Q4 2022 Arteris Inc Earnings Call

Speaker 1: whiz

Speaker 2: Good afternoon everybody and welcome to Altera's fourth quarter and full year 2022 earnings call. Please note this call is being recorded and simultaneously webcast. All material contained in the webcast is sole property and copyright of Altera Incorporated with all rates reserved.

Speaker 2: For opening remarks and introductions, I will now turn the call over to Erika Manion of Sapphire Investor Relations. Please go ahead. Erika Manion, Sapphire Investor Relations, USA

Speaker 3: Thank you and good afternoon. With me today from Otero are Charlie Janick, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer.

Speaker 3: Charlie will begin with a brief review of the business results for the fourth quarter and full year ended December 31, 2022.

Speaker 3: Nick will review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter and full year of 2023. We will then open the call for questions.

Speaker 3: 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 materially differ from those anticipated and you should not place undue reliance on forward-looking statements.

Speaker 3: Additional information regarding these risks, uncertainties, and factors that could cause results to differ appear in the press release our terrorists issued today and in the documents and reports filed by our terrorists from time to time with the Securities and Exchange Commission.

Speaker 3: 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 US GAAP.

Speaker 3: The non-GAAP measures are presented as we believe that they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance.

Speaker 3: These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with US GAAP.

Speaker 3: A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended December 31, 2022. In addition, for a definition of certain of the key performance indicators used in this presentation such as annual contract value, confirmed design starts, and the

Speaker 3: active customers and remaining performance obligations, please see the press release for the quarter ended December 31, 2022. Listeners who do not have a copy of the press release for the quarter ended December 31, 2022, may obtain a copy by visiting the investor relations section of the company's website. Now, I will turn the call over to Charlie.

Speaker 4: Thank you, Erica, and thanks to everyone for joining us on the call this afternoon.

Speaker 4: We're excited to report a strong finish to 2022 with annual contract value plus trailing 12-month royalties of $52.4 million, up 22% year-over-year, when adjusted to exclude high silicon and DJI as discussed in previous calls.

Speaker 4: We continue our growth in 2022 illustrated by adding 38 active customers.

Speaker 4: and reaching 82 design stars during the year, and over 3 billion systems shipped with SoCs connected by our TerraSystem IP Synth Inception.

Speaker 4: We continued our progress in automotive semiconductor electronics by closing eight automotive customer licenses in 2022.

Speaker 4: Demonstrating the continued demand for our solutions, we had a total of 24 confirmed SOC project design starts in the fourth quarter.

Speaker 4: We also added 14 new customers in the quarter, contributing to the 20% year-to-year increase in customers deploying our Terrace IP.

Speaker 4: 2022 deals were driven by strong demand for our tourist products across all of our core markets and led in particular by automotive and consumer electronics, followed by enterprise computing, industrial, and communication applications.

Speaker 4: In Q4, we also continued to see our Terrace technology sales to automotive OEMs, including in China, where our Terrace IP was licensed for next generation electric vehicle design.

Speaker 4: Besides OEMs, we also saw strong automotive momentum with Pier 1s and numerous semiconductor companies.

Speaker 4: For example, Telechip licensed Artarius IP in the fourth quarter for advanced automotive solutions.

Speaker 4: These solutions help to ensure security requirements are met when designing telechips, new business area solutions such as Advanced Driver Assistance Systems, ADAS, and Microcontroller Units, and more.

Speaker 4: Advanced SOCs require best-in-class network-on-chip technology for low power and safe connectivity, and we're excited that the Altera's products continue to be the leading choice for high-performance, innovative solutions in the advanced SOC automotive markets.

Speaker 4: Besides automotive, other applications are also getting more sophisticated for growing AI and machine learning electronics, including smart edge devices.

Speaker 4: The advanced SOCs that power them typically use ARM or RISC-V processor IP and tend to increasingly require our Terrace Network-on-chip interconnect IP for SOC connectivity.

Speaker 4: To that end, Arterius and Sci-5 announced a partnership to accelerate RISC-V SoC designs for edge applications to speed up electronics product innovation for consumer electronics and industrial markets.

Speaker 4: Turning to our product portfolio, we are very excited about our new FlexNOC 5 innovations and the 74 acquisition.

Speaker 4: Over the last several years, a semiconductor manufacturing process technology went beyond 17 nanometer with many new SOC designs starting at 5 nanometer and increased 3 nanometer ramp up. The associated physical effects

Speaker 4: have started to impact how engineers design SOCs by causing physical layout-driven network-on-chip connectivity iterations which have a growing impact on project schedules.

Speaker 4: To address this growing challenge our customers face, we announce FlexNOC 5 physically aware network on-chip IP with unique and patented technology.

