Arteris Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 20, 2024

There are 9 speakers on the call.

Operator

Good afternoon, everyone, and welcome to the Altair's 4th Quarter and Year End 2023 Earnings Call. Please note, this call is being recorded and simultaneously webcast. All material contained in the webcast is sold property and copyright of Arteryx 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 Calkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the Q4 full year ended December 31, 2023. Nick will review the financial results for the Q4 full year, followed by the company's outlook for the Q1 full year of 2024. We will then open the call for questions.

Speaker 1

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 actual results to differ in the press release, our tariffs issued today and 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. Our non GAAP measures are presented as we believe they provide investors with the means of evaluating 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 December 31, 2023. 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 December 31, 2023. Listeners who do not have a copy of the press release for the quarter ended December 31, 2023, may obtain a copy by visiting the Investor Relations section of the company's website. Now I will turn the call over to CEO, Charlie Janik.

Speaker 2

Thank you, Erica, and thanks to everyone for joining us on the call this afternoon. We're excited to report a strong finish to 2023 with annual contract value, plus trailing 12 month variable royalties of 56,100,000 dollars We added 4 new customers in the 4th quarter, totaling 23 new customers for the year. Our customer base continues to expand across all of our key verticals and regions with particular success in automotive, enterprise, consumer and communications. Our customer base has now delivered approximately 3,500,000,000 SoCs to their electronic systems customers. The continued growth of SoC design complexity and associated design costs increasingly drives our customer base toward commercial system IP.

Speaker 2

As we look back at 2023, this accelerating industry adoption of commercial system IP solutions is demonstrated by a record number of license deals and record high customer chip design activity with 29 confirmed design starts for the quarter and 95 for the year. I'm delighted to note that we added 4 new major semiconductor and system house companies as customers during the year. Not only are we seeing growth in a number of our customers, we're also seeing further design penetration within our existing customer base. License revenue was strong across all of our vertical markets and balanced across geographies. Notable achievement includes strong adoption of FlexNOC version 5 of the physically aware network on chip, which now represents majority of FlexNOC sales.

Speaker 2

Customer design wins from the past years are developing into a growing royalty base for our tariffs as we've seen a 32% year over year increase in royalties in 2023. Historically, our royalty revenue was primarily driven by leading edge applications within the consumer space. But today, we see that our royalty stream is comprised of a broader mix across numerous customers in automotive, consumer electronics and enterprise computing and other applications. Our continued momentum in artificial intelligence and machine learning or AIML space remains strong with AIML representing over 50% of our license deals in the quarter across a broad section of our verticals. For example, RAIN AI is another innovative AI chip company, which recently selected the Arteris FlexNOC 5 Physically Aware Network on Chip IP for use in its Edge AI Accelerator.

Speaker 2

The low power, low latency and high bandwidth capabilities of FlexDOT 5 will be critical in helping RAIN and its customers to process the large data requirements needed for generative AI applications. Communications where AI supports the globally accelerating transition to 5 gs is another vertical where we saw strong adoption of Arteris products, heard the growing need for high bandwidth, low power 5 gs chips that can only reach their performance goals by leveraging our Tera system IP. As an example, HQ, a leading innovator in 5 gs and AI technologies has licensed our Teris FlexNOC for use in its comprehensive multimode 4 gs5 gs base station chip. It is a RISC V based device that offers a scalable architecture, high throughput and low power consumption effectively shrinking an entire base station onto a single SoC. Sailinx is another innovator in communications infrastructure, which has licensed both our Encore and FlexNOC interconnect IPs for use in their next generation modem SoC with the aims to provide telecom players with power to deliver ultra high capacity multi gigabit links over longer distances at an optimized total cost of ownership.

