Good afternoon, everyone. And welcome to the Arteris First Quarter 2023 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 Incorporated 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 first quarter ended March 31, 2023. Nick will review the financial results for the first quarter, followed by the company’s outlook for the second 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 federal securities laws. These statements 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 actual 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, we will see 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. These non-GAAP measures are presented as we believe they provide investors with the 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 March 31, 2023. In addition, 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 March 31, 2023. Listeners who do not have a copy of the press release for the quarter ended March 31, 2023, may obtain a copy by visiting the Investor Relations section of the company’s website. Now I will turn the call over to Charlie.

Thank you, Erica, and thanks to everyone joining us on the call this afternoon. We are excited to report a solid start to 2023 with annual contract value plus trailing 12-month royalties of $54.8 million, up 20% year-over-year when adjusted to exclude HiSilicon and DJI, as discussed in previous calls and up 5% sequentially. We continued our growth into 2023 with the addition of seven new customers and 22 confirmed design starts in the first quarter. Deals in the first quarter were driven by strong demand for Arteris products across our core market segments and led in particular by design wins in automotive and enterprise computing. Royalty revenue in the quarter was primarily driven by automotive, followed by consumer electronic products. An element of Arteris's strategy is to service both semiconductor and system companies. This continues to yield positive results. With the added focus on the broader automotive supply chain including OEMs and following last year’s ARM automotive partnership, we are pleased to report that in the year-to-date, Arteris has secured four OEM design wins, including three new car companies across the U.S., Europe and APAC. These new relationships demonstrate Arteris's ability to engage across the broader global automotive supply chain. This is important as establishing direct relationships with auto manufacturers can create additional opportunities for those car companies to encourage their own supply chains to leverage Arteris technology as well. Advanced SoCs require best-in-class network-on-chip technology for low power and safe connectivity. So we remain excited that Arteris products continue to be the leading choice for innovative solutions in the automotive SoC market. AI and machine learning also continue to be strong growth drivers for Arteris. New advanced AI electronics tend to require and benefit from network-on-chip IP and SoC integration automation. In the first quarter, Arteris closed numerous global AI and machine learning customer deals across various vertical markets driven by strong demand for Arteris technology. One of those notable AI wins in the Americas was Tenstorrent for enterprise computing applications. Tenstorrent develops our AI high-performance computing and data center RISC-V SoCs and chiplets. The Tenstorrent team extensively evaluated Arteris Ncore cache coherent interconnect IP and selected it for the next-generation products, along with our FlexNoC non-coherent interconnect IP. This is an example of Arteris's ability to support AI high-end computing and the emerging RISC-V ecosystem. Another design win in the quarter was a selection of Arteris by ASICLAND, an APAC-based ASIC design house. Arteris system IP products will be deployed in ASICLAND’s AI chips for automotive, enterprise computing and edge computing applications for consumer and industrial markets. Another design win in the AI space was Axelera AI, a European provider of advanced solutions for edge computing, with Arteris products used to accelerate Computer Vision at the Edge. Arteris was chosen for its ability to enable Axelera AI engineers to meet performance, ultra-low power and time-to-market objectives in its Metis AI Platform. The emerging generative AI technology is opening another potential future application for Arteris products. While promising, generative AI is quite computationally expensive with query costs over 10 times higher than heuristic search algorithms. Arteris anticipates that there will be an increase in AI and machine learning hardware design activity in an effort to lower the computation costs of processing the large language models. With Arteris already designed in over 150 different machine learning chips, the generative AI ASIC and accelerator activity presents another exciting potential future opportunity for our company. Turning to our product portfolio, we are very excited about both our new FlexNoC 5 innovation and the Semifore acquisition that we discussed last quarter. Over the last several years, as semiconductor manufacturing process nodes have progressed, the associated physical effects have begun to impact how engineers design SoCs, including causing multiple iterations of physical layout network-on-chip connectivity, which in turn impacts project schedules. To address this growing challenge for customers, in February, we announced FlexNoC 5 Physically Aware Network-on-Chip IP with unique and patented technology. We are happy to report that we have delivered a feature-complete early access version of FlexNoC 5 to multiple customers. We anticipate being able to ship a full production release in the second quarter of 2023 with a positive impact on our revenue and ACV growth forecasted in the second half of 2023. Expanding the Arteris product portfolio in the first quarter, we announced the acquisition of Semifore, a leader in hardware/software interface technology. The addition of Semifore complements our Magillem Connectivity and Register Management technology, allowing Arteris to provide a more comprehensive SoC integration solution. Together with our NOC interconnect IPs, Arteris is now able to provide a complete solution, helping to increase chip design performance, power efficiency and productivity, while improving the customer’s overall SoC design economics from reducing product schedules to lowering the risk of costly redesigns. Macroeconomic uncertainties and global recessionary concerns continue to create headwinds. We also continue to be impacted by the U.S. BIS regulations with respect to U.S.-China trade, as well as tightening credit conditions in the U.S.A., which may affect our smaller start-up customers. 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, enterprise computing, consumer electronics and AI across all applications, driving the needs for increased use of commercial system IP. With that, I will turn it over to Nick to discuss our financial results in more detail.

