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spk05: Good afternoon, everyone, and welcome to the R3's first quarter 2024 earnings call. Please note, this call is being recorded and simultaneously webcast. All material contained in the webcast is sole property and copyright of the R3's 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.
spk10: Thank you and good afternoon. With me today from our terrace are Charlie Janik, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the first quarter ended March 31, 2024. Nick will review the financial results for the first quarter, followed by the company's outlook for the second quarter and full year of 2024. We will then open the call for questions. Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to 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 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 March 31, 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 obligation, please see the press release for the quarter ended March 31, 2024. Listeners who do not have a copy of the press release for the quarter ended March 31, 2024 may obtain a copy by visiting the investor relations section of the company's website. In addition, management will be referring to the Q1 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.
spk02: Thank you, Erika, and thanks to everyone for joining us on the call this afternoon. We're excited to report a solid first quarter of 2024 with annual contract value plus royalties of $58.2 million. I'd also like to highlight that we delivered a positive free cash flow quarter, and we're reaffirming our target of achieving positive free cash flow in 2024. This quarter's success was driven by continued robust licensing activity across all of our verticals, led in particular by enterprise computing and automotive deals. As with recent quarters, the rise in artificial intelligence is a driving factor for our customers, with approximately half of our first quarter license deals enabling AI and machine learning design starts, increasingly supporting generative AI and large language model applications. We continue to expand our foothold with large customers as five of our significant wins were with top 30 global technology companies. Each of these wins, with a major system and semiconductor companies, increasingly demonstrates the growing demand for commercial system IP vendors such as Arteris. We saw continued healthy design activity from our customers, primarily in enterprise computing and automotive, followed by deployments for communications and industrial applications and consumer electronics. One of the enterprise computing wins in the first quarter was one of our largest system IP deals with a top-10 semiconductor company. Specifically, it significantly expands the deployment of our terrorist network on chip IPs across a growing number of SOC designs. This business relationship continues our trend of securing relationships with major technology companies that can be expanded over time. As of today, approximately half of the top 30 semiconductor and technology companies are our terrorist customers. As mentioned earlier, the growth of AI is fueling the increasing adoption of our terrorist products, which we believe are well-suited to tackle the growing design size, complexity, performance, power, and cost requirements of AI chips. As an example of this trend, we announced that Rebellion's A pioneering AI semiconductor startup in Korea has licensed FlexNoc network-on-chip IP and Magilum SoC automation integration software for its next-generation neural processing unit aimed at generative AI. Rebellions chose Arteris per RIP and our software enabling superior performance and design flexibility for their inference chips while meeting energy efficiency requirements needed to deliver cost-efficient AI hardware computing at scale. On the product front, our FlexNOC 5 network on chip launched in the middle of last year continues to find solid adoption. This adoption spans across all our verticals and all of our main geographical markets from small to large customers. Building upon this momentum, we announced the release and immediate availability of the latest version of our Encore cash coherent network on chip IP. Arteris Encore supports any processor IP that connects to NCORE-supported protocols, offering multiple protocols, flexible configurations, and ISO 26262 functional safety, and is utilized by Mobileye, a long-time customer who is at the forefront of the autonomous vehicle evolution. The expanded NCORE IP also delivers on the previously announced Arm and Arteris Automotive Partnerships. Targeting a broad range of automotive designs from microcontrollers to autonomous driving chips, the collaboration results in pre-validation of our Teres N-Core interconnect IP, integrating with and supporting various ARM V9-based processor IPs for automotive semiconductors. The aim is to enable next generation of automotive electronics, including advanced driver assistance systems, or ADAS, cockpit and infotainment systems, vision, radar, LIDAR, body and chassis control, and more. By optimizing and pre-validating Arteris N-Core network on chip to work seamlessly with ARM's latest processor IPs, customers benefit from accelerated path to high-performance, power-efficient, and safe automotive SOCs. Speaking of automotive collaboration, at the recent Automotive Computing Conference, Mercedes-Benz presented a vision for standardization of automotive computing and multi-die chiplets, supported by partners including ARM, Intel Foundry, Synopsys, Renaissance, Arteris, and others. We are excited to be partnering in pioneering a reference with Mercedes-Benz for its network-on-chip and last-level cache implementations as part of the ADU platform, addressing a full range of autonomous driving applications. Yet another collaboration in the first quarter included expanding our RISC-V ecosystem support to help offer on-chip connectivity for companies deploying the DAMO Zhuan-T processor IP in their SoCs. This collaboration underscores Arteria's capability to support processor choices made by our customers, including the support of both ARM and RISC-V processors on the same SOC. Currently, certain macroeconomic dynamics, including geopolitical uncertainties and the US BIS restrictions concerning China-US trade, continue to impact our business, though we are not seeing further deterioration at this time. While these dynamics do create near-term headwinds, we believe that the scale and scope of our long-term opportunity reigns robust, supported by a strong product pipeline of new system IP 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 using our terrorist system IP technologies. With that, I'll turn it over to Nick to discuss our financial results in more detail.
