AIP earnings call analysis

NASDAQ:AIP Q2 2026 Earnings Call Transcript Generated on 10/9/2026 Operator | Conference Operator: Good afternoon, everyone, and welcome to the Art Terris 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 Terris, with all rights reserved. For opening remarks and introductions, I would like to turn the call over to Erica Mannion, at Fudge Fire Investor Relations.

Please go ahead. Erica Mannion | Investor Relations, Fudge Fire

Thank you, and good afternoon. With me today from our terrace are Charlie Janac, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the second quarter end of 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 security laws. These statements are based on management's current expectations and assumptions and involve material risks and uncertainties that 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 ARTERIS issued today and in the documents and reports filed by ARTERIS 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 U.S. GAAP. The non-GAAP measures are presented as we believe that they provide investors with a 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 of 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.

Charlie Janac | Chief Executive Officer

Thank you, Erica, and thanks to everyone for joining us on our call today. The Ontario 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, or HPC, workloads continue to drive demand for more complex chips and triplets 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 essential 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 chiplet development continues to be a key revenue driver for Arteris. Over the past four quarters, enterprise computing has made up an average of 29% of Arteris 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 Arteris 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 Arteris the obvious choice for scale-up and scale-out architectures. Another example, of Arteris Progress in Data Center Applications was a large win with one of the top U.S. semiconductor design houses building custom ASICs for various hyperscalers, where Arteris FlexGen Smart Knock IP is increasingly being used for 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, often 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 Arteris 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 with 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 SciQuity 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-curricle applications, where cybersecurity is rapidly moving from a should to a must technology, accelerated by rapid development in frontier AI models and growing sets of required standards and regulations. On the NOC IP front, The number of FlexGen Smart Knock customers continues to grow as customers are increasingly seeing the value in automation and wire-length efficiency, which helps reduce power, that our various Smart Knock 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 hydrolux areas. All of these require a combination of high performance, energy efficiency, safety, and security. Overall, Arteris Thank you for joining us. and additional parking acquisitions. As previously announced, Michal Hawkins will be retiring following a distinguished tenure as our CFO. Michal 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 achieving a positive free cash flow operation while laying the foundation 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 8, 2026. Saurabh comes to us from Ava Technologies where he was instrumental in taking the company public on NASDAQ and in managing financial operations, capital allocations, 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.

Nick Hawkins | Chief Financial Officer

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 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 will be referring to the 2Q 2026 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 ACP 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. Turning to slide 5 of the presentation, total revenue for the second quarter was $24.1 million, up 46% year-over-year, and 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 RPO, which is our contracted future revenue at the end of the second quarter, totalled $135 million, another all-time high for our terris. We expect just over half our RPO at the end of the second quarter will be recognised 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%. GAAP gross profit in the quarter was $20.5 million, representing a gross margin of 85%. A reminder 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 6. Non-GAAP 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 grossly. 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-gap operating loss in the quarter was $4.6 million. Gap 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 $0.10. GAAP net loss in the quarter was $14.1 million or diluted net loss per share of $0.30. Moving to slide 7 and turning to the balance sheet and cash flow. We ended the quarter with $123 million in cash flow. Thank you very much. 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, NGRI guidance for the third quarter and 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-Gap 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 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 at $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. 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 are 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-gap operating profit. With that, I will turn the call back to the operator for the Q&A portion of the call.

Operator | Conference Operator

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. Your first question comes from Kevin Gerrigan from Jefferies.

Please go ahead. Kevin Gerrigan | Analyst, Jefferies

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 Psycuity? Should we think about it as a licensing deal and then get royalties and does that displace a competing solution or is this a greenfield opportunity?

Charlie Janac | Chief Executive Officer

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 and mid-range CPU designs, right? And basically, they are essentially taking a leadership position about making the designs 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, you know, we think that other processor-type companies should be taking the lead of Arm in deploying cybersecurity hardware assurance solutions. And I would also like to thank Arm that they 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 is very, very nice to let us announce it.

Nick Hawkins | Chief Financial Officer

There you go. 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 for school to know that Charlie's not retiring.

Kevin Gerrigan | Analyst, Jefferies

Yeah, 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?

Charlie Janac | Chief Executive Officer

No. So Psycuity, at least so far, has been a non-royalty-bearing sort of software EDA-type model. You know, 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-bearing product.

Kevin Gerrigan | Analyst, Jefferies

Okay, perfect. Thanks, guys, and make and enjoy retirement.

Nick Hawkins | Chief Financial Officer

Thank you, Kevin. It's been a delight working with you for the last several years.

Operator | Conference Operator

Your next question comes from Josh Bacalter from TD Cowan.

Please go ahead. Josh Bacalter | Analyst, TD Cowen

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 Did the U.S. Design House win on an ASIC platform, I think, using, you know, for chiplet 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. Charlie Janac | Chief Executive Officer

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 They build chips for hyperscalers, and they have, after extensive evaluation, decided to use Arteris for fulfilling those designs.

Josh Bacalter | Analyst, TD Cowen

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 of years?

Thank you. Charlie Janac | Chief Executive Officer

I think I'll defer to Nick on the royalty question. But we have a strong presence in the China automotive market and also with China automotive OEMs. And So Li Auto is just one of the opportunities that 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?

Nick Hawkins | Chief Financial Officer

Sure, absolutely, Charlie. Hi, Josh. So, yeah, so Li Auto is a mid-size Chinese EV company. 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 screen 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 Thank you both.

Operator | Conference Operator

Your next question comes from Martin Yang from Oppenheimer.

Please go ahead. Martin Yang | Analyst, Oppenheimer

Good afternoon. Thank you for taking my question. First, Nick, hope you have a very satisfying retirement. It's been a pleasure working with you through different companies over the years. My first question is on OPEX. So the change in The annual guidance relating to profitability, is the bulk of that change related to the payroll tax increase? Is there any additional off-tax increase?

Nick Hawkins | Chief Financial Officer

Yeah, Martin, so yeah, you're absolutely right. The majority of that decrease in NGI guidance, the two million decrease, is, as you rightly say, that is the French employer payroll taxes on RSU vesting. We had a, maybe we should have seen this coming, but we didn't. We had a very large spike in the stock price during the June quarter. and it's a tax that's levied based on the prevailing price at the date of vesting and so completely exogenous to us outside of our control. There are a couple of other things. We have had, as you saw, a lot of success and we're guiding up on the revenue front. Some of that, a good portion of that is coming from security and a lot of that is coming from government work. And government work, as you know, carries a much lower gross margin than traditional organic work or even the commercial business that security has. So those are the two big levers that have led us to that. There is also an element of this which is again a victim of our own success because our deal flow is so strong and this also affected the second quarter. Our sales commissions and FA commissions are significantly higher than we thought when we had a lower guide on revenue.

