Arteris, Inc. — Q1 2022 Form 10-Q
Business context and period: Arteris develops and licenses semiconductor on-chip interconnect intellectual property and related software, support, and services. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Amounts are in U.S. dollars.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Revenue | $11.8 million | $6.7 million; up 77% |
| Gross profit / gross margin | $10.8 million / 92% | $5.8 million / 87% |
| Operating expenses | $17.4 million | $12.2 million; up 42% |
| Operating loss | $6.6 million | $6.4 million |
| Net loss | $6.8 million | $6.7 million |
| Net loss per share, basic and diluted | $0.22 | $0.36 |
| Operating cash flow | $(1.4) million | $0.5 million provided |
| Cash and cash equivalents | $82.2 million | $85.8 million at Dec. 31, 2021 |
| Vendor financing arrangements | $0.9 million | $1.1 million at Dec. 31, 2021 |
Licensing, support and maintenance revenue rose 72% to $10.6 million; variable royalties were $1.0 million, up 101%. Research and development expense increased 45% to $9.5 million, sales and marketing rose 60% to $3.9 million, and general and administrative expense rose 24% to $4.0 million. Stock-based compensation increased to $2.3 million from $0.3 million, including expense associated with pre-IPO RSUs whose performance condition was met following the IPO.
Cash used in investing activities was $0.3 million, including $0.2 million of deferred Transchip transaction costs. Financing activities used $1.9 million, primarily for $1.6 million of contingent acquisition consideration. Working capital was approximately $58.5 million at quarter-end. Total liabilities were $64.7 million, including $49.5 million of deferred revenue, $2.7 million of operating lease liabilities, and $0.9 million of vendor financing. The filing reports no term-loan balance at March 31.
Changes and operating indicators
- Management attributed licensing growth primarily to new agreements with existing customers and added customers. Arteris added seven Active Customers in the quarter, the same number as in Q1 2021.
- Customers started 19 designs, compared with 20 in Q1 2021. Annual Contract Value (ACV) was $49.6 million, versus $38.1 million a year earlier; ACV plus trailing-twelve-month royalties and other revenue was $52.8 million, versus $41.8 million.
- Remaining Performance Obligations (RPO), as defined by management, were $60.5 million, versus $47.4 million a year earlier. Separately, contracted but unsatisfied performance obligations disclosed in the revenue note were $49.6 million; $25.2 million, excluding non-cancelable FSA commitments, was expected to be recognized over the next 12 months.
- Gross margin improved, but higher operating costs left the operating loss broadly similar to the prior-year quarter. Cash from operations moved from positive to negative.
Outlook, risks, and unusual items
- Liquidity outlook: Management said cash, available borrowing capacity, and cash expected from operations should cover working capital, capital expenditures, financial commitments, and other liquidity needs for at least 12 months. Additional financing could be required if these resources prove insufficient; availability and terms are not assured.
- Expense outlook: Management expects R&D expense to increase in absolute terms and as a percentage of revenue in the near term, then decrease as a percentage over the medium to long term. It expects sales and marketing expense to rise in absolute terms, with productivity potentially reducing it as a share of revenue over time. The filing provides no specific revenue or earnings guidance.
- Business risks: Revenue depends on lengthy customer design and product cycles, eventual customer product shipments, royalties, and semiconductor end-market conditions. Management also highlights customer and revenue concentration, competition, seasonality, semiconductor cyclicality, supply-chain constraints, export controls, and geopolitical and China-related risks. Samsung represented 20% and Intel 17% of Q1 revenue; customers in China represented 23.6% of revenue.
- Transchip transaction: Arteris agreed to invest in Transchip, a Chinese entity, and anticipated holding a 40.321% equity interest after closing. The transaction had not closed by March 31, 2022. The planned Arteris subscription was approximately $12.5 million, mostly through an in-kind five-year technology license; the filing says the transaction remained subject to closing conditions.
- Export-control matter: After quarter-end, on April 29, 2022, the U.S. Bureau of Industry and Security closed its review of a voluntary disclosure with a warning letter and no referral for prosecution. The disclosure concerned potential inadvertent EAR violations involving two customers; Arteris said it no longer provided them products or ongoing support and had taken remedial measures.
- Other items: Management reported no material adverse COVID-19 impact on Q1 results, cash flows, or financial condition, but said future effects remain uncertain. It reported no known legal matters expected to materially adversely affect the company. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether the strong licensing growth and higher ACV/RPO convert into recognized revenue and cash receipts, given long design cycles and customer shipment dependencies.
- Customer concentration and geographic exposure, particularly the disclosed 37% of Q1 revenue attributable to Samsung and Intel combined and 23.6% from China.
- Progress, final terms, and financial consequences of the Transchip investment and technology license, including the transaction’s closing status.
- Cash use, operating expense growth, and stock-based compensation as the company pursues growth while continuing to report quarterly losses.
- Effects of export restrictions and U.S.-China trade developments on customer access, licensing revenue, and future royalties.