Arteris, Inc. (AIP) Earnings Call Transcript & Summary

Thank you. Good afternoon everyone and welcome to the Art Terrace second quarter 2026 earnings call. Please note this call is being recorded and simultaneously webcast. All material contained in the webcast is the sole property and copyright of Art Terrace, with all rights reserved for opening remarks for opening remarks and introductions i would like like to turn the call over to erica manion at sapphire investor relations please go ahead.

Thank you and good afternoon. With me today from our terrace are Charlie Janet, Executive Officer, and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the second quarter ended June 30, 2026. Nick will review the financial results for the second quarter of 2026, followed by the company's outlook for the third quarter and the full year of 2026. 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 are based on management's current expectations and assumptions and involve material risks and uncertainties that could cause actual results to differ materially 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 our terrorists issued today and then in the documents and reports filed by our terrorists from time to time with the Securities and Exchange Commission. Please note, during this call we will cite certain non-GAAP measures including, among others, 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 the means of evaluating and understanding how the company 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 U.S. GAAP. A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended June 30, 2026. In addition, for a definition of certain of the key performance indicators used in this presentation, such as annual contract value and remaining performance obligations, please see the press release for the quarter ended June 30, 2026. These key performance indicators are presented for supplemental informational purposes only. should not be considered a substitute for financial information presented in accordance with GAAP, and may differ from similarly titled metrics or measures used by other companies, securities analysts or investors. Listeners who do not have a copy of the press release for the quarter ended June 30, 2026, may obtain a copy by visiting the investor relations section of the company's website. In addition, management will be referring to the second quarter 2026 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, Erica, and thanks to everyone for joining us on our call today. The arterious second quarter of 2026 produced multiple record-breaking results. We reached another record annual contract value plus royalties, exiting the quarter at $99.5 million, representing a 44% year-on-year increase. We achieved record revenue, royalties, and RPO backlog. Licensed deal flow in the quarter was driven by several large deals with existing and new customers. These wins spanned all key verticals, led by growth in enterprise computing and automotive, followed by aerospace and defense, communications, consumer electronics, and industrial markets for varieties of semiconductors, including chiplets, system on chip or SOCs, application specific integrated circuits or ASICs, field programmable gate arrays or FPGAs, and microcontrollers. Further to our diversification strategy, no single customer made up more than 10% of our revenue in the first half of 2026. Our customer design activity was healthy again in a quarter. For the trailing 12 months to June 30, 2026, our customers reported 21% higher number of design starts year over year. Rapidly evolving high-performance computing workloads continue to drive demand for more complex chips and chiplets across data centers, smart jet devices, and physical AI systems. This in turn is increasing the demand for Arteris products that help deliver the underlying high performance, efficient, safe and secure data movement. to semiconductors in the AI era. In the second quarter of 2026, the majority of our customers' design starts supported AI or HPC use cases as part of the device, and this trend is continuing. Data center chip and chip-led development continues to be a key revenue driver for our terrorists. Over the past four quarters, enterprise computing has made up an average of 29% of our terrorist ACV plus royalties, with AI infrastructure representing some of the biggest deals in the second quarter. As an example, one of the world's largest hyperscale cloud companies has chosen to adopt and standardize on our terrace for its infrastructure silicon system IP. Arteris technology will enable the high performance and energy efficient semiconductor data movement for the next generation of data centers. Large-scale compute must adapt quickly for rapidly evolving software workloads that require ASICs, SOCs, and chiplets with interconnect that can support the throughput, bandwidth, and power requirements, making Arteria the obvious choice for scale-up and scale-out architectures. Another example of Arteria's progress in data center applications was a large win with one of the top US semiconductor design houses building custom ASICs for various hyperscalers, Arteris