Arteris, Inc. (NASDAQ:AIP) is a leading provider of semiconductor system IP, including interconnect and other intellectual property (IP) technology. The company's solutions manage the on-chip communications and IP block deployments in System-on-Chip (SoC) semiconductors and systems of chiplets. Arteris' proprietary solutions achieve this by connecting client IP blocks such as processors, memories, artificial intelligence/machine learning (AI/ML) accelerators, graphics subsystems, safety and security, and other input/output subsystems (I/Os) via multiple Network-on-Chips (NoCs) to enable faster SoC targeting, more efficient, and lower cost solutions.

Business Overview

Arteris' growth is being driven by the increasing sophistication and complexity of SoCs, now extending into the disaggregation of SoCs into systems that implement the communication protocol aspects. The company partners with industry-leading providers like Synopsys, Cadence, Alphawave and others to connect to their die-to-die interfaces. The addition of more processors, channels of memory access, machine learning sections, additional I/Os interface standards, and other subsystems within SoCs is driving the need for more advanced System IP, including NoC interconnect IP's.

Financials

For the fiscal year ended December 31, 2023, Arteris reported annual revenue of $53.7 million, a net loss of $36.9 million, annual operating cash flow of -$15.7 million, and annual free cash flow of -$17.2 million. In the first quarter of 2024, the company generated revenue of $12.9 million and a net loss of $9.4 million.

Arteris' financial performance in the first quarter of 2024 was solid, with annual contract value (ACV) plus royalties reaching $58.2 million, above the midpoint of the company's guidance range. Remaining performance obligations (RPO) also grew to a record $74.7 million, representing a 30% year-over-year increase and reflecting a strong quarter in terms of new license deals.

The company's GAAP gross profit for the first quarter was $11.5 million, representing a gross margin of 89%. Non-GAAP gross profit was $11.7 million, or a 91% gross margin. Total GAAP operating expenses for the quarter were $20.6 million, while non-GAAP operating expenses were $17.0 million, down 4% year-over-year, reflecting Arteris' focus on prudent management of operating costs.

Arteris reported a GAAP operating loss of $9.1 million and a non-GAAP operating loss of $5.3 million for the first quarter. The company's net loss for the quarter was $9.4 million, or a diluted net loss per share of $0.25. On a non-GAAP basis, the net loss was $5.6 million, or a diluted net loss per share of $0.15.

One of the highlights of the quarter was Arteris' achievement of positive free cash flow of $0.3 million, which was above the midpoint of the company's guidance range and in line with its goal of achieving positive free cash flow in 2024.

Guidance

For the second quarter of 2024, Arteris expects ACV plus royalties of $58 million to $62 million, revenue of $13.2 million to $14.2 million, and a non-GAAP operating loss of $6.5 million to $4.5 million. The company also expects non-GAAP free cash flow to be in the range of negative $1.4 million to positive $1.6 million.

For the full year 2024, Arteris' guidance includes ACV plus royalties to exit the year 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 $23.4 million to $19.4 million, and non-GAAP free cash flow of negative $2.4 million to positive $2.6 million.

Geographic Revenue Distribution

Geographically, Arteris derived 65.7% of its revenue from sales to customers outside of the United States in the first quarter of 2024, with 30.5% of revenue coming from customers located in China. This represents a slight decrease from 2023, when 65.4% of revenue was from international customers and 31.1% was from China.

Revenue Streams

The company's revenue is primarily generated from licensing intellectual property, licensing software, support and maintenance services, professional services, training services, and royalties. In the first quarter of 2024, licensing, support and maintenance revenue was $11.7 million, while variable royalties and other revenue was $1.2 million.

Business Drivers

Arteris' business is driven by the increasing complexity of SoCs, particularly in the automotive, enterprise computing, communications, consumer electronics, and industrial markets. The company's solutions are designed to address the growing demand for smaller die size, lower power consumption, higher frequency of operation, and more efficient management of critical net latency in a timely and cost-effective manner.

Product Portfolio

The company's product portfolio includes its flagship FlexNoC network-on-chip IP, which continues to see strong adoption across all its verticals and geographical markets. Arteris also recently announced the release of the latest version of its Ncore cache coherent interconnect on-chip IP, which is being utilized by long-time customer Mobileye, a leader in the autonomous vehicle evolution.

Growth Strategy

Arteris' growth strategy includes expanding its foothold with large customers, as evidenced by five significant wins in the first quarter with top 30 global technology companies. The company also continues to see robust design activity from its customers, particularly in the enterprise computing and automotive sectors, as well as in communications, industrial applications, and consumer electronics.

Market Trends

The rise of AI and machine learning is a significant driver for Arteris, with approximately half of the company's first quarter license deals enabling AI and machine learning design starts, increasingly supporting generative AI and large language model applications. Arteris believes its products are well-suited to address the growing design size, complexity, performance, power, and cost requirements of AI chips.

Risks and Challenges

While Arteris faces some near-term headwinds from geopolitical uncertainties and U.S. trade restrictions concerning China, the company believes the scale and scope of its long-term opportunity remains 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.

Conclusion

Overall, Arteris' first quarter results demonstrate the company's ability to navigate the complexities of the semiconductor landscape, with a focus on delivering innovative solutions, managing costs effectively, and positioning itself for long-term growth. The company's guidance for the second quarter and full year 2024 suggests continued momentum, and investors will be closely watching Arteris' progress as it seeks to capitalize on the growing demand for advanced system IP technologies.