Arteris Aktie

Thank you. Good afternoon everyone and welcome to the Art Terrace 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 Art Terrace, with all rights reserved for opening remarks for opening remarks and introductions i would like like to turn the call over to erica manion at sapphire investor relations please go ahead.

Thank you and good afternoon. With me today from our terrace are Charlie Janet, Executive Officer, and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the second quarter ended June 30, 2026. Nick will review the financial results for the second quarter of 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'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 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 our terrorists issued today and then in the documents and reports filed by our terrorists 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 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 June 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 June 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 or investors. Listeners who do not have a copy of the press release for the quarter ended June 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 Charlie. Thank you, Erica, and thanks to everyone for joining us on our call today. The arterious 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-on-year increase. We achieved record revenue, royalties, and RPO backlog. Licensed 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 varieties 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 a quarter. For the trailing 12 months to June 30, 2026, our customers reported 21% higher number of design starts year over year. Rapidly evolving high-performance computing workloads continue to drive demand for more complex chips and chiplets across data centers, smart jet 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. 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 chip-led development continues to be a key revenue driver for our terrorists.

Over the past four quarters, enterprise computing has made up an average of 29% of our terrorist 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 our terrace for its 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 Arteria the obvious choice for scale-up and scale-out architectures. Another example of Arteria's progress in data center applications was a large win with one of the top US semiconductor design houses building custom ASICs for various hyperscalers, Arteris FlexGen Smart Knock 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 SpeedData, 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. in data centers. Physical AI, from automotive to aerospace and defense, and along with industrial applications such as robotics, continues to experience strong and growing demand for Arturia's products and solutions.

Here, performance, energy, 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 newest SUV model. Multiple chips designed with Arteris are used in each vehicle and run 2,560 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 CyEngine, a provider of advanced automotive chips, selecting Arteris for its next-generation SoC platforms for 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're 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 Cycuity 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 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 the ARM 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, etc. accelerated by rapid development in frontier AI models, and glowing sets of required standards and regulations. On the NOC IP front, the number of FlexGen Smart NOC customers continues to grow as customers are increasingly seeing the value in automation and wider length efficiency which helps reduce power that Arteris Smart NOC 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 IC-Link 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 their next generation of silicon chips and chiplets with our technology. Thank you. I'm 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 Tuckin 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 in achieving a positive free cash flow operation while laying the foundation for near future non-GAAP profitability.

I'm 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 Saurabh Sinha will join Arteris as our new CFO starting on September 8th, 2026. Farab comes to us from Ava 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'll turn it over to him one last time to discuss our financial results in more detail.

Thank you, Charlie. Good afternoon, everyone. As Charlie mentioned, this is my final learning school for Arteris, and I am delighted to be handing over the reins to Sarah up 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'll be referring to the 2Q2026 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 ACB 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. And this increased expense was driven by a much higher stock price during the June quarter. If you look at slide five of the presentation, total revenue for the second quarter was $24.1 million, up 46% year over year. 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, ACB 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. The remaining performance obligation to our IPO, which is our contracted future revenue at the end of the second quarter, totaled $135 million, another all-time high for our tariffs. We expect just over half our RPO at the end of the second quarter will be recognized as revenue in the 12 months starting July 1, 2026. Non-GAAP gross profit in the quarter was $21 million, representing a gross margin of 87%. The net gross profit in the quarter was $20.5 million, representing a gross margin of 85%. 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 six. 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 gap 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 in the quarter was $4.7 million or diluted net loss per share of 10 cents. Gap net loss in the quarter was $14.1 million or diluted net loss per share of 30 cents.

Moving to slide seven, I'm turning to the balance sheet and cash flow. We ended the quarter with $123 million in cash, cash equivalents and investments, and we've 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, NGOI guidance for the third quarter of the full year takes into account the higher run rate of French employer payroll taxes on RSU vesting. For the third quarter, we expect ACB plus royalties of $99 to $103 million, revenue of $24 to $25 million, non-GAAP operating loss of $3 to $1 million. As a reminder, we are no longer guiding quarterly free cash flow.

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 full year revenue guidance. For the full year 2026, our guidance is as follows. ACB plus royalties to exit 2026 add $102 to $106 million, revenue of $95 to $98 million, an increase of $3.5 million from prior guidance and representing a 37% year-over-year increase at the midpoint. Thank you. Non-GAAP operating loss of between $10 to $7 million. Non-GAAP free cash flow of positive $5 to positive $9 million, unchanged from prior guidance. We're 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 our terrace 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 in the current year. With that, I will turn the call back to the operator for the Q&A portion of the call.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. If you'd like to withdraw a question, press star 2. One moment please for your first question. first question comes from Kevin Gary Gama from Jefferies please go ahead.

