Arteris, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Arteris develops and licenses system IP and software used to connect and integrate components in system-on-chip designs. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $14.7 | $14.8 | $27.9 | $26.6 |
| Gross profit / gross margin | $13.5 / 91.7% | $13.5 / 91.3% | $25.5 / 91.6% | $24.3 / 91.5% |
| Operating loss / operating margin | $(8.7) / (58.9)% | $(5.4) / (36.6)% | $(17.4) / (62.5)% | $(12.0) / (45.3)% |
| Net loss | $(9.2) | $(5.7) | $(18.2) | $(12.5) |
| Net loss per share, diluted | $(0.26) | $(0.18) | $(0.52) | $(0.39) |
- Revenue mix: Q2 licensing, support and maintenance revenue was $13.0 million, down 7%; variable royalties were $1.7 million, up 190%. For the first half, licensing, support and maintenance was $24.8 million, up 1%, and royalties were $3.0 million, up 90%.
- Expenses: Q2 operating expenses rose 17% to $22.2 million: R&D increased 17% to $12.1 million, sales and marketing increased 26% to $5.6 million, and G&A increased 9% to $4.5 million. First-half operating expenses rose 18% to $43.0 million.
- Cash flow: First-half operating cash use was $9.9 million, compared with $1.2 million in the prior-year period. Investing activities provided $0.4 million and financing activities used $1.1 million. Cash, cash equivalents and restricted cash declined $10.7 million to $26.7 million.
- Liquidity and obligations: Cash and cash equivalents were $26.3 million and short-term investments were $28.6 million at June 30, totaling approximately $55.0 million. Current assets were $70.4 million versus current liabilities of $43.7 million. Vendor financing arrangements totaled $2.9 million; the filing reports no conventional borrowings. Management stated available resources and expected product receipts should meet liquidity needs for at least 12 months.
- Other balance-sheet items: Deferred revenue was $53.4 million. Remaining performance obligations were $63.5 million, of which $34.1 million was expected to be recognized over the next 12 months. Total assets were $106.8 million and stockholders’ equity was $26.9 million.
Changes versus the prior comparable period
- Q2 revenue was nearly flat, while first-half revenue grew 5%. Management attributed the Q2 decline in licensing, support and maintenance revenue mainly to timing changes for certain contracts; a substantial majority of revenue from those arrangements was expected in future quarters.
- Higher Q2 royalties reflected timing, including fixed and upfront royalties from certain customers. Royalty timing and customer product sales make this revenue difficult to predict.
- Net loss widened in both the quarter and first half as operating expenses increased faster than revenue. The first-half loss also included $1.6 million of equity-method investment losses, versus none in 2022.
- Other income increased, primarily because higher interest rates and investment balances raised interest income. The first-half tax provision also increased to $0.9 million from $0.5 million.
- First-half operating cash use increased materially, partly reflecting a $2.4 million increase in accounts receivable; deferred revenue increased $2.7 million and partly offset cash use.
Outlook, commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management expects R&D expense to increase in absolute terms and as a percentage of revenue in the near term; over the medium to longer term it expects R&D to decline as a share of revenue, while still increasing in absolute dollars.
- Management cited business indicators of $53.6 million in annual contract value (ACV), 12 net new active customers and 22 confirmed design starts in Q2. ACV was $48.6 million a year earlier; customer retention averaged 98% over the year to June 30, 2023. These are supplemental, non-GAAP operating measures.
- International exposure is significant: 66.5% of first-half revenue came from outside the U.S. and 29.9% from China. Management expects China revenue to decrease due to U.S. export restrictions, which could limit licensing and support to certain customers.
- Patent litigation: Network System Technologies filed patent-infringement complaints involving Arteris and others. On July 21, 2023, after quarter-end, the Western District of Texas granted Arteris’s motion to dismiss in part and denied it in part. Arteris is defending the claims and anticipates higher legal expenses; the outcome and potential financial impact remain uncertain.
- Other key risks include ongoing losses, rising operating costs, long customer design and production cycles, semiconductor-market cyclicality, customer and royalty concentration, competition, and the possibility that product designs or end-market demand do not translate into sales or royalties. The filing reports a full valuation allowance against U.S. federal and state deferred tax assets.
- Semifore-related contingent employee compensation was recognized as expense as services were provided. Arteris also entered a new Campbell, California headquarters lease in May 2023, with future payments of $2.6 million and a term of approximately 5.4 years, expected to commence in the second half of 2023.
Important facts for investors to verify
- Whether revenue deferred by contract-recognition timing converts to recognized revenue as expected, and whether royalties continue to grow beyond timing-related payments.
- Whether operating expense growth, cash burn and stock-based compensation remain manageable relative to revenue growth and liquidity.
- Developments and potential costs in the patent litigation, including any effects on Arteris or customer products and operations.
- The impact of U.S.–China export controls on customer access, support, licensing and future revenue, given the company’s China exposure.
- Progress in design starts, customer adoption, product commercialization and conversion of the $63.5 million RPO into revenue and cash receipts.