Arteris Q1 2024 Earnings Call Transcript

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May 2, 2024

There are 9 speakers on the call.

Operator

Good afternoon, everyone, and welcome to the Arteus First Quarter 2024 Earnings Call. Please note, this call is being recorded and simultaneously webcast. All material contained in the webcast is sold property and copyright of the Artiris Inc. With all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion of Sapphire Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you and good afternoon. With me today from Arteris are Charlie Janik, Chief Executive Officer and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the Q1 ended March 31, 2024. Nick will review the financial results for the Q1 followed by the company's outlook for the Q2 and full year of 2024. We will then open the call for questions.

Speaker 1

Before we begin, I'd like to remind you that management will make statements during this call that are forward looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to differ materially from those anticipated and you should not place undue reliance on forward looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appear in the press release, our tariffs issued today, in the documents and reports filed by our tariffs from time to time with the Securities and Exchange Commission. Please note, during this call, we will cite certain non GAAP measures, including non GAAP net loss, non GAAP net loss per share and free cash flow, which are not measures prepared in accordance with U. S.

Speaker 1

GAAP. The non GAAP measures are presented as we believe they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance. These non GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U. S. GAAP.

Speaker 1

A reconciliation of these non GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended March 31, 2024. In addition, for a definition of certain of the key performance indicators used in this presentation, such as annual contract value, confirmed design starts, active customers and remaining performance obligation, please see the press release for the quarter ended March 31, 2024. Listeners who do not have a copy of the press release for the quarter ended March 31, 2024, may obtain a copy by visiting the Investor Relations section of the company's website. In addition, management will be referring to the Q1 2024 earnings presentation, which can be found in the Investor Relations section of the company's website under the Events and Presentations tab. Now, I will turn the call over to Charlie.

Speaker 2

Thank you, Erica, and thanks to everyone for joining us on the call this afternoon. We're excited to report a solid Q1 of 2024 with annual contract value plus royalties of 58,200,000 dollars I'd also like to highlight that we delivered a positive free cash flow quarter and we are reaffirming our target of achieving positive free cash flow in 2024. This quarter's success was driven by continued robust licensing activity across all of our verticals, led in particular by enterprise computing and automotive deals. As with recent quarters, the rise in artificial intelligence is a driving factor for our customers with approximately half of our first quarter license deals enabling AI and machine learning design starts increasingly supporting generativei and large language model applications. We continue to expand our foothold with large customers as 5 of our significant wins were with top 30 global technology companies.

Speaker 2

Each of these wins with a major system and semiconductor companies increasingly demonstrates the growing demand for commercial system IP vendors such as Arteris. We saw continued healthy design activity from our customers, primarily in enterprise computing and automotive, followed by deployments for communications and industrial applications and consumer electronics. 1 of the enterprise computing wins in the Q1 was one of our largest system IP deals with a top 10 semiconductor company. Specifically, it significantly expands the deployment of our Terrus network on chip IPs across a growing number of SoC designs. This business relationship continues our trend of securing relationships with major technology companies that can be expanded over time.

Speaker 2

As of today, approximately half of the top 30 semiconductor and technology companies are our Teris customers. As mentioned earlier, the growth of AI is fueling the increasing adoption of our Teris products, which we believe are well suited to tackle the growing design size, complexity, performance, power and cost requirements of AI chips. As an example of this trend, we announced that Rebellion, a pioneering AI semiconductor startup in Korea has licensed FlexNOC network on chip IP and Magilum SoC automation integration software for its next generation neural processing unit aimed at generative AI. Rebellion chose Arteris per RAP and our software enabling superior performance and design flexibility for their inference chips, while meeting energy efficiency requirements needed to deliver cost efficient AI hardware computing at scale. On the product front, our FlexNOC 5 network on chip launched in middle of last year continues to find solid adoption.

