Executive Summary / Key Takeaways

• Core Investment Thesis: Arteris is a critical enabler in the rapidly evolving semiconductor landscape, particularly for AI-driven System-on-Chip (SoC) and chiplet designs. Its proprietary Network-on-Chip (NoC) interconnect IP and SoC integration automation software are becoming indispensable as chip complexity escalates, driving a secular outsourcing trend from internal development to commercial solutions.
• Technological Leadership: The company's innovative FlexGen Smart NoC IP, leveraging AI-driven automation, promises up to 10x engineering productivity and significant Power, Performance, and Area (PPA) improvements. This technology, already adopted by industry leaders like AMD (AMD) for AI chiplet designs, reinforces Arteris's competitive moat.
• Robust Growth Metrics: Arteris achieved record Annual Contract Value (ACV) plus royalties of $69.1 million and a new high in Remaining Performance Obligations (RPO) of $99.3 million in Q2 2025, reflecting strong demand and future revenue visibility. Revenue grew 13% year-over-year in Q2 2025 and 20% in H1 2025, driven by new and expanded customer engagements.
• Strategic Market Expansion: The company is strategically expanding its footprint into the complex microcontroller (MCU) market, aiming to capture entire generations of designs from major manufacturers like Infineon (IFX) and GigaDevice (603986.SS), which promises high royalty volumes despite lower individual Average Selling Prices (ASPs).
• Path to Profitability & Free Cash Flow: While currently operating at a net loss due to heavy R&D investments, Arteris is demonstrating operating leverage by keeping General and Administrative (G&A) expenses flat on a non-GAAP basis for three years. Management projects positive non-GAAP free cash flow for the full year 2025, signaling improving financial health.

The Interconnect Imperative: Arteris's Core Mission in a Chiplet World

Arteris, Inc. stands at the nexus of the semiconductor industry's most profound transformation: the relentless pursuit of higher performance and efficiency in System-on-Chip (SoC) designs and the burgeoning era of chiplets. Founded in 2004, Arteris established itself as a pioneer in on-chip interconnect fabric technology, developing, licensing, and supporting the proprietary System IP that manages the intricate communications and IP block deployments within these complex silicon architectures. Its core mission is to enable faster SoC targeting, greater efficiency, and lower costs for its customers, who span the automotive, enterprise computing, communications, consumer electronics, and industrial sectors.

The company's strategic evolution has been marked by key acquisitions that have broadened its capabilities. The 2020 acquisition of Magillem Design Services S.A. significantly enhanced Arteris's SoC Integration Automation software, complementing its interconnect IP by automating NoC configuration and the assembly of IP blocks into SoCs. This was further bolstered by the integration of Semifore, Inc.'s CSRCompiler, creating a "single source of truth" for register management. A pivotal moment for the company was its IPO in October 2021, providing crucial capital to fuel its aggressive research and development (R&D) and global expansion, including a new engineering and customer support center in Kraków, Poland.

The industry landscape is characterized by an insatiable demand for processing power, particularly driven by Artificial Intelligence (AI) and Generative AI workloads. This has led to an exponential increase in SoC sophistication, with more processors, memory channels, machine learning sections, and I/O interfaces. This growing complexity places an unprecedented premium on the interconnect IP's ability to move data efficiently within these chips. Arteris addresses this by providing advanced NoC interconnect IP and SoC Integration Automation software, which not only offers cost-effective solutions but also mitigates the risks associated with maintaining expensive in-house NoC development teams. This dynamic is accelerating a secular trend where major customers are increasingly outsourcing their system IP needs to specialized commercial vendors like Arteris to accelerate time-to-market, reduce costs, and enhance operating efficiencies.

In this competitive arena, Arteris faces formidable rivals such as Synopsys (SNPS), Cadence Design Systems (CDNS), and ARM Holdings (ARM). These larger players offer broad portfolios of electronic design automation (EDA) and IP solutions, benefiting from extensive ecosystems and established market presence. However, Arteris carves out its niche through specialized, highly customizable interconnect technology and a commitment to being a neutral IP provider, supporting diverse CPU architectures including ARM, RISC-V, and x86. While Synopsys and Cadence offer comprehensive suites, Arteris's focused approach often translates to more efficient and tailored solutions for specific NoC applications, potentially offering greater ease of integration for certain SoC designs. Compared to ARM, Arteris differentiates through its emphasis on configurable NoC technology, providing greater flexibility for custom SoC designs. This targeted innovation allows Arteris to capture opportunities in emerging applications faster, even as its financial scale and R&D investment capacity may lag behind its larger counterparts.

Technological Edge: The AI-Driven Moat

Arteris's competitive advantage is deeply rooted in its differentiated technology, which directly addresses the escalating challenges of modern chip design. The company's core offerings are designed to optimize the "on-chip communications" that are the lifeblood of any complex SoC.

