office in Taiwan and announced plans to open an office in Japan. This preliminary effort resulted in an increase in our Asia revenue from zero in the first half of the year to 6% of total revenue in the fourth quarter.
Strategic alliances are very important for ARC to achieve the goal of building a long-term profitable business. We have announced several strategic alliances this year and will continue to partner with those companies that provide "Best of Breed" technology, to complement our approach to product design. In addition to relationships with Synopsys, Standard Microsystems, Hynix, e-MDT and Denali Software, we negotiated alliances with:
- Metrowerks, an independently operated subsidiary of Motorola, Inc., that signed an agreement in July to distribute ARC software products to its worldwide customer base.
- Mentor Graphics which announced co-verification model support for the family of ARCtangent user-customisable RISC/DSP cores in early December.
- Ashling Microsystems, a recognized expert in embedded software development tools, agreed in October to extend its suite of emulators and trace development tools to the ARCtangent usercustomisable 32-bit RISC/DSP microprocessor.
In June, we announced that we had completed the integration of ARC's subsidiary operations into a single functional organization. VAutomation, Precise Software and MetaWare now all operate under the ARC International brand name. This has resulted in significant improvements in ARC's product offering and image in the marketplace.
For customers, such as SanDisk, Hifn, Qlogic, RF Micro Devices, Fujitsu, Infineon Technologies, Sun Microsystems and many others, ARC is a one-stop shop for embedded RISC/DSP processors, RTOS, software, peripherals and development tools. ARC has a unique product portfolio and we offer integrated products that are not available from any other company.
During the second half of the year, we consolidated ARC's software engineering teams to promote synergies in software product development and reduce the overall cost structure. The transition was completed in early 2003. Our engineering facility in Ottawa was closed and a number of t he Ottawa based RTOS and protocol software engineers were relocated to Santa Cruz, California, where ARC's software development team is headquartered.
Our Chairman, Jan Tufvesson, has informed the company of his intention to resign effective at the AGM in May. The Board will announce the appointment of a new Chairman shortly. "Jan has made an important contribution to ARC and the Board of ARC thanks him for his hard work over the past 3 years," said Mike Gulett, CEO.
In the past twelve months, ARC's management team has been significantly strengthened; we now have a new management team with the experience and skills to lead ARC to profitability.
Headcount at the end of 2002 was 198 compared to 223 at the end of 2001, a reduction of 11% over the year. We centralised and streamlined many functions, which has led to improved results and reduced costs.
Our growth in 2003 will be driven by new products, and increased market penetration. Our customer activity has significantly increased over the past year and we are working with a record number of prospective new customers. We believe that this will lead to continued organic growth as we convert prospective licensees into new, valued customers.
Looking ahead, we do not anticipate any significant changes in market conditions. However, with our expanded product offering and renewed focus, we believe that we are well positioned to benefit from any upturn in demand.
Fourth Quarter ended 31 December 2002
Total turnover for the fourth quarter was £3.2 million, up 41% from the prior year quarter (Q4 2001: £2.3 million) and up 16% from the third quarter revenue of £2.8 million. Prior to currency translation, with virtually all sales in US$, underlying turnover was up 54% year over the previous year and 18% sequentially. License income was up 19% over the previous quarter at £2.5 million (Q3 2002: £2.1 million). Maintenance and service income was the same as the previous quarter at £0.5million (Q3 2002: £0.5 million). Royalty income was unchanged at £0.2 million (Q3 2002: £0.2 million). Within the turnover base, 22% of sales were in Europe, 72% in North America and the remaining 6% in Asia. From a product perspective, 39% were processor shipments, software sales represented 24% of turnover and the remaining 37% was peripheral products.
Cost of sales increased slightly to £0.3 million (Q3 2002: £0.2 million, Q4 2001: £0.4 million), which resulted in a gross margin of 89% (Q3 2002: 91% Q4 2001: 83%). Total operating expenses (excluding exceptional costs, amortisation of goodwill and depreciation) were down 2% to Q3 at £7.2 million and down 9% year over year (Q3 2002: £7.3 million, Q4 2001: £7.9 million).
