Q1 2022 Arteris Inc Earnings Call
[music].
Good afternoon, everyone and welcome to the <unk> IP first quarter 2022 earnings calls.
All of them want to you are contained in the webcast is the sole property and copy of eight Chris IP with all rights reserved for.
For opening remarks, and introductions I will now turn the call.
Well go to Eric off money.
At Sapphire Investor Relations. Please go ahead. Thank you and good afternoon with me today from our terrorists I P. R. Charlie Janet <unk>, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer, Charlie will begin with a brief review of the business results for the first quarter ended March 31, 2022 nickels.
Nick will then review the financial results for the first quarter, followed by the company's outlook for the second 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 the federal securities laws.
These statements involve material risks and uncertainties that could cause actual results or events to differ materially from those anticipated and you should not place undue reliance on forward looking statements.
Additional information regarding these risks and uncertainties and factors that could cause actual results to differ appear in the press release are terrorists IP issue 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 non-GAAP net loss per share and free cash flow, which are not measures prepared in accordance with U S. GAAP.
These non-GAAP measures are presented as we believe that they provide investors with a major of evaluating and understanding how the company's management evaluates the company's operating performance.
These non-GAAP measures should not be considered in isolation from as substitutes for or superior to financial measures prepared in accordance with U S. GAAP.
A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended March 31 2022.
In addition for a definition of certain key performance indicators used in this presentation such as annual contract value design starts active customers and remaining performance obligations. Please see the press release for the quarter ended March 31 2022.
Listeners, who do not have a copy of the press release for the quarter ended March 31, 2022 may obtain a copy by visiting the Investor Relations section of the Companys Web site.
Now I'd like to turn the call over to Charlie.
Thank you Erica and thanks to everyone for joining us on the call. This afternoon.
We're excited to report a strong first quarter to start 2022 with annual contract value plus trailing 12 month royalties of $52 8 billion up 26% year over year.
Demonstrating our continued momentum our active customers increased by seven new system might be customers in the quarter.
Total customer design starts in the quarter were 19 <unk> projects.
Major new customer deals, including IP licenses to Cambria Con rapid silicon and so show next camp.
<unk> selected our terrorists IP knock interconnect solution based on our strong technology track record for automotive machine learning applications.
We also signed a key new deal with a major a ride sharing company in the quarter and announced that BMW license our tourists IP for a neural network accelerated project.
Additionally, Sandro deployed our tourists IP for their next generation automotive AI ml soc's.
We believe these relationships underlying that associate creation is occurring at all stages of the automotive supply chain from semiconductor companies to tier one vendors automotive Oems and ride sharing companies, it's electrification automated driving an issue consolidation revolutionize the industry.
Besides the progress in automotive we also continued a strong momentum in AI ml consumer electronics enterprise and five G communication market segments.
We continue to close new deals addressing AI ml technology during the first quarter across numerous verticals.
The market for machine learning at the edge continues to be promising with continued addition of new customers and a broad range of applications.
On the product front in the first quarter. We continued our strong investment in engineering, new system IP products and are confident they will continue our multiyear track record of delivering at least one new major system IP product in 2022.
Democratization of our Soc design as well as disintermediation of the semiconductor supply chain. We believe is driving a strong need for automation of system might be solutions in order to compensate for a shortage of associate architects and skilled interconnect IP engineers.
While we are seeing strong demand for our products. We're also seeing worldwide inflationary pressures in terms of employee compensation and service provider pricing.
As we discussed in our prior conference calls we are seeing the regionalization of the semiconductor industry.
However, the troubling events in Ukraine are driving the United States and Europe together into a more cohesive block than previously predicted.
I should mention that are curious IP has no current exposure to either Ukraine or Russia.
We believe that it is important however for our tourists IP to continue to expand its multi regional presence in order to be a global system might be provider.
Lastly in the first quarter, we continued to strengthen our management team by adding these house Iwinski as our Chief marketing Officer.
