Good afternoon, everybody, welcome to Arteris' Fourth Quarter and Full Year 2022 Earnings Call. Please note this call is being recorded and simultaneously webcast. All material contained in the webcast is sole property and copyright of Arteris, Inc, with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.
Thank you and good afternoon. With me today from Arteris are Charlie Janac, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the fourth quarter and full year ended December 31, 2022. Nick will review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter and full year of 2023. We will then open the call for questions. Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of the federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ 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 that during this call, we will cite certain non-GAAP measures, including 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 December 31, 2022. For a definition of certain of the key performance indicators used in this presentation, such as Annual Contract Value, confirmed design starts, active customers and Remaining Performance Obligations, please see the press release for the quarter ended December 31, 2022. Listeners who do not have a copy of the press release for the quarter ended December 31, 2022 may obtain a copy by visiting the investor relations section of the company's website. I will turn the call over to Charlie.
Thank you, Erica. Thanks to everyone for joining us on the call this afternoon. We're excited to report a strong finish to 2022 with Annual Contract Value plus trailing 12-month royalties of $52.4 million, up 22% year-over-year when adjusted to exclude HiSilicon and DJI as discussed in previous calls. We continued our growth in 2022, illustrated by adding 38 active customers and reaching 82 design starts during the year and over 3 billion systems shipped with SoCs connected by Arteris system IP since inception. We continued our progress in automotive semiconductor electronics by closing eight automotive customer licenses in 2022. Demonstrating the continued demand for our solutions, we had a total of 24 confirmed SoC project design starts in the fourth quarter.
We also added 14 new customers in the quarter, contributing to the 20% year-over-year increase in customers deploying Arteris' IP. 2022 deals were driven by strong demand for Arteris' products across all of our core markets and led in particular by automotive and consumer electronics, followed by enterprise computing, industrial, and communication applications. In Q4, we also continued to see Arteris' technology sales to automotive OEMs, including in China, where Arteris' IP was licensed for next-generation electric vehicle designs. Besides OEMs, we also saw strong automotive momentum with Tier 1s and numerous semiconductor companies. For example, Telechips licensed Arteris' IP in the fourth quarter for advanced automotive solutions. These solutions help to ensure security requirements are met when designing Telechips's new business area solutions such as advanced driver assistance systems, ADAS, and microcontroller units, MCUs.
Advanced SoCs require best-in-class Network on Chip technology for low power and safe connectivity, and we're excited that the Arteris' products continue to be the leading choice for high-performance innovative solutions in the advanced SoC automotive markets. Besides automotive, other applications are also getting more sophisticated with growing AI and machine learning electronics, including smart edge devices. The advanced SoCs that power them typically use Arm or RISC-V processor IP and tend to increasingly require Arteris' Network on Chip interconnect IP for SoC connectivity. To that end, Arteris and SiFive announced a partnership to accelerate RISC-V SoC designs for edge applications to speed up electronics product innovation for consumer electronics and industrial markets. Turning to our product portfolio, we are very excited about our new FlexNoC 5 innovations and the Semifore acquisition.
Over the last several years, as semiconductor manufacturing process technology went beyond 17 nm with many new SoC designs starting at 5 nm and increased 3 nm ramp-up , the associated physical effects have started to impact how engineers design SoCs by causing physical layout-driven Network on Chip connectivity iterations, which have a growing impact on project schedules. To address this growing challenge our customers face, we announced FlexNoC 5, physically aware Network on Chip IP with unique and patented technology. This fifth generation of our core interconnect technology provides customers with up to 5x faster physical convergence over manually driven physical iterations for new and derivative designs across automotive, communications, consumer electronics, enterprise computing and industrial applications. Continuing our efforts to expand the scope of IP and SoC solutions, in the fourth quarter, we acquired Semifore, a leader in hardware software interface automation, providing register management technology.
Semifore is used by customers to effectively design, verify, document, and help in the validation of the hardware software integration that is essential to every SoC, and is used by leading semiconductor and system companies across automotive, consumer electronics, communication, enterprise computing, and other applications. The addition of Semifore complements both our Magillem IP deployment automation and our Network on Chip IP, and expands our SoC solutions by providing a critical SoC integration layer, which in turn allows customers to accelerate hardware, software development and convergence. With the new FlexNoC 5 innovations and Semifore acquisition, we expect our customers to be able to accelerate their SoC designs with via physically aware IP connectivity and to better integrate SoC hardware and software layers, improving the overall SoC economics while reducing project schedules and risks of costly redesign.
As previously discussed, we are seeing short-term macroeconomic uncertainties and global recessionary impacts, particularly in the first half of 2023. We're also seeing headwinds from the tightening U.S. BIS regulations with respect to U.S. China trade. However, we believe that Arteris is well positioned to continue to make progress even in this challenging economic environment as our customers innovate in areas such as automotive, consumer electronics, and machine learning across all applications, driving the need for use of commercial system IP. With that, I'll turn it over to Nick to discuss our financial results in more detail.
