Q3 2021 Arteris Inc Earnings Call

November 30, 2021

[music].

Good morning, everyone and welcome to the art terrorists I P third quarter 2021 earnings call for opening remarks, and introductions I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

Thank you and good morning, with me today from a terrorist's IP or Charlie Janet Chen.

Executive Officer, and Nick Hawkins, Chief Financial Officer, Charlie will begin with a brief review of the business results for the third quarter ended September 32021, Nick will then review the financial results for the third quarter, followed by the company's outlook for the fourth quarter and full year of 2021.

We will then open the call for questions.

Please note that this call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor statements contained in our press release for a more complete description.

Yeah.

Please note. This presentation describes certain non-GAAP measures, including non-GAAP net loss and non-GAAP net loss per share, which are not measures prepared in accordance with U S. GAAP.

The non-GAAP measures are presented in this presentation 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 as substitutes for or superior to financial measures prepared in accordance with U S. GAAP.

Listeners, who do not have a copy of the quarter ended September 32020 press release may obtain a copy by visiting the Investor Relations section of the company's website now I'd like to turn the call over to Charlie.

Thank you Erica and thanks, everyone for joining us on the call. This afternoon.

We are excited to report our first quarter as a public company.

I want to extend a special thanks to Dr terrorist IP team for their hard work and support during the IPO process.

We are excited about this next step in our company's journey, notably since our terrorist IP is the first pure play semiconductor IP company to go public on a major USA stock exchange in 19 years.

I'll start this off with a few highlights from the quarter and then because it is our first earnings call I want to take some time to discuss our business and market opportunity as many of you may be new to the <unk> story.

We reported a strong third quarter with GAAP revenue of $9 million up 39% year over year.

<unk>, our continuing momentum through the end of third quarter 2021, we have added 28, new system IP customers, marking the highest number of new customer additions in the nine months period in company history.

In the third quarter alone. The total number of active customers increased from 166, 279, with new customer applications, ranging from automotive to machine learning to consumer foggy wireless and data center associates at the highest number of customers, creating new machine learning associates.

This included two major automotive design wins for our leading address you'll see projects, including one with BMW.

We believe there are products are utilized in 70% to 80% of all automotive Adas Soc projects.

Geographically the largest licensing regions for the quarter were EMEA, followed by China, and then closely followed by USA.

There were 22 customer design starts in the third quarter.

Continuing the strong trend and taking a total of nine months ended September 32, 65, our highest ever number in the nine months period.

We saw strong performance in the third quarter across all of our system IP application market segments with notable new license contracts in machine learning at automotive.

In addition, we were especially encouraged by the acceleration of automotive royalties as car electrification and automated driving deployment continues to expect.

We have made good progress on the integration of Bachelor.

Flowing the acquisition in November 2020, and are encouraged by the high renewal rates.

From our IP deployments software customers.

Looking forward, we believe our market opportunity remains very attractive on a sustained basis.

For those of you who are new to the story, let me tell you a little bit more about our tourist IP.

We are a leading provider of semiconductor system IP that enables our customers to deliver increasingly complex associates that not only process data, but also able to make decisions.

The growth in the number of connected on chip IP blocks and subsystems places an increasing premium on the interconnect ip's capability to move data. Its a complex so sees as well as our IP deployment technologies ability to automate important aspects of the S. C creation design flow.

We believe this increase so see complexity is creating a significant opportunity for growth of our sophisticated system IP solutions.

Founded in 2003, we have pioneered and emerge as a global leader in the development of interconnect IP technology for Archie communications that addresses the complexity performance and cost requirements of advantage, especially semiconductors.

Traditional onshore communication methods such as hybrid buses are generally inadequate in handling communications within advanced semiconductors for sophisticated applications.

We leveraged our extensive technological expertise to develop a new method for object communications to address these critical semiconductor development challenges. This method is called network on chip or knock interconnect.

By pioneering the use of proprietary networking techniques to remove the inherent architectural limitations of traditional watch it communications.

To improve ease of integration performance silicon area and power consumption, we help our customers to achieve their desired goals faster faster easier and lower R&D and associated costs.

We're also a leading provider of IP deployment software, which enables our customers to more efficiently deploy the internally developed and commercially licensed semiconductor IP block libraries to accelerate creation, although Sociedad semiconductors.

Our IP deployment solutions compliment, our interconnect IP solutions by helping to automate not only the customer configuration of interconnect ip's, but also the process of integrating and assembly all of the customers IP blocks into what I foresee.

Products, incorporating our IP are used to carry critical data, it's a complex system Sis for sophisticated applications, including automated driving artificial intelligence machine learning five G.

Wireless communications data centers and consumer electronics among other applications.

I think deployment software together with our knock interconnect IP and several knock interface ip's that improve associate data flow performance make up the system.

P market segment.

We work directly with our customers throughout the development process and seek to develop long term sustainable relationships with them as our technology becomes embedded in our products in here.

Processes.

We also leverage our long history in interconnect IP design and are able to serve a broad range of applications and deliver customer specific features that are useful to other customers.

For example, in the third quarter, we announced Ava technologies and innovator in four dimensional Lidar is our 200 customer I'm curious I'd be history.

They are a leader in innovative automotive radar systems.

The 200 customer milestone quickly follows the company's announcement. It was 150 of customer in November 2020, and its 100 customer in 2018, reflecting our terrorists a rapid growth of semiconductor design teams license the company's technologies to speed development and increase performance of associate.

Yes.

Specific to Eva they chose Arcturus IP arm chip.

Interconnect technology as part of their proprietary digital processing chip because our technology complements those high standards for functional safety.

In addition, the terrorists IP interconnect technology increases digital processing chip performance by optimizing Artrip communications for high bandwidth and low latency data flows.

<unk> state of the art quality of service Oculus techniques.

Within the artificial intelligence machine learning market in the third quarter, we also announced that the imaging S. O C leader IDEXX license flex knock interconnect IP for its next generation image processing associate.

IMAX chose our terrorists IP arm chip interconnect technology as part of their proprietary image processing chip because it enables them to design and integrate a complete and superior imaging solution without dependency on external IP blocks for the machine learning function.

In addition, they are terrorists IP interconnect increases image processing chip performance by optimizing onshore communication for high bandwidth low latency data flows using state of the art Corio a service techniques. Our technology also provides opportunities for our customers to reduce power consumption in battery operated applications.

To ensure we stay at the forefront of technology innovation for these and other opportunities we intend to continue ramping up our investments in a next generation product offering.

As an example of this we recently announced the launch of our terrorists harmony trace design data intelligence solution to east compliance with a semiconductor industry functional safety and quality standards.

Well design teams with functional safety requirements are creating complex is so sees our systems are terrorists harmony trace increase assistant quality and the ability to achieve functional safety certification by creating and maintaining traceability between disparate systems for requirements specification.

<unk> hardware design software code tests and documentation. So that engineers will know immediately when a change occurs and the effect of that change on other design artifacts and part of the system.

The development of Hanmi trace was driven by our customers' needs to establish an automated traceability flow and implement change management best practices between their existing requirements specification.

Their electronic design automation tool suite their code software code repository documentation tools.

Army trades allows our customers to use their existing tools and automatically linked data between them due to hanmi traces unique semiconductor industry specific semantic computing technology.

As we look at a multitude of both captive and Greenfield system IP opportunities in the market. We estimate there are tangible expand to an estimated $3 2 billion in 'twenty 'twenty, six but $1 1 billion in 2020, driven by an increasing number of their Soc design wins and growing complexity increasing.

Average selling prices of interconnect IP and I P diploma in software.

Deeper into the knock interface IP market.

More specifically, we believe our growth will be driven by technology trends, requiring more sophisticated Archie processing automotive machine learning <unk> and wireless communications data center and consumer electronic markets.

Also the need for sophisticated system IP products is growing rapidly in order to address the requirements of smaller die size lower power consumption and higher operation frequencies as well as management of critical let latencies in a timely and cost effective manner.

There are also structural growth factors, such as regionalization of the semiconductor industry more system houses building their own custom or partner customize silicon.