Martin Yang | Analyst, Oppenheimer

Thanks, Nick. Next question regarding royalty and cadence of royalty. This quarter royalty has a very slight dip. So can you maybe give us an outlook on how the royalty revenue would trend into the second half or into 2017?

Thanks. Nick Hawkins | Chief Financial Officer

Yeah. Yeah. Great observation, Martin. So I would characterize it more that the upward trajectory is slightly slower in a sequential quarter base than it was last quarter, and indeed the quarter before. There are a couple of things to bear in mind for that. One is that royalties do go through slight ups and downs. Remember we saw a down in the March quarter of 2024 when Mobileye I think it was 24th, let me correct me if I got that wrong. But it was the March quarter when Mobileye had an overstuffed channel and they had to reduce their inventory levels in the channel and so they shipped significantly less in the March quarter and then also in the June quarter. So these things can happen. There was one of our customers, I obviously can't mention who, but he had some Some logistical and supply chain issues, and that held back one quarter's worth of shipments. But that's come back on stream, so it's a pause. The growth rate, I mean, if you look at the last 12 months, over the prior year, last 12 months, at June 30, that's still up 67%, and that is still, even with that little dip, that is still well above our long-term CAGR that we've socialized with the street. You did ask about 27 as well, I'm sorry, I didn't know that.

Martin Yang | Analyst, Oppenheimer

Right, a longer-term distraction.

Nick Hawkins | Chief Financial Officer

So, this is another great question. So, Our long-term guide on royalties CAGR, growth rate annual, is high 30s to low 40s percent. That's what we've said in the past. Now, clearly, we are traveling at a faster rate than that today. We are, as Amber just mentioned, we're 67% up on a 12-month basis. I don't want you to assume that that rate can carry on ad infinitum. So I'm sticking at the moment. Now, Sarab, when he joins, he may come to a different view. But right now, I think it's safe to stick with the high 30s to low 40s percent. Kega and we can revisit that if we see this level of robustness and royalties and success then we can revisit that in the coming quarters.

Martin Yang | Analyst, Oppenheimer

Thank you, I appreciate it.

Operator | Conference Operator

Your next question comes from Suji De Silva from Rust Capital.

Please go ahead. Suji De Silva | Analyst, Rust Capital

Hi, Charlie. Hi, Nick. Congrats on the results here, and Nick, best of luck with the transition, certainly. On the deal activity, very strong in the quarter. Maybe you can talk about the areas that you're seeing the strongest growth outside of your core auto and AI data center, just to understand where some of these areas might be inflicting earlier.

Charlie Janac | Chief Executive Officer

Yeah, I mean, it's been a pretty broadly distributed sort of growth and deal flow. The data center has sort of taken the lead, I would say, because there's a lot of investment in data center. And we think that some of that is going to perhaps change a little bit. But I think AI is going to be everywhere. And as the cost of AI come down a bit, people are just going to need more and more chips. So we think that whatever happens with the data center investment is not going to have a major effect on us. But we're also seeing strong action in microcontrollers, automotive. We have some embedded VGA business. The space business continues reasonably well.

So we're pretty happy. Martin Yang | Analyst, Oppenheimer

And I think we've announced – Charlie Janac | Chief Executive Officer: on the earnings is that for the first half, for the first time for six months, no one was more than 10% of our licensed revenue in the first half of 2026. So we're well distributed, I think.

Nick Hawkins | Chief Financial Officer

Can I just add a couple of things to that, Sujin? Thanks for your kind words. We will no doubt stay in touch. But the two other areas that are of interesting note in terms of strong deal for one was Sakiyoti. Sakiyoti had a very solid quarter, and there are some consequences to that. You probably saw as a $2.2 million Gap, Opex Charge that went through in the quarter because we had a more robust view in terms of the likelihood of them hitting their full earn-out target which is obviously good news and secondly we're seeing some very interesting strength in some of the memory players and that is obviously Ultimately, data center related, but it has been some solid deal flow from them.

Suji De Silva | Analyst, Rust Capital

Very interesting. And then my other question is on the, you know, you talked about data center AI generally and anything customer particular. Maybe, Charlie, you can talk about where those customers were hitting a breaking point where they cut over to you guys and what they were using in the past. Was it an in-house solution? Just to understand the cutover and maybe the reasons for it.

Thanks. Charlie Janac | Chief Executive Officer

So the hyperscalers are a specific type of a customer. Their goal is not to make everything in-house. So our observation is that they keep buying from Intel. They keep buying from AMD. They keep buying, you know, some for the new ARM chips. But they're also building – they understand the workloads that they're dealing with through the data center better than anyone else. and sometimes they're reluctant to even share the information about how those workloads behave and what those specifications are so they're doing a lot of that workload acceleration basic work in-house and sometimes they outsource that to large companies who unfortunately the one that we got a fairly large deal in the quarter wants to remain confidential but So they're doing a combination of buying commercial chips, making stuff in-house, and also going to design partners, usually large design partners. And they, I think, are going to keep on doing that. So there's no goal on their side to go one way or the other. They just want to maintain a balance between those three approaches.

Suji De Silva | Analyst, Rust Capital

Okay. Thanks, Charlotte. Thanks, Nick.

Operator | Conference Operator

Ladies and gentlemen, as a reminder, if you'd like to ask a question, press star 1 on your telephone keypad. Your next question comes from Maddy DePaola from Rosenblatt.

Please go ahead. Maddy DePaola | Analyst, Rosenblatt

Hey, guys. Calling on behalf of Kevin Cassidy. Thanks for taking my question. How do you expect physical AI products production cycle to compare to data center and automotive life cycles for driving royalty revenue?

Charlie Janac | Chief Executive Officer

So to us, the physical AI chips look very much like automotive because you need functional safety and you need security because when mechanized systems interact with human beings, those scenarios have to be handled, right? So the functional safety and now the cybersecurity assurance are going to play very well in the physical AI space. But the design cycles we think will be significantly faster in robotics than they will in automotive. But because you have functional safety and security involved, those design cycles will be slower than you see in data center, where basically in a data center, people come up with a workload Okay, thank you.

Operator | Conference Operator

And there are no further questions at this time. I will turn the call back over to Charlie for closing remarks.

Charlie Janac | Chief Executive Officer

Well, thank you for joining us on our poll today. We really appreciate your interest in our terrace. We're very excited about our business and we look forward to meeting and updating you on our business progress in the course ahead.