Yes, hey Charlie and Nick, congrats on the great results and Charlie, great working with you and hope you enjoy your retirement. Hey, can you talk more about the expanded partnership with Arm with Siteuity? 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 isn't actually a whole lot of commercial solutions for what Psycuity does. Essentially what ARM is using it for is to identify potential weaknesses in the high-end designs right and basically they are essentially taking a leadership position about making the design that they deliver to their customers be essentially have significant amount of hardware security assurance so it's a greenfield opportunity there's opportunities for expansion. And we think that other processor-type companies should be taking the lead of ARM in deploying cybersecurity hardware assurance solutions. Got it. Okay. That makes sense. And I would also like to thank ARM today to allow 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, very nice to let us announce it.

Hey, Kevin. Okay. This is Nick. I just want to chip in. You said that Charlie was retiring. I know that was a slip of the tongue, and you know that it's actually me who's retiring, but I just want everybody else who might be listening to this call to know that Charlie's not retiring. It's Nick. Yes, I apologize for that. It's been a long week so far. My fault.

And then, so I guess, you know, just kind of going off that, does the addition of Psycuity allow you to negotiate a higher royalty rate with customers? Yes.

No. So, security, 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 weaknesses, cybersecurity weaknesses, but also to fix them. So there might be some opportunities there, but right now it's a non-royalty based.

product. Okay, perfect. Thanks, guys. And Nick, enjoy your retirement.

Thank you, Kevin. Been a delight working with you for the last several years.

Your next question comes from Josh Bacalter from TD Cowan. 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 Charlie, thank you for staying with us. Maybe to start, you called out the US design house win on an ASIC platform, I think using for chiplets and and multi-die offerings. Can you elaborate on, you know, is this a new customer and maybe speak to what type of applications and maybe timeline to materiality for this revenue contribution? Thank you.

it's not a new customer, but it was a very small customer, a relatively small customer prior to this. But 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're also working. with partners to build chips to their specification. And this, you know, a large semiconductor company, one of their, you know, strong business product lines is that they build chips for hyperscalers and they have, after an extensive evaluation, decided to use Arteris for fulfilling those designs. Thanks for that, Charlie. Data center hyperscaler application.

Got it. Okay. Thank you for that, Charlie. And then maybe to follow up, I thought the Lee Auto announcement was interesting as well, especially given it's in 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.

years thank you I think I'll defer to Nick on the on the royalty royalty question about the we we have a strong presence in in a China automotive market and also with China automotive OEMs and so so Lee Auto is just just one of the opportunities that we pursue we are pursuing or have pursued. And this has been underway for a while, and they are starting to ship their system in a car, in actually real-world cars. But as far as the royalty percentage in China, Nick, do you want to take that one?.

Sure, absolutely, Charlie. Hi, Josh. So, yes, so Lee Auto is a mid-size EV, Chinese EV company. Yes. So their volumes can be meaningful, and they are growing. So we're delighted that they have started to send checks so rapidly. This is a feature of the Chinese automotive market. As far as how far it can go, the jury's out on that. We'll have to wait and see. But typically, if you go back to any automotive royalty stream that we've seen in the past, typically you 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 forever. a large number of years. You'll 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're watching very carefully, and I'm sure my successor, Sarah, will be keeping a close watching eye on that.

Thank you both. Welcome. Your next question comes from Martin Yang from Oppenheimer. Please go ahead.

Good afternoon. Thank you for taking my question. First, Nick, hope you have a very satisfying retirement. It's been a pleasure working with you through different companies over the years. My first question is on OPEX. So the change in the annual guidance relating to profitability, is the bulk of that change related to the payroll tax increase? Is there any additional op-tax increase?.

Yes, Martin, so yes, you're absolutely right. The majority of that decrease in NGOI guidance, the 2 million decrease, is, as you rightly say, that is the French employer payroll taxes on RSU vesting. We had a, maybe we should have seen this coming, but we didn't. We had a very large spike in the stock price during the June quarter. And it's a tax that's levied based on the prevailing price at the date of vesting, and so 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're guiding up on the revenue front.

Some of that, a good portion of that is coming from security. And a lot of that is coming from government work. And government work, as you know, carries a much lower gross margin than traditional organic work or even the commercial business that Sanctuity has. 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 and this also affected the second quarter, our sales commissions and FA commissions are significantly higher than we thought when we had that lower guide on revenue.

Thanks, Nick. Next question regarding royalty and cadence of royalty. This quarter royalty has a very slight dip. So, partially, can you maybe give us the outlook on how the royalty revenue would trend into the second half or into 2017?.

Yes, great observation, Martin. So I would characterize it more that the upward trajectory is slightly slower in a sequential quarter base than it was last quarter, and indeed called it before. There are a couple of things to bear in mind for that. One is that royalties do go through royalties slight ups and downs. We remember we saw a down in the March quarter of 2024 when Mobileye I think it was 24, somebody correct me if I got that wrong. But it was the March quarter when Mobileye had a, they had an overstuffed channel and they had to reduce their inventory levels in the channel. And so they shipped significantly less in the March quarter and then also in the June quarter. So these things can happen. There was one of our customers, I obviously can't mention who, but who had some logistical and supply chain issues. and that held back one quarter's worth of shipments.