And the lengthening of the semiconductor supply chain, which favors our IP deployment software.

As a result, we believe these trends have led to an increased economic benefit of in licensing of system IP and in fact, all commercial semiconductor IP.

This is an exciting time to beat our tourist IP looking.

Looking ahead, we recognize that our IPO is just one step on the journey of our company.

While we are excited to have achieved this milestone we have much more to do.

We look forward to continue our momentum in the years ahead and updating all of you in the quarters to come.

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

Thank you Charlie and good afternoon, everyone.

That's already also.

Results to date, please note that I'll be referring to non-GAAP metrics.

A reconciliation of GAAP to non-GAAP metrics is included in today's earnings release, which is available Oh.

On our website.

Yeah.

Given this is our first call as a public company.

I want to start by sharing some perspectives about our business model.

Production profile.

Through financial highlights for the third quarter, and finally, I'll close with guidance for the fourth quarter and full year before we open up the goal for questions.

Our revenue is derived from licensing.

To appropriately license and software support and maintenance services.

Professional services.

Trading services and royalties.

Our interconnect IP solutions include software licenses and services.

We're updates and technical support.

We enter into license agreements with customers that typically range from two to three years.

And generally consist of delivery over design license that grants with customer the right to use the IP license to design, a contractually defined number of products.

And stand ready to support services.

The customer with our application engineer.

Bolt substance.

While revenue derived from our interconnect IP license agreements is typically recognized rapidly over the duration of the license agreement.

Most typically pay fees either shortly after signing the agreements with us for the start of each year following the design license to them.

Having now Touchwood run ahead of revenue recognition.

Yeah.

In conjunction with our interconnect IP licensing agreements.

Some cool Crazy idea sold we generate royalty revenue.

Royalty revenues recognized during the quarter, which customer shipments.

And the calculated either as a percentage of customer chip I actually.

On a per unit basis as specified in the license agreement.

Our deployment solutions includes software licenses software updates and technical support.

The software licenses all time based licenses with terms generally ranging from one to three years.

Robin do you allocate it to the software licenses are generally recognized at that point in time. Upon the later of the delivery dates for the beginning of the license period or on a total basis.

And revenue allocated to support services is recognized ratably over the support to them.

Given the variation in revenue recognition methodologies between our product offerings.

Management team, we focus on annual contract value or <unk> is a leading indicator of financial performance.

We define an ACB for an individual customer agreement as the total fixed please under the agreement also referred to as the total contract value or <unk>.

But at a number of years and the agreement to them.

Is this calculation does not include the contributions from royalty payments. We also refer to H E B plus trailing 12 month royalties.

Which provides a more complete picture of our total Cogs.

We monitor this metric to measure our success and believe that historical increase shows our progress.

Our customers adoption of our platform.

Moving on to our quarterly results ACB, plus trailing 12 month royalties and other revenue as of September 30 was $45 $6 million.

The 1% year over year on a pro forma basis, including Muslim.

Driven in particular by growth in automotive and machine learning applications and up 4% Cogs.

Gotcha.

Total revenue for the third quarter was $9 million up 9% year over year, while remaining performance obligations or P O.

A $56 million up 48% year over year.

Gross profit in the quarter was $8 $1 million, representing a gross margin of 19% compared to $6 $2 million in the year ago period.

The high gross profit for the quarter was primarily attributed to the increase in licensing and support revenue, partially offset by lower royalty revenues from the significant reduction of shipments for about customer high silica.

R&D expenses for the third quarter was $7 $6 million or eight 5% the revenue.

Compared to 62% in the year ago period.

The increase was driven by additional development costs and an additional head count and payroll expenses, we continue to invest in new and improved product offerings.

Sales and marketing expense for the quarter was $3 $2 million or 6% of revenue roughly in line with the year ago period.

We intend to continue to invest in sales and marketing as we continue to drive awareness in the market.

They expand ourselves and application engineering forces and marketing efforts to capture the significant opportunity in front of us.

G&A expenses, but of course, there was a $1.7 million or 19% of revenue compared to 40% in the year ago period.

It reflects an increase in people and infrastructure related expenses associated with our public company ready efforts offset by a reduction in professional fees associated with our IPO.

GAAP operating loss for the third quarter was $4 $5 million or 50% of revenue increasing from a loss of $3 $6 million or 40 bumps on the revenue in the year ago period.

Non-GAAP operating loss was 4.0 am I live in the World.

44% of revenue.

Increasing from a loss of $2 $4 million or 37%.

Revenue in the year ago period.

GAAP net loss in the quarter was $5 million or net loss per share of <unk>.

24 cents.

Non-GAAP net loss for the Cogs that was Brooklyn $4 million.

<unk> net loss per share of 21 cents based on approximately 26 million weighted average diluted shares outstanding.

Turning to the balance sheet and the cash flow.

We ended the quarter with $11 $2 million in cash.

Cash flow from operations was a usage of $2 $5 million in the quarter, while free cash flow.

<unk> capital expenditure was a usage of $2 $6 million subs.

Subsequent to the quarter end, we closed our initial public offering.

And net proceeds of $71 $1 billion.

I would now like to turn to our outlook for the fourth quarter and the full year 2021.

For the fourth quarter, we expect ICD, plus trailing 12 month royalties of $48 5 million to $50 million.

On revenue of 10.0 dollars to $11 $1 billion.

With non-GAAP operating loss margin of 2% to 54%.

And non-GAAP free cash flow margin of negative 37% to negative 52%.

The poll EBITDA, we expect revenue of $36 $3 million to $37 $5 million.

Non-GAAP operating loss margin of 40% to 50%.

Non-GAAP free cash flow margin of negative 20% to negative 35%.

With that I would like to open up the call to questions operator.

At this time, we'll be conducting a question and answer session. If you'd like to ask your question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please.

While we pull for questions.

Yeah.

Our first question is from Mark of a package with Jefferies. Please proceed with your question.

Hi, Thanks for taking my question and congrats on the first quarter out of the blocks here I had a couple of questions. Charlie maybe for you could you talk about the process.

You undergo for adding new customers, what do you have to do to convince them how long does it take to convert somebody who's never used your.

IP before and has is has.

It's becoming a public company has it has it help that process.

Yeah, I think it is definitely helped one of the reasons for going public was to reassure the market that we are.

You're going to be a long term sustainable company and they were not interested in being bought right. So the market was really afraid they were going to go away.

The way some of the other competitors that we had Oh do acquisition, so that helped a lot.

In terms of a process.

Actually shortening I would say so usually you go through the usual demonstration.

Evaluation.

And then basically license negotiation and then closure and that typically takes I would say, they're there's a range on that right, but you know I would say four to five months is a typical cycle a.

With some of the outliers being a short as a couple of weeks.

And one of the few cases, we just laugh about it taken 10 years, so, but I would say four to five months as well that will that process takes and the IPO has definitely helped.

Gotcha, that's helpful and.

And once you once you win.

Customer once you break in and and you have a successful program. There would you expect the customer to embrace your technology broadly for four other projects and I guess, maybe another way to ask the question is.

You've articulated the you know the benefits of using your IP is tied to market lower cost lower risk.

Or are there are there other benefits for the company to to reuse your IP to reuse. It once they've used it once for I don't know maybe continuity of of of their own product.

Portfolio.

Yeah I mean.

Oh, Yes. My remark. This is this is a sticky technology right. So.

Once you break in and once you're successful the customer has a track record of Oh reusing the technology on subsequent projects you know we have some restrictions about.

You know, what we can disclose but one of the customers that allow us to disclose this is essentially mobilize where we've been essentially in five generations of projects.

Spanning 11 years right so those.

Those are.

We aim to foster or those kinds of relationships and for US. The initial our initial license deal is really pre sales are for the next deals. What we typically see is that we get are used on the complex projects, where the customer has some traditionally some difficulties.

With alternative technologies.

And then as they realize how productive our products. Our methodology is then they expanded their less less.

Less complex products in order to get the.

