Arteris Q1 2025 Earnings Report

Arteris EPS Results

• Actual EPS: N/A
• Consensus EPS: -$0.11
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Arteris Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $15.90 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Arteris Announcement Details

• Quarter: Q1 2025
• Date: 5/13/2025
• Time: After Market Closes
• Conference Call Date: Tuesday, May 13, 2025
• Conference Call Time: 4:30PM ET

Arteris (NASDAQ:AIP) provides semiconductor interconnect intellectual property (IP) and System-on-Chip (Soc) Integration Automation software solutions (SIA) in the Americas, the Asia Pacific, Europe, and the Middle East. The company develops, licenses, and supports the on-chip interconnect fabric technology used in Soc designs and Network-on-Chip (NoC) interconnect IP. Its products include FlexNoC and FlexWay silicon-proven interconnect IP products; Ncore, a silicon-proven and cache coherent interconnect IP product that provides scalable, configurable, and area efficient characteristics; and CodaCache, a last-level cache semiconductor IP product. The company also offers SIA products comprising Magillem Connectivity that shortens and streamlines the SoC integration process; and Magillem Registers and CSRCompiler that addresses hardware-software integration challenges for SoCs. The company serves semiconductor manufacturers, original equipment manufacturers, hyperscale system houses, semiconductor design houses, and other producers of electronic systems. Arteris, Inc. was founded in 2003 and is headquartered in Campbell, California.

Arteris Q1 2025 Earnings Call Transcript

Key Takeaways

• Arteris achieved a record annual contract value plus royalties of $66.8 million in Q1, drove 28% year-over-year revenue growth to $16.5 million, and generated $2.7 million in non-GAAP free cash flow.
• The company secured four major design wins with top 30 technology firms and saw expanded deployments by leading hyperscale, consumer electronics, and automotive OEMs—bringing its roster of direct automotive customers to 10.
• Product innovation continued with FlexGen, the AI-driven smart NOC IP now in 20+ customer evaluations and expected to contribute revenue in H2, and the latest release of Madulem SoC integration automation software.
• Arteris strengthened its ecosystem by joining the Intel Foundry Accelerator Program, founding Intel’s chiplet alliance, participating in IMEC’s Automotive Chiplet Forum, and opening a new engineering hub in Krakow, Poland.
• Despite global economic and tariff uncertainties, Q2 guidance calls for $16.1–16.5 million in revenue and ACV+royalties of $66–70 million, while full-year 2025 revenue is guided to $65–71 million with unchanged midpoints.

Presentation

[Operator]

Good afternoon, everyone, and welcome to the Arteris First Quarter twenty twenty five Earnings Call. Please note that this call is being recorded and simultaneously webcast. All material contained in the webcast is sole property and copyright of Arteris Incorporated with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion of Software Investor Relations. Please go ahead.

[Erica Mannion, Partner & Founder at Sapphire Investor Relations, LLC]

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 highlights for the first quarter ended 03/31/2025. Nick will review the financial results for the first quarter followed by the company's outlook for the second quarter and the full year of 2025. We will then open the call for questions.

[Erica Mannion, Partner & Founder at Sapphire Investor Relations, LLC]

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 materially differ 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 issued today and in the documents and reports filed by Arteris 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.

[Erica Mannion, Partner & Founder at Sapphire Investor Relations, LLC]

GAAP. The non GAAP measures are presented as we believe that 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 or as substitutes for or superior to financial measures prepared in accordance with U. S. GAAP.

[Erica Mannion, Partner & Founder at Sapphire Investor Relations, LLC]

A reconciliation of these non GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended 03/31/2025. In addition, for a definition of certain of the key performance indicators used in this presentation, such as annual contract value, contract design starts and remaining performance obligations, please see the press release for the quarter ended 03/31/2025. Listeners who do not have a copy of the press release for the quarter ended 03/31/2025 may obtain a copy by visiting the Investor Relations section of the company's website. In addition, management will be referring to the Q1 twenty twenty five 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.

[Charles Janac, Chairman , President & CEO at Arteris]

Thank you, Erica, and thanks to everyone for joining us on our call today. In the first quarter of twenty twenty five, we achieved another record annual contract value plus royalties of $66,800,000 and generated $2,700,000 in non GAAP positive free cash flow as demand for commercial semiconductor system IP products continues to grow. Our success during the quarter saw steady adoption across enterprise computing, communications and automotive semiconductors, driven by growing chiplet and SoC design complexity, as well as proliferation of AI applications. During the quarter, we had several key design wins. Four came from top 30 global technology companies expanding their deployment of Arteris products.

