Arteris, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Arteris develops and licenses semiconductor system IP, including network-on-chip interconnect technology and SoC integration software. Figures are unaudited; amounts are in U.S. dollars.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $13.3 million | $12.6 million | $41.2 million | $39.2 million |
| Gross profit / margin | $12.0 million / 90% | $11.7 million / 93% | $37.5 million / 91% | $36.0 million / 92% |
| Operating loss | $8.5 million | $7.8 million | $25.9 million | $19.8 million |
| Net loss | $8.2 million | $7.7 million | $26.3 million | $20.2 million |
| Basic and diluted loss per share | $0.23 | $0.23 | $0.75 | $0.63 |
| Cash used in operating activities | — | $12.8 million | $6.4 million |
Revenue mix and trends: Q3 licensing, support and maintenance revenue rose 9% to $12.1 million; royalties increased 54% to $1.1 million, mainly from higher production at existing customers. Other revenue declined with the timing of professional-services work. Nine-month revenue grew 5%; royalty growth reflected both increased customer production and royalty audit findings. Management said certain 2023 contract terms changed revenue timing, deferring a substantial majority of revenue from some contracts to future quarters.
Financial position and liquidity
- At September 30, cash and cash equivalents were $18.6 million, short-term investments $27.7 million, and long-term investments $10.3 million. Cash plus short-term investments totaled $46.4 million, compared with $68.2 million in cash and investments at December 31, 2022.
- Total assets were $102.2 million, down from $115.5 million at year-end; total liabilities were $80.1 million, up from $78.0 million. Stockholders’ equity fell to $22.0 million from $37.5 million, while accumulated deficit reached $92.7 million.
- Vendor financing arrangements totaled $3.0 million; the filing reports no other conventional borrowings. Lease liabilities were $1.6 million. Deferred revenue totaled $52.5 million.
- Operating cash use increased year over year, mainly reflecting the larger net loss and a $3.2 million increase in accounts receivable. Cash, cash equivalents and restricted cash declined $18.4 million during the first nine months; investing and financing activities also used cash.
- Management believes available cash, investments and expected product receipts will fund working capital and other requirements for at least the next 12 months, but notes additional financing could be needed if resources prove insufficient.
Material changes and operating indicators
- Operating expenses rose 14% year over year for the first nine months to $63.4 million, exceeding revenue growth. R&D increased 12%, sales and marketing 22%, and general and administrative 10%. Management cited hiring and investment in engineering, higher stock-based compensation, and increased legal fees.
- For Q3, operating expenses rose 5%; R&D was roughly flat, while sales and marketing and G&A increased. Q3 gross margin declined to 90% from 93%, primarily alongside higher FAE-related costs.
- Annual Contract Value was $52.3 million, versus $50.2 million a year earlier. RPO, as defined in management’s KPI discussion, was $62.5 million versus $59.3 million. Separately, the notes report $61.3 million of contracted unsatisfied or partially satisfied obligations, excluding potential future royalties; $32.7 million of that amount was expected to be recognized over the next 12 months.
- Arteris added one net new active customer and recorded 22 confirmed design starts in Q3, compared with 10 and 21, respectively, in Q3 2022. Annual average customer retention was 98%.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management expects R&D spending to increase in absolute terms in the near and medium term, with a potential decline as a percentage of revenue over the medium to long term as products launch. It also expects sales and marketing spending to increase in absolute terms.
- Arteris recorded a $2.5 million nine-month loss from its 35% equity-method investment in Transchip. It also recognized $0.9 million of income over the first nine months from deferred income related to a technology license to Transchip. The investment’s carrying value was $9.4 million, and management reported no impairment indicators.
- Patent litigation brought by Network System Technologies continued. A motion to dismiss was granted in part and denied in part with leave to amend; Arteris filed a further motion to dismiss and said it expects increased legal expenses. The company cannot predict the outcome or potential financial effect.
- China exposure is significant: 31.0% of nine-month revenue came from customers located in China, and 64.8% came from customers outside the United States. U.S. export-control amendments effective November 17, 2023 may restrict licensing or support for some China-related customers and could delay projects or reduce revenue.
- Other important risks include continued losses, long design-to-production cycles and uncertain royalties, customer and semiconductor-industry concentration and cyclicality, competition, and potential dilution from equity compensation. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether deferred revenue recognition from amended customer arrangements, bookings and the reported ACV/RPO convert into revenue as expected.
- Whether royalty growth and confirmed design starts translate into sustained production and cash receipts, given customer concentration and long product cycles.
- Cash burn, investment balances, accounts-receivable collection and management’s stated liquidity horizon.
- Potential legal costs and outcomes of the patent litigation, and the effect of evolving U.S.–China export controls on customer activity.
- Operating-expense growth, stock-based compensation and share-count changes: shares outstanding rose to 36.8 million from 34.6 million at December 31, 2022.