Speaker 4: This fifth generation of our core interconnect technology provides customers with up to five times faster physical convergence over manually driven physical iterations for new and derivative designs across automotive, communications, consumer electronics, enterprise computing, and industrial applications. Continuing our efforts

Speaker 4: to expand the scope of IP and SoC solutions, in the fourth quarter we acquired Semifore, a leader in hardware-software interface automation providing register management technology.

Speaker 4: Semi4 is used by customers to effectively design, verify, document, and help in the validation of the hardware-software integration that is essential to every SoC and is used by leading semiconductor and system companies across automotive, consumer electronics, communication, enterprise computing, and other applications.

Speaker 4: The addition of Semifore complements both our Magilum IP deployment automation and our network on-chip IP and expands our SoC solutions by providing a critical SoC integration layer which in turn allows customers to accelerate hardware, software development and convergence.

Speaker 4: With the new FlexNOC 5 innovations and semi-four acquisition, we expect our customers to be able to accelerate their SoC designs.

Speaker 4: We are physically aware of IP connectivity and to better integrate SoC hardware and software layers.

Speaker 4: improving the overall SOC economics while reducing project schedules and risks of costly redesign.

Speaker 4: As previously discussed, we are seeing shorter macroeconomic uncertainties and global recessionary impacts, particularly in the first half of 2023.

Speaker 4: We're also seeing headwinds from the tightening U.S.-BIS regulations with respect to U.S.-China trade."

Speaker 4: However, we believe that Artelius is well positioned to continue to make progress even in this challenging economic environment as our customers innovate in areas such as automotive, consumer electronics, and machine learning across all applications driving the need for use of commercial system IP.

Speaker 4: With that, I'll turn it over to Nick to discuss our financial results in more detail. Thank you Charlie and good afternoon everyone.

Speaker 5: As I review our fourth quarter and full year results today, please note that I will be referring to non-GAAT metrics.

Speaker 5: A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website.

Speaker 5: I want to start by summarizing our key results for the fourth quarter. The total revenue for the fourth quarter was 11.2 million.

Speaker 5: At the end of the fourth quarter ACB plus trailing 12 month royalties and other revenue was $52.4 million up 22% year over year when adjusted to exclude high select and DJI as Charlie mentioned.linear.

Speaker 5: $10.1 million representing a gross margin of 90%. non-GAAP gross profit for the quarter was $10.2 million representing a gross margin of 91%.

Speaker 5: Total operating expense for the fourth quarter was 19.2 million dollars compared to 17.6 million dollars in the prior year period. Long gap operating expense for the quarter was 16.0 million dollars compared to 13.3 million dollars in the prior year period. The increase was primarily driven by a combination of...

Speaker 5: investment in sales and marketing to drive products awareness and strong engagement with customers and strategic partners Additionally, we continue to invest in certain next generation products while significantly driving operating leverage in G&A expense.

Speaker 5: Operating loss for the fourth quarter was $9.1 million compared to a loss of $7.3 million in the year-ago period.

Speaker 5: non-GAAP operating loss was $5.8 million or 51.8%.

Speaker 5: compared to a loss of $2.8 million in the year-ago period.

Speaker 5: Net loss for the quarter was $7.2 million for diluted net loss per share of 21 cents.

Speaker 5: longer net loss for the course that was four million dollars or diluted net loss per share of 12 cents.

Speaker 5: based on approximately 33.6 million weighted average of which we are really zo Lobby that affects creat lending facilities in our area

Speaker 5: So does the balance sheet and cash flow. We ended the quarter with $72.6 million in cash, equivalents and investments.

Speaker 5: Cash flow used in operations was approximately $400,000 for the quarter, while free cash flow, which includes capital expenditure, was approximately negative $800,000.

Speaker 5: or 7.1%. Moving on to our annual results.

Speaker 5: Total revenue for 2022 was $50.4 million, up 33% year over year, reflecting strong growth across IP licensing and royalty revenue.

Speaker 5: Gross profit for 2022 was $46.1 million representing gross margin of 92%. Total operating expenses were $75 million compared to $55.9 million in the year ago period.

Speaker 5: Non-gap operating expenses were $62.8 million compared to $49.9 million in a year ago period. The increase was primarily due to the incremental costs expected of a public company.

Speaker 5: Our breaking loss was $28.9 million, increasing from a loss of $21.8 million in the year-ago period.

Speaker 5: non-GAAP operating loss was $16.2 million or 52.1%, increasing from a loss of $15.5 million in the year-ago period.

Speaker 5: Our operating losses are in part derived from our subscription-based ratable revenue recognition, which defers a portion of revenue. We define RPO, or its performance obligations, as the amount of contracted future revenue. RPO was $57.7 million as of December 31, 2022.

Speaker 5: Net loss in 2022 was $27.4 million or net loss per share, basic and deleted of 84 cents.

Speaker 5: non-GAAP net loss was $14.7 million for net loss per share, basic and diluted of 45 cents based on approximately 32.6 million weighted average shares outstanding.