Speaker 2

This adoption spans across all our verticals and all of our main geographical markets from small to large customers. Building upon this momentum, we announced the release and immediate availability of the latest version of our Encore cash coherent network on chip IP. Our Teris Encore supports any processor IT that connects to Encore supported protocols, offering multiple protocols, flexible configurations and ISO 26,262 functional safety and is utilized by Mobileye, a longtime customer who is at the forefront of the autonomous vehicle evolution. The expanded Encore IP also delivers on the previously announced Arm and Arterius automotive partnership, targeting a broad range of automotive designs from microcontrollers to autonomous driving chips. The collaboration results in pre validation of our Teris N Core interconnect IP integrating with and supporting various ARM V9 based processor IPs for automotive semiconductors.

Speaker 2

The aim is to enable next generation of automotive electronics including advanced driver assistance systems or ADAS, cockpit and infotainment systems, vision, radar, lidar, body and chassis control and more. By optimizing and pre validating our Teris Encore network on chip to work seamlessly with ARM's latest processor IPs, customers benefit from accelerated path to high performance, power efficient and safe automotive SoCs. Speaking of automotive collaboration, at the recent Automotive Computing Conference, Mercedes Benz presented a vision for standardization of automotive computing and multi die chiplets supported by partners including ARM, Intel Foundry, Synopsys, Renesas, Arteris and others. We are excited to be partnering in pioneering a reference with Mercedes Benz for its network on chip and last level cash implementations as part of the ADU platform addressing a full range of autonomous driving applications. Yet another collaboration in the Q1 included expanding our RISC V ecosystem support to help offer on chip connectivity for companies deploying the DAMO Zhuan T Processor IP in their SoCs.

Speaker 2

This collaboration underscores Arterius capability to support processor choices made by our customers including the support of both ARM and RISC V Processors on the same SoC. Currently, certain macroeconomic dynamics, including geopolitical uncertainties and the U. S. BIS restrictions concerning China U. S.

Speaker 2

Trade continue to impact our business, though we are not seeing further deterioration at this time. While these dynamics do create near term headwinds, we believe that the scale and scope of our long term opportunity remains robust, supported by a strong product pipeline of new system IP technologies and solid relationships with some of the largest electronics companies in the world who continue to innovate in exciting areas such as generative AI and autonomous driving using our Tera system IP technologies. With that, I'll turn it over to Nick to discuss our financial results in more detail.

Speaker 3

Thank you, Charlie, and good afternoon, everyone. As I review our Q1 results today, please note I will be referring to GAAP as well as non GAAP metrics. A reconciliation of GAAP to non GAAP financials is included in today's earnings release, which is available on our website. As a reminder, I will be referring to the Q1 2024 earnings presentation, which can be found in the presentation. Total revenue for the Q1 was $12,900,000 down 2% year over year, but up 4% sequentially and above the midpoint of our guidance range.

Speaker 3

If we take into account the change to ratable revenue treatment in the Q2 of 2023, the year over year revenue growth would have been 16%. At the end of the Q1, annual contract value or ACV plus royalties was $58,200,000 also above the midpoint of our guidance range. Remaining performance obligations or RPO at the end of the Q1 were $74,700,000 representing a 30% year over year growth, growing to the highest level we have ever reported and reflecting a solid quarter in terms of new license deals. GAAP gross profit for the 1st quarter was 11 point representing a gross margin of 89%. Non GAAP gross profit in the quarter was $11,700,000 representing a gross margin of 91%.

Speaker 3

Now moving to Slide 5. Total GAAP operating expense for the Q1 was 20 point $6,000,000 compared to $20,300,000 in the 4th quarter. Non GAAP operating expense in the quarter was $17,000,000 up 1% sequentially, but 4% lower than the Q1 of 2023, reflecting the team's continued focus on prudent management of our operating expenses. We'll continue to limit spending to strategically critical areas while investing in profitable revenue growth. GAAP operating loss for the Q1 was $9,100,000 compared to a loss of $8,800,000 in the prior year period.