Thank you, Charlie, and good afternoon, everyone. As I review our first quarter results today, please note, 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. Total revenue for the first quarter was $13.2 million, up 12% year-over-year and 17% sequentially. At the end of the first quarter, ACV plus trailing 12-month royalties and other revenue was $54.8 million, up 20% year-over-year when adjusted to exclude HiSilicon and DJI, as Charlie mentioned. Gross profit in the quarter was $12.0 million, representing gross margin of 91%. Non-GAAP gross profit in the quarter was $12.1 million, representing gross margin of 92%. Total operating expense for the first quarter was $20.8 million, compared to $17.4 million in the prior year period. Non-GAAP operating expense in the quarter was $17.7 million, compared to $15.1 million in the prior year period. This increase was primarily driven by a combination of continued investment in next-generation products, together with increased investment in sales and marketing to drive product awareness and strong engagement with customers and strategic partners. Additionally, we have continued to achieve significant operating leverage in G&A expense. Operating loss for the first quarter was $8.8 million, compared to an operating loss of $6.6 million in the prior year period. Non-GAAP operating loss was $5.6 million or 42%, compared to a loss of $4.2 million in the prior year period. Net loss for the quarter was $9.0 million or diluted net loss per share of $0.26. Non-GAAP net loss in the quarter was $5.8 million or diluted net loss per share of $0.17 based on approximately 34.6 million weighted average diluted shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $63.4 million in cash, cash equivalents and investments. Cash flow used in operations was approximately $8.4 million in the quarter, driven predominantly by timing of payments from customers, which contributed to our stronger results in the fourth quarter of last year. Free cash flow, which includes capital expenditure, was approximately negative $8.5 million, in line with our prior guidance. As we discussed in our prior call, our expectation is that free cash flow will normalize to break even over the remaining three quarters of 2023 taken as a whole. I would now like to turn to our outlook for the second quarter and full year 2023. For the second quarter, we expect ACV plus trailing 12-month royalties of $53.5 million to $57.5 million and revenue of $13 million to $14 million with a non-GAAP operating loss margin of 37% to 57% and non-GAAP free cash flow margin of negative 26.8% to negative 51.8%. For the full year, our guidance is unchanged. 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% to 43.5%, non-GAAP free cash flow margin of negative 9.7% to negative 19.7%, reflecting the anticipated improvement from the first quarter. Finally, I would draw your attention to the shelf registration statement that we filed with the SEC in November for a maximum aggregate offering price of $150 million, including a prospectus supplement or an at-the-market or ATM offering of up to $50 million pursuant to a sales agreement with Jefferies. Since as mentioned in our last earnings call we do not intend to sell any shares pursuant to activate the ATM at this stage, we have decided to terminate the sales agreement related to the ATM. Following this termination, $150 million will remain available under our S3. We do not have any present intention to offer securities pursuant to this registration statement. With that, I will turn the call over to the Operator and open it up for questions.

Thank you. Our first question is from Gus Richard with Northland. Please proceed with your question.

Yes. Thanks for taking my question. Charlie, can you talk a little bit about the customers you see for FlexNoC 5 and sort of what uptick do you expect in the second half?

The FlexNoC 5 includes several interesting features, with the primary one being integrated physical awareness. We aim to address the challenge faced in sub-16-nanometer processes, where creating an effective architecture can become complex and lead to numerous back-end iterations, potentially causing customers to miss market opportunities. Our goal is to enable clients to measure physical effects early in the design phase so they can hand over a physically verified or estimated design to their place and route teams. This significantly raises the average selling price of FlexNoC, and we expect it to meaningfully increase revenue in the second half of the year. While I can't provide an exact figure yet, I anticipate a substantial uptick due to the increase in the FlexNoC average selling price. This offering will be beneficial for most customers designing below 16-nanometers, which constitutes a large portion of our customer base.

