Q4 2021 Arteris Inc Earnings Call
Good afternoon, everyone and welcome to the Ark Harris I P fourth quarter and full year 2021 earnings call all material contained in the webcast is the sole property and copyright of our terrorists IP with all rights reserved for opening remarks, and introductions I will now turn the call over to MS. Erica Mannion at Sapphire.
Relations. Please go ahead you may begin.
Thank you and good afternoon with me today from our tariffs are T are Charlie <unk>, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer Charlie.
Charlie will begin with a brief review of the business results for the fourth quarter ended December 31, 2021, Nick will then review the financial results for the fourth quarter and full year 2021, followed by the company's outlook for the first quarter and full year of 2022, we will then open the call for questions.
Before we begin I'd like to remind you that management will make statements. During this call that are forward looking statements within the meaning of federal Securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated and you should not place undue reliance on forward looking statements.
Additional information regarding these risks uncertainties and factors that could cause results to differ appear in the press release are terrorists IP issued today and in the documents and reports filed by our terrorists IP 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 and non-GAAP net loss per share, which are not measures prepared in accordance with U S. GAAP.
The non-GAAP measures are prepared 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 press release for the quarter ended December 31, 2001 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 a strong fourth quarter, our second quarter as a public company with annual contract value plus trailing 12 month royalties or $50 million up 19% year over year.
Demonstrating our continuing momentum in 2021, our active customers increased by 42, new system IP customers, including 36, four knock interconnect IP and six for IP deployment software.
This marks the highest number of new active customer additions in a 12 month period in the company's history.
In the fourth quarter alone. The total number of active customers increased from 179 to 192.
Total customer design starts increased from 57 in 2022 86 in 2021 .
Machine learning applications continue to account for the largest number of new licensees licenses, followed by automotive and <unk> infrastructure.
Machine learning design wins included corn Army slide five and six other as of yet unannounced machine learning companies.
The edge machine learning market continues to be promising with large number of new customers and broad range of applications.
Customers in the automotive market continued adoption of our tourists IP technology in the fourth quarter illustrated by both solid license revenue and increasing automotive royalties as evs and automated driving vehicles begin commercialization in increasing numbers.
Automotive orders continued to be strong across the entire supply chain, including semiconductor companies, such as mobile Ly and NXP.
Tier one vendors such as Bosch.
Automotive Oems such as BMW and several other ride sharing companies as well as several unannounced customers.
Demonstrating the breadth of activity throughout the automotive supply chain in the fall.
Fourth quarter, we won a key design win with a major automotive OEM, who is making the transition to designing their own slc's together with their semiconductor company partners.
The reason this OEM selected our terrorists IP was their desire to control their associate architectures, allowing this OEM to better support their extensive automated driving software development programs.
In addition, our terrorist IP track record in supporting functional safety requirements with our resilient features was another factor in the selection process.
With a successful track record of our existing automotive customers and getting their Soc eastern market. We believe our terrorist IP is increasingly being viewed as an innovative technology partner in the automotive sector.
Another major developed in the quarter was the increasing increasing adoption of both our tourists IP network on chip knock interconnect products and IP deployment software by customers at the same time in an attempt to shorten associated design cycles and make the use of their IP block library outfits more effective.
Design win customers licensing both products.
Some drill a U K based design house, and mobile and the emerging machine learning company, that's worth for other unannounced customers licensing both solutions together in a quarter.
As we discussed last quarter, we announced the launch of our terrorist harmony trace designed data intelligence solutions to help ease compliance with semiconductor industry functional safety and quality standards.
The development of harmony trace was driven by our customers' needs to establish an automated traceability flow.
And change management and best practices between their existing requirements specification electronic design automation tools software code depository and documentation tools Army trace allows our customers to use their existing tools and automatically linked data between them due to hanmi choices unique semi.
Conductor industry specific semantic computing technology.
We believe harmony Tracy is a revolutionary product that is adopted by multiple companies at different levels of industry supply chain.
