Prepared remarks
Good afternoon, everyone, and welcome to the Arteris Second 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 would now like to 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 Karel Charles Janac, Chief Executive Officer, and Nicholas Bryan Hawkins, Chief Financial Officer. Karel will begin with a brief review of the business results for the second quarter ended 06/30/2026. Nick will review the financial results for the second quarter 2026 followed by the company's outlook for the third 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 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 then 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 U.S. GAAP. The non-GAAP measures are presented as we believe that they provide investors with the means of evaluating and understanding how the company, 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 06/30/2026. 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 06/30/2026. 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, investors. Listeners who do not have a copy of the press release for the quarter ended 06/30/2026 may obtain a copy by visiting the Investor Relations section of the company's website. In addition, management will be referring to the second 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 Karel.
Thank you, Erica. And thanks to everyone for joining us on our call today. The Arteris second quarter of 2026 produced multiple record-breaking results. We reached another record annual contract value plus royalties, exiting the quarter at $99.5 million, representing a 44% year-over-year increase. We achieved record revenue, royalties, and RPO backlog. License deal flow in the quarter was driven by several large deals with existing and new customers. These wins spanned all key verticals led by growth in enterprise computing and automotive, followed by aerospace and defense, communications, consumer electronics, and industrial markets, for various types of semiconductors, including chiplets, system on chip or SoCs, application specific integrated circuits or ASICs, field programmable gate arrays or FPGAs, and microcontrollers. Further to our diversification strategy, no single customer made up more than 10% of our revenue in the first half of 2026. Our customer design activity was healthy again in the quarter, with a trailing 12-month to 06/30/2026 our customers reported a 21% higher number of design starts year over year. Rapidly evolving high performance computing or HPC workloads continue to drive demand for more complex chips and chiplets across data centers, smart edge devices, and physical AI systems. This in turn is increasing the demand for Arteris products that help deliver the underlying high performance, efficient, safe, and secure data movement essential to semiconductors in the AI era. In the second quarter of 2026, the majority of our customers' design starts supported AI or HPC use cases as part of the device, and this trend is continuing. Data center chip and chiplet development continues to be a key revenue driver for Arteris. Over the past four quarters, enterprise computing has made up an average of 29% of our ACV plus royalties, with AI infrastructure representing some of the biggest deals in the second quarter. As an example, one of the world's largest hyperscale cloud companies has chosen to adopt and standardize on Arteris's infrastructure silicon system IP. Arteris technology will enable the high performance and energy-efficient semiconductor data movement for the next generation of data centers. Large scale compute must adapt quickly for rapidly evolving software workloads that require ASICs, SoCs, and chiplets with interconnect that can support the throughput, bandwidth, and power requirements, making Arteris the obvious choice for scale-up and scale-out architectures. Another example of Arteris' progress in data center applications was a large win with one of the top U.S. semiconductor design houses building ASICs for various hyperscalers, where Arteris FlexGen SmartNOC IP is increasingly being used with the underlying data movement in chiplets and multi-die chips to support high-end scale-up AI compute. Additionally, we announced that Speedata, developer of the purpose-built analytics processing unit or APU, has deployed Arteris in its Callisto processor that runs large volume analytics processing for applications which require high-bandwidth capable chips, often in data centers. Physical AI from automotive to aerospace and defense, along with industrial applications such as robotics, continues to experience strong and growing demand for Arteris products and solutions. Here, performance, energy efficiency, safety, security, and proven reliability are essential for foundational semiconductors. Li Auto, a leader in China's new energy vehicle market, has successfully deployed its in-house designed autonomous driving chips in their L9S SUV model. Multiple chips designed with Arteris are used in each vehicle and run 2.56 thousand trillion operations per second, or TOPS, to effectively and safely perform autonomous driving and other advanced driving tasks. As customers take deliveries of these vehicles, we are starting to see initial royalty contributions. Another example is Cycuity, a provider of advanced automotive chips, selecting Arteris for its next generation SoC platforms with the intelligent cockpit, advanced driver assistance applications, and AI cockpit drive