But how joins US following a 22 year career at cadence design systems, including leadership roles in product strategy solutions and customer engagement, culminating as a corporate vice president marketing and business development.
With me Hauls addition, we now have a complete top management team with significant public company experience for our next stage of growth 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 I review, our first quarter results today. Please note I'll be referring to non-GAAP metrics.
A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website.
Total revenue for the first quarter was $11 $8 million.
77% year over year.
As a reminder of those of you who mutually alturas IP story.
Revenues derived from licensing intellectual property licensing and software.
And maintenance services, providing professional services cleaning services and royalties.
Given the variation in revenue recognition methodologies between our product offerings.
The management team, we focus on annual contract value or ICB.
As a leading indicator of financial performance we.
We define ACB for an individual customer agreements the total fixed fees under the agreement well.
Two as the PCB or total contract value divided by the number of years in the agreement.
As this calculation does not include the contribution from royalty payments. We also referred to ACB plus trailing 12 month royalties as a metric which provides a more complete picture of our total revenues.
Monitor this metric to measure our success unbelievable historical increase shows our progress in expanding our customers adoption of our solutions.
Yeah.
At the end of the first quarter ACB, plus trailing 12 month's royalties and other revenue was $52 $8 million up 20.
26% year over year, driven in particular by growth in automotive.
Consumer electronics enterprises, and five G communication market segments.
5% goldstrike the daughter.
Remaining performance obligations or <unk> was $65 million up 28% year over year as of March 31st 2022.
We define <unk> as the amount of contracted future revenue.
Gross profit in the quarter was $10 $9 million, representing a gross margin of 92%.
And compared to $5 $8 million or 87% in the prior year period.
R&D expense for the first quarter was $8 2 million or 17% of revenue compared to $6 $3 million in the prior year period.
The increase was primarily driven by additional head count in our full R&D centers and payroll expense as we continue to invest in developing new and improved product offerings.
Sales and marketing expense for the first quarter was $3 $6 million or 31% of revenue compared to $2 $4 million in the year ago period, we continue to invest in sales and marketing as we work to continue to drive awareness of the benefits of our solution in the market and expand out.
Sales and application Engineering force and marketing efforts to harvest the significant potential in front of us.
G&A expense for the first quarter was $3 $2 million or 27% of revenue compared to $3 7 million in the year ago period.
G&A reflects an increase in people and infrastructure related to expenses associated with our transition to being a public company.
Operating loss for the first quarter was $6 $6 million or 56% of revenue compared to a loss of $6 $4 million in the year ago period.
non-GAAP operating loss was $4 2 million or 36% of revenue compared to a loss of $5 $8 million in the year ago period.
Net loss for the quarter was $6 $8 million or net loss per share basic and diluted of 'twenty to 'twenty two cents.
non-GAAP net loss for the quarter was $4 million or net loss per share basic and diluted of 14th since.
Based on approximately 31 6 million weighted average diluted shares outstanding.
As a reminder, our IPO lockup expired on April 22022.
When the lockup expired former employees current employees and all the stockholders held approximately nine 8 million shares which are no longer subject to the lockup and can be freely sold subject to normal restrictions such as having material nonpublic information or MPI.
Additionally, current and former employees and directors held approximately $8 3 million shares when the lockup expired.
The subject to outstanding options or reserve for future issuance pursuant.
She went to restricted stock unit grants as part of our employee incentive programs.
These shares assuming that satisfied the various best in conditions can also be sold subject to normal restrictions.
Turning to the balance sheet and cash flow, we ended the quarter with $82 $2 million in cash.
Flow used in operations was $1 million in the quarter, while free cash flow, which includes capital expenditure was negative $1 5 million.
Dollars.
I would now like turn to the outlook for the second quarter and full year 2022.
For the second quarter, we expect ACB, plus trailing 12 month royalties of 49 point volume to $51.5 million.
Revenue of 11.5 to 14, but $5 million with non-GAAP operating loss margin of 19, 4% to 34, 4%.
And non-GAAP free cash flow margin of negative 29, 4% to negative 44, 4%.