But that's come back on stream. So it's a pause. The growth rate, I mean, if you look at the last 12 months, over the prior year, last 12 months, at June 30th, That's still up 67%. And that is still, even with that little dip, that is still well above our long-term CAGR that we've socialized with the street. You did ask about 27 as well, I'm sorry, I didn't. Right, longer term, a longer term strategy. So, this is another great question. So, our long term guide on royalties CAGR, growth rate annual, is, is high 30s to low 40s percent.

That's what we've said in the past. Now, clearly, we are traveling at a faster rate than that today. We are, as Amber just mentioned, we're 67% up on our... on a 12-month basis. Now, I don't want you to get to a situation where you're that that rate can carry on ad infinitum. So I'm sticking at the moment, now Saurabh when he joins he may come to a different view, but right now I think it's safe to stick with the high 30s to low 40s percent CAGR, and we can revisit that if we see this level of rebound. robustness in royalties and success, then we can revisit that in the coming quarters.

Thank you, I appreciate it, Colin. Cool. Your next question comes from Sujee De Silva from Roth Capital. Please go ahead.

Hi Charlie, hi Nick, congrats on the results here and Nick, best of luck with the transition, certainly. On the deal activity, very strong in the quarter. Maybe you can talk about the areas that you're seeing the strongest growth outside of your core auto and AI data center. Just understand where some of these areas might be inflicting earlier. Yes, I mean, it's been a pretty broadly distributed.

sort of growth and deal flow. The data center has sort of taking the lead, I would say, because there's a lot of investment in data center, We think that some of that is going to perhaps change a little bit, but I think AI is going to be everywhere. And as the cost of AI come down a bit, people are just going to need more and more chips. So we think that we're going to have to do more and more. whatever happens with the data center investment is not going to have a major effect on us. But we're also seeing strong action in microcontrollers, automotive. We have some embedded FPGA business. The space business continues reasonably well.

So we're pretty happy. And I think we've announced on the earnings is that for the first half for the first time for six months, no one was more than 10% of our, of our license revenue in the first half of 2026. So we're, we're well distributed, I think.

can I just add a couple of things to that Suji in French for your kind words um we will no doubt stay in touch. But the two other areas that are interesting not in terms of strong deal for one was security. Security had a very solid quarter and there are some consequences to that. You probably saw as a $2.2 million gap OPEX charge that went through in the quarter because we had a more robust view in terms of the likelihood of them hitting their full earn-out target, which is obviously good news. And And secondly, we're seeing some very interesting strength in some of the the memory players. And that is obviously ultimately data center related, but it has been some solid deal flow from them.

Very interesting. And then my other question is on the, you talked about data center AI generally and ASIC customer in particular. Maybe Charlie 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 a customer. Their goal is not to make everything in-house. So our observation is that they keep buying from Intel, they keep buying from AMD, they keep buying some for the new ARM chips. But they're also building, they understand the workloads that they're dealing with through the data center better than anyone else, and sometimes they're reluctant to even share the information about how those workloads behave and what those specifications are. So they're doing a lot of that work acceleration ASIC work in-house, and sometimes they outsource that to large companies, who unfortunately, the one that we got a fairly large deal in the quarter wants to remain confidential. So they're doing a combination of buying commercial chips, making stuff in-house, and also going to design partners, usually large design partners.

And they, I think, are going to keep on doing that. So there's no goal on their side to go one way or the other. They just want to maintain a balance between those things.

three approaches. Okay. Thanks, Charlie. Thanks, Nick. Thank you. Thank you.

Ladies and gentlemen, as a reminder, if you'd like to ask a question, press star 1 on your telephone keypad. Your next question comes from Maddy DePaola 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?.

So, to us, the physical AI chips look very much like automotive because you need functional safety and you need security because when mechanized systems interact with human beings, those scenarios have to be handled, right? So the functional safety and now 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 and automotive, but because you have functional safety and security involved, those design cycles will be slower than you see in data center, where basically, in a data center, people come up with a workload, and that workload may be worth a billion or two in revenue, and they want to chip extremely fast, so you're going to have the fastest cycles be the data center workload accelerators. The physical AI will be somewhere in the middle and the 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 Charlie for closing remarks.

Well, thank you for joining us on our call today. We really appreciate your interest in our terrace. We're very excited about our business, and we look forward to meeting and updating you on our business progress in the course ahead. So thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

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'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 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, 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, 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'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, 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 March 31, 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 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 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. The first quarter of 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-on-year increase. We also achieved record revenue, record royalties and record revenue backlog.

Customer engagements 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 2/3 of our customer engagements are into AI chips. New chips and chiplets continue to get more complex and perform more advanced computing. Efficient, safe and 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 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, high-performance computing, or HPC, including high-bandwidth memory or 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 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'm pleased to say that another leading global memory supplier is now utilizing 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 Gen 5 SoC series. Tailored for advanced driver assistance and automated 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 Arteris network-on-chip technology for silicon data movement.