The acceleration of Oh, essentially and so see a generation across the entire portfolio. So so yes.

We have to be very very careful not just to have great high quality products, but also to a very strong customer support that makes it easy for the customer to use us on subsequent projects.

Got you very helpful.

I'll go back into the queue. Thanks.

Our next question is from Matt Ramsey with Cowen. Please proceed with your question.

Yes. Thank you very much good afternoon everybody.

Hi, guys. Congratulations on the first quarter out of the gate and congrats Charlie for getting through that script without stop loving your lines at all that that's quite an accomplishment.

My My my first question is sort of a bigger picture, one and the way that.

My team is sort of characterize the opportunity in front of our terrace, and the automotive market and in the AI machine learning market is a tough.

A comparison back to.

I don't know 2009 through 2011, when a whole bunch of companies that we're designing chips for mobile phones.

We're faced with this smartphone inflection.

And needed to then design S O sees and needed.

On chip interconnect to do that.

And that was sort of the first phase of our terrorists the company in a big inflection and where we're at now is.

It seems like in the automotive industry, a bunch of companies that are designing microcontrollers need to design SFC.

And some of the auto companies themselves are designing chips for the first time and then the AI market you either have big cloud companies that are starting up chip design projects internally or you have <unk>.

New startups in AI.

All of those companies don't have been interconnect teams and M. I <unk> articulating the inflections that are driving opportunities for your company correctly, and if and maybe Charlie if you'd comment on that a little bit I'd appreciate it. Thanks.

Yeah, I mean, you know the smartphone so see inflection was that you had architectures are there are many too many communication right.

Oh, the simpler ones, where you had many initiators to a single target which was the memory.

The inflection point that we're dealing with now is that these chips are allowed not to just process data, but they were actually allowed to make decisions.

And that requires a much greater data traffic complexity.

So those kinds of chips used much.

Larger number of system IP products.

They are more complex the design so our U.

You essentially have to use our productivity and automation to fight the growing complexity.

So the current inflection is that these <unk> are are making decisions and that's that's driving our business both today and in the in the future and basically you know the car is a yeah, one way to characterize the car of today and in the near.

Future as basically a power constrained server on wheels, right and and so the mechanics are becoming less important in the software and electronics are becoming more important and that's essentially driving the industry to put more and more S. O sees Uh huh.

Inside the car, including associates that are there are there to make some decisions.

Got it.

That makes a lot of sense.

As my follow up question I'd be remiss, if I didn't ask about Bmw's since you brought it up in the prepared script.

If you could give us some sort of characterization of all of that customer now that you're talking about the design wins that you have is this for one chip or one program that theyre doing well or is it broader than that is it something that was led by the knock IP or or maybe even the design services part.

Of your business, if you could characterize it that the scope of that engagement that would be helpful. Thank you.

Yeah, So we actually Oh, yeah to follow up on Mark's question. We typically do break you know on one project right. Initially so there's there's definitely as one project.

We're not allowed to say, what it's for except to say that its for a car.

But.

The bigger picture here.

Is that the car companies have lost control of their architectures right. They were relying on tier ones to give them the subsystems, which they assembled and technologically those subsystems. They really haven't changed a whole lot in in decades at least you know they've been improved but structure.

They really haven't changed now the architecture of the entire car is being revolutionized.

Partially forced by by Tesla.

And so the car companies are now in a fairly aggressive mode in getting back the control of the architecture of the car. So I don't think BMW is unique in that you know many of the ridesharing companies and many of the car companies are.

We're going to get involved either in building Ip's are building at least defining the architectures together with semiconductor partners. So they can get customized.

Chips for their their software architectures or in some cases, they will build a soc eased himself and so this again is a is something new and something of an inflection point in DFW is just Oh, you know one example that where they were.

We're at BMW was kind enough to allow us to say, who they are but they are but there are others.

Got it very clear. Thank you very much congrats on the early success I'll jump back in the queue.

Yeah.

Our next question is from Hans <unk> with Rosenblatt Securities. Please proceed with your question.

Thanks, and I also echo Matt's commentary about congratulations and a good job at the intro.

Clarification, Charlie the BMW engagement. This is your first engagement with BMW.

Yes.

Okay.

Congrats there.

High level question regarding renewals.

And.

In terms of.

The outlook is that still at a high level, what part of the outlook.

Reported in years.

Reengagement with them you're licensing customers.

So I think.

It varies a bit by quarter by quarter, but generally I would say that.

About 70% of our business or certainly the licensing revenue is renewals and about 30% maybe.

Maybe a low 30% of comes from new customers.

So 70% is reorders.

Okay, and then lastly.

And how about the.

The opportunity here in terms of ESP expansion per license what are the trends there all in how much can you get from our.

Customers, who license everything thanks.

Okay.

Yeah. So our S. T has been going up throughout the history of the company.

And.

It doesn't come from raising prices of each individual product where it comes from is the fact that the D. S. O sees need more system IP functionality right. So you wind up the current.

Current associates needing cash go here and see as well as the non coherent interconnect.

They have machine learning sections, so machine learning traffic because its own class, though it needs a machine learning interconnect there is.

The resilience.

There's the physical awareness because you want to take a pause.

I'm sorry.

Brazilians for functional safety for mission critical associates physical awareness because now.

You need to take into account physical constraints upfront.

You have.

To decide which data traffic stays on chip in which goes off chips. So you'll have the last level Cashcall coda cash and you have all of the IPD software, which allows you to package all of your other Ips in E. S. O C. So you know if you're going to buy all of that from us today.

It's gonna be project, it's going to be somewhere around $1 million.

Where are in the on the average we're probably somewhere around the low 400 thousands for Sanofi.

And it'll it'll go up more in the future.

Because you're gonna have triplets and other other types of other.

Other types of functionalities that are that will make the the data traffic patterns, even more complex.

Great.

Run down that Charlie again, congratulations to the team.

Okay.

Our next question is from Gus Richard with Northland. Please proceed with your question.

Yes, thanks for taking my questions and congratulations guys great job.

Kelly can you talk a little bit about you know.

Where are your incremental customers are coming from are they semiconductor companies or is it expanding into nontraditional system houses cloud houses et cetera.

Yes.

So oh.

Obviously, there are a lot of system houses are now starting to do associates.

And some of that is done with partners, so they're partnering with the traditional semiconductor companies.

Give them not custom chips, but customized chips based on existing platforms, but a modified with a few additional ip's for their own particular.

Our requirement.

And you also have a tremendous growth in startups in China.

So that goes to two things the system houses and starting to build chips.

And there's a lot of startups are in semi.

Semiconductor startups in China.

And also.

Also some of the major semiconductor companies are now starting to you'll have issues with their own internally developed a system IP. So we think that also provides an additional growth potential for our products.

Yeah.

Alright.

We think so.

Yeah. So that leads me to the second question.

Basically some companies have issues with designed for reuse and you know and a shortage of integration <unk> integration Engineers can you talk about you know sort of how you help alleviate those those problems and you know incremental increases in productivity.

And then how does that map into you.

You know I T exact and how will that help.

Accelerate designs to market.

Yeah. So there's two things here one is the interconnect and one is the IP deployment software even though.

Ultimately, they're extremely synergistic so before are terrorists.

It took a tens of days to build an interconnect maybe you know.

If you weren't particularly good at it and it could take even months, but it depends of days even for the good guys.

With our terrorists, they're really effective teams.

Can build interconnect in days right and so that's.

That's a that's a major productivity increase which is one of the reasons why our Terry's has grown so.

So well.

But as you say there is a tremendous shortage of interconnect engineers and even even semi experience semiconductor engineers. So what do we need to do is we need to cut down the generation of interconnect two hours.

Right and that's something that that we need to be working on.

The other thing is what I call the disintermediation of the supply semiconductor supply chain. Some of these new entrants only do portions of the design cycle, they're not ibm's right. So they they built couple of Ip's and they they buy the rest and so they've been fairly long they may tell us lay out contractors packaging houses.

