Arteris, Inc.

Good afternoon, everyone, and welcome to the Artteris fourth quarter and full year 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 Artteris incorporated with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erika Mannion of Sapphire Investor Relations. Please go ahead.

Thank you and good afternoon. With me today from Artteris are Charlie Janek, 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 year ended December 31st, 2024. Nick will review the financial results for the fourth quarter, followed by the company's outlook for the first quarter and full year of 2025. We will then open the call for questions. Before we begin, I'd like to remind you that management will make statements during this call that are forward looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated and you should not place undue reliance on forward looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appear in the press release Artteris issued today and in the documents and reports filed by Artteris 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 US GAAP. The non-GAAP measures are presented as we believe that they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for or superior to financial measures prepared in accordance with US GAAP. A reconciliation of the non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter end of December 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 obligations, please see the press release for the quarter end of December 31, 2024. Listeners who do not have a copy of the press release for the quarter end of December 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 fourth quarter 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.

Thank you, Erika, and thanks to everyone for joining us on our call today. In the fourth quarter of 2024, we achieved a record annual contract value plus royalties of $65.1 million as demand for commercial semiconductor system IP products continues to grow. Our success during the quarter was fueled by increased adoption of AI-driven enterprise computing and automotive SoCs. We also continue to generate growing momentum in other key verticals, including microcontrollers or MCUs. Business in the fourth quarter was driven by a mix of the addition of new customers, including several market leaders, as well as increased penetration in our current customer base, demonstrating the success of our land and expand strategic approach. For example, the largest win in the quarter came from a global top five technology company that expanded its use of the Arteris product portfolio, complementing previous NOC IP orders with the addition of Magilm and CSR compiler SoC integration automation software for their high end AI SoCs for enterprise computing applications. Also, a major automotive OEM and a top five automotive semiconductor company expanded their use of Arteris products for several additional SoCs given the combination of superior performance, power, and area efficiency, as well as functional safety for their mission critical applications. Last quarter, we shared that we are strategically expanding into the microcontroller or MCU space where designs have grown in complexity in recent years to benefit from low latency, flexible power, and area efficient commercial NOC IPs. We are pleased to report the strategic expansion has already started to bear fruit with Infineon, the leading microcontroller manufacturer, becoming a new customer standardizing on our Arteris NOCs for automotive MCUs, which serves many of the world's top automotive tier one vendors and OEMs. We believe the strategic MCU win will help to accelerate our growing royalty stream. Another key customer win was GigaDevice where Arteris was selected by the microcontroller business unit as a result of our optimization in interconnect area and power consumption while ensuring functional safety. We're also seeing increased adoption of Arteris technology for chiplets, particularly for high performance enterprise computing applications, sophisticated autonomous driving, and smart edge devices across market leading companies, mid-size players, and innovative startups. These customers are increasingly pursuing a multi-dye strategy to expand compute power with Arteris as the core interconnect IP for each chiplet due to our technology's superior power performance and area or BPA. One such example was TemsStorrent, which expanded the deployment of Arteris NOCs for their next generation of chiplet based AI solutions for high performance, energy efficient, RISC-V computing for AI and HPC data centers. Similarly, Menta deployed Arteris for their edge IP chiplet to ensure better performance and area efficiency for edge AI and IoT computing. As we look back on 2024, we witnessed accelerating industry demand for Arteris technology, which we believe was fueled by increased penetration of AI into not only high end data centers and autonomous driving, but a wide range of new products, including edge devices. Complexity has and we believe will continue to impact high end compute and traditional low end technologies, including MCUs, driving demand for efficiency that is enabled by Arteris network on chip technology. This has resulted in addition of 14 new customers and increased wallet share of Arteris products in customers ranging from top five technology companies down to new innovative startups with our technology now being part of nearly 850 designs to date. Last year, we also saw increased adoption of the physically aware FlexNOC 5, which leverages advanced node and placement information to enable up to 5X faster physical coverage while supporting best in class PPA. We are happy to highlight that in the fourth quarter, over 75% of FlexNOC Interconnect IP customers chose this more advanced version, which was introduced just a year and a half ago. Also noteworthy, last year's addition of tiling and expanding mesh technology in FlexNOC and Encore product lines, along with ARM V9 support, helped to advance Arteris as the right partner to support the most innovative chip designs. Moreover, I'm very excited to announce today our FlexGen SmartNOC IP, which has the potential to revolutionize semiconductor designs by delivering up to 10X engineering productivity and lowering power consumption and improving overall PPA. FlexGen builds upon the silicon proven and physically aware FlexNOC 5 IP to automate the creation of high performance network on chip NOC designs. Supported by AI driven automation, FlexGen reduces manual iteration by over 90%, providing expert level NOC topologies in hours or days instead of weeks, as demonstrated by DreamChip on their ADAS SoC as well as multiple other designs. FlexGen is now ready for production deployments and has been delivered for evaluations to over 10 companies, some of which have been working with this technology for more than six months. FlexGen is the culmination of years of groundbreaking innovation and multiple patents with a goal of boosting productivity while improving quality of results to overcome extreme design challenges semiconductor and system companies face when creating today's chips or chiplets, which often contain 5 to 20 NOCs each. We expect FlexGen to have a positive impact on our customers and on our business going forward. Lastly, our longstanding position as a neutral IP provider was illustrated in our continued success with ARM based designs, customers using RISC-V and x86 CPU IP architectures. To further support this expanding processor IP ecosystem, last quarter we announced a partnership with MIPS to provide a pre-verified RISC-V reference platform to support mutual customers. The goal is to improve interoperability and shorten SoC integration for chip designs for automotive, enterprise computing and edge AI applications using our tariffs as their essential connectivity backbone. We believe that the scale and scope of our long-term opportunity remain robust and is 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 high growth areas such as General AI and autonomous driving using our tariffs, technologies and global support. With that, I'll turn it over to Nick to discuss our financial results in more detail.

