Prepared remarks
Good afternoon, everyone, and welcome to the Arteris First Quarter 2026 Earnings Call. Please note that 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.
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 first quarter ended March 31, 2026. Nick will review the financial results for the first quarter of 2026 followed by the company's outlook for the second quarter and the full year of 2026. We will then open the call for questions. Before we begin, I would like to remind you 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 and events to materially differ from those anticipated. You should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties, and factors that could cause results to differ appears in the press release of 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, we 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 US GAAP. The non-GAAP measures are presented as we believe that they provide 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, or as substitutes for, financial measures prepared in accordance with US GAAP. A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended March 31, 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 03/31/2026. These key performance indicators are presented for supplemental informational purposes only and 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 March 31, 2026 may obtain a copy by visiting the investor relations section of the company's website. In addition, management will be referring to the first quarter 2026 earnings presentation, which can be found in the Investor Relations section of the company's website under the Events and Presentations tab. Now I will turn the call over to Charlie.
Thank you, Erica. And thanks to everyone for joining us on our call today. 2026 was a robust quarter for Arteris, as we reached another record annual contract value plus royalties of $92.8 million, representing a 39% year-over-year increase. We also achieved record revenue, record royalties, and record revenue from new logos. Customer engagement in the quarter included both existing customer renewals as well as adding new logos. We won license deals in enterprise computing, automotive, communications, consumer electronics, and aerospace and defense sectors. AI integration into all types of electronics, from data centers to edge devices and physical AI systems, is increasing the demand for advanced connectivity and security products, and now two-thirds of our customer engagements are into AI chips. New chips and chiplets continue to get more complex and perform more advanced computing. Efficient, safe, secure data movement within those devices is essential, which is driving the growing adoption of Arteris products and solutions. Every semiconductor must move data to be a chip or chiplet. Rapidly advancing data movement powered by chips is evident in recent earnings releases by semiconductor companies. Many of these companies are also our Arteris customers and have both beaten their first quarter revenue projections and raised guidance for the year. This performance has clearly flowed through into our royalty stream, which has increased 67% year over year. Enterprise computing, which includes data centers and high performance computing or HPC, including high bandwidth memory (HBM) and other AI infrastructure companies, was again the biggest contributor to our licensing activity in the quarter. This includes a leading global hyperscaler, which expanded its use of our Arteris network-on-chip technology for its next generation of data center chips. Advanced AI data centers are experiencing strong demand for HBM, and I am pleased to say that another leading global memory supplier is now utilizing our Arteris system IP to accelerate their memory chip development. Automotive also continues to be a strong sector for us where our technology is helping to meet the needs of physical AI systems. An example was an important first quarter deal announcement with Renesas. That increased their licenses and deployed our system IP for their most advanced R-Car Gen5 SoC series, tailored for advanced driver assistance and automatic driving systems. This latest SoC delivers AI performance of up to 400 trillion operations per second, or TOPS, with multi-die chiplet extensions to boost AI performance using our Arteris network-on-chip technology for silicon data movement. In communications, where efficient, safe, and secure data movement is also playing an increasingly important role in transmitting data, particularly between data centers and edge and endpoint devices, in the first quarter, one of the leading European 5G and 6G communications equipment players further expanded the use of Arteris technology to accelerate the integration of advanced telecommunication chips. Satellites extend communications into aerospace and defense where the pace of innovation and development of advanced, resilient, safe, and secure semiconductors is growing rapidly. In the first quarter, a leading U.S. space infrastructure company expanded its use of Arteris for the development of next-generation space applications. Beyond Earth's orbit, it was a pleasure to see the success of the Artemis II mission where AMD chips with built-in Arteris technology were used to support critical sensor fusion, data routing, and image processing for the Orion spacecraft. This is yet another example of Arteris' use in data-intensive space exploration. We continue to see adoption of our FlexGen Smart NoC IP in major accounts and startups. We are also working with early adopters on two products for optimized chiplet and multi-die system IP, which we anticipate deploying in production during 2026 with focus on AI, HPC, and ADAS designs. We broadened our system IP portfolio, which addresses key aspects of advanced chip design, through the acquisition of Semifore, a leading chip cybersecurity company. This technology is critical to the security of chips regardless of their complexity. We are starting the process of leveraging our deep relationships with over 200 semiconductor design companies and are already seeing strong interest from many of these customers across many verticals, including data center, aerospace and defense, consumer, automotive, and communications. By way of example, a top-five U.S.