[Charles Janac, Chairman , President & CEO at Arteris]

The largest win including Madulam SoC integration automation software, as well as interconnect IP for various applications, including memory controllers and consumer electronic projects. Another of the large wins came from an expanded reorder from a top five technology company with products and services, including hyperscale computing and consumer electronics. Also, a major automotive OEM expanded its use of Arteris product portfolio for its next generation of EV vehicles. Another key win and one of the three new Arteris customers in the quarter was with an industry leading Japanese automotive OEM. This customer licensed our products to support their new in house development of autonomous driving SoCs that include AI and functional safety capabilities.

[Charles Janac, Chairman , President & CEO at Arteris]

They selected Arteris based on the combination of our product's superior performance, lower power area efficiency and high resilience for their mission critical applications. With this latest addition, we now have 10 automotive OEMs as direct Arteris customers. Adoption of our technology also continues to be strong with advanced semiconductor companies. For example, our physically aware FlexNoc IP with AI and functional safety support was chosen for the development of NextChip's next generation vision based ADAS technology to realize the future of autonomous driving with sustainability. We are seeing increased movement from internal system IP solutions to commercial vendors such as Arteris, as customers desire resource efficiency, quality and faster solutions delivery.

[Charles Janac, Chairman , President & CEO at Arteris]

I'm pleased to report that our penetration of the increasingly complex microcontroller MCU system IP market continues with initial receipt of royalties from a top five MCU manufacturer. This penetration is driven by continued increases in MCU complexity as well as ever more stringent latency and cost requirements. In addition to our customer momentum, we continue to deliver new technology. In the last earnings call, we announced FlexGen, our AI driven smart NOC IP technology, which has the potential to revolutionize semiconductor designs by delivering up to 10x engineering productivity, lowering power consumption and improving overall performance. We now have over 20 customers who see projects evaluating FlexGen, which is a promising start for this innovative product, which we expect will generate revenue and ACV in the second half of the year.

[Charles Janac, Chairman , President & CEO at Arteris]

In the first quarter, Arteris also released the latest generation of Madulem Register Management Automation software used for semiconductor hardware and software integration. This latest technology provides a single source of data for development of SoCs and chiplets by chip architects, hardware designers, firmware engineers, verification teams, documentation teams, helping to mitigate the silicon failure risks associated with the unfortunate and quite common instances of out of date specifications, interpretation differences across various teams, and user errors. The latest product improves performance and scalability to address the needs of any semiconductor design ranging from simple IoT devices to state of the art complex artificial intelligence SoCs, FPGAs and chiplets. I'm also proud to see that our focus on innovation being recognized in three prominent categories in the twenty third Annual American Business Awards out of 3,600 nominations. These included the Gold Award for the Most Innovative Tech Company of the Year, another Gold Award for Technical Innovation of the Year for our NCORE NOC IP with its support for ARM, RISC V, x86 and mixed architectures, and the Silver Award in the Product Innovation category for our FlexNOC and NCORE NOC dialing technology in support of advanced AI computing at the data center and the edge.

[Charles Janac, Chairman , President & CEO at Arteris]

Beyond actively driving in house innovation, Arteris continues to expand ecosystem collaboration to provide full solutions to our customers, including leveraging our products' physical awareness to support the faster development of advanced electronics with more predictable power, performance and area or PPA for SoCs and chiplets. We recently announced that Arteris joined the Intel Foundry Accelerator Program, becoming members of the IP Alliance enabling silicon designs using Intel's 18A advanced process node to collaborate on physically aware NOx for future nodes. Additionally, Arteris also became a founding member of Intel Foundry's new chiplet alliance, which aims to create a robust network of ecosystem partners to ensure interoperability and to accelerate creation of a wide range of multi die silicon applications. Similarly, Arteris also joined the IMEC sponsored Automotive Chiplet Forum, whose goal is to share insights and ensure industry alignment and interoperability for automotive chiplet based architectures, where our NOC products with ISO 26,262 functional safety capabilities will play an increasingly important role moving forward. Lastly, we announced the opening of our new engineering and customer support center in Krakow, Poland.