And so forth. So they have a long chain of of Oh for contract Theres, a long supply chain and the issue for them is how do you get it all to work when it comes back all the stuff that you bought in your license comes back and you need to turn into an S. O C.

And so you need a standard.

That is essentially allows you to package all of that stuff.

Into a form that is easily integrated bowl and IP exact is a is a very good way of doing that right. It allows you to build.

And integration model around the IP without worrying necessarily about what's inside the IP. It allows you to configure the registers. The exit boards allows you to manage your high level connectivity and so you have a much more much better chance of taking all that stuff that's coming back to you for all the.

Suppliers and turning that into a working out so see quickly efficiently and at lower cost and lower risk and so we're involved in both of those areas and one of the things that we find is that the IP exact tools are actually making our interconnect IP subsystems easier to integrate in their Soc. So.

We're actually in some sense are eating our own dog food.

And it turns out that the the two things that are quite synergistic.

Got it very helpful and if I can sneak in a third I apologize.

You know as <unk>.

We're going to system in package heterogeneous integration.

And <unk> disintegrated, a little bit into separate di how does that impact your business.

It makes them more valuable.

It makes it more complex and we thrive on essentially allowing customers to manage the complexity. So.

Think about it just just as an example, the EMCORE cache coherent interconnect right. The reason you need cache coherency is that you need to have smaller multiple cores that.

That arent, so quite so power hungry and and generates so much heat and those kinds of things.

But the software programmers are not trained in schools to worry about hardware I know this from my my oldest son, Who's a computer science Guy and he's he was a gas than what it takes to manage hardware.

So we need to handle that for the software teams and so we came up with cache coherency, which essentially allows multiple processors to look like a single programming space.

Now what people want is to make multiple dies look like a single programming space and this is obviously, a more complex and more expensive and more profitable problem right and so.

So the triplets is a technology that is here to stay it's still not deployed by a huge numbers of people except on the leading edge, but it makes the interconnect are much more complicated and much more sophisticated yet again.

Got it. Thanks, thanks, so much I'll jump back in the queue.

Our next question is from ambitious reversed Stubhub. Please from BMO. Please proceed with your question.

Alright, Thank you I don't want to mix into left out.

Right out of the gate to make pretty.

Pretty solid keeping the numbers tight maybe as we learned the business model and the.

Quarterly ebbs and flow can you just please scream for us visibility with respect to the Kpis.

We look at E. C V plus the L. T M arpino deferred revenue that would be very helpful and I just have a question for Charlie you catch your breath.

[laughter].

Well I'm delighted that you decided to give me a chance to.

Fine.

So thank you for that.

So yeah in terms of visibility we have.

No I think from our previous conversations we have a fairly strong.

And visible pipeline from whether you look good.

H M TTM royalties.

Or do you look at revenue.

Uh huh.

The the one element of revenue that is.

Not so hundred percent predictable is IPD revenue because most of that is.

Punch in time upfront.

So if you look at it from quarter to quarter.

It can fluctuate, but in long term because we have.

<unk> are very high.

Proportion of repeat.

Customers so.

The what Charlie was talking about just to make it clear was that all about revenue 70% of that Robert bookings, 70% of that comes from.

From previous customers existing customers, 30% comes from new roughly.

The 70% that's preexisting customers.

Ron on the 98% retention rate so in other words 98, sometimes customers come back.

So even if there's a point in time.

<unk>, four <unk> and IPD Tesla.

It might appear sort of in the in Q1 or it much better in Q2, depending upon the customer just wants to place that repeat order.

The benefit of having profitable revenue recognition.

All of our IP our interconnect.

Revenue.

Oh contracts and some of I P. D contracts is the once that goes into the pipe.

And to the waterfall is actually we can see for the next 234 years, how that's going to play out into revenue and the same thing's true you mentioned I see the same is true with H E. B a C. V is a is a again a multiple of all current contracts.

So if we have a contract that's a three year contract, which is not unusual.

Then that gets.

<unk> divided up into.

36 months and it goes on a 136, but that Oh, sorry, one cause annual one month 12.

Is that sort of years with.

So a three year contract with a 300000 would be 100000 of ICB.

Go on the day contract signed that would come off screen is later and so we can predict.

With a fair degree of cars, which is why you don't see a great deal of variation on these numbers from from where we originally talked to you because we do have this incredibly visible.

Pipeline and we'd also operating expense.

Yes.

We can control at quite carefully.

Kind of what's your your.

Question.

Yeah, Yeah. It does it does and it helps to solidify what we've been talking about in the past. Thank you for that and Tony on the turning to you I'm bit designs towards what other areas that these are in and then how would you characterize the end.

You gave us some good.

Our comparisons from a year ago for some other metrics but.

How are they start changing because of the end markets from a year ago couple of years ago, and then where do you see that going I'm, assuming it's going to be more.

Automotive and so see a machine learning, but then.

It would be helpful to see what the comparisons were from a couple of years ago. Thank you.

Yeah.

So yeah, I mean, the the hot market well.

I know a couple of years ago about a bunch of years ago was with smartphone right. So.

There was.

Majority of the designs came there as that market.

Consolidated.

The volume stayed the same but the number of.

The group, but the number of designs and a number of companies have.

Drunk right now, it's expanding a little bit.

With with five G. Because five G is gonna be used for machine to machine communication. So so that that part of it is expanding and yet again, but the kind of the first I O T market that actually works from a business point of view and this is just my opinion is the automotive market.

The car is really an Iot device.

It's this whole huge multibillion dollar investment is essentially turning the car.

From a mechanical device to a device that's full time attached to the cloud that's attached to the electronic erode infrastructure, which is going to emerge and the cars are also going to communicate to each other right. So the car is really a very complex and actually the initial Iot device and it's.

It's a very very nice business and consequently, everybody's piling into automotive right. So the number of customers or that are potential automotive customers is just increasing because there's such a growth in our in the number of chips that are going to be inside the car.

But the biggest market is machine learning right and so some.

Some of the car chips, our machine learning chips, the Adas chips, so machine learning trips, but our machine learning is a is going to be everywhere and it's gonna be used for making this relatively complex system.

Functionality to be more user friendly right that the machine is going to figure out.

You know how to operate itself and in certain cases, so the the largest number of designs in the future are going to be a machine learning. However.

From our experience so far I think we would say that we only probably have a leap.

Ignoring the automotive guys only one non automotive machine learning customer paying royalties right. So the volumes of that market Hasnt really started yet.

But yes that is that is what is the future market and then there's a lot of other companies show their servers.

There's a consumer devices. So we will take all of that.

But the focus for US right now is really on automotive machine learning and <unk> from a product development point of view and feature development point of view.

Got it.

And good luck.

As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.

Our next question is from Mark <unk> with Jefferies. Please proceed with your question.

Hi, Thanks for working me back into the queue.

Quick question here when dishes and as a follow up on the ASP question.

Before.

As you look at you know your projection for your own internal projections for ASP improvement over time.

To what extent is that predicated that ASP expansion predicated on new I P that you haven't developed yet versus.

P that you have already developed.

And you're just waiting for the customers to reach for it. Thank.

Thank you that's all I had.

Oh, well that's a that's a good question and that's not completely easy to answer quantitatively.

No.

Clearly the products that we have.

The customer spend on those products is increasing right. So there's more cash coherent chips, Oh theres more machine learning chips.

There's more automotive chips, so those require more of the products that we already have right.

Hum, but there's also other things that need to be developed and and so you.

Our our strategy has been.

To not shortchanged R&D spending and so we are putting out a new product every year.

That's the goal is one new major product every year and as well of three releases two to three leases of every major product that we have there are sort of customer enhancement.

Releases.

And and so we're trying to keep pace with this market.

Because we are basically doing R&D for 10% of the chip.

Alright, the IND.

Connect is about 10% of the silicon area, roughly maybe a little bit more depending on what functionality you put on so we need to keep pace with this and so we are going to be delivering new products continuously and so I didn't know if I was to take a guess.

Maybe.

I would say half the growth would come from maybe 40% of the growth will come from the products that we have and maybe 50% to 60% will come from products that are that have.

