Arteris, Inc. quarterly report, Q2 FY2023

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

MetricQ2 2023Q2 2022Six months 2023Six 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

  1. Whether revenue deferred by contract-recognition timing converts to recognized revenue as expected, and whether royalties continue to grow beyond timing-related payments.
  2. Whether operating expense growth, cash burn and stock-based compensation remain manageable relative to revenue growth and liquidity.
  3. Developments and potential costs in the patent litigation, including any effects on Arteris or customer products and operations.
  4. The impact of U.S.–China export controls on customer access, support, licensing and future revenue, given the company’s China exposure.
  5. Progress in design starts, customer adoption, product commercialization and conversion of the $63.5 million RPO into revenue and cash receipts.