So thank you very much. Operator | Conference Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you. Thank you. jsPDF 3.0.3 D:20261009125458-00'00'

NASDAQ:AIP Q1 2026 Earnings Call Transcript Generated on 6/6/2026 spk01: Thank you. Thank you.

Thank you. Thank you. Operator | Conference Operator

Good afternoon, everyone, and welcome to the Arteries First Quarter 3026 Earnings Call. Please note that this call is being recorded and simultaneously webcast. All material contained in the webcast is the sole property and copyright of Arteries, with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion at Sapphire Investor Relations.

Please go ahead. Erica Mannion | Investor Relations, Sapphire Investor Relations

Thank you and good afternoon. With me today from our terrace are Charlie Janik, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the first quarter ended March 31, 2026. Nick will review the financial results for the first quarter of 2026 followed by the company's outlook for the second 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 and events to materially differ 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 appear in the press release our tariffs issued today, and in the documents and reports filed by our tariffs 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 the U.S. GAAP. The non-GAAP measures are presented as we believe that they provide investors with the means of evaluating and understanding how the company's 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 gap measure can be found in the press release for the quarter ended March 31, 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 March 31, 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 March 31, 2026, may obtain a copy by visiting the investor relations section of the company's website. In addition, management will be referring to the first quarter 2026 earnings presentation, which can be found in the investor relations section of the company's website under events and presentations tab. Now, I will turn the call over to Charlie.

Charlie Janik | Chief Executive Officer, Arteris

Thank you, Erica, and thanks to everyone for joining us on our call today. The first quarter of 2026 was a robust quarter for our tariffs, as we reached another record annual contract value plus royalties of $92.8 million, representing a 39% year-on-year increase. We also achieved record revenue, record royalties, and record revenue backlog. Customer engagement in the quarter included both existing customer renewals as well as adding new logos. We want licensed deals in enterprise computing, automotive communications, consumer electronics, and aerospace and defense sectors. AI integration into all types of electronics, from data centers to edge devices and physical AI systems, is increasing the demand for advanced connectivity and security products, and now two-thirds of our customer engagements are into AI chips. New chips and chiplets continue to get more complex, and perform more advanced computing. Efficient, safe and secure data movement within those devices is essential, which is driving the growing adoption of Arteris products and solutions. Every semiconductor must move data to be a chip or chiplet. Rapidly advancing data movement powered by chips is evident in recent earnings releases by semiconductor companies. Many of these companies are also Arteris customers and have both beaten their first quarter revenue projections and raised guidance for the year. This performance has clearly flowed through into our royalty stream, which has increased 67% year over year. Enterprise computing, which includes data centers, high performance computing, or HPC, including high bandwidth memory, or HPM, and other AI infrastructure companies, was again the biggest contributor to our licensing activity in the quarter. This includes a leading global hyperscaler, which expanded its use of Arteris network on chip technology for its next generation of data center chips. Advanced AI data centers are experiencing strong demands for HBM, and I'm pleased to say that another leading global memory supplier is now utilizing Arteris system IP to accelerate their memory chip development. Automotive also continues to be a strong sector for us where our technology is helping to meet the needs of physical AI systems. An example was an important first quarter deal announcement with Renesas that increased their licenses and deployed our system IP for their most advanced, our car, Gen 5 SOC series. Tailored for advanced driver assistance and automatic driving systems, this latest SOC delivers AI performance of up to 400 trillion operations per second, or TOPs, with multi-die chiplet extensions to boost AI performance using Arteris network on chip technology for silicon data movement. Communication with efficient, safe, and secure data movement is also playing an increasingly important role in transmitting data, particularly between data centers and edge and endpoint devices. In the first quarter, one of the leading European 5G and 6G communications equipment players further expanded their use of Arteris technology to accelerate the integration of advanced telecommunication chips. Satellites extend communications into aerospace and defense, where the pace of innovation and development of advanced, resilient, safe, and secure semiconductors is growing rapidly. In the first quarter, a leading US space infrastructure company expanded its use of Arteris for the development of next-generation space applications. Beyond Earth's orbit, it was a pleasure to see the success of the Artemis II mission, where AMD chips with built-in Arteris technology were used to support critical sensor fusion, data routing, and image processing for the Orion spacecraft. This is yet another example of Arteris' use in data-intensive space exploration. We continue to see adoption of our FlexGen Smart Knock IP at major accounts and startups. We are also working with early adopters on two products for optimized chiplet and multi-die system IP, which we anticipate deploying in production during the second half of 2026 with focus on AI, HPC, and ADAS designs. We broaden our system IP portfolio, which addresses key aspects of advanced chip design through the acquisition of Cycuity, a leading chip cybersecurity company. This technology is critical to the security of chips regardless of their complexity. We are starting the process of leveraging our deep relationships with over 200 semiconductor design companies and are already seeing strong interest from many of these customers across many verticals including data center, aerospace and defense, consumer, automotive and communications. By way of example, a top five U.S.-based hyperscaler, which is an existing Arteris customer, has licensed Arteris security technology in the first quarter to help mitigate cybersecurity risks. The ever-increasing focus on cybersecurity threats is highlighting the need for our solutions which identify and help mitigate cybersecurity vulnerabilities during chip development phase before silicon mass production. We recently announced a collaboration with MIPS to accelerate the development of physical AI chips. MIPS will use our Terrace FlexGen Smart Knock IP and Magilum SoC integration automation software to help accelerate the development of scalable SoC platforms targeting high-growth markets in physical AI, including automotive microcontroller units, MCUs, and advanced driver assistance systems, ADAS, robotics, and embedded computing. Lastly, Arteris was named to Fast Company's list of the world's most innovative companies of 2026. Arteris ranks number four in the most innovative companies in the North America category, as this year's list shines a spotlight on businesses that are shaping industry through their innovations. Arteris joins the ranks of Google, NVIDIA, Anthropic, and more in Fast Company's 2026 list of world's most innovative companies. Arteris also won a Stevie Award for 2026 Technology Innovation of the Year in the software category for our Cycuity semiconductor cybersecurity products. On an organizational front, today we also announced that Mick Hawkins, our CFO, has chosen to retire effective August 31st, 2026. Nick will take us through our Q2 report and continue to serve as an advisor to Arteris after his retirement date to facilitate an orderly transition. Nick leaves the company in great shape with no debt, positive free cash flow, and major contributions to three acquisitions. Nick has been an invaluable partner during a transformative period for Arteris. We thank Nick for his dedication to the company and wish him all the best. With that, I'll turn it over to Nick to discuss our financial results in more detail.