Speaker 5: Cash flow used in operations was $6.8 million in 2022, while free cash flow, which includes capital expenditure, was negative $7.8 million or 15.5%.

Speaker 5: which was better than previously guided. Partly it was as a result of a 2.5 million favorable timing of cash received early from customers.

Speaker 5: I'd now like to turn to our outlook for the first quarter and the full year 2023.

Speaker 5: For the first quarter, we expect ACB plus 12 months royalties of $51.5 million to $55.5 million.

Speaker 5: and revenue of $11 million to $13 million.

Speaker 5: with non-gap operating loss margin of 55% to 75%.

Speaker 5: and non-gap pre-cash flow margin of negative 56.7% to negative 81.7%

Speaker 5: partly resulting from the $2.5 million early payment from customers in the fourth quarter of 2022 that I mentioned earlier.

Speaker 5: For the full year, we expect revenue of $56 million to $60 million.

Speaker 5: ACV plus trailing government's wealth is to exit 2023 at $60.4 million to $65.4 million.

Speaker 5: non-gap operating loss margin of 28.5% to 43.5%

Speaker 5: and non-gap pre-cash flow margin of negative 9.7% to negative 19.7% reflecting the concentration of negative pre-cash flow into the first quarter.

Speaker 5: Finally, I would draw your attention to the shelf registration statements that be filed the DSEC in November for a maximum aggregate operating price of $150 million, including a prospective supplement from ATM or ACHOMARCAT offering of up to $50 million.

Speaker 5: We have not activated the ATM at this stage and have no intention to do so at the current stop price levels. With that, I will turn the call over to the operator and open up for questions.

Speaker 2: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker 4: So thank you for your interest and time in our chairs. We look forward to meeting with some of you at the upcoming investor conferences. And we are participating in the next couple of months. And we look forward to updating all of you on our business progress in the quarters to come.

Speaker 2: Please, looking forward to your questions. Our first question is from Hans Moisesen with Roosevelt Securities. Please proceed. Thank you for taking the question. This is McClain on for Hans. Thank you for taking the question.

Speaker 6: Could you please provide the mix of licensing engagements in the quarter between automotive, communications, machine learning, and etc. and I had a follow-up as well. Thank you.

Speaker 7: Nick, do you want to take this one or do you want me to take it?

Speaker 7: Yeah. So.

Speaker 5: So automotive is about 20% roughly? I'm sorry, I was on mute. I'm sorry.

Speaker 4: But carry on, you might as well finish. Yeah, so automotive is about 20% roughly. Consumer roughly 25%.

Speaker 4: Enterprise is probably something like 15 and then the rest of it and then the realties are somewhere around 8%.

Speaker 6: Okay, thank you, that's very helpful. And then just lastly, if you could just expand on the general trend for the deals.

Speaker 4: Overall, that would be helpful. Yeah, so automotive continues to be a strength. We've added a number of automotive customers for the quarter and for the year. The automotive royalties are going nicely.

We are also very excited about our progress in machine learning. There are some new exciting applications for machine learning ASICs that are coming up including ASICs for the chat GPT large language models. And we are also continue to be excited by the unforeseen space applications. So there is a...

seems to be a lot of work going on in both terrestrial and orbital space applications.

Thank you for that color. That's helpful. Thank you. As a reminder to star one on your telephone Qpad, if you would like to ask a question. I would like to ask a question.

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

Yes, thanks for taking the question. At Kelly, I was wondering if you talked a little bit about semi-four and how that fits into your...

You know product portfolio is it just a separate standalone product where will there be some Integration with the existing product sweet

It basically is a very high performance, high capability register management product that is extremely fast and extremely high capacity. So we also have a gate register management capability in the Magellan product line. So initially, touch?!

We are going to sell them separately, side by side, but our plan is over the long term for the semi-four register managements to be increasingly integrated into the next generationonen products.

standalone, short-term, integrated in the medium term.

standalone short term integrated in the medium term. And then on the FlexNOC5

Is there an ASP uplift for this new product and how far along are you in showing that to customers?

Right. So the

The FlexNOC5 has essentially integrated physical awareness in it and that capability has a significant ASP uplift compared to the FlexNOC4 without physical awareness.

So we do anticipate a revenue upswing from that. And it is a product that we have so far delivered to several early access customers who are providing us feedback.

as they test a product in their projects.

So we're in an early access stage with the FlexNOC 5, but we have custom installations. And if I can just add some color to that, excellent answer. The impact to me, you talked about where it's at in terms of customer adoption.

there are some early access customers and we expect to see sort of revenue accretion in the second half from that.

There are some early access customers and we expect to see revenue accretion in the second half from that through the ASP uplift.

The last one for me, in your comments, you talked a little bit about the impact of the macro and headwinds from China and some of the trade issues. I was just wondering if you could expand on that a little bit and just kind of...

Give us a sense of how much of a headwind that's creating for you in the short term.

