Q4 2023 Arteris Inc Earnings Call
Operator: Good afternoon, everyone, and welcome to the Arteris fourth quarter and year-end 2023 earnings call. Please note this call is being recorded and simultaneously webcast. All material contained in the webcast is the sole property and copyright of Arteris, Inc., with all rights reserved. For opening remarks and introductions, I want to turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.
Good afternoon, everyone and welcome to the <unk> fourth quarter and year end 2020 earnings call. Please note. This call is being recorded and simultaneously webcast.
You all contained in the webcast is sold property and copyright of factories.
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.
Erica Mannion: Thank you and good afternoon. With me today from Arteris 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, 2023. 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 2024. We will then open the call for questions. Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on such forward-looking statements.
Thank you and good afternoon with me today from our tariffs are Charlie <unk>, 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 2023.
Rick 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 2024, we will then open the call for questions.
Before we begin I'd like to remind you management will make statements. During this call that are forward looking statements within the meaning of federal Securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated and you should not place undue reliance on forward looking statements.
Erica Mannion: Additional information regarding these risks, uncertainties, and factors that could cause actual results to differ is included in the press release Arteris issued today and in the documents and reports filed by Arteris from time to time with the Securities and Exchange Commission. Please note that 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. Non-GAAP measures are presented as we believe they provide investors with a 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.
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 bioterrorist 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.
Our 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.
Erica Mannion: 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, 2023. 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, 2023. Listeners who do not have a copy of the press release for the quarter ended December 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 CEO Charlie Jennings. Thank you, Erica, and thanks to everyone for joining us on the call this afternoon. We're excited to report a strong finish to 2023 with annual contract value plus trailing 12-month variable royalties of $56.1 million. We added 4 new customers in the 4th quarter, totaling 23 new customers for the year.
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, 2023 and.
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 2023.
Listeners, who do not have a copy of the press release for the quarter ended December 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 CEO Charlie Janet.
Thank you, Eric and thanks to everyone for joining us on the call. This afternoon.
We're excited to report a strong finish to 2023 with annual contract value <unk> trailing 12 months variable royalties of $56 1 million.
We added four new customers in the fourth quarter totaling 23, new customers for the year.
Charlie Janik: Our customer base continues to expand across all of our key verticals and regions, with particular success in automotive, enterprise, consumer, and communication. Our customers have now delivered approximately 3.5 billion SoCs to their electronic systems customers. The continued growth of SoC design complexity and associated design costs increasingly drives our customers toward commercial system IP.
Our customer base continues to expand across all of our key verticals and regions with particular success in automotive enterprise consumer and communications.
Our customer base has now delivered approximately $3 5 billion Soc.
Tronic systems customers.
The continued growth of associated design complexity and associated design costs.
Pleasingly drives our customer base toward commercial system IP.
Charlie Janik: As we look back at 2023, this accelerating industry adoption of commercial system IP solutions is demonstrated by a record number of license deals and record high customer chip design activity, with 29 confirmed design starts for the quarter and 95 for the year. I'm delighted to note that we added four new major semiconductor and system house companies as customers during the year. Not only are we seeing growth in the number of our customers, but we're also seeing further design penetration within our existing customer base. License revenue was strong across all of our vertical markets and balanced across geographies.
As we look back at 2023, this accelerating industry adoption of commercial system IP solutions as demonstrated by a record number of license deals and record high customer chip design activity with 29 confirmed design starts for the quarter and 95 for the year.
I'm delighted to note that we added four new major semiconductor and system house companies as customers during the year.
Not only are we seeing growth in a number of our customers.
Also seeing further design penetration within our existing customer base.
License revenue was strong across all of our vertical markets and balanced across geographies.
Charlie Janik: Notable achievements include strong adoption of FlexKnock version 5 of the Physically Aware Network on Chip, which now represents the majority of FlexKnock sales. Customer design wins from the past years are developing into a growing royalty base for Arteris as we've seen a 32% year-over-year increase in royalties in 2023. Historically, our royalty revenue was primarily driven by leading-edge applications within the consumer space.
Notable achievements.
<unk> strong adoption of flex box version five of the physically where network on chip, which now represents a majority of <unk> sales.
Customer design wins from the past years are developing into a growing royalty base for tariffs as we've seen at 32% year over year increase in royalties in 2023.
Historically, our royalty revenue was primarily driven by leading edge applications within the consumer space, but today, we see that our royalty stream is comprised of a broader mix across numerous customers in automotive.
Charlie Janik: But today, we see that our royalty stream is comprised of a broader mix across numerous customers in automotive, consumer electronics, and Enterprise Computing and other applications. Our continued momentum in the artificial intelligence and machine learning, or AIML, space remains strong, with AIML representing over 50% of our license deals in a quarter across a broad section of our vertical space. For example, RAIN-AI is another innovative AI chip company which recently selected the Arteris FlexNOC5 physically aware network on chip IP for use in its Edge AI accelerator. The low-power, low-latency, and high-bandwidth capabilities of FlexNOT5 will be critical to helping RAIN and its customers to process the large data requirements needed for generative AI applications.