[Charles Janac, Chairman , President & CEO at Arteris]

This new location will support the development of network on chip IP and SoC integration automation software for the semiconductor industry. Arteris has hundreds of customers worldwide who are supported by workforce across 11 countries. The addition of a hub in Poland will expand the company's global footprint and provide Arteris with expanded access to top engineering talent for product development, validation and customer support. We believe the scale and scope of our long term opportunity remain robust and are supported by our current products and strong product pipeline of new silicon system IP technologies as well as growing relationships with some of the largest and most advanced electronics companies in the world. Our customers continue to innovate in exciting high growth areas, such as generative AI, autonomous driving, five gs and six gs communications using our Teris products and global support.

[Charles Janac, Chairman , President & CEO at Arteris]

We are diligently monitoring the current global economic uncertainty, although this did not lead to any deal cancellations or delays in the first quarter. Nevertheless, we do see greater potential for variability in financial outcomes for the year due to this economic uncertainty. The clearest impacts are potential short term headwinds to royalties as a result of veining customer global confidence and automotive and other tariffs. Additionally, our overseas based OpEx is likely to increase should the recent weakness of the U. S.

[Charles Janac, Chairman , President & CEO at Arteris]

Dollar persist or worsen. As a potential offsetting factor, we are seeing opportunities for our customer base to accelerate outsourcing of their silicon system IP needs to Arteris to accelerate their products' time to market, reduce their own costs and increase their operating efficiencies. Nick will cover these impacts more when he discusses our guidance. With that, I'll turn it over to Nick to discuss our financial results in more detail.

[Nick Hawkins, CFO at Arteris]

Thank you, Charlie, and good afternoon, everyone. As I review our first quarter 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. Also as a reminder, I will be referring to the 1Q twenty twenty five earnings presentation, which can be found in the Investor Relations section of the company's website under Events and Presentations tab. We had a strong first quarter characterized by beating our guidance on all key financial measures.

[Nick Hawkins, CFO at Arteris]

Turning to Slide five of the presentation. Total revenue for the first quarter was $16,500,000 up 28% year over year, benefiting from approximately $500,000 1 time revenue and exceeding the top end of our guidance range. At the end of the first quarter, annual contract value or ACV plus royalties was $66,800,000 up 15% year over year, above the midpoint of our guidance range and a record high for the company. Remaining performance obligations or RPO at the end of the first quarter were $88,900,000 representing 19% year over year increase, once again a new high for Arteris. Non GAAP gross profit for the quarter was $15,300,000 representing a gross margin of 92%.

[Nick Hawkins, CFO at Arteris]

GAAP gross profit for the quarter was $15,000,000 representing a gross margin of 91%. Now turning to slide six. Non GAAP operating expense in the quarter was $18,400,000 up 9% sequentially and 8% higher year over year, impacted by the timing of certain nonlinear expenses and in part driven by the weaker U. S. Dollar increase in the cost of our overseas operations.

[Nick Hawkins, CFO at Arteris]

Additionally, we continue to grow the investment in our R and D and field application engineering teams that drive technology innovations and solution support. Total GAAP operating expense for the first quarter was $22,700,000 representing a 10% year over year increase. As we look ahead, we plan to focus spending on strategically critical areas, in particular, in key people who could help drive product development, enhance customer support through field application engineering and expand the geographic and key account reach of our global sales team. We believe that these ongoing investments can accelerate our top line growth. At the same time, we are driving operating leverage by controlling G and A spending, which has now remained broadly flat on a non GAAP basis for approximately three years.

[Nick Hawkins, CFO at Arteris]

Non GAAP operating loss for the first quarter was $3,200,000 close to the top end of our guidance range. This represents a $2,100,000 or 40% improvement compared to the loss of $5,300,000 in the prior year period. GAAP operating loss for the first quarter was $7,700,000 compared to a loss of $9,100,000 in the prior year period. Non GAAP net loss in the quarter was $3,600,000 or diluted net loss per share of zero nine dollars based on approximately 40,900,000.0 weighted average diluted shares outstanding. GAAP net loss in the quarter was $8,100,000 or diluted net loss per share of $0.20 Moving to Slide seven and turning to the balance sheet and cash flow.

