Q2 2024 Arteris Inc Earnings Call
Ladies and gentlemen, this is the operator. Today's conference call will start momentarily. Please stay on the line. Thank you. Again, today's conference call will start momentarily. Please stay on the line. Thank you very much.
Operator: Stay on the line.
Operator: Thank you.
Operator: Again, today's conference call will start momentarily. Please welcome to the Arteris 2nd quarter, 2024 earning school. Please note, this call is being recorded and simultaneously webcast.
Operator: Please stay on the line. Thank you. Again, today's conference call will start momentarily. Please stay on the line. Thank you very much.
[inaudible]
Operator: Good afternoon, everyone, and welcome to the Arteris Second Quarter 2024 Earnings Call. Please note this call is being recorded and simultaneously webcast.
Speaker Change: Good afternoon, everyone, and welcome to the Arteris Second Quarter 2024 Earnings Call.
Operator: All material contained in the webcast is the sole property and copyright of Arteris, with all rights reserved.
Speaker Change: Please note this call is being recorded and simultaneously webcast.
Erica Mannion: All material contained in the webcast is the sole property and copyright of Arteris, with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.
Erica Mannion: For opening remarks and introductions, I will now turn the call over to Erica Mannion at Software Investor Relations. Please go ahead.
Erica Mannion: Thank you, and good afternoon. With me today from Arteris, are Charlie Janac, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results of the second quarter and June 30, 2024. Nick will review the financial results of the second quarter, followed by the company's outlook for the third quarter and full year of 2024.
Speaker Change: Thank you and good afternoon. With me today from Arteris are Charlie Janac, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer.
Speaker Change: Charlie will begin with a brief review of the business results for the second quarter ended June 30, 2024. Nick will review the financial results for the second quarter, followed by the company's outlook for the third quarter and full year of 2024. We will then open the call for questions.
Erica Mannion: We will then open the call for questions.
Erica Mannion: 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 risk uncertainties and factors that could cause actual results to differ appears 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.
Speaker Change: 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.
Operator: 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. 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. 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.
Speaker Change: 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.
Speaker Change: Additional information regarding these risks, uncertainties, and factors that could cause actual results to differ appear 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.
Erica Mannion: 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. Gap. 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. These non-GAAP measures should not be considered in isolation from, as a substitute for, or superior to financial measures prepared in accordance with U.S. Gap.
Speaker Change: 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.
Speaker Change: 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 Change: 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 June 30, 2024. In addition, for a definition of certain key performance indicators using 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 June 30, 2024. Witnesses who do not have a copy of the press release for the quarter ended June 30, 2024 may obtain a copy by visiting the Investor Relations section of the company's website. In addition, management will be referring to Q2-2024 earnings presentation, which can be found in the Investor Relations section of the company's website under the Events and Presentations tab.
Operator: A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended June 30, 2024. In addition, for a definition of certain 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 June 30, 2024. Listeners who do not have a copy of the press release for the quarter ended June 30, 2024, may obtain a copy by visiting the investor relations section of the company's website.
Speaker Change: A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended June 30, 2024.
Speaker Change: In addition, for a definition of certain of 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 June 30, 2024.
Speaker Change: Listeners who do not have a copy of the press release to the quarter ended June 30, 2024, may obtain a copy by visiting the investor relations section of the company's website.
Operator: In addition, management will be referring to the Q2 2024 earnings presentation, which can be found in the investor relations section of the company's website under the events and presentations tab. Now, I will turn the call over to Charlie.
Speaker Change: In addition, management will be referring to Q2 2024 earnings presentation, which can be found in the investor relations section of the company's website under events and presentations tab. Now, I will turn the call over to Charlie.
Erica Mannion: Now, I will turn the call over to Charlie.
Charlie Janac: Thank you, Erica. And thanks to everyone for joining us on the call this afternoon. In the second quarter of 2024, we achieved record annual contract value plus royalties of 60.1 million. For the second from second quarter, we also delivered positive free cash flow. Our success during the quarter was fueled by customer demand for AI-driven automotive and enterprise computing SoC solutions along with growing momentum in our other verticals.
Charlie Janac: Thank you, Erica, and thanks to everyone for joining us on the call this afternoon. In the second quarter of 2024, we achieved record annual contract value plus royalties of $60.1 million.
Charlie Janac: For the second consecutive quarter, we also delivered positive free cash flow. Our success during the quarter was fueled by customer demand for AI-driven automotive and enterprise computing SoC solutions, along with growing momentum in our other verticals. We expanded our customer base in the second quarter with seven new customers licensing Arteris System IP products. In addition to these new customer wins, we signed four new license deals with current customers, which comprise the world's top 30 technology companies.
Speaker Change: For the second consecutive quarter, we also delivered positive free cash flow.
Charlie Janac: Our success during the quarter was fueled by customer demand for AI-driven automotive and enterprise computing SoC solutions, along with growing momentum in our other verticals.
Charlie Janac: Lewis. We expanded our customer base in the second quarter with seven new customers licensing our terrorist system IP products. In addition to these new customer wins, we signed four new license deals with current customers who comprised of the world's top 30 technology companies. During a quarter, we experienced steady design activities of our customers with 21 from design start. Highlighting our continued momentum in the automotive industry, particularly for AI enabled autonomous driving, our new customers include two market leading global automotive OEMs. We believe this demonstrates the growing importance of optimized electronics in autonomous applications with our terrorist system IP with functional safety capabilities being a key building block for overall connectivity.
Speaker Change: We expanded our customer base in the second quarter with seven new customers licensing Arteris system IP products.
Charlie Janac: In addition to these new customer wins, we signed four new license deals with current customers who comprised of the world's top 30 technology companies.
