Q1 2023 Arteris Inc Earnings Call
[music].
Good afternoon, everyone and welcome to the Ark terrorists first quarter 2023 earnings call.
Please note this call is being recorded and simultaneously webcast all.
All material contained in the webcast the sole property and copyright of our terrorists incorporated with all rights reserved for opening remarks, and introductions I will now turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.
Yeah.
Thank you and good afternoon with me today from our tariff.
Charlie Janick, 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, 2023 Nicola.
Nick will review the financial results for the first quarter, followed by the company's outlook for the second quarter and full year 2023.
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 differ materially from those anticipated and you should not place undue reliance on forward looking statements.
Additional information regarding these risks uncertainties and factors that could cause actual results to differ appear in the press release are terrorists issued today and in the documents and reports filed Bioterrorists from time to time with the Securities and Exchange Commission.
Please note during this call, we will say 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 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.
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 2023.
In addition.
For a definition of certain of the key performance indicators used in this presentation such as annual contract value.
Confirmed design start active.
Active customers and remaining performance obligations. Please see the press release for the quarter ended March 31 2023.
Listeners, who do not have a copy of the press release for the quarter ended March 31, 2023 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 joining us on the call. This afternoon.
We're excited to report a solid start to 2023 with annual contract value plus trailing 12 month royalties of $54 8 million.
Up 20% year over year, when adjusted to exclude high Silicon and D. G. I as discussed in previous calls and up 5% sequentially.
We continued our growth into 2023 with the addition of seven new customers and 22 confirmed design starts in the first quarter.
Deals in the first quarter were driven by strong demand for our terrorist products across our core market segments and led in particular by design wins in the automotive and enterprise computing.
Royalty revenue in the quarter was primarily driven by automotive followed by consumer electronic products.
An element of our tourist strategy is to service, both semiconductor and system companies.
This is continuing to yield positive results.
With the added focus on the broader automotive supply chain, including Oems and following last year's arm automotive partnership. We are pleased to report that in the year to date are terrorists have secured for OEM design wins, including three new car companies across the U S Europe and APAC.
These new relationships demonstrate our tourists ability to engage across the broader global automotive supply chain.
This is important.
As establishing direct relationships with auto manufacturers can create additional opportunities for those car companies to encourage their own supply chain to leverage our choice of technology as well.
Advanced <unk> require best in class network on chip technology for low power and save connectivity. So we remain excited there are terrorists products continued to be the leading choice for innovative solutions in the automotive vessels market.
AI and machine learning also continued to be strong growth drivers for our terrorists.
New advanced.
I electronics tend to require and benefit from network on chip IP in their Soc integration automation.
In the first quarter, our tourists closed numerous global AI and machine learning customer deals across various vertical markets driven by strong demand for our various technology.
One of those notable wins in the Americas was 10 started for enterprise computing applications.
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High performance computing and data center risk five so season triplets.
The 10, starting team extensively evaluated our terrorists and core cash coherent interconnect IP and selected for the next generation products, along with our flex knock non coherent interconnect IP.
This is an example of our terrorist ability to support a high end computing and the emerging risk five ecosystem.
Another design win in the quarter was the selection of our terrorists by AC glad and APAC based ASIC design House.
Our tariff system IP products will be deployed in ASIC lands AI chips for automotive enterprise computing and edge computing applications for consumer and industrial markets.
Another design win in the AI space was accelerated AI, a European provider of advanced solutions for edge computing with Arcturus products used to accelerate computer vision at the edge.
Our tourists was chosen for its ability to enable accelerate AI engineers to meet performance ultra low power and time to market objectives, and it's met its AI platform.
The emerging generative AI technology is opening another potential future obligation for I joist products well.
Promising generally they are it is quite computationally expensive with query costs over 10 times higher than heuristics search algorithms.
Or terrorist anticipates that there will be an increase in AI and machine learning hardware design activity in an effort to lower the computation costs of processing the large language models.
With our terrorists already designed.
150 different machine learning chips, the generative AI AC and accelerator activity presents another exciting potential future opportunity for our company.
Turning to our product portfolio, we are very excited about both our new flex knock five innovation and the semi for acquisition that we discussed last quarter.
Over the last several years of semiconductor manufacturing process nodes have progressed.