-based hyperscaler, which is an existing Arteris customer, licensed Arteris security technology in the first quarter to help mitigate cybersecurity risks. The ever-increasing focus on cybersecurity threats is highlighting the need for our solutions, which identify and help mitigate cybersecurity vulnerabilities during the chip development phase, before silicon mass production. We recently announced a collaboration with MIPS to accelerate the development of physical AI chips. MIPS will use Arteris FlexGen Smart NoC IP and Magillem SoC integration automation software to help accelerate the development of scalable SoC platforms targeting high-growth markets in physical AI including automotive microcontroller units (MCUs), advanced driver assistance systems (ADAS), robotics, and embedded computing. Lastly, Arteris was named to Fast Company's list of the world's most innovative companies of 2026. Arteris ranks number four in the Most Innovative Companies in the North America category. This year's list shines a spotlight on businesses that are shaping industry through their innovations. Arteris joins the ranks of Google, NVIDIA, Anthropic, and more in Fast Company's 2026 list of the world's most innovative companies. Arteris also won a Stevie Award for 2026 Technology Innovation of the Year in the Software category for our semiconductor cybersecurity products. On an organizational front, today, we also announced that Nick Hawkins, our CFO, has chosen to retire effective August 31, 2026. Nick will take us through our Q2 report and continue to serve as an adviser to Arteris after his retirement date to facilitate an orderly transition. Nick leaves the company in great shape, with no debt, positive free cash flow, and major contributions to three acquisitions. Nick has been an invaluable partner during a transformative period for Arteris. We thank Nick for his dedication to the company and wish him all the best. With that, I will turn it over to Nick to discuss our financial results in more detail.
Thank you, Charlie. Good afternoon, everyone. It has been a rewarding and enjoyable experience to help lead Arteris through an important stage in its development. I am proud of the exceptional finance team we have built and what the company has accomplished. During my seven years at Arteris, in addition to leading the company through its IPO, I have also led our M&A processes, including the important recent acquisition of the cybersecurity company, Semifore. Arteris has grown substantially in revenue and market capitalization, is now cash flow positive, and is transitioning to profitability this year. It has been a privilege to serve under Charlie and our excellent board alongside our industry-leading leadership team and all our people. Arteris is well positioned for the future, and I look forward to following the company's continued progress in the years ahead. As I review our first quarter 2026 results today, please note I will be referring to GAAP as well as non-GAAP metrics. Please note also that a reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website. Also, a reminder, I will be referring to the 1Q 2026 earnings presentation, which can be found in the Investor Relations section of the company's website under the Events and Presentations tab. We had a strong first quarter, beating the top end of our revenue and ACV plus royalties guidance and meeting the top end of our non-GAAP operating income guidance range. Turning to Slide 5 of the presentation: total revenue for the first quarter was $22.9 million, up 39% year over year and above the top end of our guidance range. Notably, trailing 12-month royalties were $7.9 million, 67% higher year over year, setting a new record high. Our royalty stream today is fueled by a balanced mix of customers across all our vertical markets, and our large royalty reporters, which we define as reporting more than six-figure dollars per quarter, are in automotive, consumer, enterprise computing, and aerospace and defense. The number of customers reporting quarter-million-plus royalty dollars has grown from one a year ago to three currently, further highlighting our rapidly diversifying and growing royalty revenue stream. At the end of the first quarter, ACV plus royalties was $92.8 million, up 39% year over year, above the top end of our guidance range and at a new record high. Remaining Performance Obligations, or RPO, which is our contract future revenue at the end of the first quarter, totaled $118 million, 33% higher year over year and another record high for Arteris. We expect just over half of our RPO at the end of the quarter will be recognized as revenue in the 12 months starting April 1, 2026. Non-GAAP