Arteris, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; financial statements are unaudited. Arteris develops and licenses semiconductor interconnect and related software IP, with support, maintenance, and royalty revenue. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $12.6M | $9.0M | $39.2M | $26.4M |
| Gross profit / margin | $11.7M / 93% | $8.1M / 90% | $36.0M / 92% | $23.8M / 90% |
| Operating loss / margin | $(7.8)M / (61)% | $(4.5)M / (50)% | $(19.8)M / (50)% | $(14.5)M / (55)% |
| Net loss | $(7.7)M | $(5.0)M | $(20.2)M | $(15.6)M |
| Basic and diluted loss per share | $(0.23) | $(0.24) | $(0.63) | $(0.79) |
| Cash used in operating activities | Not presented quarterly | $(6.4)M | $(4.0)M |
Q3 revenue increased 41% year over year; nine-month revenue rose 48%. Licensing, support and maintenance revenue increased 37% in Q3 and 47% for the nine months, mainly from new customers and expanded agreements with existing customers. Nine-month royalties increased 18%; Q3 royalties declined 6%. Gross margin improved, but operating and net losses widened as operating expenses grew faster than revenue. Weighted-average shares increased to 32.8M in Q3 and 32.2M for the nine months, versus 20.6M and 19.8M, respectively, in 2021.
Liquidity, balance sheet, and operating indicators
- At September 30, 2022, cash and cash equivalents were $68.2M and short-term investments were $4.4M. Management reported $72.6M combined, including $4.2M held by foreign subsidiaries. Long-term investments were an additional $2.0M.
- Total assets were $118.8M; current liabilities were $43.7M and total liabilities were $78.5M. Stockholders’ equity was $40.4M, down from $52.9M at December 31, 2021.
- Vendor financing arrangements totaled $1.9M; the filing reports no outstanding term loan. Nine-month investing cash outflow was $7.3M and financing cash outflow was $3.9M. Cash and cash equivalents fell $17.6M from year-end.
- Deferred revenue was $49.7M. Remaining performance obligations were $59.3M, of which $28.9M, excluding non-cancelable customer commitments, was expected to be recognized over the next 12 months.
- Annual Contract Value (ACV) was $50.2M, versus $42.7M a year earlier; RPO was $59.3M, versus $50.6M. Arteris added 10 active customers and recorded 21 confirmed design starts in Q3, compared with six and 22, respectively, in Q3 2021.
Material changes and unusual items
- Research and development expense increased 45% in Q3 and 50% for the nine months. Sales and marketing expense rose 36% and 60%; general and administrative expense rose 129% and 24%, respectively. Higher stock-based compensation was a significant contributor: $9.1M for the nine months, compared with $1.1M in 2021.
- In June, Arteris transferred a technology license to Transchip and ceased consolidating it, retaining an equity-method investment. The investment was carried at $12.2M at quarter-end; Arteris’s ownership was diluted from 40.3% to 35.0% after a subsequent funding round. The $11.6M license contribution was recorded as deferred income and is recognized over ten years; the company also recorded a $0.1M deconsolidation gain.
- Nine-month financing cash use included $1.6M of contingent acquisition consideration payments and $2.1M of employee tax withholding on settled restricted stock units.
Outlook, commentary, and risks
- No formal revenue or earnings guidance is provided. Management said cash, investments, available borrowing capacity, and anticipated operating cash generation should fund expected needs for at least the next 12 months; additional financing could be needed if those resources prove insufficient.
- Management expects R&D expense to rise in absolute terms and as a share of revenue in the near term, with the share expected to decline over the medium to longer term as products launch. It also expects ongoing investment in sales and marketing and continued growth in G&A costs.
- Arteris warned that U.S. export controls announced October 7, 2022 could restrict licensing or support to certain China-based semiconductor, advanced-computing, and supercomputer-related entities. The company was evaluating the rules and anticipated pressure on China revenue; China represented 26.4% of nine-month revenue.
- Business risks include customer and revenue concentration, long design and commercialization cycles, dependence on customers’ end-product sales for royalties, semiconductor-industry cyclicality, competition, hiring and product-development demands, and geopolitical, export-control, and China-related risks. The filing says COVID-19 did not materially adversely affect results or liquidity in the reported periods, but future effects remain uncertain.
- The company reported no known legal proceedings expected to have a material adverse effect. Management concluded disclosure controls and procedures were effective at the reasonable-assurance level, with no material change in internal control over financial reporting identified during the quarter.
Important facts for investors to verify
- Reconcile customer concentration disclosures: the notes report Customer B at 24% of Q3 revenue and 26% for the nine months, while the risk factors state that Intel accounted for 26% of revenue. Confirm the applicable period, customer identity, and concentration measure.
- Track the financial and commercial effects of the October 7 export controls, including any restrictions on China customers, revenue, and support obligations.
- Assess whether revenue and ACV growth can outpace operating-cost growth and stock-based compensation, and whether operating cash use remains consistent with management’s liquidity expectations.
- Monitor Transchip’s performance, Arteris’s 35% ownership, the equity-method investment’s carrying value, and recognition of the deferred license income.
- Evaluate the timing and conversion of RPO into recognized revenue, particularly given long design cycles, royalty dependence on customer shipments, and the expected $28.9M of RPO recognition over the next 12 months.