Communication with 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 their 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 at major accounts and startups. We are also working with early adopters on 2 products for optimized chiplet and multi-die system IP, which we anticipate deploying in production during the second half of 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 Cycuity, 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 5 U.S.-based hyperscaler, which is an existing Arteris customer, has 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 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 and 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 #4 in the most innovative companies in the North America category as 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 World's most Innovative Companies. Arteris also won a Stevie Award for 2026 Technology Innovation of the Year in the software category for our Cycuity 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 3 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'll 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 7 years at Arteris, in addition to leading the company through its IPO, I've also led our M&A processes, including the important recent acquisition of the cybersecurity company, Cycuity.

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 results for 2026 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, as 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 was $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 over 6-figure per quarter are in automotive, consumer, enterprise computing and aerospace and defense.

The number of customers reporting a $0.25 million plus royalty dollars has grown from 1 a year ago to 3 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 contracted 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 first 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 OpEx 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 1/4 of the rate of revenue on a non-GAAP basis over the last 3 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 $0.6 million 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 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 Cycuity 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 the second quarter of 2026, we expect ACV plus royalties of $95 million to $99 million, revenue of $23 million to $24 million, non-GAAP operating loss of $3 million to $2 million, 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 $0.5 million from prior guidance. Non-GAAP free cash flow of positive $5 million to positive $9 million. We're 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, I will turn the call back to the operator for the Q&A portion of the call.

[Operator Instructions] Your first question comes from the line of Kevin Cassidy of Rosenblatt.

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 -- yes, on the hyperscaler design win and also the high bandwidth memory, what's the time line of those products coming to market or generating royalties? And I guess 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 cycles in that space are a little bit quicker than you'd expect in, say, automotive, which is quite a long design cycle, as you know, can be up to 6 years in some cases. In this sphere, it's more like 2 to 3 years that we'd expect to see something floating through from that.

Okay. And same within the high bandwidth memory?

Similar, yes.

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. But these products have a much faster churn than, like Nick said, the automotive, for example. And so they rise quicker and they also die quicker.

Okay. Yes, that was going to be my next question is the life cycle of the products as they come to the market. And also, I would imagine as they go down the process to smaller process nodes, the price of the products go up. So your overall royalties could be increasing compared to the past generation?

Yes. I mean...

Yes. That's exactly [indiscernible], Kevin. Go ahead Charlie.

These tend to be high-priced chips.

Right. And getting more expensive those...

Yes.

[Operator Instructions] And your next question comes from the line of Josh 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, if we think -- as we think about the raise of the annual guidance, how much of this is -- would you categorize as coming from the better royalty environment that you spoke to just from better chip sell-through versus increased confidence in licensing deals that you expect to sign over the next several quarters?

So let me take that one, Charlie. So Josh, thanks for your kind words. It's been a pleasure. I've got to say. On the increased guidance, I mean, I'll say just one general thing, which is philosophically, we tend to be careful on our guidance. We're very mindful of guiding our friends on the street diligently. And so we don't like to get over our skis on guidance. But we are seeing a very strong trajectory in royalties. So the 12-month trailing was up 67%. But actually year-over-year first quarter, interesting was up over 100%.

So we are seeing a nice pick up there, and we're seeing more people reporting bigger and bigger numbers. So that's part of it. There is -- I would categorize the first quarter as robust and good from 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. So something like 4x bigger than the next biggest April we've ever seen.

So we're seeing a lot of activity. We're seeing a really strong pipeline on deals. I think that we want to wait until we're a little further through the quarter to see if this robustness continues and persists before we look at future guidance.

Okay. And then maybe following up on some of Kevin's questions earlier. You've 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 in response to Kevin, like what's a reasonable time frame at which that could be a more meaningful portion of overall revenue in the model?

Yes. I mean the data center segment from a license perspective is growing very nicely, right? So on the royalty side, because data center, though the chips are higher priced, the volumes are lower, we expect automotive to be -- continue to be a pretty solid royalty generator. But on the license side, we're definitely seeing solid growth from our data center customers.

If I can add to that also from a quantitative perspective, Josh, enterprise is now -- which is where our data center business resides in our verticals is now the largest of our verticals in terms of license generation. It's slightly now higher than automotive, which used to be the #1. They're both in the sort of 30% to 35% range. What's interesting is aerospace and defense now partially as a result of the addition of Cycuity, is now close to 10% of our ACV. So it's an interesting developing field.

And we have a follow-up question from Kevin Cassidy of Rosenblatt.

Just on the Cycuity acquisition and now that you've had them for a quarter or so, can you say is it coming in better than expected? Or does the outlook -- I guess, if you could give us what's the pipeline look like from here?

So we've really started in middle of January. So it's early days. There were some pretty good government orders in flight, which we closed. So that's very promising. And for the second quarter, we're starting to see some very, very promising deals from the commercial side. So we think that this acquisition is going to turn out just fine.

And cybersecurity, because of the MIDAS product and other sort of AI-based technologies, the cybersecurity is coming to the forefront. And we think that all of our customers, which there's more than 200, can use the Cycuity product. So we're very excited about the potential, but -- and it looks promising, but it's relatively early days.