fusion solution with high performance and functional safety requirements. On the product side, we are seeing equally strong momentum with customer adoption of new technologies. Following the acquisition of Cycuity earlier this year, which provides semiconductor cybersecurity assurance, we recently announced an expanded partnership with Arm. The hardware security assurance technology is already in use by Arm during the design phase of selected CPUs. Moving forward, Arm engineering teams are expanding their adoption of this security technology across additional next generation processors to help identify and mitigate potential security weaknesses and vulnerabilities supporting the delivery of robust and resilient CPUs. We are honored to be supporting Arm's leadership in the application of cybersecurity hardware assurance for safer CPU hardware. We see similar cybersecurity hardware assurance opportunities with other IP suppliers, semiconductor companies, and system houses building silicon for applications ranging from AI infrastructure to mission-critical applications where cybersecurity is rapidly moving from a 'should' to a 'must' technology, accelerated by rapid development in frontier AI models and growing sets of required standards and regulations. On the NOC IP front, the number of FlexGen SmartNOC customers continues to grow as customers are increasingly seeing the value in automation and wire-length efficiency which helps reduce power that Arteris SmartNOC IP offers. In the first half of 2026, we closed multiple seven-figure deals for FlexGen with major semiconductor customers. On the ecosystem front, we announced a collaboration with iCLINK by IMEC, which is IMEC's service provider for high-end ASICs and silicon photonics. Arteris technology will be deployed as part of their ongoing efforts to accelerate and simplify the development of next generation HPC chiplets and ASIC chips. Our customers continue to innovate in exciting high growth areas. All of these require a combination of high performance, energy efficiency, safety, and security. Overall, Arteris continues to be in a strong position to support growing semiconductor applications in the AI era across data centers, edge devices, and physical AI systems, helping customers to innovate and develop the next generation of silicon chips and chiplets with our technology. I am happy also to announce that we have completed our ATM program, raising $72 million to support our ability to invest in industry-leading system IP products, global customer support, and additional tuck-in acquisitions. As previously announced, Nick Hawkins will be retiring following a distinguished tenure as our CFO. Nick helped lead Arteris through its successful IPO, built an excellent finance organization, delivered at or above financial guidance on nearly all financial metrics, and was instrumental in achieving positive free cash flow while laying the foundation for near-term non-GAAP profitability. I am very grateful for his leadership and contribution to Arteris over the years, and wish him the best in the next chapter of his life. I am pleased to share that Sarab Sinha will join Arteris as our new CFO starting on September 8, 2026. Sarab comes to us from EVA Technologies where he was instrumental in taking the company public on Nasdaq and in managing financial operations, capital allocation, and investor relations. We expect a smooth transition and remain focused on executing our strategy, meeting our customers' growing needs, and delivering shareholder value. With that, I want to again thank Nick for having been an invaluable partner, and I will turn it over to him one last time to discuss our financial results in more detail.
Thank you, Karel. Good afternoon, everyone. As Karel mentioned, this is my final earnings call for Arteris, and I am delighted to be handing over the reins to Sarab next month. I have absolute confidence that he will continue the solid financial stewardship of the company, and he will be supported by our exceptional global finance team. This has been a great and enjoyable journey, and together, we have delivered many remarkable achievements that have benefited our stockholders and our people. As I review our second quarter results for 2026 today, please note I will be referring to GAAP as well as non-GAAP metrics. Please also note that a reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website. Also, as a reminder, I will be referring to the 2Q26 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 second quarter, beating the top end of our guidance for revenue and ACV plus royalties. Non-GAAP operating income was impacted by unexpectedly high employer payroll taxes related to French employee RSU vesting, which totaled $1.7 million in the quarter. This increased expense was driven by a much higher stock price during the June quarter. Turning to Slide 5 of the presentation. Total revenue for the second quarter was $24.1 million, up 46% year-over-year, and above the top end of our guidance range. Notably, trailing 12-month royalties was $8.6 million, 65% higher year-over-year, setting a new record high. Royalties continue to show strong growth, driven by a healthy mix of customers across all of our verticals, and with exciting new royalty streams coming online every quarter. At the end of the second quarter, ACV plus royalties was $99.5 million, up 44% year-over-year, above the top end of our guidance range—once again, a new record