<unk>.
In enterprise computing and other applications.
Our continued momentum in artificial intelligence and machine learning or AI ml space remained strong with AI ml, representing over 50% of our license deals in the quarter.
Across a broad section of our verticals.
For example, great AI.
Other innovative AI chip company, which recently selected <unk> flex knock five physically aware network on chip IP for use in edge AI accelerator.
Low power low latency and high bandwidth capabilities of flex dot five will be critical to helping <unk> and its customers.
<unk> is the large data requirements needed for generative AI applications.
Charlie Janik: Communications, where AI supports the globally accelerating transition to 5G, is another vertical where we saw strong adoption of Arteris products for the growing need for high bandwidth, low power 5G chips that can only reach their performance goals by leveraging Arteris system IP. As an example, EdgeQ, a leading innovator in 5G and AI technologies, has licensed Arteris FlexNOC for use in its comprehensive multi-mode 4G, and 5G base station chip. It is a RISC-V based device that offers a scalable architecture, high throughput, and low power consumption, effectively shrinking an entire base station onto a single SoC. K-Links is another innovator in communications infrastructure, which has licensed both our N-Core and FlexKnock Interconnect IPs for use in their next-generation modem SoC with the aim of providing DOM players with power to deliver ultra-high-cap In the automotive industry, we have seen an accelerating proliferation of AI-enabled Advanced Driver Assistance Systems, ADAS, and other advanced electronics to support electrification, automated driving, and electronic unit ECU consolidation, ensuring all electronics adhere to automotive functional safety standards and other mission-critical applications.
Communications, where AI supports the globally accelerating transition to five G is another vertical where we saw strong adoption of our various products for the growing need for high bandwidth low power five G chips that can only reach their performance goals by leveraging our teller system IP.
As an example HQ.
<unk> innovator in five G and AI technologies as license or tariffs flex lock for us and its comprehensive multi mode for <unk> base station chip.
It is a risk five based device that offers a scalable architecture high throughput and low power consumption effectively shrinking and then higher base station onto a single associate.
<unk> is another innovator in communications infrastructure, which is licensed both our EMCORE and flex knock interconnect ic's for use in their next generation modem Soc with the aims to provide players with power to deliver ultra high capacity multi gigabit links over longer distances.
Is that an optimize total cost of ownership.
In automotive we have seen an accelerating proliferation of AI enabled advanced driver assistance systems, Adas and other advanced electronics to support electrification automated driving and electronic unit you see consolidation, ensuring all electronics adhere to automotive functional safety standards.
And other mission critical applications.
Nick Hawkins: To continue to expand our technology to better support this endeavor, in Q4, we announced that NCORE Cache Connector and Interconnect IP achieved ISO 26262 certification, a key milestone to ensure safe technology is incorporated into modern vehicles and other autonomous systems. Similarly, our Magellan SoC integration automation software also received ISO 26262 PCL1 functional safety certification, further expanding upon Arteris' ongoing commitment to support mission-critical safety applications. The strong focus on the automotive industry was recognized in the fourth quarter, with Arteris being awarded the Autonomous Vehicle Technology of the Year award by Autotech Breakthrough. Finally, in the fourth quarter, Arteris achieved ISO 9001 Quality Management System Certification, further supporting customer confidence in our commitment to product and process quality. Currently, certain macroeconomic dynamics, including geopolitical uncertainties and the U.S. BIS restrictions with respect to China-U.S. trade, continue to impact our business.
We continue to expand our technology to better support this endeavor in Q4, we announced that EMCORE cache coherent interconnect IP has achieved ISO to $660 certification.
A key milestone to ensure safe technology is incorporated into modern vehicles and other autonomous systems.
Similarly, our modular associated Gration automation software also received ISO to six to six two.
One functional safety certification further expanding upon our tariffs ongoing commitment to support mission critical safety obligations.
The strong focus on automotive was recognized in the fourth quarter without tariffs being awarded the autonomous vehicle technology of the year award by audit that breakthrough.
Finally in the fourth quarter <unk> achieved ISO 9001 quality management system certification further supporting customer confidence and our commitment to product and process quality.
Currently.
Macroeconomic dynamics, including geopolitical uncertainties in the USPI as restrictions with respect to China U S trade continue to impact our business.
Nick Hawkins: While these dynamics do create near-term headwinds, we believe that the scale and scope of our long-term opportunity remains robust. This is illustrated by a robust product pipeline of new system technologies and solid relationships with some of the largest electronics companies in the world, who continue to innovate in exciting areas such as generative AI and autonomous driving. With that, I'll turn it over to Nick to discuss our financial results in more detail. Thank you, Charlie, and good afternoon, everyone.
