AIP earnings call analysis

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'

NASDAQ:AIP Q3 2025 Earnings Call Transcript Generated on 6/6/2026 Operator | Conference Operator: This call is being recorded and simultaneously broadcast. All materials 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.

Operator | Conference Operator

Please go ahead.

Erica Mannion | 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 third quarter ended September 30, 2025. Nick will review the financial results for the third quarter, followed by the company's outlook for the fourth quarter and the full year of 2025. 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 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 US GAAP. The non-GAAP measures are presented as we believe 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 end of September 30, 2025. In addition, for a definition 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 September 30, 2025. 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, security analysts, or investors. Listeners who do not have a copy of the press release for the quarter ended September 30, 2025 may obtain one by visiting the investor relations section of the company's website at ir.arteris.com. In addition, management will be referring to the third 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

Thank you, Erica. And thanks to everyone for joining us on our call today. In the third quarter of 2025, we achieved yet another record annual contract value plus royalties of $74.9 million, resulting in 24% year-over-year growth. We saw increased product adoption in chiplets and SOCs across multiple vertical markets. AI applications accounted for over half of our licensing dollars in the third quarter, reflecting the growing adoption of Altera's system IP technology from data centers to the smart edge. We continue to see growing adoption of our product portfolio by top technology companies. An example of this is Altera, which selected Altera's technology portfolio to streamline design workflows, optimize data movement, and enable intelligent computing across data center, communications, vision, industrial applications, robotics, aerospace, and defense applications. This includes our network on-chip IP products, including NCORE and FlexGen, and the Magellan platform for IP block integration and hardware software integration automation, which Altera plans to use in designing their next generation of FPGA and SOC FPGA solutions. Speaking of FlexGen, last quarter, we announced that AMD licensed the Smart Knock IP to provide high performance data transport in AI chiplets across AMD's broad portfolio from data centers to edge devices. I'm happy to note that in the third quarter, AMD has ordered additional incremental licenses. In addition to the Altera and AMD relationships, we added four other new FlexGen customers in the third quarter. Within the automotive sector, FlexGen was deployed by DreamChip, a custom SLC design house for high-end automotive semiconductor design. Additionally, a leading automotive OEM adopted FlexGen for next-generation EVs. Within the industrial sector, NanoExplore, a provider of radiation-hardened silicon technology serving the aerospace, defense, avionics, and industrial markets, licensed FlexGen SmartNOC IP to address the demanding mission-critical computing requirements in space while supporting their product performance, team productivity, device reliability, and meeting the underlying area and cost targets. This represents another example of our products being used not only for applications on Earth, but increasingly in terrestrial orbit where performance, safety, reliability, and security are essential. These examples illustrate the broad applicability of our new FlexGen SmartNOC IP, helping design teams deliver on expanded needs of chiplets and SOCs. Additionally, we expect demand to scale, with rising design complexity and the move to advanced foundry nodes, particularly 5 nanometer, 3 nanometer, 2 nanometer, and as we head into the angstrom era of silicon. As the semiconductor industry accelerates efforts to increase performance and efficiency, especially driven by AI workloads at data centers and the edge, we are continuing to see a growing shift from traditional monolithic chips toward chiplets for multi-die SOC architectures, particularly for AI infrastructure and data center applications. One of the key chiplets is the IOHUB chiplet, which controls data movement across heterogeneous multi-die SOCs. 2B systems license our NCore and FlexNoc interconnect IPs to develop just such an IOHUB chiplet where Arteris technology serves to control multi-die data traffic, meeting the high bandwidth, low latency energy efficiency, and total cost of ownership objectives, while meeting the needs of enterprise computing in data centers and cloud infrastructure. In the quarter, we also saw increased adoption of chiplets for high-end automotive applications, including our recently expanded multi-die solution. For example, one of our advanced automotive semiconductor customers shifted from a single chip to multi-die SOC architectures for their next generation ADAS design, leveraging N-Core and FlexNoc IPs for underlying data movement. Aside from various automotive semiconductor companies, we also saw expanded adoption of Arteris technology by automotive OEMs. Two of the top five EV automotive OEM companies expanding their use of silicon-proven Arteris technology with functional safety for their next-generation vehicles, which increasingly include a wider array of advanced electronic functionality. Given the accelerating demand for increasingly advanced chiplets and chips, from the AI surge in the high end to the growing needs of advanced microcontrollers, the need for more specialized computing is becoming increasingly evident. This trend drives a broad range of specialized processors, or XPUs, for a growing number of applications by providers who increasingly rely on Arteria's technology for their underlying connectivity and data movement. With our growing ecosystem, we recently announced an expanded collaboration with Alibaba Demo Academy, enabling better integration and optimized performance between their RISC-V CPU cores and our data movement system IPs. This collaboration is intended to further enable mutual customers to more efficiently design Edge AI server communications and automotive chips. Such ecosystem collaborations help enhance support for end customers, enabling them to accelerate their pace of innovation, with recent example being Accelera AI, a provider of purpose-built hardware acceleration technology for AI inference. They recently expanded the use of Arteris to help accelerate computer vision for edge devices using our technology to help achieve high bandwidth, low latency, and scalability requires to optimize their next generation inference products. The need for ecosystem collaboration is also evident as industry standards continue to evolve. In particular, AI data center infrastructure needs are rapidly evolving, driving demand for purpose-built solutions that can better support rapidly expanding AI workloads. To better meet the associated demand from customers, Arteris joined the Ultra Accelerator Link Consortium, or UA-Link. The goal of this organization is to establish an optimized scale-up ecosystem across multiple AI accelerators, with Arteris NOC IPs serving as data movement transport in chiplets and SOCs. We joined with other companies in the consortium, such as AMD, Astera Labs, AWS, Cisco, Google, HP Enterprise, Intel, Meta, and Microsoft, all of whom deal with high-end computing, and some of whom are requesting related support in our products. Lastly, I'm proud that Arteris Continuous Innovation was recognized with yet another award, this time as the winner of the most innovative technology company of the year, by the 22nd Annual International Business Awards, while also being recognized for new FlexGen Smart Knock IP and Magilum Registers integration automation software product, both announced earlier this year. We believe the scale and scope of our opportunity to remain robust, supported by our current products and strong pipeline of new data movement system IP technologies, as well as growing relationships with the largest and most advanced electronics companies in the world, in collaboration with a broader ecosystem. Our customers continue to innovate in exciting high growth areas across multiple applications from AI data centers to the edge, autonomous driving, advanced communications, consumer and industrial use cases. Many of these customers are increasingly turning to our products and solutions to support their innovative designs. With that, I'll turn it over to Nick to discuss our financial results in more detail.