The associated physical effects have begun to impact how engineers designers, so CS, including causing multiple iterations of physical layout network on chip connectivity, which in turn impacts project schedules.
To address this growing challenge for customers in February we announced flex knock five physically awareness work on chip IP with unique and patented technology.
We are happy to report that we have delivered a feature complete early access version of flex knock five to multiple customers.
We anticipate being able to ship at full production release in second quarter 23, with a positive impact on our revenue and ACB growth forecasted in second half of 2023.
Expanding the alturas product portfolio in the first quarter, we announced the acquisition of semi for Alere.
Peter in hardware software interface technology the.
The addition of semi for complements our modular connectivity and register management technology, allowing our terrorists to provide a more comprehensive S. O C integration solution.
Together with our knock interconnect Ip's are tourists is now able to provide a complete solution, helping to increase chip design performance power efficiency and productivity, while improving the customers' overall Soc design economics.
From reducing product schedules to lowering the risk of costly redesigns.
Macroeconomic uncertainties in global recessionary concerns continue to create headwinds.
We also continued to be impacted by the U S. B I S regulations with respect to China U S trade.
As well as tightening credit conditions in the USA, which may affect our smaller startup customers.
We believe there are terrorists is well positioned to continue to make progress even in this challenging economic environment.
Customers.
In areas, such as automotive enterprise computing consumer electronics, and AI across all applications driving the need for increased use of commercial system IP.
With that.
I'll turn it over to Nick to discuss our financial results in more detail.
Yeah.
Thank you Charlie and good afternoon, everyone as I review, our first quarter results. Today. Please note all of their parents to non-GAAP metrics.
Installation 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 $13 $2 million.
12% year over year and 17% sequentially.
At the end of the first quarter ACD bus trailing 12 month royalties and other revenue was $54 8 million.
Dollars 20.
20% year over year, when adjusted to exclude high Silicon and Vijay as Charlie mentioned.
Gross profit in the quarter was $12 million, representing a gross margin of 91%.
non-GAAP gross profit in the quarter was $12 $1 million, representing a gross margin of nine 2%.
Total operating expense for the first quarter was $28 million compared to $17 $4 million and probably get periods.
non-GAAP operating expense in the quarter was $17 $7 million compared to $15 $1 million in the prior year period.
This increase was primarily driven by a combination of continued investments in next generation products.
Together with increased investment in sales and marketing to drive product awareness and strong engagement with customers and strategic partners.
Additionally, we have continued to achieve significant operating leverage in G&A expense.
Operating loss for the first quarter, it was $8 $8 million compared to an operating loss of $6 $6 million in the prior year period.
non-GAAP operating loss was $5 $6 million or 42%.
Compared to a loss.
$2 million in the prior year period.
Net loss for the quarter was 9.0 a million dollars or diluted net loss per share of 26 cents.
non-GAAP net loss in the quarter, it was like $8 million or diluted net loss per share of 17 cents based on approximately 34 6 million weighted average diluted shares outstanding.
Turning to the balance sheet and cash flow.
We ended the quarter with $63 $4 million in cash cash equivalents and investments.
Cash flow used in operations was approximately $8 $4 million in the quarter driven.
Led by the timing of payments from customers.
Which contributed to our stronger results in the fourth quarter of last year.
Free cash flow, which includes capital expenditure was approximately a negative $8 $5 million in line with our prior guidance.
As we discussed on prior calls.
Expectation is that free cash flow will normalize to break even over the remaining three quarters of 2023.
Taken as a whole.
I would now like to turn to our outlook for the second quarter and full year 2023.
For the second quarter, we expect ACB pumps trailing 12 month royalties of $33 5 million to $57 $5 million and.
Revenue of 13 million to $14 million.
With a non-GAAP operating loss margin of 7% to 57%.
And non-GAAP free cash flow margin of negative 26, 8% to negative 51, 8%.
For the full year guidance is unchanged.
We expect revenue of $56 million $60 million ACB.
ACB plus trailing 12 month royalties exit 'twenty to 'twenty $364 million to $65 $4 million.
non-GAAP operating loss margin of 21, 5% to 43, 5%.
non-GAAP free cash flow margin of negative nine point something percent to negative 19, 7%.
Reflecting the anticipated improvement from the first quarter.
Finally, I would draw your attention to the shelf registration statement, we filed with the FCC in November for a maximum aggregate offering price of $150 million, including a prospectus supplement or at the market or ATM offering of up to $50 million.