While these dynamics do create near term headwinds, we believe that the scale and scope of our long term opportunity remains robust.
This is illustrated by our robust product pipeline of new system technologies and solid relationships with some of the largest electronics companies in the world, who continue to innovate and exciting areas such as Jeremy of AI and autonomous driving.
With that I'll turn it over to Nick to discuss our financial results in more detail.
Thank you Charlie and good afternoon, everyone.
Nick Hawkins: As I review our fourth quarter and folio 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 fourth quarter was $12.5 million, up 12% year-over-year and above the top end of our guidance range. At the end of the fourth quarter, annual contract value, or ACV, plus trailing 12-month variable royalties and other revenue was $56.1 million, also above the top end of our guidance range. The remaining performance obligations on RPO at the end of the fourth quarter were $72.7 million, representing 26% year-over-year growth, going through its highest level on record for Arteris. Gap gross profit for the quarter was $11.1 million, representing a gross margin of 88%. Non-gap gross profit for the quarter was $11.3 million, representing a gross margin of 90%.
As I review, our fourth quarter and full year results today. Please note I'll be referring to non-GAAP metrics.
A reconciliation of GAAP to non-GAAP.
As included in today's earnings release, which is available on our website.
Total revenue for the fourth quarter was $12 5 million up 12.
12% year over year.
Above the top end of the guidance range.
At the end of the fourth quarter annual contract value or ICB, plus trailing dropbox variable royalties and other revenue was $56 1 million.
Above the top end of our guidance range.
Remaining performance obligations.
At the end of the fourth quarter was $2 $7 million, representing 26% year over year growth growing to its highest level on record for our tenants.
Gross profit for GA was 11 $1 billion, representing a gross margin of 88% non-GAAP gross profit for the quarter was $11 $3 million, representing gross margin of 90%.
Nick Hawkins: Total gap operating expense for the fourth quarter was $20.3 million compared to $20.4 million in the third quarter, down 1% sequentially; non-gap operating expense in the quarter was $16.8 million. As we've done throughout 2023, we will continue to proactively and prudently manage operating expenses, limiting spending to strategically critical areas. Yeah, operating loss for the fourth quarter was $9.2 million, compared to a loss of $9.1 million in the year-ago period. Non-GAP operating loss was $5.5 million, or 44%, compared to a loss of $5.8 million in the year-ago period. Net loss in the quarter was $10.5 million, or diluted net loss per share of 29 cents. Non-GAAP net loss in the quarter was $6.8 million, or diluted net loss per share of 18 cents based on approximately 36.8 million weighted average diluted shares outstanding.
Total GAAP operating expense for the bulk of which was $23 million compared to $24 million.
The third quarter down 1% sequentially.
non-GAAP operating expense in the quarter was 60 point taken.
That was flat sequentially.
As we've done throughout 2023, we will continue to proactively and prudently manage operating expenses limiting spending to strategically critical areas.
GAAP operating loss for the fourth quarter with $9 2 million compared to a loss of $9 $1 million in the year ago period.
non-GAAP operating loss was $5 $5 million or 44% compared to a loss of $5 8 million in the year ago period.
Net loss in the quarter was $10 $5 million.
Diluted net loss per share of 29 cents.
GAAP net loss in the quarter was $6 $8 million.
Diluted net loss per share of <unk> 18.
Just on approximately $36 8 million weighted average diluted shares outstanding.
Nick Hawkins: Certainly, after the balance sheet and cash flow, we ended the quarter with $53 million in cash, cash equivalents, and investments. Cash flow used in operations was approximately $3 million and a quarter. Pre-cash flow, which includes capital expenditure, was approximately negative $3.4 million, coming in better than the top end of our guidance range. Moving on to our annual results. Total revenue for 2023 was $53.7 million, up 7% year-over-year, reflecting our switch to a fully ratable revenue model at the end of the second quarter. Total operating expenses were $83.7 million compared to $75.7 million in the year-ago period, while non-GAAP operating expenses were $69.1 million compared to $62.8 million in the yoga period.
Certainly you have the balance sheet and cash flow.
The quarter with $53 million in cash cash equivalents and investments.
Flow used in operations was approximately $3 million in the quarter free cash flow, which includes capital expenditure was broke something negative $3 $4 million coming in better than the top end and provide guidance range.
Moving on to the annual results total revenue was $53 $7 million.
Year over year, reflecting a switch to a fully retro revenue model at the end.
For the second quarter.
Total operating expenses were $83 $7 billion compared to $75 7 million in the year ago periods.
While non-GAAP operating expenses were $69 $1 million compared to $62 $8 million of yoga David.