Yeah, so there are some different macro headwinds. There's also some macro tailwinds, but we continue to see the strength in our business and we see continued investment by customers in developing new applications for automated driving, car electrification.

edge and data center machine learning, and machine to machine communications based on 5G. So we are seeing a relatively steady number of design starts. And in general, our customers are investing in designing their way out of recession.

while there might be some tailwind on railties based on unit volumes that could be somewhat reduced. The design starts seems to be just fine as our customers turn to engineering new products.

Can I add some numerical colour to that as well, that answer? The headwinds you point out are very...

very true and very real and that is what we have been talking about. If you remember back to the Q3 earnings call, we referenced to the expected BIS related China headwinds in Q3, sorry, in FY23.

and we talked then about a 7% estimated impact on overall revenue for 23 as a result of that. We're not backing away from that thought, we also don't know yet because we haven't seen the full impact, there definitely is some and so that by itself is

It's sort of a $4 to $5 million impact on 23. And on top of that, we have something like a royalties impact negative of a million, which is just inability of our customers to ship volume.

And so those two together are sort of like a five to six million dollar impact, which it shouldn't be huge news at that point, but it's short term. So the royalties will recover as volumes recover and China will, the whole China situation will recover as well.

Got it. All right. Thank you. That's it for me. And our final question is from Ambrish Syrovastria with BMO. Please proceed. Hi, guys. This is Jamison on for Ambrish. Thanks for the question.

So I just have a couple brief ones. So I'm just kind of curious. You are talking about these macrohead wins. It seems like taking place for respecting at least the first half more so than the back half. So should we inspect the first half of 2023?

Should we expect a relatively flat growth versus 2022 and then an acceleration in the back half in terms of revenue?

Yes, that's exactly what we're saying. So it's not out of line with what other people in the semi-space broadly have been headlining recently. We don't know exactly when these things are going to improve, but you've hit them a long head.

Perfect. And then I just want to clarify one other thing is it's a gross margin. I think that you have mentioned in the past there's some seasonality in gross margins, especially in the first quarter where we are at least modeling a step down before a gradual increase to the year followed by a step down 1Q. Is that still something that we should be expecting or is that a

I guess is largely might not be the case anymore as you continue to grow your revenues. Thank you. Yeah, it's a great question. It's actually, the answer is unfortunately a mathematical one. The vast bulk of our customer revenue is related to our field application engineers.

and we obviously don't hire a file at those linearly with revenue numbers. So as you hit lower revenue quarters, then the same dollars of FAs are spread over a small amount of revenue and vice versa when you have high revenue. So typically you'll see higher gross margin in high revenue quarters and lower gross margin in.

in low revenue quarters. So, and as you rightly point out, Q1 is a relatively low revenue quarter, so the margins would typically be a little bit lower than normal.

It's plus minus 1%.

It's plus minus 1%. You can call it filter, it's plus minus 1%. Okay, wonderful. Thank you so much.

Our next question is from Ethan Pasnick with Callan. Please proceed. Yeah, hi. This is Ethan Pasnick on for Matt Ramsey. I had a question on how we should think about, I guess, use of cash and OpEx throughout the year. I think that's where you would point yourself in a certain way. Got toNS your opinion. Yeah. Sure.

We've seen a lot of companies tighten the belt, but how are you balancing, kind of staying prudent versus some of the growth initiatives that are currently underway? Yeah, so let me give you a little bit of color around OptX and free cash flow. So, let's start with...

But throughout 2022, we were continuing to increase our optics, particularly in engineering. The G&A has been flat now for about a year. Sales has been relatively flat. Marketing, we have added to in the fourth quarter, but we're not expecting that to grow at all going forward. So, so...

The real growth in OPEX into 2023 over and above the exit rate is really in next-gen products in R&D.

So, a particular Flex might have learned to marketing and to digital marketing, product marketing.

and sort of customer positioning marketing, which is all about increasing our positioning with customers. And part of the result we saw of that was the ARM engagement, the ARM partnership that we announced earlier on that we expect to have some not insubstantial upside even.

even as we speak and a more certain feature in the automotive space. You mentioned cash flow, so a lot of times people will ask, so how would you – I've asked the same question. How could you go from a negative eight to a negative eight?

to a negative eight guided on free cash flow. Part of that you have to take into account that we have this advanced payment from customers which we weren't expecting right at the death of 2022, which is around two and a half million. So the negative 7.8 that we actually reported for 2022, underlying was actually a negative 10.3, which is exactly in line with our Q3 guidance for the full year.

quarter which is you can see from the first quarter guidance which is approximately negative and we're looking at

and the rest of 2023, therefore, has gotten to be relatively flat in terms of free cash flow. Which puts us in a very good place, we think, to be a cash flow neutral during 2024, and then cash flow posted thereafter. Okay, I got it. Thank you very much.

detailed answer. I admittedly may have missed this in the beginning of the Q&A, but I was wondering if you could discuss the the full year outlook a little bit more in detail. Obviously, I'm aware that the team has significant visibility. But maybe parse out areas you're seeing downward pressure or

or if there are areas where maybe there's accelerated interest in terms of shipments and royalties. So I would be curious to hear that flushed out a little bit more. Yeah, I mean, as Nick pointed out, we're seeing a bit of a headwind from China, right? So it has sort of a modest impact on our growth rate there. On the other hand, we're seeing a bit of a headwind from China. So I would be curious to hear that.

to continue strength in automotive. There are some new exciting machine learning applications that are coming up that is creating excitement both in the customer base and that requires new silicon to be designed.