Pursuant to a sales agreement with Jefferies.
Since as mentioned in our last earnings call, we did not intend to sell any shares issuance to activate the ATM at this stage.
We have decided to terminate the sales agreements related to the ATM.
Following this termination I'm 50, Merlin believes will remain available under our S. Three.
We did not have any presence intention to offer securities pursuant to this registration statement.
With that I'll turn the call.
Operator.
<unk>.
Yeah.
Thank you well now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Information Tom when they can't your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star one.
One moment, please while we poll for questions.
Yeah.
Thank you. Our first question is from Gus Richard with Northland. Please proceed with your question.
Yeah. Thanks for taking my question.
Kelly can you talk a little bit about the customers you see poor flex not by then.
What uptake do you expect in the second half.
So.
The flex knock five has a number of interesting features but the main feature is integrated physical awareness.
And so the problem. We're trying to solve is that for these sub 16 nanometer processes you can now make a perfectly good.
Architecture.
That is very difficult to place and route and that leads to a bunch of iterations in the back end and it actually could even cause the customer to Miss a market window. So what we're trying to do is a lot of people to.
Measure the physical effects.
In the early part of the design cycles, so that essentially they can the customer can turnover of physically verified or physically estimated design to their to their place and route team right and so this raises obviously the E S P of off like stock substantially.
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Meaning for way.
The exact number I can give you yet.
But I think that we will see a significant uptick because of the flex knock a flex knock our average selling price increase and this is basically useful for pretty much any customer doing a design below 16 nanometer, which happens to represent most of our customer base.
Hey, guys. This is Nick.
Great question.
As always but.
Just a little bit of color to add to Charlie's excellent commentary.
The big impact on our two H a full fledged oxide.
Because it is a ratable product.
Hum.
Tonight.
Took the life is.
Two and half years on average.
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The the more pronounced impact will be on a C V plus G T Mo.
So we pick up the ACB.
But value of the contract.
Immediately but the revenue of course is spread out as well.
Overtime Xactly, if we land on the functional side contract in November for example will have one or two months worth of Oh about chips for your time.
So it makes sense.
Yes. It does absolutely that was super helpful. And then just.
Two quick questions given tightening credit standards, and you know bank selling left and right and.
Great things going on in China I was wondering if you could just talk about you know startup slash China activity and then I wanted to make sure I understand you know free.
Free cash flow.
You know by year end is that.
We'll expect it to be.
Breakeven or better.
So I'll take the first one and I like the second.
Second piece of it.
So.
So basically China is coming out of its COVID-19 Hum sort of slumber right. So there's a there's a headwind of the oh, the sort of the the trade war issues, but as we discussed earlier, we are we're kind of somewhat diversified against this.
Because significant percentage of our products are a French technology, which have different export restrictions in the U S restrictions, but China's coming out of the Covid Schlumberger. So.
You know I think we'll see actually you know toward the end of the year hopefully some improvement.
From a from the China business.
The credit cards here I think is real I think our capital is getting tight I think that doesn't that causes problems, where people who were short of capital and so this will impact some of our startup.
Our customers who are you know if you don't have 18 months of cash you're going to have to be very very careful and so there will be some headwinds with some of our smaller customers.
On the other hand as some of these are larger companies are tightening up their budgets outsourcing system. IP development is actually more is sort of more cost effective and so we think that we might also see some.
Some tailwind from from some large companies potentially are going outside for some of their system IP solutions.
So it's a mixed bag.
Got it thanks, and then the free cash flow and that's it for me.
And we are starting to see some some interesting developments of mood, but it's nothing that's a subtle seriously in the pipe that but some some interesting movements on outsourcing to commercial market, which we don't see a leader in them, but as far as the free cash flow like the.
When we are when we announced Q4.
Guidance for 2023.
We guide that last time that Q1 would would bear the brunt of the negative.
Free cash flow for the whole of 2023.
Part of that was because we have this this flip up any cash from Q1 by a couple of big customers into Q4 of last year. So the benefits of last year to the detriment to Q1 in part because Q1 is a ways.
A sort of a hangover quarter.
A few things that are.
Non linear.
In Opex, but I wouldn't go too detailed but it's similar for most companies and say coupons off on a sort of a heavy opex and the like the cash inflow from bookings.
