Arteris, Inc. (AIP) Q3 2026 Earnings Call Transcript

Operator: Good afternoon, everyone, and welcome to the Arteris Third Quarter 2026 Earnings Call. Please note, this call is being recorded and simultaneously webcast. All material contained in the webcast is the sole property and copyright of Arteris with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

Erica Mannion: Thank you, and good afternoon. With me today from Arteris are Charlie Janac, Chief Executive Officer; and Saurabh Sinha, Chief Financial Officer. Charlie will begin with a brief review of the business results for the third quarter ended September 30, 2026. Saurabh will review the financial results for the third quarter of 2026, followed by the company's outlook for the fourth quarter and the full year of 2026. We will then open the call for questions. Before we begin, I'd like to remind listeners that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements are based on management's current expectations and assumptions and involve material risks and uncertainties that could cause actual results or events to differ materially from those anticipated, and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appear in the press release Arteris issued today and in the documents and reports filed by Arteris from time to time with the Securities and Exchange Commission. Please note, during this call, management will cite certain non-GAAP measures, including, among others, non-GAAP net loss, non-GAAP net loss per share and free cash flow, which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are presented as we believe that they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended September 30, 2026. In addition, for a definition of certain of the key performance indicators used in this presentation such as annual contract value and remaining performance obligations, please see the press release for the quarter ended September 30, 2026. These key performance indicators are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP and may differ from similarly titled metrics or measures used by other companies, securities analysts or investors. Listeners who do not have a copy of the press release for the quarter ended September 30, 2026, may obtain a copy by visiting the Investor Relations section of the company's website. In addition, management will be referring to the third quarter 2026 earnings presentation, which can be found in the Investor Relations section of the company's website under the Events and Presentations tab. Before I turn the call over to Charlie, I would like to mention that management will participate in the ROTH Technology Conference on November 18 in New York and the Northland Growth Conference on December 16, which takes place virtually. Now I will turn the call over to CEO, Charlie Janac.

Karel Janac: Thank you, Erica, and thanks to everyone for joining us on our call today. In the third quarter, we achieved another record annual contract value plus royalties of $104 million, representing a 39% year-on-year increase and record revenue of $25.8 million, representing a 48% increase. Once again, we also achieved record royalties and RPO backlog. License activity in the quarter remained strong, supported by the continuing integration of data center edge and physical AI computing. We are seeing this across all market verticals, led by enterprise computing, followed by automotive, industrial, consumer electronics, communications and aerospace and defense applications. 1/3 of those wins in dollar terms were with top 30 global technology customers, demonstrating strong market momentum. A growing number of customers are deploying multiple products from our 4 system IP product lines. This multiproduct adoption reflects the critical role our solutions play in managing rising semiconductor design complexity. During the quarter, Arteris surpassed 1,000 customer-confirmed design starts. Arteris is increasingly becoming a key partner in the rapidly evolving semiconductor market spanning the world's largest established technology companies through the most innovative start-ups. By enabling the underlying high-performance, efficient, safe and secure data movement in silicon devices, Arteris has been able to support innovation from the smartphone inflection to today's deployments in sophisticated and complex AI infrastructure silicon, intelligent edge devices and physical AI. Surpassing 1,000 customer confirmed design starts demonstrates continued customer confidence in our products and our customer success organization. AI infrastructure semiconductor design activity remained strong in Q3 with a growing demand for Arteris products that help enable the underlying data movement in chips and chiplets. In the third quarter, our largest deal was with a top hyperscaler who expanded their existing use of Arteris technology to accelerate the creation and integration of chips and chiplets. In addition, 2 of the industry's top 10 semiconductor companies expanded their usage of our products to support their existing AI accelerators and data center compute needs as well as the growing demand for architecture across XPUs for agentic workloads and other applications. Physical AI is another area where we continue to see growing demand for Arteris products. Building upon our proven technology in automotive and autonomous systems, customers are able to scale our solutions to drones, humanoid robotics and adjacent applications. In the third quarter, one of our largest deals came from a leading automotive OEM, which expanded the use of Arteris technology for successive generations of their in-house advanced chip designs where performance, energy efficiency, safety and security are crucial. Another highlight of the third quarter was our announcement of the expansion of our chiplet and multi-die solution. The silicon design sophistication continues to grow across applications, the required physical semiconductor area becomes quite large, creating design, manufacturing and yield challenges. As a result, the development of chiplets and their integration into multi-die SoCs is accelerating. This, in turn, introduces the challenge of addressing die-to-die communication and data movement that previously occurred seamlessly within one chip, now having to cross physical boundaries while maintaining performance efficiency and predictable traffic behavior. The expansion of our chiplet and multi-die solution addresses this challenge by extending data movement across die-to-die links, allowing multiple dies to operate as a unified architecture. The new FlexGen multi-die and Ncore multi-die products expand the Arteris solution to support chiplet architectures. These increasingly include solutions for agentic AI workloads, HPC, data center, cloud infrastructure, physical AI and others. Together with Arteris Magillem IP integration automation and Cycuity hardware security assurance, our expanded portfolio provides semiconductor engineering teams with technologies spanning data movement, system integration and cybersecurity for increasingly complex multi-die designs. These new products are a direct result of close collaboration with customers such as AMD and Socionext and ecosystem partners, including Cadence, Silitronics, Synopsys, UniVista and others. Chiplets, multi-die systems, AI infrastructure and physical AI also increasingly require semiconductor cybersecurity assurance. The growing security threats posed by fast-evolving frontier AI models identification and exploitation of vulnerabilities are driving new and growing cybersecurity standards compliance requirements. This results in growing interest and demand for our security semiconductor cybersecurity assurance products. During the third quarter, we announced the expansion of the third-party IP program as part of the Trusted and Assured Microelectronics program. This program driven in close collaboration by BAE Systems and SiFive aims to address the growing challenge of ensuring the security and trustworthiness of commercially sourced third-party silicon IP and cybersecurity assurance methodologies for semiconductors used in mission-critical systems enabled by Arteris products. Our customers continue to innovate in exciting high-growth areas, which require a combination of high-performance, efficiency, safety and security backed by global customer support. Arteris continues to be in an excellent position to support demand for advanced semiconductor technologies in the AI era, spanning infrastructure silicon, edge devices and physical AI systems. Our focus remains on enabling customers to accelerate their innovation while reducing development risks to bring their next-generation products to market with Arteris technology at its core. Lastly, I will hand the call over to our new CFO. Saurabh Sinha brings more than 25 years of financial leadership experience at public and high-growth technology companies, and we're excited to have him on board. With that, I will turn it over to Saurabh to discuss our financial results in detail.