Thank you, Charlie. Good afternoon, everyone. As I review our fourth quarter and full year results today, please note that I will be referring to non-GAAP metrics. A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website. I want to start by summarizing our key results for the fourth quarter. Total revenue for the fourth quarter was $11.2 million. At the end of the fourth quarter, ACV plus trailing 12 month royalties and other revenue was $52.4 million, up 22% year-over-year when adjusted to exclude HiSilicon and DJI, as Charlie mentioned. Gross profit was $10.1 million, representing a gross margin of 90%. Non-GAAP gross profit for the quarter was $10.2 million, representing a gross margin of 91%.
Total operating expense for the fourth quarter was $19.2 million compared to $17.6 million in the prior year period. Non-GAAP operating expense for the quarter was $16.0 million compared to $13.3 million in the prior year period. The increase was primarily driven by a combination of investment in sales and marketing to drive product awareness and strong engagement with customers and strategic partners. Additionally, we continue to invest in certain next generation products while significantly driving operating leverage in G&A expense. Operating loss for the fourth quarter was $9.1 million compared to a loss of $7.3 million in the year ago period. non-GAAP operating loss was $5.8 million or 51.8% compared to a loss of $2.8 million in the year ago period.
Net loss for the quarter was $7.2 million or diluted net loss per share of $0.21. Non-GAAP net loss for the quarter was $4 million or diluted net loss per share of $0.12 based on approximately 33.6 million weighted average diluted shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $72.6 million in cash equivalents and investments. Cash flow used in operations was approximately $400,000 for the quarter, while free cash flow, which includes capital expenditure, was approximately - $800,000 or 7.1%. Moving on to our annual results. Total revenue for 2022 was $50.4 million, up 33% year-over-year, reflecting strong growth across IP licensing and royalty revenue.
Gross profit for 2022 was $46.1 million, representing gross margin of 92%. Total operating expenses were $75 million compared to $55.9 million in the year ago period. Non-GAAP operating expenses were $62.8 million compared to $49.9 million in the year ago period. The increase was primarily due to the incremental costs expected of a public company. Operating loss was $28.9 million, increasing from a loss of $21.8 million in the year ago period. Non-GAAP operating loss was $16.2 million or 52.1%, increasing from a loss of $15.5 million in the year ago period. Our operating losses are in part derived from our subscription-based ratable revenue recognition, which defers a portion of revenue.
We define RPO or Remaining Performance Obligations as the amount of contracted future revenue. RPO was $57.7 million as of December 31, 2022. Net loss in 2022 was $27.4 million, or net loss per share basic and diluted of $0.84. Non-GAAP net loss was $14.7 million, or net loss per share, basic and diluted of $0.45 based on approximately 32.6 million weighted average shares outstanding. Cash flow used in operations was $6.8 million in 2022, while free cash flow, which includes capital expenditure, was -$7.8 million or 15.5%, which was better than previously guided, partly as a result of a $2.5 million favorable timing of cash received earlier from customers.
I'd now like to turn to our outlook for the first quarter and the full year 2023. For the first quarter, we expect ACV plus trailing 12 month royalties of $51.5 million to $55.5 million, and revenue of $11 million to $13 million with non-GAAP operating loss margin of 55%-75% and non-GAAP free cash flow margin of -56.7% to -81.7%, partly resulting from the $2.5 million early payment from customers in the fourth quarter of 2022 that I mentioned earlier. For the full year, we expect revenue of $56 million to $60 million. ACV plus trailing 12-month royalties to exit 2023 at $60.4 million to $65.4 million.
Non-GAAP operating loss margin of 28.5%-43.5% and non-GAAP free cash flow margin of -9.7% to -19.7%, reflecting the concentration of negative free cash flow into the first quarter. I would draw your attention to the shelf registration statement that we filed with the S.E.C. in November for a maximum aggregate operating price of $150 million, including a prospectus supplement for an ATM or at-the-market offering of up to $50 million. We have not activated the ATM at this stage and have no intention to do so at the current stock price levels. I will turn the call over to the operator and open up for questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We will pause for one moment to poll for questions.
Thank you for your interest and time in Arteris. We look forward to meeting with some of you at the upcoming Investor Conferences that we are participating in the next couple of months. We look forward to updating all of you on our business progress in the quarters to come. Please, looking forward to your questions.
Our first question is from Hans Mosesmann with Rosenblatt Securities. Please proceed.
Thank you for taking the question. This is Kevin on for Hans. Could you please provide the mix of licensing engagements in the quarter between automotive, communications, machine learning, and et cetera? I had a follow-up as well. Thank you.