Research and development costs decreased 8% to £ 3.3 million (Q3 2002: £3.6 million, Q4 2001: £3.3 million). Sales and marketing costs increased 17% to £2.6 million (Q3 2002: £2.2 million, Q4 2001: £2.9 million) to fund additional promotional costs. General and administration costs declined 25% to £1.0 million (Q3 2002: £1.3 million, Q4 2001: £1.3 million). The Company had 198 employees at 31 December 2002 compared with 223 at 31 December 2001and 200 at 30 September 2002
Interest income declined slightly to £1.0 million based on the lower cash balance (Q3 2002: £1.1 million).
The net loss prior to restructuring decreased 8% sequentially to £4.9 million and decreased 22% from the year ago quarter (Q3 2002: £5.3 million Q4 2001: £6.2 million). Loss per share prior to restructuring improved to (1.6)p (Q2 2002:(1.7)p). Net loss including the net restructuring charge was £4.3 million (Q3 2002: £7.5 million, Q4 2001: £4.9 million).
Cash flow and balance sheet
The net cash outflow from operations was £4.3 million, (Q3 2002 an outflow of £4.5 million). Capital expenditure was £1.6 million including a technology investment of £1.0m. There was also purchase of the company's shares for £1.7 million. The movement in net funds during the quarter was an outflow of £7.1 million. Net assets at 31 December 2002 were £114.8 million, including net cash of £101 million.
Twelve months ended 31 December 2002
Total turnover at £11.7 million was up 7% from the previous year before currency impact and up 2% after currency impact (2001: £11.4 million). Licence income increased to £9.1 million (2001: £8.9 million). Maintenance and service income was £2.0 million (2001: £2.0 million) and royalties were also unchanged at £0.5 million (2001: £0.5 million). Within the turnover base, 28% of sales were in Europe, 69% in North America and the remaining 3% in Asia. From a product perspective, 46% were processor shipments, software sales represented 33% of turnover and the remaining 20% was peripheral products.
Cost of sales was down 21% to £1.3 million (2001: £1.7 million), resulting in a gross margin of 89% (2001: 85%). Total operating expenses (excluding exceptional costs, amortisation of goodwill and depreciation) decreased 18% to £29.3 million (2001: £35.8 million). Research and development costs were down 2% to £13.1 million (2001: £13.3 million), sales and marketing costs were down 30% to £10.1 million (2001: £14.3 million) and general and administration costs were down 25% to £4.9 million (2001: £6.6 million).
Interest income was £4.4 million (2001: £6.6 million).
Net loss before exceptional items was £20.5 million (2001: £24.3). Including net exceptional charges of £1.5 million, net loss decreased 26% to £22.0 million (2001: £29.8 million).
Cash flow and balance sheet
The net cash outflow from operations was £19.6 million (2001: £27.3 million). Capital expenditure was £3.3 million (2001: £5.3 million). The movement in net funds was a £19.9 million outflow (2001: £25.0 million). Net assets at 31 December 2002 were £114.8 million (2001: £136.1 million), including net cash of £101 million. (2001:£121 million)
No interim dividend payment will be made or declared in respect of the twelve months ended 31 December 2002.
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About ARC International
ARC International is the first company to offer integrated solutions for SoC design, in an effort to minimise design risk for customers developing next generation wireless, networking and consumer electronics products. In 1998, ARC introduced the industry's first user-customisable 32-bit RISC/DSP processor core. In early 2000, ARC became the first company to integrate the development tools, peripherals, RTOS and software that enabled the designer to get better design optimisation and performance. ARC's approach of providing a single source for the major SoC building blocks reduces the number of IP suppliers, reduces cost, reduces the risk of system -on-chip design and reduces timeto- market.
ARC's products include the ARCtangent™ user -customisable 32-bit RISC/DSP processor, the first USB 2.0 OTG high-speed controller on the m arket and an 802.11 MAC and baseband multi-standard IP core. ARC provides software development and system software for ARM, PowerPC and MIP's processors as well as for its own ARCtangent processor family.
ARC International employs 198 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 on the company's web site, www.ARC.com. ARC International is listed on the London Stock Exchange as ARC Int ernational plc (LSE:ARK).
Statements made in this report 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 forwardlooking 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
ARC, the ARC logo, ARCtangent, USB Now and WLAN Now are trademarks of ARC International. All other brands or product names are the property of their respective holders.