Charlie Janac: During the quarter, we experienced steady design activity from our customers with 21 confirmed design starts.
Charlie Janac: Highlighting our continued momentum in the automotive industry, particularly for AI-enabled autonomous driving, our new customers include two market-leading global automotive OEMs. We believe this demonstrates the growing importance of optimized electronics in autonomous applications, with Arteris system IP with functional safety capabilities being a key building block for overall connectivity. One of these new customers is a top five global automotive OEM by market capitalization. In addition, two notable customer designs started in the second quarter, including one for a major robo-taxi company and the other for a market-leading 8S company.
Speaker Change: Highlighting our continued momentum in the automotive industry, particularly for AI-enabled autonomous driving, our new customers include two market-leading global automotive OEMs.
Speaker Change: We believe this demonstrates the growing importance of optimized electronics in autonomous applications, with Arteris System IP with functional safety capabilities being a key building block for overall connectivity.
Charlie Janac: One of these new customers is a top five global automotive OEM by market capitalization. In addition, two notable customer designs started in the second quarter, including one for a major robot taxi company and the other for a market leading ADAS company. We expect this trend to continue given growing demand for automotive AI innovation. AI also fueled the demand for our terrorist technology in enterprise computing in the quarter, particularly in the data center application illustrated by securing the highest number of licenses compared to other regions. AI and ML electronics require high performance, low energy consumption, and high bandwidth data traffic, which our terrorist products are designed to address.
Speaker Change: One of these new customers is a top five global automotive OEM by market capitalization.
Speaker Change: In addition, two notable customer designs started in the second quarter, including one for a major robo-taxi company and the other for a market-leading 8S company.
Charlie Janac: We expect this trend to continue given growing demand for automotive AI innovation. AI also fueled the demand for Arteris technology in enterprise computing in the quarter, particularly in the data center application illustrated by securing the highest number of licenses compared to other verticals. AI and ML electronics require high performance, low energy consumption, and high bandwidth data traffic, which Arteris products are designed to address. We expanded our relationship with a major global networking infrastructure system house, reflecting the increased compute needs for higher performance and improved efficiency within the communications vertical.
Speaker Change: We expect this trend to continue given growing demand for automotive AI innovation.
Speaker Change: AI also fueled the demand for Arteris technology in enterprise computing in the quarter, particularly in the data center application, illustrated by securing the highest number of licenses compared to other verticals.
Speaker Change: AI and ML electronics require high performance, low energy consumption, and high bandwidth data traffic, which Arteris products are designed to address.
Charlie Janac: We expand our relationship with a major global networking infrastructure system house, reflecting the increased compute needs for higher performance and improved efficiency within the communications vertical. We continue to add large technology company customers that previously use internal developed system IP. One such company is a new OEM licensing our terrorist system IP for advanced plant panel AI-enabled digital televisions. Besides growing customer traction, our terrorist is proactively working to defend the IP ecosystem to help customers accelerate innovation. In March, we announced support for our V9 processors with focus on automotive applications. This was followed by an ecosystem partnership with ND Technology to support the growing adoption of risk-five SOCs for AI, 5G, and other applications.
Speaker Change: We expanded our relationship with a major global networking infrastructure system house, reflecting the increased compute needs for higher performance and improved efficiency within the communications vertical.
Charlie Janac: We continue to add large technology company customers that previously used internally developed system IP. Besides growing customer traction, Arteris is proactively working to expand the IP ecosystem to help customers accelerate innovation. In March, we announced support for ARMv9 processors with a focus on automotive applications. This was followed by an ecosystem partnership with Andes Technology to support the growing adoption of RISC-V SoCs for AI, 5G, and other applications, providing on-chip connectivity for any SOC architecture chosen by our customers.
Speaker Change: We continue to add large technology company customers that previously used internal developed system IP. One such company is a new OEM licensing Arteris system IP for advanced flat panel AI-enabled digital televisions.
Speaker Change: Besides growing customer traction, Arteris is proactively working to expand the IP ecosystem to help customers accelerate innovation.
Speaker Change: In March, we announced support for ARMv9 processors with focus on automotive applications.
Speaker Change: This was followed by an ecosystem partnership with Andes Technology to support the growing adoption of RISC-V SoCs for AI, 5G, and other applications.
Charlie Janac: This customer driven addition further expands our terrorist support across both arm and risk-five processor ecosystems, providing entrepreneurship connectivity for any SOC architecture chosen by our customers. To the acquisition of Semi-port in December 2022, we've seen a growing number of customers recognize the value of our hardware software interface technology. One of these customers is Esperanto Technologies, who provided risk-five-based silicon for development of high performance, energy efficient generally AI and high performance computing with data center and enterprise edge applications. They chose our terrorist SOC integration automation software because of its hardware software integration automation efficiency, air reduction, and streamlined design workflow.
Speaker Change: This customer-driven addition further expands Arteris' support across both ARM and RISC-V processor ecosystems, providing on-chip connectivity for any SoC architecture chosen by our customers.
Charlie Janac: Since the acquisition of Semaphore in December 2022, we've seen a growing number of customers recognize the value of our hardware-software interface technology. One of these customers is Esperanto Technologies, who provided RISC-V-based silicon for the development of high-performance, energy-efficient generative AI and high-performance computing for data center and enterprise edge applications.
Speaker Change: Since the acquisition of Semiport in December 2022, we've seen a growing number of customers recognize the value of our hardware-software interface technology.
Speaker Change: One of these customers is Esperanto Technologies, who provided RISC-V-based silicon for development of high-performance, energy-efficient generative AI and high-performance computing for data center and enterprise edge applications.