So I think there is offsetting tailwinds and headwinds. And so you have impact on consumer, strength in automotive, strength in machine learning.

And to your point on a question on royalties, yeah, for certain royalties in 2022 and in fact early 2023 are directly impacted by recessionary impacts because recessionary impacts directly impact, volumes are saying that from all semis.

that their unit shipments are down pretty much across the board and so that impacts directly our royalties. But of course because we designed in, the strength of our model is because we designed in, as those recessionary impacts recede then so do royalties accelerate. So we're expecting a...

the

You probably noticed that automotive is one area that does not seem to be suffering right now particularly. Still doing very well. And so our automotive royalties has now more than doubled in the last two years. So just giving you an idea of the scope of that increase and we're adding new deals all the time.

star one. This is a test.

There are no more questions at this time.

We can conclude today's conference. Thank you everybody for your participation. You made this connect your lives at this time and have a wonderful day.

Thank you everyone.

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and welcome to Altera's fourth quarter and full year 2022 earnings call. Please note this call is being recorded and simultaneously webcast. All material contained in the webcast is sole property and copyright of Altera Incorporated with all rates reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion.

of Sapphire Investor Relations. Please go ahead. Thank you and good afternoon. With me today from our terrorists are Charlie Janik, Chief Executive Officer and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the fourth quarter and full year ended December 31, 2022. Nick will review the financial results for the fourth quarter and full year followed by the company's outlook for the first quarter.

anticipated and you should not place undue reliance on board looking statements. Additional information regarding these risks and certain fees and factors that could cause results to differ appear in the press release or terrorist issue today and in the documents and reports filed by our terrorist from time to time with the Securities and Exchange Commission. Please note during this call we will cite certain non- GAAP measures including non-GAP and outlaw.

non-gap net loss per share and free cash flow, which are not measures prepared in accordance with US GAP. The non- GAAP measures are presented 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 isolation from as substitutes for or superior to financial measures prepared in accordance with US GAP. A reconciliation of these non- GAAP measures can be found in the press release for the quarter-end of December 31, 2022. In addition, for a definition of certain of the key performance indicators,

used in this presentation, such as annual contract value, confirmed design starts, active customers and remaining performance obligations, please see the press release for the quarter ended December 31, 2022. Listeners who do not have a copy of the press release for the quarter ended December 31, 2022 may obtain a copy by visiting the investor relations section of the company's website. Now I will 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 finish to 2022 with annual contract value plus trailing 12-month royalties agree to stay tied to 2021 THIS FOURTH Didn't

the continued demand for our solutions, we had a total of 24 confirmed SoC project design starts in the fourth quarter. We also added 14 new customers in the quarter, contributing to the 20% year-to-year increase in customers deploying our Terrace IP.

2022 deals were driven by strong demand for Arterios products across all of our core markets and led in particular by automotive and consumer electronics, followed by enterprise computing, industrial and communication applications. In Q4, we also continued to see Arterios technology sales to automotive OEMs, including in China, America and costs and we have really automated our investment technology to produce about 3.4 billion dollars for the Car

where Arterius IP was licensed for next generation electric vehicle designs. Besides OEMs, we also saw strong automotive momentum with Tier 1s and numerous semiconductor companies. For example, Bellachip licensed Arterius IP in the fourth quarter for advanced automotive solutions.

These solutions help to ensure security requirements are met when designing telechips, new business area solutions such as Advanced Driver Assistance Systems, ADAS, and Microcontroller Units, new 1999

Advanced SOCs require best-in-class network-on-chip technology for low power and safe connectivity, and we're excited that the Artarius products continue to be the leading choice for high-performance, innovative solutions in the advanced SOC automotive markets. Besides automotive, we're excited that the Artarius products continue to be the leading choice for high-performance, innovative solutions in the advanced SOC automotive markets.