Speaker 2

In automotive, we have seen an accelerating proliferation of AI enabled advanced driver assistance systems, ADAS and other advanced electronics to support electrification, automated driving and electronic unit ECU consolidation, ensuring all electronics adhere to automotive functional safety standards and other mission critical applications. We continue to expand our technology to better support this endeavor in Q4, we announced that Encore Cash Conver and Interconnect IP has achieved ISO 26,262 certification. A key milestone to ensure safe technology is incorporated into modern vehicles and other autonomous systems. Similarly, our Madeline SoC integration automation software also received its ISO 26,262 TCL1 functional safety certification, further expanding upon Arterus' ongoing commitment to support mission critical safety applications. The strong focus on automotive was recognized in the 4th quarter with Artares being awarded the Autonomous Vehicle Technology of the Year award by Autotech Breakthrough.

Speaker 2

Finally, in the Q4, Arteris achieved ISO 9,000 and 1 Quality Management System Certification, further supporting customer confidence in our commitment to product and process quality. Currently, certain macroeconomic dynamics, including geopolitical uncertainties and the U. S. BIS restrictions with respect to China and U. S.

Speaker 2

Trade continue to impact our business. While these dynamics do create near term headwinds, we believe that the scale and scope of our long term opportunity remains robust. This is illustrated by a robust product pipeline of new system technologies and solid relationships with some of the largest electronics companies in the world who continue to innovate in exciting areas such as generating AI and autonomous driving. 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 Q4 and full year results today, please note I'll be referring to non GAAP metrics. A reconciliation of GAAP to non GAAP financials is included in today's earnings release, which is available on our website. Total revenue for the Q4 was $12,500,000 up 12% year over year and above the top end of our guidance range. At the end of the Q4 annual contract value or ACV plus trailing 12 month variable royalties and other revenue was $56,100,000 also above the top end of our guidance range.

Speaker 3

Remaining performance obligations or RPO at the end of the Q4 was $72,700,000 representing 26% year over year growth growing through its highest level on record for Arteris. GAAP gross profit for the quarter was $11,100,000 representing a gross margin of 88 percent. Non GAAP gross profit for the quarter was $11,300,000 representing gross margin of 90%. Total GAAP operating expense for the 4th quarter was $20,300,000 compared to $20,400,000 in the 3rd quarter, down 1% sequentially. Non GAAP operating expense in the quarter was $16,800,000 flat sequentially.

Speaker 3

As we've done throughout 2023, we will continue to proactively and prudently manage operating expenses, limiting spending to strategically critical areas. GAAP operating loss for the Q4 was $9,200,000 compared to a loss of $9,100,000 in the year ago period. Non GAAP operating loss was $5,500,000 or 44 percent compared to a loss of $5,800,000 in the year ago period. Net loss in the quarter was $10,500,000 or diluted net loss per share of $0.29 Non GAAP net loss in the quarter was $6,800,000 or diluted net loss per share of $0.18 based on approximately 36,800,000 weighted average diluted shares outstanding. Turning now to the balance sheet and cash flow.

Speaker 3

We ended the quarter with $53,000,000 in cash, cash equivalents and investments. Cash flow used in operations was approximately $3,000,000 in the quarter. Free cash flow, which includes capital expenditure, was approximately negative $3,400,000 coming in better than the top end of our guidance range. Moving on to our annual results. Total revenue for 2023 was $53,700,000 up 7% year over year reflecting our switch to a fully ratable revenue model at the end of the second quarter.

Speaker 3

Total operating expenses were $83,700,000 compared to $75,700,000 in the year ago period, while non GAAP operating expenses were $69,100,000 compared to $62,800,000 in the year ago period. Net loss in 2023 was $36,900,000 or net loss per share basic and diluted of $1.03 Non GAAP net loss was $21,600,000 or net loss per share basic and diluted of $0.60 based on approximately 35,700,000 weighted average shares outstanding. Cash flow used in operations was $15,700,000 in 2023, while free cash flow, which includes capital expenditure, was negative $17,200,000 or 32% of revenue. I would now like to turn to our outlook for the Q1 and full year of 2024. For the Q1, we expect ACV plus trailing 12 month variable royalties of $55,000,000 to $59,000,000 and revenue of $12,100,000 to $13,100,000 with non GAAP operating loss margin of 41% to 61% and non GAAP free cash flow margin of negative 9% to positive 11%, reflecting strong sales in the prior quarter.