Speaker 3

Non GAAP operating loss was $5,300,000 or 41 percent compared to a loss of $5,600,000 in the prior year period. Net loss in the quarter was $9,400,000 or diluted net loss per share of $0.25 Non GAAP net loss in the Q1 was $5,600,000 or diluted net loss per share of $0.15 based on approximately 37,700,000 weighted average diluted shares outstanding. Moving to Slide 6 and turning to the balance sheet and cash flow. We ended the quarter with $53,400,000 in cash, cash equivalents and investments. Free cash flow, which includes capital expenditure, was positive $300,000 This was above the midpoint of our guidance range and in line with the company's goal to be free cash flow positive in the current year.

Speaker 3

I would now like to turn to our outlook for the Q2 and full year 2024 and refer now to Slide 7. I would draw your attention to the fact that our guidance methodology has changed to guiding operating loss and free cash flow in terms of dollars instead of percent of revenue. For the Q2, we expect ACV plus royalties of $58,000,000 to $62,000,000 revenue of $13,200,000 to $14,200,000 with non GAAP operating loss of $6,500,000 to $4,500,000 non GAAP free cash flow of negative $1,400,000 to positive $1,600,000 reflecting strong sales in the Q1. For the full year 2024, our guidance is as follows. ACV Plus royalties to exit 2024 at $62,000,000 to $68,000,000 up 16% year over year at the midpoint Revenue of $54,500,000 to $57,500,000 non GAAP operating loss of between $23,400,000 to $19,400,000 non GAAP free cash flow of negative $2,400,000 to positive $2,600,000 In conclusion, we are encouraged by the strong start to 2024 in our top line and our effective cost management, which has resulted in above guidance performance in all the financial metrics for the Q1.

Speaker 3

I'm particularly encouraged by the positive free cash flow generated in the quarter. We aim to maintain this momentum for the remainder of the year. With that, I will turn the call over to the operator to open it up for questions.

Operator

Thank Your first question comes from the line of Matt Ramsay from TD Cowen. Your line is now open.

Speaker 4

Thank you very much everybody. Good afternoon. First of all, Nick, congrats on the free cash flow. I wanted to ask just a general question around the RPO, almost $75,000,000 and looks like up 30% year over year. And just given some of the accounting changes and different things like that, I just wanted to revisit RPO and how deals are flowing into RPO and what that 30% growth, is that sort of a sustainable level that you guys think can be reflective of the business going forward?

Speaker 4

And just kind of remind us how that should sort of peanut butter its way into revenue over time and give sort of confidence in what those free cash flow numbers are on a directional basis? Thanks.

Speaker 5

Yes. Hi, Matt. Happy Earnings Day. As always, a great question. The way that just to remind the way that RPO works is as deals flow in, they flow into RPO as they get recognized into revenue, RPO amortizes.

Speaker 5

And so generally if deals are coming in faster than revenues being recognized and RVO increases. We have had a sort of a special tailwind by the shift to RASM revenue treatment because that throttled back the speed at which RPO is being recognized into GAAP revenue. Nevertheless, all of that $74,700,000 of RPO will flow into revenue at some point. So it gives you some sort of understanding of the strength of the future revenue pipeline if there is such a thing. And that represents somewhere close to a year and a half's worth of run rate revenue, which is essentially in back log if you want to for want of a better word.

Speaker 5

So yes, we're pretty encouraged by that. To your question of can you expect that rate of increase to go on ad infinitum? The answer is logically not really. It will continue to increase because the deal flow is still very strong. But the 30% is in part because of the shift to to ratability.

Speaker 5

But don't expect it to suddenly die and stop growing. It will continue to grow.

Speaker 4

Got it. No, that's helpful.

Speaker 5

And could grow quite strongly.

Speaker 4

That's helpful, Nick. Just remind me really quickly when which quarter will you guys report where the RPO number year over year will be sort of an apples to apples?

Speaker 5

So there's another very good question. So the Q2 of 2023 was when we shifted completely. We did have a couple of vestigial deals in the Q3 and a little bit in the Q4 of 2023 that where we haven't quite managed to stem the non ratable deals, but now they have gone completely. So but to all intents and purposes, we will be apples to apples lapping right size numbers by Q2 end of Q2 end of this quarter essentially. So go into Q3, we will be like for like comparable and there won't be this confusion anymore of well, if it hadn't been for the shift ratability growth would have been X.

