Q3 2024 Arteris Inc Earnings Call
Operator: Good afternoon, everyone, and welcome to the Arteris third quarter 2024 earnings. Please note this call is being recorded and simultaneously webcast. All material obtained in with all rights reserved.
Good afternoon, everyone and welcome to the Artur <unk> third quarter 2024 earnings call.
Please note this call is being recorded and.
Simultaneously webcast it Amit.
All material and then.
That's pretty in copyright of our tiers.
It was 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: For opening remarks and introductions, I will now turn the call over to Erica Mannion of Sapphire Investor Relations.
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 for the third quarter ended September 30, 2024.
Erica Mannion: Thank you and good afternoon with me today from our terrorists are Charlie Janick, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer, Charlie will begin with a free for a review of the business results for the third quarter ended September 32020 for Nick will review the financial results for the third quarter, followed by the companies.
Erica Mannion: Nick will review the financial results for the third quarter, followed by the company's outlook for the fourth quarter and full year of 2022. We will then open the call for questions.
Erica Mannion: Outlook for the fourth quarter and full year of 2024, we will then open the call for questions before.
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 risks, uncertainties, and factors that could cause 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: Before we begin I'd like to remind you that management will make statements. During this call that a 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.
Erica Mannion: Additional information regarding these risks uncertainties and factors that could cause results to differ appear in the press release are terrorists issued today and in the documents and reports filed Bioterrorists from time to time with the Securities and Exchange Commission.
Erica Mannion: Please note, during this call, we will cite certain non-GAAP measures, including non-GAAP loss, non-GAAP net loss per share, and free cash flow, which are not measures prepared in accordance with U.S. GAAP. The 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. A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended September 30, 2024.
Please note during this call we will cite certain non-GAAP measures, including non-GAAP loss non-GAAP net loss per share and free cash flow, which are not measures prepared in accordance with U S. GAAP.
Erica Mannion: The non-GAAP measures are presented as we believe they provide investors with immune to 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 rec.
A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended September 32024.
Erica Mannion: 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 September 30, 2024.
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. So you see the press release for the quarter ended September 32024.
Erica Mannion: Listeners who do not have a copy of the press release for the quarter ended September 30, 2024 may obtain a copy by visiting the investor relations section of the company's website. In addition, management will be referring to the Q3 2024 earnings presentation, which can be found in the Investor Relations section of the company's website under the Events and Presentations tab.
Listeners, who do not have a copy of the press release for the quarter ended September 32024 may obtain a copy by visiting the Investor Relations section of the company's website.
Yeah.
In addition management will be referring to the Q3 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.
Charlie Janac: Now I will turn the call over to Charlie.
Charlie Janac: Thank you, Erica, and thanks to everyone for joining us on our call today. In the third quarter of 2024, we achieved a record annual contract value plus royalties of $60.5 million. We also delivered positive free cash flow of 1.1 million, making it our third consecutive quarter of positive free cash flow. Our success during the quarter was, in particular, fueled by demand for AI-driven enterprise computing and automotive SoC solutions, along with growing momentum in our other verticals. Business in the third quarter was primarily driven by increasing adoption of our technology by our current customer base.
Charlie Janick: Thank you Erica and thanks to everyone for joining us on our call today.
Charlie: In the third quarter of 2024, we achieved a record annual contract value plus royalties of $60 5 million.
We also delivered positive free cash flow of $1 1 million, making it our third consecutive quarter of positive free cash flow.
Charlie: Our success during the quarter was in particular fueled by demand for AI, driven enterprise computing and automotive SLC solutions, along with growing momentum in our other verticals.
Business in the third quarter was primarily driven by increasing adoption of our technology by our current customer base.
Charlie Janac: as an example. The top five global technology companies increased their deployment of Arteris products to enable development of their high-end AI chiplets and SOCs. This expanded engagement provides our customers with a broader access to our system IT. We expect to see designs from this customer used in a wide range of products, such as hyperscale cloud data center applications, as well as high-volume consumer electronics. Similarly, NIO, a pioneer and a leading company in the global smart electric vehicle market, deployed Arteris technology for its next generation of ADAS and LiDAR SoCs, using our Physically Aware Not technology to reduce silicon implementation risks and schedules.
As an example.
Erica Mannion: A top five global technology companies increase their deployment of our <unk> products to enable development of their high end AI chip lids and associates.
Erica Mannion: This expanded engagement provides our customers with a broader access to our system I T <unk>.
We expect to see designs from this customer used in a wide range of products such as Hyperscale cloud data center applications as well as high volume consumer electronics.
Similarly, MEO, a pioneer and a leading company in the global Smart electric vehicle market deployed Arcturus technology for its next generation of eight asset like ours will cease using our physically where nox technology to reduce silicon the implementation risks and schedule.
Charlie Janac: This is yet another example of our continued success in accelerating automotive electrification and autonomous driving, with over nine carmakers already using Arteris directly as the gold standard for functionally safe high-end automotive computing. And during the quarter, we also announced the adoption of Arteris NOC-IP and SoC integration automation software products by Tier 4 for Intelligent Vehicle SoC, then Storen for next generation of chiplet-based AI solutions, and VeriSilicon for HPC data center SoCs. Majority of the new designs in the third quarter came from enterprise computing, followed by automotive, consumer electronics, and communications vertical. The demand for multiple type of AI chips and chiplets from data centers to endpoint devices, including the smart edge, continues to be a key factor in our success this year.
Erica Mannion: This is yet. Another example of our continued success in accelerating automotive electrification and autonomous driving with over nine carmakers already using our terrorists directly as the gold standard for a functionally safe high end automotive computing.