Nick Hawkins | Chief Financial Officer, Arteris

Thank you, Charlie. Good afternoon, everyone. It has been a rewarding and enjoyable experience to help lead Arteris through an important stage in its development. I am proud of the exceptional finance team we have built and what the company has accomplished. During my seven years at Arteris, in addition to leading the company through its IPO, I've also led our M&A processes, including the important recent acquisition of the cybersecurity company, Psycuity. Arteris has grown substantially in revenue and market capitalization, is now cash flow positive, and is transitioning to profitability this year. It has been privileged to serve under Charlie and our excellent board, alongside our industry-leading leadership team and all our people. Arteris is well positioned for the future, and I look forward to following the company's continued progress in the years ahead. As I review our first quarter results for 2026 today, please note I will be referring to GAAP as well as non-GAAP metrics. Please note also 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 will be referring to the 1Q2026 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 first quarter. beating the top end of our revenue and acv plus royalties guidance and meeting the top end of our non-gap operating income guidance range turning to slide five of the presentation total revenue for the first quarter was 22.9 million dollars up 39 year-over-year and above the top end of our guidance range notably training 12-month royalties was 7.9 million dollars six to seven percent higher year over year setting a new record high our royalty stream today is fueled by a balanced mix of customers across all our vertical markets and our large royalty reporters which we define as over six figure dollars per quarter are in automotive consumer enterprise computing and aerospace and defense The number of customers reporting a quarter million plus royalty dollars has grown from one a year ago to three currently, further highlighting our rapidly diversifying and growing royalty revenue stream. At the end of the first quarter, ACB Plus royalties was $92.8 million, up 39% year over year, above the top end of our guidance range, and at a new record high. Romanian performance obligations, or RPO, which is our contracted future revenue, at the end of the first quarter totaled $118 million, 33% higher year-over-year, and another record high for our tariffs. We expect just over half of our RPO at the end of the first quarter will be recognized as revenue in the 12 months starting April 1, 2026. Non-GAAP gross profit in the quarter was $20.1 million, representing a gross margin of 87%. GAAP gross profit in the quarter was $19.7 million, representing gross margin of 86%. This now reflects for the first time the inclusion of subcontractor costs as cost of revenue for certain security government contracts. Now moving to slide six. Non-GAAP operating expense in the course is $22.6 million. In line with our operating leverage goals, we are maintaining our commitment to limit overall growth in OPEX to 50% of our revenue growth. We believe that our investments into product development and customer success will help to accelerate our top-line growth in the coming years. At the same time, we are delivering operating leverage, which is being driven across all cost categories. and we remain disciplined in our spending and investments, in particular in G&A spending, which is on average grown at less than one quarter the rate of revenue on a non-GAAP basis over the last three years. This has resulted in a 31 percentage point improvement in non-GAAP operating margin over that period. Total GAAP operating expense for the first quarter was $29 million, which included acquisition-related expenses of $0.6 million in the first quarter. Non-GAAP operating loss in the quarter was $2.5 million at the top end of our guidance range. GAAP operating loss for the first quarter was $9.3 million compared to a loss of $7.7 million in the prior year period. Non-GAAP net loss in the quarter was $1.2 million or diluted net loss per share of 3 cents. GAAP net loss in the quarter was $8 million or diluted net loss per share of 17 cents. Moving to slide seven and turning to the balance sheet and cash flow. We ended the quarter with $41.9 million in cash, cash equivalents and investments and we have no financial debt. Free cash flow, which includes capital expenditure, was negative $7.4 million in the first quarter, including approximately $3 million deal consideration elements and fees related to the security acquisition that closed in the quarter. I would now like to turn to our outlook for the second quarter and the full year 2026 and refer now to slide eight. First, starting with the next quarter, we will no longer be guiding quarterly free cash flow. As our average deal size continues to grow, we believe that the consequent fluctuations in quarter-to-quarter operating cash flows make the guidance of this KPI less helpful to investors. Additionally, on an annual basis, we are already free cash flow positive, having delivered that in 2025 and guiding increased positive free cash flow for 2026. This was our first strategic financial objective. We are now focused on delivering our next strategic financial objective, the inflection to non-GAAP profitability towards the end of the current year. For the second quarter of 2026, we expect ACV plus royalties of $95 million to $99 million, revenue of $23 million to $24 million, non-GAAP operating loss of $3 million to $2 million, free cash flow of positive $2 million to positive $8 million. 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 guidance for the full year on top and bottom line metrics. For the full year of 2026, our guidance is as follows. ACV plus royalties to exit 2026 at $102 million to $106 million, an increase of $2 million from prior guidance. Revenue of $91 million to $95 million, $2 million higher than prior guidance and representing a 32% year-over-year increase at the midpoint. non-GAAP operating loss of between $8.5 million to $4.5 million, an improvement of $0.5 million from prior guidance, and non-GAAP free cash flow of positive $5 million to positive $9 million. We're seeing a strong start to the second 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-gap operating profit for a period as early as the fourth quarter of the current year. With that, I will turn the call back to the operator for the Q&A portion of the call.

Operator | Conference Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone, and you will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press the star followed by the number two. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Kevin Cassidy of Rosenblatt.

Please go ahead. Kevin Cassidy | Analyst, Rosenblatt Securities

Yes, thanks for taking my question. And congratulations on the great results. And Nick, congratulations on a successful career and all the best as you go through the next stage. My question, yes. Yeah, on the hyperscaler design win and also the high bandwidth memory, What's the timeline of those products coming to market or generating royalties? And I guess I'm trying to get a feel, is there an acceleration in any of these hyperscaler ASICs or any of these developments?

Kevin Cassidy | Analyst, Rosenblatt Securities

Hey, I'm Kevin.

Nick Hawkins | Chief Financial Officer, Arteris

This is Nick. Let me handle the royalties part of that question. Generally speaking, the design cycles in that space are a little bit quicker than you'd expect in, say, automotive, which is quite a long design cycle, as you know, can be up to six years in some cases. In this sphere, it's more like two to three years that we'd expect to see something floating through from that.

Kevin Cassidy | Analyst, Rosenblatt Securities

Okay, and same with the high bandwidth memory?

Kevin Cassidy | Analyst, Rosenblatt Securities

Similar, yeah.

Charlie Janik | Chief Executive Officer, Arteris

Yeah, I mean, those are all going into data center AI. And those are basically some of the quickest design cycles that we see. But also, the volumes are actually more significant than they used to be in the past. But these products have a much faster churn than, like Nick said, the automotive, for example. And so they rise quicker and they also die quicker.

Kevin Cassidy | Analyst, Rosenblatt Securities

Okay, that was going to be my next question, the life cycle of the products as they come to the market. Also, I would imagine as they go down the process to smaller process nodes, the price of the products go up. So your overall royalties could be increasing compared to the past generation.