Thank you, Charlie, and good afternoon, everyone. As I review our fourth quarter results today, please note I'll be referring to GAP as well as non-GAP metrics. A reconciliation of GAP to non-GAP financials is included in today's earnings release, which is available on our website. Also, as a reminder, I'll be referring to 4Q 2024 earnings presentation, which can be found in the Invest Relations section of the company's website under the Events and Presentations tab. Turning to slide five of the presentation, total revenue for the fourth quarter was $15.5 million, up 24% -over-year and above the midpoint of our guidance range. At the end of the fourth quarter, annual contract value, or ACV, plus royalties, was $65.1 million, slightly above the midpoint of our guidance range, and a record high for the company. Remaining performance obligations, or RPO, at the end of the fourth quarter were $88.4 million, representing 22% -over-year increase and growing to the highest level we have ever reported. Non-GAP gross profit for the quarter was $14.2 million, representing a gross margin of 91%. GAP gross profit for the quarter was $13.9 million, representing a gross margin of 90%. For the full year, non-GAAP gross profit was $52.7 million, representing a gross margin of 91%. GAAP gross profit was $51.8 million, representing a gross margin

of 90%. Now moving to slide six. Non-GAAP operating

expense in the quarter was $16.9 million, flat sequentially and only 1% higher year over year. This reflects the team's continued focus on prudent management of our operating expense. Total GAAP operating expense for the fourth quarter was $21 million, representing 4% year over year increase. For the full year, non-GAAP operating expense was $67.6 million, a decline of 2% from prior year. Total GAAP operating expense was $83.4 million, a slight decline from prior year. As we look ahead, we plan to continue to limit spending to strategically critical areas while investing in profitable revenue growth. Non-GAAP operating loss in the quarter was $2.8 million, which came in above the top end of our guidance range. This represents a $2.7 million improvement compared to the loss of $5.5 million in the prior year period and a $0.6 million improvement sequentially. GAAP operating loss for the fourth quarter was $7.1 million compared to a loss of $9.2 million in the prior year period and $7.9 million in the third quarter. For the full fiscal year, non-GAAP operating loss was $14.8 million, representing a $5 million improvement compared to the prior year. GAAP operating loss for the fourth quarter was $31.6 million, representing an improvement of $3.5 million from the prior year. Non-GAAP net loss in the quarter was $3.9 million, or diluted net loss per share of $0.10, based on approximately 40.2 million weighted average diluted shares outstanding. GAAP net loss for the quarter was $8.2 million, or diluted net loss per share of $0.20. For the full fiscal year, non-GAAP net loss was $16.9 million, or diluted net loss per share of $0.43, based on approximately 38.9 million weighted average diluted shares outstanding. GAAP net loss for the year was $33.6 million, or diluted net loss per share of $0.86. Moving to slide seven and turning to the balance sheet and cash flow. We ended the quarter with $52.3 million in cash, cash equivalents, and investments, and we have no financial debt. Free cash flow, which includes capital expenditure, was negative $2.7 million in the fourth quarter and negative $1.0 million for the full year. This was below our guidance due to short-term working capital timing changes at the end of the year, with some customer payments that were forecasted for the fourth quarter being received shortly after the fourth quarter closed. This, along with strong water growth, resulted in an increase in our accounts receivable balance of $11.9 million from the prior quarter end. I would now like to turn to our outlook for the first quarter and the full year and refer now to slide eight. For the first quarter of 2025, we expect ACV plus royalties of $65.5 million to $67.5 million, revenue of $15.7 million to $16.1 million, with non-GAAP operating loss of $4 million to $3 million, non-GAAP free cash flow of negative $2 million to positive $2 million. For the full year 2025, our guidance is as follows. ACV plus royalties to exit 2025 at $73 million to $77 million, revenue of $66.0 million to $70 million, non-GAAP operating loss of between $12.5 million to $8.5 million, and non-GAAP free cash flow of positive