spk01: Thank you, Charlie, and good afternoon, everyone. As I review our first quarter results today, please note I will 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. As a reminder, I will be referring to the first quarter 2024 earnings presentation and 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 first quarter was $12.9 million, down 2% year over year, but up 4% sequentially and above the midpoint of our guidance range. If we take into account the change to radical revenue treatment in the second quarter of 2023, the year-over-year revenue growth would have been 16%. At the end of the first quarter, annual contract value, or ACV, plus royalties was $58.2 million, also above the midpoint of our guidance range. Remaining performance obligations, or RPO, at the end of the first quarter were $74.7 million. representing a 30% year-over-year growth, growing to the highest level we have ever reported and reflecting a solid quarter in terms of new license deals. Gap gross profit for the first quarter was $11.5 million, representing a gross margin of 89%. Non-gap gross profit in the quarter was $11.7 million, representing a gross margin of 91%. Now moving to slide five. Total gap operating expense for the first quarter was $20.6 million compared to $20.3 million in the fourth quarter. Non-gap operating expense in the quarter was $17 million, up 1% sequentially, but 4% lower than the first quarter of 2023, reflecting the team's continued focus on prudent management of our operating expenses. We'll continue to limit spending to strategically critical areas while investing in profitable revenue growth. Gap operating loss for the first quarter was $9.1 million compared to a loss of $8.8 million in the prior year period. Non-gap operating loss was $5.3 million or 41% compared to a loss of $5.6 million in the prior year period. Net loss in the quarter was $9.4 million or diluted net loss per share of $0.25. Non-GAAP net loss in the first quarter was $5.6 million or diluted net loss per share of $0.15 based on approximately 37.7 million weighted average diluted shares outstanding. Moving to slide six and turning to the balance sheet and cash flow. We ended the quarter with $53.4 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 in line with the company's goal to be free cash flow positive in the current year. I would now like to turn to our outlook for the second quarter and the full year of 2024 and refer now to slide seven. I would draw your attention to the fact that our guidance methodology has changed to guiding operating loss and free cash flow in terms of dollars instead of percent of revenue. For the second quarter, we expect ACB plus royalties of $58 million to $62 million, revenue of $13.2 million to $14.2 million, with non-GAAP operating loss of $6.5 million to $4.5 million. Non-GAAP free cash flow of negative $1.4 million to positive $1.6 million, reflecting strong sales in the first quarter. For the folio 2024, our guidance is as follows. ACB plus 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 of between $23.4 million to $19.4 million. non-gap free cash flow of negative 2.4 million dollars to positive 2.6 million dollars in conclusion we are encouraged by the strong start to 2024 in our top line and our effective cost management which has resulted in above guidance performance in all the financial metrics for the first quarter i'm particularly encouraged by the positive free cash flow generated in the quarter We aim to maintain this momentum for the remainder of the year.
spk03: With that, I will turn the call over to the operator to open it up for questions.
spk04: Thank you.
spk05: Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you would like to cancel your request, please press star two. Please ensure you lift the handset if you're using a speakerphone before pressing any keys.
spk03: One moment, please, for your first question.
spk04: Your first question comes from the line of Matt Ramsey from TD Cowen.
spk05: Your line is now open.
spk09: Thank you very much, everybody. Good afternoon. First of all, Nick, congrats on the free cash flow. I wanted to ask just a general question around the RPO, almost $75 million and looks like up 30% year over year. And just given some of the accounting changes and different things like that, I just wanted to revisit RPO and how deals are flowing into RPO and what that 30% growth, is that sort of a sustainable level growth? that you guys think could be reflective of the business going forward and just kind of remind us how that should sort of peanut butter its way into revenue over time and give sort of confidence in what those free cash flow numbers are on a directional basis. Thanks.
