Arteris, Inc. (NASDAQ:AIP) Q4 2023 Earnings Call Transcript
Arteris, Inc. (NASDAQ:AIP) Q4 2023 Earnings Call Transcript February 20, 2024
Arteris, Inc. misses on earnings expectations. Reported EPS is $-0.18 EPS, expectations were $-0.17. Arteris, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, everyone, and welcome to the Arteris Fourth Quarter and Year End 2023 Earnings Call. Please note, this call is being recorded and simultaneously webcast. All material contained in the webcast is sole property and copyright of our Arteris, Inc. with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.
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 fourth quarter and full year ended December 31, 2023. Nick will review the financial results for the fourth quarter and full year followed by the company's outlook for the first quarter and full year of 2024. We will then open the call for questions. Before we begin, I'd like to remind you management, will make statements during this call that are forward-looking statements, within the meaning of federal securities laws. These statements involve material risks and uncertainties that, could cause actual results, or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements.
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. 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. The non-GAAP measures are presented as we believe they provide investors with the means of evaluating, and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP.
A reconciliation of these non-GAAP measures, to the nearest GAAP measure can be found in the press release for the quarter ended December 31, 2023. In addition, for a definition of certain of the key performance indicators used in this presentation, such as annual contract value, confirmed design starts, active customers and remaining performance obligations, please see the press release for the quarter ended December 31, 2023. Listeners who do not have a copy of the press release, for the quarter ended December 31, 2023, may obtain a copy by visiting the Investor Relations section of the company's website. Now, I will turn the call over to CEO, Charlie Janac.
Karel Janac: Thank you, Erica, and thanks to everyone for joining us on the call this afternoon. We're excited to report a strong finish to 2023, with annual contract value also trialing 12-month variable royalties of $56.1 million. We added four new customers in the fourth quarter, totaling 23 new customers for the year. Our customer base continues to expand, across all of our key verticals and regions, with particular success in Automotive, Enterprise, Consumer and Communications. Our customer base has now delivered approximately 3.5 billion SoCs, to their Electronic Systems customers. The continued growth of SoC design complexity and associated design costs, increasingly drives our customer base, towards commercial system IP.
As we look back at 2023, this accelerating industry adoption, of commercial system IP solutions is demonstrated, by a record number of license deals, and record-high customer chip-design activity, with 29 confirmed design starts for the quarter, and 95 for the year. I'm delighted to note that we added four new major semiconductor, and system house companies, as customers during the year. Not only are we seeing growth in a number of our customers, we're also seeing further design penetration within our existing customer base. License revenue was strong across all of our vertical markets and balanced across geographies. Notable achievement includes strong adoption of FlexNoC version 5, of the Physically Aware network on chip, which now represents the majority of FlexNoC sales.
Customer design wins, from the past years are developing into a growing loyalty base for Arteris, as we've seen a 32% year-over-year increase in royalties in 2023. Historically, our royalty revenue was primarily driven, by leading-edge applications within the consumer space. But today, we see that our royalty stream is comprised of a broader mix, across numerous customers in Automotive, Consumer Electronics and Enterprise Computing and other applications. Our continued momentum in artificial intelligence and machine learning, or AI/ML space remains strong, with AI/ML representing over 50% of our license deals in the quarter, across a broad section of our verticals. For example, Rain AI is another innovative AI chip company, which recently selected the Arteris FlexNoC 5, Physically Aware network on chip IP for use in its edge AI accelerator.
The low power, low latency and high-bandwidth capabilities of FlexNoC 5, will be critical to helping Rain and its customers, to process the large data requirements needed for generative AI applications. Communications, where AI supports the globally accelerating transition to 5G is another vertical, where we saw strong adoption of our Arteris products, heard the growing need for high bandwidth, low-power 5G chips that can only reach their performance goals by leveraging Arteris system IP. As an example, HQ, a leading innovator in 5G and AI technologies has licensed Arteris FlexNoC for use in its comprehensive, multi-mode 4G, 5G base station chip. It is a risk five base device that offers a scalable architecture, high throughput and low power consumption, effectively shrinking an entire base station onto a single SoC.
SCALINX is another innovator in communications infrastructure, which is licensed both our Ncore and FlexNoC interconnect IPs for use in their next-generation modem SoC, with the aims to provide telecom players with power to deliver ultra-high capacity, multi gigabit links over longer distances, at an optimized total cost of ownership. In Automotive, we have seen an accelerating proliferation, of AI-enabled advanced driver assistance systems, ADAS, and other advanced electronics to support rectification, automated driving, and electronic unit ECU consolidation, ensuring all electronics adhere to automotive functional safety standards and other mission-critical applications. To continue to expand our technology to better support this endeavor in Q4, we announced that Ncore cache coherent interconnect IP has achieved ISO 26262 certification.
