Good afternoon, everyone and welcome to the Arteris Third Quarter 2024 Earnings Call. Please note this call is being recorded and simultaneously webcasted. 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 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 third quarter ended September 30, 2024. Nick will review the financial results for the third quarter, followed by the company's outlook for the fourth quarter and full year of 2024. 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 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 cite certain non-GAAP measures, including non-GAAP 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 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 September 30, 2024. 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 September 30, 2024. Listeners who do not have a copy of the press release for the quarter ended September 30, 2024, may obtain a copy by visiting the Investor Relations section of the company's website. In addition, management will be referring to the Q3 2024 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. In the third quarter of 2024, we achieved a record annual contract value plus royalties of $60.5 million. We also delivered positive free cash flow of $1.1 million, making it our third consecutive quarter of positive free cash flow. Our success during the quarter was, in particular, fueled by demand for AI-driven enterprise computing and automotive SoC solutions, along with growing momentum in our other verticals. Business in the third quarter was primarily driven by increasing adoption of our technology by our current customer base. As an example, a top 5 global technology company increased their deployment of Arteris products to enable development of their high-end AI chiplets and SoCs. This expanded engagement provides our customers with a broader access to our system IP. We expect to see designs from this customer used in a wide range of products such as hyperscale cloud data center applications as well as high-volume consumer electronics. Similarly, NIO, a pioneer and a leading company in the global smart electric vehicle market, deployed Arteris technology for its next generation of ADAS and LiDAR SoCs using our physically-aware NoC technology to reduce silicon implementation risks and schedule. This is yet another example of our continued success in accelerating automotive electrification and autonomous driving with over 9 carmakers already using Arteris directly as the gold standard for functionally safe, high-end automotive computing. During the quarter, we also announced the adoption of Arteris NoC IP and SoC integration automation software products by Tier IV for intelligent vehicle SoC, then starting for next generation of chiplet-based AI solutions and VeriSilicon for HPC data center SoCs. Majority of the new designs in the third quarter came from enterprise computing, followed by automotive, consumer electronics and communications…

Thank you, Charlie and good afternoon, everyone. As I review our third quarter results today, please note that I'll be referring to GAAP as well as non-GAAP metrics. 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'll be referring to the 3Q 2024 earnings presentation which can be found in the Investor Relations section of the company's website under the Events and Presentations tab. Turning to Slide 4 of the presentation. Total revenue for the third quarter was $14.7 million, up 11% year-over-year and at the midpoint of our guidance range. At the end of the third quarter, annual contract value or ACV plus royalties was $60.5 million at the midpoint of our guidance range and a record high for the company. Remaining performance obligations, or RPO, at the end of the third quarter were $78.4 million, representing a 25% year-over-year increase, also growing to the highest level we have ever reported. GAAP gross profit in the quarter was $13.3 million, representing a gross margin of 90%. Non-GAAP gross profit in the quarter was $13.5 million, representing a gross margin of 92%. Now turning to Slide 5. Total GAAP operating expense for the third quarter was $21.2 million, representing a 4% year-over-year increase. Non-GAAP operating expense in the quarter was $16.8 million, flat both sequentially and year-over-year. This reflects the team's continued focus on prudent management of our operating expenses. As we look ahead, we will continue to limit spending to strategically critical areas while investing in profitable revenue growth. GAAP operating loss for the third quarter was $7.9 million, compared to a loss of $8.5 million in the prior year period and $7.4 million in the second quarter. Non-GAAP operating loss was $3.3 million…

[Operator Instructions] Our first question is from Joshua Buchalter from TD Cowen.

Congrats on solid results in a choppy backdrop. To start and speaking of the choppy backdrop, I mean, this has been an interesting earnings season with China autos positive and the rest of the world, weak. Maybe you could spend a couple of minutes talking about in that -- in an environment where China continues to take share in the global auto market. I mean, is that a net positive or is that a headwind for you guys? Because obviously, one of your lead customers, Mobileye has been losing share in that market but also there's a lot of local vendors that are also building up their semiconductor portfolios where you have partnered. So I'd just be curious to hear your view on that backdrop and the impacts to your business?