high. Remaining performance obligation, or RPO, which is our contracted future revenue at the end of the second quarter, totaled $135 million, another all-time high for Arteris. We expect just over half our RPO at the end of the second quarter will be recognized as revenue in the period starting July 1, 2026. Non-GAAP gross profit in the quarter was $21 million, representing a gross margin of 87%. GAAP gross profit in the quarter was $20.5 million, representing a gross margin of 85%. A reminder that our 2026 gross margin now reflects 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 $25.5 million. Our OpEx was slightly above trend as a result of the RSU-driven payroll taxes that I mentioned earlier, together with higher commissions resulting from a very strong deal-flow quarter. As a reminder, our long-term operating leverage model is to limit our OpEx growth rate to approximately half our revenue growth rate. We continue to believe that our investments into product development and customer success will help to accelerate our top-line growth in coming years. Total GAAP operating expense for the second quarter was $34.4 million, which included acquisition-related expenses of $2.2 million. Non-GAAP operating loss in the quarter was $4.6 million. GAAP operating loss for the quarter was $13.9 million. Non-GAAP net loss for the quarter was $4.7 million, or a diluted net loss per share of $0.10. GAAP net loss in the quarter was $14.1 million, or diluted net loss per share of $0.30. Moving to Slide 7 and turning to balance sheet and cash flow. We ended the quarter with $123 million in cash, cash equivalents, and investments, and we have no financial debt. The overall $81.6 million increase in cash, cash equivalents, and investments in the quarter was driven by the successful ATM execution which raised approximately $72 million of net proceeds at an average price of over $35, coupled with $8.6 million positive free cash flow in the second quarter which brought the trailing 12-month free cash flow to positive $6.8 million. I would now like to turn to the outlook for the third quarter and the full year 2026, and refer now to Slide 8. For the sake of clarity, non-GAAP operating loss guidance for the third quarter and the full year takes into account the higher run rate of French employer payroll taxes on RSU vesting. For the third quarter, we expect ACV plus royalties of $99 million to $103 million, revenue of $24 million to $25 million, and a non-GAAP operating loss of between $3 million to $1 million. As a reminder, we are no longer guiding quarterly free cash flow. As we look forward to full-year 2026, we are seeing continued strength in semiconductors and signs of an upward trend in the cycle in the market. Consequently, we are raising our full year revenue guidance. For the full-year 2026, our guidance is as follows: ACV plus royalties to exit 2026 at $102 million to $106 million; revenue of $95 million to $98 million, an increase of $3.5 million from prior guidance and representing a 37% year-over-year increase at the midpoint; non-GAAP operating loss of between $10 million and $7 million; and non-GAAP free cash flow of between positive $5 million to positive $9 million, unchanged from prior guidance. We are seeing a strong start to the third 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, I will turn the call back to the operator for the Q&A portion of the call.
Questions and answers
Your first question comes from Kevin Garrigan from Jefferies. Please go ahead.
Yeah. Hey, Karel and Nick, congrats on the great results. And Nick, great working with you. Hope you enjoy your retirement. Hey, can you talk more about the expanded partnership with Arm on Cycuity? Should we think about it as a licensing deal and then get royalties? And did that displace a competing solution, or was this a greenfield opportunity?
So it is a greenfield opportunity. There is not actually a whole lot of commercial solutions for what Cycuity does. Essentially, what Arm is using it for is to identify potential weaknesses in high-end and midrange CPU designs. Right? And basically, they are taking a leadership position about making the designs that they deliver to their customers have a significant amount of hardware security assurance. So it is a greenfield opportunity. There are opportunities for expansion. And we think that other processor companies should be taking the lead of Arm in deploying cybersecurity hardware assurance solutions. I would also like to thank Arm that they allowed us to announce it because security has a significant number of very impressive customers, but people tend to be secretive about security, so Arm was very nice to let us announce it.
Hey, Kevin. I just want to chip in. You said that Karel was retiring. I know that was a slip of the tongue, and I just want everybody else who might be listening to know that Karel is not retiring. It is me who is retiring.
Yeah. I apologize for that. It's been a long week so far. My fault. And then, I guess, going off that, does the addition of Cycuity allow you to negotiate a higher royalty rate with customers?
No. So Cycuity, at least so far, has been a non-royalty-bearing sort of software EDA-type model. In the future, there are opportunities between the network on chip and security to actually not only identify cybersecurity weaknesses, but also to fix them. So there might be some opportunities there. But right now, it is a non-royalty-bearing product.