Other applications are also getting more sophisticated for growing AI and machine learning electronics, including smart edge devices. The advanced SOCs that power them typically use ARM or RISC-V processor IP, and tend to increasingly require our Terrace network on-chip interconnect IP for SOC connectivity. To that end, our Terrace and PSY-5 announced a partnership to accelerate RISC-V SOC designs for edge applications to speed up electronics product innovation for consumer electronics and industrial markets. Turning to our product portfolio,

we are very excited about our new FlexNOC 5 innovations and the semi-floor acquisition. Over the last several years, a semiconductor manufacturing process technology went beyond 17 nanometer with many new SoC designs starting at 5 nanometer and increased 3 nanometer ramp-up. The associated physical effects have started to impact how engineers design SoCs by causing physical layout-driven network-on-chip connectivity iterations which have a growing impact on project schedules.

To address this growing challenge our customers face, we announced FlexNOC 5 physically aware network on-chip IP with unique and patented technology. This fifth generation of our core interconnect technology provides customers with up to five times faster physical convergence and faster physical convergence.

over manually driven physical iterations for new and derivative designs across automotive, communications, consumer electronics, enterprise computing, and industrial applications. Continuing our efforts to expand the scope of IP and SoC solutions, in the fourth quarter we acquired Semifore, a leader in hardware-software interface automation providing register management technology.

Semi4 is used by customers to effectively design, verify, document, and help in the validation of the hardware-software integration that is essential to every SoC and is used by leading semiconductor and system companies across automotive, consumer electronics, communication, enterprise computing, and other applications.

The addition of Semifore complements both our Madulum IP deployment automation and our network on-chip IP and expands our SoC solutions by providing a critical SoC integration layer, which in turn allows customers to accelerate hardware, software development and convergence.

With the new FlexNOX 5 innovations and semi-fore acquisition, we expect our customers to be able to accelerate their SOC designs. We are physically aware, IP connectivity, and to better integrate SOC hardware and software layers.

improving the overall SOC economics while reducing project schedules and risks of costly redesign. As previously discussed, we are seeing short-term macroeconomic uncertainties and global recessionary impacts, particularly in the first half of 2023.

We're also seeing headwinds from the tightening U.S. BIS regulations with respect to U.S.-China trade. However, we believe that our Terrace is well positioned to continue to make progress even in this challenging economic environment as our customers innovate in areas such as automotive, consumer electronics, and machine learning across all applications driving the need for use of commercial system IP. 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 our webinar 4th quarter and 4 year results today, please note that I will be referring to non-gap metrics. A reconciliation of Gap to Non-Gap Mantles is included in today's earnings release, which is available on our website. I want to start by summarising out key results for the fourth quarter. Total revenue for the fourth quarter was 11.2 million. At the end of the fourth quarter, ACB plus 1212 month royalties and other revenue was $52.4 million, up 22% year-ever year when adjusted to exclude.

high select and DJI as Charlie mentioned. Gross profit was $10.1 million representing a gross margin of 90%.

Non-gap gross profit for the quarter was $10.2 million representing a gross margin of 91%. Total operating expense for the fourth quarter was $19.2 million compared to $17.6 million in the prior year period. Non-gap operating expense for the quarter was $16.0 million.

compared to $13.3 million in the prior period. The increase was primarily driven by a combination of investment in sales and marketing to drive products awareness and starting engagement with customers.

and strategic partners. Additionally, we continue to invest in certain next-generation products while significantly driving operating leverage in G&A expense. Operating loss for the fourth quarter was $9.1 million compared to a loss of $7.3 million in the year-a-go period. Non-gap operating loss was $5.8 million or 51.8%.

compared to a loss of $2.8 million in the year-ago period. Net loss for the quarter was $7.2 million or diluted net loss per share of 21 cents. Non-gap net loss for the quarter was $4 million or diluted net loss per share of 12 cents.

based on approximately 33.6 million weighted average diluted shares outstanding. So the balance sheet and cash flow. We ended the quarter with $72.6 million in cash, cash equivalents, and investments.

Cashflow user operations was approximately $400,000 for the quarter, while free cashflow, which includes capital expenditure, was approximately negative $800,000 or 7.1%.

Moving on to our annual results. Total revenue for 2022 was $50.4 million, up 33% year-over-year, reflecting strong growth across IP licensing and royalty revenue. Gross profit for 2022 was $46.1 million, representing gross profit.

million dollars in a year ago period. The increase was primarily due to the incremental costs expected of a public company.

Operating loss was $28.9 million, increasing from a loss of $21.8 million in the year-ago period. non-GAAP operating loss was $16.2 million, or 50.1%, increasing from a loss of $15.5 million in the year-ago period. Our operating losses are in part derived from our subscription-based ratable revenue recognition,

dollars.

or net loss per share basic and diluted of 84 cents. non-GAAP net loss was $14.7 million or net loss per share basic and diluted of 45 cents based on approximately 32.6 million weighted average shares outstanding. Cash flow used in operations was $6.8 million in 2022 while free cash flow, which includes capital expenditure was negative 7.7.

of $51.5 million to $55.5 million and revenue of $11 million to $13 million with non-gap operating loss margin of 55% to 75% and non-gap free cash flow margin of negative $56.7% to negative $81.7% partly resulting from the $2.5 million.

early payment from customers in the fourth quarter of 2022 that I mentioned earlier. For the full year, we expect revenue of $56 million to $60 million. ACV plus trailing 12 month royalties to exit 2023 at $60.4 million to $65.4 million. Nongat operating loss margin at $60 million.