Speaker 3

For the full year 2024, our guidance is as follows. ACV plus trailing 12 month variable royalties 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 margin of 33% to 43% and non GAAP free cash flow margin of negative 5% to positive 5%. We are encouraged by the above guidance performance and strong deal activity in the prior quarter. While we expect some quarter to quarter cash flow fluctuations throughout the year due to timing of deals, we expect that with the actions we have taken in 2023, we will become a free cash flow positive in 2024.

Speaker 3

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

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Matt Ramsay from TD Cowen. Please go ahead.

Speaker 4

Thank you very much, gentlemen. Good afternoon.

Speaker 5

I guess one thing I wanted

Speaker 4

to get an update on, Charlie, and you mentioned some of it in your script, but over the last couple of quarters, just on a run rate basis, licensing in China was a fairly material headwind. And I'm just trying to get an idea of if the environment has improved at all, if the headwind is at least sort of stabilized in the run rate going forward and if there's been any real change in China versus 90 days ago when we had this chat? Thanks.

Speaker 6

Yes, Matt. So, yes, we saw a significant decline in the middle of Q3, but things have not gotten I think things are stable at the moment. I don't think the economy in China has improved. I think there's some other cockroaches to be revealed. But there is a significant deal flow coming from China and we do not see things getting any worse.

Speaker 6

Where our strategy in response to this has been as the capital has gotten tied for the smaller companies in China, we have shifted our attention to larger companies that are designing SoCs. And so we anticipate that we'll the situation in China will be stable going forward. It might get better. Hey, Matt. We're planning on stability.

Speaker 7

Hey, Matt. This is Nick. Just a couple of bits of color to Charlie's excellent commentary. When we come to looking at the numbers side, and I'm just looking at revenue here, I'm not looking at ACV, which is obviously a separate beast, but just the impact on ratable revenue, GAAP revenue. The impact that we felt in 2023 from the China headwind was approximately $2,000,000 That was only obviously representing 3rd and 4th quarter.

Speaker 7

The impact in 2024 and this is assuming nothing gets better. It also assumes that nothing gets worse obviously. That impact would be approximately double that of $4,000,000 headwind.

Speaker 4

Thank you both for that and thanks for the numbers. I guess since I have you Nick, I noticed in the full year 2024 outlook, I mean, you have to squint a little at the numbers, but the midpoint is roughly free cash flow breakeven. Yes. I think our team had been assuming sort of free cash flow breakeven second half of twenty twenty four and maybe non GAAP breakeven second half of twenty twenty five. Things seem a little bit ahead of that schedule, if you're able to guide that for the full year on free cash flow.

Speaker 4

So maybe you could walk us through what's changed there? Is it lower OpEx? Is it more visibility on revenue? I'm just trying to figure out it seems at first look that they seem like things have been pulled in a little bit on free cash flow breakeven, which is great to see. Thanks.

Speaker 7

Yes. It's always free cash flow is always going to a bit of a variable feast, Matt. I mean, the 1st and 4th quarters, you probably saw in our commentary that we benefited again from a kind of a present from customers in Q4 of 2023 with to the tune of a few small number of 1,000,000 of dollars where they paid early again. And I don't know why they do this, but they do. The nevertheless, we're still coming for free cash flow neutral slightly to slightly positive for FY 2024.

Speaker 7

You've obviously also noticed that we're gunning for or we're guiding for free cash flow neutral in Q1. But not all quarters are created equally. The 2nd quarter and the 3rd quarter tend to be weaker from a free cash flow perspective, the 4th quarter and then sometimes the Q1 depending on deals tend to be positive. So really at the moment we're at that stage where we might see a sawtooth of free cash flow over the quarters. But if you look at the overall trajectory over the year, we're looking at free cash flow neutral to positive.