spk01: Yeah. Hi, Matt. Happy earnings day. As always, a great question. The way that, just to remind, the way that RPO works is as deals flow in, they flow into RPO. As they get recognized into revenue, RPO amortizes. And so generally, if deals are coming in faster than revenues being recognized, then RPO increases. We have had a sort of a special tailwind by the shift to breathable revenue treatment because that throttled back the speed at which RPO is being recognized into GAAP revenue. Nevertheless, all of that 74.7 million of RPO will flow into revenue at some point. So it gives you some sort of understanding of the strength of the future revenue pipeline, if there is such a thing. And that represents somewhere close to a year and a half's worth of run rate revenue. which is essentially in backlog, for want of a better word. So, yeah, we're pretty encouraged by that. To answer your question of can you expect that rate of increase to go on ad infinitum, the answer is logically not really. It will continue to increase because deal flow is still very strong. But the 30% is in part because of the shift to backlog. to ratability. But don't expect it to suddenly die and stop growing. It will continue to grow.
spk09: Got it. No, that's helpful.
spk01: And could grow quite strongly.
spk09: That's helpful, Nick. Just remind me really quickly, which quarter will you guys report where the RPO number year over year will be sort of an apples to apples?
spk01: So there's another very good question. So the second quarter of 23 was when we shifted completely. We did have a couple of vestigial deals in the third quarter and a little bit in the fourth quarter of 23 where we hadn't quite managed to stem the non-rattable deals. But now they have gone completely. But to all intents and purposes, we will be apples to apples lapping right-sized numbers by end of this quarter, essentially. So going into third quarter, we will be like-for-like comparable, and there won't be this confusion anymore of, well, if it hadn't have been for the shift of relatability, growth would have been X. Right now, if we don't point that out, I think it would be misleading.
spk09: Got it.
spk01: So when we're reporting third quarter, essentially, you'll see true lifeline.
spk09: My second question, Charlie, obviously what's happening in AI across, starting in the data center, but then I think gradually getting into client-side devices, automotive, the edge, networking, all the other markets over time. The AI leader in the industry seems to be speeding up its roadmap and innovation keeps moving at a quicker and quicker pace. I'm wondering if you're seeing that reflected in the interactions that you guys are having with the customer base in terms of the faster things move, it would seem the more likely and more value it would be for folks to use third-party IP for some of these very complicated systems where it's been stressing internal teams as it was. Are you seeing that speeding up of the treadmill affecting any of your business conversations, especially as you roll out new products to license?
spk02: Yeah, I mean, one of the things that we're learning as we talk to customers is that, you know, we talked about automotive being kind of slow, right, which is both an advantage and a disadvantage in a certain sense. Generally, AI, on the other hand, is just the opposite. It's extremely quickly moving because the large language model evaluations and the algorithms are changing very, very quickly. So the silicon has to be done really, really fast in order to make sense for the customers. And then, of course, the lifetime of those designs may be relatively short compared to automotive as well. So the answer is yes, things are moving. There's a lot of different approaches. There's lots of innovations. And, you know, there's, you know, I think we've said that half the design starts that we saw in a quarter were basically machine learning designs. And, you know, people are trying to get to very, very fast design cycles, which essentially puts a premium on automation and productivity of system IP generation. So it's an opportunity for sure.
spk09: Nope, that totally makes sense. I guess my last question, and I thought it was very clear in your script, Charlie, that there are still some headwinds in China, but things have certainly stabilized and there's not any additional things. I guess my question is, do you feel like where we are right now in China for you guys is sort of a permanent steady state? Or if there were catalysts to, I don't know, unlock the roadblock there and to have things returned a little bit more normal, what would those be? And are they even remotely on the table or likely?
spk02: Yeah, I mean, obviously, as a management team, we consider a number of scenarios, right? There's the, you know, scenario where there's some unpleasantness around Taiwan, which will make things worse. But there's also a scenario that the US and China will come to some kind of an accommodation, where you know, where things get better. are you know on those sort of scenarios the one that we're banking on is that thing stays the same that basically We're the business is going to continue at the current level. We're going to keep getting new customers in China new design wins But that it's not going to go to the I would say the previous bonanza before the before the the headwinds sort of started between between China and the US so we're we're planning and for things to stay the same. We're planning for status quo in terms of our Chinese business. No.
spk09: Perfectly clear. Thank you for that. Congrats, guys, on the progress. I'll jump back in the queue.
spk04: Your next question comes from the line of Hans Mosesman from Rosenblatt.
spk05: Your line is now open.
