Arteris Inc

NASDAQ:AIP

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

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

[Erica Mannion, executive]

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 second quarter ended June 30, 2024. Nick will review the financial results for the second quarter followed by the company's outlook for the third quarter and full year of 2024. We will then open the call for questions.



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 actual 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 that they provide investors with a 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 June 30, 2024.



In addition, for a definition of certain of 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 June 30, 2024. Listeners who do not have a copy of the press release for the quarter ended June 30, 2024, may obtain a copy by visiting the Investor Relations section of the company's website. In addition, management will be referring to Q2 2024 earnings presentation, which can be found in the Investor Relations section of the company's website under Events and Presentations tab.



Now I will turn the call over to Charlie.

[Karel Janac, executive]

Thank you, Erica, and thanks to everyone for joining us on the call this afternoon. In the second quarter of 2024, we achieved record annual contract value plus royalties of $60.1 million. For the second consecutive quarter, we also delivered positive free cash flow. Our success during the quarter was fueled by customer demand for AI-driven automotive and enterprise computing SoC solutions, along with growing momentum in our other verticals. We expanded our customer base in the second quarter with seven new customers licensing Arteris System IP products. In addition to these new customer wins, we signed four new license deals with current customers who comprised of the world's top 30 technology companies. During the quarter, we experienced steady design activities from our customers with 21 [for the] firm design [stocks]. Highlighting our continued momentum in the automotive industry, particularly for AI-enabled autonomous driving, our new customers include two market-leading global automotive OEMs. We believe this demonstrates the growing importance of optimized electronics and autonomous applications with Arteris System IP with functional safety capabilities being a key building block for overall connectivity.



One of these new customers is a top five global automotive OEM by market capitalization. In addition, two notable customer designs started in the second quarter, including one for a major robotaxi company and the other for a market-leading ADAS company. We expect this trend to continue given growing demand for automotive AI innovation. AI also fueled the demand for our tariffs technology in enterprise computing in the quarter, particularly in the data center application illustrated by securing the highest number of licenses compared to other verticals. AI and ML electronics require high performance, low energy consumption and high bandwidth data traffic, which Arteris products are designed to address.



We expanded our relationship with a major global networking infrastructure system house, reflecting the increased compute needs for higher performance and improved efficiency within the communications vertical. We continue to add large technology company customers that previously used internal developed system IP. One such company is a new OEM licensing Arteris System IP for advanced flat panel AI-enabled digital televisions. Besides growing customer traction, Arteris is proactively working to expand the IP ecosystem to help customers accelerate innovation.



In March, we announced support for Armv9 processors with focus on automotive applications. This was followed by an ecosystem partnership with Andes Technology to support the growing adoption of RISC-V SoCs for AI, 5G and other applications. This customer-driven addition further expands Arteris support across both Arm and RISC-V processor ecosystem, providing [on-ship] connectivity for any SoC architecture chosen by our customers.



Since the acquisition of Semiforce in December 2022, we've seen a growing number of customers who recognize the value of our hardware/software interface technology. One of these customers is Esperanto Technologies who provided RISC-V based silicon for development of high-performance, energy-efficient generative AI and high-performance computing for data center and enterprise edge applications. They chose Arteris SoC integration automation software because of its hardware/software integration automation efficiency, [error] reduction and streamlined design workflows.



In addition, in the second quarter, Arteris was included in the Russell 2000 Index. We believe the scale and scope of our long-term opportunity remains robust, supported by a strong pipeline of new system IP technologies and solid relationship 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 Arteris System IP technologies.



With that, I'll turn it over to Nick to discuss our financial results in more detail.

[Nicholas Hawkins, executive]

Thank you, Charlie, and good afternoon, everyone. As I review our second quarter results today, please note I'll 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'll be referring to 2Q 2024 earnings presentation, which can be found in the Investor Relations section of our company's website under the Events and Presentations tab.



Turning to Slide 4 of the presentation. Total revenue for the second quarter was $14.6 million, up 13% sequentially and above the top end of our guidance range. This was driven by strong deal activity early in the quarter, enabling us to recognize higher-than-expected revenue within the quarter. At the end of the second quarter, annual contract value, or ACV, plus royalties was $60.1 million, above the midpoint of our guidance range, a record high of the company.



Remaining performance obligations, or RPO, at the end of the second quarter was $77.5 million, representing a 19% year-over-year increase also growing to the highest level we have ever reported. GAAP gross profit for the quarter was $13.1 million, representing a gross margin of [90]%. Non-GAAP gross profit in the quarter was $13.4 million, representing a gross margin of 92%.



Now turning to Slide 5. Total GAAP operating expense for the second quarter was $20.6 million, flat compared to the first quarter. Non-GAAP operating expense in the quarter was $16.8 million, 1% lower sequentially and 6% lower than the second quarter of 2023, reflecting the team's continued focus on prudent management of our operating expenses. As we look ahead, we will continue to limit the spending to strategically critical areas while investing in profitable revenue growth.