FlexGen Smart Knock IP is increasingly being used with the underlying data movement in chiplets and multi-die chips to support high-end scale-up AI compute. Additionally, we announced that SpeedData, developer of the Purpose-Built Analytics Processing Unit or APU, has deployed Arteris in its Callisto processor that runs large volume analytics processing for applications which require high bandwidth capable chips. in data centers. Physical AI, from automotive to aerospace and defense, and along with industrial applications such as robotics, continues to experience strong and growing demand for Arturia's products and solutions. Here, performance, energy, safety, security, and proven reliability are essential for foundational semiconductors. Li Auto, a leader in China's new energy vehicle market, has successfully deployed its in-house designed autonomous driving chips in their newest SUV model. Multiple chips designed with Arteris are used in each vehicle and run 2,560 trillion operations per second or tops to effectively and safely perform autonomous driving and other advanced driving tasks. As customers take deliveries of these vehicles, we are starting to see initial royalty contributions. Another example is CyEngine, a provider of advanced automotive chips, selecting Arteris for its next-generation SoC platforms for the Intelligent Cockpit, Advanced Driver Assistance applications, and AI Cockpit Drive Fusion solution with high-performance and functional safety requirements. On the product side, we're seeing equally strong momentum with customer adoption of new technologies. Following the acquisition of Cycuity earlier this year, which provides semiconductor cybersecurity assurance, we recently announced an expanded partnership with ARM. The Cycuity hardware security assurance technology is already in use by ARM during the design phase of selected CPUs. Moving forward, ARM engineering teams are expanding their adoption of security technology across additional next-generation processors to help identify and mitigate potential security weaknesses and vulnerabilities supporting the delivery of robust and resilient CPUs. We are honored to be supporting the ARM leadership in the application of cybersecurity hardware assurance for safer CPU hardware. We see similar cybersecurity hardware assurance opportunities with other IP suppliers, semiconductor companies, and system houses, building silicon for applications ranging from AI infrastructure to mission critical applications, where cybersecurity is rapidly moving from a should to a must technology, etc. accelerated by rapid development in frontier AI models, and glowing sets of required standards and regulations. On the NOC IP front, the number of FlexGen Smart NOC customers continues to grow as customers are increasingly seeing the value in automation and wider length efficiency which helps reduce power that Arteris Smart NOC IP offers. In the first half of 2026, we closed multiple seven-figure deals for FlexGen with major semiconductor customers. On the ecosystem front, we announced a collaboration with IC-Link by IMEC, which is IMEC's service provider for high-end ASICs and silicon photonics. Arteris technology will be deployed as part of their ongoing efforts to accelerate and simplify the development of next-generation HPC chiplets and ASIC chips. Our customers continue to innovate in exciting high growth areas. All of these require a combination of high performance, energy efficiency, safety and security. Overall, Arteris continues to be in a strong position to support growing semiconductor applications in the AI era across data centers, edge devices, and physical AI systems, helping customers to innovate and develop their next generation of silicon chips and chiplets with our technology. Thank you. I'm happy also to announce that we have completed our ATM program, raising $72 million to support our ability to invest in industry-leading system IP products, global customer support, and additional Tuckin acquisitions. As previously announced, Nick Hawkins will be retiring following a distinguished tenure as our CFO. Nick helped lead Arteris through its successful IPO, built an excellent finance organization, delivered at or above financial guidance on nearly all financial metrics, and was instrumental in in achieving a positive free cash flow operation while laying the foundation for near future non-GAAP profitability. I'm very grateful for his leadership and contribution to Arteris over the years and wish him the best in the next chapter of his life. I am pleased to share that Saurabh Sinha will join Arteris as our new CFO starting on September 8th, 2026. Farab comes to us from Ava Technologies, where he was instrumental in taking the company public on NASDAQ and in managing financial operations, capital allocation, and investor relations. We expect a smooth transition and remain focused on executing our strategy, meeting our customers' growing needs, and delivering shareholder value. With that, I want to again thank Nick for having been an invaluable partner, and I'll turn it over to him one last time to discuss our financial results in more detail.