The initial feedback from customers has been positive as hanmi trace helps them verify and close gaps between product specifications and actual implementation of those requirements.
We are now at a stage, where we are working with multiple early adopters to fit hanmi trace into their product development folks.
We expect Hanmi trace will take time for wide customer adoption, but we believe it will ultimately be a valuable product for mission critical segments of the semiconductor industry.
As we look ahead to move towards system, IP being a greater complexity and therefore greater value continues.
Because you're making it so six which incorporate machine learning functions are it will continue to be more complex than data processing semiconductors, and we believe this provides our tourists IP the opportunity to deliver ever increasing value.
Since 2003, the industry developed for one processor a few iOS in one or two memory channels to hundreds of IP blocks multiple processors cache coherency used outside of the process, the subsystem and up to eight channels of memory access.
Well recently, we have also viewed the emergence of machine learning technology, and chipsets, which require a further increase in system IP complexity.
The semiconductor industry is also going through regionalization, where fab investment into three major economic blocks of the world is increasing dramatically.
Democratization of Soc design, the system houses being able to build their own custom semiconductor and semi custom Soc as profitably as well as the disintermediation of the semiconductor supply chain toward a fabless model, where only a few critical IP blocks are being design internally by the major system companies we believe.
<unk> is a further expanding our potential customer base.
All of these trends support greater design activity with more companies engaging in semiconductor design and more outsourcing of non core IP block technology, which in turn favor as the development of gross of Ontario IP.
We do not currently anticipate a slowdown in their Soc design starts.
More and more companies are designing or so six or partnering with SLC design partners to get the silicon they need to support their business models.
Some of these software driven business models require large investments and benefit from running on customized silicon.
For example, we believe that automotive Oems, who do not move to at least understand their Soc hardware architectures will be at a significant disadvantage versus dose, which have access to customize silicon technologies.
Moreover, our customers design starts are increasingly complex.
We believe this increase in SLC complexity makes it increasingly difficult to develop system IP solutions in house, though some of the largest semiconductor companies continued to do so.
The added benefit broad curious I P. The increasing number of IP blocks in SLC designs also increases the value of IP deployment software solutions given their ability to accelerate the use of all types of IP blocks, if facilitate as Youll see assembly.
As a result, we're seeing a trend towards associates system IP solutions being increasingly license from commercial vendors such as our tourist IP.
Specific to our tourist IP, we plan to introduce at least one new IP deployment and or not interconnect product in 2022.
Before I turn the call over to Nick to review the financials I would also like to mention we have strengthened our management team with additional cash by our as our new executive Vice President of global sales, providing our executive team with additional public company experience.
We also plan to continue to invest in engineering customer support sales and technical marketing head count to enhance the support of our customers and continue growing our business to capitalize on our system IP opportunity.
With that I'd like to turn it over to Nick to discuss our financial results in more detail.
Thank you Charlie and good afternoon, everyone.
Oh, sorry about view, our fourth quarter and full year results. Today. Please note that I'll be referring to non-GAAP metrics.
A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website.
As a reminder, for those who are new to the alturas I'd be story revenues derived from licensing intellectual property license.
Licensing software.
Support and maintenance services professional services training services and royalties.
Given the variation in revenue recognition methodologies between all product offerings as a management team, we focus on annual contract value or <unk> as a leading indicator of financial performance.
We define HCV for an individual customer agreements the total fixed fees under that agreement.
I referred to as total contract value or T. C D.
Divided by the number of years and they very much.
Does this calculation does not include the contribution from royalty payments. We also referred to ACB plus trailing 12 months Wolters as a metric which provides a more complete picture of our total revenue proxy.
We monitor this metric to measure our success.
I believe the historical increase shows our progress in expanding our customers adoption of our solutions.
At the end of the fourth quarter, HEB, plus trailing 12 month royalties.
Other revenue was $57 million up 19% year over year.