[Nick Hawkins, CFO at Arteris]

We ended the quarter with $55,100,000 in cash, cash equivalents and investments, and we have no financial debt. Free cash flow, which includes capital expenditure, was positive $2,700,000 for the quarter, above the top end of our guidance benefiting from some early customer payments that were due early in the second quarter. I would now like to turn to our outlook for the second quarter and full year 2025 and refer now to Slide eight. Looking forward, the current economic turbulence has created some marked uncertainty for our business. And consequently, we have revisited our 2025 guidance.

[Nick Hawkins, CFO at Arteris]

As a general contextual comment, our view is that the current economic turbulence presents three key financial considerations for 2025. First, the current trade challenges may result in short term reduction for end demand for some of our customers' products and in our key market verticals, especially automotive and consumer. It is, however, not yet clear what, if any, impact there will be to our royalty revenue in 2025. The first quarter unit sales reports from our customers have generally been better than expected. However, it is possible that this is in part resulting from pull forward demand for our customers' products in anticipation of increased tariff costs.

[Nick Hawkins, CFO at Arteris]

Consequently, we have not adjusted our overall FY twenty twenty five revenue guidance at the midpoint since we believe that the overall net impact will not be materially different from our prior expectations. Second, since the start of the year, the U. S. Dollar has weakened against most major currency pairs. While the significant majority of our revenue is invoiced in U.

[Nick Hawkins, CFO at Arteris]

S. Dollars, approximately 40% of our expenses are denominated in foreign currencies, predominantly the euro, which is appreciated by up to 10% against the U. S. Dollar this year. In the event that the U.

[Nick Hawkins, CFO at Arteris]

S. Dollar exchange rates remain at current levels, we estimate that the annual impact on Alteris expenses would be approximately $1,000,000 However, due to unrelated offsetting expense factors, we are not adjusting our midpoint guidance for non GAAP operating income and free cash flow for FY 2025. Third, while our tariffs products are not subject to tariffs, there is a potential existential impact of the ongoing trade disputes and collateral economic impacts to our business environment, including factors such as consumer and industrial confidence. As a result, we have widened our top line guidance ranges. This economic turbulence is exogenous to our Terrus business operations and it is hard to forecast with certainty the longevity or collateral consequences of changing our economic policies.

[Nick Hawkins, CFO at Arteris]

That being said, while the industrial markets remain clouded with tariff and geopolitical uncertainty, we see our customers' long term growth and therefore our license and royalty revenue remaining robust. For the second quarter of twenty twenty five, we expect ACV plus royalties of $66,000,000 to $70,000,000 revenue of $16,100,000 to $16,500,000 with non GAAP operating loss of $4,000,000 to $3,000,000 and non GAAP free cash flow of negative $5,000,000 to zero, which reflects the reverse effect of early customer payments that benefited the first quarter, as I mentioned earlier. Therefore, we expect free cash flow for the first half overall to be positive at the midpoint. For the full year 2025, our guidance is as follows: ACV plus royalties exit 2025 at $71,000,000 to $79,000,000 revenue of $65,000,000 to $71,000,000 non GAAP operating loss of between $14,000,000 to $7,000,000 non GAAP free cash flow of zero to positive $8,000,000 In spite of the near term challenges I outlined, we are very encouraged by the continued strong deal pipeline. And I would reiterate the point raised earlier by Charlie that we are seeing promising signs of an accelerated interest by some major customers to increase their outsourcing to the commercial market for the system IP products that Arteris specializes in.

[Nick Hawkins, CFO at Arteris]

With that, I will turn the call over to the operator and open it up for questions. Operator?

[Operator]

Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Josh Buchalter from TD Cowen. You may now ask your question.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

Hey guys, thank you for taking my question and congrats on the steady results and an interesting backdrop. I guess I want to hit on the tariff and the trade environment right now. You're being upfront with sort of your cautious view. I guess I wanted to ask more directly, are you seeing any changes from your customers' behaviors yet? And in particular, on their willingness and desire to invest in their IP and SOC roadmaps going forward or is no change yet and you're just being more cautious on the back half?

[Charles Janac, Chairman , President & CEO at Arteris]

Well, mean, semiconductors, so IP and ADA is not really subject to any tariffs directly, right? We are seeing some replanning of projects in China due to knowing tariffs, but also some of the increasing regulations coming from The US. But on the other hand, what we're also seeing is that as the larger companies want to, they're looking at their efficiencies. And so there seems to be an increased willingness by those companies to outsource system IP to commercial vendors, such as Arteris. And the Arteris type of companies actually tend to do fairly well in markets that are just under uncertainty because our customers tend to design their way out of recessions.