28.5% to 43.5% and non-gap free cash flow margin of negative 9.7% to negative 19.7% reflecting the concentration of negative free cash flow into the first quarter.

Finally, I would draw your attention to the Shell registration statement that we filed the DSEC in November for a maximum aggregate operating price of $150 million, including a prospective supplement from ATM or Appa Market offering of up to $50 million. We have not activated the ATM at the stage and have no intention to do so at the current stock price levels.

question from the queue and for participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. We will pause for one moment to pull for questions.

So thank you for your interest and time in our terrace. We look forward to meeting you, to meeting with some of you at the upcoming investor conferences. And we are participating next couple of months. And we look forward to updating all of you on our business progress in the course to come. Please looking forward to your questions. Our first question is from Hans Moes has been with us.

Nick, do you want to take this one or do you want me to take it?

Yeah, so so automotive is about 20. I'm sorry. I'm from the UK.

Yeah, so automotive is about 20% roughly.

Yeah, so automotive is about 20% roughly. Consumer roughly 25% enterprise is probably something like 15. And then the rest of it and then the realties are somewhere around 8%.

Okay, thank you. That's very helpful. And then just lastly, if you could just expand on the general trend for the deals.

Okay, thank you. That's very helpful. And then just lastly, if you could just expand on the general trend for the deals overall, that would be helpful.

So automotive continues to be a strength. We've added a number of automotive customers for the quarter and for the year. The automotive royalties are going nicely. We are also very excited about our progress in machine learning. There are some new exciting applications for machine learning ASICs that are coming up including ASICs for the CHAT GPT large language models. And we are also continue to be excited by the unforeseen space applications.

seems to be a lot of work going on in both terrestrial and orbital space applications. Thank you for that, Keller. That's helpful. Thank you. As a reminder to star one on your telephone keypad if you would like to ask a question.

Our next question is from Gus Richard with Northland. Please proceed. Yes, thanks for taking the question. It's time for me to talk a little bit about semi-four and how that fits into your...

in a product portfolio, is it just a separate standalone product or will there be some integration with the existing product suite? Michael Yes, so as you know, there is a – so what Semi4 does, it basically is a very high performance, high capability register management product that is extremely fast and extremely high capacity. So we also have a gate register management capability in the Magilent product line. So initially, we are going to –

sell them separately side by side, but our plan is over the long term for the semi-for register management to be increasingly integrated into the next generation of the generation, the Madgillum products. So it's a standalone short-term integrated in the medium term. ... and then on the QuickSkloc5 Euth!

Is there an ASP uplift for this new product and how far along are you in showing that to customers? Right. So, the

The FlexNOC 5 has essentially integrated physical awareness in it and that capability has a significant ASP uplift compared to the FlexNOC 4 without physical awareness. So we do anticipate a revenue upswing from that and it is a product that we have so far that is very much in favor to several early access customers who are providing us feedback.

on, you know, as they test a product in their projects. So we're in an early access stage with the FlexNOC 5, but we have customer installations. And if I can just add some color to that, if I can just add some color to that, Exxonanza. The impact to me talks about where it's at in terms of customer adoption. The awesome early access customers, and we expect to see.

So revenue accretion in the second half of the match. Through the ASP Outlift. Got it. The last one for me, you know, in your report comments, you talked a little bit about, you know, the impact of the macro and, you know, headwinds from China and some of the trade issues and I was just wondering if you could expand on that a little bit and just kind of give us a sense of how much of a headwind that's creating for you in the short term. So yeah, I mean there are some definite macro headwinds. There's also some macro tailwinds.

But we continue to see the strength in our business, and we see continued investment by customers in developing new applications for automated driving, car electrification, edge and data center machine learning, and machine to machine communications based on 5G. So we are seeing a relatively steady number of design starts.

and in general our customers are investing in designing their way out of recessions. So while there might be some tailwind on royalties based on unit volumes that could be somewhat reduced, the design start seems to be just fine as our customers turn to engineering new products. Can I add some numerical colour to that?

as well, that answer. The headwinds, you point out very, very, very true and very real, and that is what we are, have been talking about. But if you remember back to the Q3 earnings call, we referenced to the expected BIS related China headwinds in Q3, sorry, FY 23, and we talked then about a 7% change,

estimated impact on overall revenue for 23 as a result of that. We're not backing away from that thought. We also don't know yet because we haven't seen the full impact. There definitely is some and so that by itself is sort of a four to five million dollar impact on 23.