Driven in particular by growth in automotive and machine learning applications.
And up 10% corporate culture.
Total revenue in the fourth quarter was $11 4 million.
Dollars down.
Year over year due to a $7 4 million points in time IP licensing revenue recognized in the fourth quarter of 2020.
<unk> two D J I.
<unk> profit associated with it but at this point in time revenue also benefited the fourth quarter.
Annual non-GAAP operating income net income earnings per share and free cash flow in 2020.
Remaining performance obligations or OPO was $60 5 million.
26% year over year.
As of December 31, 2021.
Yeah.
We did find out as the amount of contract in future revenues.
Gross profit for the quarter was $10 $3 million, representing a gross margin of 90%.
And compared to $14 1 million in the year ago period.
R&D expense for the fourth quarter, with some point $3 million or 64% of revenue compared to 5.0 to $100 in the year ago period.
The increase was driven by additional development costs from additional head count including costs due to the additional headcount, resulting from the Muslim acquisition and.
Payroll expenses as we continue to invest in new and improved product offerings.
Sales and marketing expense for the fourth quarter was 3.0% to 27% of revenue compared to $3 4 million in the year it'll get period.
We intend to continue to invest in sales and marketing as we continue to drive awareness of the market and expand ourselves on application engineering force and marketing assets to capture the.
Significant opportunity in front of us.
G&A expense for the fourth quarter was $2 million or 24% of revenue compared to zero point $9 billion in the year ago period.
G&A reflects an increase in people and infrastructure related expense.
I stated without public ready assets.
Operating loss for the fourth quarter, with some point $3 million or 64% of revenue.
Creasing from profit of $3 $2 million in the year ago period.
non-GAAP operating loss was $2 8 million or 24% of revenue decreasing from a profit of $8 million in the year ago period.
Net loss in the quarter was $7 $8 million or net loss per share basic and diluted all 27 cents.
non-GAAP net loss in the quarter was $3 $3 million or net loss per share basic and diluted all 12 sets based on approximately $28 5 million weighted average shares outstanding.
Turning now to the balance sheet and cash flow, we ended the quarter with $85 $8 million in cash cash flow provided by operations was $3 2 million in the quarter, while free cash flow, which includes capital expenditure was positive $2 $9 million.
Moving to our annual results total revenue for 2021 was $37.9 billion up 19% year over year.
Due to an increase in the 27% and license revenue.
Driven by continued expansion of our active customer base and the successful integration of <unk>.
P deployment solutions acquired from Muslim.
Offset by a $1 3 million dollar decline in royalty and other revenue from supply chain constraints on our customers shipments volumes.
And the decline in royalties from high Silicon, who has been directly impacted by U S government export controls.
Gross profit in 2021 was $34 $1 million, representing a gross margin of 19% compared to 19, 5% in the year ago period.
Reflecting the inclusion of the higher field application engineering support expenses inherent in the newly acquired IP solutions.
Total operating expenses were $49 $7 million compared to $32 2 million.
In the year ago period.
Yeah.
Oh pricing loss was $21 $8 million up 57% of revenue increasing from a loss of $3 $8 million in the year ago period.
non-GAAP operating loss was $15.5 million or 41% of revenue Inc.
Increasing from a loss of $1 8 million adults in the year ago period.
Net loss in 'twenty, and 'twenty, one was $23 $4 million or net loss per share basic and diluted of a dollar and cents.
non-GAAP net loss was $17 $2 million.
Net loss per share basic and.
Diluted all 78 based on approximately 22 million.
Weighted average shares outstanding.
Cash flow used in operations was zero point $8 million in 'twenty to 'twenty one.
Free cash flow, which includes capital expenditure was negative $1 $600.
I would now like to turn to our outlook for the first quarter.
The full year 2022.
For the first quarter, we expect ACB, plus trailing 12 month royalties or $55 million to $52 $5 million.
Revenue of $10 million to $12 million.