Speaker 5

Right now, if we didn't point that out,

Speaker 3

I think it would be misleading.

Speaker 4

Got it. Thank you.

Speaker 5

So when we're reporting when we're reporting Q3 essentially you'll see true life, life.

Speaker 4

Got it. My second question, Charlie, we've obviously, what's happening in AI across starting in the data center, but then I think gradually getting into client side devices, automotive, the edge, networking, all the other markets over time. The AI leader in the industry seems to be speeding up its roadmap and innovation keeps moving at a quicker and quicker pace. I'm wondering if you're seeing that reflected in the interactions that you guys are having with the customer base in terms of the faster things move, it would seem the more likely and more value it would be for folks to use 3rd party IP for some of these very complicated systems where it's been stressing internal teams as it was. Are you seeing that, I don't know, speeding up of the treadmill affecting any of your business conversations, especially as you roll out new products to license?

Speaker 2

Yes. I mean, one of the thing that we're learning as we talk to customers is that we talked about automotive being kind of slow, right, which is both an advantage and a disadvantage in certain sense. Generative AI on the other hand is just the opposite. It's extremely quickly moving because the large language model evaluations and the algorithms are changing very, very quickly. So the silicon has to be done really, really fast in order to make sense for the customers.

Speaker 2

And then, of course, the lifetime of those designs may be relatively short compared to automotive as well. So the answer is yes, things are moving. There's a lot of different approaches. There's a lots of innovations. And there's I think we've said that half the design starts that we saw in the quarter were basically machine learning designs and people are trying to get to very, very fast design cycles, which essentially puts a premium on automation and productivity of system IP generation.

Speaker 2

So it's an opportunity for sure.

Speaker 4

No, that totally makes sense. I guess my last question and I thought it was very clear in your script, Charlie, that there are still some headwinds in China, but things have certainly stabilized and there's not any additional things. I guess my question is that do you feel like where we are right now in China for you guys is a is sort of a permanent steady state? Or if there were catalysts to, I don't know, unlock the roadblock there and to have things returned a little bit more normal, what would those be and are they even remotely on the table or likely?

Speaker 2

Yes, I mean, obviously, as a management team, we consider a number of scenarios, right? There's the scenario where there's some unpleasantness around Taiwan, which will make things worse. But there's also a scenario that U. S. And China will come to some kind of an accommodation where things could get better.

Speaker 2

Our on those sort of scenarios, the one that we're banking on is that things stays the same. That basically, where the business is going to continue at the current level, we're going to keep getting new customers in China, new design wins, But that it's not going to go to the I would say the previous bonanza before the headwinds sort of started between China and the U. S. So we're planning for things to stay the same. We're planning for status quo in terms of our Chinese business.

Speaker 4

No. Perfectly clear. Thank you for that. Congrats guys on the progress. I'll jump back in the queue.

Operator

Your next question comes from the line of Hans Mosesmann from Rosenblatt. Your line is now open.

Speaker 6

Yes, thanks. Hey, congrats guys on the free cash flow. Hey, Charlie, can you give us a sense on ASP trends over the past quarter licensing royalties? How's that trend or how's it looking as the year progresses?

Speaker 2

So, the ASPs have been growing nicely. It's we're pretty much on track discussing with the ASP trends that we discussed on the IPO a couple of years ago, where as we get more products into the market with higher ASPs and as the chips get more complex and use more system IP, the ASP is growing very nicely. And I think our financial show that, right? So that trend continues and what we said is that we're going to be at $1,000,000 average by 2026 ASP and I think that can very easily happen.

Speaker 6

And right now they're around half of that?

Speaker 2

Yes. So right now I would say it's a little bit I think last year we were somewhere around 460,000. Dollars Now we're probably over $500,000 probably $550,000 something like this. But the reason that we know we're on track is that a number of the deals are over $1,000,000 And so it's definitely not it's actually probable that eventually the average deal will be over $1,000,000 So the ASPs are going well.