$1 million

to

positive $7 million. We are very encouraged by the

strong deal flow exiting the year and our effective cost management that resulted in better than expected performance in non-GAAP operating income in 2024, and this possessions us for further improvements in our key financial metrics in 2025. With that, I will turn the call over to the operator and open

it up for questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speaker phone, please make sure to lift your handset before pressing any

keys. Your first question comes from the line of

Gus Richard from Northland. Please go ahead.

Yes, thanks for taking my questions. I guess, Nick, first for you, by my calculation, your bookings were over $30 million in the quarter, and that would kind of help explain the increase in deferred revenue and balance in accounts receivable. Am I in the right zip code?

Hi, Gus. Welcome to call. Nice to meet you again. So, as you know, we don't actually specifically talk about bookings, not one of our metrics that we publish, but we have characterized the fourth quarter as a strong deal flow quarter. The fourth quarter is always our strongest deal flow quarter of the year, and this was no exception.

Okay. And

Charlie, if you just could you talk a little bit more about FlexGen, and you know, attending X increase and productivity is a lot. Is that, you know, place and route or, you know, is it just doing the knocks? And just can you talk a little bit more about, you know, how the product works and how it's different from, you know,

prior versions? You still there? I wonder whether Charlie might be on mute.

Sorry, Gus.

Yes. Sorry. I apologize. I was on mute. Yes. So FlexGen is based on FlexMod 5. So you have all of the manual editing capability that you had before. But what FlexGen does is you basically feed it a connectivity map, a list of all the connections, locations of all the IP block exit ports and a floor plan, and it gives you basically a knock, a knock topology in minutes, hours to minutes versus days. And this has been validated by, you know, a large number of benchmarks. So the productivity increase is huge, but it's not enough. So we've also been able to achieve superior wire length. So sometimes depending on the benchmark, it can be from relatively modest for something like a small microcontroller all the way to 30% or up to 30% for very complex large SOCs. And that gives you improvements in latency and gives you improvements in power. So we think that, you know, the three years of work that we have put into this is generating some very good results. And as we had in the script, we've basically shipped this to about 10 companies and I think three more in the last month and a half as well. So I think we're up to 13 or so. And the take up with the product has been very strong.

And then the last one for me, if I recall, the uplift on this product is about a 30% increase in ASV, is that right?

That's right. OK, let me jump back in the queue and let somebody else ask questions. Your next question comes from the line of Kevin Garigan

from Rosenblatt Securities. Please go ahead.

Yeah. Hey, Charlie and Nick. Congrats on the solid results in solid 2024. Hey, Charlie, just kind of going off of Gus's last question, can you just kind of talk about ASV trends per project? I think previously you were looking to hit kind of one million in 2026. So where did they kind of finish out for 2024? And is that one million ASV still kind of on track?