[Charles Janac, Chairman , President & CEO at Arteris]

So while there may be some impact on royalties, which are relatively small portion of our revenue at this point in time, the licensing activity remains robust.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

Thank you for all the color there.

[Nick Hawkins, CFO at Arteris]

Just to add to that, Josh, thanks for the question. This is Nick speaking. So, yes, just to reiterate in case anybody missed it. While we're pointing out that there is some economic uncertainty around because things are changing day to day, as you know, we The business is still robust. We're not seeing the change in the pipeline one way or the other.

[Nick Hawkins, CFO at Arteris]

So we think we're well set for the year, which is why we haven't changed our full year midpoint guidance on any of the metrics. There is, as you rightly point out a great deal of uncertainty still. And so we don't know what the knock on impact and what the collateral impact might be, which is why in common with many other companies, we've just widened our guidance range because we have less certainty right now.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

Okay, makes sense. Thank you for the color, both of you. And for my follow-up, I wanted to ask about FlexGen. It sounds like you're increasingly confident in the success of that platform. Could you maybe elaborate on what's driving the expectations for revenue and ACV in the second half of the year and where sort of you're seeing initial traction from an application standpoint for FlexGen?

[Joshua Buchalter, Director - Equity Research at TD Cowen]

Thank you.

[Charles Janac, Chairman , President & CEO at Arteris]

So, we've been working on FlexGen for three years. We've been delivering it to customers, since second half of last year. We have right now at the moment about 20 projects evaluating FlexGen. The feedback has been almost universally positive. And we have been able to get it to a production status, full production status back in February of this year with the release of FlexGen 1.2, which is the third release of it.

[Charles Janac, Chairman , President & CEO at Arteris]

And we anticipate that it's gonna generate substantial bookings and then revenue, which is ratable in the second half. So we're very pleased with the reception of Flexjet. And the applications are fairly broad, right? They range from automotive, data center, enterprise consumers. And so it's a pretty broad spectrum of companies that are using it for evaluations right now.

[Nick Hawkins, CFO at Arteris]

And just to add a little bit of color to that as well. Josh, as I'm sure you know, from previous commentary, any increase from FlexGen, which is likely to be through its ASP as much as major new customers, The is likely to be first will be mathematically felt first in RPO and ACV because they step up contract by contract immediately. The revenue because of its rational nature of everything is running on a sort of two point five to three point five year contract design term, because it's rateable the impact on revenue from any second half deal signed or even second quarter deals signed will be much more muted. So obviously the full effect in 2026. It also may benefit free cash flow, of course, but to the extent that people pay customers pay upfront.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

Thanks, both. Appreciate it.

[Operator]

Your next question comes from the line of Kevin Garrigan from Rosenblatt Securities. Please ask your question.

[Kevin Garrigan, Research Analyst at Rosenblatt Securities]

Yes. Hey, Charlie and Nick, congrats on the solid results. Hey, you guys spoke about accelerated interest from companies that have in sourced. Are you also seeing accelerating decision timelines by customers that are kind of that going from having an initial conversation to signing the licensing agreement than you've previously seen?

[Charles Janac, Chairman , President & CEO at Arteris]

Not really. I mean, people are generally trying to accelerate their design cycles, but the licensing activity is really pretty much steady, I would say, steady growth. And there is, of course, a number of large companies that are looking to basically what we're seeing is they're saying, okay, for whatever we're doing today, we're gonna keep the existing system IP, but we're not gonna invest in it for the next generation because it's becoming more complex and more difficult. And so the next generation tends to get outsourced. So, we're pretty pleased with that area of business.

[Charles Janac, Chairman , President & CEO at Arteris]

And we think ultimately because of the complexity and new application, most of the system IP is going to ultimately get outsourced. And we're gonna go from maybe two thirds of the market being internal to maybe one third of the market being internal and two thirds being commercial. So I think this economic uncertainty is actually accelerating that, even though we're not seeing much impact on faster sort of decision making on individual projects.

[Nick Hawkins, CFO at Arteris]

Kevin, thanks for the question. This is Nick. Just to add to Charlie's excellent commentary. There are two key things that are driving that. One is a pure economic one, which is driven out by the complexity, the increase in complexity of SOC designs.