Been developed yet and one of the advantages are Terry has is because we see so many designs by so many customers we have a fast rate of learning there almost anyone because we can synthesize the customer requirements or what theyre going to need a much bigger sample base.

Then for example, any internal group right.

So we are gonna do continuously delivering at least one product a year.

For the foreseeable future because that's what the market can absorb and that's what the market requires.

Yeah.

Got it very helpful. Thank you Charlie.

We have reached the end of the question and answer session and I will now turn the call over to Charlie <unk> for closing remarks.

Yes, so I would very much like to thank everyone on the call today, it's been a pleasure working with you and pleasure for.

Also thank you for your interest in our terrorists.

And also before we close I would like to acknowledge my thanks to our to our employees.

For their continued dedication and diligent work and to our shareholders for their for their support.

So we look forward to updating you in the future and do like to have you have a pleasant afternoon and evening, depending where you are and thank you for your support of our terrorists.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

Thanks Kimberly.

[music].

Good morning, everyone and welcome to the art terrorists IP third quarter 2021 earnings call for opening remarks, and introductions I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

Thank you and good morning, with me today from a Terrorist's IP or Charlie Janick, Chief Executive Officer, and Nick Hawkins Chief Financial Officer.

Charlie will begin with a brief review of the business results for the third quarter ended September 32021, Nick will then review the financial results for the third quarter, followed by the company's outlook for the fourth quarter and full year of 2021.

We will then open the call for questions. Please.

Please note that this call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor statements contained in our press release for a more complete description.

Yeah.

Please note. This presentation describes certain non-GAAP measures, including non-GAAP net loss and non-GAAP net loss per share, which are not measures prepared in accordance with U S. GAAP.

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.

Listeners, who do not have a copy of the quarter ended September 32020 press release may obtain a copy by visiting the Investor Relations section of the Companys website now I'd like to turn the call over to Charlie.

Thank you Erica and thanks, everyone for joining us on the call. This afternoon.

We are excited to report our first quarter as a public company.

I want to extend a special thanks to Dr. Curious IP team for their hard work and support during the IPO process.

We are excited about this next step in our company's journey, notably since our terrorist IP is the first pure play semiconductor IP company to go public on a major USA stock exchange in 19 years.

I'll start this afternoon with a few highlights from the quarter and then because it is our first earnings call I want to take some time to discuss our business and market opportunity as many of you may be new to the <unk> story.

We reported a strong third quarter with GAAP revenue of $9 million up 39% year over year.

<unk> our continued momentum through the end of third quarter 2021, we have added 28, new system might be customers, marking the highest number of new customer additions in the nine months period in company history.

In the third quarter alone. The total number of active customers increased from 166, 279, with new customer applications, ranging from automotive to machine learning to consumer <unk> wireless and data center associates with the highest number of customers, creating new machine learning Soc.

This included two major automotive design wins for our leading edge SLC projects, including one with BMW.

We believe there are products are utilizing 70% to 80% of all automotive Adas Soc projects.

Geographically the largest licensing regions for the quarter were EMEA, followed by China, and then closely followed by USA.

There were 22 customer design starts in the third quarter.

Continuing the strong trend and taking a total of nine months ended September 32, 65, our highest ever number in the nine months period.

We saw strong performance in the third quarter across all of our system IP application market segments with notable new license contracts in machine learning and automotive.

In addition, we were especially encouraged by the acceleration of automotive royalties.

Our electrification and automated driving deployment continues to expect.

We have made good progress on the integration of Bachelor.

Following the acquisition in November 2020, and are encouraged by the high renewal rates from our IP deployments software customers.

Looking forward, we believe our market opportunity remains very attractive on a sustained basis.

For those of you who are new to the story, let me tell you a little bit more about our <unk> IP.

We are a leading provider of semiconductor system IP that enables our customers to deliver increasingly complex associates that not only process data. We're also able to make decisions.

The growth in a number of connected on chip IP blocks and sub systems places, an increasing premium on the interconnect ip's capability to move data its a complex associates as well as our IP deployment technologies ability to automate important aspects of the SLC creation design flow.

We believe this increase complexity is creating a significant opportunity for growth of our sophisticated system IP solutions.

Founded in 2003, we have pioneered and emerge as a global leader in the development of interconnect IP technology for Arctic communications that addresses the complexity performance and cost requirements of advanced Soc semiconductors.

Traditional onshore communication methods such as hybrid buses are generally inadequate in handling communications within advanced semiconductors for sophisticated applications.

By pioneering the use of proprietary networking techniques to remove the inherent architectural limitations of traditional <unk> communications.

To improve ease of integration performance silicon area and power consumption, we help our customers to achieve their desired goals faster.

Easier and as lower R&D and associated costs.

We are also a leading provider of IP deployment software, which enables our customers to more efficiently deploy the internally developed and commercially licensed semiconductor IP block libraries to accelerate creation of <unk> semiconductors.

Our IP deployment solutions complement our interconnect IP solutions by helping to automate not only the customer configuration of interconnect ip's, but also the process of integrating and assembly all of the customers IP blocks into NFC.

Products, incorporating our IP are used to carry critical data its a complex associates for sophisticated obligations, including automated driving artificial intelligence machine learning <unk> and wireless communications data centers and consumer electronics among other applications.

I think deployment software together with our knock interconnect IP and several knock interface ip's that improve Soc data flow performance make up the system.

<unk> market segment.

We work directly with our customers throughout the Soc development process and seek to develop long term sustainable relationships with them.

Knowledge, it becomes embedded in our products and.

And processes.

We also leverage our long history in interconnect IP design and are able to serve a broad range of applications and deliver customer specific features that are useful to other customers.

For example, in the third quarter, we announced Ava technologies and innovator in four dimensional Lidar is our 200 customer in Ontario, IP history, and VI are a leader in innovative automotive radar systems.

The 200 customer milestone quickly follows the company's announcement of its 150 of customer in November 2020, and there's 100 customer in 2018, reflecting our terrorist rapid growth of semiconductor design teams license the company's technologies to speed development and increase performance of associates.

Yeah.

Specific to Eva they chose our curious IP arm chip.

Connect technology as part of their proprietary digital processing chip because our technology complements it was high standards for functional safety.

In addition, the <unk> IP interconnect technology increases digital processing chip performance by optimizing on chip communications for high bandwidth and low latency data flows including state of the art quality of service Oculus techniques.

Within the artificial intelligence machine learning market in the third quarter, we also announced that the imaging SLC leader IDEXX licensed <unk> interconnect IP for its next generation image processing Soc.

IMAX chose our tourist IP arm chip interconnect technology as part of their proprietary image processing chip because it enables them to design and integrate a complete and superior imaging solution with our dependency on external IP blocks for the machine learning function.

In addition, Dr terrorist IP interconnect increases image processing chip performance by optimizing onshore communications for high bandwidth low latency data flows using state of the art quality of service techniques. Our technology also provides opportunities for our customers to reduce power consumption and battery operated obligations.

To ensure we stay at the forefront of technology innovation for these and other opportunities we intend to continue ramping up our investments in our next generation product offering.

Our design teams with functional safety requirements are creating complex associates. Our systems are terrorist harmeet trace increase assistant quality and the ability to achieve functional safety certification by creating and maintaining traceability between disparate systems for requirements specification.

There are electronic design automation tool suite their code software code repository and documentation tools.

<unk> allows our customers to use their existing tools and automatically linked data between them due to hanmi traces unique semiconductor industry specific semantic computing technology.

As we look at a multitude of both captive and Greenfield system IP opportunities in the market. We estimate there are tangible expand to an estimated $3 2 billion. In 2026 were $1 1 billion in 2020, driven by an increasing number of our Soc design wins and growing complexity increasing.

Average.

Selling prices of interconnect IP and IP deployment software.

Move deeper into the knock interface IP market.

Also the need for sophisticated system IP products is growing rapidly in order to address the requirements of smaller die size lower power consumption and higher operation frequencies as well as management of critical it latencies in a timely and cost effective manner.