Nick Hawkins: Net loss in 2023 was $36.9 million, or net loss per share basic and diluted of $1.03; non-gap net loss was $21.6 million, or net loss per share basically diluted of 60 cents based on approximately 35.7 million weighted average shares outstanding. Cash flow used in operations was $15.7 million in 2023, while free cash flow, which includes capital expenditure, was negative $17.2 million, or 32% of revenue. I would now like to turn to our outlook for the first quarter and full year of 2024. For the first quarter, we expect ACB plus trailing 12-month variable royalties of $55 to $59 million and revenue of $12.1 to $13.1 million with a non-GAAP operating loss margin of 41% to 61% and non-GAAP pre-cash flow margin of negative 9% to positive 11%, reflecting strong sales in the prior quarter. For the full year 2024, our guidance is as follows: ACB plus $1,012,000,000 in variable royalties to exit 2024 at $62-$68 million, up 16% year-over-year at the midpoint, revenue of $54.5 to $57.5 million, non-GAAP operating loss margin of 33% to 43% and non-GAAP free cash flow margin of negative 5% to positive 5%.
Net loss in 2023 was $36 $9 million or net loss per share basic and diluted of $1 <unk>.
non-GAAP net loss was $21 $6 million or net loss per share basic and diluted of 60 cents based on approximately $35 7 million weighted average shares outstanding.
Cash flow used in operations was.
$18 $7 million in 2023, while free cash flow, which includes capital expenditures was negative $17 $2 million or stretch 2% of revenue.
I would now like to turn to our outlook for the first quarter and full year of 2024.
For the first quarter, we expect ACB, plus trailing 12 month variable royalties.
55% to $59 million.
Revenue of $12 $1 million to $31 million with non-GAAP operating loss margin of 41% to 61% and non-GAAP free cash flow margin of negative 9% posted 11%.
Reflecting strong sales in the prior quarter.
For the full year 2024, our guidance is as follows.
ACB plus trailing 12 month variable royalties to exit 2024 $62 million to $68 million up.
16% year over year at the midpoint.
Revenue of 55 to $57 $5 million.
non-GAAP operating loss margin.
33% to 43%.
And non-GAAP free cash flow margin of negative 5%.
Positive but.
Operator: We're encouraged by the above guidance, performance, and strong deal activity in the product order. While we expect some quarter-to-quarter cash flow fluctuations throughout the year due to the timing of deals, we expect that with the actions we have taken in 2023, we will become free cash flow positive in 2024. With that, I will turn the call over to the operator to open it up for questions. Operator?
We are encouraged by the above guidance performance and strong deal activity in the product quarter.
While we expect some quarter to quarter cash flow fluctuations throughout the year due to timing of deals we expect with the actions we've taken in 2023.
We'll become a free cash flow positive in 2024.
With that I will turn the call to the operator to open it up to questions operator.
Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Did you have a question? Please press the star followed by the 1 on your telephone keypad.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by Don on your telephone keypad.
Operator: You will hear a three-tone prompt acknowledging a request. Questions will be taken in the audio. To cancel your request, please press the star followed by the 2. If you are using a speakerphone, please leave the handset before pressing.
Acknowledging the request questions will be taken into <unk> <unk>.
Cancel your request. Please press the star followed with you if youre using a speaker phone. Please lift the handset before pressing any one moment. Please for your first question.
Operator: One moment, please, for your first question. Your first question comes from the line of Matt Ramsay from TD Common. Please go ahead. Thank you very much, gentlemen.
Your first question comes from the line of Matt Ramsay from TD Cowen. Please go ahead.
Thank you very much gentlemen, good afternoon.
Matthew D. Ramsay: Good afternoon, um, One thing I wanted to get an update on, Charlie, and you mentioned some of it in your script, but over the last couple of quarters, just on a run rate basis, licensing in China has been a fairly material headwind, and I'm just trying to get an idea of if the environment has improved at all, the head winner of the sort of stabilized in the run rate going forward, and if there's been any Thanks. Yeah, Matt.
I guess.
One thing I wanted to get an update on Charlie and you mentioned some of it in your script, but.
Over the last couple of quarters.
On a run rate basis.
Licensing in China was.
A fairly material headwind and I'm, just trying to get an idea.
If the environment has improved at all.
The headwind it is at least sort of stabilized and the run rate going forward and if theres been any real change in China versus 90 days ago. When we had this chad thanks.
Charlie Janik: So, yeah, we saw a significant decline in the middle of Q3. But things have not gotten, I think things are stable at the moment. I don't think the economy in China has improved. I think there's some other, you know, cockroaches to be revealed.
Yes, Matt So yes, we saw a significant decline in the middle of Q3.
But things have not gotten I think things are stable at the moment.
I don't think the economy in China has improved I think there is.
Some other.
Cocker, which used to be revealed.
Charlie Janik: But there is a significant deal flow coming from China, and we do not see things getting any worse. Where, you know, our strategy in response to this has been, as capital has gotten tight for the smaller companies in China, we have shifted our attention to larger companies, which are designing, you know, SOCs. And so we anticipate that the situation in China will be stable going forward. It might get better. We're planning on stability. Hey, Matt, this is Nick, just a couple of bits of color to add to Charlie's excellent commentary.