With non-GAAP operating loss margin of 41.1% to 56, 1%.
non-GAAP free cash flow margin of negative 23% to negative 20, 38%.
For the full year, we expect ACB, plus trailing 12 month royalties, all $51 $6 million to $55 $6 million.
<unk> revenue of 47 point miserable in Dallas to 51 point does everybody windows.
With non-GAAP operating loss margin of 25, 6% to 46%.
Our non-GAAP free cash flow margin of negative 10, 9% to 25, 9%.
With that we'll open up the call for questions.
At this time, we'll be conducting a question and answer session. If you would 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.
From the Q participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys, one moment, while we poll for questions.
Our first question comes from the line of Matt Ramsey with Cowen You May proceed with your question.
Thank you very much guys. Good good afternoon to everybody.
Charlie I wanted to ask a couple of questions about the automotive business for you guys. I guess, there's two separate topics here. One is you announced a new win in the fourth quarter, just now with an OEM that's gonna be building their own silicon and maybe you could expand on on that a little bit.
If you are able to earn in.
I guess, what the pipeline looks like they are for our companies in the auto space to make doing be doing their own silicon rather than relying on on sort of merchant products.
And then the second question, we've talked a lot in the past about the stickiness and the durability of our tears IP interconnect being really sticky once you win customers and I noticed.
No secret mobilize gonna be re IPO ing from Intel and maybe that's the reason that they've been a little bit more open about multiple years of their roadmap going forward rather than than keeping our cards, a little closer to the vest, but I noticed in there.
That's the furthest in the future for them is now switching from from Mips to ATA risk five four the CPU architecture, but it seems like you are IP is very sticky across that transition. So maybe you could talk a little bit about the stickiness of the IP.
Okay. So to address the first question.
So.
Oh, I actually we expected.
The car companies are going to be also are building their own silicon.
That's actually may happen in a few cases, but what seems to be happening more.
Is that they are working with silicon partners that and there may be building, our architect even one or two Ips themselves and then they're working with our silicon partners to basically build.
<unk> silicon that's.
That supports the very large investments that they're making in their software infrastructure for automated driving and infotainment and in those kinds of things. So we think that.
The reasons, we highlighted this design win is we think that is a part of a greater trend.
And we think that those car companies that.
Don't at least understand their silicon architectures or wish their software runs are going to be at a big big competitive advantage. So we think that at least architectural IP design is going to be pervasive across the entire automotive so our supply chain.
Now the second question was about mobile a lot right.
So yeah.
It is a very sticky technology, particularly in automotive.
If you are changing your interconnect in the middle of a project or are you you basically have to requalify the silicon right. So so yeah. The network on chip is actually stickier, even stickier in automotive than it is in other other less mission critical.
So as long as you're doing a good job and as long as you're supporting the customer.
Sure and you're delivering the technology that can keep the.
Pace with the evolution of their architectures are you generally get the repeat business on the next set of projects.
So very sticky.
Yeah.
Thank you for the color on both of those topics Charlie as my.
Second I guess topic, Nick I wanted to ask a bit about does.
Visibility of the business going forward, there's obviously a lot [laughter].
Going on in the world at the moment and.
From a supply chain point of view geopolitical point of view and a number of things, but one of the attractive features of the business model that you guys have a lot of visibility.
Ability on on on forward revenue and and I Wonder if you might remind us of some of those metrics and give a little commentary on visibility for the upcoming calendar year, given given all the things we're seeing going on in the world. Thanks, very much guys sure.
Yeah, that's got some great questions.
Let me pass it up into sort of some bite size pieces.
As far as the.
He is just one topic tidal is the geopolitical.
Catherine.
Eastern Europe and Russia.
We have no.
Direct.
Customers all business in Ukraine, and Russia.
So we have no intention of changing.
Trenching up either in the foreseeable future.
There is a.
And almost zero impact whether the secondary tertiary impact on all of it.
It kind of moves around the world, who doesn't strike that's a much bigger question all I can answer.
