Arteris, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Arteris develops and licenses semiconductor System IP, including on-chip interconnect technology and related software and support services. Comparisons below are with Q1 2022 unless stated otherwise. Figures are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / prior period |
|---|---|---|
| Revenue | $13.2 million | $11.8 million; up 12% |
| Gross profit / gross margin | $12.0 million / approximately 91% | $10.8 million / approximately 92% |
| Operating expenses | $20.8 million | $17.4 million; up 20% |
| Operating loss | $8.8 million | $6.6 million |
| Net loss / diluted loss per share | $9.0 million / $0.26 | $6.8 million / $0.22 |
| Cash used in operating activities | $8.4 million | $1.4 million |
Licensing, support and maintenance revenue increased 12% to $11.8 million, which management primarily attributed to new customers. Variable royalties rose 31% to $1.3 million. R&D expense increased 20% to $11.4 million, sales and marketing rose 28% to $5.0 million, and general and administrative expense increased 10% to $4.4 million. Higher engineering headcount and stock compensation contributed to expense growth; legal fees related to IP litigation contributed to G&A growth.
At March 31, cash and cash equivalents were $28.5 million and short-term investments were $32.4 million, totaling approximately $60.9 million. Cash and cash equivalents declined $8.9 million from year-end 2022. Current assets were $75.8 million and current liabilities were $40.9 million. Total liabilities were $75.5 million, including $1.4 million of vendor financing arrangements; the filing reports no other material noncancelable contractual commitments. Management believes available cash, investments and expected product receipts will meet liquidity needs for at least 12 months, but notes additional financing may be needed if resources prove insufficient.
Operating cash use reflected the net loss and working-capital movements, including a $2.6 million increase in accounts receivable. Investing activities provided $0.4 million, while financing activities used $1.0 million, principally for contingent acquisition consideration. Deferred revenue was $50.1 million. The filing reports $56.4 million of contracted unsatisfied performance obligations in the revenue note and a separate $57.3 million RPO operating metric; $29.7 million of the note’s obligations is expected to be recognized within 12 months.
Business metrics and material developments
- Annual Contract Value (ACV) was $51.4 million at March 31, up from $49.6 million a year earlier. ACV plus trailing-twelve-month royalties and other revenue was $54.8 million, versus $52.8 million.
- Arteris added six net new Active Customers and recorded 22 Confirmed Design Starts, compared with seven and 19, respectively, in Q1 2022. Annual average customer retention was 98%.
- Revenue remained internationally concentrated: 65.3% came from outside the U.S. and 29.0% from China. Samsung represented 11% and Intel 10% of Q1 revenue, according to the risk disclosures.
- Interest and other income, net, was $0.9 million, versus a $0.1 million expense, primarily reflecting higher interest rates and investment income. Arteris also recorded a $0.8 million share of Transchip’s loss, recognized on a one-quarter lag; its Transchip investment carrying value was $11.1 million.
- Stock-based compensation was $3.0 million, up from $2.3 million. Unamortized compensation cost for unvested RSUs was $40.6 million, expected to be recognized over a weighted-average 3.1 years.
Outlook, risks and unusual items
The filing provides no numerical financial guidance. Management expects R&D expense to increase in absolute terms and as a percentage of revenue in the near term; it anticipates a lower R&D expense ratio over the medium to longer term as products launch. Management also expects sales and marketing expense to rise in absolute terms, while expressing an expectation that cost of revenue as a percentage of revenue will modestly decline over time. It cautions that quarterly revenue can fluctuate with contract timing and terms, customer design cycles, and royalty-bearing product sales.
Key business risks include the long interval between design wins and royalty production, semiconductor-industry cyclicality, customer and revenue concentration, competition, and dependence on end-market demand. U.S. export restrictions affecting China may limit licensing and support to certain customers; management expects China revenue to decrease. Arteris also disclosed patent-infringement complaints filed in Texas against the company and others, including claims involving some customers. It intends to defend the cases but says outcomes are uncertain and defense costs are expected to increase; the filing does not provide a clear estimate of potential loss.
Other notable exposures include cash deposits above insured limits, reliance on international operations, and the possibility that operating losses and cash use persist. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth, ACV and design starts translate into sustained licensing revenue and future royalties, given customer design and production timelines.
- The pace of operating-expense growth and cash burn relative to management’s stated minimum 12-month liquidity outlook.
- The financial and commercial impact of U.S.-China export restrictions, especially given China’s 29.0% share of Q1 revenue.
- Developments, defense costs and potential exposure from the Texas patent litigation; the filing does not quantify a possible loss.
- The difference between the $56.4 million performance-obligation amount in the revenue note and the $57.3 million RPO metric, including their definitions and timing.
- Customer concentration, Transchip’s operating performance and the continued recognition of Semifore-related compensation costs.