I have the same problem with my Z1 using Cubase VST (PC).
What I found is the KORG Prophecy and the Z1's arpeggiator when using and external clock source from Cubase won't work for the following reason-
Cubase echos back midi information which will cause the ARP to cut off (it is getting double the information).
It is a pain but what you should do is set the keyboard to LOCAL OFF. Now when you select the Cubase track for your Prophecy, you should be able to hear the ARP kick in.
What I did is set Cubase to reset MIDI devices after stop because I have noticed the Z1 (or cubase I don't know) sometimes gets a small glitch.
I just record my parts (with LOCAL ON) not expecting to hear the ARP- in fact I turn it off. Then when I go to play the track back, I hear the ARP being played.
If you are trying to record the notes from the ARP, then the LOCAL OFF should do the trick.
Good Luck,
DarrenDiego