Nick, do you want to take this one, or do you want me to take it? A utomotive is about 20%.
Sorry. I started. You might as well finish.
Automotive is about 20%, roughly. Consumer, roughly 25%. Enterprise is probably something like 15%. Then the rest of it, and then royalties are somewhere around 8%.
Okay. Thank you. That's very helpful. Just lastly, if you could just expand on the general trend for the deals, overall, that would be helpful.
Automotive continues to be a strength. We've added a number of automotive customers for the quarter and for the year. We've the automotive royalties are growing nicely. We are also very excited about our progress in machine learning. There are some new exciting applications for machine learning ASICs that are coming up, including ASICs for the ChatGPT large language models. We're also continue to be excited by the unforeseen space applications. There's seems to be a lot of work going on in both terrestrial and orbital space applications.
Thank you for that color. That's helpful. Thank you.
As a reminder, just star one on your telephone keypad if you would like to ask a question. Our next question is from Gus Richard with Northland. Please proceed.
Yes. Thanks for taking the question. Hey, Charlie, I was wondering if you could talk a little bit about Semifore and how that fits into your product portfolio. Is it just a separate standalone product, or will there be some integration with the existing product suite?
Yes. As you know, there is an so what Semifore does, it basically is a very high-performance , high- capability register management product that is extremely fast and extremely high-capacity . We also have register management capability in the Magillem product line. Initially, we are going to sell them separately, side by side. Our plan is over the long term for the Semifore register managements to be increasingly integrated into the next generation Magillem products. It's standalone short term, integrated in the medium term.
On the FlexNoC 5, is there an ASP uplift for this new product? And how far along are you in showing that or selling that to customers?
Right. The FlexNoC 5 has essentially integrated physical awareness in it. That capability has a significant ASP uplift compared to the FlexNoC 4 without physical awareness. We do anticipate a revenue uplift from that. It is a product that we have so far delivered to several early access customers who are providing us feedback on, you know, as they test the product in their projects. We're in an early access stage with the FlexNoC 5, but we have customer installations.
If I can just add some color to that excellent answer. The impact, I mean, you talked about where it's at in terms of customer adoption. There are some early access customers, we expect to see sort of revenue accretion in the second half from that through the ASP uplift.
Got it. Then the last one for me. You know, in your prepared comments, you talked a little bit about, you know, the impact of the macro and, you know, headwinds from China and some of the trade issues. I was just wondering if you could expand on that a little bit and just kind of give us a sense of how much of a headwind that's creating for you in the short term.
T here are some definite macro headwinds. There's also some macro tailwinds, but we continue to see the strength in our business. We see continued investment by customers in developing new applications for automated driving, car electrification, edge and data center machine learning and machine-to-machine communications based on 5G. W e're seeing a relatively steady number of design starts. You know, in general, our customers are investing in designing their way out of recessions. While there might be some tailwind on royalties based on unit volumes, that could be somewhat reduced, the design starts seems to be just fine as our customers turn to engineering new products.
Can I add some numerical color to that as well, that answer? The headwinds you point out are very true and very real, and that is what we have been talking about. If you remember back to the Q3 Eearnings Call, we referenced to the expected BIS-related China headwinds in Q3, sorry, in FY 2023. We talked then about a 7% estimated impact on overall revenue for 2023 as a result of that. We're not backing away from that thought. We also don't know yet because we haven't seen the full impact. There definitely is some. That by itself is sort of a $4 million to $5 million impact on 2023.
On top of that, we have something like a royalties impact negative of $1 million, which is just inability of our customers to ship volume. Those two together are like a $5 million to $6 million impact, which is it shouldn't be huge news at that point, but it's short-term . The royalties will recover as volumes recover and China will, the whole China situation will recover as well.
Got it. All right. Thank you. That's it for me.
Our final question is from Ambrish Srivastava with BMO. Please proceed.
Hi, guys. This is Jamison on for Ambrish. Thanks for the question. I just have just a couple brief ones. I'm just kind of curious. You are talking about these macro headwinds, it seems like taking place or affecting at least the first half more so than the back half. Should we expect-? Looking at the first half of 2023, should we expect a relatively flat growth versus 2022 and then an acceleration in the back half in terms of revenue?
Yes, that's exactly what we're saying. It's not out of line with what other people in the semi space broadly, have been headlining recently. We don't know exactly when these things are gonna improve, but that you've hit the nail on the head.
Okay, perfect. I just wanna clarify one other thing is, it's the gross margin. I think that you have mentioned in the past there's some seasonality in gross margins, especially in the first quarter where we are at least modeling a step down before, you know, a gradual increase through the year, followed by a step down in 1Q . Is that still something that we should be expecting? Is that, you know, something that I guess is largely might not be the case anymore as you continue to grow your revenues? Thank you.