[Nick Hawkins, CFO at Arteris]

And it's becoming tougher and tougher for the support internal teams, which are very expensive. And typically we look at a sort of a 10X payback from taking an Alteris license versus doing the design internally. So pure economics in times like we have at the moment, that is something that our customers were noticing a supremely focused on is improving their OpEx and improving the bottom line. And the second is actually just a scarcity issue. And we've touched on this before.

[Nick Hawkins, CFO at Arteris]

There is a scarcity of qualified hardware engineers who are capable of designing networks on chip. And that is something that actually FlexGen plays into very well because it decreases the amount of sophistication required by a customer's design team to be able to design a NOG. So those two factors are quite interesting and almost the executable drivers of the move to the commercial market.

[Kevin Garrigan, Research Analyst at Rosenblatt Securities]

Okay, great. I appreciate the color on that. And then, as a follow-up on your joining the Intel Foundry Alliance program, I know it's only been two weeks or so since the announcement, but have you guys seen any increase in interest? And do you think this joined by joining the Alliance, it could help you land a customer too that you might've otherwise thought you wouldn't be able to capture?

[Charles Janac, Chairman , President & CEO at Arteris]

Yeah, mean, lot of this is related to Libu Tan taking over as CEO of Intel, right? And what we're expecting is that Libu is going to be much more open toward commercial solutions, both EDA and on the IP side. And also that there is a commitment by Intel toward continued investment in the foundry technology and in customer relationships for the foundry. So we want to make sure that we participate in the 18A sort of process deployment, and that we're basically the main system IP partner for that alliance. So yes, we expect that this will result in some additional business over the next twelve months.

[Kevin Garrigan, Research Analyst at Rosenblatt Securities]

Yeah, that makes sense. Okay, great. Thanks guys and congrats again on the results.

[Operator]

Your next question is from the line of Gus Richard from Marfland. Please ask your question.

[Gus Richard, MD & Senior Research Analyst at Northland Capital Markets]

Yes, thanks for taking the questions. First of all, was book to bill approximately one in the quarter? That was kind of what I was coming up with.

[Nick Hawkins, CFO at Arteris]

Yes. So Gus, thanks. But we don't disclose bookings. And so I don't really want to comment on that.

[Gus Richard, MD & Senior Research Analyst at Northland Capital Markets]

Okay. Always got to ask.

[Nick Hawkins, CFO at Arteris]

You've always got to ask.

[Gus Richard, MD & Senior Research Analyst at Northland Capital Markets]

Second

[Gus Richard, MD & Senior Research Analyst at Northland Capital Markets]

question, Charlie, you joined two chiplet alliances, IMEC and Intel. And just wondering a couple of questions around chiplets. How do you see that evolving? Has the industry coalesced around UCIE standard or is another interconnect standard competing with that? And sort of what is the how long is it going to take for things to settle out so people can mix and match chiplets is kind of where I'm trying to get at.

[Charles Janac, Chairman , President & CEO at Arteris]

Yeah, so triplets are already in production, but these are homogeneous triplet SoCs where essentially it's one company, one process. And so you have multi die chips like Intel Meteor Lake essentially shipping in very significant volumes. What is just now starting to be established is a heterogeneous chiplet environment where the chiplets are coming from different suppliers. They're coming from different processes. They have to be packaged in innovative ways.

[Charles Janac, Chairman , President & CEO at Arteris]

And so this is going to take a number of years, even though people are already investing today, which is kind of why we're very interested in this particular aspect of the system IP world. Because basically, we make chips communicate on single die, but now we have to make chips communicate across multiple dies or multiple chiplets in a more efficient manner. And that makes the system IP much more complex and much more valuable. So we're very excited about that. In order to make this work, the industry and the whole ecosystem has to standardize in terms of some standards.

[Charles Janac, Chairman , President & CEO at Arteris]

So clearly you mentioned UCI E, Gus, and that seems to be the communication mechanism for cash coherent communication between multiple dyes, right? But we're basically trying to make multiple dies that have multiple processors look like a single programming space to the software. So it's quite complex. And so you need standards like UCIE, you need standards like IP exact, system very long. And so we expect that over the next couple of years that the industry will coalesce a lot based on few standards in order to lower the cost of each individual projects, because the only way that this is going to really work economically is if these things are repeatable based on certain standards and we're committed to support whatever standards are emerging.

[Charles Janac, Chairman , President & CEO at Arteris]

And the whole ecosystem has to coalesce around the standards in order to make these heterogeneous multi die chiplets, SoCs, an economic reality.

