ARC International Reports 2008 Results

Published: 25-Feb-2009

ARC International plc (ARC International), a UK-based provider of consumer IP to original equipment manufacturer (OEM) and semiconductor companies, has reported revenues of GBP17 million for the year-end 2008, up 18%, compared with the revenues of GBP14.4 million in the previous year-end. It has also reported net loss of GBP7.3 million, or 4.93 pence loss per share, for the year-end 2008, compared with the net loss of GBP2.5 million, or 1.69 pence loss per share, in the previous year-end.

For the year ended December 31, 2008 revenues and royalties increased over 2007:

Royalty revenue GBP7.9 million, up 61% (2007: GBP4.9 million) or $14.3 million, up 47% (2007: $9.7 million);

Licensing revenue GBP7.3 million, flat year on year (2007: GBP7.4 million) or $13.4 million, down 11% (2007: $15.0 million).

Net loss included the results of non-recurring expenses, charges and delayed revenues:

Restructuring charges of GBP2.3 million;

Additional expenses of GBP1.6 million associated with Sonic Focus acquisition;

Two contracts delayed to 1H 2009 as previously announced.

Significant actions to drive enhanced revenue opportunities:

New executive appointments to the management team and strengthened worldwide Sales and Marketing organizations;

New higher royalty “Sound-to-Silicon” multimedia solutions generating significant sales opportunities with OEM and chip customers throughout Asia, North America, and Europe;

Launch of new multimedia solutions at the CES and Mobile World Congress events generated strong customer interest;

ARC Sonic Focus products now shipping in new PCs and laptops from Tier 1 customers.

Restructuring completed generating annual savings in excess of 25% of costs:

Early and decisive action in response to fundamental industry shifts and worsening economic climate to ensure that restructuring benefits are fully realized in 2009;

Development programs maintained while operating on significantly lower cost base;

New organization enhances ability to deploy more integrated multimedia solutions.

Commenting on the company’s performance, Carl Schlachte, president and chief executive officer, said: “In 2008 ARC traded against the backdrop of an increasingly challenging economic environment that worsened in the second half of the year. Including all non-recurring events our net loss was larger than expected. Going forward into 2009, we remain cautious as visibility is limited and uncertainty in the semiconductor industry with lengthening sales cycles may affect the timing of new licence revenues and royalty volumes.”

Schlachte continued, “However a rapid transition to profitability and positive cash flow continues to be our overriding strategic goal, and in response to the challenging semiconductor market and global economic conditions we have taken swift and decisive action to further enhance our ability to achieve this goal within planned timescales. To accelerate growth in our revenues and customer base, we have strengthened our product portfolio through the acquisition of Sonic Focus, transformed our ability to deploy integrated multimedia solutions, broadened our target market to include the higher royalty OEM and consumer electronics sectors, strengthened our worldwide sales and marketing organizations and made significant new appointments to the senior management team. In addition, the company-wide restructuring announced in September 2008 has been substantially completed, and is already delivering improved operational efficiencies, a rationalized and streamlined management structure and product portfolio, and a significantly lower cost base. We will continue to assess industry conditions throughout 2009 to ensure that the company’s cost structure is aligned with revenue opportunities.

“Over the medium to long term we expect consumer demand for devices delivering increasingly higher quality multimedia content to continue to grow, driving OEM and semiconductor companies to create innovative next-generation products with better performance and lower development costs. Feedback from ARC’s worldwide customers and partners confirms our confidence that our integrated solutions and more efficient organization can continue to provide compelling value. We remain confident in our strategy and our ability to execute.”

Revenue:

Total revenue in 2008 in US dollars was up 8% to $31.2 million (2007: $28.9 million). License and engineering revenue in US dollars was down 11% to $13.4 million (2007: $15.0 million). In sterling, license and engineering revenue was flat at GBP7.3 million compared to 2007 (2007: GBP7.4 million). Maintenance and service revenue in US dollars was down 17% to $3.5 million (2007: $4.2 million). In sterling, maintenance and service revenue was down 14% at GBP1.8 million (2007: GBP2.1 million). In US dollars, royalty revenue was up by 47% to $14.3 million (2007: $9.7 million). In sterling, royalty revenue increased 61% to GBP7.9 million (2007: GBP4.9 million). Sales in Europe were 20% (2007: 20%) of total sales, North America 55% (2007: 65%) and Asia 25% (2007: 15%).

Cost of sales and operating expenses:

Cost of sales decreased 7% to GBP1.3 million (2007: GBP1.4 million). Gross margin increased to 92% (2007: 90%). Without the restructuring effects, net operating expenses increased by 25% to GBP22.8 million (2007: GBP18.3 million).

The company had 163 employees at December 31, 2008 compared with 196 at December 31, 2007. The 17% decrease in headcount was due to a company-wide restructuring to be completed in Q1 of 2009, and was offset by increase in headcount from the Sonic Focus acquisition. Excluding the effects of the restructuring, research and development costs increased 30% to GBP9.6 million (2007: GBP7.4 million). Sales and marketing cost was essentially flat at GBP5.5 million compared to 2007 (2007: GBP5.5 million). General and administration costs increased 22% to GBP4.5 million (2007: GBP3.7 million). Other expenses, comprised of depreciation and amortization, increased to GBP3.1 million (2007: GBP1.7 million) due to additional amortization of intangibles included in the acquisitions. The incremental operating expenses excluding amortization as a result of the acquisition during the year was GBP1.2 million in 2008. Incremental amortization expenses associated with technologies and intangible assets acquired in 2008 was GBP0.3 million in 2008. Restructuring costs for 2008 were GBP2.3 million.

Finance income:

Interest income was down 40% to GBP0.9 million (2007: GBP1.5 million) due to the decrease in average cash balance and decrease in interest rates earned on investments.

Loss for the period:

The charge for the reorganization of GBP2.3 million, and the incremental expenses from the acquisition of Sonic Focus gave rise to the increase in the net loss.

Cash flow and balance sheet:

The net cash outflow from operations before restructuring costs decreased to GBP4.8 million (2007: GBP5.1 million). Capital expenditure, including payments made for acquisitions and investments in associate, was GBP4.6 million (2007: GBP8.1 million). Net cash outflow in connection with the reorganization was GBP1.6 million, including the share repurchases. The movement in cash and short-term investments during the year was an outflow of GBP8.5 million (2007: GBP10.4 million). Net assets at December 31, 2008 were GBP21.5 million (December 31, 2007: GBP30.3 million), including cash and short-term investments of GBP12.7 million (December 31, 2007: GBP21.2 million).

Dividend:

No interim dividend payment will be made for the year ended December 31, 2008.

Acquisitions:

During the period the company acquired Sonic Focus, Inc. for a total consideration of GBP2.8 million.

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