For the full year.
We expect a C V plus trailing 12 month royalties, all 51, 6% to $55 $6 million.
And revenue of $48 million to $52 million, representing an increase from the prior guidance of $47 million to $51 million.
non-GAAP operating loss margin of 24, 9% to 39.9%.
Similar to prior guidance.
non-GAAP operating loss margin of 25, 6% to 46%.
The impact of wage inflation on our operating expenses.
And non-GAAP free cash flow margin of negative 10, 5% to negative 25, 5% similar to prior guidance of negative 10, 9% to negative 25, 49%.
With that we'll open up the call for questions I would feel quite tough.
Thank you.
At this time well be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first question is from Matt Ramsey with Cowen. Please go ahead.
Hey, guys. This is Josh buchalter on behalf of Matt. Thank you for taking my questions and congrats on the results.
First thing I wanted to ask about was that guidance calls for a sequential decline of ATB, but kind of talk much royalty revenue.
You saw that you maintained the full year guidance, but I was wondering you know what would normal normal seasonality look like and was there any impact in the short term.
Related to your China shut downs, whether a contract signed that customers or royalty shipments. Thank you.
Yeah, Hi.
I Wonder it's Nick here.
It's a great question I mean, you already know because we've spoken to many times, but we have a headwind in Q2, which is already sort of built into our guidance, but just everybody else knows who's not familiar with this but it was a very substantial deal with high silicon.
May of 2019 and dates and this month.
That's great. So that's sort of a headwind of around $3 $3 billion in Q2.
That's not.
That's not something new news, but it is a headwind nevertheless, the the other point.
Which is the slightly decline in ACB guidance for Q2 plus royalties.
It's two things one is.
As you know, we do have a little bit of seasonality, where the IPD business.
And generally I'll sort of bookings as well.
And sometimes we can end up with a big deal folding into the end of one quarter or the beginning of another quarter. We are seeing a few Chinese deals for example, pulling them out of the end of June and the beginning of July .
And that creates a incident ACB.
Picks back up again in the next quarter, which is why you're seeing the full year.
Moving.
The second.
Issue.
Yeah.
<unk> is the TTM I'll call it ATB plus P. T M O M.
We are seeing supply chain constraints I think our customers know about obviously setting up customers.
This is everything from sort.
Five okay.
Hum capacity generally found that capacity.
Things like double gases, which are constrained by Russia.
I'm not producing our customer's ability to ship volumes, then puts a dent a.
MIT royalties looking at impact longer term royalties, but it doesn't impact with them.
So it give us.
Our folks in answer to the question.
Yeah that was perfect. Thank you I appreciate all the color there.
And then for my follow up all the record earnings even in the past several we've heard about.
Why constraints impacting auto units that said, there's going to be an improving mix of premium and ftes, which come with associated increase in semiconductor content. I was wondering if you could help us parse out.
This net exposure from both the mix shift to higher semi content versus lower overall unit and how this result, how this impacts your overall near term results, but more importantly long term.
Given the increased complexity of vessels that are going into vehicles. Thank you.
Yeah I mean, this is Charlie I'll I'll take that one.
So the automotive.
Business continues to be robust.
We're not seeing any slowdowns in the design cycles.
There are more members of the or more participating companies of the automotive ecosystem there are designing associates.
These are increasingly complex so that all favors.
Our terrorists as far as we can see.
I'll be the only sort of headwinds that could arise is that the the semiconductor manufacturing capacity constraints could impact our royalties, but people are building fabs that are pretty pretty robust rate and.
We think that there will be.
The constraints in the semiconductor manufacturing are gonna be over at some point, we don't know exactly when but.
It could be second half of this year it could be early next year, but.
Theres just a lot of a lot of very interesting design activity, that's taking place in the automotive changes.
So one of the one.
One of the things that look, particularly promising.
I should also add that Oh you were.
We're going to see an increase in military spending.
And that May also translate into additional associated starts.
Yeah, just one one.
One additional comment to make.
On the automotive side, almost kind of more of a longer term you.