gross profit in the quarter was $20.1 million, representing a gross margin of 87%. GAAP gross profit in the quarter was $19.7 million, representing gross margin of 86%. This now reflects, for the first time, the inclusion of subcontractor costs as cost of revenue for certain security government contracts. Now moving to Slide 6: non-GAAP operating expense in the quarter was $22.6 million. In line with our operating leverage goals, we are maintaining our commitment to limit overall growth in operating expense to 50% of our revenue growth. We believe that our investments into product development and customer success will help to accelerate our top-line growth in the coming years. At the same time, we are delivering operating leverage which is being driven across all cost categories, and we remain disciplined in our spending and investments, in particular in G&A spending, which has on average grown at less than one-third of the rate of revenue on a non-GAAP basis over the last three years. This has resulted in a 31 percentage point improvement in non-GAAP operating margin over that period. Total GAAP operating expense for the first quarter was $29 million which included acquisition-related expenses of $600 thousand in the first quarter. Non-GAAP operating loss in the quarter was $2.5 million at the top end of our guidance range. GAAP operating loss for the first quarter was $9.3 million compared to a loss of $7.7 million in the prior year period. Non-GAAP net loss in the quarter was $1.2 million or diluted net loss per share of $0.03. GAAP net loss in the quarter was $8.0 million or diluted net loss per share of $0.17. Moving to Slide 7 and turning to the balance sheet and cash flow: we ended the quarter with $41.9 million in cash, cash equivalents and investments, and we have no financial debt. Free cash flow, which includes capital expenditure, was negative $7.4 million in the first quarter, including approximately $3 million of deal consideration elements and fees related to the Semifore acquisition that closed in the quarter. I would now like to turn to our outlook for the second quarter and the full year 2026 and refer now to Slide 8. First, starting with the next quarter, we will no longer be guiding quarterly free cash flow. As our average deal size continues to grow, we believe that the consequent fluctuations in quarter-to-quarter operating cash flows make the guidance of this KPI less helpful to investors. Additionally, on an annual basis, we are already free cash flow positive, having delivered that in 2025 and guiding increased positive free cash flow for 2026. This was our first strategic financial objective. We are now focused on delivering our next strategic financial objective: the inflection to non-GAAP profitability towards the end of the current year. For 2026, we expect ACV plus royalties of $95 million to $99 million, revenue of $23 million to $24 million for Q2, non-GAAP operating loss of $3 million to $2 million and free cash flow of positive $2 million to positive $8 million. As we look forward to the full year of 2026, we are seeing continued strength in semiconductors and signs of an upward trend cycle in the market. Consequently, we are raising our guidance for the full year on top- and bottom-line metrics. For the full year 2026, our guidance is as follows: ACV plus royalties to exit 2026 at $102 million to $106 million, an increase of $2 million from prior guidance; revenue of $91 million to $95 million, $2 million higher than prior guidance and representing a 32% year-over-year increase at the midpoint; non-GAAP operating loss of between $8.5 million to $4.5 million, an improvement of $500 thousand from prior guidance; and non-GAAP free cash flow of positive $5 million to positive $9 million. We are seeing a strong start to the second quarter, with momentum and increasing customer engagement leading us to believe that we will see continued strength in the second half of the year, building on our strong revenue growth, coupled with carefully focused expense discipline, that is delivering operating leverage. We continue to believe that Arteris is on a path to profitability, and we expect to report a non-GAAP operating profit for a period as early as the fourth quarter of the current year. With that, we will turn the call back to the operator for the Q&A portion of the call.
Questions and answers
Thank you. Ladies and gentlemen, we will now begin the question and answer session. On your touch tone phone, you will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by the number two. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Kevin Cassidy of Rosenblatt. Please go ahead.
Thanks for taking my question. Congratulations on the great results. And, Nick, congratulations on a successful career and all the best as you go through the next stage. My question: on the hyperscaler design win and also the high bandwidth memory, what is the timeline of those products coming to market or generating royalties? I'm trying to get a feel: is there an acceleration in any of these hyperscaler ASICs or any of these developments?
Kevin, this is Nick. Let me handle the royalties part of that question. Generally speaking, the design cycle in that space is a little bit quicker than you would expect in, say, automotive, which is quite a long design cycle and can be up to six years in some cases. In this sphere, it is more like two to three years that we would expect to see something flow through from design to royalty recognition.