The.
The supply chain was very interesting one because you see this time and time again.
Pretty much everybody out, but who's in the semi easily.
Businesses related to salaries is commenting on the same issue would choose silicon.
Shortage silicon splashing children's children visits.
To be cold.
And all the foundries are completely tapped out as you know.
Which means that a.
Volumes from our customers a serious constrained.
So we've seen an impact on royalties.
For sure.
So very successful chip.
Products from our customers, but oh constrained in terms of volume.
And we see that playing out for probably the rest of 2022.
Starting to moderate in 2023.
Generally what we're hearing.
In the in the industry.
But as far as the the the last question, which I guess is the real.
The real key is we go into each quarter with about.
About 80, 85% visibility of the following quarters revenue and I'm pretty much a C D as well each of N T T at all.
So that's that's actually very helpful to us.
In terms of guiding the street.
We start if you look at the 12 months out a picture we are somewhere in the 60% to 70%.
If you include the.
The renewals.
But we are but we have enjoyed over the years.
That's a 90 plus percent renewal rate from our big customers.
So we have a very very strong visibility of our revenue.
On the flip side on the other side with goals.
Opex and.
On Opex, we can.
Control to the best Yeah to the best of all those things anyway.
Definitely some inflationary issues around Opex, because you know wage inflation is is creeping up, especially engineering people, but we are staying on top of it.
We're mindful of how we guided the street.
And our commitments we've made to.
The analyst community Investor community to deliberate on adults.
No.
Yeah, Yeah. It does I I understand there's a lot of variability going on right now with sort of a supply.
Supply chain in sami's versus.
Demand side stuff geopolitically, so I appreciate the color and the visibility definitely helps congrats on the results guys I'll jump back in the queue.
Yeah.
Our next question comes from the line of <unk> Srivastava with BMO capital markets. You May proceed with your question.
Hello. This is jamison Phillips, calling in for Bruce. Thanks for the question I think the personally I want to touch on was I think consensus had been looking for.
Some pretty big downs downward sequential declines in <unk>.
Guys are guiding only down 4%. So I was wondering if you could maybe remind us if theres any seasonality to this wonky revenue because at least we are modeling it another big downturn once you and if there isn't any seasonality maybe.
Maybe just a little bit of explanation on that.
Do you think about revenue going forward.
Sure Yeah, I mean, let me take that one sure.
So the entire thanks for the question again, and I Should've said, my math as well and I forgot what she'd like IMAX and like.
Two questions.
But yes to.
To the Toby My question.
The.
Well one of the less known AR features of our business because we've only owned it for a year.
The I'd be dependent software business that we acquired for Muslim.
And as you probably know from ambush such that say mainly points in time revenue recognition.
Muddle.
And so.
Some deals and then lapse.
So the upside of the business.
And swing revenue a little bit more than the rest of world revenue recognition model really.
The S E T business as we go Silicon IP, which is the interconnect.
<unk>.
In Q1, we did actually have a how about you'd be having a conscious effort.
To to normalize more in it.
Quarter to quarter.
The deployment business what used to be very much Q2, Q4 centric before we acquired it a lot.
The mentality, but thought it was.
Suddenly carried through into 2021.
And we spend a lot of time working with the sales force I'm working with the application of generic pools. So you balance that out a little bit more between the quarters.
That's what we're doing that.
And part of the success of that was too.
To normalize more into Q1, and so therefore, we're not seeing the seasonality that we originally thought all will be of course supposed to quad was that we would have a very heavy Q4 because of the predominance of our big IP deployment.
Tracks.
Unless so in Q1, it's not looking to be more.
Less seasonally fluctuates, but we'd originally thought so this is kind of more like the norm. That's why we're not changing the annual.
Guidance by much.
Even though this is not for them in Q1.
Simply because it's just becoming more balanced across the year.