You may remember that the.
We published some data.
All the data.
Talk exactly about life, you'll you're referencing but which is the number of S. M C.
Vic.
It's growing from around so the three to four in 2020 up to the low twenty's something around 23.
Perfect.
Listen sports of L. Two plus by 2026.
Our bodies exactly.
The issue that you're referencing that but that's more of a longer term trend it doesn't really make a massive.
Different from sort of course Dakota.
Understood. Thank you I'll hop back in the queue.
Thank you. Our next question is from Mark the Packers with Jefferies. Please go ahead.
Yeah.
Hey, Thanks for taking my question.
I don't know if.
Charlie or Nick.
You you referenced.
Meyer compensation.
Expenses.
Just in.
New product development, and and I guess can you can you talk about.
How that that if it's manifesting ASO and.
Your your customers' willingness or eagerness to.
To reach to you guys too to help potentially offset that that same challenge that they may be having thank you.
So let me stop there.
Okay.
Let me take the first half and then I'll pass over to Charlie for the so the more commercial industrial sort of pop out in the second part of your question.
Mark.
I mean in general.
I'd be surprised to hear that.
We're seeing primary and secondary.
Inflation across which is 75% about about opex roughly is its people.
And another.
Another significant portion is services and services is basically people and that's happening in U S Europe , and Asia Pacific, particularly China.
You know what the wage inflation rates are running out but they're pretty.
They're pretty high so we're trying to tighten up as much as possible, but there is without question sort of upward pressure, but you were saying.
As far as the.
It's not just R&D it's.
Accountant to pay more bullish paid more marketing people paid more.
And it's more difficult you have to compete harder to get good people.
As far as the willingness of our customers Great question, William who our customers to do business with us and whether they want us to share the pain.
Bye.
Some sort of cost reduction I would guess that's a really that's a split down the the.
The wheelhouse of Charlie.
Yeah, Yeah, we're not seeing any I wouldn't say that we're seeing a particular margin pressures of our product.
Our products generate a lot of value they save customers a lot of money.
And so we're not seeing.
We don't see price pressure or margin pressure on our products at this time.
So thanks for that and I.
I guess I was tackling this from the standpoint of.
Hey.
Seem to me like.
If your customers are seeing similar wage pressures than you know given the prices up your your your.
License is that it actually may make it easier for your customers to make a decision if they're in a make or buy decision that they there.
Seeing the wage pressures in labor.
Shortages, yeah. They may skew more often and I was wondering if that was manifesting.
In your pipeline or not.
I think I think that's that's absolutely correct.
The fact that our customers are also having difficulty.
Finding some oh skilled labor labor is expensive for them as well it basically means that the automation is something that.
He is going to get.
Very good reception.
Both our near term medium term and long term.
Does expand the opportunity for a terrorist IP product adoption versus internal solutions.
Got you. Thank you.
Thank you.
Next question is from hands most men with Rosenblatt Securities. Please go ahead.
Yeah. Thank you congratulations guys good execution.
Just a question on.
On the royalty and the headwind, but what end market is driving that is that wireless.
If there is a headwind.
So yeah.
Yeah, I mean, I don't know Nick if you want to take this or whether you take it but.
Basically the the smartphone royalties have been declining.
And the automotive royalties have been rising right.
So.
As sort of the automotive adoption.
Place and more of the existing designs and make it into cars and get shipped billed volume.
That will lead to a rise of Oh four of additional royalty revenue. So we think on a long term basis, we feel pretty confident.
Uh huh.
In a royalty stream.
As the automotive Oh royalties.
Over from the smartphone royalties and ultimately there will be some of the mixed use learning designs, which are quite numerous.
Recently will will actually reach production and start generating volume.
Yeah, I mean, you're exactly right that there are other actually big rising stars in our and our royalty stream.
One is consumer.
Interestingly the.
The other is more sort of.
Industrial.
And those are sort of growing very nicely.
High Silicon.
We can actually put a name to it.
The mobility side.