GAAP operating loss for the second quarter was $7.4 million compared to a loss of $8.7 million in the prior year period. Non-GAAP operating loss was $3.5 million, which is better than the top end of our guidance compared to a loss of $4.2 million in the prior year period. Net loss in the quarter was $8.3 million or diluted net loss per share of $0.22. Non-GAAP net loss in the quarter was $4.4 million or diluted net loss per share of $0.11 based on approximately 38.5 million weighted average diluted shares outstanding.



Moving to Slide 6 and turning to the balance sheet and cash flow. We ended the quarter with $53.9 million in cash, cash equivalents and investments. Free cash flow, which includes capital expenditure, was positive $300,000. This is above the midpoint of our guidance range and in line with the company's goal to be free cash flow positive for the full year of 2024.



Now I would like to turn to our outlook for the third quarter and the full year 2024 and refer to Slide 7. For the third quarter of 2024, we expect ACV plus royalties of $58.5 million to $62.5 million. Revenue of $14.2 million to $15.2 million; non-GAAP operating loss of $5.5 million to $3.5 million and non-GAAP free cash flow of negative $1.4 million to positive $1.6 million. For full year 2024, our guidance is as follows: ACV plus royalties exit 2024 at $62 million to $68 million, up 16% year-over-year at the midpoint, unchanged from the prior guidance. Revenue of $56 million to $58 million, increasing the midpoint of our guidance by $1 million. Non-GAAP operating loss of between $22 million and $18 million, improving the midpoint of our guidance by $1.4 million and non-GAAP free cash flow of negative $2.4 million to positive $2.6 million, unchanged from prior guidance.



In conclusion, we are encouraged by our top line trajectory and our effective cost management in the first half of the year that resulted in the above guidance performance in the second quarter and the increased guidance in revenue and operating income for the full year. We are particularly excited about achieving positive free cash flow for two consecutive quarters.



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

[Operator]

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions.) One moment while we prepare the Q&A roster. The first question is from the line of Mr. Matt Ramsay from TD Cowen.

[Matthew Ramsay, analyst]

Good afternoon, everybody. Congrats on a very solid set of results and on the free cash flow metrics, and I think you guys keep delivering there, which is great to see. I guess my first question is around licensing activity and sort of design activity. There's -- I mean you guys are focused on lots of segments of the market, but in particular, on the emergence for AI products and also in the automotive ADAS domain. But at the same time, there's a lot of different segments of the semiconductor industry that are feeling cyclicality and having budget cuts associated with the cyclicality and whatnot. So, it'd just be interesting, Charlie, to hear your perspective on how the licensing activity and the design activity looks for your customer base or potential customer base? Are they continuing to invest, or maybe increasingly so around AI, but the customer base is continuing to invest in new programs and new chip projects in the face of what's been some challenging cyclicality for the industry on the other side? Any thoughts there might appreciate it. And I got a follow-up. Thanks.

[Karel Janac, executive]

This is -- thanks, Matt. So, this is why we have always been on the track record of being highly diversified in terms of applications, in terms of geographies, in terms of customer size, in terms of applications. And so, we are -- we're seeing some impact on royalties from the shipment volumes decline, there are some issues in automotive, for example. But we -- but royalties are still a relatively small percentage of our revenue. We're not seeing anything major on the design side because, one, design activity is -- essentially results in revenue for these companies three to four years down the road or seven years down the road for automotive. And so, the design activity continues. And typically, when people have challenges on the shipment side, they tend to invest in R&D to design their way out of any recessions.



So, we're -- this quarter, we are seeing industrial applications be actually the majority of the design starts with automotive -- I'm sorry, with AI being a little bit less than the last two quarters. But overall, the design activity is pretty much unaffected as far as we can see.

[Matthew Ramsay, analyst]

That's really interesting with -- Maybe a follow-up there on that topic and then a question for Nick. On that topic, Charlie, just to kind of extend that conversation a little bit. Are you seeing any movement within the customer base to potentially -- just given the macro environment and whatnot to maybe not want to invest in internal teams as much and think of you maybe more as an external IP vendor. Is that -- is the economic condition in a lot of the industries and semis, is that affecting that shift at all? And then I guess my follow-up for Nick, we've had a couple of quarters now of free cash flow. I know you guys have some target goals out there as you grow the business to get back to sort of non-GAAP profitability and whatnot. If you have any updated thoughts there because I think that's sort of an important next hurdle because you've gotten over the one that was in front of you.