Erica Mannion: During the quarter, we also announced the adoption of our terrorists knock IP and Soc integration automation software products by tier four for intelligent vehicles Soc.
Erica Mannion: Then starting for next generation of chip based AI solutions, and very silicon for H P. C data Center associates.
Okay.
Majority of the new designs in the third quarter came from enterprise computing, followed by automotive consumer electronics and communications verticals.
The demand for multiple type of AI chips, and chip lots from Datacenters to endpoint devices, including smart edge continues to be a key factor in our success this year.
Charlie Janac: Nearly half of our license deals in dollar terms in the year have enabled AI SoC development, more than doubling year over year. We continue to work with market-leading customers to further advance our technology, accelerating the broad shift towards smarter electronics. Accordingly, in October, we announced the addition of NOC tiling, supported by MESH, and innovation in our IP products to accelerate the design of AISOCs by providing scalable performance, power reduction, and increased design reuse. By organizing network interface units, or NIUs, into modular, repeatable blocks, both FlexNOC and NCore IP users can replicate verified functional modules into larger AI compute clusters.
Nearly half of our license deals.
In dollar terms in the year have enabled AI Soc development.
Erica Mannion: A doubling year over year.
We continue to work with market, leading customers to further advance our technology accelerating the broad shift towards smarter electronics.
Erica Mannion: Accordingly in October we announced the addition of knock tiling supported by mesh and innovation in our IP products to accelerate the design of <unk> by providing scalable performance power reduction an increased desire to reuse.
By organizing network interface units are and I'll use into modular repeatable blocks, both flex knock at EMCORE IP users can replicate verified functional modules into larger AI compute clusters.
Charlie Janac: These support sophisticated workloads for vision, machine learning, deep learning, natural language processing, including large language models and generative AI, both for training and inference applications. Earlier this year, we announced expanded support for ARMv9 architecture CPUs with Arteris and Core IP extensions for Joy customers. Additionally, we announced a partnership with Andes Technologies to accelerate RISC-V SoC adoption and are pleased to have been named by them as Partner of the Year. We recently expanded our collaboration with Sci5, announcing pre-verified RISC-V solutions for data centers with our NCORE product, providing faster, lower-risk SoC design for AI workloads and power efficiency requirements.
Erica Mannion: These support sophisticated workloads for vision machine learning deep learning natural language processing, including large language models are Jeremy I both for training.
Erica Mannion: Inference applications.
Earlier this year, we announced expanded support for RMB nine architecture, Cpus with Arcturus and core IP extensions for jewelry customers.
Additionally, we announced a partnership with Ed These technologies to accelerate risk five associate options and are pleased to have been named by them as a partner of the year.
Erica Mannion: We recently expanded our collaboration with Sy five announcing pre verified risk five solutions for data centers with our EMCORE product, providing faster lower risk S. O C designed for AI workloads and power efficiency requirements.
Charlie Janac: Moreover, Arteris joined the Synopsys Arc Access Program. The aim is to provide interoperable and optimized solution for mutual customers using Synopsys processors and Arteris Knox. Our strategy of supporting mid and high-end SOCs and expanding our footprint within large customers appears to be paying off. In dollar terms, the majority of our license deals in a quarter were with the top 10 technology companies as they create ever more sophisticated electronics that increasingly need AI-enabled, high-performance, and energy-efficient SOCs. To further expand our footprint at large customers, we have broadened our focus to include the support of microcontroller chips, many of which are now complex enough to benefit from our system IP technology.
Erica Mannion: Moreover.
Or terrorist joined the Synopsys arc access program. The aim is to provide interoperable and optimized solution for mutual customers using synopsys processors and our tourists Nox.
Erica Mannion: Our strategy of supporting mid and high end Soc and expanding our footprint with our large customers appears to be paying off.
In dollar terms the majority of our license deals in the quarter were with a top 10 technology companies as they create evermore sophisticated electronics that increasingly need AI and.
Erica Mannion: Labeled high performance energy efficient associates.
To further expand our footprint at large customers. We have broadened our focus to include the support of microcontroller chips. Many of which are now complex enough to benefit from our system might be technology.
Charlie Janac: These designs are numerous and are often produced in large volumes. As microcontrollers are used to control the operation of electronic systems such as industrial machinery, automotive functions, and IoT devices, they require low latency and low power consumption. To address these requirements, we have achieved the ability to create data packets with zero latency penalty for these types of devices. This strategy aims to expand customer usage of Arteris technology from complex SOCs to their mid to upper range microcontroller product lines and demonstrates the technological flexibility and scalability of our product. We are also aiming to address an even broader set of designs at our large customers.
Erica Mannion: These designs are numerous and are often producing large volumes.
Erica Mannion: As Microcontrollers are used to control the operation of electronic systems, such as industrial machinery automotive functions and Iot devices that require low latency low power consumption.
To address these requirements, we have achieved the ability to create data packets with zero latency penalty for these types of devices.
This strategy aims to expand customer usage of our tourist technology from complex associates did their mid to upper age microcontroller product lines and demonstrates the technological flexibility and scalability of our products.
Erica Mannion: We are also aiming to address an even broader set of designs that are large customers.
Charlie Janac: We believe the scale and scope of our long-term opportunity remain robust, supported by our current products and strong product pipeline of new system IP technologies, as well as growing relationships with some of the largest and most advanced electronics companies in the world. Our customers continue to innovate in exciting growth areas such as generative AI and autonomous driving using Arteris technology.
Erica Mannion: We believe the scale and scope of our long term opportunity remained robust supported by our current products and strong product pipeline of new system might be technologies as well as growing our relationships with some of the largest and most advanced electronics companies in the world.