Thank you, Charlie. Good afternoon, everyone. As Charlie mentioned, this is my final learning school for Arteris, and I am delighted to be handing over the reins to Sarah up next month. I have absolute confidence that he will continue the solid financial stewardship of the company and he will be supported by our exceptional global finance team. This has been a great and enjoyable journey, and together we have delivered many remarkable achievements that have benefited our stockholders and our people. As I review our second quarter results for 2026 today, Please note I will be referring to GAAP as well as non-GAAP metrics. Please also note that a reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website. Also, as a reminder, I'll be referring to the 2Q2026 earnings presentation, which can be found in the investor relations section of the company's website. under the events and presentations tab. We had a strong second quarter, beating the top end of our guidance for revenue and ACB Plus royalties. Non-GAAP operating income was impacted by unexpectedly high employer payroll taxes related to French employee RSU vesting, which totaled $1.7 million in the quarter. And this increased expense was driven by a much higher stock price during the June quarter. If you look at slide five of the presentation, total revenue for the second quarter was $24.1 million, up 46% year over year. above the top end of our guidance range. Notably, trailing 12-month royalties was $8.6 million, 65% higher year-over-year, setting a new record high. Royalties continue to show strong growth, driven by a healthy mix of customers across all of our verticals, and with exciting new royalty streams coming online every quarter. At the end of the second quarter, ACB plus royalties was $99.5 million, up 44% year over year, above the top end of our guidance range. Once again, a new record high. The remaining performance obligation to our IPO, which is our contracted future revenue at the end of the second quarter, totaled $135 million, another all-time high for our tariffs. We expect just over half our RPO at the end of the second quarter will be recognized as revenue in the 12 months starting July 1, 2026. Non-GAAP gross profit in the quarter was $21 million, representing a gross margin of 87%. The net gross profit in the quarter was $20.5 million, representing a gross margin of 85%. that our 2026 gross margin now reflects the inclusion of subcontractor costs as cost of revenue for certain security government contracts. Now moving to slide six. operating expense in the quarter was $25.5 million. Our OPEX was slightly above trend as a result of the RSU-driven payroll taxes that I mentioned earlier, together with higher commissions resulting from a very strong deal flow quarter. As a reminder, our long-term operating leverage model is to limit our OPEX growth rate to approximately half our revenue growth rate. We continue to believe that our investments into product development and customer success will help to accelerate our top-line growth in coming years. Total gap operating expense for the second quarter was $34.4 million, which included acquisition-related expenses of $2.2 million. Non-GAAP operating loss in the quarter was $4.6 million. GAAP operating loss for the quarter was $13.9 million. Non-GAAP net loss in the quarter was $4.7 million or diluted net loss per share of 10 cents. Gap net loss in the quarter was $14.1 million or diluted net loss per share of 30 cents. Moving to slide seven, I'm turning to the balance sheet and cash flow. We ended the quarter with $123 million in cash, cash equivalents and investments, and we've have no financial debt. The overall $81.6 million increase in cash, cash equivalents and investments in the quarter was driven by the successful ATM execution, which raised approximately $72 million of net proceeds at an average price of over $35. coupled with $8.6 million positive free cash flow in the second quarter, which brought the trailing 12-month free cash flow to positive $6.8 million. I would now like to turn to the outlook for the third quarter and the full year 2026 and refer now to slide 8. For the sake of clarity, NGOI guidance for the third quarter of the full year takes into account the higher run rate of French employer payroll taxes on RSU vesting. For the third quarter, we expect ACB plus royalties of $99 to $103 million, revenue of $24 to $25 million, non-GAAP operating loss of $3 to $1 million. As a reminder, we are no longer guiding quarterly free cash flow. As we look forward to the full year of 2026, we are seeing continued strength in semiconductors and signs of an upward trend cycle in the market. Consequently, we are raising our full year revenue guidance. For the full year 2026, our guidance is as follows. ACB plus royalties to exit 2026 add $102 to $106 million, revenue of $95 to $98 million, an increase of $3.5 million from prior guidance and representing a 37% year-over-year increase at the midpoint. Thank you. Non-GAAP operating loss of between $10 to $7 million. Non-GAAP free cash flow of positive $5 to positive $9 million, unchanged from prior guidance. We're seeing a strong start to the third quarter with momentum and increasing customer engagement leading us to believe that we will see continued strength in the second half of the year. Building on our strong revenue growth, coupled with carefully focused expense discipline that is delivering operating leverage, we continue to believe that our terrace is on a path to profitability and we expect to report a non-GAAP operating profit. for a period as early as the fourth quarter in the current year. With that, I will turn the call back to the operator for the Q&A portion of the call.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. If you'd like to withdraw a question, press star 2. One moment please for your first question. first question comes from Kevin Gary Gama from Jefferies please go ahead.