Speaker Change: They chose Arteris SoC integration automation software because of its hardware software integration automation efficiency, error reduction, and streamlined design workflows.
Charlie Janac: In addition, in the second quarter, Arteris was included in the Russell 2000 Index. We believe the scale and scope of our long-term opportunity remained robust, supported by a strong pipeline of new system IP technologies and solid relationships with some of the largest authorized companies in the world who continue to innovate in exciting areas. As Jeremy Dan, I'll turn over to Nick to discuss our financial results in more detail.
Speaker Change: In addition, in the second quarter, Arteris was included in the Russell 2000 Index.
Speaker Change: We believe the scale and scope of our long-term opportunity remain robust, supported by a strong pipeline of new system IP technologies, and solid relationship with some of the largest electronics companies in the world, who continue to innovate in exciting areas such as generative AI and autonomous driving.
Speaker Change: System IP Technologies. With that, I'll turn it over to Nick to discuss our financial results in more detail.
Nick Hawkins: Thank you, Charlie, and good afternoon, everyone. As a review, our second quarter results today, please let Arteris be referring to Gap as it was well on Gap metrics. A reconciliation of GAAP and non-GAAP financials has been included in today's earnings release, which is available on my website.
Nicholas Hawkins: Thank you, Charlie, and good afternoon, everyone. As I review our second quarter results today, please note I'll be referring to GAAP as well as non-GAAP metrics. A reconciliation of gapped and un-gapped financials is included in today's earnings release, which is available on our website, and above the top end of our guidance ring. This was driven by strong deal activity early in the quarter, enabling us to recognize higher than expected revenue within the quarter.
Nick Hawkins: Thank you, Charlie, and good afternoon, everyone.
Nick Hawkins: As I review our second quarter results today, please note I'll be referring to GAAP as well as non-GAAP metrics. A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website.
Nick Hawkins: Also, as a reminder, I'll be referring to the 2002-2024 earnings presentation, which can be found in the Investor Relations section of our company's website under the Events and Presentations tab. Turn your sign to four of the presentation. Total revenue for the second quarter is $14.6 million, up 13% sequentially, and above the top end of our guidance range. This was driven by strong deal activity early on the quarter, enabling us to recognise higher than expected revenue within the quarter. At the end of the second quarter, annual contract value or ACV plus royalty is worth $60.1 million, above the bedpoint of our guidance range, our record-higher company.
Speaker Change: Also, as a reminder, I'll be referring to Q Q2 024 earnings presentation, which can be found in the investor relations section of our company's website under the events and presentations tab.
Speaker Change: Only at side 4 of the presentation, total revenue for the second quarter was $14.6 million, up 13% sequentially, and above the top end of our guidance range.
Speaker Change: This was driven by strong deal activity early in the quarter, enabling us to recognise higher than expected revenue within the quarter.
Nicholas Hawkins: At the end of the second quarter, annual contract value, or ACV, plus royalties was $60.1 million, above the midpoint of our guide in the strange and a record high at the company. Remaining performance obligations, or RPO, at the end of the second quarter were $77.5 million, representing a 19% year-over-year increase, also growing to the highest level we have ever recorded. Gap's gross profit for the quarter was $13.1 million, representing a gross margin of 90%.
Speaker Change: At the end of the second quarter, annual contract value, or ACV, plus royalties was $60.1 million, above the midpoint of our guidance range and a record high for the company.
Nick Hawkins: From any performance obligations or RPO at the end of the second quarter was $77.5 million, representing a 19 percent year of the year increase, also growing to the highest level we have ever reported. Gap gross profit of a quarter was $13.1 million, representing a gross margin of 90 percent. Nongat gross profit in the quarter was $13.4 million, representing a gross margin of 92 percent. Now, turning to slide five, total gap operating expense for the second quarter was $20.6 million, quite compared to the first quarter. Nongat operating expense in the quarter was $16.8 million, 1 percent lower sequentially, and 6 percent lower than the second quarter of 2023, reflecting the team's continued focus on prudent management of our operating expenses.
Speaker Change: The remaining performance obligations, or RPO, at the end of the second quarter was $77.5 million, representing a 19% year-over-year increase, also growing to the highest level we have ever reported.
Speaker Change: Gap gross profit for the quarter was $13.1 million, representing a gross margin of 90%.
Nicholas Hawkins: Non-GAAP gross profit in the quarter was $13.4 million, representing a gross margin of 92%. Total cap operating expense for the second quarter was $20.6 million, flat compared to the first quarter. Non-GAAP operating expense in the quarter was $16.8 million, 1% lower sequentially and 6% lower than the second quarter of 2023, reflecting the team's continued focus on prudent management of our operating expenses. As we look ahead, we will continue to limit spending to strategically critical areas while investing in profitable revenue growth.
Speaker Change: non-GAAP gross profit in the quarter was $13.4 million, representing a gross margin of 92%.
Speaker Change: Now turning to slide 5.
Speaker Change: Total cap operating expense for the second quarter was $20.6 million, flat compared to the first quarter.
Speaker Change: non-GAAP operating expense in the quarter was $16.8 million, 1% lower sequentially and 6% lower than the second quarter of 2023, reflecting the team's continued focus on prudent management of our operating expenses.
Nick Hawkins: As we look ahead, we will continue to limit the spending to strategically critical areas while investing in profitable revenue growth. Gap operating loss for the second quarter was $7.4 million, compared to a loss of $8.7 million in a prior year period. Nongat operating loss was $3.5 million, which is better than the top end of our guidance, compared to a loss of $4.2 million in the prior year period. Net loss in the quarter was $8.3 million, or diluted net loss per share of 22 cents. Non-GAAP net loss in the quarter was $4.4 million, or diluted net loss per share of their 11 cents, based on approximately $38.5 million weighted average diluted shares outstanding.