Erica Mannion: Our customers continue to innovate and exciting growth areas, such as journey of AI and autonomous driving using <unk> technologies.
Charlie Janac: Before I hand the call over to Nick, we're excited to have two seasoned individuals join our leadership. We recently announced that Joachim Kunkel joined our board of directors and we most recently served as the general manager of the IP business unit at Synopsys where he grew revenue from nearly zero to over $1.5 billion. In addition, Ken Way joined as Arteris EVP of sales, leading our global and application engineering force, bringing with them a wealth of experience and industry knowledge gained from Acronix, Xilinx, Freescale, and others.
Before I hand, the call over to Nick we're excited to have two seasoned individuals join our leadership team.
Erica Mannion: We recently announced that Yadkin Congo during our board of directors, having most recently served as general manager of the IP business unit at Synopsys, where he grew revenue from nearly zero to over $1 5 billion.
Erica Mannion: In addition, Ken weigh joined as our terrorists EVP of sales, leading our global and application Engineering force, bringing with him a wealth of experience and industry knowledge gained from our chronic <unk> xilinx freescale and others.
Nick Hawkins: With that, I'll turn it over to Nick to discuss our financial results in more detail.
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 I review our third quarter results today, please note that 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. Also as a reminder I'll be referring to the 3Q 2024 earnings presentation which can be found in the investor relations section of the company's website under the events and presentations tab. Turning to slide four of the presentation, total revenue for the third quarter was $14.7 million, up 11% year-over-year, and at the midpoint of our guidance.
Nick Hawkins: Thank you Charlie and good afternoon, everyone.
Nick Hawkins: That's our view on third quarter results today. Please note that I'll be referring to GAAP as well as non-GAAP metrics.
Nick Hawkins: A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website.
Also as a reminder, I'll be referring to the <unk> 2024 earnings presentation, which can be found in the Investor Relations section of the company's website under the events and presentations tab.
Turning to slide four of the presentation total revenue for the third quarter was $14 $7 million up 11% year over year.
Nick Hawkins: The midpoint of our guidance range.
Nick Hawkins: At the end of the third quarter, annual contract value, or ACV, plus royalties, was $60.5 million at the midpoint of our guidance range, and a record high for the company. Remaining Performance Obligations, or RPO, at the end of the third quarter were $78.4 million, representing a 25% year-over-year increase.
At the end of the third quarter.
Nick Hawkins: Annual contract value or ICB, plus royalties was $65 million.
Erica Mannion: The midpoint of our guidance range on a record high for the company.
Yeah.
Erica Mannion: Remaining performance obligations or <unk>.
Erica Mannion: Third quarter was $78 $4 million, representing a 25% year over year increase.
Nick Hawkins: also going to the highest level we have ever reported. Gap gross profit in the quarter was $13.3 million, representing a gross margin of 90%. Non-GAAP gross profit in the quarter was $13.5 million, representing a gross margin of 92%.
Erica Mannion: Also going to the highest level, we have ever reported.
GAAP gross profit in the quarter was $13 3 million, representing a gross margin of 90%.
Erica Mannion: Yeah.
Erica Mannion: non-GAAP gross profit in the course of this $13 $5 million, representing a gross margin of 92%.
Nick Hawkins: Now turn to slide 5. Total cap operating expense for the third quarter was $21.2 million, representing a 4% year-over-year increase. non-GAAP operating expense in the quarter was $16.8 million, flat both sequentially and year-over-year. This reflects the team's continued focus on prudent management of our operating expense. As we look ahead, we will continue to limit spending to strategically critical areas while investing in profitable revenue growth. Cap operating loss for the third quarter was $7.9 million compared to a loss of $8.5 million in the prior year period.
Erica Mannion: Yeah.
Erica Mannion: Now turning to slide five.
Erica Mannion: Total GAAP operating expense for the third quarter was $21 $2 million, representing a 4% year over year increase.
Erica Mannion: non-GAAP operating expense in the quarter was $16 $8 million.
Erica Mannion: Both sequentially and year over year.
Erica Mannion: This reflects 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.
Erica Mannion: GAAP operating loss for the third quarter with some $9 million compared to a loss of $8 $5 million in the prior year period.
Nick Hawkins: and $7.4 million in the second quarter. Non-GAP operating loss was $3.3 million, which is better than the top end of our guidance. This represents a $1.2 million improvement compared to the prior year period, and a slight improvement sequentially. Net loss in the quarter was $7.7 million or diluted net loss per share was $0.20. non-GATT net loss in the quarter was $3.1 million or diluted net loss per share of 8 cents based on approximately 39.3 million weighted average diluted shares outstanding.
Erica Mannion: And $7 $4 million in the second quarter.
Erica Mannion: non-GAAP operating loss was $3 $3 million, which is better than the top end of our guidance. This represents a $1 2 million improvement compared to prior year period, and a slight improvement sequentially.
Net loss in the quarter was $7 $7 million or diluted net loss per share was 20 cents.
Erica Mannion: non-GAAP net loss in the quarter was $3 $1 million or diluted net loss per share of <unk> <unk> based on approximately $39 3 million weighted average diluted shares outstanding.
Nick Hawkins: Moving to slide six and turning to the balance sheet and cash flow. We ended the quarter with $54.5 million in cash, cash equivalents and investment. Pre-cash flow, which includes capital expenditure, was positive $1.1 million. This was 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.
Erica Mannion: Moving to slide six and turning to the balance sheet and cash flow.
We ended the quarter with $54 $5 million in cash cash equivalents and investments.
