Arteris, Inc. Q1 FY2025 earnings call

Key Design Wins

• Four top 30 global technology companies expanded deployment of Arteris products, including a large win with Magillem for SoC integration automation software and interconnect IP.
• An expanded reorder from a top five technology company for hyperscale computing and consumer electronics products.
• A major automotive OEM expanded use of Arteris product portfolio for next-generation EV vehicles, and an industry-leading Japanese automotive OEM licensed products for autonomous driving SoCs.

New Technology Releases

• Released FlexGen, an AI-driven smart NoC IP technology with over 20 customer SoC projects evaluating it, expected to generate revenue and ACV in the second half of the year.
• Launched the latest generation of Magillem register management automation software for semiconductor hardware and software integration.

Awards and Collaborations

• Recognized in three categories in the 23rd Annual American Business Awards.
• Joined the Intel Foundry Accelerator Program and Intel Foundry's Chiplet Alliance, and the IMEC-sponsored Automotive Chiplet Forum.
• Opened a new engineering and customer support center in Kraków, Poland.

Total revenue for the first quarter was $16.5 million, up 28% year-over-year. Annual contract value (ACV) plus royalties was $66.8 million, up 15% year-over-year. Remaining performance obligations (RPO) at the end of the first quarter were $88.9 million, a 19% year-over-year increase. Non-GAAP gross profit for the quarter was $15.3 million, representing a gross margin of 92%. GAAP gross profit for the quarter was $15.0 million, representing a gross margin of 91%.

Second Quarter 2025

• ACV plus royalties: $66 million to $70 million
• Revenue: $16.1 million to $16.5 million
• Non-GAAP operating loss: $4 million to $3 million
• Non-GAAP free cash flow: negative $5 million to 0

Full Year 2025

• ACV plus royalties to exit 2025: $71 million to $79 million
• Revenue: $65 million to $71 million
• Non-GAAP operating loss: $14 million to $7 million
• Non-GAAP free cash flow: 0 to positive $8 million

• Global economic uncertainty may lead to variability in financial outcomes, with potential short-term headwinds to royalties due to waning customer confidence and automotive and other tariffs.
• Overseas-based OpEx may increase if the recent weakness of the U.S. dollar persists or worsens.

Q: Hey guys, thank you for taking my questions and congrats on the steady results in an interesting backdrop. I guess I want to hit on the tariff and the trade environment right now. You're being upfront with sort of your cautious view. I guess I wanted to ask more directly, are you seeing any changes from your customers' behaviors yet? And in particular, on their willingness and desire to invest in their IP and SoC roadmaps going forward? Or is no change yet and you're just being more cautious on the back half?

A: So, I mean, semiconductors, so IP and EDA is not really subject to any tariffs directly, right? We are seeing some re-planning of projects in China due to not only tariffs but also some of the increasing regulations coming from the U.S. So, -- but on the other hand, what we're also seeing is that as the larger companies want to -- they're looking at their efficiencies. And so there seems to be an increased willingness by those companies to outsource system IP to commercial vendors such as Arteris. And the Arteris type of companies actually tend to do fairly well in markets that are just under uncertainty because our customers tend to design their way out of recessions. So, while there may be some impact on royalties, which are a relatively small portion of our revenue at this point in time, the licensing activity is -- remains robust.

Q: Thank you for the color there. And for my follow-up, I wanted to ask about FlexGen. It sounds like you're increasingly confident in the success of that platform. Could you maybe elaborate on what's driving the expectations for revenue and ACV in the second half of the year and where sort of you're seeing initial traction from an application standpoint for FlexGen? Thank you.

A: So, we've been working on FlexGen for three years. We've been delivering it to customers since second half of last year. We have right now at the moment, about 20 projects evaluating FlexGen. The feedback has been almost universally positive. And we have been able to get it to a production status -- full production status back in February of this year with the release of FlexGen 1.2, which is the third release of it. And we anticipate that it's going to generate substantial bookings and then revenue, which is ratable in the second half. So, we're very pleased with the reception of FlexGen. And the applications are fairly broad, right? They range from automotive, data center, enterprise, consumer. So, it's a pretty broad spectrum of companies that have -- that are using it for evaluations right now.

Q: Yes, hey Charlie, Nick, congrats on the solid results. You guys spoke about accelerated interest from companies that have in-sourced. Are you also seeing accelerating decision timelines by customers that are kind of going from having an initial conversation to signing the licensing agreement than you've previously seen?

