Arteris, Inc. (NASDAQ:AIP) Q1 2024 Earnings Call Transcript

Arteris, Inc. (NASDAQ:AIP) Q1 2024 Earnings Call Transcript May 2, 2024

Arteris, Inc. beats earnings expectations. Reported EPS is $-0.15, expectations were $-0.17. AIP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Erica Mannion: Thank you, and good afternoon. With me today from Arteris are Charlie Janac, Chief Executive Officer; and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the first quarter ended March 31, 2024. Nick will review the financial results for the first quarter followed by the company’s outlook for the second quarter and full year of 2024. We will then open the call for questions. Before we begin, I’d like to remind you 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 Arteris 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. 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.

A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended December 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 obligations, 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.

Karel Janac: Thank you, Erica, and thanks to everyone for joining us on the call this afternoon. We’re excited to report a solid first quarter of 2024 with annual contract value plus royalties of $58.2 million. I’d also like to highlight that we delivered a positive free cash flow quarter, where we’re 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 generative AI 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. 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. One of the enterprise computing wins in the first quarter, is one of our largest system IP deals with a top 10 semiconductor company. Specifically, it significantly expands the deployment of Arteris’ 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. As of today, approximately half of the top 30 semiconductor and technology companies are Arteris customers. As mentioned earlier, growth of AI is fueling the increasing adoption of our Arteris 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 Rebellions, a pioneering AI semiconductor startup in Korea, has licensed FlexNoC network-on-chip IP and Magillem SoC automation integration Software, for its next generation neural processing unit aimed at generative AI. Rebellions chose Arteris per IP 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 the middle of last year, continues to find solid adoption. 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 Ncore cache coherent interconnect on chip IP. Arteris Ncore supports any processor IP, connects to Ncore supporting protocols, offering multiple protocols, flexible configurations, ISO 26262 functional safety and is utilized by Mobileye, a long-time customer who is at the forefront of the autonomous vehicle evolution. The expanded Ncore IP, also delivers on the previously announced Arm and Arteris automotive partnership.

Targeting a broad range of automotive designs, from microcontrollers to autonomous driving chips. Collaboration results in pre-validation of Arteris Ncore, interconnect IP, integrating with and supporting various Armv9 based processor IPs for automotive semiconductors. 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 Arteris Ncore 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 cache implementations as part of the ADU platform, addressing a full range of autonomous driving applications. Another collaboration in the first quarter, included expanding our RISC-V ecosystem support, to help offer on-chip connectivity for companies deploying the Damo-XuanTie processor IP in their SoCs. This collaboration underscores Arteris 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. 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 Arteris system IP technologies. With that, I’ll turn it over to Nick, to discuss our financial results in more detail.

Nicholas Hawkins: Thank you, Charlie and good afternoon everyone. As our review of 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. As a reminder, I will be referring to the first quarter 2024 earnings presentation, which can be found in the Investor Relations section of the company’s website under the Events and Presentations tab. Turning to Slide 4 of the presentation. Total revenue for the first quarter was $12.9 million, down 2% year-over-year, but up 4% sequentially, and above the midpoint of our guidance range. If we take into account the change to ratable revenue treatment in the second quarter of 2023, the year-over-year revenue growth would have been 16%.

At the end of the first quarter, annual contract value or ACV plus royalties was $58.2 million, also above the midpoint of our guidance range. Remaining performance obligations or RPO at the end of the first quarter were $74.7 million, 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 first quarter was $11.5 million, representing a gross margin of 89%. Non-GAP gross profit in the quarter was $11.7 million, representing a gross margin of 91%. Now moving to Slide 5. Total GAAP operating expense for the first quarter is $20.6 million, compared to $20.3 million in the fourth quarter. Non-GAAP operating expense in the quarter, was $17 million up 1% sequentially, but 4% lower than the first quarter 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 first quarter was $9.1 million compared to a loss of $8.8 million in the prior year period. Non-GAAP operating loss was $5.3 million or 41% compared to a loss of $5.6 million in the prior year period. Net loss in the quarter was $9.4 million, or diluted net loss per share of $0.25. Non-GAAP net loss in the first quarter, was $5.6 million or diluted net loss per share of $0.15, based on approximately $37.7 million weighted average diluted shares outstanding. Moving to Slide 6 and turning to the balance sheet and cash flow. We ended the quarter, with $53.4 million 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. I would now like to turn to our outlook for the second quarter 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 second quarter, we expect ACV plus royalties of $58 million to $62 million, revenue of $13.2 million to $14.2 million with non-GAAP operating loss of $6.5 million to $4.5 million. Non-GAAP free cash flow of negative $1.4 million to positive $1.6 million, reflecting strong sales in the first quarter.

For the full year 2024, our guidance is as follows: ACV plus royalties to exit 2024 at $62 million to $68 million, up 16% year-over-year at the midpoint; revenue of $54.5 million to $57.5 million; non-GAAP operating loss of between $23.4 million to $19.4 million; non-GAAP free cash flow of negative $2.4 million to positive $2.6 million. 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 financial metrics for the first quarter. 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: [Operator Instructions] Your first question comes from the line of Matt Ramsay from TD Cowen.

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Q&A Session

Matthew Ramsay: First of all, Nick, congrats on the free cash flow. I wanted to ask just a general question around the RPO. It’s almost $75 million 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. 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 in a directional basis?

Nicholas Hawkins: Yes. Hi, Matt. Happy earnings day. As always, a great question. The way that just remind the way that RPO works, is as deals flow in, they flow into RPO as they get recognized into revenue, RPO amortizes. So generally, if deals are coming in faster than revenues being recognized, then RPO increases. We have had a sort of a special tailwind by the shift to [ ratable ] revenue treatment, because that throttled back the speed at which RPO is being recognized into GAAP revenue. Nevertheless, all that $74.7 million 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 1.5 year worth of run rate revenue, which is essentially in backlog if you want — for want of a better word.

So yes, we’re pretty encouraged by that. As 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 deal flow is still very strong. But the 30% is in part, because of the shift to ratability. But don’t expect it to suddenly die and stop growing. It will continue to grow and could grow quite strongly.

Matthew Ramsay: No, it’s helpful Nick. Just remind me really quickly — which quarter will you guys report where the RPO number year-over-year will be sort of an apples-to-apples?

Nicholas Hawkins: That’s another very good question. So the second quarter of ’23 was when we shifted completely. We did have a couple of vestigial deals in the third quarter, and a little in the fourth quarter of ’23, where we hadn’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 — end of this quarter essentially. So going to third quarter 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 to ratability growth would have been X. Right now, if we don’t point that out, I think it will be misleading. So when we’re reporting third quarter essentially, you’ll see true life line.

Matthew Ramsay: 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 third-party IP for some of these very complicated systems, where it’s been stressing internal teams as it was. Are you seeing that speeding up of the treadmill affecting any of your business conversations especially as you roll out new products to license?

Karel Janac: Yes, I mean one of the things that we’re learning as we talk to customers is that — yes 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. 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. And there’s a lot of innovations and — I think we said that half the design starts that we saw in a 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.

So it’s an opportunity for sure.

Matthew Ramsay: 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 sort of a permanent steady state, or if there were catalysts to I don’t know — unlock the roadblock there. And to have things return to a little bit more normal, what would those be, and are they even remotely on the table or likely?

Karel Janac: 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. On those sort of scenarios, the one that we’re banking on is that things stay the same. That basically 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.