Speaker 5

Hey, Hans, this is Nick. Nice to catch up again. One other piece of color in addition to Charlie's commentary there is, when you look at royalties, we've had this conversation before. Royalties, the ASP and royalties is also in the ascendancy, as we have transitioned away from several years ago into being dominated by the mobility market, the cell phone, smartphone market with very small royalty rates now to more dominated by automotive, which has probably 3 times the royalty rate of smartphones and some of the devices. So and some are much higher than that as Charlie likes to point out, the space type application has substantially higher ASP.

Speaker 5

So that's another drag factor to the upside.

Speaker 6

Okay. That's helpful. And just a question back in the IPO, you guys had and since then, I guess, you've been saying that in automotive platforms, you could see as many SoCs per car north of 20 or maybe between 20, 25 from what it was a few years ago, maybe 3 or 4. Is that still theme to happen over the next several years?

Speaker 2

Yes, absolutely.

Speaker 5

And I think we're pretty much on track to where that was originally conceived in terms of the timeline.

Speaker 3

I mean we

Speaker 2

And it can be more. I mean, we've had a discussion with a customer and they were telling us that they need 46 cameras for level 4 driving, right? So that would imply SoC consumption way in advance of basically having 4 camera SoCs, right? So yes, we feel pretty comfortable with that projection.

Speaker 6

Okay. Then the last question and I'll let I'll go back in the queue. The time from licensing to tape out or from time to license to production for your customer engagements, Has that changed over the past couple of years?

Speaker 2

So it has I mean, in a particular vertical, it has not, right? So the automotive design still takes 2.5, 3 years. What has changed is that as people do more generative AI designs and those designs, the large language models and the algorithmic technologies that are being employed have impact on the underlying silicon. And so that segment is moving very, very fast, much faster than any other segment that we've seen. People are looking for 9 month design cycles or less and product life cycles probably of 1 or 2 years only.

Speaker 2

And so that segment is moving very, very fast and that would on the average lower the design term. But within each individual segment, we're not seeing much change because we enable people to go faster, but the chips are more complex, right? So there's a constant fight between automation and productivity and complexity within each segment.

Speaker 6

Okay. Right, right. That makes sense. All right, guys. I'll go back into the queue.

Speaker 6

Thanks.

Operator

Your next question comes from the line of Kevin Garrigan from Westpark Capital. Your line is now open.

Speaker 7

Yes. Hey, Charlie and Nick. Good afternoon. Let me echo my congrats on the progress. Going off of Hans' question regarding kind of SoCs and cars, I know you gave an example of a customer looking for multiple vision cameras.

Speaker 7

You're seeing a lot more automotive OEMs kind of introduce, I would say, infotainment features right now, while ADAS may be taking a little bit longer than kind of expected. So is there kind of one category that you're seeing more designs for currently than others, like maybe infotainment or the design starts kind of focusing on all functions across the board?

Speaker 2

So we're seeing I mean, the automotive progress continues, right? So we're seeing some more Tier 1s starting to build chips. We're starting to see some more OEMs build chips, right? In terms of categories, there's a lot of noise and publicity about automated driving, but we don't see the design activity really changing a whole lot, right? Because those electronic decisions are made 7 to 8 years before deployment.

Speaker 2

So on the design side, we're not seeing any slowdown in the automotive driving direction. It's just that people are realizing and we've been saying I've been feeling this all along is that the automated driving in a city environment is going to be exceedingly difficult without changing the cities and therefore will take a lot longer. But on highways and secondary highway highways, primary highways and secondary highways, automated driving is highly useful and very practical and very valuable. And that will continue.

Speaker 7

Okay, perfect. Thanks, Charlie. I appreciate that color. And just as a follow-up, so you had noted that there are several more evaluations and prospective customers in the pipeline for FLEXNOC 5. Do you expect many of these customers to kind of decide sooner rather than later whether to use Arteris or is it more kind of maybe an end of year phenomenon?