spk08: Yeah, thanks. Hey, congrats, guys, on the free cash flow. Hey Charlie, can you give us a sense on ASP trends over the past quarter, licensing, royalties, how's that trend or how's it looking as the year progresses?
spk02: So the ASPs have been growing nicely. We're pretty much on track. Discussed you know with the ASP trends that we discussed on the IPO a couple years ago Where you know as we get more? products into the market With with with higher ASPs and as the chips get more complex and use more system IP the ASP is growing growing very nicely and And I think, you know, our financials show that, right? So that trend continues. And what we said is that we're going to be at a million-dollar average by 2026 ASP. And I think that can very easily happen.
spk08: And right now, they're around half of that?
spk02: Yeah. So right now, I would say it's a little bit – I think last year we were somewhere around $460,000. Now we're probably over $500,000, probably $550,000, something like this. But the reason that we know we're on track is that a number of the deals are over a million. And so it's actually probable that eventually the average deal will be over a million. So the ASPs are going well.
spk01: Hey, Hans, this is Nick. Nice to catch up again. One other piece of color, in addition to Charlie's commentary there, is when you look at royalties, and we've had this conversation before, royalties, the ASP in royalties is also in the ascendancy as we have transitioned away from royalties several years ago into being dominated by the mobility market, the cell phone, smartphone market, with very small royalty rates, now to more dominated by automotive, which has probably three times the royalty rate of smartphones and similar devices. And some are much higher than that, as Charlie likes to point out, the space... type application has substantially higher ASV. So that's another drag factor to the upside.
spk08: Okay, that's helpful. And just a question back in the IPO, you guys, and since then, I guess, you've been saying that in automotive platforms, you can see as many SOCs per car north of 20, or maybe between 20 and 25 from what it was a few years ago, maybe three or four. Is that still seen to happen over the next several years?
spk02: Yes, absolutely.
spk01: I think we're pretty much on track to where that was originally conceived in terms of the timeline. Okay.
spk02: And it can be more. I mean, you know, we had a discussion with a customer, and, you know, they were telling us that they need 46 cameras for level 4 driving, right? So that would imply SOC consumption way in advance of basically having four camera SOCs, right? So, you know, yeah, we feel pretty comfortable with that projection.
spk08: Okay. Then the last question, and I'll go back in the queue. the time from licensing to tape out or from time to license to production for your customer engagements, has that changed over the past couple of years?
spk02: So it has, I mean, in a particular vertical, it has not, right? So the automotive design still takes two and a half, three years. What has changed is that as people do more generative AI designs and those designs, the large language models and the algorithmic technologies that are being employed, you know, have impact on the underlying silicon. And so that segment is moving very, very fast, much faster than any other segment that we've seen. People are looking for nine-month design cycles or less. and product life cycles probably of one or two years only. And so that segment is moving very, very fast, and that would, on the average, lower the design term. But within each individual segment, we're not seeing much change because we enable people to go faster, but the chips are more complex, right? So there's a constant fight between automation and productivity and complexity within each segment.
spk08: Right, right. Oh, that makes sense. All right, guys. I'll go back to the queue. Thanks.
spk05: As a reminder, should you have a question, please press star followed by the number one on your touchtone phone. Your next question comes from the line of Kevin Garrigan from West Park Capital. Your line is now open.
spk06: Yeah. Hey, Charlie and Nick. Good afternoon. Let me echo my congrats on the progress. Going off of Hans' question regarding SOCs and cars, I know you gave an example of a customer looking for multiple vision cameras. You're seeing a lot more automotive OEMs introduce, I would say, infotainment features right now, while ADAS may be taking a little bit longer than expected. So Is there kind of one category that you're seeing more designs for currently than others, like maybe infotainment or the design starts, you know, kind of focusing on all functions across the board?
spk02: So we're seeing, I mean, the automotive progress continues, right? So we're seeing some more tier ones starting to build chips. we're starting to see some more OEMs build chips, right? In terms of categories, you know, there's a lot of noise and publicity about automated driving, but we don't see the design activity really changing a whole lot, right? Because those electronic decisions are made seven to eight years before deployment. So on the design side, we're not seeing any slowdown in the in the automotive driving direction. It's just that people are realizing, and we've been saying, I've been feeling this all along, is that the automated driving in a city environment is going to be exceedingly difficult without changing the cities, and therefore will take a lot longer. But on highways and secondary highways, primary highways and secondary highways, automated driving is highly useful and very practical and very valuable. And that will continue.