There are no further questions at this time. I will now turn the call over back to Charlie Janac for closing remarks.

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 some investment conferences. So thank you for your support.

Ladies and gentlemen, this concludes today's conference call. Thank you, everyone, for joining. You may now disconnect.

Good afternoon, everyone, and welcome to the Arteris Fourth Quarter and Full Year 2025 Earnings Call. Please note, this call is being recorded and simultaneously webcast. All material contained in the webcast is sole property and copyright of Arteris, Inc. with all rights reserved.

For opening remarks and introductions, I will now turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.

Thank you, and good afternoon. With me today from Arteris are Charlie Janac, Chief Executive Officer; and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the Fourth Quarter ended December 31, 2025. Nick will review the financial results for the fourth quarter and full year of 2025, followed by the company's outlook for the first quarter and full year of 2026. We will then open the call for questions.

Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appear in the press release Arteris issued today and in the documents and reports filed by Arteris from time to time with the Securities and Exchange Commission.

Please note, 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's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended December 31, 2025.

In addition, for a definition of certain of the key performance indicators used in this presentation such as annual contract value, confirmed design starts and remaining performance obligations, please see the press release for the quarter ended December 31, 2025. 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 December 31, 2025, may obtain a copy by visiting the Investor Relations section of the company's website.

In addition, management will be referring to the fourth quarter 2025 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 CEO, Charlie Janac.

Thank you, Erica, and thanks to everyone for joining us on our call today. In the fourth quarter of 2025, we achieved many company records and milestones, including yet another record annual contract value plus royalties of $83.6 million, which represents a 28% year-on-year increase. This success was driven across our major vertical markets with the largest impacts in enterprise computing, automotive and consumer electronics markets, but also across other applications, including communications, industrial and aerospace and defense.

Overall, we are seeing expanding proliferation of AI-driven semiconductor designs from data center to the edge as well as physical AI, which in turn drives increased deployment of Arteris technology. Given the combination of the rising demand for efficient data movement in semiconductors in the AI era and our expanding set of innovative products that successfully meet the growing needs of our customers, I am proud to announce that our customers have now shipped over 4 billion chips and chiplets, incorporating Arteris network-on-chip IP as the underlying interconnect. This continues to positively impact our royalty revenue stream.

On January 14, we closed the acquisition of Cycuity, a leading provider of semiconductor cybersecurity assurance products. Cycuity brings a rich history of strong collaborations with major commercial semiconductor companies as well as companies in the national security sector, such as Booz Allen Hamilton and National Laboratories. The addition of Cycuity's technology and expertise strengthens the Arteris product portfolio, enabling chip designers to analyze and improve security in IT blocks, chiplets and SoCs.

Cycuity products enable the early detection of cybersecurity risks in the semiconductor hardware and firmware that serve as the foundation for all application software. The Cycuity products enable customers to uncover hardware, security weaknesses and potential vulnerabilities and help to reduce associated security risks during the design phase prior to silicon manufacturing and end device production deployments.

According to the National Institute of Standards and Technology, or NIST, newly reported cybersecurity silicon vulnerabilities grew by over 15x in the last 5 years with the unreported number likely much higher. The Cycuity acquisition will help us to address market concerns about the rapidly increasing volume of sophisticated cyber attacks targeting the vast amounts of data moving to semiconductors from AI data centers to networks and a broad range of devices across the digital ecosystem.

There is a growing need for cybersecurity domain expertise and proven technology with Cycuity acquisition brings to Arteris, enabling us to proactively help customers address cybersecurity in processors and other silicon devices. We believe this product line can be used by all of our existing customers as well as others in a broader semiconductor and systems ecosystem that are not current customers.

Our vision is to bring improved hardware security and advanced vulnerability testing to all SoCs, thereby extending Arteris reach meaningfully in terms of new customers and new entry points for every design regardless of complexity.

Moving on to our organically developed products, all of which experienced strong customer adoption in 2025. FlexGen, our AI-driven Smart NoC IP product announced a year ago, saw a strong uptick in customer adoption and has now been licensed for over 30 production device deployments across each of our vertical end markets with customers, including AMD for AI chiplet designs, Dream Chip for automotive and NanoXplore for aerospace applications. FlexGen's initial success reflects the growing need for optimized chip designs for lower power usage and latency combined with accelerated development cycles. This is particularly true for complex SoCs and chiplet designs in today's AI era, which have high performance and low power goals and tight market windows in which to deliver silicon.

Accordingly, we expect FlexGen momentum to continue in 2026. In the second half of 2025, we also saw strength in the licensing of our cash coherent interconnect IP product, Ncore, across various edge and server applications. For example, in early fourth quarter of 2025, Altera selected Ncore and FlexGen products from Arteris to advance intelligence computing from cloud to edge applications. This significant order underscores Arteris ability to support large customers across multiple of their product generations and ability that drives our 90% plus customer retention rate. We continue to see growing adoption of our product portfolio by top technology companies and large enterprises.