Speaker 2

No, I mean FlexCon 5 has been doing very well, right. So it's the penetration is meeting expectations. The 2nd generation physical awareness provides very valuable capability to customers below 16 nanometer. And so FlexNOC 5 has a 30% pricing uptick. And so that's a combination of value and ASP increase that really helps the business.

Speaker 2

And what we're looking forward to is sometime this year to announce some further innovation that will further provide additional value.

Speaker 7

Okay, perfect. Thanks guys.

Speaker 5

Thanks Kevin. Thanks Kevin.

Operator

Your next question comes from the line of Gus Richard from Northland. Your line is now open.

Speaker 8

Yes. Thanks for letting me ask a few questions and congratulations on entering the promised land free a positive free cash flow.

Speaker 2

Yes. We promised it and we're doing our absolute best to make it happen.

Speaker 8

You delivered. In the press release, you mentioned 5 deals with 30 of the top global technology companies. And I was just wondering if you could explain exactly what you mean by top 30 global tech companies. Is it semis? Is it hyperscalers?

Speaker 8

Is it by market cap? Is it by revenue? Just a little bit more color on that statement. Yes.

Speaker 2

So in order to have a sort of a unified methodology, we're going by market cap. And so, it's basically top 20 semiconductor companies by market cap and then top 10 system houses by market cap. And together they make up the we call the top 30 it's the Arteris top 30 technology index.

Speaker 8

Got it. And then which buckets were those 5 companies in, the semi companies or the system houses?

Speaker 2

Both, both sides.

Speaker 8

Okay.

Speaker 2

Yes. The reason we didn't want to do revenue, we go by revenue is because the revenue from the public semiconductor companies is available, but you don't know what the system house chip revenue really is, right? So that's why it just made market cap just made sense from a sort of a unified methodology perspective.

Speaker 8

Got it. And then just looking at the numbers and sort of realizing how your cash works, is it reasonable to assume that the bookings in the quarter are on the order of $6,000,000

Speaker 5

So I'll ask that question again Gus, I didn't get the tail end of it.

Speaker 8

Sure. Just looking at sort of your accounting and making some back of the envelope calculations, is it reasonable to assume that bookings were on the order of $6,000,000 in the quarter?

Speaker 5

No, hopefully a lot more than that.

Speaker 2

Yes, a lot more than that.

Speaker 5

I mean our OpEx runs at sort of high 70s, so not high 70s, 70s in the quarter. So yes, but basically TCV of bookings total contract value has to run-in terms of collections in excess of that to be cash flow positive in the quarter. And then you've got plus or minus working capital shifts at the end of the quarter and the beginning of the quarter, which can sometimes mess things up a little bit. But that's the basic deal. So bookings, which is what we would call TCV plus and royalties, we would throw into that bucket.

Speaker 5

So it's everything together have to be north of the OpEx number.

Speaker 8

Okay, got

Speaker 5

The non GAAP OpEx because it has to be non GAAP OpEx because obviously the SBC is not a cash expense, if that makes sense. Does that make sense, Gus?

Speaker 8

Yes, absolutely. Yes, that does indeed. And then typically you guys announce a new product every year and I'm just wondering are there any thoughts on sort of when and what new product might be this year?

Speaker 2

Not ready to announce. But what we said is that we expect there to be impact on revenue in the second half. And that's not changed from the Q4 to this quarter. We've been working very hard. We've been making progress and we still feel that we're going to make a good on that statement.

Speaker 8

Got it.

Speaker 2

And we're very excited about it.

Speaker 8

Yes. That's it for me. Thanks so much.

Speaker 2

Thanks, Gus.

Speaker 8

Thank you, Gus.

Operator

There are no further questions at this time. I will now turn the call over to Charlie Janak for closing comments.

Speaker 2

Thank you everyone for the good questions and being on the call. And we look forward to seeing most of you at the upcoming conferences that we're participating in. And we look forward to updating you on the progress of the company. Thank you very much.

Operator

That concludes our question and answer session. Have a great call and you may now disconnect.

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