There are also structural growth factors, such as regionalization of the semiconductor industry more system houses building their own custom or partner customized silicon.

And the lengthening of the semiconductor supply chain, which favors our IP deployment software.

As a result, we believe these trends have led to an increased economic benefit of in licensing of system IP and in fact, all commercial semiconductor IP.

This is an exciting time to beat our tourist IP looking.

Looking ahead, we recognize that our IPO is just one step on the journey of our company. While we are excited to have achieved this milestone we have much more to do with.

We look forward to continue our momentum in the years ahead and updating all of you in the quarters to come.

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

Thank you Charlie and good afternoon, everyone.

As already I also told results today. Please note that I'll be referring to non-GAAP metrics.

A reconciliation of GAAP to non-GAAP metrics is included in today's earnings release, which is available.

On our website.

Yeah.

Given this is our first call as a public company.

I want to start by sharing some perspectives about our business model.

<unk> financial profile.

Through financial highlights for the third quarter, and finally, I'll close with guidance for the fourth quarter and full year before we open up the goal for questions.

Our revenue is derived from licensing.

Intellectual property licensing software support and maintenance services.

Professional services.

Training services and royalties.

Our interconnect IP solutions include software licenses services.

Software updates and technical support.

We entered into license agreements with customers that typically range from two to three years.

And generally consist of delivery over design license, the grumps with customer the right to use the IP license.

I am a contractually defined number of products.

And stand ready to support services.

The customer with our application engineer.

Substance.

While revenue derived from our interconnect IP license agreements is typically recognized ratably over the duration of the license agreement.

<unk> typically pay fees either shortly after signing the agreements with us for the start of each year following the design license to them.

Oh gosh, let it run ahead of revenue recognition.

Yeah.

In conjunction with our interconnect IP licensing agreements.

Got some KOL crazy idea sold we generate royalty revenue.

Royalty revenues recognized during the quarter, which customer shipments.

And the calculated either as a percentage of customer chip I actually.

On a per unit basis as specified in the license agreement.

Our deployment solutions includes software licenses software updates and technical support.

The software licenses are time based licenses with terms generally ranging from one to three years.

Revenue allocated to the software licenses is generally recognized at that point in time. Upon the later of the delivery date for the beginning of the license period or on a total basis.

And revenue allocated to support services is recognized ratably over the support to them.

Given the variation in revenue recognition methodologies between our product offerings.

The management team, we focus on annual contract value or <unk> is a leading indicator of financial performance.

We define an ACB for an individual customer agreement as the total fixed please under the agreement also referred to as the total contract value or <unk>.

Everybody at a number of years and the agreement to them.

As this calculation does not include the contributions from royalty payments. We also refer to HEB plus trailing 12 month royalties.

Trick, which provides a more complete picture of our total revenue proxy.

We monitor this metric to measure our success and believe that historical increase shows our progress.

One thing our customers adoption of our platform.

Moving on to our quarterly results ACB, plus trailing 12 month royalties and other revenue as of September 30 was $45 $6 million.

Only 1% year over year on a pro forma basis, including Muslim.

Driven in particular by growth in automotive and machine learning applications and up 4% quarter over quarter.

Total revenue for the third quarter was $9.0 million uplift.

So, it's 9% year over year, while remaining performance obligations or <unk>.

$56 million up 48% year over year.

Gross profit in the quarter was $8 1 million, representing a gross margin of 90%.

Compared to $6 $2 million in the year ago period.

R&D expense for the third quarter was $7 $6 million or 85% of revenue.

Compared to 62% in the year ago period.

The increase was driven by additional development costs and an additional head count and payroll expenses as we continue to invest in new and improved product offerings.

Sales and marketing expense for the quarter was $3 $2 million or 36% of revenue roughly in line with the year ago period.

We intend to continue to invest in sales and marketing as we continue to drive awareness in the market.

They expand ourselves and application engineering forces and marketing efforts to capture the significant opportunity in front of us.

G&A.

For the third quarter was $1 $7 million or 19% of revenue compared to 40% in the period.

<unk> reflects an increase in people and infrastructure related expenses associated with our public company ready efforts offset by a reduction in professional fees associated with our IPO.

GAAP operating loss for the third quarter was $4 $5 million or 50% of revenue increasing from a loss of $2 $6 million or <unk>.

A few bumps in the revenue in the year ago period.

Non-GAAP operating loss was <unk> million or 44% of revenue.

Increasing from a loss of $2 $4 million or 37%.

Revenue in the year ago period.

GAAP net loss in the quarter was $5 million or net loss per share of.

24 cents.

Non-GAAP net loss for the Cogs that was $4 $4 million.

<unk> net loss per share of 21 cents based on approximately 26 million weighted average diluted shares outstanding.

Turning to the balance sheet and the cash flow.

We ended the quarter with $11 $2 million in cash.

Cash flow from operations was a usage of $2 $5 million in the quarter, while free cash flow.

<unk> capital expenditure was a usage of $2 6 million subs.

Subsequent to the quarter end, we closed our initial public offering.

Okay, and net proceeds of $71 $1 billion.

I would now like to turn to our outlook for the fourth quarter and the full year 2021.

For the fourth quarter, we expect ACB, plus trailing 12 month royalties of $48 5 million to $50 million.

And revenue of 10.0.

To $11 $1 billion.

With non-GAAP operating loss margin of 2% to 54%.

And non-GAAP free cash flow margin of negative 37% to negative 52%.

The poll EBITDA, we expect revenue of $36 3 million to $37 $5 million.

Non-GAAP operating loss margin of 40% to 50%.

Non-GAAP free cash flow margin of negative 20% to negative 35%.

With that I would like to open up the call to questions operator.

At this time, we will be conducting a question and answer session. If you'd like to ask your question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys one moment.

While we pull for questions.

Yeah.

Our first question is from Mark look package with Jefferies. Please proceed with your question.

Hi, Thanks for taking my question and congrats on the first quarter out of the blocks here I had a couple of questions. Charlie maybe for you could you talk about the process.

You undergo for adding new customers, what do you have to do to convince them how long does it take to convert somebody who's never used your IP.

IP before and has is.

As becoming a public company has it has to help that process.

Yeah, I think it is definitely helped one of the reasons for going public was to reassure the market that we are going.

We're going to be a long term sustainable company and they were not interested in being bought right. So the market was really afraid.

We're going to go away.

The way some of the other competitors that we had.

Due to acquisition so that helped a lot.

In terms of the process.

It's actually shortening I would say.

So usually you go through the usual demonstration.

Evaluation.

And then basically license negotiation and then closure and that typically takes I would say.

There's a range on that right but.

I would say four to five months is a typical cycle.

With the outliers being a short as a couple of weeks.

And one of the few cases, we just laugh about it its taken 10 years.

So, but I would say four to five months as well that will that process takes and the IPO has definitely helped.

Gotcha, that's helpful and.

And once you once you win.

Customer once you break in and you have a successful program. There would you expect the customer to.

Embrace your technology broadly for four other projects that I guess, maybe another way to ask the question is.

You've articulated the you know the.

The benefits of using your IP is tied to market lower cost lower risk.

Are there are there other benefits for the company to reuse your IP.

To reuse it once they have used it once.

Sure.

Maybe continuity of of their own product ports.

Portfolio.

Yeah I mean.

Oh, Yes. My remark. This is this is a sticky technology right. So.

Once you break in and once you are successful.

The customer has a track record of Oh reusing the technology on subsequent projects.

We have some restrictions about.

You know, what we can disclose but one of the customers that allow us to disclose this is essentially mobilize where we've been essentially in five generations of projects.

Spanning 11 years right so those.

Those are.

We aim to foster or those kinds of relationships and for us the initial initial.

Initial license deal is really pre sales for the next deals what we typically see is that we get are used on the complex projects, where the customer has some traditionally some difficulties with alternative technologies.

And then as they realize how productive our products are in our methodology is then they expanded to their less less.

Less complex products in order to get the.

You'll get the acceleration of of essentially <unk> generation across the entire portfolio. So.