Speaker Change: As we look ahead, we will continue to limit spending to strategically critical areas while investing in profitable revenue growth.
Nicholas Hawkins: Gap operating loss for the second quarter was $7.4 million compared to a loss of $8.7 million in the prior year period. Non-GATT operating loss was $3.5 million, which is better than the top end of our guidance compared to a loss of $4.2 million in the prior year period. Net loss in the quarter was $8.3 million, or diluted net loss per share of 22%. Non-GAAP net loss in the quarter was $4.4 million, or diluted net loss per share of $0.11, based on approximately 38.5 million weighted average diluted shares outstanding.
Speaker Change: That operating loss for the second quarter was $7.4 million compared to a loss of $8.7 million in a prior year period.
Speaker Change: Non-GAP operating loss was $3.5 million, which is better than the top end of our guidance, compared to a loss of $4.2 million in the prior year period.
Speaker Change: Net loss in the quarter was $8.3 million or diluted net loss per share of 22 cents.
Speaker Change: Non-GAP net loss in the quarter was $4.4 million, or diluted net loss per share of $0.11, based on approximately 38.5 million weighted average diluted shares outstanding.
Nick Hawkins: Moving to slide six and turning the balance sheet in cash flow. We ended the quarter with $53.9 million in cash, cash equivalents and investments. Free cash flow, which includes capital expenditure, was positive $300,000. This was above the midpoint of our guidance range and had line with companies gold to be free cash flow positive for the full year of 2024.
Speaker Change: Moving to slide six, I'm turning to the balance sheet and cash flow.
Nicholas Hawkins: We enter the quarter with $53.9 million in cash, cash requirements, and investments. Now I would like to turn to our outlook for the third quarter and the full year 2024, and please refer to slide 7. For the third quarter of 2024, we expect ACV plus royalties of $58.5 million to $62.5 million, revenue of $14.2 million to $15.2 million, non-gap operating loss of $5.5 million to $3.5 million, and Nongap free cash flow of negative $1.4 million to positive $1.6 million.
Speaker Change: We ended the quarter with $53.9 million in cash, cash requirements and investments.
Speaker Change: Free cash flow, which includes capital expenditure, was positive $300,000. This is above the midpoint of our guidance range and in line with the company's goal to be free cash flow positive for the full year of 2024.
Nick Hawkins: Now I would like to turn to our outlook for the third quarter and the full year of 2024 and refer to slide seven. For the third quarter of 2024, we expect ACV vast royalties of $58.5 million to $62.5 million, revenue of $14.2 million to $15.2 million, non-GAAP operating loss of $5.5 million to $3.5 million, and non-GAAP free cash flow of negative $1.4 million to positive $1.6 million. For the full year of 2024, our guidance is as follows. ACV plus royalties exit 2024, $62 million to $68 million, up 16% year of year at the midpoint, unchanged from the prior guidance.
Speaker Change: Now I would like to turn to our outlook for the third quarter and the full year 2024 and refer to slide 7.
Speaker Change: For the third quarter of 2024, we expect ACV plus royalties of $58.5 million to $62.5 million.
Speaker Change: Revenue of $14.2 million to $15.2 million.
Speaker Change: non-gap operating loss of 5.5 million dollars to 3.5 million dollars
Speaker Change: and Nongap free cash flow of negative $1.4 million to positive $1.6 million.
Nicholas Hawkins: For the full year of 2024, our guidance is as follows. ACB plus royalties to exit 2024 $62 million to $68 million, up 16% year over year at the midpoint, unchanged from the prior guidance. Revenue of $56 million to $58 million, increasing the midpoint of our guidance by $1 million, non-GAAP operating loss of between $22 million and $18 million, improving the midpoint of our guidance by $1.4 million, and non-GAAP free cash flow of negative $2.4 million to positive $2.6 million, unchanged from prior guidance.
Speaker Change: For the full year of 2024, our guidance is as follows.
Speaker Change: ACB plus royalties to exit 2024 $62 million to $68 million up 16% year-over-year at the midpoint unchanged from the prior guidance
Nick Hawkins: For revenue of $56 million to $58 million, increasing the midpoint of our guidance by $1 million. Non-GAAP operating loss of between $22 million and $18 million, improving the midpoint of our guidance by $1.4 million, and non-GAAP free cash flow of negative $2.4 million to positive $2.6 million unchanged from prior guidance. In conclusion, we are encouraged by our top-line trajectory and our effective cost management in the first half of the year. It resulted in the above guidance performance in the second quarter and the increased guidance in revenue and operating income for the full year. We are particularly excited about achieving positive free cash flow for two consecutive quarters.
Speaker Change: Revenue of $56 million to $58 million, increasing the midpoint of our guidance by $1 million.
Speaker Change: non-gap operating loss of between $22 million and $18 million, improving the midpoint of our guidance by $1.4 million.
Speaker Change: and non-GAAP free cash flow of negative $2.4 million to positive $2.6 million unchanged from prior guidance.
Nicholas Hawkins: In conclusion, we are encouraged by our top line trajectory and our effective cost management in the first half of the year that resulted in the above-guidance performance in the second quarter and the increased guidance in revenue and Operating Income for the full year. We are particularly excited about achieving positive free cash flow for two consecutive quarters. With that, I will turn the call back to the operator and open it up for questions. (inaudible)
Speaker Change: In conclusion, we are encouraged by our top line trajectory and our effective cost management in the first half of the year that resulted in the above guidance performance in the second quarter.
Speaker Change: and the increased guidance in revenue and operating income for the full year. We are particularly excited about achieving positive free cash flow for two consecutive quarters.