Hey, Gus. This is Nick. It’s a great question and as always. But just a little bit of color to add to Charlie’s excellent commentary. The bigger impact on 2H for FlexNoC 5, because it is a ratable product, it’s interconnect and typical life is two and a half years on average for a license. The more pronounced impact will be on ACV plus TTMR. So we pick up the ACV, the annualized value of the contract immediately, but the revenue, of course, is spread over time. So if we land a new FlexNoC 5 contract in November, for example, we will only have one month or two months’ worth of a two-year to three-year term in the revenue. Does that make sense?

Yes. It does. Absolutely. That was super helpful. And then just two quick questions, given timing, credit standards and banks selling left and right, and everything that’s going on in China, I was wondering if you could just talk about start-up/China activity. And then I want to make sure I understand free cash flow by year end, is that still expected to be breakeven or better?

I will take the first question and let Nick handle the second one. Essentially, China is starting to emerge from its COVID-related stagnation. There are challenges due to ongoing trade tensions, but as we mentioned earlier, our business is somewhat diversified since a significant portion of our products utilize French technology, which faces different export restrictions compared to the U.S. With China coming out of its COVID-induced pause, we expect to see some improvement in our business there toward the end of the year. The credit situation is indeed a concern, as capital has become more constrained, affecting some of our start-up clients. Companies lacking 18 months of cash will need to proceed with caution, leading to challenges for some smaller customers. Conversely, with larger companies tightening budgets, outsourcing system IP development can be more cost-effective, which might provide a boost as they look to external solutions for their system IP needs. Overall, the situation presents a mix of opportunities and challenges.

Got it. Thanks. And then the free cash flow and that’s it for me. Yeah.

We are starting to notice some interesting developments and movements. While nothing is seriously in the pipeline, there are noteworthy shifts regarding outsourcing to the commercial market, where we are a leader. Concerning free cash flow, when we announced Q4 and provided guidance for 2023, we indicated that Q1 would experience the most significant negative free cash flow for the entire year. This was partly due to some major clients shifting early cash from Q1 to Q4 of the previous year. We benefitted last year, which negatively impacted Q1, which is typically a quarter with some irregularities in operating expenses. I won’t delve into too much detail, but this pattern is common among most companies. Q1 often sees high operating expenses and lower cash inflows from bookings. We anticipated a negative cash flow of approximately $8.5 million for Q1, which is precisely where we landed. For the full year, we are maintaining our forecast, just as we did during our last guidance, also at $8.5 million. This suggests that across Qs 2, 3, and 4, we expect to be neutral overall. It won’t be linear, as it rarely is for us. Our Q4 typically serves as our strongest cash flow quarter due to the significant portion of our bookings occurring then. We are still predicting around $5 million in negative free cash flow for Q2, with Q3 expected to be neutral or slightly negative, and Q4 anticipated to be strongly positive. This scenario is reminiscent of 2021; 2022 was somewhat unusual from a timing perspective, with Q4 not being as robust, but there are explanations for that. We are confident in our full-year guidance of neutrality from April 1 to December 31.

Hello everyone. Congratulations on the results. This is Ethan Potasnick substituting for Matt. I wanted to focus on the full year guidance. It was encouraging to see you reaffirm it. In the previous call, there was talk of a potential headwind of around $4 million to $5 million due to macro softness and possibly an additional $1 million in royalties. I would like to know how you perceive this situation developing, and if you could share insights on trends for the rest of the year across different end markets, that would be very helpful.

Sure. And…

So let me just take the trends and then I will let Nick answer about the guide. So… one of those things that makes us pretty optimistic about the second half is that we should be able to ship FlexNoC 5 production in the second quarter. So that means that we will have full second half of FlexNoC 5 revenue. So do you think that’s going to be helpful to the whole year guide? And then, as I said, you just have a sort of a mixed bag of tailwinds/headwinds, right? I answered Gus’ question, right, where you have China coming back online a little bit more, but there’s more trade friction. You have credit crunch, which affects smaller customers, but perhaps more outsourcing pressure from the big customers. So we feel comfortable that we are well-positioned to meet the guidance. And then with that, I will turn it over to Nick to discuss the actual numbers.