And same with the high bandwidth memory?
Several, yes.
I mean, those are all going into data center AI, and those are basically some of the quickest design cycles that we see. But also the volumes are actually more significant than they used to be in the past. These products have a much faster churn than, like Nick said, automotive, for example. They ramp quicker, and they also decline quicker.
That was my question about the life cycle of the products as they come to the market. Also, I would imagine as they go down the process to smaller process nodes the price of the products goes up, so your overall royalties could be increasing compared to the past generation?
Yeah.
At least these tend to be high-priced chips.
Right. Getting more expensive. Okay. Great. Thank you.
Once again, if you wish to ask a question, please press 1 to join the queue. Your next question comes from the line of Joshua Buchalter of TD Cowen.
Congrats on the results and, more importantly, best wishes and a big thank you to Nick on your next endeavor. I guess, to start, maybe big picture: as we think about the raise of the annual guidance, how much of this would you categorize as coming from the better royalty environment that you spoke to just from better chip sell-through versus confidence in licensing deals that you expect to sign over the next several quarters? Thank you.
So let me take that one, Charlie. Joshua, thanks for your kind words. Philosophically, we tend to be careful on our guidance. We are very mindful of guiding our friends on the street diligently, and so we do not like to get over our skis on guidance. But we are seeing a very strong trajectory in royalties: the trailing 12 months was up 67%, and actually year-over-year first quarter was up over 100%. So we are seeing a nice pickup there, and we are seeing more people reporting bigger and bigger numbers. That is part of it. I would categorize the first quarter as robust from a deal flow perspective in dollars. The start to the second quarter was very strong: we actually had the strongest April on record in terms of deal flow by a significant margin—about four times bigger than the next biggest April we've ever seen. So we are seeing a lot of activity and a really strong pipeline on deals. We want to wait until we are a little further through the quarter to see if this robustness continues and persists before we look at future guidance.
Okay. Thank you for all the color there. Then maybe following up on some of Kevin's questions earlier: you have been highlighting some pretty sizable hyperscale data center wins, I think, with FlexGen but other IP over the last few quarters. How should we think about the scale of data center overall compared to your historic auto exposure? Given it moves faster, as you mentioned, what is a reasonable time frame at which that could be a more meaningful portion of overall revenue in the model? Thank you.
The data center segment from a license perspective is growing very nicely. On the royalty side, because data center chips are higher priced but volumes are lower, we expect automotive to continue to be a pretty solid royalty generator. But on the license side, we are definitely seeing solid growth from our data center customers.
If I can add quantitatively, enterprise, which is where our data center business resides, is now the largest of our verticals in terms of license generation. It is now slightly higher than automotive, which used to be the number one. They are both in the sort of 30% to 35% range. What is interesting is aerospace and defense is now, partially as a result of the addition of security, close to 10% of our ACV. So it is an interesting developing field.
Thank you for the color, both.
Once again, if you wish to ask a question, please press 1 to join the queue. We have a follow-up question from Kevin Cassidy of Rosenblatt. Please go ahead.
Thanks for taking my follow-up question. Just on the Semifore acquisition and now that you have had them for a quarter or so, can you say is it coming in better than expected, or does the outlook change? What does the pipeline look like from here?
We have really just started integrating Semifore in January, so it is early days. There were some pretty good government orders in flight which we closed, so that is very promising. For the second quarter, we are starting to see some very promising deals from the commercial side. We think this acquisition is going to turn out well. Cybersecurity, because of the MIPS collaboration and other AI-based technologies, is coming to the forefront and we think that all of our customers—more than 200 of them—can use the Semifore product. So we are very excited about the potential; it looks promising, but it is relatively early days.
Okay. Thank you.
There are no further questions at this time.
Well, thank you for joining our call today and for your interest in Arteris. We look forward to meeting with you and updating you on our business progress in the quarters ahead, and seeing some of you at various investment conferences. Thank you for your support.
Ladies and gentlemen, this concludes today's conference call. Thank you, everyone, for joining. You may now disconnect.