Nick Hawkins: With that, I will turn the call back to the operator, and I will clear that for questions.
Speaker Change: With that, I will turn the call back to the operator and open it up for questions.
Operator: Operator? Ladies and gentlemen, we will now begin the question-and-answer session.
Speaker Change: operator.
Operator: Ladies and gentlemen, we will now begin the question and answer session. The first question is from Mr. Matt Ramsey from T.D. Cowen, and it's now open.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
Operator: Martin. Should you have a question, please press star followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised.
Speaker Change: Should you have a question, please press star followed by the number 1 on your touchtone phone. You will hear a prompt that your hand has been raised.
Speaker Change: Should you wish to decline from the polling process, please press 1 followed by the number 2. If you are using a speakerphone, please make sure to lift your handset before pressing any keys.
Speaker Change: One moment while we prepare the Q&A roster.
Kevin Garrigan: Thank you, Mr. Matthew from TD Cohen. Good afternoon, everybody. Hey, Charlie, hi, Nick. Congrats on a very solid set of results and on the free castle metrics, and thank you guys. Keep delivering there, which is great to see. I guess my first question is around licensing activity and sort of design activity. There's, when you guys are focused on lots of segments of the market, but in particular on the emergence for AI products and also in the automotive aid ask domain. But at the same time, there's a lot of different segments of the semiconductor industry that are feeling cyclicality and having budget cuts associated with that cyclicality and whatnot.
Speaker Change: The first question is in the name of Mr. Matt Ramsey from T.D. Cowen, and it's now open.
Matthew Ramsay: Good afternoon everybody, hey Charlie, hi Nick, congrats on a very solid set of results and on the free cash flow metrics. Nick, I think you guys keep delivering there, which is great to see. I guess my first question is around licensing activity and sort of design activity across lots of segments of the market, but in particular around the emergence of AI products and also in the automotive ADAS domain. But at the same time, there are a lot of different segments of the semiconductor industry that are feeling the cyclicality and having budget cuts associated with that cyclicality and whatnot.
Speaker Change: Good afternoon, everybody. Hey, Charlie. Hi, Nick. Congrats on...
Speaker Change: A very solid set of results on the free cash flow metrics, Nick, and I think you guys keep delivering there, which is great to see. I guess my first question is...
Speaker Change: around licensing activity and sort of design activity. There's, I mean, you guys are focused on...
Speaker Change: Lots of segments of the market but in particular on the emergence for AI products.
Speaker Change: and also in the automotive ADAS domain.
Speaker Change: But at the same time, there's a lot of different segments of the semiconductor industry that are feeling...
Speaker Change: cyclicality and having budget cuts associated with that cyclicality and whatnot. So, it'd just be interesting, Charlie, to hear your perspective on how the licensing activity and the design activity looks for your customer base or potential customer base. Are they continuing to invest
Matthew Ramsay: So, it'd just be interesting, Charlie, to hear your perspective on how the licensing activity and the design activity look for your customer base or potential customer base. Are they continuing to invest? Or maybe increasingly so around AI. But is the customer base continuing to invest in new programs and new chip projects in the face of what's been some challenging cyclicality for the industry on the other side?
Kevin Garrigan: So it just be interesting to hear your perspective on how the licensing activity and the design activity looks for your customer base or potential customer base. Are they continuing to invest, or maybe increasingly so around AI? But the customer base and continuing to invest in new programs and new chip projects in the face of what's been some challenging cyclicality for the industry on the other side. Any thoughts there? I got a lot of thanks.
Speaker Change: or maybe increasingly so around AI. But is the customer base in continuing to invest in new programs and new chip projects in the face of what's been some challenging cyclicality for the industry on the other side? Any thoughts there? I appreciate it. I gotta follow up. Thanks.
Matthew Ramsay: Any thoughts there? I'd appreciate it. I have got to follow up. Thanks.
Charlie Janac: Thanks, Matt. So this is why we have always had the track record of being highly diversified in terms of applications, in terms of geographies, in terms of customer size, in terms of applications. And so we are not seeing, we're seeing some impact on royalties from the shipment volumes decline and some issues in the automotive industry, for example. But royalties are still a relatively small percentage of our revenue.
Charlie Janac: So this is why we have always been on the track record of being highly diversified in terms of applications, in terms of geographies, in terms of customer size, in terms of applications. And so we are not seeing; we're seeing some impact on royalties from the shipment volumes decline or some issues in automotive, for example. But, but royalties are still a relatively small percentage of our revenue. We're not seeing anything major on the design side. And because one design activity is essentially results in revenue for these companies three to four years down the road or seven years down the road for automotive.
Speaker Change: This is, thanks Matt. So this is why we have always been on the track record of being highly diversified in terms of applications, in terms of geographies, in terms of customer size, in terms of applications.
Speaker Change: And so we are not seeing...we're seeing some impact on royalties from the shipment volumes decline and some issues in automotive, for example, but royalties are still a relatively small percentage of our revenue. We're not seeing anything major on the design side.
Charlie Janac: We're not seeing anything major on the design side because, one, design activity essentially results in revenue for these companies three to four years down the road or seven years down the road for the automotive industry. And so the design activity continues. And typically, when people have challenges on the shipment side, they tend to invest in R&D to design their way out of any recession. So this quarter, we are seeing industrial applications be the majority of the design starts, with automotive, I'm sorry, with AI being a little bit less than the last two quarters. But overall, design activity is pretty much unaffected, as far as we can see.
Speaker Change: because one, design activity essentially results in revenue for these companies three to four years down the road or seven years down the road for automotive.