Yes, exactly, Charlie. It’s great to hear from you again, Ethan, and please say hi to Matt for me when you see him. Regarding your question, you have a strong recollection of the headwinds we discussed last time. We mentioned that growth in 2023 would likely be more robust if we didn’t face certain challenges, primarily from China and macroeconomic factors, specifically a 7% to 8% negative impact due to headwinds from China, translating to about $4 million that could have been realized under unrestricted conditions. Additionally, royalties are directly affected by recessionary impacts; regardless of whether we are officially recognized to be in a recession, it is clear that we are experiencing one. This situation dampens demand for end products, particularly in the consumer space, though automotive seems less affected as manufacturers strive to produce as much as possible in response to inventory shortages. However, there is a general temporary demand shortage across the board, which accounts for an additional $1 million in expected royalties. We anticipated closer to $5 million this year, but we’re projecting around $4 million, which is less than ideal. Ideally, we would have guided $5 million initially and hoped to reach $6 million, but the figures are trending downward due to the overall reduction in volume. In summary, while the situation remains unchanged, I wanted to provide further context on the matter you brought up.

Understood. Terrific. Thank you. Second question, it seems like auto through this kind of earnings season and year-to-date has continued its kind of streak of resiliency as compared to other end markets. And I know you can’t talk about specific customer programs, but maybe if you guys could perhaps characterize how activity in automotive is doing. Are customers still kind of full steam ahead or are there any kind of signs of a slowdown?

One of the key points we aim to convey during the earnings call is our engagement with the entire automotive supply chain, which includes ridesharing companies and automotive original equipment manufacturers. In the past, it was nearly impossible to secure a meeting with car manufacturers, as they would question why a semiconductor IP company was interested in discussing with them. However, that situation has changed significantly. Tire manufacturers are now taking steps to control their architectures by either designing chips in-house or collaborating with partners to develop silicon architectures that support their comprehensive software needs. We are pleased to announce that we have secured year-to-date deals with four automotive companies, although we cannot disclose their names. These companies are located across Europe, the Asia-Pacific region, and the United States, highlighting our ability to cater to the entire automotive supply chain for advanced automotive-focused system IP. The automotive sector is undergoing a substantial transformation, with continuous investments being made to navigate both offensive and defensive aspects of this change. We view the automotive business, alongside the machine learning and artificial intelligence segments, as one of the standout areas in our current operations.

Terrific. Thank you.

Our next question is from Kevin Garrigan with Westpark Capital. Please proceed with your question.

Yeah. Hey, everyone. Let me echo my congrats on the strong results. Just a quick question. So I know you had noted that you are in a strong position to continue to gain market share and potential for large companies to outsource. Are you seeing any increase in competition from anyone and can you kind of remind us who your competition is?

Yes. The competitive landscape remains favorable. Our main competitors are the internal teams developing their own system intellectual property. One impact of this recession is that some companies may struggle to maintain those investments, potentially leading to increased outsourcing of system IP by large semiconductor and hyperscaler firms. This is one of the trends we're observing. Additionally, in the machine learning sector, particularly with generative AI, there is a significant challenge related to the cost per query. We anticipate substantial investment in specialized hardware and accelerators to reduce the costs associated with queries like those of ChatGPT. There is a lot of innovation happening, and we believe we are well-positioned to meet these challenges.

Okay. Got it. Yeah. That makes total sense. And then just one quick follow-up. So you have one quarter of 2023 in the books and as you look out to the rest of the year besides the macro, is there anything else that kind of keeps you up at night?

Yeah. Lots of things. But, I think, as I said, the sort of for us at least, the kind of the headwinds and tailwinds balance out and so we feel, I think, comfortable with the guidance that Nick discussed.

I believe my response is two-fold. First, I can deliver the income statement numbers, especially the revenue, which is influenced by our forward visibility. We generally have around 70% to 75% visibility, and currently, we are at about 75% to 80% visibility for achieving our 2023 revenue numbers. This gives me a reasonable level of comfort and doesn't cause me much anxiety since the effective return business we need to bridge any gaps is relatively minor, and we have a strong sales team. Additionally, we have exciting products launching in the second half of the year, including FlexNoC 5, which is already available. The second aspect is cash management. Since our last conversation, we have been intensely focused on managing our cash and are very cautious with every penny spent on operating expenses. Our model is straightforward: we generate cash from bookings and spend cash on operating expenses. We always aim to maximize bookings because that drives our growth, but we're being extremely careful with our operating expenses. We have significantly reduced our burn rate and operating rate since the end of the third quarter to ensure we can achieve good operating leverage from bookings growth and manage our cash flow effectively this year. This gives us some reassurance that we can meet or even exceed our negative cash flow projections in our guidance.

Okay. Got it. That makes sense. Thanks for that. That’s all for me. Thanks, guys.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Charlie Janac for any closing comments.

Okay. Well, thank you for your time and interest in Arteris. We look forward to meeting with you at the upcoming investor conferences that we are participating in during the next couple of months and we look forward to updating all of you on our business progress in the quarters to come. Thank you.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.