An example of this is NXP, which delivers purpose-built, rigorously tested technologies that enable devices to sense, think and act intelligently. We recently announced that NXP has expanded its use of Arteris products to accelerate its edge AI efforts. NXP is deploying Arteris more broadly across its AI-enabled silicon solutions, including for intelligent vehicles, advanced industrial systems and secure seamless customer experiences on the edge. This includes our Ncore and FlexNoC network-on-chip IPs, CodaCache last-level cache IP and Magillem SoC integration software. NXP is using these products to develop latest AI-driven silicon designs, including SoCs, neural processing units or NPUs and microcontrollers or MCUs with safe and secure high-performance data movement.

Another example of a recent win is Black Sesame, which also licensed both cache coherent and non-coherent interconnect IPs for their devices dual needs with Ncore and FlexNoC being used to address the automotive industry's demand for automated driving silicon. Black Sesame develops a broad range of automotive semiconductors that spans from high-performance SoCs for AI autonomous driving to cross-domain SoCs used in a broad range of vehicles. Arteris technology provides the high-performance network-on-chip connectivity with safety that is critical for designing tomorrow's complex automotive SoCs and achieving time-to-market requirements. Power consumption is a key factor in new SoC designs, particularly those supporting AI workloads.

In the fourth quarter, Blaize deployed Arteris system IP for their scalable, energy-efficient AI silicon. The Blaize AI platform delivers a programmable, energy-efficient foundation for hybrid AI deployment models spanning edge and cloud infrastructure, which enables users to build multimodal AI inference for smart vision, sensing, acoustic monitoring and real-time language understanding at the edge for industrial transportation and smart surveillance applications. By using Arteris interconnect IP, Blaize can ensure efficient data movement along with reduction in power consumption.

AI is also increasingly driving chiplet projects. The number of chiplet projects incorporating Arteris technology more than tripled over the past 2 years. All of these projects require state-of-the-art Arteris technology and close collaboration with multiple ecosystem partners, which has been a major focus for us over the years.

In the fourth quarter, we announced that Arteris is a founding member of the CHASSIS program, which aims to create an open automotive chiplet platform. Led by Bosch, this initiative includes automotive OEMs such as BMW, Renault and Stellantis as well as automotive suppliers, semiconductor companies, EDA and software providers and research entities with Arteris providing network-on-chip expertise and chiplet and multi-die SoC interconnect technology.

Arteris is also part of Cadence's recently announced strategic collaboration with Arm, Samsung Foundry and other IP partners to deliver pre-validated chiplet solutions. The goal of this initiative is to reduce engineering complexity and accelerate time to market for mutual customers developing chiplets targeting physical AI, data centers and high-performance computing or HPC applications with Arteris interconnect IP enabling the underlying data movement.

Our customers continue to innovate in exciting growth areas such as AI-enabled chips and chiplets from data centers to edge devices. The same is true for physical AI, which is based on foundation of silicon combining computing, sensing and data movement to interact with the real world. Physical AI requires a combination of quality, high-performance, energy efficiency, functional safety and cybersecurity, among others, which is supported by our products.

Overall, Arteris is in a strong position to support semiconductor applications in the AI era across enterprise computing infrastructure, autonomous vehicle decision-making, advanced communication, smarter consumer electronics, industrial automation and aerospace and defense use cases. With the addition of Cycuity to our product offering, we have the opportunity to become a leader in SoC security solutions for our existing customer base as well as a door opener to other companies who design SoCs, thereby helping us to realize our mission of enabling every design with leading-edge Arteris technology.

With that, I'll turn it over to Nick to discuss our financial results in more detail.

Thank you, Charlie, and good afternoon, everyone. As I review our fourth quarter and full year results for 2025 today, please note, I'll be referring to GAAP as well as non-GAAP metrics. Please 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 4Q 2025 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 fourth quarter, beating our guidance on all financial measures. The Cycuity acquisition closed in January 2026, therefore, the Cycuity financial performance is not included in any of our reported results for 2025. However, our guidance for the first quarter and the full year 2026 incorporates the expected financial results of the Cycuity business from January 14, 2026 onwards.

Turning to Slide 5 of the presentation. Total revenue for the fourth quarter was $20.1 million, up 16% sequentially and 30% year-over-year and above the top end of our guidance range. For the full year 2025, total revenue was $70.6 million, 22% higher year-over-year. Notably, variable royalties was 50% higher year-over-year with the fourth quarter setting a new record. Our royalty stream today is fueled by a balanced mix of customers across all our vertical markets with the number of large royalty reported tripling in the last 2 years.

At the end of the fourth quarter, annual contract value plus royalties was $83.6 million, up 28% 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 contracted future revenue at the end of the fourth quarter totaled $117 million, representing a 32% year-over-year increase, another record high for the company. As disclosed in the notes to our financial statements, we expect approximately half of our RPO will be recognized as revenue in 2026. This projection excludes cancelable and noncancelable FSA.

