Arteris, Inc. Q3 FY2024 earnings call

• In the third quarter of 2024, achieved a record annual contract value plus royalties of $60.5 million and positive free cash flow of $1.1 million for the third consecutive quarter.
• Business was driven by demand for AI-driven enterprise computing and automotive SoC solutions, e.g., a top 5 global technology company expanded deployment of Arteris products for high-end AI chiplet and SoC development, and NIO deployed Arteris technology for its next generation of ADAS and LiDAR SoCs.
• New designs in the third quarter were primarily from enterprise computing, followed by automotive, consumer electronics, and communications. Nearly half of license deals in dollar terms in the year enabled AI SoC development, doubling year-over-year.
• In October, announced NoC Tiling supported by mesh and innovation in IP products to accelerate AI SoC design. Earlier, expanded support for Armv9 architecture CPUs, partnered with Andes Technologies to accelerate RISC-V SoC adoption, and joined Synopsys ARC Access program.
• Expanded focus to support microcontroller chips, which can benefit from the company's system IP technology.
• Joachim Kunkel joined the Board of Directors and Ken Way became EVP of Sales.

Total revenue for the third quarter was $14.7 million, up 11% year-over-year and at the midpoint of the guidance range. Annual contract value plus royalties reached $60.5 million, a record high. Remaining performance obligations at the end of the third quarter were $78.4 million, a 25% year-over-year increase. GAAP gross profit was $13.3 million with a margin of 90%, while non-GAAP gross profit was $13.5 million with a margin of 92%.

• Fourth quarter 2024 outlook: ACV plus royalties $63 million - $67 million, revenue $14.7 million - $15.7 million, non-GAAP operating loss $5 million - $4 million, non-GAAP free cash flow -$0.9 million to $1.1 million.
• Full year 2024 guidance: ACV plus royalties to exit 2024 at $63 million - $67 million (up over 16% year-over-year at midpoint), revenue $56.9 million - $57.9 million, non-GAAP operating loss $17.1 million - $16.1 million, non-GAAP free cash flow $0.7 million - $2.7 million.

• Uncertainty from market share shifts in the automotive market. - Geopolitical tensions may lead to trade barriers affecting market expansion. - Delays in new product launches may impact revenue and market expectations.

Q: Regarding the impact of China's automotive market share changes on the business, is it a net positive or headwind?

A: Charles Janac said the company's strategy is to be involved in as many projects as possible, and its tariffs should benefit regardless of market share shifts. Nick Hawkins added about Chinese auto suppliers and mentioned Mobileye's impact on revenue is less than 1%.

Q: Enterprise computing design was the leading contributor this quarter, any more details? And what the funnel may look like over the next year?

A: Charles Janac said the business is strong and the company is moving into the microcontroller market. Nick Hawkins added enterprise computing is still the slightly biggest revenue contributor, growing nicely, and AI/ML contributes about 40% of total revenue across verticals.

Q: Is design activity in the Chinese EV market increasing faster than other regions and whether customers are accelerating the time line from licensing to production?

A: Charles Janac said global design activity is strong, automotive chip design cycles are long, and design activity is not greatly affected by market share changes, with strong design activity in China and others in the US and Europe.

Q: Are ASPs in the microcontroller market the same as in complex SoCs?

A: Charles Janac said no, but bundling designs can improve the situation. Nick Hawkins added previous experience in MCU with a US large semiconductor company for a Bluetooth project with substantial volume and royalties.

Q: Cloud service providers are designing their own ASICs, how many top ASPs or Top 30 tech companies you are involved with?

A: Charles Janac said about 15 of the Top 30 tech companies designing chips use Arteris technology, and there is a large deal with a Top 5 tech company to expand product use.

Q: Customer feedback on NoC Tiling product?

A: Charles Janac said the product is just coming out, much awaited by customers for AI design, reception expected to be good but revenue impact likely next year. Nick Hawkins added MCU is a new incremental product area with previous experience.