I still don't decline to zero, but it is getting close but it is it is a decline quarter to quarter over time.
But for sure automotive remains the mainstay.
We're in a.
35, plus customers 60 plus designs.
Have a good spread across all the different players.
Players that the laws, whether it be stomach not throw.
Or tier ones or Oems, we have a good spread across all of them are new cros.
It goes.
As well so it's it's a it's a nice position to be in.
But we do have broad brush broad based.
Royalty stream coming in from other sites as well.
That's very helpful and just as a as a follow up.
Question on the BMW <unk>.
When the neural network accelerator project can you comment on.
Who is the competition in that in that project or projects that are similar to that are those in house efforts or are there. Other players that are kind of coming out there that are challenging you guys with this IP.
Yeah.
Yeah, I mean the.
We kind of have to two classes of competitors, obviously wanted to harm and I don't know if there's a competitor on this particular.
Particular.
The situation.
And the other one is internal right.
But I think integral internal interconnect is becoming increasingly.
Expensive and difficult to develop because of the shortage of.
Interconnect engineers right so I.
I think that the.
Our main challenge in these kinds of sales cycles is to prove out there were suitable for the customer acquisition for our.
Applications, where they're really trying to do.
So oh, so that's really the main Uh huh.
Her though that we have to we have to get over for these kinds of design.
I don't think.
The competitive situation out there whether it's on the BMW deal or some other place it.
Is.
It's pretty favorable.
Okay.
Okay, great. Thanks.
Thank you <unk>.
Question is from English see lots of oil with BMO. Please go ahead.
Alright. Thank you very much a question on Nick you mentioned seasonality for HCV and TTM royalties could you just explain how we should be thinking about it on a go forward basis, and then the second kind of related question.
You you talked about China deals moving from end of quarter. Two the other is that largely because of the shutdowns that.
Very well publicized shutdowns in China or is there something else going on there.
And you had a very quick follow up after that Nick sorry.
Well, Hello, Hi, great to speak with you again.
Well, but yeah in terms of the.
The China situation or biotech see I'll take them in order the seasonality question first.
Generally speaking as you think.
So the ACB pumps P. P M a.
Is it kind of designed to be something which is relatively steady.
It does move around such as.
So the point in time revenue does.
Part of the reason we adopted it is one of our metrics.
It does however, it.
It can suffer from deals Ah <expletive> large license is shifting from being signed.
Actually the software delivered.
By the end of the last week of a quarter or the first week of the second quarter and that's usually outside of our control, but it's totally outside of our control because it's customer driven.
That's great on the accident, we provided on the backs of the Oscar de why then it goes on day, one so the seasonality.
Is still fairly steady.
Yeah, It's always ACB plus chemo is it always gets a bit of a boost in Q4, because that's when we have.
A particularly strong set of bookings, but of course, they get spread over the.
The subsequent years.
Depending on the contract.
The China question is it's slightly unique.
Yeah. It is it is totally a COVID-19 issue.
Because the epicenter of our customers. These are also the epicenter of the Covid shutdown.
Cut down and that has been quite severe.
The reaction by the Chinese authorities to this is.
They really want to stamp it out and you probably know it's quite difficult people get to work and collaborate and.
So we have no doubt.
Deals have not gone away, but just maybe take that literally.
The situations, where people cannot get walks us to put that chop them on a license.
Basic is that because in China, the choppers everything you'd see probably by the situation.
So anyway.
But that's what we have to really.
Really didn't move in trying to around got kind of an end and.
Oh, sorry go ahead.
To add some color to the color.
The revenue of course is much more smooth the GAAP revenue is much more smooth when its a side, but it's and interconnect them a sale.
Because that spread evenly over the number of days in the license side, if its three years the three times 365 days.
Spread so you automatically get that so it doesn't have the same sort of lumps unless it's a point in time revenue, which is more of a an IPD software.
Bill So you had another question.
Actually I'm just.