Erica Mannion: Free cash flow, which includes capital expenditure was positive one $1 million.
Erica Mannion: This was 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 2024.
Nick Hawkins: I'd now like to turn to our outlook for the fourth quarter and for the full year 2024 and refer now to slide 7. For the fourth quarter of 2024, we expect ACB plus royalties of $63 million to $67 million. revenue of $14.7 million to $15.7 million with non-GAAP operating loss of $5 million to $4 million and non-GAAP or pre-cash flow of negative $0.9 million to positive $1.1 million.
Erica Mannion: I would now like to turn to our outlook for the fourth quarter and for the <unk>.
Erica Mannion: Full year 2024.
Erica Mannion: Now to slide seven.
Erica Mannion: Okay.
Erica Mannion: For the fourth quarter of 2020, full we expect ACD plus royalties of $63 million to $67 million.
Erica Mannion: Revenue of $14 $7 million to $15 $7 million.
Erica Mannion: non-GAAP operating loss of $5 million to $4 million.
Erica Mannion: And non-GAAP.
Erica Mannion: Free cash flow of negative.
Erica Mannion: $9 million.
Erica Mannion: Positive $1 $1 million.
Nick Hawkins: For the full year 2024, our guidance is as follows. ACB plus royalties to exit 2024 at $63 million to $67 million, up over 16% year-over-year at the midpoint, midpoint unchanged from the prior guidance. Revenue of $56.9 million to $57.9 million, increasing the midpoint of our guidance by $0.4 million. Non-cap operating loss of between $17.1 million to $16.1 million, improving the midpoint of our guidance by $3.4 million. and non-gap free cash flow of positive $0.7 million to positive $2.7 million, which is $1.6 million higher than the prior guidance at the midpoint and represents an improvement of $18.9 million year over year.
Erica Mannion: For the full year 2024, our guidance is as follows.
Erica Mannion: ACD, thus royalties to exit 2024, $63 million to $6 million to $7 million up over 16% year over year at the midpoint midpoint unchanged from our prior guidance.
Erica Mannion: Revenue of $56 9 million dose 57, $9 million, increasing the midpoint of our guidance by $4 million.
Erica Mannion: non-GAAP operating loss of between $17 $1 million to $16 one Melinda.
Erica Mannion: Improving the midpoint about guidance by $3 $4 million.
Erica Mannion: And non-GAAP free cash flow positives at zero point $7 million to positive $2 $7 million, which is $1 $6 million higher than the prior guidance at the midpoint and represents an improvement of $18 $9 million year over year.
Nick Hawkins: We are very encouraged by our top line trajectory and by our effective cost management in the first three quarters of the year that resulted in strong performance for the third quarter and improved guidance for revenue, operating income and free cash flow for the full year. We are particularly excited about achieving positive free cash flow for three consecutive quarters.
Erica Mannion: We are very encouraged by our top line trajectory.
Erica Mannion: Our effective cost management in the first three quarters of the year. It resulted in strong performance for the third quarter and improved guidance for revenue.
Erica Mannion: Income and free cash flow for the full year.
Erica Mannion: We are particularly excited about achieving positive free cash flow for three consecutive quarters.
Operator: With that, I will turn the call over to the operator and open it up for questions.
Erica Mannion: With that I will turn the call over to the operator and open it up for questions.
Operator: Operator? Thank you. We will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press the star followed by the 2. If you are using a speakerphone, please lift a handset before pressing a button.
Erica Mannion: Okay.
Erica Mannion: Yeah.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen.
Speaker Change: We are now we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
Speaker Change: You will hear a prompt that you had has been raised.
Speaker Change: Should you wish to decline from the polling process. Please press the star followed by the two.
Speaker Change: If you're using a speaker phone please lift the handset before pressing any keys.
Joshua Buchalter: Our first question is from Joshua Buchalter from TV Cowan.
Speaker Change: Our first question is from Joshua Buchalter from TV Cowen. Please go ahead.
Charlie Janac: Please go ahead. Hey, guys. Thank you for taking my questions and congrats on solid results in a choppy backdrop. To start, and speaking of the choppy backdrop, I mean, this has been an interesting earnings season with China Auto's positive and the rest of the world weak. Maybe you could spend a couple minutes talking about, you know, in an environment where China continues to take share in the global auto market, I mean, is that a net positive or is that a headwind for you guys? Because, you know, obviously one of your lead customers, Mobilize, had been losing share in that market, but also there's a lot of local vendors that are also building up their semiconductor portfolios where you have partnered.
Joshua Buchalter: Hey, guys. Thank you for taking my questions and again congrats on solid results in a in a choppy backdrop.
Joshua Buchalter: To start in and speaking on that a bit choppy backdrop I mean this has been a.
Speaker Change: Interesting, earning season with China Auto is positive in the rest of the world weak.
Speaker Change: Maybe you could spend a couple of minutes talking about.
Speaker Change: In an environment, where China continues to take share in the global auto market I mean is that a net positive.
Speaker Change: Or is that a headwind for you guys. Because obviously one of your big customers mobilize had been losing share in that market, but also there's a lot of.
Speaker Change: Local vendors that are also building up their semiconductor portfolios, where you have partnered so I'd just be curious to hear your view on that backdrop and the impacts to your business. Thank you.
Charlie Janac: So I'd just be curious to hear your view on that backdrop and the impacts to your business. Thank you. So, um, yeah. But this sort of automotive disruption, it's kind of difficult to pick winners ahead of time, right? And so we have, our strategy has been to be in as many projects as we can capture. And so we are in startups, we're in automotive car manufacturers, we're in tier ones. And so regardless of market share shifts, Arteris should benefit. But we do have a strong presence in the China automotive market. I think NIO was kind enough to allow us to announce that they are using us for some of their automotive SOC projects, right?