A key milestone to ensure safe technology is incorporated into modern vehicles and other autonomous systems. Similarly, our Magillem SoC integration Automation Software also received its ISO 26262 TCL1 functional safety certification, further expanding upon Arteris's ongoing commitment, to support mission-critical safety applications. The strong focus on automotive was recognized in the fourth quarter, with Arteris being awarded the Autonomous Vehicle Technology of the Year Award by AutoTech Breakthrough. Finally, in the fourth quarter, Arteris achieved ISO 9001 Quality Management System certification, further supporting customer confidence in our commitment, to product and process quality. Currently, certain macroeconomic dynamics, including geopolitical uncertainties and the U.S. BIS restrictions with respect to China U.S. trade, continue to impact our business.
While these dynamics do create near-term headwinds, we believe that the scale and scope of our long-term opportunity remains robust. This is illustrated by a robust product pipeline, of new system technologies and solid relationships, with some of the largest electronics companies in the world, who continue to innovate in exciting areas, such as general AI and autonomous driving. With that, I'll turn it over to Nick to discuss our financial results in more detail.
Nicholas Hawkins: Thank you, Charlie, and good afternoon, everyone. As I review our fourth quarter and full year results today, please note that I'll be referring to non-GAAP metrics. A reconciliation of GAAP to non-GAAP financials, is included in today's earnings release, which is available on our website. Total revenue for the fourth quarter was $12.5 million, up 12% year-over-year and above the top end of our guidance range. At the end of the fourth quarter, annual contract value or ACV, plus trailing 12-month variable royalties, and other revenue was $56.1 million, also above the top end of our guidance range. Remaining performance obligations, or RPO, at the end of the fourth quarter was $72.7 million, representing 26% year-over-year growth, going through its highest level, on record for Arteris.
GAAP gross profit for the quarter was $11.1 million, representing a gross margin of 88%. Non-GAAP gross profit for the quarter was $11.3 million, representing gross margin of 90%. Total GAAP operating expense for the fourth quarter was $20.3 million, compared to $20.4 million in the third quarter, down 1% sequentially. Non-GAAP operating expense in the quarter was $16.8 million, flat sequentially. As we've done throughout 2023, we will continue to proactively and prudently manage operating expenses, limiting spending to strategically critical areas. GAAP operating loss for the fourth quarter was $9.2 million, compared to a loss of $9.1 million in the year ago period. Non-GAAP operating loss was $5.5 million, or 44%, compared to a loss of $5.8 million in the year ago period.
Net loss in the quarter was $10.5 million, or diluted net loss per share of $0.29. Non-GAAP net loss in the quarter was $6.8 million, or diluted net loss per share of $0.18, based on approximately 36.8 million weighted average diluted shares outstanding. Turning now to the balance sheet and cash flow. We ended the quarter with $53 million in cash, cash equivalents and investments. Cash flow used in operations was approximately $3 million in the quarter, free cash flow, which includes capital expenditure was approximately negative $3.4 million, coming in better than the top end of our guidance range. Moving on to our annual results. Total revenue for 2023 was $53.7 million, up 7% year-over-year, reflecting our switch to a fully ratable revenue model, at the end of the second quarter.
Total operating expenses were $83.7 million, compared to $75.7 million in the year ago period. While non-GAAP operating expenses were $69.1 million, compared to $62.8 million in the year ago period. Net loss in 2023, was $36.9 million, or net loss per share basic and diluted, of $1.03. Non-GAAP net loss was $21.6 million, or net loss per share basically diluted, of $0.60 based on approximately 35.7 million weighted average shares outstanding. Cash flow used in operations was $15.7 million in 2023, while free cash flow, which includes capital expenditure was negative $17.2 million, or 32% of revenue. I would now like to turn to our outlook for the first quarter, and full year of 2024. For the first quarter, we expect ACV plus trailing 12-month variable royalties of $55 million to $59 million, and revenue of $12.1 million to $13.1 million, with non-GAAP operating loss margin, of 41% to 61%.
And non-GAAP free cash flow margin, of negative 9% to positive 11%, reflecting strong sales in the prior quarter. For the full year 2024, our guidance is as follows: ACV plus trailing 12-month variable royalties to exit 2024, at $62 million to $68 million, up 16% year-over-year at the midpoint. Revenue of $54.5 million to $57.5 million, non-GAAP operating loss margin of 33% to 43%. And non-GAAP free cash flow margin of negative 5% to positive 5%. We are encouraged by the above guidance performance and strong deal activity in the prior quarter. While we expect some quarter-to-quarter cash flow fluctuations, throughout the year due to the timing of deals, we expect that with the actions we have taken in 2023, we will become free cash flow positive in 2024.
With that, I will turn the call over to the operator to open it up for questions. Operator?
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