Okay. Perfect. Thanks, guys. And Nick, enjoy your retirement.
Thank you, Kevin. Been a delight working with you for over the last several years.
Your next question comes from Joshua Buchalter from TD Cowen. Please go ahead.
Hey guys, thanks for taking my questions, and let me echo the congrats to Nick on retirement and say thank you for all the work over the years and also Karel, thank you for staying with us. Maybe to start, you called out the U.S. design house win for an ASIC platform, I think using for chiplets and multi-die offerings. Can you elaborate on, is this a new customer and maybe speak to what type of applications and maybe timeline to materiality for this to be a revenue contribution? Thank you.
It is not a new customer, but it was a very small customer, or relatively small customer prior to this. Essentially the hyperscalers are employing a number of different business models. They buy commercial chips from Intel and maybe Arm in the future. They are building accelerators themselves and they are also working with partners to build chips to their specification. This large semiconductor company, one of their strong product lines is that they build chips for hyperscalers, and after an extensive evaluation, they decided to use Arteris for fulfilling those designs. That is a data center hyperscaler application.
Got it. Okay. Thank you for that, Karel. And then maybe to follow up, I thought the Li Auto announcement was interesting as well, especially given it is for an in-house autonomous driving chip. Any way you can size this opportunity and maybe how big China auto is overall within your royalty portfolio? How big it can be over the next couple of years? Thank you.
I will defer to Nick on the royalty question. But we have a strong presence in the China automotive market and also with China automotive OEMs. Li Auto is just one of the opportunities that we are pursuing or have pursued. This has been underway for a while, and they are starting to ship their system in actual cars. But as far as the royalty percentage in China, Nick, do you want to take that one?
Sure. Hi, Joshua. So yes, Li Auto is a midsize Chinese EV company. Their volumes can be meaningful and they are growing, so we are delighted that they have started to send checks so rapidly. It is a feature of the Chinese automotive market. As far as how far it can go, the jury's out on that — we will have to wait and see. Typically, if you go back to any automotive royalty stream that we have seen in the past, you typically see a ramp over the first three years. Not necessarily totally even, but there is a ramp over the first three years, and then it plateaus for a large number of years. You will know that, for example, the Chinese automotive market has swung very heavily towards EVs as part of their electrification strategy as a country. So this is something that we are watching very carefully, and I am sure my successor, Sarab, will be keeping a close eye on that.
Got it. Thank you both.
Your next question comes from Martin Yang from Oppenheimer. Please go ahead.
Good afternoon. Thank you for taking my question. First, Nick, I hope you have a very satisfying retirement. It has been a pleasure working with you through different companies over the years. First question is on OpEx: the change in the annual guidance relating to profitability — is the bulk of that change related to the payroll tax increase or is there any additional OpEx increase?
Yeah, Martin. So you are absolutely right. The majority of that decrease in non-GAAP operating loss guidance — the $2 million decrease — is, as you rightly say, the French employer payroll taxes on RSU vesting. We had a — maybe we should have seen this coming, but we did not. We had a very large spike in the stock price during the June quarter, and it is tax that is levied based on the prevailing price at the date of vesting. So it is completely exogenous to us, outside of our control. There are a couple of other things. We have had, as you saw, a lot of success and we are guiding up on the revenue front. A good portion of that is coming from Cycuity, and a lot of that is coming from government work. Government work, as you know, carries a much lower gross margin than traditional commercial business. So those are the two big levers that have led us to that. There is also an element of this which is, again, a victim of our own success because our deal flow is so strong. This also affected the second quarter — our sales commissions and FAE commissions are significantly higher than we thought when we had that lower guide on revenue.
Next question regarding royalty and cadence of royalty. This quarter royalty has a very slight dip. Maybe give us the outlook on how the royalty revenue would trend into the second half or into 2027. Thanks.