Saurabh Sinha: Thank you, Charlie. Good afternoon, everyone. Since joining Arteris in September, I have spent the past few weeks integrating with the team and diving deep into our operations. It is a privilege to step into the company at such a pivotal moment in its growth. I look forward to collaborating closely with the team to capture the significant opportunities ahead and drive long-term value for both customers and shareholders. As I review our Q3 2026 results, I will refer to both GAAP and non-GAAP financial measures. The earnings release posted on our website includes a reconciliation of the non-GAAP measures to their most directly comparable GAAP measures. I will also refer to the Q3 earnings presentation, which is available in the Investor Relations section of our website under Events and Presentations. We delivered another quarter of solid financial results. And in Q3, we exceeded or met our guidance on revenue and other key KPIs. Turning to Slide 5. Q3 revenue was $25.8 million, up 48% from a year ago and exceeding the top end of our guidance range. At quarter end, ACV + Royalties totaled $104 million, up 39% year-over-year and also exceeding the top end of our guidance, setting another record. Trailing 12 months royalties were $9.4 million, up 71% year-over-year and also a record high. Remaining performance obligations, or RPO, which represents contracted future revenue totaled $135 million at quarter end, another record for Arteris. We expect slightly more than half of this amount to be recognized as revenue during the 12 months beginning October 1, 2026. Non-GAAP gross profit was $22.8 million for a non-GAAP gross margin of 89%. GAAP gross profit was $22.3 million for a GAAP gross margin of 87%. As a reminder, 2026 gross margin includes subcontractor costs in cost of revenue for certain Cycuity government contracts. Now to Slide 6. Non-GAAP operating expenses in the quarter were $24 million. As mentioned in previous calls, expense growth has been impacted this year by French payroll taxes associated with RSU vesting. Our long-term operating model objective is to grow operating expenses at approximately half the rate of revenue growth and our Q3 revenue and operating expense results are consistent with that model. As always, our continued investment in product development and customer success will support revenue growth over the coming years. Total GAAP operating expenses for Q3 were $33.6 million. Non-GAAP operating loss was $1.2 million, which is an improvement of $2.3 million from the same quarter a year ago. GAAP operating loss was $11.3 million. Non-GAAP net loss was $1.1 million or $0.02 per diluted share. GAAP net loss was $11.2 million or $0.23 per diluted share. Moving now to Slide 7. Free cash flow in the quarter was negative $2.1 million, primarily reflecting the timing of customer payments. We ended the quarter with $120 million in cash, cash equivalents and investments and no financial debt, which includes the completion of our ATM program. Now turning to our outlook for Q4 and full year 2026, please refer to Slide 8. For Q4 2026, we expect ACV + Royalties of $103 million to $107 million. Revenue of $25.7 million to $26.7 million. Non-GAAP operating income of negative $0.9 million to positive $1.1 million. As we look to finishing a strong 2026 for Arteris, we see continued strength in semiconductors. Consequently, we are raising our full year guidance on revenue, ACV + Royalties and non-GAAP operating income. For the full year 2026, our guidance is as follows: ACV + Royalties to exit 2026 at $103 million to $107 million, an increase of $1 million from prior guidance. Revenue of $98.5 million to $99.5 million, an increase of $2.5 million from prior guidance. Non-GAAP operating loss of between $9.2 million to $7.2 million, an improvement of $0.3 million from prior guidance. Non-GAAP free cash flow of positive $5 million to positive $9 million, unchanged from prior guidance. We are encouraged by the continued license activity and ongoing customer engagement. We remain focused on execution and on managing expenses carefully as we work toward improving operating leverage. With that, I'll turn the call back to the operator for the Q&A.