Kevin Cassidy | Analyst, Rosenblatt Securities

Yeah, that's true, Kevin.

Charlie Janik | Chief Executive Officer, Arteris

Sorry, Joe. These tend to be high-priced chips.

Kevin Cassidy | Analyst, Rosenblatt Securities

Right. Right. And getting more expensive those.

Yes. Okay. Great. Thank you. Operator | Conference Operator

Once again, if you wish to ask a question, please press star 1 to join the queue. And your next question comes from the line of Josh Buchalter of TD Cowen.

Please go ahead. Josh Buchalter | Analyst, TD Cowen

Hey, guys. Thank you for taking my question, and congrats on the results, and more importantly, best wishes, and a big thank you to Nick on your next endeavor. I guess to start, maybe big picture, as we think about the raise of the annual guidance, how much of this would you categorize as coming from the better royalty environment that you spoke to, just from better chip sell-through, versus increased confidence in licensing deals that you expect to sign over the next several quarters.

Thank you. Nick Hawkins | Chief Financial Officer, Arteris

So let me take that one, Charlie. So, Josh, thanks for your kind words. It's been a pleasure, I've got to say. On the increased guidance, I mean, I'll say just one general thing, which is, you know, philosophically we tend to be – careful on our guidance. We're very mindful of guiding our friends on the street diligently. And so we don't like to get over our skis on guidance. But we are seeing a very strong trajectory in royalties. The 12-month trailing was up 67%, but actually year-over-year first quarter, interestingly, was up over 100%. So we are seeing a nice pick-up there, and we're seeing more people reporting bigger and bigger numbers. So that's part of it. There is a I would categorize the first quarter as robust and good from a deal flow perspective in dollars. The start to the second quarter was very strong. We actually had the strongest April on record in terms of deal flow by a significant margin, so something like four times bigger than the next biggest April we've ever seen. So we're seeing a lot of activity. We're seeing a really strong pipeline on deals. I think that we want to wait until we're a little further through the quarter to see if this robustness continues and persists before we look at future guidance.

Josh Buchalter | Analyst, TD Cowen

Okay, thank you for all the color there. And then maybe following up on some of Kevin's questions earlier, you've been highlighting some pretty sizable hyperscale data center wins, I think, with FlexGen but other IPs. over the last few quarters, how should we think about the scale of data center overall compared to your historic auto exposure? Given it moves faster, as you mentioned in response to Kevin, what's a reasonable timeframe at which that could be a more meaningful portion of overall revenue in the model?

Thank you. Charlie Janik | Chief Executive Officer, Arteris

Yeah, I mean, the data center segment, from a license perspective, is growing very nicely, right? So on the royalty side, because data center, though the chips are higher priced, the volumes are lower. You know, we expect automotive to be, you know, continue to be a pretty solid royalty generator. But on the license side, we're definitely seeing solid growth from our data center customers.

Nick Hawkins | Chief Financial Officer, Arteris

If I can add to that also from a quantitative perspective, Josh, Enterprise is now, which is where our data center business resides in our verticals, is now the largest of our verticals in terms of license generation. It's slightly now higher than automotive, which used to be the number one. They're both in the sort of 30% to 35% range. What's interesting is aerospace and defense now partially as a result of the addition of security is now close to 10%. of our ACV, so it's an interesting developing field.

spk07

Thank you for the call, both.

Operator | Conference Operator

Once again, if you wish to ask a question, please press star 1 to join the queue. And we have a follow-up question from Kevin Cassidy of Rosenblatt.

Please go ahead. Kevin Cassidy | Analyst, Rosenblatt Securities

Yeah, thanks for taking my follow-up question. Just on the security acquisition, and now that you've had them for a quarter or so, can you say, is it coming in better than expected? Or is the outlook, I guess, what's the pipeline look like from here?

Charlie Janik | Chief Executive Officer, Arteris

So we've really started in middle of January, so it's early days. There were some pretty good government orders in flight, which we closed. So that's very promising. And for the second quarter, we're starting to see some very, very promising deals from the commercial side. So we think that this acquisition is going to turn out just fine. And cybersecurity, because of the Mythos product and other sort of AI-based technologies, the cybersecurity is coming to forefront. And we think that all of our customers, of which there's more than 200, can use the Cycuity product. So we're very excited about the potential. And it looks promising, but it's relatively early days.

Kevin Cassidy | Analyst, Rosenblatt Securities

Okay, thank you.

Operator | Conference Operator

There are no further questions at this time. I will now turn the call over back to Charlie Chanik for closing remarks.

Charlie Janik | Chief Executive Officer, Arteris

Well, thank you for joining our call today and for your interest in Arteris. We look forward to meeting with you and updating you on our business progress in the course ahead and seeing some of you at some investment conferences. So thank you for your support.

Operator | Conference Operator

Ladies and gentlemen, this concludes today's conference call. Thank you everyone for joining. You may now disconnect. jsPDF 3.0.3 D:20260606085915-00'00'

NASDAQ:AIP Q4 2025 Earnings Call Transcript Generated on 6/6/2026 Emily Beynon | Transcriptionist: Thank you. Thank you. © transcript Emily Beynon ... ...

Thank you. Thank you. Operator | Conference Call Operator

Good afternoon, everyone, and welcome to the R30's fourth quarter and full year 2025 earnings call. Please note this call is being recorded and simultaneously webcast. All material contained in the webcast is sole property and copyright of Arteris Inc. with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion of Sapphire Investor Relations.

Please go ahead. Erica Mannion | Director of Investor Relations, Sapphire Investor Relations

Thank you and good afternoon. With me today from Arteris are Charlie Janik, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the fourth quarter ended December 31, 2025. Nick will review the financial results for the fourth quarter and full year 2025, followed by the company's outlook for the first quarter and 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 the 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 or events to materially differ 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 Arteris issued today and in the documents and reports filed by Arteris 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 the U.S. GAAP. The non-GAAP measures are presented as we believe that they provide investors with the means of evaluating and understanding how the company's 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 December 31, 2025. In addition, for a definition of certain of the key performance indicators used in this presentation, such as annual contract value, confirmed design starts, and remaining performance obligations, please see the press release for the quarter ended December 31, 2025. These key performance indicators are presented for supplemental informational purposes only and 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 December 31, 2025 may obtain a copy by visiting the investor relations section of the company's website. In addition, management will be referring to the fourth quarter 2025 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 CEO, Charlie Janik.

Charlie Janik | Chief Executive Officer, Arteris Inc.