Great observation, Martin. I would characterize it more that the upward trajectory is slightly slower than in a sequential quarter compared to last quarter and the quarter before. There are a couple of things to bear in mind. Royalties do go through slight ups and downs. We remember we saw a dip in the March quarter of 2024 when one customer had an overstocked channel and had to reduce inventory levels, which caused lower shipments in the March quarter and the June quarter. These things can happen. There was one of our customers — I cannot mention who — who had some logistical and supply chain issues and that held back one quarter's worth of shipments, but that has come back on stream. So it is a pause, not a structural change. If you look at the last 12 months to June 30, that is still up 67% year-over-year even with that little dip, and that is still well above our long-term CAGR that we have discussed. Regarding 2027 and the longer-term trajectory: our long-term guide on royalties CAGR growth rate is the high-thirties to low-forties percent. That is what we have said in the past. Clearly, we are traveling at a faster rate than that today — we are at 67% on a trailing 12-month basis. I do not want you to assume that that rate can carry on indefinitely, so I am sticking, at the moment, with the high-thirties to low-forties percent CAGR. We can revisit that if we see sustained robustness in royalties and success; we will reassess in coming quarters.
Thank you. I appreciate the color.
Your next question comes from Suji Desilva from Roth Capital. Please go ahead.
Hi Karel, hi Nick. Congrats on the results here. And Nick, best of luck with the transition. On the deal activity, strong in the quarter. Maybe you can talk about the areas that you are seeing the strongest growth outside of your core auto and AI data center, just to understand where some of these other areas might be inflecting earlier.
Yeah. It has been a pretty broadly distributed sort of growth and deal flow. Data center has sort of taken the lead because there is a lot of investment in data center. We think that some of that may change a little bit, but AI is going to be everywhere. As the cost of AI comes down a bit, people are going to need more and more chips. So we think that whatever happens with data center investment is not going to have a major effect on us. We are also seeing strong action in microcontrollers, automotive, some embedded FPGA business, and the space business continues reasonably well. For the first half, for the first time in six months, no one was more than 10% of our license revenue in the first half of 2026, so we are well distributed.
Can I just add a couple of things to that, Suji? The two other areas that are interesting to note in terms of strong deal flow: one was Cycuity, which had a very solid quarter, and there are consequences to that — you probably saw it as a $2.2 million GAAP OpEx charge in the quarter because we had a more robust view in terms of the lack of them hitting their full earn-out target, which is good news. Secondly, we are seeing some very interesting strength in some of the memory players, and that ultimately is data center related, but there has been solid deal flow from them.
Very interesting. And then my other question is on the data center ASIC customer in particular. Maybe you can talk about where those customers were hitting a breaking point where they cut over to you guys and what they were using in the past. Was it an in-house solution? Just to understand the cutover and maybe the reasons for it. Thanks.
So the hyperscalers are a specific type of customer. Their goal is not to make everything in-house. They keep buying from Intel, AMD, and some ARM-based solutions in the future. They are building accelerators themselves and sometimes they outsource to partners. Our observation is they understand the workloads that they are dealing with through the data center better than anyone else, and sometimes they are reluctant to share information about how those workloads behave and what those specifications are. They do a lot of workload-acceleration ASIC work in-house and also work with large design partners to build to their specifications. They are going to maintain a balance between those approaches rather than go exclusively one way or the other.
Okay. Thanks, Karel. Thanks, Nick.
Ladies and gentlemen, your next question comes from Madison de Paola from Rosenblatt. Please go ahead.
Hey, guys. Calling on behalf of Kevin Cassidy. Thanks for taking my question. How do you expect physical AI products' production cycle to compare to data center and automotive life cycles for driving royalty revenue?
To us, the physical AI chips look very much like automotive because you need functional safety and you need security. When mechanized systems interact with human beings, those scenarios have to be handled. So the functional safety and the cybersecurity assurance capability we have are going to play very well in the physical AI space. But the design cycles we think will be significantly faster in robotics than they will be in automotive. Because you have functional safety and security involved, those design cycles will be slower than you see in data center where people come up with a workload that may be worth significant revenue and they want a chip extremely fast. So you are going to have the fastest cycles in data center workload accelerators, physical AI will be somewhere in the middle, and automotive will be among the longest design cycles.
Okay. Thank you.
And there are no further questions at this time. I will turn the call back over to Karel for closing remarks.
Well, thank you for joining us on our call today. We really appreciate your interest in Arteris. We are very excited about our business and we look forward to meeting and updating you on our business progress in the course ahead. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.