Arteris, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial statements are unaudited. Arteris develops and licenses on-chip interconnect and related IP and software for semiconductor system-on-chip designs.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $9.0 million | $6.4 million | $26.4 million | $17.4 million |
| Gross profit | $8.1 million | $6.2 million | $23.8 million | $16.2 million |
| Gross margin | 90% | 96% | 90% | 94% |
| Operating loss | $(4.5) million | $(2.6) million | $(14.5) million | $(6.9) million |
| Net loss | $(5.0) million | $(3.8) million | $(15.6) million | $(10.8) million |
| Net loss per share, basic and diluted | $(0.24) | $(0.22) | $(0.79) | $(0.62) |
Q3 revenue grew 39% year over year; nine-month revenue grew 52%. Licensing, support and maintenance revenue increased 56% in Q3 and 74% year to date, which management attributed to new customers, including Magillem, and expanded agreements with existing customers. Royalties declined 11% in Q3 and 29% year to date. Management cited lower sales by a significant customer affected by U.S. government trade restrictions for the year-to-date decline.
Operating expenses rose 43% in Q3 and 65% year to date. R&D increased 90% in Q3 and 74% year to date, primarily from engineering headcount and product investment. Gross margin fell year over year, while operating losses widened. Q3 G&A fell 32%, mainly due to lower professional-services costs; year-to-date G&A rose 95%, reflecting higher compensation and professional-services expenses.
Cash, debt and liquidity
- Cash was $11.2 million at September 30, 2021, versus $11.7 million at December 31, 2020. Total current assets were $24.4 million and current liabilities were $36.7 million.
- For the first nine months, operating cash use was $4.0 million, compared with $0.5 million in 2020; investing cash use was $0.5 million in both periods. Financing provided $4.0 million, compared with $0.9 million.
- At September 30, term-loan balance, net of issuance costs, was $0.1 million; vendor financing was $1.1 million. The company was in compliance with loan covenants. The $2.0 million revolving line was unused and was not renewed at its November 2021 maturity.
- Deferred revenue was $38.2 million. The filing reports $50.6 million in RPO under its KPI definition; a separate note reports $41.3 million of contracted but unsatisfied performance obligations, including $3.0 million of non-cancelable FSA commitments. The measures are not presented as interchangeable.
Outlook, risks and unusual items
- IPO after quarter-end: On October 29, 2021, Arteris completed its IPO, selling 5.75 million shares at $14 per share and receiving $71.1 million in net proceeds. Outstanding preferred shares converted into 4,471,316 common shares. The September 30 cash balance excludes IPO proceeds.
- Management said existing cash, borrowing capacity and expected operating cash generation should meet expected needs for at least 12 months, while noting that additional financing might be needed if resources prove insufficient. It gave no specific revenue or earnings guidance.
- Management expects R&D expense to increase in absolute terms and as a share of revenue in the near term; it expects sales and marketing and public-company costs to rise in absolute terms. These are expectations, not quantified guidance.
- Key business risks include long customer selection and chip-design cycles, royalty timing and dependence on customers’ product sales, semiconductor-industry cyclicality, supply-chain or end-market weakness, and technology changes that could make IP obsolete. COVID-19’s full future effects remained uncertain; management said results through September 30 had not been adversely affected.
- The filing identifies no known legal matters expected to have a material adverse effect. It reports $2.5 million of gross unrecognized tax benefits and says the outcome of possible settlements could not be reasonably estimated. A full valuation allowance remained against U.S. federal and state deferred tax assets.
- IPO-triggered vesting conditions on certain RSUs became satisfied upon the IPO; the company recognized $2.5 million of cumulative stock-based compensation expense after the quarter. Disclosure controls were assessed as effective; no material internal-control changes were reported.
Important facts for investors to verify
- How much of licensing growth is recurring and sustainable, and whether customer concentration or upfront contract timing materially affects comparability.
- Whether the significant royalty customer’s trade-restriction and sales-volume pressures persist, and how royalty trends develop.
- Post-IPO cash, share count, dilution from outstanding options and RSUs, and the timing and magnitude of public-company and compensation costs.
- The distinction and reconciliation between reported RPO of $50.6 million and the $41.3 million contracted-obligation figure in the notes.
- Whether operating cash use and widening losses improve as revenue grows, and whether the company remains within its stated liquidity horizon.