Thank you, Erica. And thanks to everyone for joining us on our call today. In the fourth quarter of 2025, we achieved many company records and milestones, including yet another record annual contract value plus royalties of 83.6 million, which represents a 28% year-on-year increase. This success was driven across our major vertical markets with the largest impacts in enterprise computing, automotive, and consumer electronics markets, but also across other applications, including communications, industrial, and aerospace and defense. Overall, we are seeing expanding proliferation of AI-driven semiconductor designs from data center to the edge, as well as physical AI, which in turn drives increased deployment of Arteris technology. Given the combination of the rising demand for efficient data movement in semiconductors in the AI era and our expanding set of innovative products that successfully meet the growing needs of our customers, I am proud to announce that our customers have now shipped over 4 billion chips and chiplets, incorporating our terrorist network on-chip IP as the underlying interconnect. This continues to positively impact our royalty revenue stream. On January 14th, we closed the acquisition of Cycuity, a leading provider of semiconductor cybersecurity assurance products. SciQity brings a rich history of strong collaborations with major commercial semiconductor companies, as well as companies in the national security sector, such as Booz Allen Hamilton and National Laboratories. The addition of SciQity's technology and expertise strengthens the Arteris product portfolio, enabling chip designers to analyze and improve security in IP blocks, chiplets, and SOCs. Security products enable the early detection of cybersecurity risks in the semiconductor hardware and firmware that serve as the foundation for all application software. The security products enable customers to uncover hardware security weaknesses and potential vulnerabilities and help to reduce associated security risks during the design phase prior to silicon manufacturing and end-device production deployments. According to the National Institute of Standards and Technology, or NIST, newly reported cybersecurity silicon vulnerabilities grew by over 15 times in the last five years, with the unreported number likely much higher. The security acquisition will help us to address market concerns about the rapidly increasing volume of sophisticated cyber attacks targeting the vast amounts of data moving through semiconductors, from AI data centers to networks and a broad range of devices across the digital ecosystem. There is a growing need for cybersecurity domain expertise and proven technology, which security acquisition brings to our terrace, enabling us to proactively help customers address cybersecurity in processors and other silicon devices. We believe this product line can be used by all of our existing customers as well as others in a broader semiconductor and systems ecosystems, they are not current customers. Our vision is to bring improved hardware security and advanced vulnerability testing to all SOCs, thereby extending our terrace reach meaningfully in terms of new customers and new entry points for every design, regardless of complexity. Moving on to our organically developed products, all of which experienced strong customer adoption in 2025. LexGen, our AI-driven smart NOC IP product announced a year ago, saw a strong uptick in customer adoption and has now been licensed for over 30 production device deployments across each of our vertical end markets with customers including AMD for AI chip design, DreamChimp for automotive, and NanoExplorer for aerospace applications. FlexGen's initial success reflects the growing need for optimized chip designs for lower power usage and latency combined with accelerated development cycles. This is particularly true for complex SoCs and CUPLA designs in today's AI era, which have high performance and low power goals and tight market windows in which to deliver silicon. Accordingly, we expect FlexGen momentum to continue in 2026. In the second half of 2025, we also saw strength in the licensing of our cash coherent interconnect IP product and core across various edge and server applications. For example, in early fourth quarter 2025, Altera selected anchor and flexion products from our terrorists to advance intelligence computing from cloud to edge applications. This significant order, underscores Arteria's ability to support large customers across multiple of their product generations, an ability that drives our 90% plus customer retention rate. We continue to see growing adoption of our product portfolio by top technology companies and large enterprises. An example of this is NXP, which delivers purpose-built, rigorously tested technologies that enable devices to think and act intelligently. We recently announced that NXP has expanded its use of Arteris products to accelerate edge AI efforts. NXP is deploying Arteris more broadly across its AI-enabled silicon solutions, including for intelligent vehicles, advanced industrial systems, and secure seamless customer experiences on the edge. This includes our mCore and FlexNOC network ownership IPs, CoderCache last-level cache IP, and Magellan SoC integration software. NXP is using these products to develop latest AI-driven silicon designs, including SoCs, neural processing units, or NPUs, and microcontrollers, or MCUs, with safe and secure high-performance data movement. Another example of a recent win is Black Sesame, which also licenses both cache-coherent and non-coherent interconnect IPs, for their devices' dual needs, with N-Core and FlexNoc being used to address the automotive industry's demand for automated driving silicon. Black Sesame develops a broad range of automotive semiconductors that spans from high-performance SOCs for AI autonomous driving to cross-domain SOCs used in a broad range of vehicles. Arteris technology provides the high-performance network-on-chip connectivity with safety that is critical for designing tomorrow's complex automotive SOCs and achieving time-to-market requirements. Power consumption is a key factor in new SOC designs, particularly those supporting AI workloads. In the fourth quarter, Blaze deployed our TerraSystem IP for their scalable, energy-efficient AI silicon. The Blaze AI platform delivers a programmable, energy-efficient foundation for hybrid AI deployment models spanning edge, and cloud infrastructure, which enables users to build multimodal AI inference for smart vision, sensing, acoustic monitoring, and real-time language understanding at the edge for industrial transportation and smart surveillance applications. By using Arteris Interconnect IP, Blaze can ensure efficient data movement along with reduction in power consumption. AI is also increasingly driving chiplet projects. The number of chiplet projects incorporating Arteris technology more than tripled over the past two years. All of these projects require state-of-the-art Arteris technology and close collaboration with multiple ecosystem partners, which has been a major focus for us over the years. In the fourth quarter, we announced that Arteris is a founding member of the Chassis program, which aims to create an open automotive chiplet platform. Led by Bosch, this initiative includes automotive OEMs such as BMW, Renault, and Stellantis, as well as automotive suppliers, semiconductor companies, EDA and software providers, and research entities, with Arteris providing network on chip expertise and chiplet and multi-die SOC interconnect technology. Arteris is also part of Cadence's recently announced strategic collaboration with ARM Samsung Foundry and other IP partners to deliver pre-validated chiplet solutions. The goal of this initiative is to reduce engineering complexity and accelerate time to market for mutual customers developing chiplets targeting physical AI, data centers, and high-performance computing or HPC application with our Terrace Interconnect IP enabling the underlying data movement. Our customers continue to innovate in exciting growth areas such as AI-enabled chips and chiplets from data centers to edge devices. The same is true for physical AI, which is based on foundation of silicon, combining computing, sensing, and data movement to interact with the real world. Physical AI requires a combination of quality, high performance, energy efficiency, functional safety, and cybersecurity, among others, which is supported by our products. Overall, Arteris is in a strong position to support semiconductor applications in the AI era across enterprise computing infrastructure, autonomous vehicle decision making, advanced communication, smarter consumer electronics, industrial automation, and aerospace and defense use cases. With the addition of Cycuity to our product offering, we have the opportunity to become a leader in SOC security solutions for our existing customer base, as well as a door opener to other companies who design SOCs, thereby helping us to realize our mission of enabling every design with leading-edge arterious technology. With that, I'll turn it over to Nick to discuss our financial results in more detail.