Speaker Change: So.
Speaker Change: Yeah I mean.
Speaker Change: But this so automotive disruptions, it's kind of difficult to clean. This ahead of time right and so we have our strategy has been to be in as many projects as we are as we can capture.
Speaker Change: And so we are in startups, where in our automotive car manufacturers were in tier ones.
Speaker Change: And so regardless of market share shifts are terrorists you benefit but.
Speaker Change: We do have.
Speaker Change: Strong presence in.
Speaker Change: China automotive market I think.
Speaker Change: Neil was kind enough to allow us to announced that they are using us for some of their some of their automotive SLC projects right and there's there's a number of others.
Charlie Janac: And there's a number of others. And so from the Arteris perspective, it doesn't make a whole lot of difference. However, the Chinese have put a huge amount of effort in their electric vehicles. They're very nice vehicles. We've been in a number of them. But because of the tensions, the rest of the world is going to probably throw up some protective barriers, right? And so I don't know how much the market share is really going to is going to shift, except that the electric car inside China is going to be the, eventually the predominant technology.
Speaker Change: And so.
Speaker Change: From our probably our choice perspective.
Speaker Change: It doesn't make.
Speaker Change: To make a whole lot of difference however.
Speaker Change:
Speaker Change: <unk> have put a huge amount of effort in their electric vehicles, they're very nice vehicles, we've been in a number of them.
Speaker Change: But because of the the tensions.
Speaker Change: The rest of the world is going to probably throw up some protective barriers right and so so I don't know how much the market share. It is really going to is going through a shift.
Speaker Change: Except that the electric car inside China is going to be there.
Speaker Change: Eventually the predominant technology.
Nick Hawkins: Can I just add a little bit of colour to Charlie's excellent comments, Josh? There are, I mean, as he rightly points out, we have a very small number of Chinese auto OEMs that we can actually, we're entitled to use their names, but you recognise most of the names that we do have, if we are able to tell you. Some of the ones that we can tell you that are in that area, that Chinese auto area, that are public include Black Sesame, which I'm sure you know, Horizon, Semidrive. Those are all very powerful vendors in that space, but there are many others we can't mention, unfortunately.
Speaker Change: Hey, guys I have a little bit.
Speaker Change: To Charlie's excellent comments Josh.
Speaker Change: They're all I mean, as you rightly pointed out we have.
Speaker Change: A very small number of of Chinese auto Oems that we cannot actually we're entitled to use their names, but you recognize most of the names that we do have if we were able to able to tally.
Speaker Change: Some of the ones that we can tell you that are in that are but.
Speaker Change: But area that the Chinese auto area.
Speaker Change: That all public include Blacks estimate, which I'm sure you know horizon semi driving.
Speaker Change: Those are all very powerful.
Speaker Change: And that are in that space, but there are many others, we call mentioned unfortunately.
Nick Hawkins: On the subject of Mobileye, excellent question. Mobileye is obviously facing a few headwinds and also is facing some headwinds specifically in China, but Mobileye is still very strong. It's one of the strongest in the market. They have an excellent set of products. There has definitely been some headwind to our royalties, as you've seen, and we've talked about in previous calls, solely derived from Mobileye week shipments in the first and second quarters, to an extent that was started to be remedied in the third quarter. But the whole impact of short, let's call it short royalties from Mobileye versus our previous expectation has a less than 1% impact on revenue for the whole year.
Speaker Change: On the subject of mobile excellent question my biopsies are facing.
Speaker Change: A few headwinds and <unk>.
Speaker Change: And also is facing some headwinds specifically in China.
Speaker Change: But mobile is still strike a very strong it's it's one of the strongest in the market. They have an excellent set of.
Speaker Change: Of products there.
Speaker Change: There is there has definitely been some headwind to our royalties as you've seen and we've talked about in previous calls.
Speaker Change: Solely derived from mobile a weak shipments in the first and second quarters to an extent that was stopped.
Speaker Change: <unk> seem to be remedied in the third quarter, but the whole impact of of short.
Speaker Change: Let's call it short.
Speaker Change: Royalties from mobilized versus our previous expectation.
Speaker Change: <unk> has a less than 1% impact on revenue.
Nick Hawkins: So it's not as dramatic as you might think. And, you know, if I may add in terms of Mobileye, Mobileye is not going anywhere. They are designed into a bunch of, you know, very impressive vehicles and, you know, they are going to continue to be the leader despite, you know, short-term headwinds or those kinds of things. We're strong believers that Mobileye is going to continue to do well in this market because of their superior software technology.
Speaker Change: Oh, yes.
Speaker Change: It's not as dramatic as you might think.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: If I may that in terms of mobile.
Speaker Change: Mobilize not going anywhere they are designed into a bunch of Oh, you know very impressive vehicles and you know.
Speaker Change: They are going to continue to be the leader.
Speaker Change: Despite short term headwinds or those kinds of things, where we believe we're strong believers that mobile is going to continue to do well.
Speaker Change: In this in this market because of.
Speaker Change: They're they're superior software technology.
Joshua Buchalter: Thank you both for all the color there.
Speaker Change: No. Thank you both for all the color there.
Charlie Janac: To follow up and move away from the auto space, I mean, it was great to see that Enterprise Computing Design was sort of the leading contributor this quarter. Any more details you can give us on sort of the contribution today and maybe what that funnel can look like over the next year or so as you diversify the revenue base? Thank you. Yeah, I mean, you know, the business continues to be strong. We've, as you said, it's a choppy market with us having to be nimble and responsive to various developments. However, one of the things that we were talking about on the earnings call is we are making a move also into the microcontroller market.