And I'm glad you answer that because the seasonality comment did surprise me because the whole reason, which made sense to not focus on bookings and go to <unk> and <unk> because bookings do tend to be lumpy, but your explanation makes sense, we should be thinking of it more as a <unk>.
Seasonality then through the course of the year correct is that does that.
Exactly right exactly right. Okay, and then my quick follow up was the royalty revenues would be are being impacted by the supply chain being gummed up but do you feel pretty comfortable with the anvil.
Guide that it should be.
It's a small number but you feel pretty comfortable that that situation should be alleviated by then.
Yeah, I mean, we're not putting.
Putting ourselves as experts on the silicon supply chain a little bit.
Much much smarter people than me to give that sort of analysis, but the the general sense.
We do follow what's going on as we speak to our customers and the foundries.
In a sense generally is it's probably a 2023.
Solution.
To get back completely ungoverned.
But we are we are still.
We're still signing contracts older.
The interconnect.
Contracts still have royalties.
The royalty rates are generally sort of the <unk>.
So increasing so theres, nothing changing now and out or.
Our model from that perspective.
It won't be variable right now is.
The units out from our customers, which is.
I'm actually if you look at the Q first quarter it was pretty strong.
But you know we're a little cautious on how that's going to play out in the next couple of quarters.
As prudent yet prudently so Nick thank you.
Yes.
Okay.
Yeah.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from Gus Richard with Northland. Please go ahead.
Yeah. Thanks for taking the question.
I'm seeing Qualcomm make good progress in getting in the automotive market and I know they have their own network on a chip.
Alrighty.
And I'm just wondering is.
Qualcomm displacing an EV OEM designs that you would expect or having any other impact on any of the design activity that youre working on.
Yeah I mean.
Qualcomm is a very nimble.
Our organization with the.
Was there.
Internal network on chip technology so.
So there are definitely a worthy competitor.
In the automotive market.
As Nick mentioned.
And our projections is that there's going to be.
23 of those fees and you know in every car.
Electrification.
Asia, and the automated driving and SKU consolidation unfolds until qualcomm's going to capture some of those but.
The existing players such as mobile ly.
B Bosch and others.
<unk> be able to defend their turf and so qualcomm will pay their share but.
They're not they're unlikely to drive other players out of the market.
In the foreseeable future right. So.
They they'll get their share, but I think the impact on our terrorists.
It's probably not going to be major given how many <unk> there are per vehicle.
Got it that's very helpful and then.
Turning to China.
There's the arms situation, which I'm curious if that's impacting.
Potential customers in China in terms of their choice.
Well.
Interconnect and also as China pulls away from.
And going to self sufficiency.
Are there any EDA players rising there that could be a challenge.
<unk>.
It's too early to know about sanctions, but.
Any thoughts along sort of those dynamics.
Yes, so I mean.
We're not I would not classify I'm curious if the EDA company, I mean, where where our semiconductor IP company.
The technology that we have is quite complex.
And where we're not seeing any alternatives in the market.
It would be indigenously coming from from the China market. So.
We're continuing to see robust activity in China with a caveat that Nick mentioned, it which is customers, particularly in Shanghai can get access to their chops to.
Validate probably with some contracts, but that's a.
Temporary a temporary effect. So we're not seeing anything right now that will be coming from China that would be threatening the IP position in in the system IP space.
Hmm.
Got it.
Helpful and sorry for Mischaracterizing your business.
Oh, Yeah, yeah yeah.
Yeah, Yeah, Yeah, I mean.
Where were you know.
We have lots of software of.
That allow people, who make up our IP work.
But.
The value of over there get it actually from us helping them get the chip out and actually be in the chip and being the communication part.
Our IP being communications part of the chip.
Right totally understood.
That's it for me thanks.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session.
And I would like to turn the call back to Chuck.
Charlie Johnny.
Closing remarks.
Yes.
So you know.
This is an exciting time to be Doctor just IP.
And we look forward to continue our momentum in the years ahead.
Abating all of you in the quarters to come.
Thank you for joining our call today and for your interest in <unk>. Thank.
Thank you very much.
Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.