Nick Hawkins | Chief Financial Officer, Arteris Inc.

Thank you, Charlie, and good afternoon, everyone. As I review our fourth quarter and folio results for 2025 today, please note I'll be referring to GAAP as well as non-GAAP. of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website. Also, as a reminder, I will be referring to the 4Q 2025 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 fourth quarter, beating our guidance on all financial measures. The security acquisition closed in January 2026. Therefore, the security financial performance is not included in any of our reported results for 2025. However, our guidance for the first quarter and the full year 2026 incorporates the expected financial results of the security business from January 14, 2026 onwards. Turning to slide five of the presentation, total revenue for the fourth quarter was $20.1 million. up 16% sequentially and 30% year-over-year and above the top end of our guidance range. For the full year 2025, total revenue was $70.6 million, 22% higher year-over-year. Notably, variable royalties was 50% higher year-over-year with the fourth quarter setting a new record. Our royalty stream today is fueled by a balanced mix of customers across all our vertical markets, with the number of large royalty reporters crippling in the last two years. At the end of the fourth quarter, annual contract value plus royalties was $83.6 million, up 28% year-over-year, above the top end of our guidance range, and at a new record high. Remaining performance obligations, or RPO, which is our contracted future revenue, at the end of the fourth quarter totaled $117 million, representing a 32% year-over-year increase, another record high for the company. As disclosed in the notes to our financial statements, we expect approximately half of our RPO will be recognized as revenue in 2026. This projection excludes cancelable and non-cancelable FSAs. Non-GAAP gross profit in the quarter was $18.5 million, representing a gross margin of 92 percent. GAAP gross profit in the quarter was $18.3 million, representing a gross margin of 91 percent. For the full fiscal year, non-GAAP gross profit was $64.8 million, representing a gross margin of 92 percent. GAAP gross profit was $63.7 million, representing a gross margin of 90 percent. Now turning to slide six. Non-GAAP operating expense in the quarter was $20.8 million. We continued to reinvest a portion of our top-line growth into technology innovations, customer solution support, and our global sales team. Total GAAP operating expense for the fourth quarter was $26.7 million, which included acquisition-related expenses of $1.4 million in the fourth quarter. For the full fiscal year, non-GAAP operating expense, which excludes the security acquisition expenses, was $77.2 million, representing an increase of 14% from the prior year. This was broadly in line with our long-term goal to manage the rate of increase in non-GAAP operating expense to around half that of the rate of increase in revenue. GAAP operating expense for the year was $96.8 million. We believe that our ongoing investments will help accelerate our top-line growth in the coming years. At the same time, we are delivering operating leverage by controlling G&A spending, which has now remained broadly flat on a non-GAAP basis for over three years. This has resulted in eight percentage point year-over-year improvement on non-GAAP operating margin. Non-GAAP operating loss in the quarter was $2.2 million, also above the top end of our guidance range. For the full 2025 fiscal year, non-GAAP operating loss was $12.5 million, representing a $2.4 million improvement over the result for the prior year, and at the top end of our guidance range. GAAP operating loss in the fourth quarter was $8.5 million, compared to a loss of $7.1 million in the prior year period. For the full year, GAAP operating loss was $33.1 million. Non-GAAP net loss in the quarter was $2.3 million, or diluted net loss per share of 5 cents, based on approximately 43.7 million weighted average diluted shares outstanding. GAAP net loss in the quarter was $8.5 million, or diluted net loss per share of 19 cents. For the full fiscal year, non-GAAP net loss was $14.1 million, or diluted net loss per share of 33 cents, based on approximately 42.3 million weighted average diluted shares outstanding. Gap net loss for 2025 was 34.7 million dollars or diluted net loss per share of 82 cents. Moving to slide seven and turning to the balance sheet and cash flow. We ended the year with 59.5 million dollars in cash, cash equivalents and investments and we have no financial debt. Free cash flow, which includes capital expenditure, was positive $3 million for the fourth quarter and positive $5.3 million for the full year, close to the top end of our guidance range. I would now like to turn to our outlook for the first quarter and the full year 2026 and refer now to slide 8. For the first quarter of 2026, we expect ACV plus royalties of $85 million to $89 million. revenue of $20.5 million to $21.5 million, with non-GAAP operating loss of $3.5 million to $2.5 million, and non-GAAP free cash flow of negative $1.5 million to positive $1.5 million. For the full year 2026, our guidance is as follows. ACV plus royalties to exit 2026 at $100 million to $104 million. Revenue of $89 million to $93 million, including approximately $7 million from the security business, noting that the majority of revenue derived from the security business we expect to be ratable. Non-GAAP operating loss of between $9 million to $5 million. approximately $1 million of which we expect to be related to the security acquisition, and non-GAAP free cash flow of positive $5 million to positive $9 million. Building on the strong deal execution in 2025, illustrated by the 32% year-over-year growth in RPO exiting the fourth quarter, and incorporating the anticipated growth in security's semiconductor cybersecurity assurance software business, We continue to believe that our terrace is on a path to profitability, as we expect to report a non-GAAP operating profit for a period as early as the fourth quarter of 2026. With that, I will turn the call back to the operator for the Q&A portion of our call.

Operator | Conference Call Operator

Operator?

Thank you. Operator | Conference Call Operator

Ladies and gentlemen, we will now begin the question and answer session. To join the question queue, you may press star then 1 on your touchtone phone. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue.

Operator | Conference Call Operator

We have a question from Kevin Garrigan from Jefferies. Your line is open. We have a question from Madison DePaola from Ross and Malt Securities.

Your line is open. Madison DePaola | Analyst, Ross and Malt Securities

Can you help us size the cross-sell opportunities by outlining which customer segments you expect to engage first and kind of expand on how security changes your ability to increase content per customer over time?

Charlie Janik | Chief Executive Officer, Arteris Inc.

Yeah. So, you know, hardware security assurance is becoming a major issue. As we said on the earnings call, there's about a 15x growth in hardware sort of hardware attacks, security attacks on semiconductors. So hardware security is becoming a major issue. And because of that, we are very excited about this Acuity hardware assurance software because not only can it be used by our substantially larger customer base, but it can be used by essentially any semiconductor company, and those chips have to be protected regardless of the complexity. So we think that it opens up a significant opportunity to essentially enhance the system IP value that we provide, but also to address basically any semiconductor out there. So we're very excited about what we have been able to accomplish, and we'll look forward to keeping you updated on our progress.