The flagship of Arteris's innovation is FlexGen Smart NoC IP, unveiled in early 2025. This AI-driven technology builds upon the silicon-proven and physically aware FlexNoC 5 IP to automate the creation of high-performance NoC designs. FlexGen is a game-changer, promising up to 10x engineering productivity and a reduction in manual iteration by over 90%, delivering expert-level NoC topologies in hours or days instead of weeks. This translates directly into faster design cycles and reduced development costs for customers. Furthermore, FlexGen achieves superior wire length, leading to improvements in latency and power consumption, critical for high-performance applications like AI. This product carries an estimated 3% increase in Average Selling Price (ASP), reflecting its enhanced value proposition. Already, over two dozen customers are evaluating FlexGen, with AMD, a top 10 semiconductor company, having licensed it for its next-generation AI chiplet designs, underscoring its breakthrough potential.

Beyond FlexGen, Arteris continues to enhance its foundational products. FlexNoC 5, introduced in mid-2023, leverages advanced node and placement information to enable up to 5x faster physical coverage while supporting best-in-class Power, Performance, and Area (PPA). In Q4 2024, over 75% of FlexNoC customers chose this advanced version, demonstrating rapid market acceptance. The recent addition of NoC Tiling and expanding mesh technology to FlexNoC and nCORE product lines further accelerates AI SoC designs by providing scalable performance, power reduction, and increased design reuse. This allows customers to replicate verified functional modules into larger AI compute clusters, addressing the needs of sophisticated workloads for vision, machine learning, and generative AI.

Arteris's software solutions, including Magillem Packaging and the latest generation of Magillem register management automation software, are equally crucial. Magillem Packaging automates IP packaging, simplifying and speeding up the assembly of silicon chiplets and chips, working seamlessly with industry standards like IEEE 1685 IP-XACT. The register management software provides a single source of data for SoC and chiplet development, mitigating silicon failure risks associated with outdated specifications and user errors. This product offers up to 3x expanded performance and 5x scalability, addressing designs from simple IoT devices to complex AI SoCs.

For investors, these technological advancements are not merely features; they are the bedrock of Arteris's competitive moat. They enable the company to command higher ASPs for its advanced products, reduce customer design risks, and accelerate time-to-market, which are paramount in the fast-paced semiconductor industry. The ability to offer superior PPA and productivity gains directly translates into increased customer adoption and wallet share, reinforcing Arteris's market positioning as an indispensable partner in the creation of next-generation silicon.

Financial Trajectory: Growth Amidst Strategic Investments

Arteris's financial performance reflects its strategic investments in R&D and market expansion, positioning it for long-term growth despite current unprofitability. For the second quarter ended June 30, 2025, Arteris reported total revenue of $16.5 million, marking a 13% year-over-year increase from $14.575 million in Q2 2024. For the first half of 2025, total revenue reached $33.034 million, up 20% from $27.522 million in H1 2024. This growth was primarily fueled by new license arrangements and expanded engagements with existing customers, particularly in the high-growth enterprise computing and automotive sectors driven by AI.

The company's revenue streams are predominantly from licensing, support, and maintenance, which accounted for $15.088 million in Q2 2025 (up 11.33% YoY) and $30.423 million in H1 2025 (up 20.29% YoY). Variable royalties, though smaller, showed robust growth, increasing 44.39% year-over-year to $1.402 million in Q2 2025 and 43.52% to $2.569 million in H1 2025. Management noted that excluding the impact from Mobileye (MBLY)'s inventory correction in early 2024, variable royalty growth in 2024 was in excess of 30%. The "Other" revenue category, primarily professional services, decreased significantly in H1 2025 due to non-recurring revenue from the prior year, but remains immaterial to the overall top line.

Arteris maintains strong gross margins, with GAAP gross profit at $14.760 million (89% margin) in Q2 2025 and $29.766 million (90% margin) in H1 2025. This high margin profile underscores the value and scalability of its IP-centric business model. However, the company continues to incur net losses, reporting a GAAP net loss of $9.130 million in Q2 2025 and $17.251 million in H1 2025. This is largely attributable to significant investments in operating expenses, particularly R&D and sales and marketing.

Operating expenses for Q2 2025 totaled $23.008 million (up 12% YoY), with R&D expenses increasing by $1.5 million (14% YoY) to $12.171 million and sales and marketing expenses rising by $1.3 million (26% YoY) to $6.335 million. These increases are driven by higher employee-related costs and headcount to support business growth and new product development. Notably, General and Administrative (G&A) expenses have remained broadly flat on a non-GAAP basis for approximately three years, demonstrating management's commitment to operating leverage. The company's GAAP operating loss for Q2 2025 was $8.248 million.

From a liquidity standpoint, Arteris ended Q2 2025 with a healthy cash, cash equivalents, and investments balance of $53.9 million and carries no financial debt. While free cash flow was negative $2.8 million in Q2 2025, the company's cash flow from operating activities for the six months ended June 30, 2025, was positive $0.375 million, and net cash provided by investing activities was $0.584 million. Management has indicated that free cash flow is typically weighted towards the second half of the year due to seasonality in payments and outflows, and they anticipate positive free cash flow for the full year 2025.