There is a significant deal flow coming from China.
We do not see things getting any worse.
Where.
Our strategy in response to this has been.
As the capital has gotten tight for the smaller companies in China, we have shifted our attention to two larger companies that are designing.
Designing.
So.
And so we anticipate that.
Will the.
The situation in China will be stable going forward.
It might get better Hey, Matt landing.
We're planning on stability.
Hey, Matt. This is Nick just a couple of bits of color to Charlie's excellent commentary when we can.
Nick Hawkins: When we come to looking at the numbers side, and I'm just looking at revenue here, I'm not looking at ACV, which is obviously a separate piece. But just the impact on ratable revenue, gap revenue, the impact that we felt in 2023 from the China headwind was approximately $2 million. That was only obviously representing the third and fourth quarter. The impact in 2024, and this is assuming nothing gets better; it also assumes that nothing gets worse. Obviously, that impact would be approximately double that at four million. Hedwig.
Looking at the numbers side.
And I'm just looking at revenue.
ACD, which is obviously a separate beast, but just the impact on ratable revenue GAAP revenue.
The impact that we felt in 2023.
From the China headwind was approximately $2 million.
That was obviously, representing third and fourth quarter the impact in 2024.
This is assuming nothing gets better.
So it seems that only gets worse, obviously that impact would be approximately double that formerly <unk>.
Headwind.
Matthew D. Ramsay: Thank you both for that, and thanks, Nick, for the numbers. I have you, Nick. I noticed in the full year, 2024 Outlook. I mean, you have to squint a little at the numbers, but the midpoint is roughly pre-cash flow break even. I think our team had been assuming sort of a free cash flow breakeven second half of 24 and maybe non-GAAP breakeven second half of 25. Things seem a little bit ahead of that schedule if you're able to guide that for the full year on pre-cash flow. So maybe you could walk us through it. What's changed there? Is it lower OPEX?
Thank you both for that and thanks, Nick for the numbers.
I guess.
Does that have unique.
I noticed in the full year.
2020 for outlook.
I mean, you have to squint, a little at the numbers, but the midpoint is roughly free cash flow breakeven.
Yes.
Our team had been.
Assuming sort of free cash flow breakeven second half of 'twenty, four and maybe non-GAAP breakeven second half of 'twenty five.
Things seem a little bit ahead of that schedule, if youre able to guide that's for the <unk>.
Full year on free cash flow, so maybe you could walk us through.
What's changed there is it lower opex is it more visibility on revenue I'm, just trying to figure out.
Nick Hawkins: Is it more visibility on revenue? I'm just trying to figure out because it seems, at first glance, that things seem like things have been pulled in a little bit on free cash flow breakeven, which is great to see.
It seems that first looked at they seem like things have been pulled in a little bit on free cash flow breakeven, which is great to see.
Nick Hawkins: Yeah, it's always, free cashflow is always going to be a bit of a variable feast, Matt. The first and fourth quarters, you probably saw in our commentary that we benefited again from a kind of present from customers in the fourth quarter of 23, to the tune of a few small numbers of millions of dollars, where they paid early again, and I don't know why they do this, but they do, uh, nevertheless, we You've obviously also noticed that we're gunning for, or we're guiding for, free cash flow neutral in the first quarter, but not all quarters are created equal. The second quarter and the third quarter tend to be weaker from a free cash flow perspective; the fourth quarter, and then sometimes the first quarter, depending on deals, tend to be positive.
Yes, it's always free cash flow is always going to a bit of a variable piece Matt.
The.
The first and fourth quarters, you probably saw in our commentary.
<unk> benefited again from a.
A kind of a present from are from customers in fourth quarter of 'twenty three.
With the <unk>.
A few small number of millions of dollars.
Will they pay dearly again, I don't know why that is.
The Netherlands was still coming for free.
Free cash flow neutral slightly slightly positive for FY 'twenty four.
You've obviously also noticed coming through.
Guidance for.
Free cash flow neutral.
In first quarter.
But not all quarters are created equally to the second quarter and third quarter tend to be weaker from a free cash flow perspective.
Fourth quarter, and then sometimes a first go through depending on deals tend to be positive. So really amendment, we're at that stage, where we might still see it shortly.
Nick Hawkins: So really, at the moment, we're at that stage where we might see a sawtooth of free cash flow over the quarters, but if you look at the overall trajectory over the year, we're looking at free cash flow neutral to positive. Got it. That's helpful. Just my last follow-up question there, piggybacking on that prior question, is, second half of 25, we're still thinking about non-gap breakeven, and second half of 26, the plan would still be for gap breakeven. Is that still on track, or has that moved up maybe a hair as well? So I think on the non-GAAP topics, that looks totally ratable; it's harder to shift the needle on revenue We do expect to break the seal on non-GAAP profitability as we exit 25 and enter 26.
