Arteris Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 1, 2024

There are 7 speakers on the call.

Operator

Good afternoon, everyone, and welcome to the Artery's Second Quarter 2024 Earnings Call.

Operator

Please note this call is being recorded and simultaneously webcast. All material contained in the webcast is the sole property and copyright of Artery's 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.

Speaker 1

Thank you, and good afternoon. With me today from Arteris are Charlie Janek, Chief Executive Officer and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the Q2 ended June 30, 2024. Nick will review the financial results for the Q2 followed by the company's outlook for the Q3 and full year of 2024. We will then open the call for questions.

Speaker 1

Before we begin, I'd like to remind you that management will make statements during this call that are forward looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to differ materially from those anticipated, and you should not place undue reliance on forward looking statements. Additional information regarding these risks, uncertainties and factors that could cause actual results to differ appear in the press release of 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 per share and free cash flow, which are not measures prepared in accordance with U. S.

Speaker 1

GAAP. The non GAAP measures are presented as we believe 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.

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 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.

Speaker 2

Thank you, Erica, and thanks to everyone for joining us on the call this afternoon. In the Q2 of 2024, we achieved record annual contract value plus royalties of $60,100,000 For the 2nd 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 Q2 with 7 new customers licensing our Tera system IP products. In addition to these new customer wins, we signed 4 new license deals with current customers who comprised of the world's top 30 technology companies.

Speaker 2

During the quarter, we experienced steady design activity from our customers with 21 confirmed design starts. Highlighting our continued momentum in the automotive industry, particularly for AI enabled autonomous driving, our new customers include 2 market leading global automotive OEMs. We believe this demonstrates the growing importance of optimized electronics in autonomous applications with our Tera system IP with functional safety capabilities being a key building block for overall connectivity. 1 of these new customers is a top 5 global automotive OEM by market capitalization. In addition, 2 notable customer designs started in the 2nd quarter, including one for a major robotaxi company and the other for a market leading ADAS company.

Speaker 2

We expect this trend to continue given growing demand for automotive AI innovation. AI also fueled the demand for our Teris 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 our Teris 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.

Speaker 2

One such company is a new OEM licensing, Arterus 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 ARM B9 Processors with focus on automotive applications. This was followed by ecosystem partnership with Andes Technology to support the growing adoption of RISC V SoCs for AI 5 gs and other applications. This customer driven addition further expands our Teradata support across both ARM and RISC V Processor Ecosystems, providing on chip connectivity for any SoC architecture chosen by our customers.

Speaker 2

Since the acquisition of Semiphore in December 2022, we've seen a growing number of customers 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 our Teris SoC integration automation software because of its hardware software integration automation efficiency, error reduction and streamlined design workflows. In addition, in the Q2, our tariffs was included in the Russell 2,000 Index. We believe the scale and scope of our long term opportunity remained 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 generating AI and autonomous driving using our Tera system IP technologies.

Speaker 2

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 Q2 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. 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 Q2 was $14,600,000 up 13% sequentially and above the top end of our guidance range.

Speaker 3

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 $60,100,000 above the midpoint of our guidance range and a record high for the company. Remaining performance obligations or RPO at the end of the second quarter was 77 point $5,000,000 representing a 19% year over year increase also growing to the highest level we have ever reported. GAAP gross profit for the quarter was $13,100,000 representing a gross margin of 90%. Non GAAP gross profit in the quarter was $13,400,000 representing a gross margin of 92%.

Speaker 3

Now turning to Slide 5. Total GAAP operating expense for the 2nd quarter was $20,600,000 flat compared to the Q1. Non GAAP operating expense in the quarter was $16,800,000 1% lower sequentially and 6% lower than the Q2 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 Q2 was $7,400,000 compared to a loss of 8 point $7,000,000 in the prior year period.

Speaker 3

Non GAAP operating loss was $3,500,000 which is better than the top end of our guidance compared to a loss of $4,200,000 in the prior year period. Net loss in the quarter was $8,300,000 or diluted net loss per share of $0.22 Non GAAP net loss in the quarter was $4,400,000 or diluted net loss per share of $0.11 based on approximately 38,500,000 weighted average diluted shares outstanding. Moving to Slide 6 and turning to the balance sheet and cash flow. We ended the quarter with $53,900,000 in cash, cash equivalents and investments. Free cash flow, which includes capital expenditure was positive $300,000 This was above the midpoint of our guidance range and in line with the company's goal to be free cash flow positive for the full year of 2024.

Speaker 3

Now I would like to turn to our outlook for the Q3 and the full year of 2024 and refer to Slide 7. For the Q3 of 2024, we expect ACV plus royalties of $58,500,000 to $62,500,000 revenue of $14,200,000 to $15,200,000 non GAAP operating loss of $5,500,000 to $3,500,000 and non GAAP free cash flow of negative $1,400,000 to positive $1,600,000 For full year of 2024, our guidance is as follows. ACV plus royalties to exit 2024 62 $1,000,000 to $68,000,000 up 16% year over year at the midpoint, unchanged from the prior guidance. Revenue of $56,000,000 to $58,000,000 increasing the midpoint of our guidance by $1,000,000 Non GAAP operating loss of between $22,000,000 $18,000,000 improving the midpoint of our guidance by $1,400,000 and non GAAP free cash flow of negative $2,400,000 to positive $2,600,000 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 2nd quarter and the increased guidance in revenue and operating income for the full year.