Non-GAAP gross profit in the quarter was $18.5 million, representing a gross margin of 92%. GAAP gross profit in the quarter was $18.3 million, representing a gross margin of 91%. For the full fiscal year, non-GAAP gross profit was $64.8 million, representing a gross margin of 92%. GAAP gross profit was $63.7 million, representing gross margin of 90%.

Now turning to Slide 6. Non-GAAP operating expense in the quarter was $20.8 million. We continue to reinvest a portion of our top line growth into technology innovations, customer solution support and our global sales team. Total GAAP operating expense for the fourth quarter was $26.7 million, which included acquisition-related expenses of $1.4 million in the fourth quarter.

For the full fiscal year, non-GAAP operating expense, which excludes the Cycuity acquisition expenses, was $77.2 million, representing an increase of 14% from the prior year. This was broadly in line with our long-term goal to manage the rate of increase in non-GAAP operating expense to around half that of the rate of increase in revenue. GAAP operating expense for the year was $96.8 million. We believe that our ongoing investments will help accelerate our top line growth in the coming years.

At the same time, we are delivering operating leverage by controlling G&A spending, which has now remained broadly flat on a non-GAAP basis for over 3 years. This has resulted in an 8 percentage point year-over-year improvement on non-GAAP operating margin. Non-GAAP operating loss in the quarter was $2.2 million, also above the top end of our guidance range. For the full 2025 fiscal year, non-GAAP operating loss was $12.5 million, representing a $2.4 million improvement over the result for the prior year and at the top end of our guidance range. GAAP operating loss for the fourth quarter was $8.5 million compared to a loss of $7.1 million in the prior year period. For the full year, GAAP operating loss was $33.1 million.

Non-GAAP net loss in the quarter was $2.3 million or diluted net loss per share of $0.05 based on approximately 43.7 million weighted average diluted shares outstanding. GAAP net loss in the quarter was $8.5 million or diluted net loss per share of $0.19.

For the full fiscal year, non-GAAP net loss was $14.1 million or diluted net loss per share of $0.33 based on approximately 42.3 million weighted average diluted shares outstanding. GAAP net loss for 2025 was $34.7 million or diluted net loss per share of $0.82.

Moving to Slide 7 and turning to the balance sheet and cash flow. We ended the year with $59.5 million in cash, cash equivalents and investments, and we have no financial debt. Free cash flow, which includes capital expenditure, was positive $3 million for the fourth quarter and positive $5.3 million for the full year, close to the top end of our guidance range.

I would now like to turn to our outlook for the first quarter and full year 2026 and refer now to Slide 8. For the first quarter of 2026, we expect ACV plus royalties of $85 million to $89 million, revenue of $20.5 million to $21.5 million, with a non-GAAP operating loss of $3.5 million to $2.5 million and non-GAAP free cash flow of negative $1.5 million to positive $1.5 million.

For the full year 2026, our guidance is as follows: ACV plus royalties to exit 2026 at $100 million to $104 million; revenue of $89 million to $93 million, including approximately $7 million from the Cycuity business, noting that the majority of revenue derived from the Cycuity business, we expect to be ratable. Non-GAAP operating loss of between $9 million to $5 million, approximately $1 million of which we expect to be related to the Cycuity acquisition and non-GAAP free cash flow of positive $5 million to positive $9 million.

Building on the strong deal execution in 2025, illustrated by the 32% year-over-year growth in RPO exiting the fourth quarter and incorporating the anticipated growth in Cycuity's semiconductor cybersecurity assurance software business, we continue to believe that Arteris is on a path to profitability, as we expect to report a non-GAAP operating profit for a period as early as the fourth quarter of 2026.

With that, I will turn the call back to the operator for the Q&A portion of our call. Operator?

[Operator Instructions] We have a question from Kevin Garrigan from Jefferies. We have a question from Madison De Paola from Rosenblatt Securities.

Can you help us size the cross-sell opportunity by outlining which customer segments you expect to engage first and kind of expand on how security changes your ability to increase content per customer over time?

Yes. So hardware security assurance is becoming a major issue. As we said on the earnings call, there's about a 15x growth in sort of hardware attacks -- security attacks on semiconductors. So hardware security is becoming a major issue. And because of that, we are very excited about the Cycuity hardware assurance software because not only can be used by our substantially larger customer base, but it can be used by essentially any semiconductor company and those chips have to be protected regardless of the complexity. So we think that it opens up a significant opportunity to essentially enhance the -- want to enhance the system IP value that we provide, but also to address basically any semiconductor out there.

So we're very excited about what we have been able to accomplish, and we'll look forward to keeping you updated on our progress.

[Operator Instructions] Our next question is from Kevin Garrigan from Jefferies.

Congrats on the great results and outlook. Your NXP announcement, so NXP is now using 4 of your solutions, which I think is probably up from 1 or maybe 2. Are you seeing more interest from customers to deploy an entire suite of solutions? And I'd imagine that if you do get customers that are deploying the entire suite, that puts your licensing ASPs well above the $1 million that you kind of were targeting a couple of years ago?