A: Not really. I mean people are generally trying to accelerate their design cycles. But the licensing activity is really pretty much steady, I would say, steady growth. And there is, of course, a number of large companies that are looking to -- basically, what we're seeing is that they're saying, okay, for whatever we're doing today, we're going to keep the existing system IP, but we're not going to invest in it for the next generation because it's becoming more complex and more difficult. And so the next generation tends to get outsourced, right? So, we're pretty pleased with that area of the business. And we think, ultimately, because of the complexity and new application, most of the system IP is going to ultimately get outsourced. And we're going to go from maybe two-thirds of the market being internal to maybe one-third of the market being internal and two-thirds being commercial. So, I think this economic uncertainty is actually accelerating that, even though we're not seeing much impact on faster sort of decision-making on individual projects.

Q: Yes, thanks for taking the questions. First of all, was book-to-bill approximately 1 in the quarter? That was kind of what I was coming up with.

A: Yes. So, Gus, thanks. But we don't disclose bookings and so I don't really want to comment on that.

Q: Yes, thanks for letting me ask question here. Charlie, I just want to curious what you would point to in terms of your annual forecast, you're looking for continued growth on the licensing side. I was wondering if you could talk to it by an end market perspective, where you're most hopeful of for the remainder of the year?

A: So, clearly, the highest growth at the moment is in AI. There's AI projects for data center training. There's AI projects for data center inference. There's projects for edge inference. And actually, AI is making it into the endpoints like phones and cars. So, that's the large number of projects. And we've -- I think we're probably where half of the design starts in the quarter were actually somehow AI related, right? We continue to be bullish about automotive. The automotive industry has some cycles, but people are designing now automotive chips for six or seven years from now that that are going to -- so that is also pretty robust. And we're very excited about our microcontroller entry. The microcontrollers are now becoming much more complex. So, they need network-on-chip and software that helps the microcontrollers come together more efficiently. And then there's the usual consumer and enterprise applications, which are also steady, right? So, -- and what's really happening, Gus sort of asked about the market size, right? There's probably about 60 -- 600, 700 SoCs that are being designed a year. And we have only 15% of that, right? So, there's plenty of growth. And each project uses more and more system IP. So -- and which becomes more and more valuable, right? And so we're very bullish about the opportunity that we have in front of us. And our main challenge is to make sure that we remain the main independent neutral player in this particular piece of the world.

Q: Hey guys, thanks for letting me ask question here. Charlie, I just want to curious what you would point to in terms of your annual forecast, you're looking for continued growth on the licensing side. I was wondering if you could talk to it by an end market perspective, where you're most hopeful of for the remainder of the year?

A: So, clearly, the highest growth at the moment is in AI. There's AI projects for data center training. There's AI projects for data center inference. There's projects for edge inference. And actually, AI is making it into the endpoints like phones and cars. So, that's the large number of projects. And we've -- I think we're probably where half of the design starts in the quarter were actually somehow AI related, right? We continue to be bullish about automotive. The automotive industry has some cycles, but people are designing now automotive chips for six or seven years from now that that are going to -- so that is also pretty robust. And we're very excited about our microcontroller entry. The microcontrollers are now becoming much more complex. So, they need network-on-chip and software that helps the microcontrollers come together more efficiently. And then there's the usual consumer and enterprise applications, which are also steady, right? So, -- and what's really happening, Gus sort of asked about the market size, right? There's probably about 60 -- 600, 700 SoCs that are being designed a year. And we have only 15% of that, right? So, there's plenty of growth. And each project uses more and more system IP. So -- and which becomes more and more valuable, right? And so we're very bullish about the opportunity that we have in front of us. And our main challenge is to make sure that we remain the main independent neutral player in this particular piece of the world.

Q: Just for Nick, I wanted to ask you on the OpEx. You were, I think, last quarter talking about keeping SG&A flat. Obviously, it's at a higher level in the first half. Just kind of curious if flat is still the right way to think about it?

A: So, when we talked about full year guidance last time around, Blayne, we characterized or I characterized 2025 as an up year by about 10%. So, roughly half the rate of top line growth. So, we've got revenue growing this year guided at 18% and we're sort of maintaining our view on OpEx at about half of that, so 9% to 10% overall. And I think that's still reasonable where we're getting all that operating leverage, and this is maybe what you're recalling is in G&A, which has now been flat for three years -- three full years, including so 2025, 2024, 2023 have been completely flat the way we're guiding it right now. So, where we're putting the investment in is in R&D, sales and field application engineering because they're all driving short, medium and long-term top line growth. And we think there's huge opportunities left.