[noise] taught us either so we we forecast late in the half and then a negative issue for Q1.
And that's exactly why we came in sight. So it was.
So on the money so to speak the the full year it was still but she forecasting just like we did for the.
The last time, we guided full year, but again eight in a hot button, which means the Qs two three and four will take them.
As a whole we're expecting to be neutral it won't be linear but it never is for US. We are our Q4 is always our strongest cash flow quarter, because that's when the Lee.
The largest slice about bookings.
So Q2, we were still guiding five unchanged Manhattan.
Oh consumption free cash flow.
Upstream will be neutral to slightly negative in Q4 will be strongly positive.
It's a bit like a replay of 2021, but as you can remember that.
2022 was a bit of an old.
Yeah from a cadence perspective, Q4 wasn't as strong, but the reasons behind that.
Yes.
But yes, we're standing behind it I saw your guidance of neutral between April one and December 31.
Perfect. Thanks, so much that's it for me I'll jump out of line.
Okay.
Thank you. Our next question is from Matt Ramsey with Cowen. Please proceed with your question.
Yeah, Hi, everybody congrats on the resolve this is actually Ethan Potassa gone for for Matt I, just I wanted to drill down into the full year guide. It was great to see you guys kind of reiterated on the prior call. There was some discussion about maybe four or $5 million headwind on macro soft.
Mass and then maybe another million or so in royalties. So I was wondering.
How do you kind of see that dynamic playing out and then if you could talk about trends.
Over the remainder of the year across end markets have been really helpful.
Sure. So let me let me just take stake of the trends and then I'll, let Nick answer about the guide.
So one of those things that makes us pretty optimistic about the second half is that.
That we we should be able to ship.
Oh <expletive> stockpile production in the second quarter. So that means that we will have full second half of Oh flex arc five revenue. So we think that's a that's a that's gonna be a helpful tool could be oh.
All your guide.
And then you know as I said, you have a sort of a mixed bag of tailwind headwinds right.
Did I answer it took us this question right, where you have China coming back online a little bit more but there's more trade friction.
You have a credit crunch, all of which affect smaller customers, but perhaps more outsourcing pressure from the big customers. So we feel comfortable that we're well positioned to meet.
To meet the guidance and then with that I'll turn it over to Nick to discuss the actual numbers.
Yeah, exactly Charlie so he's a great to hear you again so.
Say, hi to Mike when you're when you're saying.
The so you'll have your question you've got a great memory only.
But the headwinds question.
But we talked about last time, and essentially we were saying hey look growth into 2023 would be.
Somewhat stronger if we didn't have one.
China Slash macro headwinds most of which was China should be I S. A headwind, which we were we were talking about a sort of a 7% to 8%.
Negative on the yeah I'm.
I'm not quite special for Milan essentially.
But that would have been there if if all things have been unrestricted so to speak.
And the other in schools royalties, which is a direct are directly attributable to anything which is impacted by recession.
We will know that we all weather, especially we're in a recession or unofficial recession.
We will neither we actually I'll.
And so that dampens demand for end products.
Whether they are in the consumer space.
Less so in the automotive space, because they want to watch it.
Oh EMS are all desperately trying to manufacture as much as possible.
To deal with the general channel inventory shortage.
So there's not really so much that but generally across the across the box there is a.
Demand.
Temporary demand shortage.
So so actually all the men and women.
Well that seems still about right, we would have expected to get more like $5 a share but looking at more like full from royalties, which is a lot less than we would like we would draw the guided five jumped to six but its.
It's gone the other way around because of this this general sort of volume production.
The picture in other words in short there's not changed.
But just to re establish the color on the subject, but like you said, we'll have to go up again.
Understood a terrific. Thank you a second question it seems like auto through this kind of aren't earning season and you know year to date is a continued its streak of resiliency as compared to other end markets.
And I know you can't talk about specific customer programs. So it may be.
If you guys could perhaps characterize how you know activity in automotive is doing or are customers still kind of full steam ahead or are there any kind of signs of a slowdown.
So so the one of those things that.
We tried to get across on the earnings call is that we're trying to engage with the entire a supply chain of automotives, including the ridesharing companies and the automotive.
Automotive Oems.
And it used to be maybe four or five years ago, you could never get a meeting with a car company because they would say why are you talking to US your your semiconductor IP company well that has completely changed.