It's a good, great question. It's actually the answer is unfortunately a mathematical one. We the vast bulk of our customer revenue is related to our Field Application Engineers. We obviously don't hire and fire those linearly with revenue numbers. As you hit lower revenue quarters, the same dollars of FAEs are spread over a smaller amount of revenue and vice versa when you have high revenue. Typically, you'll see higher gross margin in high revenue quarters and lower gross margin in low revenue quarters. As you rightly point out, Q1 is a relatively low revenue quarter. The margins would typically be a little bit lower than normal.
Okay.
It's ±1%. It's quarter-to-quarter, it's ±1%.
±1% . Okay, wonderful. Thank you so much.
Our next question is from Ethan Potasnick with Cowen. Please proceed.
Hi, this is Ethan Potasnick on for Matthew Ramsay. I had a question on how we should think about the use of cash and OpEx throughout the year. We've heard, seen a lot of companies kind of tighten the belt, but how are you balancing staying prudent versus some of the growth initiatives that are currently underway?
Let me give you a little bit of color around OpEx and free cash flow. Throughout 2022, we were continuing to increase our OpEx, particularly in engineering. The G&A has been flat now for about a year. Sales has been relatively flat. Marketing, we have added to in the fourth quarter, but we're not expecting that to grow at all going forward. The real any growth in OpEx into 2023 over and above the exit rate is really in next-gen products in R&D.
Particularly FlexNoC 5 that we've talked about, for example, which doesn't have a revenue impact until really the second half, as you pointed out, and then it increases sequentially quarter over quarter after that as the higher SPs kick in. Of course, we have the OpEx throughout the year. W e've invested quite heavily into marketing, into digital marketing, product marketing, and sort of customer positioning marketing, which is all about increasing our positioning with customers.
Part of the result we saw of that was the Arm engagement, the Arm partnership that we announced earlier on that we expect to have some not insubstantial upside even as we speak, and then more so in the future in the automotive space.
You mentioned cash flow. A lot of times people will ask, "Well, so how will you" , I've asked the same question. How can you go from a -$ 8 million to a -$ 8 million guided on free cash flow? Part of that, you have to take into account that we have this advance payment from customers, which we weren't expecting right at the death of 2022, which is around $2.5 million. The -$7. 8 million that we actually reported for 2022 underlying was actually a - $ 10.3 million , which is exactly in line with our Q3 guidance for the full year.
If you add that back to 2023, what we should have had in 2023, instead of - $8.5 million, we end up with - $6 million . Really underlying, you've got you're on improvement from - $10.5 million to - $6 million . The majority of that negative cash flow for 2023 is taking place in the first quarter, which is you can see from the first quarter guidance of which is approximately - $8 million . The rest of 2023, therefore, is guided to be relatively flat in terms of free cash flow. Which puts us in a very good place, we think, to be cash flow neutral during 2024, then cash flow positive thereafter.
Okay. Got it. Thank you for that detailed answer. I may, admittedly may have missed this in the beginning of the Q&A, but I was wondering if you could discuss the full-year outlook a little bit more in detail. Obviously, I'm aware that the team has significant visibility. But, you know, maybe kind of parse out areas you're seeing downward pressure or if there are areas where maybe there's accelerated interest in terms of shipments and royalties. Would be curious to hear that fleshed out a little bit more.
A s Nick pointed out, we're seeing a bit of a headwind from China, right? It has a modest impact on our growth rate there. On the other hand, continued strength in automotive. There's some new exciting machine learning applications that are coming up that is, you know, creating excitement both in the customer base, and that it requires new silicon to be designed. I think there's, you know, offsetting tailwinds and headwinds. Y ou have impact on consumer, strength in automotive, strength in machine learning.
To your point on, question on royalties for certain royalties in 2022, and in fact early 2023, are directly impacted by recessionary impacts, because recessionary impacts directly impact volumes. We're seeing that from all the semis, that their unit shipments are down pretty much across the board. That impacts directly our royalties. Of course, because we're designed in, the strength of our model is because we're designed in, as those recessionary impacts recede, then so do royalties accelerate. We're expecting some acceleration of royalties in the second half and significantly thereafter into 2024 and beyond. I would point out that royalties for automotive are still on a tear.
You've probably noticed that automotive is one area that does not seem to be suffering right now, particularly. still doing very well. Our automotive royalties has now more than doubled in the last 2 years. Just give me an idea of the scope of that increase, and we're adding new deals all the time, new design-ins.
Understood. Thank you very much.
As a reminder, it is star one on your telephone keypad if you would like to ask a question. We will just pause for a brief moment to poll for any final questions. Once again, it is star one. There are no more questions at this time. We can conclude today's conference. Thank you, everybody, for your participation. You may disconnect your lines at this time, and have a wonderful day.