Speaker Change: To follow up and move away from the auto space.
Speaker Change: You see the enterprise computing design with sort of the.
Speaker Change: Leading contributor this quarter.
Speaker Change: Any more details you can give us on sort of the contribution today and maybe what that funnel can look like over the next year or so as you diversify the revenue base. Thank you.
Speaker Change:
Speaker Change: I mean, yeah. The business continues to be strong we saw as you said, it's it's a choppy market with with us having to be be nimble and responsive to various developments.
Speaker Change: However, one of the things that we were talking about it on the earnings call is.
Speaker Change: We are making a move also into the microcontroller market.
Nick Hawkins: Microcontrollers have now become sophisticated enough that at least the mid-range to upper range of the microcontroller market can benefit from our system IP technology. So that opens up an additional segment. So we're very excited about that. And we're also excited about our strong product pipeline for next year. So we continue to be prudent but optimistic.
Speaker Change: Microcontrollers.
Speaker Change: Now become sophisticated enough that at least the mid range to upper range of the of the Oh.
Speaker Change: Microcontroller market can benefit from our from our system might be technology. So that opens up an additional segment. So we're very excited about that we're also excited about our strong product pipeline now for Oh for next year. So we're we continue to be a.
Speaker Change: Prudent but optimistic.
Nick Hawkins: Yeah, one thing I'll just add to that, Charlie, is that, as you can actually see, Joshua, from the investor deck that's on our website now, the enterprise computing actually still remains slightly our biggest revenue contributor, slightly larger than automotive. It's in the low 30% total of revenue, and it's growing quite nicely. A lot of that's driven out of the enterprise space, sorry, the AI element of the enterprise space. And if you look at AIML as its own sector, I can't call it a vertical because it's really a horizontal, that actually contributes to about 40% of total revenue.
Speaker Change: Yeah, one thing I would just add to what Charlie is that.
Speaker Change: I actually see Josef on the.
Speaker Change: Investor deck, that's on our website now.
Speaker Change: The.
Speaker Change: Enterprise computing is actually still remains slightly our biggest revenue contributor.
Speaker Change: Slightly it's slightly larger than automotive, it's it's it's in the low 30% total revenue and it's growing quite nicely a lot of that's driven out of the sort of at the enterprise space. So sorry, the AI element to the enterprise space.
Speaker Change: And I if.
Speaker Change: If you look at AI ml as a.
Speaker Change: Sector sector account all of the vertical because it's really a horizontal.
Speaker Change: It actually contributes to about 40% of total revenue, but if it goes it goes across all our verticals as you probably know so so some some really interesting dynamics going on that.
Joshua Buchalter: But that goes across all our verticals, as you probably know. So there's some really interesting dynamics going on there. Thank you both. Appreciate it.
Speaker Change: Thank you both I appreciate it.
Kevin Garrigan: Your next question is from Kevin Garrigan from Rosebud Securities, please. Yeah, hey, Charlie, Nick, good afternoon. And let me echo my congrats on the solid results.
Erica Mannion: Your next question is from Kevin Garrigan from Rosenblatt Securities. Please go ahead.
Kevin Garrigan: Yeah, Hey, Charlie Nick Good afternoon, and let me Echo my congrats on the solid results.
Charlie Janac: Going off of Josh's question on the Chinese auto market, so I guess a different way to kind of ask the question, are you are you seeing design activity in the Chinese EV market increasing at a faster clip versus other parts of the world? And I think the I think you guys had mentioned the average time from licensing to production for automotive is about two and a half to three years. Are you seeing these Chinese customers looking to accelerate that timeline? Um, yes, I mean, um, we're I mean, we're seeing design activity throughout the world, right?
Kevin Garrigan: Going off roads, Josh This question on the Chinese auto market. So I guess, a different way to kind of ask the question.
Speaker Change: Are you are you seeing design activity in the Chinese EV market, increasing at a faster clip versus other parts of the World then I think the.
Speaker Change: I think you guys had mentioned the average time from licensing to production for automotive is about two and a half to three years are you seeing these Chinese customers looking to accelerate that timeline.
Speaker Change: Yeah I mean.
Speaker Change: Work.
Speaker Change: I mean, we're seeing design activity.
Speaker Change: Throughout the World right I mean people are.
Charlie Janac: I mean, people, you know, precisely as you said, the design cycles for automotive chips are long. And so, right now, people are really building chips for the 2030 automotive model year, right? People typically try to design their way out of recessions. And so, even when there's shipment volume impact, the impact on the design activity, from our perspective, at least, doesn't seem to be great. And certainly, the Chinese design activity is robust.
Speaker Change: Yeah precisely as you said the the.
Speaker Change: The design cycles for automotive chips, along and so right now people aren't really building chips for the 2030.
Speaker Change: Automotive a model year right and so.
Speaker Change: People typically try to design their way out of recessions and so even even when there is a shipment volume impact.
Speaker Change: The impact on the design activity from our perspective at least doesn't seem to be great and.
Speaker Change: Certainly the Chinese design activities robustness, but there's also.
Charlie Janac: But there's also, you know, a number of designs that are being done in the US and in Europe. Okay. Got it. That makes sense.
Speaker Change: Number of designs that are being done in the U S and in Europe.
Speaker Change: Okay got it got it that makes sense.