Okay. That's helpful. Thanks, and looking at the second half versus the first half I think we've been modeling back half up maybe 60%, 50% compared to the first half when you were talking about this balancing of revenues, we should be looking for as kind of a steady studied with low single digit growth.
The rest of the year given the.
Do you maintain the annual guidance is that correct.
Yeah exactly so so you know, we're guiding 10 and a half million for Q1 of our revenue as I'm sure you've seen.
And we're guiding 49 million for the for the year.
And obviously four times 10 to the half is yeah. It is.
42, and so there is definitely a pickup anticipated in Q4 Q4 for us is.
Historically has always been the strongest quarter.
It's a culture, where our customer base.
In many cases, and it's just not a new thing and I'm sure you credit for it. It's in many cases, where customers will seek to use that budget.
And some of that budget goes to us and say, we have a lot of activity in the in the fourth quarter.
This year actually we were successful in skewing that there's much towards October November December .
December which was actually a really positive thing because it helps our cash flow in Q4 and.
With that as opposed to Uh huh.
Boston change, though the ammo of the business.
But yes, there is definitely an uptick.
It's not just that there's a seasonality issue. It is also because the business is still growing.
So naturally you would hope in the second half was going to be bigger than the first off.
Okay wonderful thank you very much.
Yes, yes, it does I appreciate it and I say high temperature or me.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Kevin Garrigan with Rosenblatt Securities. You May proceed with your question.
Yeah, Hey, good afternoon, everyone. This is Kevin on for Hans just a couple of quick ones.
But first of all in terms of Asps per license.
How are you kind of look at your expansion opportunities. So can you can you give us a sense of what the trends are there and how they compare to maybe three or six months ago and kind of at a high level are these opportunities or expansion kind of in line with what you've been thinking.
Yeah. So so they're there they're theres couple of tailwind here.
So one of them is that the the chips are getting much more complex and so they just use more system IP right.
You have no cache coherency.
Going outside the.
You know in some cases outside of the CPU subsystem.
You have multiple layers of caches you.
You have more channels of memory. So so so the asps going up because you know.
They're just more more of our products that are necessary to build these complex chips.
The other Oh, the other positive development is that some of our customers.
And I think we covered it all.
On the call is that.
Some of our customers are now starting to buy not only the interconnect, but also the IP deployment software right off the bat initially and so that also rises DSP. So we saw we've seen some very positive trends in that are in there.
In that aspect right and so.
You know a couple of years ago, where all we had was a non coherent interconnect.
You basically a wind up with.
Oh.
Just maybe a 300000 kind of thought ESP.
Whereas now you're you may be.
If if everybody buys everything from us it's over a million right and the average is probably now more like a 450 or 500. So D. E. S. P has been going up and we think that it's going to keep going up so.
You know obviously, we're trying to provide good value to our customers in terms of what we deliver but a D. A S. P. I think is going to continue to increase for the next several years.
Okay.
Got it got it. Thank you very much that's very helpful. And then just as a quick follow up.
Regarding your design starts I know you guys said in your press release at all major verticals can increase but was there kind of one standout vertical that you would point out.
Yeah in terms of in terms of design wins are there is just a lot of activity in machine learning right.
So we're getting one machine learning order after another.
Particularly for the edge machine learning applications.
Yeah on the royalty side, the automotive royalties are starting to kick in right. So that's that's also very very positive, but on the license side I would say the biggest the biggest driver and the biggest segment.
Is is machine learning because ultimately machine learning, it's not going to be its own segment, it's going to be everywhere.
So those features are going to be necessary for a very large very large number of chips.
Perfect. Thank you and congrats on the results.
Okay. Thanks, Kevin.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Charlie for closing remarks.
Yeah.
So [noise].
This is an exciting time to be Doctor is IP.
We look forward to continuing our momentum.
In the years ahead and updating all of you in.
In the quarters to come.
So thank you for joining our call today and thank you for your interest.
And I'm curious like T. Thank you very much.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.
Thanks, everybody.
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