Charlie Janac: And so the design activity continues. And typically when people have challenges on the shipment side, they tend to invest in R&D to design their way out of any recessions. So we're, you know, this quarter, we are seeing industrial applications be actually the majority of the design starts with automotive. I'm sorry, with AI being a little bit less than the last two quarters, but overall the design activity is pretty much unaffected as far as we can see.
Speaker Change: And so the design activity continues, and typically when people have challenges on the shipment side, they tend to invest in R&D to design their way out of any recessions.
Speaker Change: So, we're, you know, this quarter we're seeing industrial applications be actually the majority of the design starts.
Speaker Change: with automotive, I'm sorry, with AI being a little bit less than the last two quarters. But overall, the design activity is pretty much unaffected as far as we can see.
Peter: Peter.
Peter: Thank you for that, Charlie. That's really interesting.
Charlie Janac: No, thank you for that, Tyler. That's really interesting. Maybe a follow-up on that topic and then a question for Nick. On that topic, Charlie, just to kind of extend that conversation a little bit, are you seeing any movement within the customer base to... potentially, just given the macro environment and whatnot, to maybe not want to invest in internal teams as much and think of you maybe more as an external IP vendor?
Kevin Garrigan: Maybe a follow-up there on that topic, and then a question for Nick. On that topic, Charlie, just to kind of extend that conversation a little bit.
Speaker Change: Thank you for that, Tyler. That's really interesting. Maybe a follow-up there on that topic and then a question for Nick.
Kevin Garrigan: Are you seeing any movement within the customer base to potentially just given the macro environment and whatnot to maybe not want to invest in internal teams as much and think of you maybe more as an external IP vendor? Is that the economic condition in a lot of industries and families? Is that affecting that shift at all?
Speaker Change: Charlie, just to kind of extend that conversation a little bit, are you seeing any movement within the customer base to
Speaker Change: potentially, just given the macro
Speaker Change: to maybe...
Speaker Change: not want to invest in internal teams as much and.
Charlie Janac: Is the economic condition in a lot of industries and semis, is that affecting that shift at all? And then, I guess my follow-up for Nick, we've had a couple of quarters now of free cash flow. I know you guys have some target goals out there as you grow the business to get back to non-gap profitability and whatnot. If you have any updated thoughts there, because I think that's sort of an important next hurdle because you've gotten over the one that was in front of you. Thanks.
Speaker Change: think of you maybe more as an external IP vendor. Is that, is the economic condition in a lot of industries and semis, is that affecting that shift at all? And then I guess my follow-up for Nick, we've had a couple of quarters now of free cash flow. I know you guys have some
Nick Hawkins: And then I guess my follow-up for Nick: we've had a couple of quarters now, free cash flow. I know you guys have some targeted goals out there as you don't gap profitability and whatnot. If you have any updated thoughts there, I think that's sort of an important next hurdle because you've gotten over the one that was in front of you.
Speaker Change: target goals out there as you grow the business to get back to sort of non-gap profitability and whatnot. If you have any updated thoughts there, because I think that's sort of an important next hurdle because you've gotten over the one that was in front of you. Thanks.
Charlie Janac: Thanks. So, in terms of the investment in internal IP. So when you have guys like Nick and some of these big corporations scrutinizing the budgets, they are basically saying, okay, should we keep developing internal system IP or should we abide from our tariffs for less? And we're continuing to make progress, as we said on the call, with essentially closing few large companies that have been 100% internal previously. And so that trend kind of continues. So when the economy gets difficult, we're actually kind of a beneficiary because we save people money, both on OpX and also on R&D cost and also on unit costs.
Nicholas Hawkins: So, you know, in terms of the investment in internal IP, right? So when you have, you know, guys like Nick in some of these big corporations, you know, scrutinizing the budgets, right? They are basically saying, okay, should we keep developing internal system IP or should we abide by Arteris for less? And we're continuing to make progress, as we said on the call, with essentially closing a few large companies that have been 100% internal previously, right?
Speaker Change: So.
Speaker Change: You know, in terms of the investment in internal IP, right?
Speaker Change: So, when you have guys like Nick in some of these big corporations scrutinizing the budgets, they are basically saying, okay, should we keep developing internal system IP or should we abide from Arteris for less?
Speaker Change: We're continuing to make progress as we said on on on the call
Speaker Change: with essentially closing few large
Speaker Change: companies that have been 100% internal previously, right? And so that trend kind of continues.
Nicholas Hawkins: And so that trend kind of continues. So when the economy gets difficult, we're actually kind of a beneficiary because we save people money, both on OPEX and also on R&D unit, on R&D costs and also on unit costs. So, you know, the economy getting a little bit squirrely is not necessarily bad for Arteris. On the excellent cash flow question, so, so, um... Yeah, people, as I, as I'm sure you know, because it pays the bills, and so we set out to achieve that in the first quarter and did it.
Speaker Change: So, when the economy gets difficult, we're actually kind of a beneficiary because we save people money, both on OPEX and also on R&D costs and also on unit costs.
Charlie Janac: So the economy, the limited scurly is not necessarily bad for our the excellent cash flow question. So yeah, people, as I'm sure you know, completely overused the phrase "laser-focused," but we are really genuinely laser-focused on cash flow. Not just free cash flow, but just cash flow period because it pays at the bills. And so we set out to achieve that in the first quarter and made it. I'm not sure that everybody totally believes that we would make it second quarter running, but we did because we're just super focused on it. We're now absolutely rigidly focused on making it for the third quarter as well, which is why we're guiding slightly positive for third quarter.
Speaker Change: You know, the economy being a little bit squirrelly is not necessarily bad for Arteris.
Speaker Change: And then Nick, your question.