spk06: Okay, perfect. Thanks, Charlie. I appreciate that color. And just as a follow-up, so you noted that there are several more evaluations and prospective customers in the pipeline for FlexNOC 5. Do you expect many of these customers to kind of decide sooner rather than later whether to use Arteris or is it more kind of maybe an end-of-year phenomenon?
spk02: No, I mean, FlexNOC 5 has been doing very well, right? So the penetration is meeting expectations. The second generation physical awareness provides very valuable capability to customers below 60 nanometer. And so, you know, FlexNOC 5 has a 30% pricing uptick. And so, So that's a combination of value and ASP increase that really helps the business. And what we're looking forward to is, you know, sometime this year to announce some further innovation that will, you know, further provide additional value.
spk03: Okay, perfect. Thanks, guys.
spk01: Thanks, Kevin. Thanks, Kevin.
spk05: Your next question comes from the line of Gus Richard from Northland. Your line is now open.
spk07: Yes, thanks for letting me ask a few questions, and congratulations on entering the promised land, a positive free cash flow.
spk02: Yes, we promised it, and we're doing our absolute best to make it happen.
spk07: You delivered. Firstly, she mentioned five deals with 30 that top global technology companies. And I was just wondering if you could explain exactly what you mean by top 30 global tech companies. Is it semis? Is it hyperscalers? Is it by market cap? Is it by revenue? You know, just a little bit more color on that statement.
spk02: Yeah. So in order to have a sort of a unified methodology, we're going by market cap. And so It's basically top 20 semiconductor companies by market cap, and then top 10 system houses by market cap. And together they make up what we call the top 30. It's the Arteris Top 30 Technology Index.
spk07: Got it. And then which buckets were those five companies in? The semi-companies or the system houses?
spk02: Both. Both sides. Okay. Yeah, the reason we didn't want to do revenue, we go by revenue, is because the revenue from the public semiconductor companies is available, but you don't know what the system house chip revenue really is, right? So that's why it just made market cap just made sense from sort of a unified methodology perspective.
spk07: Got it. And then just looking at the numbers and, you know, sort of realizing, you know, how your cash works, is it reasonable to assume that the bookings in the quarter are on the order of $6 million?
spk01: So I'll ask that question again, Gus. I didn't get the tail end of it.
spk07: Oh, sure. You know, just looking at sort of your accounting and making some back of the envelope calculations, is it reasonable to assume that bookings were on the order of $6 million in the quarter?
spk01: No, hopefully a lot more than that.
spk07: Yeah, a lot more than that.
spk01: I mean, our OPEX runs at sort of high 70s. Sorry, not high 70s, 17s in the quarter. So, yeah, but basically TCV of bookings, total contract value, has to run in terms of collections in excess of that to be cash flow positive in the quarter. And then you've got plus or minus working capital shifts at the end of the quarter and the beginning of the quarter, which can sometimes mess things up a little bit. But that's the basic deal. So bookings, which is what we would call TCV, plus and royalties we would throw into that bucket, so it's everything together, have to be north of the OPEX number. Okay, got it. The non-GAAP OPEX, and it has to be the non-GAAP OPEX because obviously the SBC is not a cash expense, if that makes sense. Does that make sense, Gus?
spk07: Yeah, absolutely. Yeah, that does indeed. And then, you know, typically you guys announce a new product every year, and I'm just wondering are there any thoughts on, you know, sort of when and what, a new product might be this year?
spk02: Not ready to announce, but what we said is that we expect there to be impact on revenue in the second half. And that's not changed from the fourth quarter to this quarter. We've been working very hard. We've been making progress, and we still feel that revenue that we're going to make it good on that statement.
spk07: Got it.
spk02: And we're very excited about it.
spk07: Yeah. That's it for me. Thanks so much.
spk02: Thanks, Gus.
spk01: Thank you, Gus.
spk05: There are no further questions at this time. I will now turn the call over to Charlie Janak for closing comments.
spk02: Thank you, everyone, for the good questions and being on the call. And we look forward to seeing most of you at the upcoming conferences that we're participating in. And we look forward to updating you on the progress of the company. Thank you very much.
spk05: That concludes our question and answer session.
spk03: Have a great call, and you may now disconnect.
spk00: Music Music Thank you. you Thank you. Thank you. So, Bye. Thank you. Bye. Thank you. you
spk03: Good afternoon everyone and welcome to the RTA's first quarter 2024 earnings call.
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