Nick Hawkins | Chief Financial Officer

Thank you, Charlie, and good afternoon, everyone. As I review our third quarter results today, please note that I'll be referring to GAAP as well as non-GAAP metrics. 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 3Q 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 third quarter, meeting or beating our guidance on all financial measures. Turning to slide five of the presentation, total revenue for the third quarter was $17.4 million, up 5% sequentially and 18% year-over-year, and above the top end of our guidance range. Notably, trailing 12-month variable royalties was 36% higher year-over-year. At the end of the third quarter, annual contract value plus royalties was $74.9 million, up 24% year-over-year, above the top end of our guidance range and at a new record high. Remaining performance obligations, which is our contracted future revenue, at the end of the third quarter was $104.7 million, representing 34% year-over-year increase, a new high and exceeding the $100 million milestone for the first time Non-GAAP gross profit for the quarter was $15.9 million, representing a gross margin of 91%. GAAP gross profit for the quarter was $15.6 million, representing a gross margin of 90%. Now turning to slide six. Non-GAAP operating expense for the quarter was $19.5 million. We continue to reinvest a portion of our top-line growth into technology innovations, solution support, and our global sales team. Total gap operating expense for the third quarter was $24.4 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-gap basis for over three years. This has resulted in a 15% improvement of non-GAAP operating expense as a percentage of revenue for the year to date compared to the same period in 2023. Non-GAAP operating loss in the quarter was $3.5 million, in line with our guidance. GAAP operating loss for the third quarter was $8.7 million compared to a loss of $7.9 million in the prior year period. Non-GAAP net loss for the quarter was $3.8 million, or diluted net loss per share of $0.09, based on approximately 42.7 million weighted average diluted shares outstanding. GAAP net loss in the quarter was $9 million, or diluted net loss per share of $0.21. Moving to slide seven, I'm turning to the balance sheet and cash flow. We ended the quarter with $56.2 million in cash, cash equivalents and investments, and we have no financial debt. Free cash flow, which includes capital expenditure, was positive $2.5 million for the third quarter, above the midpoint of our guidance range. I would now like to turn to our outlook for the fourth quarter and the full year 2025 and refer now to slide eight. For the fourth quarter 2025, we expect ACB plus royalties of $74 million to $78 million, revenue of $18.4 million to $18.8 million, with non-GAAP operating loss of $2.3 million to $3.3 million, and non-GAAP fee cash flow of $0.2 million to $3.2 million.