Our free cash flow in the quarters.
If you look at the overall trajectory of the year, we're looking at free cash flow neutral to positive.
Got it that's helpful. Just my last follow up there and any kind of piggyback on that prior question.
Second half of.
25, we're still thinking about non-GAAP breakeven.
Second half of 2016, the plan would still be four four for GAAP breakeven is that still on track or has that moved up maybe a hair as well.
So I think on the non-GAAP.
So that would fully ratable, it's harder to change to shift the needle on revenue, we do expect to break the seal on non-GAAP.
Profitability.
As we exit 'twenty five 'twenty six.
Nick Hawkins: So the full year 25, we don't think at this stage, although we're not guiding it clearly, we don't think that it is feasible to be non-GAAP operating positive, operating profit positive, but we'd expect to see the exit of that year as being the pivot point as to where we go into non-GAAP profitability, and then we will see we enjoy the benefits of that through 2026. Does that make any sense to answer your question? Nick, obviously, we're looking at decent ways out here, given the macro, so I appreciate that color, and yes, it does answer the question, but thank you very much, guys, congratulations, and I'll jump back. Thanks a lot. Thank you, and your next question comes from the line of Hans Mossesman from Rosenblatt. Please go ahead.
So.
The full year 2000 Psi.
I think at this stage, although we're not guiding it clearly.
We don't think that is a fee.
Feasible to be.
non-GAAP operating positive operating profit positive.
But we would expect to see the exit of that year.
Being the pivot point as to where we go into non-GAAP profitability and then we see we enjoy the benefits of that through 2026 does that make any sense to answer your question.
Nick Thats, obviously, where we are.
Looking at decent ways out given the background. So I appreciate that color and yes. It doesn't answer the question, but thank you very much guys, congrats and ill jump back in queue.
Thanks, Matt.
Thank you and your next question comes from the line of hence Masa Smith from Rosenblatt. Please go ahead.
Hans Mossesman: Hey, thanks. Hey guys, good evening. Congratulations on the execution.
Hey, Thanks, Hey, guys get.
Good evening.
Thats on the execution.
Charlie Janik: Hey, Charlie, or Nick, ASPs for licensing. What is that trend? How's that looking as we go into 2024? So we've announced FlexNOT5 in, and it all started shipping in the beginning of June of 2023. So we have a whole year to deliver it. FlexNoc5 is now over half of FlexNoc sales. So the ASP of that is about 33 percent higher because of the second generation of physical awareness. So the ASP is tracking kind of to our projections. It's going up every year.
Charlie.
Sure Nick.
Asp's for licensing what is that trend how is that looking as we go into 2024.
So.
We've.
We've announced flex knock five in.
We started shipping in the beginning of June of 2023, So we have a whole year of delivering it flex dark fibers novel, perhaps of flex.
<unk> sales so the ASP of that is about 33% higher because of the second generation physical awareness. So the ASP is tracking to kind of to our projections is going up every year.
Charlie Janik: And, you know, we said on the IPO that we're going to be at something like a million average project deal size by 2026. And I think we're still tracking to that. So the ASPs are rising well, driven by essentially new functionality that we're delivering to the marketplace to address the complexity of some of these generative AI and automotive SOCs. And you may have mentioned this, I apologize; I've been traveling; what are royalties as a percentage of revenue? Yeah, let me take that one.
And.
We said on the IPO that were going to be at something like 1 million.
Sure.
Project deal size by 2026, and I think we're still we're tracking to that so the asps are rising well driven by essentially.
New functionality that we're delivering to the marketplace to address the complexity of some of these to Germany of AI and <unk>.
And.
Automotive <unk>.
Great and.
You May have mentioned this I apologize I have been traveling what were royalties as a percentage of revenues.
Nick Hawkins: That's the next question. Yeah. Let me take that one.
Yes, let me take the next question.
Yeah, Let me tell you that were on that.
Nick Hawkins: So, if I give you the numbers, it's probably easier. I mean, royalties come in at around, sort of, 10 cents. But the total, but if you look at 22, for example, we had total royalties and other of 4.3, but if you strip out the other, which is really just, it's nothing to do with royalties. It's things like training, SOWs, and various other things that can't be recognized as license revenue.
If I give you the numbers, it's probably easier.
Royalties come in at around sort of 10.
<unk>.
But the.
Of total, but if you look at 'twenty two for example.
We had total royalties and other of $4 three but if you strip out the other which is really just.
It has nothing to do with royalties, it's things like training <unk> and various other things the company recognized as license revenue.
Nick Hawkins: If you just look at the variable royalties that we report, it was 3.1 million in 2022. If you look at 23, it was 5.1 million. So that's obviously a pretty big increase. Bah!
Look at the variable royalties that we reported was $3 1 million in 2022.
If you look at 'twenty three it was $5 1 million. So that's obviously a pretty big increase.