And on top of that, we have something like a royalties impact negative of a million, which is just inability of our customers to ship volume. And so those two together are sort of like a $5 to $6 million impact, which it shouldn't be huge news at that point, but it's short term. So the royalties will recover as volumes recover, and that whole China situation will recover as well.

Got it. All right. Thank you. That's it for me. And our final question is from Ambrish, Syrovastria with BMO. Please proceed. Hi, guys. This is Jamison on, from Ambrish. Thanks for the question. Thank you.

So I just have just a couple brief ones. So I'm just kind of curious, you are talking about these macro headwinds. It seems like taking place or affecting at least the first half more so than the back half. So should we expect, looking at the first half of 2023, should we expect a relatively flat growth versus 2022 and then an acceleration in the back half in terms of revenue? Yes, that's exactly what we're saying. So it's not out of line with what…

with what other people in the semi-space broadly have been headlining recently. We don't know exactly when these things are going to improve, but you hit them a long head. Perfect. And then I just want to clarify one other thing. It's a gross margin. I think that you have mentioned in the past there's some seasonality in gross margins, especially in the first quarter where we are at least modeling a step down before a gradual increase to the year followed by a step down 1q. Is that still something that we should be expecting?

So as you hit lower revenue quarters, then the same dollars of FAAs are spread over a small amount of revenue and vice versa when you have high revenue. So typically you'll see higher gross margin and high revenue quarters and lower gross margin.

in low revenue quarters. So, as you've right-upend out, Q1 is a role to be low revenue quarters. So the margin is would typically be a little bit lower than normal. But it's plus minus 1%, but you call it to quarter as plus minus 1%. Okay, wonderful. Thank you so much.

use of cash and op-ex throughout the year we've heard. Seeing a lot of companies kind of tighten the belt, but how are you balancing, you know, kind of staying prudent versus some of the kind of growth initiatives that are currently underway? Yeah, so let me give you a little bit of color around.

marketing we have added to in the fourth quarter but we're not expecting that to grow at all going forward. So the real any growth in OPEX into

2023 over and above the exit rate is really in next gen products in R&D. So particular FlexNock 5 that we've talked about, for example, which doesn't have a revenue impact until the second half, as you pointed out, and then it increases sequentially quarter over quarter after that as the higher SPs kick in. And of course we have the OpEx throughout the year.

And then we have some, we've invested quite heavily into marketing, into digital marketing, product marketing, and sort of customer positioning marketing, which is all about increasing our positioning with customers. And part of the result we saw that was the ARM engagement, the ARM partnership that we announced earlier on that we expect to have some not insubstantial upside even as we speak and then more so in the future in the automotive space.

And then you mentioned cash flow. So a lot of times people will ask, so how will you, I mean, I've asked some question. How can you go from a negative eight to a negative eight guided on pre-cashbo? Part of that, you have to take into account that we have this advance payment from customers which you weren't expecting right at the death of 2022, which is around two and a half million. So the negative 7.8, we actually reported for 2022 underlying was actually a negative 10.3, which is exactly in line with our Q3 guidance for the full.

we thank to the Cachelay Mutual during 2024 and then Cachelay posted thereafter.

Okay, got it. Thank you for that detailed answer. Admittedly, I may have missed this in the beginning of the Q&A, but I was wondering if you could…

discuss the the full year outlook a little bit more in detail. Obviously I'm aware that you know the team has significant visibility but but you know maybe kind of parse out areas you're seeing I get downward pressure or or if there are areas where maybe there's

Accelerating interest in terms of shipment and rail fees. So it would be curious to hear that flushed out a little bit more. Yeah, I mean, as Nick pointed out, we're seeing a bit of a headwind from China, right? So it says, sort of a modest impact on our growth rate there. On the other hand, don't use strengthen automotive. There's some new, exciting machine learning applications that are coming up.

on royalties. Yeah, for certain royalties in 2022, and in fact, early 2023, are directly impacted by recessionary impacts because recessionary impacts, directly impact. Volumes are saying that from all semis that their unit shipments are down, too much cost aboard.

and so that impacts directly our royalties. But of course, because we're designed in, strength of our model is because we're designed in, as those recessionary impacts recede, then so do royalties accelerate. So we're expecting some acceleration of royalties in the second half and significantly thereafter into 2024 and beyond. I would point out that royalties in automotive are still on a tear. You've probably noticed that automotive is one area that does not seem to be suffering right now particularly. Still doing very well. And so our automotive royalties.

has now more than doubled in the last two years. So just giving an idea of the scope of that increase and we're adding new deals all the time, new design ins. Understood, thank you very much. As a reminder, it is star one on your telephone keypad. If you would like to ask a question, we will just pause for a brief moment to poll for any final questions. Once again, it is star one. There are no more questions at this time. We can conclude today's conference.

Thank you everybody for your participation. You may disconnect your lines at this time and have a wonderful day. Thank you everyone.