So yes.

We have to be very very careful not just to have great high quality products, but also to a very strong customer support.

That makes it easy for the customer to use us on subsequent projects.

Got you very helpful.

I'll go back into the queue. Thanks.

Our next question is from Matt Ramsey with Cowen. Please proceed with your question.

Yes. Thank you very much good afternoon everybody.

Guys can congratulations on the first quarter out of the gate and congrats Charlie for getting through that script without a loving your lines at all that that's quite an accomplishment.

Mike.

My first question is sort of a bigger picture, one and the way that.

My team is sort of characterize the opportunity in front of our terrace, and the automotive market and in the AI machine learning market is Oh.

A comparison back to.

I don't know 2009 through 2011, when a whole bunch of companies that we're designing chips for mobile phones.

We're faced with this smartphone inflection.

And needed to then design S ocs and needed.

Chip interconnect to do that.

And that was sort of the first phase of our terrorists the company and the big inflection and where we're at now.

It seems like in the automotive industry, a bunch of companies that are designing microcontrollers need to design <unk>.

New startups and AI.

All of those companies don't have been interconnect teams and M. I <unk> articulating the inflections that are driving opportunities for your company correctly, and if and maybe Charlie if you comment on that a little bit I'd appreciate it. Thanks.

Yeah I mean.

The smartphone Soc inflection was that you had architectures there are many too many communication right.

Oh, the simpler ones, where you had many initiators to a single target which was the memory.

The inflection point that we're dealing with now is that these chips are allowed not to just process data, but they were actually allowed to make decisions.

And that requires a much greater data traffic complexity.

So those kinds of chips used much.

Larger number of system IP products.

They are more complex the design so youre.

You essentially have to use our productivity and automation to fight the growing complexity.

So the current inflection is that these <unk> are are making decisions and that's that's driving our business both today and in the in the future and basically.

The car is yes, one way to characterize the car of today and in the near future as basically a power constrained server on wheels, right and and so the mechanics are becoming less important in the software and electronics are becoming more important than that.

Its essentially driving the industry to put more and more <unk>.

Inside the car, including associates that are there are there to make some decisions.

Got it.

That makes a lot of sense.

As my follow up question I'd be remiss, if I didn't ask about Bmw's since you brought it up in the prepared script.

If you could give us some sort of characterization of of of that customer now that you are talking about the design wins that you have is this for one chip or one program that theyre doing was.

Or is it broader than that is it something that was led by the knock IP or or maybe even the design services parts of your business. If you could characterize the scope of that engagement that would be helpful. Thank you.

Yeah, So we actually the.

To follow up on Mark's.

Question, we typically do breaking on one project right. Initially so there's there's definitely as one project were not allowed to say, what it's for except to say that its for a car but the.

The bigger picture here.

Is that the car companies have lost control of their architectures right. They were relying on tier ones to give them the subsystems, which they assembled and technologically those sub systems that really haven't changed a whole lot in our in decades at least they've been improved but structural.

They really haven't changed now the architecture of the entire car is being revolutionized.

Should we be forced by by Tesla.

And so the car companies are now in a fairly aggressive mode in getting back the control of the architecture of the car. So I don't think BMW is unique in that you know many of the ride sharing companies and many of the car companies are.

We're going to get involved either in building Ips.

Building at least defining the architectures together with semiconductor partners. So they can get customized.

Chips for their their software architectures or in some cases, they will build a soc eased himself and so this again is something new and something of an inflection point and BMW is just one example that where they were.

We're at BMW was kind enough to allow us to say, who they are but they are but there are others.

Got it very clear. Thank you very much congrats on the early success I'll jump back in the queue.

Yeah.

Our next question is from Hans <unk> with Rosenblatt Securities. Please proceed with your question.

Thanks, and I also echo Matt's commentary about congratulations and a good job at the intro.

Clarification Charlie.

BMW engagement. This is your first engagement with BMW.

Yes.

Okay.

Congrats there.

High level question regarding renewals.

And.

In terms of.

The outlook is that still at a high level.

Part of the outlook.

For the quarters and years.

Re engagements with them you are licensing customers.

So I think.

It varies a bit by quarter by quarter, but generally I would say.

About 70% of our business or certainly the licensing revenue is renewals and about 30% maybe.

Maybe a low 30% of comes from new customers.

So 70% is reorders.

Okay, and then lastly.

And how about the the opportunity here in terms of ESP expansion per license what are the trends there.

And how much can you get from our.

Customers, who license everything thanks.

Okay.

Yeah. So our S. T has been going up.

Throughout the history of the company.

And.

It doesn't come from raising prices of each individual product.

What it comes from is the fact that the B S. O sees need more system IP functionality right. So you wind up.

The.

Current associates needing cash coherency.

As well as the non coherent interconnect.

They have machine learning sections, so machine learning traffic has its own class. So it needs a machine learning interconnect there is.

The resilience.

There's physical awareness because you want to take a pause.

I'm sorry.

Resilience for functional safety for mission critical associates physical awareness because now.

You need to take into account physical constraints upfront.

You have to.

To decide which data traffic stays on chip in which goes off chips. So you'll have a last level cashcall coda cash.

And you have all of the IPD software, which allows you to package all of your other Ips India Sophie so.

If you're going to buy all that from US today, it's gonna be project, it's going to be somewhere around $1 million.

There are in the on the average we're probably somewhere around the low 400 thousands for Sanofi.

And it'll it'll go up more in the future.

Because you're gonna have triplets.

And you know other other types of other.

Other types of functionalities that are that will make the.

The data traffic patterns, even more complex.

Great.

And that run down that Charlie Dan congratulations to the team.

Thanks, Dan.

Our next question is from Gus Richard with Northland. Please proceed with your question.

Yes, Thanks for taking my question and congratulations guys great job.

Charlie can you talk a little bit about you know where your incremental customers are coming from are they semiconductor companies or is it expanding into non traditional system houses cloud houses et cetera.

Yes.

So.

Obviously, there are a lot of system houses are now starting to do soc's and some of that is done with partners. So they're partnering with the traditional semiconductor companies.

To give them not custom chips, but customized chips based on existing platforms, but modified with a few additional IP for their own particular.

Our requirements.

And you also have a tremendous growth in startups in China.

So that goes to two things the system houses and starting to build chips.

And there's a lot of startups are in semi.

Semiconductor startups in China.

And.

Also some of the major semiconductor companies are now starting to you'll have it.

Issues with their own internally developed system IP. So we think that also provides an additional growth potential for our products.

Alright, and then we did three things.

Yeah. So that leads me to the second question.

Basically some companies have issues with designed for reuse and <unk>.

And a shortage of integration <unk> integration engineers can you talk about sort of how you help alleviate those those problems and incremental increases in productivity and then how does that map into you.

You know IP exact and how will that help <unk>.

Accelerate designs to market.

Yeah. So there's two things here one is the interconnect and one is the IP deployment software even though.

Ultimately they're extremely synergistic.

So before our terrorists it took.

Tens of days to build an interconnect maybe.

If you weren't particularly good at it could take even months, but it depends of days even for the good guys.

With our terrorists, they're really effective teams.

Can build interconnect in days right and so that's.

That's a that's a major productivity increase which is one of the reasons why our terrorist has grown so.

So well.

But as you say there is a tremendous shortage of interconnect engineers and even even semi experience semiconductor engineers. So what do we need to do is we need to cut down.

The generation of interconnect two hours right and that's something that that we need to be working on.

And they buy the rest and so they've been fairly long they made to us lay out contractors packaging houses and so on and so forth. So they have a long chain of of Oh for contractors, a long supply chain and the issue for them is how do you get it all to work when it comes back all the stuff that you've.

Bought in your license comes back and you need to turn into <unk> and.

And so you need a standard.

That is essentially allows you to package all of that stuff.

Into a form that is easily integrated bowl and IP exact is a is a very good way of doing that right. It allows you to build.

Suppliers and turning that into a working at Soc quickly efficiently and at lower cost and lower risk and so we're involved in both of those areas and one of the things that we find is that the IP exact tools are actually making our interconnect IP subsystems easier to integrate in their Soc is so.