Yes, hey Charlie and Nick, congrats on the great results and Charlie, great working with you and hope you enjoy your retirement. Hey, can you talk more about the expanded partnership with Arm with Siteuity? Should we think about it as a licensing deal and then get royalties and did that displace a competing solution or was this a greenfield opportunity?.

So it is a greenfield opportunity. There isn't actually a whole lot of commercial solutions for what Psycuity does. Essentially what ARM is using it for is to identify potential weaknesses in the high-end designs right and basically they are essentially taking a leadership position about making the design that they deliver to their customers be essentially have significant amount of hardware security assurance so it's a greenfield opportunity there's opportunities for expansion. And we think that other processor-type companies should be taking the lead of ARM in deploying cybersecurity hardware assurance solutions. Got it. Okay. That makes sense. And I would also like to thank ARM today to allow us to announce it because Security has a significant number of very impressive customers, but people tend to be secretive about security, so ARM was very, very nice to let us announce it.

Hey, Kevin. Okay. This is Nick. I just want to chip in. You said that Charlie was retiring. I know that was a slip of the tongue, and you know that it's actually me who's retiring, but I just want everybody else who might be listening to this call to know that Charlie's not retiring. It's Nick. Yes, I apologize for that. It's been a long week so far. My fault.

And then, so I guess, you know, just kind of going off that, does the addition of Psycuity allow you to negotiate a higher royalty rate with customers? Yes.

No. So, security, at least so far, has been a non-royalty-bearing sort of software EDA-type model. In the future, there are opportunities between the network on chip and security to actually not only identify weaknesses, cybersecurity weaknesses, but also to fix them. So there might be some opportunities there, but right now it's a non-royalty based.

product. Okay, perfect. Thanks, guys. And Nick, enjoy your retirement.

Thank you, Kevin. Been a delight working with you for the last several years.

Your next question comes from Josh Bacalter from TD Cowan. Please go ahead.

Hey guys, thanks for taking my questions and let me echo the congrats to Nick on retirement and say thank you for all the work over the years and also Charlie, thank you for staying with us. Maybe to start, you called out the US design house win on an ASIC platform, I think using for chiplets and and multi-die offerings. Can you elaborate on, you know, is this a new customer and maybe speak to what type of applications and maybe timeline to materiality for this revenue contribution? Thank you.

it's not a new customer, but it was a very small customer, a relatively small customer prior to this. But essentially, the hyperscalers are employing a number of different business models. They buy commercial chips from Intel and maybe ARM in the future. They are building accelerators themselves, and they're also working. with partners to build chips to their specification. And this, you know, a large semiconductor company, one of their, you know, strong business product lines is that they build chips for hyperscalers and they have, after an extensive evaluation, decided to use Arteris for fulfilling those designs. Thanks for that, Charlie. Data center hyperscaler application.

Got it. Okay. Thank you for that, Charlie. And then maybe to follow up, I thought the Lee Auto announcement was interesting as well, especially given it's in for an in-house autonomous driving chip. Any way you can size this opportunity and maybe how big China Auto is overall within your royalty portfolio, how big it can be over the next couple.

years thank you I think I'll defer to Nick on the on the royalty royalty question about the we we have a strong presence in in a China automotive market and also with China automotive OEMs and so so Lee Auto is just just one of the opportunities that we pursue we are pursuing or have pursued. And this has been underway for a while, and they are starting to ship their system in a car, in actually real-world cars. But as far as the royalty percentage in China, Nick, do you want to take that one?.

Sure, absolutely, Charlie. Hi, Josh. So, yes, so Lee Auto is a mid-size EV, Chinese EV company. Yes. So their volumes can be meaningful, and they are growing. So we're delighted that they have started to send checks so rapidly. This is a feature of the Chinese automotive market. As far as how far it can go, the jury's out on that. We'll have to wait and see. But typically, if you go back to any automotive royalty stream that we've seen in the past, typically you see a ramp over the first three years. Not necessarily totally even, but there is a ramp over the first three years, and then it plateaus forever. a large number of years. You'll know that, for example, the Chinese automotive market has swung very heavily towards EVs. as part of their electrification strategy as a country. So this is something that we're watching very carefully, and I'm sure my successor, Sarah, will be keeping a close watching eye on that.