Operator: [Operator Instructions] Your first question comes from Kevin Garrigan with Jefferies.

Kevin Garrigan: Congrats on the results, and Saurabh, welcome to the Arteris party. Can you quantify the economics of the multiproduct adoption? How much larger is the average contract when a customer takes the NoC system integration and security products together versus just taking a single product agreement?

Karel Janac: Yes. So as we said sort of when we went public back in 2021, that by 2026, which is this year, we'll be at about $1 million ASP on the network-on-chip. If you throw in the Magillem and the Cycuity products, you're probably looking at something for an additional 400,000, maybe, 450,000, something like this. And so if you take everything from us, you would probably be somewhere around $1.4 million, $1.5 million.

Kevin Garrigan: Got it. Okay. That makes sense. And then your licensing agreements with the U.S. hyperscaler and the 2 leading-edge semiconductor companies. Can you just describe the applications, whether these are for training, inference, networking or custom silicon? And is it different than -- I guess, are the applications different than what they were previously using Arteris for?

Karel Janac: No, they're the same. So basically, they are custom silicon for AI inference.

Operator: Your next question comes from Kevin Cassidy with Rosenblatt.

Kevin Cassidy: I also welcome Saurabh. And congratulations on the milestone of 1,000 customers. When you're moving into the physical AI or expanding on the physical AI, it seems like that's a great opportunity. How much different are these designs than, say, what was in automotive or in data center?

Karel Janac: So the physical AI actually look -- have significant similarities to automotive. You need functional safety, you need security, you need power efficiency and you need performance. So the experience that we have in automotive translates directly to physical AI. And in fact, I would argue that a car eventually will become basically a robot on wheels. And so basically, the automated driving vehicles are basically applications of physical AI to transportation. There are some differences. There is a greater emphasis on sort of microcontroller functions and be able to handle motion control of the various motion axes and those kinds of things and also some additional sensor processing capability, but there's actually quite a bit of similarity.

Kevin Cassidy: Okay. Great. Sounds you've got good experience already. And also, we're seeing the trend of the smaller physical AI companies getting acquired by large analog companies or either other large microcontroller companies. What happens with your license agreements if there's a merger of 2 of your customers?

Karel Janac: So all of our contracts have assignment provisions. And -- so it's a subject of discussion where we do not unreasonably withhold assignment of the contracts, but the assignment of the contracts using our technology is not automatic.

Kevin Cassidy: Okay. Great. Congratulations on good progress towards profitability, too.

Operator: Your next question comes from Joshua Buchalter with TD Cowen.

Joshua Buchalter: Echoing the welcome to Saurabh. Maybe Kevin teed me up for one. Now that your guidance is implying, sort of, operating profitability in the fourth quarter, how should we think about leverage from here? I mean you guys have a lot of irons in the fire, but have held OpEx pretty flat the last few quarters. What's the sort of the right trajectory as we think about comparing OpEx growth to revenue growth from here?

Karel Janac: Saurabh, do you want to take that one?

Saurabh Sinha: Yes, I'll take that. So Josh, as I mentioned in my prepared remarks, our model is operating expenses to grow at half the rate of our revenue growth and which we have demonstrated in this quarter as well. So that is the trajectory we are on. And the operating expenses, we have very good visibility on it, and we expect to -- and that is why we raised our guidance for Q4.