Outlook and Strategic Catalysts: Fueling Future Expansion

Arteris's guidance for the remainder of 2025 reflects continued optimism for growth, tempered by an acknowledgment of global economic uncertainties. For the third quarter of 2025, the company expects ACV plus royalties to range from $69.5 million to $72.5 million, with revenue projected between $16.8 million and $17.2 million. Non-GAAP operating loss is guided to be between $3 million and $4 million, and non-GAAP free cash flow is anticipated to be positive, ranging from $0.5 million to $3.5 million.

Looking at the full year 2025, Arteris projects ACV plus royalties to exit the year at $72 million to $78 million. Total revenue is expected to be between $66 million and $70 million. The non-GAAP operating loss is forecast to be between $10.5 million and $15.5 million, while non-GAAP free cash flow is guided to be positive, ranging from $1 million to $7 million. Management's confidence in achieving positive free cash flow is rooted in its ability to grow top-line revenue at a significantly higher rate than its controlled operating expense growth.

The underlying assumptions for this outlook are compelling. Management observes an accelerated interest from major customers in outsourcing their system IP needs to Arteris. This trend is driven by the increasing complexity and cost of SoC designs, coupled with a scarcity of qualified hardware engineers, making internal IP development less economically viable. Arteris estimates a "10x payback" for customers who license its technology versus developing it in-house, a powerful economic incentive that gains traction during periods of economic uncertainty.

Technologically, the widespread adoption of AI is a significant tailwind. AI-related deals now constitute over 55% of Arteris's total business, with nearly half of its license deals in dollar terms enabling AI SoC development, more than doubling year-over-year. The company anticipates that its FlexGen IP, with over two dozen customer evaluations, will begin to generate substantial revenue and ACV in the second half of 2025, with the full impact on revenue becoming more pronounced in 2026 due to its ratable recognition over multi-year contract terms.

Arteris is also strategically expanding into the microcontroller (MCU) market, a segment where designs are becoming increasingly complex and require low latency and power consumption. While individual MCU licensing deals may have lower ASPs, the strategy is to secure relationships with large MCU manufacturers like Infineon and GigaDevice to capture entire generations of designs, leading to high royalty volumes and numerous design starts. This broadens Arteris's addressable market and diversifies its revenue streams.

The company's commitment to ecosystem collaboration, exemplified by joining the Intel (INTC) Foundry Accelerator Program and the IMEC-sponsored Automotive Chiplet Forum, further strengthens its market position. These partnerships aim to ensure interoperability and accelerate the creation of advanced multi-die silicon applications, reinforcing Arteris's role as a neutral and essential connectivity backbone for the industry.

Navigating the Complexities: Key Risks to Monitor

Despite a compelling growth narrative, investors should be mindful of several key risks that could impact Arteris's trajectory. The company has a history of net losses and its future profitability hinges on its ability to scale revenue faster than its R&D and sales investments. While management is focused on operating leverage, particularly by keeping G&A expenses flat, sustained losses could pressure its financial position.

A significant portion of Arteris's revenue is concentrated among a limited number of customers. This concentration exposes the company to substantial risk if a key licensee decides to cease using its technology or if sales volumes from a major customer decline. The lengthy design win process, typically six to nine months, followed by a one-to-three-year chip design cycle before mass production and royalty payments begin, introduces considerable revenue predictability challenges and requires significant upfront R&D expenditure without guaranteed returns.

International operations and geopolitical tensions, particularly between the U.S. and China, pose ongoing risks. Arteris derives a substantial portion of its revenue from outside the United States (59.9% in H1 2025), with 25% from China. U.S. export regulations and trade restrictions, such as those imposed by the Bureau of Industry and Security (BIS) on semiconductor exports to China, could limit Arteris's ability to license or support its products, potentially leading to re-planning of projects or reduced revenue from Chinese customers. Furthermore, fluctuations in foreign currency exchange rates, especially the weakening U.S. dollar against the Euro, can increase overseas operating expenses, impacting profitability.

The semiconductor industry's inherent cyclicality, characterized by rapid technological change, product obsolescence, and supply/demand fluctuations, could lead to downturns that adversely affect customer demand for Arteris's products and royalty revenue. Additionally, the increasing use of AI technologies introduces new regulatory and intellectual property challenges, with uncertainties surrounding IP ownership and data protection laws that could expose the company to litigation or compliance costs.

Conclusion

Arteris, Inc. is strategically positioned at the forefront of the semiconductor industry's most dynamic shifts, particularly the explosion of AI and the transition to complex chiplet architectures. Its differentiated NoC interconnect IP and SoC integration automation software, highlighted by the groundbreaking FlexGen technology, provide essential solutions that drive productivity, efficiency, and performance for leading chip designers worldwide. The company's ability to secure strategic wins with industry giants like AMD and expand into high-volume markets such as microcontrollers underscores the growing indispensability of its offerings.

While Arteris continues to invest heavily in R&D, leading to current net losses, its strong revenue growth, record ACV plus royalties, and robust RPO demonstrate significant market traction and future revenue visibility. Management's disciplined approach to cost control, coupled with the secular trend of outsourcing system IP, provides a clear path towards sustained positive free cash flow. Despite geopolitical headwinds and industry cyclicality, Arteris's technological leadership and strategic market expansion initiatives suggest a compelling long-term investment thesis for those seeking exposure to the foundational layers of the AI revolution.