Speaker Change: On the excellent cash flow question, so...
Speaker Change: Yeah, people, as I'm sure you know, completely overuse the phrase laser-focused, but we are really genuinely laser-focused on cash flow.
Speaker Change: Not just free cash flow, but just cash flow, period.
Speaker Change: because it pays the bills.
Speaker Change: And so we set out to achieve that in first quarter and made it. I'm not sure that everybody totally believed that we would make it second quarter running, but we did.
Nicholas Hawkins: I'm not sure that everybody totally believed that we would make it to the second quarter running, but we did, because we're just super focused on it. We're now absolutely rigidly focused on making it to the third quarter as well, which is why we guided slightly positive for the third quarter.
Speaker Change: because we're just super focused on it. We're now absolutely rigidly focused on making it for the third quarter as well, which is why we're guiding slightly positive for the third quarter.
Charlie Janac: And then the full year. If you do the math, which I'm sure you will, so I'll just say, rather than having to do the math and then ask the question, if you do the math on the guidance for free cash flow, you will see that plus plus a small amount in first quarter plus a small amount in second quarter plus a small amount in third quarter equals plus a small amount in the full year doesn't quite work out unless you go negative in the fourth quarter and, without wanting to give the game away, that's not our intention.
Nicholas Hawkins: and then the full year. If you do the math, which I'm sure you will, so I'll just save you the bother of having to do the math and then ask the question, if you do the math on the guidance for free cash flow, you'll see that plus.., plus a small amount in first quarter, plus a small amount in second quarter, plus a small amount in third quarter, equals plus a small amount in the full year doesn't quite work out unless you go negative in the full in the fourth quarter, and without wanting to give the game away that's not our intention, on a very prudent management of cash.
Nicholas Hawkins: Yeah.
Speaker Change: and then the full year.
Speaker Change: If you do the math, which I'm sure you will, so I'll just save you the bother of having to do the math and then ask the question, if you do the math on the guidance for free cash flow, you'll see that plus...
Speaker Change: plus a small amount in first quarter, plus a small amount in second quarter, plus a small amount in third quarter.
Speaker Change: equals plus a small amount in the full year doesn't quite work out unless you go negative in the full in the fourth quarter and without wanting to give the game away that's not our intention.
Charlie Janac: So we are sort of we are we are keeping very steadfastly on sort of cash flow on a very prudent, prudent amount of cash flow.
Speaker Change: So we are keeping very steadfastly on cash flow, on a very prudent management of cash flow.
Kevin Garrigan: No, thanks. Thank you very much, Nick. I really appreciate all the color, guys, and I just say, given what the last 10 days has been like, I'll use your term and say I'm laser focused on getting to the weekend. So well done, guys. Talk to you soon. That would be nice. Yeah. Yeah, indeed.
Speaker Change: Thank you very much, Nick. Really appreciate all the color guys, and I just say, given what the last 10 days has been like, I'll use your term and say I'm laser-focused on getting to the weekend. So well done, guys. Talk to you soon. That'd be nice.
Speaker Change: Yeah.
Speaker Change: Yeah, indeed.
Operator: Ladies and gentlemen, should you have a question, please press star followed by the number one on your touch-tone phone. Should you wish to decline from the polling process, please press star two. Again, if you are using a speaker phone, please make sure to lift the handset before pressing any keys.
Operator: Ladies and gentlemen, should you have a question, please press star followed by the number one on your touchtone phone. Should you wish to decline from the polling process, please press star 2. Again, if you are using a speakerphone, please make sure to lift the handset before pressing any key. Your next question comes from the line of Kevin Garrigan from West Park Capital. Please go ahead.
Speaker Change: Ladies and gentlemen, should you have a question, please press star followed by the number one on your touchtone phone.
Speaker Change: Should you wish to decline from the polling process, please press star 2. Again, if you are using a speakerphone, please make sure to lift the handset before pressing any keys.
Kevin Garrigan: Your next question comes from the line of Kevin Garrigan from West Park Capital. Please go ahead. Yeah, hey Charlie Nick, good afternoon. Let me echo my congrats on the solid results.
Speaker Change: Your next question comes from the line of Kevin Garrigan from West Park Capital. Please go ahead.
Kevin Garrigan: Yeah, hey, Charlie, Nick, good afternoon. Let me echo my congratulations on the solid results.
Kevin Garrigan: So to start, you know, some of the prospects that you haven't signed as customers, what are some of the reasons that they're waiting? I mean, you're saving them both time and money. So, is there like a product or a feature in development that they're, you know, waiting for you to bring to market? Or what are some of the reasons that you're getting?
Kevin Garrigan: Yeah, hey Charlie, Nick, good afternoon. Let me echo my congrats on the solid results. So to start, you know, some of the prospects that you haven't signed as customers, you know, what are some of the reasons that they're waiting? I mean, you're saving them both time and money. So, I mean, is there like a product or a feature in development that they're, you know, waiting for you to bring to the market? Or what are some of the reasons that you're getting?
Kevin Garrigan: So to start, you know, some of the prospects that you have ensigned as customers, you know, what are some of the reasons that they're waiting. I mean, you're saving them both time and money. So I mean, is there like a product or a feature in development that they're, you know, waiting for you to bring to some market or what are some of the reasons that you're getting. I mean, I think we're making good progress in sort of knocking down the list of companies every quarter. It's not that the people that are, you know, these large corporations are getting rid of their system IP, but they're making decisions not to enhance it sufficiently for the next generation.
Speaker Change: Thank you. Bye-bye.