Speaker 4

Got it. That's helpful. Just my last follow-up there and kind of piggybacks on that prior question is second half of '25, we're still thinking about non GAAP breakeven and second half of 'twenty six, the plan would still be for GAAP breakeven? Is that still on track? Or has that moved up maybe a hair as well?

Speaker 7

So I think on the non GAAP OpEx, that was fully ratable. It's harder to change to shift the needle on revenue. We do expect to break the seal on non GAAP profitability as we exit 2025 enter 2026. So the full year 2025, we don't think at this stage, although we're not guiding it clearly, we don't think that is feasible to be non GAAP operating positive, operating profit positive. But we'd expect to see the exit of that year as being the pivot point as to where we go into non GAAP profitability.

Speaker 7

And then we see we enjoy the benefits of that through 2026. Does that make any sense to answer your question?

Speaker 4

No, Nick, that's obviously, we're looking at decent ways out here given the macro. So I appreciate that color. And yes, it does answer the question. But thank you very much guys. Congrats and I'll jump back in the queue.

Speaker 6

Thanks Matt.

Operator

Thank you. And your next question comes from the line of Hans Mosesmann from Rosenblatt. Please go ahead.

Speaker 5

Hey, thanks. Hey, guys. Good evening. Congrats on the execution. Hey, Charlie or Nick, ASPs for licensing, what is that trend?

Speaker 5

How is that looking as we go into 2024?

Speaker 3

So,

Speaker 6

we've announced FLEXNOC 5 in or started shipping it in the beginning of June of 2023. So we have a whole year of delivering it. FlexNOC 5 is now over a half of FlexNOC sales. So the ASP of that is about 33% higher because of the 2nd generation physical awareness. So the ASP is tracking to kind of to our projections, it's going up every year.

Speaker 6

And we said on the IPO that we're going to be at something like $1,000,000 average project deal size by 2026. And I think we're still we're tracking to that. So the ASPs are rising well, driven by essentially new functionality that we're delivering into the marketplace to address the complexity of some of these generative AI and automotive SoCs.

Speaker 5

Great. And you may have mentioned this, I apologize, I've been traveling. What were royalties as a percentage of revenues?

Speaker 7

Yes, let me take that one.

Speaker 2

That's the next question.

Speaker 7

Yes. Let me take that one. So if I give you the numbers, it's probably easier. I mean royalties come in at around sort of 10% but the of total. But if you look at 2022, for example, we had total royalties and other of 4.3.

Speaker 7

But if you strip out the other, which is really just it's nothing to do with royalties. It's things like training, SOWs and various other things that can't be recognized as license revenue. If you just look at the variable royalties that we report, it was $3,100,000 in 2022. If you look at 2023, it was 5.1 $1,000,000 That's obviously a pretty big increase. But bear in mind that to be fair, there's some audit stuff in there, some audit that we had some really successful audits, thanks to our audit guru.

Speaker 7

So we have has, let's say, very big tailwind from royalty audits. If you strip out those and you just get back to pure, pure variable royalties, then we're up around 45%, 50% year over year. And in our guidance, we don't actually guide royalties, but you can look for a similar kind of growth on royalties into 2024. And there's no reason why that shouldn't continue into that. We don't actually project any sort of other royalty other revenue.

Speaker 7

We don't project or guide included in our guidance any audit benefits, any audit pickups, even though they may well happen. So we're seeing at least maintain the same rate of growth royalties and maybe increasing. So look at $5,000,000 $5,300,000 total versus $53,000,000 So it's about 10% of total revenue. So very roundabout way of answering the question. And we're getting some color in the middle, I hope you don't mind.