[Gus Richard, MD & Senior Research Analyst at Northland Capital Markets]

Got it. Effectively, this happens, you need a Switzerland NOC for the chiplets. Exactly. And then, you know, you talked about the market being two thirds internal today, one third outsourced. Roughly, what's your estimate on how big the market is today for system IP?

[Charles Janac, Chairman , President & CEO at Arteris]

Okay, so it's about somewhere between $1,000,000,000 and $1.2 The NOC itself is about $706,000,000 something like this. There is probably 300,000,000 in the SIA integration software. This is the software that's used to package, connect and configure the various IP blocks. And then there's about another, probably another 300,000,000 or $250,000,000 in system IP blocks that don't do any processing. They're used to essentially make the chip function better and communicate better, more efficiently.

[Charles Janac, Chairman , President & CEO at Arteris]

And those kind of things like last level caches, memory controllers, and so on and so forth, reorder buffers and things that just manipulate the traffic around. So it's about $12,000,000,000 Got

[Gus Richard, MD & Senior Research Analyst at Northland Capital Markets]

it. Super helpful. And then the last one for me, you talked about your large customers considering outsourcing And obviously, the next generation will be more expensive, more complex, limited resources, etcetera. But my question is, is there some underlying technological change that is making this happen now rather than two years from now or two years ago? So what is prompting people to, okay, we got to

[Gus Richard, MD & Senior Research Analyst at Northland Capital Markets]

do this?

[Charles Janac, Chairman , President & CEO at Arteris]

Well, I mean, when Arteris started, which was more than twenty years ago, you had one processor and two channels of memory and couple of IOs, right? So it was relatively easy to do this in house. Then you started getting multi core processors. So you have to introduce cash coherency.

[Charles Janac, Chairman , President & CEO at Arteris]

The next revolution came with AI. So you have these big AI sections, which have their own internal and external data communication requirements and very high bandwidth and so on and so forth. And now you have the rise of chiplets. So with each of these, it's becoming more expensive and more difficult to do. So there isn't one single thing where the CFOs and SVPs of engineering of these big companies wake up and says, Oh my God, we gotta make a change.

[Charles Janac, Chairman , President & CEO at Arteris]

But with each of these developments, it becomes really, really complex. And know Gus, you went to the Intel Foundry Day as well. And there was a Kevin O. Buckley slide which talked about a chiplet system that was 12 times the size of what's possible with reticles, right? Which is about 600 square meters.

[Charles Janac, Chairman , President & CEO at Arteris]

So these were chiplet systems 12 times the size. And so when you start to deal with these kinds of monsters, it gets very, very expensive. And that was drives the adoption of commercial IP solutions, which can be amortized over many more projects than just one company can do.

[Gus Richard, MD & Senior Research Analyst at Northland Capital Markets]

Right. And then last question for me, I'll step back. You're in a certain position it would take you so much R and D to get to what's needed for 12x theoretical size. Sort of what would it take a large company that does huge SoCs to develop something for the chiplet economy?

[Charles Janac, Chairman , President & CEO at Arteris]

I mean, these large companies, they have very large budgets. So they can decide to invest in sort of the chiplet infrastructure. But as Nick pointed out, the problem is getting the people, keeping them together for a number of years and be able to amortize that investment over relatively few projects. I mean, most of these companies are doing two to three chiplet projects right now. They're doing 10 to 15 like they're doing single die projects.

[Charles Janac, Chairman , President & CEO at Arteris]

The CFO of those companies looks at it and says, why are we doing that? And so, companies like Arteris have a faster learning than any internal team, and we can amortize that investment, which is starting to be quite large, against many, many more projects. So faster learning and basically amortization of the R and D over many more projects is the advantage that we would have against any internal team. And it's steady progress in this outsourcing to commercial solutions. And it's not going to happen overnight, but the trend is and the direction and the vector is clear.

[Gus Richard, MD & Senior Research Analyst at Northland Capital Markets]

Got it. Thanks a lot. Thanks for your patience.

[Operator]

Your next question is from the line of Blayne Curtis from Jefferies. Please go ahead.

[Blayne Curtis, Managing Director at Jefferies Financial Group]

Hey guys, thanks for letting me take a last question here. Charlie, I just want to curious what you would point to in terms of your annual forecast you're looking for continued growth on the licensing side. I was wondering if you could talk to it by an end market perspective where you're most hopeful of the remainder of the year.