Operator | Conference Operator

For the full year 2025, our guidance is as follows.

Nick Hawkins | Chief Financial Officer

ACB plus royalties exit 2025 at $74 million to $78 million, an increase of $1 million compared to our prior guidance. Revenue of $68.8 million to $69.2 million, also an increase of $1 million compared to our prior guidance. Non-GAAP operating loss of between $12.5 million to $13.5 million. and non-GAAP free cash flow of $2.5 million to $5.5 million. We remain encouraged by our strong deal execution, witnessed by the 34% year-over-year growth in RPO at the end of the third quarter. We are seeing promising signs of accelerated interest by some major customers to increase their outsourcing of system IP products to our tariffs, which we believe will help accelerate growth in our license and loyalty revenue, ACV plus royalties, RPO, and positive free cash flow. With that, I will turn the call back to the operator for the Q&A portion of the call.

Operator | Conference Operator

Operator?

Thank you. Operator | Conference Operator

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchtone phone. you will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys.

Operator | Conference Operator

One moment please for your first question. Your first question is from Kevin Garrison from .

Operator | Conference Operator

Please go ahead.

Kevin Garrison | Analyst

Yeah, hey, Charlie and Nick, congrats on the results and the Altera announcement. Can you just talk a little bit more about Altera? Are they fully away from using internal interconnect teams, or is there still more opportunities for you guys to expand there?

Charlie Janik | Chief Executive Officer

I think there's more opportunities. Basically, the application is for FPGAs and FPGASOCs. So Altera is using their own interconnect in the FPGA matrix. and then we are used essentially in the SOC part. But Altera business is going to continue to evolve and grow, and we believe that there's future opportunities, but this is a major milestone because Altera, as they spun out of Intel, chose to go with Arteris for their primary system IP requirements. But yes, there is more potential going down the road. Okay, perfect.

Kevin Garrison | Analyst

And then... since the initial discussions with AMD and the initial order announcement, it seems like it took about one quarter, maybe a little bit longer for them to expand the use of your product. So what were they kind of most impressed with that led to increasing usage in such a short timeframe?

Charlie Janik | Chief Executive Officer

Yeah. I mean, uh, AMD is a big company. Um, the, the deal in the, uh, uh, the second quarter, uh, was, uh, for their, uh, basically their central engineering group. And, uh, The third quarter deal was basically for another group. And Altera is, I'm sorry, AMD has many groups for us to work with. And so there are also additional opportunities at AMD. And we're very much looking forward to helping them accelerate their chip deliveries.

Kevin Garrison | Analyst

Got it. Got it. Okay. And just one more, if I, if I can, you talk, can you just talk a little bit more about the importance of reliability and safety when it comes to interconnects and the importance of it in, you know, some end markets like space, as you guys mentioned. And, you know, I think you guys have done a very good job on this front, but do you, do you see this as this focus as really a competitive advantage for you guys? Oh, absolutely.

Charlie Janik | Chief Executive Officer

I mean, Basically, all the important data goes through our network on chips. Basically, if that has problems or doesn't work, the chip doesn't work. Customers are very risk averse in choosing system IP solutions because any problems there can cause major delays in tape outs and field problems. You know, we're being recognized as, you know, very much a silicon-proven company. I think now our installed base has shipped something like 3.9 billion SOCs, and they all work. And probably some of the stuff you use daily probably has arterious interconnect in it. So, yes, we are very much focused on reliability. We're very much focused on quality because if the system IP doesn't work, the chip doesn't work.

Operator | Conference Operator

Yep, got it, got it. Okay, perfect. I appreciate the color. Congrats again. Thank you. The next question is from Kevin Cassidy from Rosenblatt Securities.

Please go ahead. Kevin Cassidy | Analyst, Rosenblatt Securities

Yeah, thanks for taking my question, and congratulations on the great momentum. Just on the UA-Link consortium, what kind of timing could we expect for licenses to come out of that consortium? consortium and some of the players there?