Speaker 5

Right. And so to kind of summarize that, so this year, it would probably grow as a percentage of total revenues by a few points. Is that right kind of all parking in?

Speaker 7

Yes. You'd expect it to be growing this year, albeit we won't have the audit. So the audit benefits that we have this year, we will not get next year or we sorry, we may in 2024, we're not expecting, we're not predicting or forecasting that we'll get them in our guidance. But in reality, yes, we may well get those again. Great.

Speaker 3

And then the last question

Speaker 5

Okay, perfect. And then last question, and I'll let somebody else ask a question. You guys have been kind of sharing with investors that in the automotive space, SoCs per vehicle could be over 20 over say like 2026 to 2027 timeframe. Is that still kind of like a good number to kind of talk about with investors, number of SoCs were per vehicle?

Speaker 6

Yes. The number is still good. But for example, this is public information, if you were to pay attention to, for example, the Mobileye booth at CES in January, they were showing basically automated driving control boards that not only had 2 SoCs in there, but also 34, right? So we feel pretty comfortable with the projected 23 SoCs per car number, but it could be more. And on the other hand, there's some SoC consolidation, where people are trying to consolidate management, the dashboard control and things like this.

Speaker 6

So I think the low to mid-20s number, it remains to be good.

Speaker 5

Excellent. Thank you very much.

Operator

Thank And your next question comes from the line of Kevin Garrigan from Westpark Capital. Please go ahead.

Speaker 8

Yes. Hey, good afternoon all and thanks for letting me ask a question. So just kind of going off of Hans' question, Charlie, in your script, you know that you're seeing an acceleration in AI and automotive. And then you just kind of mentioned Mobileye going ahead with adding multiple SoCs to their chip designs. Are automotive OEMs and automotive related companies still continuing with new chip designs?

Speaker 8

Are you seeing any push outs there? And then just kind of wondering how you're viewing the automotive market in 2024?

Speaker 6

Yes. So there's an increasing number of car OEMs building chips. So I think out of 35 OEMs, I think we have 9 as customers. Ultimately, it's not clear to me that all those projects are going to go to production, because I think all the car companies need to understand architectures and the cost structures of automated driving. But at the end, some of the people like Mobileye have just a huge momentum and huge critical mass in actually getting a mission critical solution like that into the market.

Speaker 6

But clearly, all the car OEMs in order to be competitive are doing some electronic design work, which provides an opportunity for our tariffs. And yes, our so our design win rate in automotive continues to be quite positive.

Speaker 8

Okay, perfect. And then just as a quick follow-up, just a clarification. The 4 active customers in the quarter, were these all new customers and customers that were using internal solutions that shifted to using our tariffs?

Speaker 6

So there's actually two numbers. They just happen to be the same. So in the Q4, we added 4 new net new customers, right? And those some of those were startups and were big companies. We also added in the year, we have a list of basically top 20 semiconductor companies and top 20 system houses.

Speaker 6

And all of those were mainly 4 of those 4 of those companies have decided to go with Arteris. So the whole thesis of this system IP market is that you have maybe 30% of the market to be commercial and 2 thirds being internal. And the thesis is that over the next 4 or 5 years, the market will go 2 thirds commercial and 1 third internal. And that provides a major opportunity for people like our terrorists. But a lot of these companies are starting slowly, right?

Speaker 6

So we're getting sort of beachhead deals. We're getting to know those large customers. We're getting to negotiate contracts with them. And then we want to do a good job so that they feel comfortable ordering more based on the success of the initial projects.

Speaker 8

Okay, perfect. I appreciate that. Thanks guys.

Operator

Thank you. That concludes our question and answer session. I will now turn the call over to Charlie Janak for closing comments.

Speaker 6

Yes. So thank you for your time and interest in Arteris. We look forward to meet with you at the upcoming investor conferences and that we are participating in during the next couple of weeks months. And we look forward to updating you on all our business progress in the quarters to come. So thank you very much for your attention.

Operator

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.

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