We're actually in some sense are eating our own dog food.

And it turns out that the the.

Two things are quite synergistic.

Got it very helpful and if I can sneak in a third I apologize.

You know as.

We're going to system in package heterogeneous integration.

And Soc.

Integrated a little bit into separate di how does that impact your business.

It makes them more valuable.

It makes it more complex and.

We thrive on essentially allowing customers to manage the complexity.

So.

Think about it just just as an example of the EMCORE cache coherent interconnect right.

The reason you need cache coherency is that you need to have smaller multiple cores.

That arent, so quite so power hungry and and generates so much heat and those kinds of things.

But.

The software programmers are not.

Trained in schools to worry about hardware I know this from my my oldest son Who's a computer science Guy and he is he was a guest and what it takes to manage hardware.

So we need to handle that for the software teams and so we came up with cache coherency, which essentially allows multiple processors to look like a single programming space.

Now what people want is to make multiple dies look like a single programming space.

And this is obviously, a more complex and more expensive and more profitable problem right and so the triplets is a technology that is here to stay it's still not deployed by a huge numbers of people, except on the leading edge, but it makes the interconnect much.

More complicated and much more sophisticated yet again.

Got it. Thanks, thanks, so much I'll jump back in the queue.

Our next question is from ambitious reversed Stubhub. Please from BMO. Please proceed with your question.

Alright, thank you.

Mixing two left out.

Right out of the gate to make pretty.

Pretty solid keeping the numbers tight maybe as we learn the business model and in the.

It really ebbs and flow can you just please scream for us visibility with respect to the Kpis.

We look at E. C V plus the LTM IPO deferred revenue that would be very helpful and I just have a question for Charlie when you catch your breath.

[laughter].

Well I'm delighted that you decided to give me a chance to.

China.

So thank you for that.

So yeah in terms of visibility we have.

You know I think from our previous conversations we have a fairly strong.

And visible pipeline from whether you look at it.

H M TTM royalties.

Or do you look at revenue.

The the one element of revenue that is.

So hundred percent predictable is IPD revenue because most of that is.

And time upfront.

So if you look at it from quarter to quarter.

It can fluctuate.

And long term because we have.

<unk> are very high.

A portion of repeat customers so.

What Charlie was talking about just to make it clear was that all about revenue 70% of that Robert bookings, 70% of that comes from.

Uh huh.

Previous customers existing customers.

If something comes from new roughly.

The 70% that's preexisting customers.

Ron on the 98% retention rate so in other words, 90% that customers come back.

So even if there's a point in time.

I've ranked four in IPD Tesla.

It might appear sort of in the Chihuahua Monterrey on Q2, depending upon the customer just wants to place that repeat order.

The benefit of having profitable revenue recognition.

Pretty much all of our IP our.

Our interconnect.

Revenue.

<unk> contracts.

Some of our IPD contracts is the once that goes into the pipe.

And to the waterfall essentially.

We can see.

For the next 234 years, how that's going to play out into revenue and the same thing's true you mentioned Cvs and same is true with HEB ACB is a is a again a multiple of all current contracts.

If we have a contract.

At three year contract, which is not unusual.

Then that gets that's basically.

Basically divided up into.

36 months.

It goes on a 136, but that Oh, sorry, one cause annual one month 12 of that sort of a year's worth.

So a three year contract with a 300000 won't be 100000 of ACB.

So on the day of contract signed that would come off screen is later and so we can predict.

With a third degree of clarity, which is why you don't see a great deal of variation on these numbers from from where we originally talked to you because we do have this incredibly visible.

Pipeline and we'd also on operating expense.

Yes.

Because we can control at quite carefully.

Kind of what's your your.

Your question.

Yeah, Yeah. It does it does and it helps to solidify what we've been talking about in the past.

Thank you for that entirely on the turning to you I'm bit designs Cogs.

Hum.

What are the areas that these are in and then how would you characterize the end and you gave us some good Uh huh.

Comparisons from a year ago for some other metrics, but how other starts changing needs of the end markets from a year ago couple of years ago, and then where do you see that going I'm, assuming it's going to be more.

Automotive is the C machine.

Machine learning, but then.

It would be helpful to see what the comparisons were from a couple of years ago.

Yeah.

So yeah, I mean, the the hot market well you know I know a couple of years ago about a bunch of years ago with a smartphone right. So.

There was.

Majority of the designs came there.

As that market consolidated.

The volume stayed the same but the number of.

The group, but the number of designs and a number of companies have.

Trunk right now, it's expanding a little bit.

With with five G. Because five G is gonna be used for machine to machine communication. So so that that part of it is expanding and yet again, but.

The kind of the first.

Oh T market that actually works from a business point of view and this is just my opinion is the automotive market. The car is really an Iot device.

It's this whole huge multibillion dollar investment is estimated.

Century, turning the car.

There are gonna be inside the car.

But the biggest market is machine learning right.

So assembled a car chips, our machine learning chips, the Adas chips or machine learning trips, but our machine learning is is going to be everywhere and it's gonna be used for making this relatively complex.

Our system.

Now to be more user friendly right that the machine is going to figure out.

You know how to operate itself and in certain cases, so the the largest number of designs in the future are going to be a machine learning. However.

From our experience so far I think we would say that we only probably have to leave it.

Ignoring the automotive guys only one non automotive machine learning customer.

Paying royalties right. So the volumes of that market Hasnt really started yet.

But yes that is a that is what is the future market and then there's a lot of other companies are their servers.

There is a consumer devices. So we'll take all of that.

But the focus for US right now is really on automotive machine learning and <unk> from a product development point of view and and feature development point of view.

Got it got it thank you and good luck.

Our next question is from Mark lift package with Jefferies. Please proceed with your question.

Hi, Thanks for working me back into the queue.

Quick question here when dishes and as a follow up on the ASP question.

Before.

As you look at you know your projections for your own internal projections for ASP improvement over time.

To what extent is that predicated that ASP expansion predicated on new I P that you haven't developed yet versus IP that you have already developed.

And you're just waiting for the customers to reach for it. Thank.

Thank you that's all I had.

Oh, well that's a that's a good question and that's not completely easy to answer quantitatively.

So clearly the products that we have.

The customer spend on those products is increasing right. So there's more cash coherent chips.

Theres more machine learning chips are.

There's more.

Automotive chips, so those require more of the products that we already have right.

But there's also other things that need to be developed.

And so you.

Our our strategy has been to not shortchanged R&D spending and so we are putting out a new product every year.

That's the goal is one new major product every year and as well of three releases two to three leases every major product that we have there are sort of customer enhancement.

It releases.

And and so we're trying to keep pace with this market.

Because we are basically doing R&D for 10% of the chip.

Alright.

Interconnect is about 10% of the silicon area, roughly maybe a little bit more depending on what functionality you put on.

So we need to keep pace with this and so we are going to be delivering new products continuously and so I don't know if I was to take a guess.

Maybe.

I would say half the growth would come from maybe 40% of the growth will come from the products that we have and maybe 50% to 60% will come from products that are that havent been developed yet and one of the advantages are Terry has is because we see so many designs by so many customers we have a fast.

Great of learning there almost anyone because we can synthesize the customer requirements or what theyre going to need for a much bigger sample base.

Then for example, any internal group right.

So we are gonna be continuously delivering at least one product a year.

For the foreseeable future because that's what the market can absorb and that's what the market requires.

Got it very helpful. Thank you Charlie.

We have reached the end of the question and answer session and I will now turn the call over to Charlie <unk> for closing remarks.

Yes, so I would very much like to thank everyone on the call today, it's been a pleasure working with you and pleasure for and.

Also thank you for your interest there are terrorists.

And also before we close I would like to acknowledge my thanks to our employees.

For their continued dedication and diligent work and to our shareholders for their for their support.

So we look forward to updating you in the future and we'd like to have you have a pleasant afternoon and evening, depending where you are and thank you for your support of our terrorists.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

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