Charlie Janac: And then in the microcontroller market, do the licensing deals in this market, do they have the same ASPs as those in complex SOCs? I was afraid you were going to ask that. So the answer is no. The ASPs are lower, typically. But the royalty volumes are very, very high, and the designs are numerous. So our strategy in the microcontroller market is really to engage with the largest microcontroller suppliers and essentially not just capture one design, but to capture an entire generation of microcontrollers, which is typically designed together. So that would essentially improve the account yield.
Speaker Change: And then in the in the microcontroller market due to the licensing deals that in this market do they have the same asp's as those in complex sse's.
Speaker Change: Right.
Speaker Change: Oh I was afraid you were going to have that.
Speaker Change: So uh huh.
Speaker Change: So if your answer is no.
Speaker Change: The asps are lower typically.
Speaker Change: But the royalty volumes are very very high and the designs are numerous.
Speaker Change: So our strategy in the microcontroller market is really to engage with the largest microcontroller suppliers.
Speaker Change: And and essentially.
Speaker Change: Not just capture one design, but to capture an entire generation of Microcontrollers, which typically designed together so.
Speaker Change: So that would.
Speaker Change: Essentially include the couch.
Charlie Janac: Because as your question implies, if you focus on one or two microcontroller projects, the ASP will be lower than what we're seeing in the SOC market. But if you bundle everything together, then essentially, you know, things will go to the right. Yep. Okay. Yeah, that makes sense.
Speaker Change: <unk> yield.
Speaker Change: Hum.
Speaker Change: As you as your question implies if you focus on one or two microcontroller projects.
Speaker Change: Pete will will be lower than what we're seeing in India in the Soc market.
Speaker Change: But if you bundle everything together then essentially things.
Speaker Change: We will go to the right.
Speaker Change: Yeah, Okay, yeah that makes sense.
Charlie Janac: And then just last one, if I could, and congrats on the announcement of the NOC tiling. How has kind of customer feedback been for this product? Well, that particular product is just coming out. People have been asking for that for a long time. So we're finally about to commence deliveries. But we have a significant number of customers waiting for it because what it does is that the AI sections are very, very complicated. And so what customers want to do is they want to design a certain section, get it verified, and then replicate it across the chip to basically build larger clusters out of these tiles, if you will.
Speaker Change: And then just last one if I could and congrats on the announcement of <unk>, Thailand, how is it kind of customer feedback been for this product.
Speaker Change: Well, it's just coming at that particular product is just coming out.
Speaker Change: I've been asking for that for a long time, so we have finally.
Speaker Change: Started or are about to come.
Speaker Change: Commenced deliveries, but we have a significant number of customers waiting for it.
Speaker Change: Because what it does is that the AI sections are very very complicated and and so what what the customers want to do is they want to design a certain section.
Speaker Change: Get it verified and then replicated across the chip to basically build larger clusters. All of these all of these titles. If you will it's why it's called tightly and so yeah. You know so so this is this was built at the request of our AI customers and we think that the reception is going to be very good.
Nick Hawkins: That's why it's called tiling. And so this is built at the request of our AI customers. And we think that the reception is going to be very good. But we've had lots of requests for it. But the orders and the revenue impact will probably not start until next year.
Speaker Change: What we saw.
Speaker Change: I had lots of requests for it.
Speaker Change: But the orders and the revenue impact will probably not start till next year.
Nick Hawkins: Hey Kevin, it's Nick. Just a little bit of extra colour, I don't want to interrupt Charlie midstream, but going back to the MCUs question, it is definitely a new incremental sort of product area for us to an extent. Having said that, we have had some history in MCUs in the past, I can't name the customer unfortunately, but it's a very large US semi, top semi company, and the volumes that we have, this is actually for a Bluetooth application, were very very substantial, and so the royalties also out of that were very substantial. So just to give you an understanding that we have actually visited this space before, we're just emphasising it much more now.
Nick Hawkins: Hey, Kevin this is Nick.
Nick Hawkins: Just a little bit of extra color and didn't want to interrupt the Charlie midstream, but going back to the <unk> question.
Nick Hawkins: It is it is definitely a a new ink.
Nick Hawkins: Incremental.
Nick Hawkins: Sort of product area for us to an extent, having said that we have had some history and M see us in the past I can't name the customer Unfortunately, but it is a very large.
Speaker Change: Semi.
Speaker Change: Top semi company.
Speaker Change: And the volumes that we have this is actually for Bluetooth application.
Speaker Change: We're very very substantial.
Speaker Change: So the royalties also apple that we're very substantial so just to give you an understanding that we have actually visited the space for a while we just emphasizing.
Speaker Change: Emphasizing it much more now.
Kevin Garrigan: Okay, perfect. I appreciate the color, guys. Thank you.
Speaker Change: Okay perfect I appreciate the color guys. Thank you.
Speaker Change: Yeah.
Gus Richard: Ladies and gentlemen, as a reminder, should you have any questions, please press the star, followed by the number on your screen. Your next question is from Gus Richard from Northland. Please go ahead. Yes, thanks for allowing me to ask some questions, and let me add my congratulations on the quarter. The cloud service providers are designing their own ASICs. There's quite a bit of data suggesting that those are in flight and starting to ramp, and I'm just wondering if you could talk about how many of the top DSPs you're involved with now, or maybe even better yet, how many of the top 30 tech companies that actually design kits you're involved with?
Speaker Change: Ladies and gentlemen, as a reminder, should you have any questions. Please press the star followed by the number one.
Speaker Change: Your next question is from Gus Richard from Northland. Please go ahead.
Speaker Change: Yes.
Gus Richard: Thanks for letting me asking questions and let me add my congratulations on the quarter.