Joshua Buchalter: And as a follow-up, I mean, you highlighted a few times seeing more traction in multi-die chiplet offerings. Any way you can help us with context of how much of the revenue base today is coming from FlexGen and Ncore solutions for multi-die?

Karel Janac: So we don't break this out individually. But right now, chiplet designs are about 10% of all designs. We think that ultimately, that grows to about maybe 30%, 35% of all designs. So it will be a significant contributor to our revenue growth. The thing that should be noted though, is that the chiplet designs are basically each chiplet is a project and each chiplet is a royalty stream. And so the chiplet projects have basically significantly higher ASP than single die projects. So we're very excited about the technology. The data movement schemes of chiplet designs are much more sophisticated and valuable. And so we think that chiplets represent a significant opportunity for Arteris going forward, and we're already in a significant number of chiplet designs.

Operator: Your next question comes from Martin Yang with Oppenheimer.

Martin Yang: Again, welcome, Saurabh. First question on the ACV + Royalties. This year -- this quarter, the incremental growth sequentially is moderating relative to the prior quarters. Is there anything worth pointing out there? Any movement that you could give us more details?

Saurabh Sinha: Yes, Martin. So I mean, we look at on a year-over-year basis, and we have shown steady growth in ACV and Royalties. If you look at the revenue growth, that has been also excellent, and we have guided up for Q4 as well. We did beat Q3 top end of the range. So it is all about looking at a snapshot at a point in time, and there is some lumpiness which happens due to timing of the deals. But we feel pretty confident about, and that is why Q4 has been guided up.

Martin Yang: Got it. Another question on security. I was curious if you have an updated view on your go-to-market approaching customers outside of government contracts. What's your longer-term vision for security comparing to what it is today?

Karel Janac: Yes. I mean, cybersecurity is becoming much more important and much more top-of-mind issues for customers, both on the government side and the commercial side. Last quarter, we announced a deal with Arm for use of security on their A-class cores. We -- this time, we announced a deal with BAE and SiFive for trusted initiative. This is more of a government side. But obviously, over time, our goal is to take security more and more into the commercial accounts where we have a significant presence. Security takes a while to adopt, but we're very encouraged with the progress that we're seeing.

Operator: [Operator Instructions] Your next question comes from Suji Desilva with ROTH Capital Partners.

Sujeeva De Silva: Saurabh, best of luck in the new role here. Staying on the chiplet topic, Charlie, maybe you could talk about -- you said they're each one project for these multichip versus monolithic die. Maybe you can give us some sense of kind of the ratio of how many projects you're seeing as we break out the chiplets versus the traditional monolithic die programs? And if it's kind of an x multiplier or if there's some bundling in there?

Karel Janac: Well, I mean, it's a subject to negotiation, right? If you have 5 or 6 chiplets in a package, there's a discussion with the customer about what is the discount on each project, right? So it's not basically 1x multiplier for each chiplet, but we and other companies in the industry are establishing a model that each chiplet in the package has its own project price and its royalty. And right now, those projects are pretty prevalent or more prevalent in the data center because they're basically used for the AI training and inference workloads. And those are big complex projects with much higher ASPs. And I think right now, as far as what we're seeing is about 10% of the license of the design starts are chiplets. But we think that over the next 2 to 3 years, it's going to grow to perhaps 35% or maybe even more. And obviously, the data movement architecture of those kinds of chips, you not only have to handle the on-die data movement, but you also have to handle the multi-die data movement. And so things get much more valuable and much more complex, and it's an opportunity for us to add value. So we're very excited about the chiplet type projects.

Sujeeva De Silva: That's great color, Charlie. And then just one question I sort of throw out there. I mean you may be seeing some early humanoid robotics projects versus automotive projects. Any sense of how many more design win opportunities are for you just on some sample examples out of the gate here, just to get some idea of a ratio of kind of a robotics opportunity -- humanoid versus an automobile, how many -- what the ratio there might be?

Saurabh Sinha: Yes. So Suji, we are well diversified from a customer base and application standpoint. So no one customer has accounted for more than 10% of our revenue in the last few quarters. And we are also diversified by geography as well along with the applications. So automotive, yes, and ADAS is important for us, but there are other applications as well, which are shaping up equally well.

Operator: Thank you. Ladies and gentlemen, that concludes today's Q&A session. I will turn the call back over to Charlie Janac.

Karel Janac: Well, thank you for joining our call today and for your interest in Arteris. Thank you for all the questions. And we look forward to updating you on our business progress in the quarters ahead and in the coming up investor conferences. So thank you for your support.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.