Charlie Janik | Chief Executive Officer

Well, some of the players are already customers, but basically the objective of the UA-Link consortium is to essentially scale up data center solutions. And so we're basically developing technology to support that, and we're already involved in some of those designs. but we're basically following that consortium's protocol in order to support the data center scale-up efforts that are pioneered by the companies that we mentioned.

Kevin Cassidy | Analyst, Rosenblatt Securities

Okay, great. And with the penetration you're getting within AMD and combining it with the Altera announcement, is there opportunities for Xilinx, or is that already included in your AMD discussion?

Charlie Janik | Chief Executive Officer

Well, Xilinx is an important part of AMD. And in fact, Xilinx was the first customer that was involved with us prior to the AMD acquisition. So Xilinx has been a longtime user of Arteris.

Operator | Conference Operator

Okay, thank you. Your next question is from Gus Richard from Northland.

Operator | Conference Operator

Please go ahead.

Gus Richard | Analyst, Northland Securities

Yes, thanks for taking the question. Real quick, you know, you've had a number of design wins for a while, and just wondering, you know, the royalty relative to most mature IT companies is relatively low. I'm just wondering when do you expect that to start to accelerate?

Kevin Cassidy | Analyst, Rosenblatt Securities

Blake, do you want to take that one?

Nick Hawkins | Chief Financial Officer

Yep. I will. Hi, Gus. Welcome to the call. It's a great question because, as you and I have discussed in the past, an increasing rate of customer design starts is a great indicator of future royalty growth because Typically, there's somewhere between a three to six year lag between start of a design and mass production and scale. And it can take even another couple of years to get to get up to full scale after the mass production starts. So so it is definitely a heavy link between the two. We're already seeing that, and we're already seeing the beginning of the inflection on royalties. There's one you'll see in our investor deck, our Q3 investor deck. There's a new additional piece of information on royalties. And what's very interesting is, number one, the growth of royalties, variable royalties, is quite impressive. And in fact, the growth year over year for the variable royalties in the trailing 12 months to the end of September compared to the prior 12 months ending September 30, 2024 was up 36%, which is in line with what we've been saying in terms of the royalties growing at roughly 2x the rate of licenses. And what's particularly interesting in that chart you'll see in the investor deck is that If you go back to 2020, which is quite an interesting start point, because that's when we were dominated in royalties from PySilicon, which has now, of course, gone to zero, we now have a higher rate of variable royalties. In fact, we have all year since the days of PySilicon back in 2020. And now, instead of it being a one-trick pony where we had one customer making up 90% of our variable royalties. We now have five customers who between them have a greater royalty stream than than the one high silicon. So we've got more diversity. We've got more people who are now the majors. So it's five majors and then another 50 smaller players. And so it's all up and to the right and growing very nicely. So we are starting to see that. I do see there's an increasing inflection point as we go through the next couple of years. So by 2028, you'll see an even faster rate of acceleration.

Gus Richard | Analyst, Northland Securities

God, that was super helpful. And then, Charlie, for you, you guys talk about the top tech companies that you've penetrated. I was wondering if they, you know, just for everybody, define what those companies are and then how many you've at this point penetrated. And then specifically in the AI ASIC crowd, you know, are you starting to penetrate those both U.S. and Taiwan?

Charlie Janik | Chief Executive Officer

Yeah, I mean, we, you know, basically we define the large companies as sort of top 20 semiconductors companies and then basically another, you know, 20 of the largest system electronics companies, right? So that's kind of jokingly referring to that as the Arteris Index. And, you know, we have, I would say, more than 50% of those companies as customers, but not all of them are huge customers, right? So there's still a long way to go in terms of expansion of our business. But, you know, obviously with the AMD and Altera announcement and there's a couple others who don't let us announce who they are. one of which we also closed in the Q3. We did our best to be able to announce them, but they did not let us. So I think our progress in the top 40 largest technology companies is quite good, but there's long ways to go. It's about a $1.2 billion market, and we're about $68 million this year or something like that. So there's a long way to go.

Gus Richard | Analyst, Northland Securities

Okay, got it. And then the Lord Baltimore of questions. You know, when I go through cash flow and balance sheet, blah, blah, and, you know, it looks like bookings were in the zip code at $32 million in the quarter, booked a bill about $1.8. So, Nick, am I in the right zip code?