Nick Hawkins: bear in mind that, to be fair, there's some audit stuff in there. There's some audit, we had some really successful audits thanks to our audit guru. So we have a very big tailwind from royalty audits. If you strip out those, and you just get back to pure, pure variable royalties, then we're up around 45-50% year-over-year. And in our guidance, we don't actually guide royalties, but you can look for a similar kind of growth in royalties into 2024. And there's no reason why that shouldn't continue. We don't actually project any sort of other royalty, other revenue, don't project or guide, or include in our guidance any audit benefits, any audit pickups, even though they may well happen.
Bear in mind, but to be fair there are some audit stuff in there that's the motive side, we had some really successful orders. Thanks.
Good.
So we have.
Hey, Brian.
Tailwind from promote LTE audits.
Strip out those just get back to a pure pure variable royalties.
Around $45, 50% year over year.
And in our guidance, we don't actually guide royalties, but you can look for a similar kind of growth on royalties into.
Into 'twenty that full and Theres no reason why that Shouldnt.
Continue and so we do not project any.
Sort of other royalty and other revenue.
We don't project.
Our guidance included in our guidance any benefits.
Benefits any audit pick ups, even though they may will happen. So we are seeing at least maintain the same basic both royalties and maybe increasing so $5 million.
Nick Hawkins: So we're seeing at least maintaining the same rate of growth of royalties and maybe increasing it. So look at 5.3 million total versus 53 million, so it's about 10% of the total. It's a very roundabout way of answering the question, and we're getting some color in the middle of it, I hope you don't mind. Right? And so to kind of, kind of summarize that so this year it would probably grow as a percentage of total revenues by a few points. Yeah, you'd expect it to be growing this way, albeit we will not have the audit, so the audit benefits that we have this year we will not get, or we, sorry, we, we may in 24, we're not expecting, we're not predicting, or forecasting that we'll get them in But in reality, yeah, we may well get those.
$5 3 million total total versus 53 million. So it's about 10% of total revenue.
So very round about.
It's a question.
With getting some color in the Midland.
In mind.
Right and so just kind of.
To kind of.
Summarize that so so this year it would probably grow as a percentage of total revenues by a few points is that does.
Is that right kind of target.
Yes.
You would expect it to be growing this year.
Albeit we.
Have the audience. So the audit benefits we had this year, we will not get next year.
We made 24, we're not expecting we're not predicting or forecasting that we'll get them in our guidance, but in reality.
They will get those again.
Charlie Janik: Great, and then the last question... Okay, perfect. And then last question, and I'll let somebody else ask a question. You guys have been kind of sharing with investors that in the automotive space, SOCs per vehicle could be over, you know, 20, say like 2026 to 2027 timeframe. Is that still a good number to kind of talk about with investors, SOCs per vehicle? Yes, the number is still good.
Great.
The last question.
Okay, Perfect and then last question and I'll, let somebody else ask a question.
You guys have been kind of sharing with investors that in the automotive space and Soc per vehicle could be over 20.
You say like 2026 to 22007 timeframe is that still kind of like a good number to kind of.
Talk about with investors number of Src's.
<unk> per vehicle.
Yes, the number is still good.
Charlie Janik: But for example, you know, this is public information; if you were to pay attention to, for example, the Mobileye booth at CES in January, they were showing basically automated driving control boards that not only had two SOCs in them but also three and four, right? So we feel pretty comfortable with the projected 23 SOCs per car number, but it could be, it could be more. And on the other hand, there's some SOC consolidation, where people are trying to consolidate driver management and dashboard control and things like this. So I think the low to mid 20s number remains to be good.
But for example.
This is public information if you were to pay.
Pay attention.
For example, global <unk> Bruce.
At CES in January and they were showing.
<unk> automated driving control boards.
Not only had <unk> in there, but also three and four right. So we feel pretty comfortable with the projected 23 Soc probe card number but it could be it could be more.
On the other hand, there are some soc consolidation.
People are trying to consolidate drug regiment that dashboard control and things like this so I think the.
The low to mid Twenty's number it's it remains to be good.
Charlie Janik: Excellent. Thank you very much. Once again, should you have a question, please press the star followed by the number on your telephone keypad. And your next question goes to the line for Kevin Garrigan from West Park Capital. Yeah, hey, good afternoon, all.
Excellent. Thank you very much.
Thank you once again should you have a question. Please press the star followed by one on your telephone keypad.
And your next question comes from the line of Kevin Garrigan from West Park Capital. Please go ahead.
Yeah, Hey, good afternoon, all and thanks for letting me ask the question.
Kevin Garrigan: And thanks for letting me ask the question. So just kind of going off on this question, Charlie, in your, in your script, you know that you're seeing an acceleration in AI and automotive. And then you just kind of mentioned Mobileye going ahead with, you know, adding multiple SoCs to their chip designs. Are automotive OEMs and automotive related companies still continuing with new chip designs? Are you seeing any pushouts there?