Speaker 3

We are particularly excited about achieving positive free cash flow for 2 consecutive quarters. With that, I will turn the call back to the operator and open it up for questions.

Speaker 4

Operator?

Operator

Ladies and gentlemen, we will now begin the question and answer The first question is from the line of Mr. Matt Ramsay from TD Cowen. Your line is now open.

Speaker 4

Good afternoon, everybody. Hi, Charlie. Hi, Nick. Congrats on a very solid set of results and on the free cash flow metrics, Nick. I think you guys keep delivering there, which is great to see.

Speaker 4

I guess my first question is around licensing activity and sort of design activity. There's and 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 that 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 is the customer base 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?

Speaker 4

Any thoughts there? I'd appreciate it. I got a follow-up. Thanks.

Speaker 5

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 not seeing we're seeing some impact on royalties from the shipment volumes decline. There are some issues in automotive, for example. Or but royalties are still a relatively small percentage of our revenue.

Speaker 5

We're not seeing anything major on the design side because, 1, design activity is essentially results in revenue for these companies 3 to 4 years down the road or 7 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 and 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.

Speaker 4

Thank you for that, Charlie. That's really interesting with risk. 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 industries and semis, is that affecting that shift at all?

Speaker 4

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 growth like 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. Thanks.

Speaker 5

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 abide from our tariffs for less. And we're continuing to make progress, as we said on the call, with essentially closing few large companies that have been 100% internal previously, right? And so that trend kind of continues.

Speaker 5

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 and D unit on R and D cost and also on unit cost. So the economy getting a little bit squarely is not necessarily bad for our tariffs. And then Nick,

Speaker 3

you're counting on on the excellent cash flow question, so yes, people as I as I'm sure you know, completely overuse the phrase laser focused, but 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 Q1 and then made it. I'm not sure that everybody totally believed that we would make it the 2nd quarter running, but we did, because we're just super focused on it. We're now absolutely rigidly focused on making it for the Q3 as well, which is why we're guiding slightly positive for the 3rd 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.

Speaker 3

If you do the math on the guidance for free cash flow, you will see that plus a small amount in 1st quarter, plus a small amount in 2nd quarter, plus a small amount in 3rd quarter equals plus a small amount in the full year doesn't quite work out unless you go negative in the full in the Q4. And without wanting 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?

Speaker 4

No, thank you very much, Nick. Really appreciate all the color guys. And I'd just say given what the last 10 days has been like, I'll use your term and say I'm laser focused on getting to the weekend. So, well done guys. Talk to you soon.

Speaker 3

That would be nice. Yes, yes, indeed.

Operator

Your next question comes from the line of Kevin Garrigan from Westpark Capital. Please go ahead.

Speaker 6

Yes. Hey, Charlie, Nick, good afternoon. Let me echo my congrats on the solid results. So to start, some of the prospects that you haven't signed as customers, what are some of the reasons that they're waiting? I mean, you're saving them both time and money.

Speaker 6

So I mean, is there like a product or a feature in development that they're waiting for you to bring to market? Or what are some of the reasons that you're getting?

Speaker 2

I mean,

Speaker 5

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're making decisions not to enhance it sufficiently for the next generation. And so the next generation or some specific requirements go to our tariffs. But in a place where we 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 are 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.

Speaker 2

And it takes time.

Speaker 6

Got it. Yes. No, that makes a ton

Speaker 3

of sense. Okay, perfect. And I do think 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 so a little bit aggressive for the semi players because more efficient from a profitability perspective. And that plays well to us.

Speaker 6

Yes. No, that makes a ton of sense, especially as costs 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?

Speaker 6

I mean, has the region kind of gotten any worse or any better for you guys since 90 days ago?

Speaker 5

No, it hasn't gotten worse and hasn't gotten better. There is a capital crunch in China. So startups have trouble getting capital. There's been number of Chinese semiconductor companies that have gone out of business for insufficient capital. So the political tension continues, but there's a robust design activity in China.

Speaker 5

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 it getting any worse and we didn't plan on it getting any better and that's kind of what we're getting.

Speaker 6

Okay. Got it. Yes, so pretty much status quo. Okay. Status quo.

Speaker 3

Thanks, Anthony.

Speaker 6

And then just last question, if I can. We're a little over halfway through the year. Any updates on the new products front?

Speaker 5

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.

Speaker 6

Okay. Got it. Yes. It's been figured I'd ask. All right.

Speaker 6

Thanks, guys.

Operator

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

Speaker 5

Well, thank you, everyone. Thank you for following our tariffs. 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.

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Arteris Q2 2024
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