So -- yes, I mean, this sort of automotive disruption, it's kind of difficult to [indiscernible] time, right? And so we have -- our strategy has been to be in as many projects as we can capture. And so we are in start-ups. We're in automotive car manufacturers, we're in Tier 1s. And -- so regardless of market share shifts, our tariffs should benefit. But we do have a strong presence in the China automotive market. I think Nio was kind enough to allow us to announce that they are using us for some of their automotive SoC projects, right? And there's a number of others. And so from the Arteris perspective, it doesn't make a whole lot of difference. However, the Chinese have put a huge amount of effort in their electric vehicles. They're very nice vehicles. We've been in a number of them. But because of the tensions, the rest of the world is going to probably throw up some protective barriers, right? And so I don't know how much the market share is going to shift except that the electric car inside China is going to be the -- eventually the predominant technology.

Can I just add a little bit color to Charlie's excellent comments, Josh. There are -- I mean, as you rightly point out, we have a very small number of Chinese auto OEMs that we can actually -- we're entitled to use the names but you recognized most of the names that we do have if we were able to tell you. Some of the ones that we can tell you that are in that area, that Chinese auto area, that are public include Black Sesame which I'm sure you know, Horizon, SemiDrive, those are all very powerful vendors in that space. But there are many others we can't mention, unfortunately. On the subject of Mobileye, excellent question, Mobileye is obviously facing a few headwinds and also is facing some headwinds, specifically in China. But Mobileye is still very strong. It's one of the strongest in the market. They have an excellent set of products. There has definitely been some headwind to our royalties, as you've seen and we've talked about in previous calls, solely derived from Mobileye weak shipments in the first and second quarters to an extent that was started to be remedied in the third quarter. But the whole impact of short, let's call it, short royalties from Mobileye versus our previous expectation, has a less than 1% impact on revenue for the whole year. So it's not as dramatic as you might think.

And if I may add in terms of Mobileye, Mobileye is not going anywhere. They are designed into a bunch of very impressive vehicles and they are going to continue to be the leader despite short-term headwinds or those kinds of things, we believe -- we are strong believers that Mobileye is going to continue to do well in this market because of their superior software technology.

No. Thank you both for all the color there. To follow up and move away from the auto space, I mean, it was great to see that enterprise computing design was sort of the leading contributor this quarter. Any more details you can give us on sort of the contribution today? And maybe what that funnel can look like over the next year or so as you diversify the revenue base?

Yes. I mean, the business continues to be strong. We've -- as you said, it's a choppy market with us having to be nimble and responsive to various developments. However, one of the things that we were talking about on the earnings call is we are making a move also into the microcontroller market. Microcontrollers have now become sophisticated enough that at least the midrange to upper range of the -- microcontroller market can benefit from our system IP technology. So that opens up an additional segment. So we're very excited about that. And we're also excited about our strong product pipeline for next year. So, we continue to be prudent but optimistic.

Yes. One thing I would just add to that, Charlie, is that as you can actually see, Josh, from the investor deck that's on our website now, the enterprise computing actually still remains slightly our biggest revenue contributor, slightly larger than automotive. It's in the low 30s percent [ph] total of revenue and it's growing quite nicely. A lot of that's driven out of the sort of the enterprise space -- sorry, the AI element of the enterprise space. And if you look at AI/ML as its own sector, I can't call it a vertical because it's really horizontal. That actually contributes to about 40% of total revenue but that goes across all our verticals, as you probably know; so some really interesting dynamics going on there.

Your next question is from Kevin Garrigan from Rosenblatt Securities.

Let me add my congrats on the solid results. Going off of Josh's question on the Chinese auto market. So I guess a different way to kind of ask the question, are you seeing design activity in the Chinese EV market increasing at a faster clip versus other parts of the world? And I think the -- I think you guys had mentioned the average time from licensing to production for automotive is about 2.5 to 3 years. Are you seeing these Chinese customers looking to accelerate that time line?

Yes. I mean we're seeing design activity throughout the world, right? I mean people -- precisely, as you said, the design cycles for automotive chips are long. And so right now, people are really building chips for the 2030 automotive model year, right? And so people typically try to design their way out of recessions. And so even when there's shipment volume impact, the impact on the design activity from our perspective, at least doesn't seem to be great. And certainly, the Chinese design activity is robust. But there's also a number of designs that are being done in the U.S. and in Europe.