Charlie Janac: I mean, I think we're making good progress in sort of knocking down the list of companies every quarter. It's not that the people that are, you know, these large corporations are getting rid of their system IP, but they're making decisions not to enhance it sufficiently for the next generation. And so the next generation or some specific requirements go to Arteris, and it takes
Speaker Change: I think we're making good progress in sort of knocking down the list of companies every quarter.
Speaker Change: It's not that the people that are, you know, these large corporations...
Speaker Change: are getting rid of their system IP but they're making decisions not to enhance it sufficiently for the next generation and so the next generation or some specific requirements go to Arteris.
Charlie Janac: And so the next generation or some specific requirements go to go to our chairs. But in a place with where feel where there's sort of rejection, right, there's, there's corporate politics. There's the opposition from the internal system IP group. There are a few companies that are taking technology directions that are too expensive first to follow that we don't; they're just too specialized, right. So it's a variety of reasons, but I think we're making good progress in, in essentially establishing beach heads in a few of these large companies every quarter. And it takes time. Got it.
Speaker Change: But in a place where there's sort of rejection, right, there's corporate politics.
Speaker Change: There's the opposition from the internal system IP group. There are a few companies that are taking technology directions that
Speaker Change: are too expensive for us to follow, that we don't, they're just too specialized, right? So it's a variety of reasons, but I think we're making good progress in essentially establishing beachheads in a few of these large companies every quarter.
Kevin Garrigan: Yeah, no, that makes sense. Okay.
Speaker Change: And it takes time. Got it.
Kevin Garrigan: And I do think there's just certainly about the child is earlier comment about how CFOs have a not playing the sole decision making process. I do think that is sort of an increasingly relevant commentary in the current climate, which is so a little bit aggressive for the semi players. Because increasingly, they are going to have to face up to measures that make their lives more efficient from a profitability perspective. And that plays them well to us. I know that that makes sense, especially as you know, costs of pretty much everything are going up these days.
Speaker Change: Just circling back to Charlie's earlier comment about how CFOs have a part to play in this whole decision making process.
Speaker Change: I do think that is sort of an increasingly relevant commentary in the current climate, which is still a little bit aggressive for
Speaker Change: for the semi-players because increasingly they are going to have to face up to measures that make their lives more efficient from a profitability perspective and that plays well to us.
Speaker Change: Yeah, no, that makes ton of sense, especially as, you know, costs of pretty much everything are going up these days, so I can definitely see how, you know, that benefits you guys.
Kevin Garrigan: So I can definitely see out. You know that that's a few guys. Okay, perfect.
Charlie Janac: And then any kind of update on Shine in what you're seeing there. I mean, has a region kind of gotten any worse or any better for you guys since, you know, 90 days ago. No, hasn't gotten worse and hasn't gotten better. There is a capital crunch in China. So startups have had trouble getting capital. There's been a number of Chinese semiconductor companies that have got out of business for insufficient capital. The, you know, sort of the political tension continues, but you know, there's a, you know, robust design activity in China. And so we're, we're seeing essentially a steady amount of business from China that you know is steady.
Speaker Change: Okay, perfect. And then
Speaker Change: Any kind of updates on China and what you're seeing there? I mean, has the region kind of gotten any worse or any better for you guys since, you know, 90 days ago?
Charlie Janac: No, it hasn't gotten worse, and it hasn't gotten better.
Speaker Change: Nope. It hasn't gotten worse and hasn't gotten better. There is a capital crunch in China, so startups have trouble getting capital. There's been a number of Chinese semiconductor companies that have gone out of business for insufficient capital.
Speaker Change: The
Speaker Change: So the political tension continues, but there's a robust design activity in China. And so we're seeing essentially a steady amount of business
Charlie Janac: That's kind of what we planned on. We didn't plan on getting any worse, and we didn't plan on getting any better. And that's kind of what we're getting. Okay, got it. Yes, we're pretty much status quo.
Speaker Change: from China that you know is steady. That's kind of what we planned on. We didn't plan on it getting any worse and we didn't plan on it getting any better and that's kind of what we're getting.
Kevin Garrigan: Okay, got it. Yeah, so pretty much the status quo. Okay. Um, and then, just, just last.
Kevin Garrigan: Okay.
Speaker Change: Okay, got it. Yeah, so pretty much status quo. Okay, that is, um, and then just
Kevin Garrigan: And then just. Just last question. If I can. We're, you know, a little over halfway through the year.
Speaker Change: Just last question, if I can.
Kevin Garrigan: Any updates on the new products front? No, no, no, no update. But we are; we are making very good progress. And we have, we're not ready to talk about it, but we have started deliveries to customers. Okay. Got it. Yes. And figured I'd ask. All right. Thanks, guys. Okay.
Speaker Change: We're, you know, a little over halfway through the year. Any updates on the new products front?
Charlie Janac: No, no, no, no, no updates. We, but we are, we are.
Speaker Change: No updates, but we are making very good progress, and we're not ready to talk about it, but we have started deliveries to customers.
Speaker Change: Okay, got it. Yeah, just figured I'd ask. All right, thanks guys.
Operator: There are no further questions at this time.
Charlie Janac: I'll hand a call over to Mr. Charlie, Janet, for a close remarks. Please go ahead. Well, thank you, everyone. Thank you for following our terrace. And we are looking forward to keeping you updated on our progress. And we appreciate your support. Thank you very much.
Speaker Change: There are no further questions at this time. I'll hand the call over to Mr. Charlie Janac for closing remarks. Please go ahead.
Charlie Janac: Well, thank you everyone. Thank you for following Arteris, and we are looking forward to keeping you updated on our progress. We appreciate your support. Thank you very much.
Charlie Janac: Well, thank you everyone. Thank you for following our terrace. And we are looking forward to keeping you updated on our progress. And we appreciate your support. Thank you very much.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.