[Karel Janac, executive]

So, in terms of the investment in internal IP, right? So, when you have guys like Nick in some of these big corporations, scrutinizing the budgets, right, they are basically saying, okay, should we keep developing internal system IP? Or should we buy it from Arteris for less? And we're continuing to make progress, as we said on the call, with essentially closing a few large companies that have been 100% internal previously, right? And so, that trend kind of continues. So, when the economy gets difficult, we're actually kind of a beneficiary because we save people money both on OpEx and also on R&D unit -- on R&D cost and also on unit costs. So, the economy being a little bit squirrely is not necessarily bad for Arteris.



And then Nick, your question?

[Nicholas Hawkins, executive]

On the excellent cash flow question. So, yes, people -- as I'm sure you know, completely overused the phrase laser focus that we are really genuinely laser focused on cash flow. Not just free cash flow, but just cash flow period because it pays the bills. And so, we set out to achieve that in first quarter and made it. I'm not sure that anybody totally believed that we would make it second quarter running, but we did because we're just super focused on it. We're now absolutely regularly focused on making it for the third quarter as well, which is why we're guiding slightly positive to the third quarter. And then the full year. If you do the math, which I'm sure you will, so, I'll just save you the bother of having to do the math and then ask the question. If you do the math on the guidance for free cash flow, you'll see that plus a small amount in first quarter, plus a small amount in second quarter plus a small amount in third quarter equals plus a small amount in the full year, doesn't quite work out unless you go negative in the full -- in the fourth quarter. And with that, I wanted to give the [game away], that's not our intention. So, we are sort of -- we are keeping very steadfastly on sort of cash flow on a very prudent management of cash flow.

[Matthew Ramsay, analyst]

Thank you very much, Nick. Really appreciate all the color guys. And I just say, given what the last 10 days has been, like, I'll use your time and say I'm laser focused on get the weekend. So, well on guys talk to you soon.

[Operator]

(Operator Instructions.) Your next question comes from the line of Kevin Garrigan from WestPark Capital.

[Kevin Garrigan, analyst]

Let me echo my congrats on the solid results. So, to start, some of the prospects that you have in signed as customers, what are some of the reasons that they're waiting? I mean you're saving them both time and money. So, I mean, is there like a product or a feature of development that they're waiting for you to bring to the market? Or what are some of the reasons that you're getting?

[Karel Janac, executive]

I mean... I think we're making good progress in sort of knocking down the list of companies every quarter. It's not that the people that are -- these large corporations are getting rid of their system IP, but they are making decisions not to enhance it sufficiently for the next generation. And so, the next generation or some specific requirements go to Arteris. But in a place where I feel where there's sort of rejection, right, there's corporate politics, there's the opposition from the internal system IP group. There are a few companies that are taking technology directions that are too expensive for us to follow that we don't -- they're just too specialized, right? So, it's a variety of reasons. But I think we're making good progress in essentially establishing beachheads in a few of these large companies every quarter. And it takes time.

[Kevin Garrigan, analyst]

Got it. Yes. No, that makes a ton of sense.

[Nicholas Hawkins, executive]

I do -- just circling back to Charlie's earlier comment about how CFOs have a part to play in this whole decision-making process. I do think that is sort of an increasingly relevant commentary in the current climate, which is a little bit aggressive for the semi players because increasingly, they are going to have to face up to measures that make their lives more efficient from a profitability perspective. And that plays well to us.

[Kevin Garrigan, analyst]

Yes. No, that makes sense, especially as cost of pretty much everything are going up these days. So, I can definitely see how that benefits you guys. Okay. Perfect. And then any kind of updates on China and what you're seeing there? I mean, has the region kind of gotten any worse or any better for you guys since 90 days ago?

[Karel Janac, executive]

No. It hasn't gotten worse and hasn't gotten better. There is a capital crunch in China. So, start-ups have trouble getting capital. There's been a number of Chinese semiconductor companies that have gone out of business for insufficient capital. The -- sort of the political tension continues, but there is a robust design activity in China. And so, we're seeing essentially a steady amount of business from China that is steady. That's kind of what we planned on. We didn't plan on getting any worse, and we didn't plan on it getting it better, and that's kind of what we're getting.

[Kevin Garrigan, analyst]

Okay. Got it. Yes. So, pretty much status quo. Okay. And then just last question, if I can. So, we're a little over halfway through the year. Any updates on the new product front?

[Karel Janac, executive]

No updates. But we are making very good progress, and we have -- we're not ready to talk about it, but we have started deliveries to customers.

[Kevin Garrigan, analyst]

Okay. Got it. Yes, I just figured I'd ask. Thanks, guys.

[Operator]

There are no further questions at this time. I'll hand the call over to Mr. Charlie Janac for closing remarks. Please go ahead.

[Karel Janac, executive]

Well, thank you, everyone. Thank you for following Arteris. And we are looking forward to keeping you updated on our progress, and we appreciate your support. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.