Okay. Got it. That makes sense. And then in the microcontroller market, do the licensing deals in this market, do they have the same ASPs as those in complex SoCs?

I was afraid you were going to ask that. So the answer is no. The ASPs are lower typically. But the royalty volumes are very, very high and the designs are numerous. So our strategy in the microcontroller market is really to engage with the largest microcontroller suppliers and essentially not just capture one design but to capture an entire generation of microcontrollers which is typically designed together. So that would essentially improve the account yield, because as your question implies, if you focus on 1 or 2 microcontroller projects, the ASP will be lower than what we're seeing in the SoC market. But if you bundle everything together, then essentially things will go to the right.

Yes. Okay. Yes, that makes sense. And then just last one, if I could. And congrats on the announcement of the NoC Tiling. How is kind of customer feedback been for this product?

Well, it's just coming -- that particular product is just coming out. People have been asking for that for a long time. So we are finally started or about to commence deliveries. But we have a significant number of customers waiting for it, because what it does is that the AI sections are very, very complicated. And so what the customers want to do is they want to design a certain section, get it verified and then replicate it across the chip to basically build larger clusters out of these tiles, if you will, that's why it's called Tiling. And so this is built at the request of our AI customers and we think that the reception is going to be very good. But we've had lots of requests for it but the orders and the revenue impact will probably not start until next year.

Kevin, this is Nick. Just a little bit of extra color. I didn't want to interrupt Charlie midstream. But going back to the MCUs question, it is definitely a new incremental sort of product area for us to an extent. Having said that, we have had some history in MCUs in the past. Well, I can't name the customer, unfortunately but it's a very large U.S. top semi company. And the volumes that we have, this is actually for a Bluetooth application, were very, very substantial. And so the royalties also out of that were very substantial. So just to give you an understanding that we have actually visited this space before. We're just emphasizing it much more now.

[Operator Instructions] Your next question is from Gus Richard from Northland.

Let me add my congratulations on the quarter. The cloud service providers are designing their own ASICs. Quite a bit of data suggesting that those are in-flight and starting to ramp. And I'm just wondering if you could talk about how many of the top ASPs you're involved with now or maybe even better yet, how many of the Top 30 tech companies that actually design chips you're involved with?

Yes. So we've sort of created our own Top 10 index, the Top 30 index by market cap, right, of technology companies. And so out of those 30, about 15 are designing chips, about half of them at the moment. And basically, 10 out of the 30 are using Arteris for something.

Got it. And you had a large deal with one of the Top 5 tech companies, this deal to expand the use of your products, correct?

Correct. So this would be one of the -- yes, so this would be one of the large hyperscalers, yes.

Got it. And then Nick, for you -- I calculate your -- from cash flow, your bookings were on the order of like $23 million, $24 million. Am I in the right ZIP code?

Close. I think that's sort of a good blended average between third quarter and fourth quarter. We do have a bit of seasonality on bookings, as you know, Gus. Typically, the fourth quarter is our strongest bookings quarter by some way. Last year was a little different. We had a sort of a reasonable third quarter and a weaker fourth quarter in terms of bookings. This year, it's back to kind of normal which is a decent third quarter but a much stronger fourth quarter. So the number that you've quoted there is, I guess, kind of an average between the two.

Between Q3 and Q4?

Yes, exactly. Q3 and Q4.

Got it. And then you guys have talked about a new product and it doesn't sound like the tiling and mesh networks is that new product and I'm just wondering if you guys have any updates on how many companies you're engaged with and when you expect to launch?

So as you say, the tiling and the mesh features is not the product that we were sort of alluding to earlier, we do have installations and we hope to provide more information on the fourth quarter earnings call.

Okay. Got it. And have you recognized some revenue on that price at this point?

Not yet, no. It's more of an early access -- more of an early access, I think at the moment, Gus, so revenue will follow in due course.

There are no further questions at this time. I would now like to turn the call over to Charlie Janac for closing comments.

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

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.