So just kind of going off of <unk> question Charlie in your in your script that Youre seeing an acceleration in AI and automotive.
I know you've kind of mentioned mobile ly going ahead with.
Adding multiple associates today are chip designs are automotive Oems in automotive related companies still continuing with with new chip designs are you seeing any push out there and then just kind of wondering how youre viewing the automotive market in 2024.
Charlie Janik: And then I'm kind of wondering how you view the automotive market in 2024? Yes, so there are an increasing number of car OEMs building chips, so... I think out of 35 OEMs, I think we have nine as customers. Ultimately, it's not clear to me that all those projects are going to go to production because, you know, I think all the car companies need to understand the architectures and the cost structures of automated driving, but at the end, some of the people like Mobileye have just a huge momentum and huge critical mass in actually getting a mission-critical solution like that into the market. But clearly, you know, all the car OEMs, in order to be competitive, are doing some electronic design work, which provides an opportunity for Arteris.
Yes, so there is a.
Increasing number of car Oems building chips.
So.
I think 35 Oems I think we have $9.
As customers.
Ultimately, it's not clear to me that all those projects are going to go to production.
Yes.
I think all the car companies need to understand architectures and the cost structures of of automated driving but at the end.
Some of the people like.
Like mobile I have just a huge.
Just huge momentum in huge critical mass in actually getting a mission critical solution like that.
Into the market, but clearly.
All of the car Oems in order to be competitive or doing some some electronic design work, which provides an opportunity for garrison and yes. Our so our design win rate in automotive continues to be.
Charlie Janik: And yes, our design win rate in automotive continues to be quite positive. Okay, perfect, perfect. And then just as a quick follow-up, just a clarification, the four active customers in the quarter, were these all new customers or customers that were using internal solutions that shifted to using Arteris? So there's actually two numbers. They just happen to be the same.
To be quite positive.
Okay perfect perfect.
And then just as a quick follow up just a clarification. The four active customers in the quarter were these all new customers and customers that were using internal solutions that shifted using our tariffs.
So theres actually two numbers, they just happen to be the same.
Charlie Janik: So, um, uh, in the fourth quarter, we added four new, uh, net new customers. Right? And those, some of those were startups. Some were big companies. We also added in the year, um, uh, you know, we have a list of basically the top 20 semiconductor companies and, uh, the top 20, uh, uh, system houses, and all of those were primarily, uh, mainly internally focused. So they made their own internal, uh, internal, uh, system IP.
So.
In the fourth quarter, we added four new net new customers right and those with some of those are startups that were big companies.
We also added in the year.
Sure.
We have a list of basically a top 20 semiconductor companies in the top 20 <unk>.
System houses.
And all of those were prime mainly internally focused so they made their own internal.
Internal system IP and four of those.
Charlie Janik: And four of those, uh, four of those companies have decided to go with Arteris. So the whole thesis of this, this system IP market is that you have maybe 30% of the market to be commercial and two-thirds being internal. And the theory is that over the next four or five years, the market will go two-thirds commercial and one-third internal. And that provides a major opportunity for people like Arteris.
Four of those companies have decided to go with our Paris, So the whole thesis.
All of this of this system IP market is that you have.
Maybe 30% of the market to be commercial and two thirds being.
Being internal.
And the thesis is that over the next four or five years that market will go two thirds commercial and one third internal.
And that provides.
The major opportunity for people who are terrorists.
Charlie Janik: But a lot of these companies are starting slowly, right? So we're getting sort of beachhead deals, we're getting to know those large customers, we're negotiating contracts with them, and then we want to do a good job so that they feel comfortable ordering more based on the success of the initial project. Okay, perfect. I appreciate that. Thanks, guys.
Yeah, a lot of these companies are starting slowly right, so where we're getting so a beachhead deals we're getting getting to know those large customers we're getting too.
Negotiate.
Contracts with them and then we.
Wanted to do a good job so that they feel comfortable ordering more based on the success of the initial projects.
Okay perfect I appreciate that thanks, guys.
Kevin Garrigan: Thank you. That concludes our question and answer session. I will now turn the call over to Charlie Janak for closing. Yes. So.
Thank you.
A question and answer session.
I will turn the call over to Charlie <unk> for closing comments.
Yes.
Charlie Janik: Thank you for your time and interest in Arteris. We look forward to meeting with you at the upcoming investor conferences that we're participating in during the next couple of weeks and months. And we look forward to updating you on all our business progress in the quarters to come. So, thank you very much for your attention. Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.
So.
Thank you for your time and interest in our tariffs.
We look forward to meet with you.
At the upcoming Investor conferences that we're participating in during the next.
The weeks and months and we look forward to updating you on all of our business progress in the quarters to come. So thank you very much for your attention.
Thank you that does conclude our conference for today. Thank you all for participating you may all disconnect.
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