The car companies are trying to get control over their architectures.
And so either they're designing chips themselves or they're working with partners.
Two design architectures silicon architectures that work for this oh fairly.
Extensive software.
And so we're sort of happy to announce that we closed in the year to date, our deals with four automotive companies now we can't say who they are.
But oh, you know, they're there broadly spread across Europe , APAC and in the U S and so it just demonstrates our ability that essentially the entire automotive supply chain is going to be a customer for advanced automotive oriented system IP and then as far as.
The card business, Oh, it's going through a major disruption the investments are in in your sort of both offensive and defensive and that disruption or are being maintained and we see the automotive business is sort of one of the along with the the machine learning artificial intelligence.
That's one of the the the shining stars of the current Oh, the occurrence of the business.
Terrific. Thank you.
Yeah.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question is from Kevin Garrigan with West Park Capital. Please proceed with your question.
Yeah, Hey, everyone. Let me Echo my congrats on the strong results just a quick question. So I know you. You had noted that you are in a strong position to continue to gain market share and you know there's potential for large companies to outsource or are you seeing any increase in competition from anyone and can you kind of remind us who your competition is.
Yes so.
The competition situation continues to be favorable the main competitors that we have a really big internal teams.
That build internal system IP.
Hum goes you know one of the effects of this recession is that you know some of the companies are going to have difficulty maintaining those investments and so perhaps there'll be.
More outsourcing of system IP by by large by large semiconductor and Hyperscale companies.
So that's that's that's kind of a you know one of the trends so.
Yeah, So that's but that's pretty much what I would I have to say and then of course the machine learning business. There's also there's generally they are where you you have a you know.
New killer App that has a major problem with a cost of procuring cost and so there's going to be we think a substantial amount of investment in our in our specialized hardware and accelerators to lower the cost of the child G. P. T generally V I a type curve.
So.
You know, there's there's a lot of innovation going on and and so we think that we're well positioned to address that.
Okay got it yeah that makes total sense and then just one one quick follow up. So you know you have one quarter of 2023 and the books.
And you know as you look out to the rest of the year. Besides you know the macro there is there anything else that kind of keeps you up at night.
[laughter], Oh, yeah lots of things, but.
But I think as I said, the sort of for us at least the kind of the headwinds and tailings balance out.
And so we feel comfortable with the guidance that that Nick Nick Nick discussed.
Okay.
I think the.
Okay.
The answer from me from the with my comments I'd ask on is twofold.
One is kind of can I deliver the.
But the income statement numbers, particularly the revenue.
And that is sort of colored by the the amount of.
The visibility we have known that we have we have a good amount of forward visibility. We typically talk around 70, 75%. We currently have around 75% to 80% visibility.
For hitting 2023 revenue numbers.
So that's what puts me in a reasonably comfortable position it doesn't actually maybe lose too much sleep.
He mounted.
Kind of it's like what types of returns business that we have to get to to fill.
GAAP is relatively small and they are a great sales team.
So we have great pumps public somehow as well and they chose me as I was trying to mention I wonder about your stripes about five which is already out.
It's.
Has it been deliberating in second half.
The other thing is of course is cash management.
We are Oh, you know since we last chatted with you.
We are laser focused on cash management.
And sorry break careful on every penny we spend on Opex.
Yeah. It's a we have a very simple model, but doesn't have capex we have.
Cash inflow from bookings I mean, our cash out to play Opex.
And so.
Obviously, we always maximize the bookings because that's where we got our growth numbers from them.
But we're not very very careful on opex.
We have.
Very carefully dialed down them.
Since the end of the third quarter of our Opex essentially run rate.
To keep it so that we can comfortably we can get good operating leverage from bookings growth.
Cash flow perspective into lithium which is why we get some comfort I get some comfort we can cheap out.
Achieve or exceed our oh negative cash flow protection in the guidance.
Yeah.
Okay got it that makes sense thanks for that.
That's all from me thanks, guys.
Thank you there are no further questions at this time I would like to turn the floor back over to Charlie Janet for any closing comments.
Okay, well. Thank you for your time and interest in our terrorists are we look forward to meeting with you at the upcoming Investor conferences, and where we're participating in during the next couple of months and we look forward to updating all of you on our business progress in the quarters to come. Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.