[Charles Janac, Chairman , President & CEO at Arteris]

So clearly the highest growth at the moment is in AI. There's AI projects for data center training. There's AI projects for data center inference. There's projects for edge inference and actually AI is making it into the endpoints like phones and cars. So that's the large number of projects.

[Charles Janac, Chairman , President & CEO at Arteris]

I think we're probably where half of the design starts in the quarter were actually somehow AI related. We continue to be bullish about automotive. The automotive industry has some cycles, but people are designing now automotive chips for six or seven years from now that are gonna So that is also pretty robust. And we're very excited about our microcontroller entry. The microcontrollers are now becoming much more complex.

[Charles Janac, Chairman , President & CEO at Arteris]

So they need network on chip and software that helps the microcontrollers come together more efficiently. And then there's the usual consumer and enterprise applications, which are also steady. What's really happening, Gus sort of asked about the market size. There's probably about six thousand six seven hundred SoCs that are being designed a year. And we have only 15% of that, right?

[Charles Janac, Chairman , President & CEO at Arteris]

So there's plenty of growth. And each project uses more and more system IP, which becomes more and more valuable. And so we're very bullish about the opportunity that we have in front of us. And our main challenge is to make sure that we remain the main independent neutral player in this particular piece of the world.

[Blayne Curtis, Managing Director at Jefferies Financial Group]

Got you. Thanks. And then just for Nick, I wanted to ask you on the OpEx. Were, I think last quarter talking about keeping SG and A flat. Obviously, it's at a higher level in the first half.

[Blayne Curtis, Managing Director at Jefferies Financial Group]

Just kind of curious if flat is still the right way to think about it?

[Nick Hawkins, CFO at Arteris]

So when we talked about full year guidance last time around, Blaine, we characterized or I characterized 2025 as an up year by about 10%. So roughly half the rate of top line growth. So we've got revenue growing this year guided at 18% and we sort of maintaining our view on OpEx at about half of that, so 9% to 10% overall. And I think that's still reasonable. Where we're getting a lot of operating leverage and this is maybe what you're recalling is in G and A, which has now been flat for three years, three full years, including this.

[Nick Hawkins, CFO at Arteris]

So '25, '20 '4, '20 '3 have been completely flat the way we're guiding it right now. So where we're putting the investment in is in R and D, sales and field application engineering, because they're all driving short, medium and long term top line growth. We think there's huge opportunities left.

[Blayne Curtis, Managing Director at Jefferies Financial Group]

Excellent.

[Nick Hawkins, CFO at Arteris]

Hey, Blaine, could I ask you just add on to Charlie's point? I was trying to cut in, but I realized I was on mute, but just to put some numbers around Charlie's commentary, AI related deals now account for north of 55% of our total business. So that's growing really nicely. But that of course is a horizontal model vertical. As you know, the two highest growth rate verticals for us are, again, not surprisingly are automotive in terms of when I'm looking at ACV and royalties, automotive and enterprise.

[Nick Hawkins, CFO at Arteris]

And enterprise is of course part of the AI story because that's obviously the backbone of the AI workload. So that's very exciting. And then in fact, it's also starting, it's our fastest growing royalty segment as well is enterprise.

[Blayne Curtis, Managing Director at Jefferies Financial Group]

Thank you.

[Operator]

There are no further questions at this time. I'd like to turn the call over to Mr. Charlie Janik for closing comments. Sir, please go ahead.

[Charles Janac, Chairman , President & CEO at Arteris]

Yes. Well, thank you for your interest in Arteris. I hope that you're pleased with the results that we delivered in Q1. And we look forward to meeting with you at the upcoming investor conferences that we're participating in during the next couple of And we look forward to updating you all on our business progress in the course to come. So thank you very much.

[Operator]

This concludes today's conference call. Thank you very much for your participation. You may now disconnect.

Participants

Executives

• Charles Janac, Chairman , President & CEO
• Nick Hawkins, CFO

Analysts

• Erica Mannion, Partner & Founder at Sapphire Investor Relations, LLC
• Joshua Buchalter, Director - Equity Research at TD Cowen
• Kevin Garrigan, Research Analyst at Rosenblatt Securities
• Gus Richard, MD & Senior Research Analyst at Northland Capital Markets
• Blayne Curtis, Managing Director at Jefferies Financial Group