Nick Hawkins | Chief Financial Officer

Yeah, I don't want to comment on bookings. Otherwise, we open up a... Pandora's box of future disclosure. So bookings is, as you know, fairly lumpy, because we have very large customers these days. So that can really create a false precedent if we start disclosing that. So I'll have to allow you to do your own math on bookings, Gus.

Operator | Conference Operator

Okay. I figured, thanks, I'll pass it on. Your next question is from Joshua Bookalter from TD Cowan.

Operator | Conference Operator

Please go ahead.

Joshua Bookalter | Analyst, TD Cowen

Hey, guys. Thank you for taking my question. Charlie, I thought your comments in the prepared remarks about seeing more traction from AI applications and specifically in the data center were interesting. Obviously, a lot's happened in the AI space over the last few months. Could you maybe level set us on how much of your opportunity over time you see coming from actually in data center versus you know, edge device, edge and embedded devices where I think, you know, that's been your bread and butter for a while.

Thank you. Charlie Janik | Chief Executive Officer

Yeah. I mean, um, basically, uh, you know, our thesis is that over time, pretty much all electronic endpoints or edge devices are going to be connected to the data center. And so for each, uh, endpoint or edge device, there is some ratio of blades in the data center. And as everything becomes connected to the data center, you know, these, uh, the number of chips that's actually in these data centers goes to a very large number. So we're sort of following customer demand, and there's just a lot of attention on AI workloads in a data center. There's a lot of project starts. Obviously, NVIDIA is a very, very major player and will continue to be a major player. But some of these... System houses are also designing some of their own chips for specific data acceleration of specific workloads. They're working on specific AI workloads and those kinds of things. So we see that as a major opportunity and we're working with those customers and we're increasingly starting to pivot our engineering to address the issues that are important to these data center companies, hyperscaler companies, that are handling the high-end AI workloads. So over time, I mean, I think data center will be somewhere between 25% to 30%, maybe 35% of our business. But right now, AI represents about 50% of all the design stars that we're involved with. So right now, there's a bit of a design star bonanza. But on a long-term basis, I would expect it to be about probably 35% or so.

Joshua Bookalter | Analyst, TD Cowen

Thank you for all the color there. Maybe, Nick, could you provide any comments or color on, you know, it seems like you're getting a lot of good traction from FlexGen, which comes with higher ASP on the royalty and I'm guessing the licensing side as well. You know, when should we expect that to start being a sort of meaningful needle mover in the model? Thank you both and congrats again.

Nick Hawkins | Chief Financial Officer

Josh, just to be clear, are you asking that question specifically regarding royalties or more generally on license revenue?

Joshua Bookalter | Analyst, TD Cowen

I was more on the royalty side.

Nick Hawkins | Chief Financial Officer

Yeah, so, I mean, FlexGen is accretive to both ASP and therefore license, but it's also accretive to royalties because it has more competence as a product than it's the more junior, the FlexNot5, that doesn't have the automation feature. So, yes, if you look at somebody, for example, who's just kicked off a FlexGen cycle or FlexGen deal with us. Most of those have come from the mid of this year onwards. And now you saw we had another four in addition to Altera and AMD in the third quarter. So it very much depends on the use case. There are some, most of the use cases right now are more in the server an FPGA environment, which don't have huge volumes, as you know. There are some which are more involved in higher volume. We're early stages yet. We do expect a lot more penetration from FlexGen into some of the other areas that are perhaps higher volume. And, of course, the biggest royalty area for us, which is about half of our total royalties, is actually from the automotive market. And so if you use FlexGen and automotive, for example, or creative design today, and you start the design, it would be 2030 to 2031 before we started seeing the royalties from that. So there's a lot of pipe stoking going on in royalties from this.

Operator | Conference Operator

Thank you. There are no further questions at this time. Mr. Janik, please proceed with closing remarks.

Charlie Janik | Chief Executive Officer

Well, thank you, everyone, for your interest in our terrace. We're very excited about the current quarter, and we look forward to meeting you with you in the upcoming non-deal load shows and investor conferences in the quarters ahead and updating you on our business progress.

Thank you very much. Operator | Conference Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. jsPDF 3.0.3 D:20260606085918-00'00'