Speaker Change:
Gus Richard: Cloud service providers are designing their own asics.
Gus Richard: Quite a bit of data, suggesting that those are.
Speaker Change: In flight and starting to ramp and I'm just wondering if you could talk about.
Speaker Change: How many of the top.
Speaker Change: <unk> involved with now or maybe even better yet how many of the top 30 tech companies that to actually design chips you're involved with.
Charlie Janac: So, yeah, so we sort of created our own top 10 index, top 30 index by market cap, right, of technology companies. And so out of those 30, about 15 are designing chips, about half of them at the moment. And basically 10 out of the 30 are using Arteris for something.
Speaker Change: So yeah. So we've sort of created our own top that index was up 30 index by by market cap right of technology companies.
Speaker Change: So out of those 30 about 15 are are designing chips about half of them.
Speaker Change: At the moment.
Speaker Change: And basically 10 out of the 30 or our using our terrorists.
Speaker Change: For something.
Charlie Janac: Got it.
Speaker Change: Got it.
Charlie Janac: And you had a large deal with one of the top five tech companies on this deal to expand the use of your products, correct? Correct. So this would be one of the large hyperscalers, yes.
Speaker Change: And you had a large deal with one of the top five tech companies.
Speaker Change: This deal to expand the use of your products correct.
Speaker Change: Correct. So this would be one of the yes. So this would be one of the large hyperscale are as yet.
Nick Hawkins: And then, Nick, for you, you know, I calculate your, from cash flow, your bookings were on the order of like $23, $24 million, am I in the right zip code? Close. I think that's sort of a good blended average between third quarter and fourth quarter. We do have a bit of seasonality on bookings, as you know, Gus. Typically, the fourth quarter is our strongest bookings quarter by some way. Last year was a little different. We had a sort of a reasonable third quarter and a weaker fourth quarter in terms of bookings. This year, it's back to kind of normal, which is a decent third quarter, but a much stronger fourth quarter.
Speaker Change: Got it and then.
Speaker Change: Nick for you.
Speaker Change: I calculate your from cash flow Youre bookings were on the order of like 23 $24 million in Miami right Zip code.
Speaker Change:
Speaker Change: Close.
Nick Hawkins: I think that's sort of a good blended average between third and fourth quarter, we do we'd have a bit of seasonality on on bookings as you know Gus.
Nick Hawkins: Typically the fourth quarter is our strongest bookings quarter by by some way last year was a little different.
Nick Hawkins: We had a.
Speaker Change: Sort of a reasonable third quarter in a weaker fourth quarter in terms of in terms of bookings. This year, it's back to kind of normal which is a decent third quarter, but a much stronger fourth quarter. So the number that you quoted there is it is I guess kind of on average between.
Nick Hawkins: So the number that you quoted there is, I guess, a kind of an average between the two. 3, Q3, Q4. Yeah, exactly. Q2 and Q3. Q3 and Q4. on it.
Speaker Change: Between the two.
Speaker Change: Between Q3 and Q4.
Speaker Change: Yeah, exactly Q3, Okay, Q2, three and Google.
Speaker Change: Got it and then.
Charlie Janac: And then... You know, you guys just talked about a new product, and it doesn't sound like, um... Tyling, and Mesh Networks use that new product. And I'm just wondering if you guys have any updates on. on how many companies you're engaged with and when you expect to launch. So, as you say, the tiling and the mesh features is not the product that we were sort of alluding to earlier. We do have installations, and we hope to provide more information on the fourth quarter earnings . . Okay, got it. And have you recognized any revenue on that product at this point?
Speaker Change: Yeah.
Speaker Change: You guys talked about a new product and it doesn't sound like.
Speaker Change: The tiling and mesh networks is that new product and I'm. Just wondering if you guys have any update on.
Speaker Change: And you know how many companies you are engaged with and when you expect to launch.
Speaker Change: We.
Speaker Change: Uh huh.
Speaker Change: So as you say the tiling and the mesh features its not not the product that we weren't sort of stuff.
Speaker Change: Alluding to earlier, we we do have we do have installations.
Speaker Change: And we hope to provide more information on the fourth quarter earnings call.
Speaker Change: Okay got it and have you recognized revenue on that product at this point.
Charlie Janac: Not yet, no. It's more of an early access thing at the moment, Gus, so revenue will follow in due course. Got it.
Speaker Change: No.
Speaker Change: So it's more of an early access more of an early access are thinking that I Havent got discussed so revenue will follow in due course.
Gus Richard: That's it for me. Thanks so much. Thanks, guys.
Speaker Change: Got it.
Speaker Change: Is it for me thanks, so much.
Speaker Change: Thanks, guys.
Speaker Change: Okay.
Operator: There are no further questions at this time.
Speaker Change: There are no further questions at this time I would now like to turn the call over to Charlie <unk> for closing comments.
Charlie Janac: I would now like to turn the call over to Charlie Janac for closing. Well, thank you, everyone, 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 months. And we look forward to updating you on all of our business progress in the quarters to come. So thank you.
Speaker Change: Well.
Charlie Janick: Thank you everyone for your time and interest in our journey as we look.
Charlie Janick: Forward to meeting with you at the upcoming Investor conferences and.
Charlie Janick: They were participating in during the next couple of months and months and we look forward to updating you on all of our business progress in the quarters to come so thank you.
Operator: Ladies and gentlemen, this concludes your conference call for today. Thank you for participating and I ask that you please disconnect. Thank you, everyone. Bye.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today.
Speaker Change: Thank you for participating and ask that you. Please disconnect your lines.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].
Charlie Janick: Yeah.