Operator | Conference Call Operator

Okay, great.

Thank you. Operator | Conference Call Operator

Again, if you would like to ask the question, please press star, then 1. Our next question is from Kevin Garrigan from Jefferies.

Your line is open. Kevin Garrigan | Analyst, Jefferies

Yeah. Hey, guys. Sorry about that. Congrats on the great results and outlook, and thanks for taking my questions. Hey, your NXP announcement. So NXP is now using four of your solutions, which I think is probably up from one or maybe two. Are are you seeing more interest from customers to deploy an entire suite of solutions? And I'd imagine that if you do get customers that are deploying the entire suite, that puts your licensing ASPs well above the one million that you kind of were targeting a couple years ago?

Charlie Janik | Chief Executive Officer, Arteris Inc.

Yeah, absolutely. And, you know, if you use everything from us, prior to the security acquisition, you're going to be well north of one million. And with security, it's going to be higher than that, right? So we basically have more to sell to our customers. And so security is a big issue now. A lot of markets, such as automotive and aerospace and even data center, are requiring ISO 21434 certification for cybersecurity protection. And so, you know, we think that this certainly helps drive the ESP significantly above the one million average project size. And also, the other thing that's helping to go above the one million is that the chiplet projects where you're dealing with multiple pieces of silicon where essentially every chiplet is a license. And every two plays a royalty also helps that trend, right? So we're very positive about the dynamics of our business.

Kevin Garrigan | Analyst, Jefferies

Yep, got it. That makes a ton of sense. And then, Nick, just a question for you. Can you talk a little bit more about the strength and royalties that you saw? Was there a specific end market that saw surprising strength, or was it more just about your customer diversification strategy?

Nick Hawkins | Chief Financial Officer, Arteris Inc.

It's a little bit of both. And hi, Kevin. Thanks for joining the call. You may have seen that the number of major reporters has grown from one five years ago to three about two years ago to nine today. So the big reporters are the six-figure plus per quarter royalty reporters. So that's a really important metric to us. And one of the issues that we look at there is looking at the spread. across geos and also across market verticals. And so of the nine large reporters today, they're spread across several segments. There are several in the automotive segment, and that remains our largest single vertical. But we do have now a very rapidly emerging consumer enterprise and even now aerospace segment. large reporters. So I'm very happy that it's a broad spectrum of strength and look forward to some further growth in the future.

Operator | Conference Call Operator

Yep. Got it. Okay. Perfect. Thanks, guys, and congrats on the results. Thank you. Thanks, Kevin.

Operator | Conference Call Operator

Once again, if you would like to ask a question, please press star, then 1. Our next question is from Gus Richard from Northland.

Your line is open. Gus Richard | Analyst, Northland Securities

Yes, thanks for taking the question, and congratulations on the results. In Q4, the royalties had a significant quarter-on-quarter step-up. Is there any catch-up royalty in that number, or should we expect that to be the run rate going forward with a seasonal bias?

Nick Hawkins | Chief Financial Officer, Arteris Inc.

Yeah, that's an excellent question, Gus, and welcome to the call. And this is Nick, by the way. There was a single royalty pickup, which was reasonably sized. It was less than half a million dollars, but that's a decent pickup, which we saw in the fourth quarter. So it did get a bit of a boost from that. So the 50% variable increase includes that. If you X that out, the growth rate year over year was still in the low 40s percent, which is above our trajectory and our... our sort of longer-term guidance for CAGR for the next five years. So we're very happy that it's already growing at that rate. Audits, you can never guarantee when they're going to produce a positive result for the company. When they happen, they're great, but we can't, as you rightly point out, you can't bank on them.

Gus Richard | Analyst, Northland Securities

Got it. And then just a little bit about security and its impact on the P&L industry. You know, my top line went up, you know, at the midpoint of guidance, about $7 million. And then I'm just curious, you know, how much of that was security for the full year? And then can you talk a little bit about the impact on the P&L in terms of, you know, step up in OpEx going forward?

Nick Hawkins | Chief Financial Officer, Arteris Inc.

Yeah, it's another excellent question, Gus. So yeah, so of the 91 million midpoint guide, it's 89 to 93 is the range for revenue in 26. Of that 91, seven approximately is security. So, and forgive me if you can hear my dog barking in the background. So 84 is the Arteris original business. And that represents about a 19% year over year growth. So as far as the rest of the financial impact from Psycuity, we do expect them to be a slight contributor to the loss for the year, so about a million dollars worth of loss. By the fourth quarter, we expect them to be roughly at break-even, which is in line with the pre-Psycuity edition Arteris business. And as far as free cash flow is concerned, we're also expecting them to be something like a million to the negative over the full year and about 1.5 million negative in the first quarter. This often happens in acquisitions, as I'm sure you've seen before. And there is a little nuance around gross margins. Some of the government work that they do is actually involves subcontractors. And the gap accounting for subcontractors is that those expenses are not OPEX, they're treated as cost of revenue. So there's something like a two percentage point, a one to two percentage point drop in gross margin intensity. But that's just literally a flip between OPEX and gross margin.

Gus Richard | Analyst, Northland Securities

Okay, got it. That was helpful. And then my last one is, when you did the security acquisition, you guys announced an ATM, and you were going to use that to replace the cash that you used for the acquisition, and I'm just wondering, you know, where are you in that equity raising effort, and, you know, when can we expect that to conclude?

Nick Hawkins | Chief Financial Officer, Arteris Inc.

So we're in the process of going through the activation Gus. We can't activate during a quiet period as you probably know because obviously we have MMPI during that period before we announce our results. So we will be going through the activation process shortly. We then are going through a process of setting up the traditional guardrails. We have a pricing committee on the board and they will agree guardrails in terms of pricing and quantum. And so you can expect maybe some small amounts to dribble through in the first quarter. It just really depends on how the market moves and and so on. We have no intent at the moment to utilize anything close to the full amount that's available there.

Gus Richard | Analyst, Northland Securities

Got it.

Operator | Conference Call Operator

Well, that was a buzz kill. Thanks for the help. There are no questions at this time.

Operator | Conference Call Operator

I would now like to turn the conference back to Charlie for the closing remarks.

Please go ahead. Charlie Janik | Chief Executive Officer, Arteris Inc.

Okay. Thank you for your interest in our tariffs. We look forward to meeting with you at the upcoming non-deal roadshow and investor conferences in the quarters ahead and updating you on our business progress.

Thank you very much. Operator | Conference Call Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. jsPDF 3.0.3 D:20260606085917-00'00'