Yes, it is. But you asked a good question on the third quarter earnings call is, you know, we've announced that we're going to enter the microcontroller business and we've been able to demonstrate success with two customers, Infineon and Giga. And you asked a good question, what's the ASP on the microcontrollers? And the answer is that while we're going after entire product lines and microcontrollers on an individual basis, the ASP there is going to be lower because those do not really need FlexGen. They may or may not need physical awareness and the interconnects while getting much more complex, a little simpler. But for the complex SOCs, we're definitely on track for one million ASPs on the average. And we know this because we're getting one million dollars per project deals now. It's just not necessarily the average. And if you were to buy everything from us right now, you'd be looking at a reasonable industry discount, about $1.5 million, if you were to buy everything from us. So as we deliver these new products and as the amount of System IP is being used increases per project, we're on track for that $1.6 million ASP. But the caveat is that you have to exclude the microcontrollers.

OK, got it. That makes sense. So that actually leads

me into my next question. You know, you're looking at complex designs in the MCU market, but maybe not as complex as those in enterprise computing or AI machine learning. So now that you kind of have Infineon and Giga under the belt, is the time between design starts production, is it similar to your typical average or is it kind of maybe accelerated because they're not, they may not need as much?

So our target is to essentially establish relationships with the large microcontroller vendors. And they typically build generations of microcontrollers every three years. So from that perspective, the design start windows are longer. However, once they start designing a generation of microcontrollers, they may design six to ten, maybe even more, maybe up to 15 microcontrollers per generation. And so the time between those design starts is actually very, very short. So what you have to do is you have to hit the time where the customer is doing a new generation of microcontrollers, and then the design start window gets relatively short for that particular generation of microcontrollers. It's a pretty different dynamic than you see in the automotive or AI SOC space.

Got it, got it. Okay, that makes sense. I appreciate that color.

Okay, that's all for me. Thanks guys and congrats on the results.

Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star followed by the number one on your touchtone phone. If you would like to withdraw from the polling process, please press star followed by the number two. If you are using a speakerphone, please make sure you lift your handset before pressing any keys. Your next question comes from the line of Ethan Potasnik from TD Cowan. Please go ahead.

Yeah, hi guys. Congrats on the great results. I wanted to kind of dig into licensing and royalty results, kind of considering the broader macro backdrop and particularly what's occurring in the automotive space. So maybe to get some expanded thoughts there would be helpful.

Nick, is it to you?

Yeah, you take this one. You're the royalty king.

Yeah, so the scoop observers among you will have spotted that the royalties on the other line was slightly lower year over year. There's two real causes for that. One is that as you'll recall from previous calls, we had some one time benefits, particularly around royalty audits, fairly substantial in 2023 and those were lighter in 2024. So we tend to look at variable royalties as a better sort of trend guide. And variable royalties, which is still the bulk of that total income line, were 20% up year over year. Remember also that Mobileye had a sort of fairly major inventory correction at the beginning of 2024, as I'm sure you'll remember. And so if you exclude Mobileye from that trend, which is quite a big royalty contributor, the overall variable royalty growth year over year was in excess of 30%. So we are seeing some, if you look at the concentration of royalties in 2024 versus 2023, the proportion of total variable royalties that came from automotive was of course a little lower than it was in the previous years because of the Mobileye impact. But it's still around half of the total.

Okay, got it. Got it. Understood. And then to kind of piggyback on a prior question about pricing and the incorporation, I guess, of new products and the foray into MCUs with FlexMox 5 carrying a higher ASP, which is great to see. But how should we think about kind of the profitability trajectory for this year and perhaps the free cash flow positive target this year exiting

2025? How are things going there?

So let me take that one real quick. So just first to count on free cash flow, we're right at that point where we're flipping from negative to positive. So we mentioned in the call that we had a small number of customers who just missed the cutoff at the end of the year, relatively minor impact, but it turned the plus sign into a slightly minor sign, but very small either side. The reason we're so confident about the full year is that we're growing the top line, as you know, in the high teens, low 20s percent. And that's basically our cash inflow. And we're constraining the OPEX and cost of revenue growth, which is essentially our cost base at half of that. So we naturally grow cash flow just automatically by our control of that metric, the OPEX being 50% of the top line growth and the top line is growing at high teens, low 20s percent. Now, one additional piece of color for you on that, Ethan, is that the free cash flow is always weighted towards the second half, or generally speaking, last quarter, the fourth quarter was a bit of an anomaly because of this small working capital shift. But generally speaking, we received most of our cash inflow in the second half. And we have some reasonably substantial sort of nonlinear cash outflows, particularly around management bonuses, for example, and around the high commissions and the annual accelerators all happen in the first quarter. So there's a little bit of seasonality around it, which basically pushes most of the cash generation into the second half. And that's traditionally what we've seen year over year.

Does that give you a good feel? Yes, thank you so much. You're welcome. Your last question comes from

the line of Gus Richard from Northland. Please go ahead.

Yes, thanks for letting me ask more questions. I appreciate it. And, you know, great, great results, guys. Just tell you mentioned, you know, your architecture, agnostic risk arm x86. And I'm kind of surprised to hear you list x86 in other, you know, can you talk about the reasons you might be involved with that particular architecture?

I'm sorry, say again? PC chipsets. Oh, okay. So we're in some PC chipset designs. Got it. And then you also mentioned

multiple knocks per design. Do all of the, you know, the fabric or the network on a chip have to be from the same vendor or can you mix and match knocks? You know, for example, you know, some of the x86 guys have their own fabrics.

Absolutely. That's a great question. So our products are designed for mix and match. I would say there are some designs where our terrace is 100% of all the interconnects, but I would say majority of them have some other types of interconnect in them, either because of legacy reasons or other reasons, right? So for example, one common, reasonably common configuration would be the arm CMN cache coherent interconnect with flex knock, the non coherent one. So that would be fairly common. Another one would be an internal fabric with with N core or flex knock. So, so we are designed for mix and match. And this is where frequently. This is frequently what occurs. But of course, over time, we would like our terrace to be more and more 100% of all the interconnects. But we're designed for mix and match.

Got it. And then the last one for me, you know, again, you mentioned a number of chiplet designs. And I'm just wondering if you could talk a little bit about, you know, as people, you know, chop up chips and use chiplets, how does your opportunity and change and, you know, how does that change the competitive landscape for y'all?

So it makes the interconnect a lot more complex, right? Because now you're no longer you're not just in the die, but you're you're sending data back and forth between different pieces of silicon. So that raises the ASP. We're also finding out that in these chip projects, you know, multiple there are multiple companies involved. So that involves multiple licenses. And of course, we treat each die as a separate project. So, you know, when when there were questions about the million dollar ASP, I think Kevin asked that the the chiplets are going and I said the microcontrollers may lower the ASP. But the chiplets of projects will increase it. Because there's multiple dies and even multiple companies involved in those in those projects. So that increases the revenue opportunity for our terrorists significantly.

Got it. And then, you know, there's, you know, an

alphabet of standards connecting chiplets together. Does that have, you know, any, you know, do you ride on top of those or do they ride on top of you? You know, how do those different protocols impact, you know, your opportunity? Does it make it more again add to complexity or, you know, and again, sort of if you can help explain what layer you live in and what layers those live in and sort of how they play together?

So there's multiple layers, but the layer that we're involved with is a data transport layer. And so we we basically interface to physical physical layer piece, such as those made by synopsis. And so we're kind of in a digital in a digital domain and we ride on top of the physical layers, which are heavily analog.

Got it. Very good.

Yeah. And, you know, as far as the different protocols, you know, it's a trade off, right? We've we try to conform to protocols that are used by our major customers. But standards are beneficial to the industry. And so we're and well, somebody said that the good thing about standards, there's so many to choose from. What we're trying to do working with our partners and the ecosystem to kind of create major, major standards that the industry can rally

around and lower costs. And in a chip, that would be used, the IE,

it would be CHI over use, the IE, you know, those kinds of things. So it's a. It's kind of a it's kind of a trade off. And the more standards you have, the higher your costs, right? Because you have to do fairly expensive developments to conform to a large variety of standards.

Got it. Super helpful. I'll jump out of the jump out of the queue. There

are no further questions at this time. I'd like to turn the call over to Charlie Janak for closing remarks. Sir, please go ahead.

Yes, thank you for your time and interest in our terrace. I think it was a quite a positive quarter and a year. And we look forward to meeting with you at the upcoming investor conferences we're participating in during the next couple of months. And we look forward to updating you on all our business progress in the course to come. Thank you for your support.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.