Yes, absolutely. And if you use everything from us prior to the Cycuity acquisition, we were going to be well north of $1 million. And with Cycuity, it's going to be higher than that, right? So we basically have more to sell to our customers. And so security is a big issue now. A lot of markets such as automotive and aerospace and even data center are requiring ISO 21434 certification for cybersecurity protection. And so we think that this certainly helps drive the ASP significantly above the $1 million average project size.

And also, the other thing that's helping to go above the $1 million is that the chiplet projects where you're dealing with multiple pieces of silicon where essentially every chiplet is a license and every chiplet is a royalty also helps that trend, right? So we're very positive about the dynamics of our business.

Yes. Got it. That makes a ton of sense. And then, Nick, just a question for you. Can you talk a little bit more about the strength in royalties that you saw? Was there a specific end market that was -- that saw surprising strength? Or was it more just about your customer diversification strategy?

It's a little bit of both. Kevin, thanks for joining the call. The -- you may have seen that the number of major reporters has grown from 1, 5 years ago to 3 about 2 years ago to 9 today. So the big reporters are the 6-figure plus per quarter royalty reporters. So that's a really important metric to us. And one of the issues that we look at there is looking at the spread across geos and also across market verticals. And so of those -- the 9 large reporters today, they're spread across several segments. There are several in the automotive segment, and that remains our largest single vertical. But we do have now a very rapidly emerging consumer enterprise and even now aerospace large reporters.

So I'm very happy that it's a broad spectrum of strength and look forward to some further growth in the future.

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

Congratulations on the results. Is -- in Q4, the royalties had a significant quarter-on-quarter step-up. Is there any catch-up royalty in that number? Or should we expect that to be the run rate going forward or with a seasonal bias?

Yes. No, that's an excellent question, Gus, and welcome to call. The -- this is Nick, by the way. The -- there was a single royalty pickup, which was reasonably sized. It was less than $0.5 million, but that's a decent pickup, which we saw in the fourth quarter. So it did get a bit of a boost from that. So the 50% variable increase includes that. If you ex that out, the growth rate year-over-year was still in the low 40s percent, which is above our trajectory and our sort of longer-term guidance CAGR for the next 5 years.

So we're very happy that it's already growing at that rate. Audits, you can never guarantee when they're going to produce a positive result for the company. When they happen, they're great, but we can't -- as you rightly point out, you can't bank on them.

Got it. And then just a little bit about Security and its impact on the P&L. My top line went up at the midpoint of guidance, about $7 million. And then I'm just curious how much of that was Security for the full year? And then can you talk a little bit about the impact on the P&L in terms of step-up in OpEx going forward?

Yes. No, it's another excellent question, Gus. So yes, so of the $91 million midpoint guide, it's $89 million to $93 million is the range for revenue in '26. Of that $91 million, $7 million approximately is Cycuity. So -- and forgive me if you can hear my dog bark in the background. So $84 million is the Arteris original business, and that represents about a 19% year-over-year growth. So as far as the rest of the financial impact from Cycuity, we do expect them to be a slight contributor to the loss for the year, so about $1 million worth of loss.

By the fourth quarter, we expect them to be at roughly breakeven, which is in line with the pre-Cycuity addition, Arteris business. And as far as free cash flow is concerned, we are also expecting them to be something like $1 million to the negative over the full year and about $1.5 million negative in the first quarter. This often happens in acquisitions, as I'm sure you've seen before.

And there is a little nuance around gross margin. Some of the government work that they do is actually involved subcontractors. And the GAAP accounting for subcontractors is that those expenses are not OpEx, they're treated as cost of revenue. So there's something like a 2 percentage point, 1 to 2 percentage point drop in gross margin intensity, but that's just literally a flip between OpEx and gross margin.

Okay. Got it. That was helpful. And then my last one is when you did the Cycuity acquisition, you guys announced an ATM and you were going to use that to replace the cash that you used for the acquisition. And I'm just wondering where are you in that raising -- equity raising effort? And when can we expect that to conclude?

So we're in the process of going through the activation, Gus. We can't activate during a quiet period, as you probably know, because obviously, we have MMPI during that period before we announce our results. So we will be going through the activation process shortly. We then are going through a process of setting up the traditional guardrails. We have a pricing committee on the Board, and they will agree guardrails in terms of pricing and quantum.

And so you can expect maybe some small amounts to dribble through in the first quarter. It just really depends on how the market moves and so on. We have no intent at the moment to utilize anything close to the full amount that's available there.

There are no questions at this time. I would now like to turn the conference back to Charlie for the closing remarks. Please go ahead.

Okay. Thank you for your interest in Arteris. We look forward to meeting with you at the upcoming non-deal road show and investor conferences in the quarters ahead and updating you on our business progress. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Good afternoon, everyone, and welcome to the Arteris Third Quarter 2025 Earnings Call. Please note, this call is being recorded and simultaneously broadcast. All materials contained in the webcast is sole property and copyright of Arteris, Inc., with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.

Thank you, and good afternoon. With me today from Arteris are Charlie Janac, Chief Executive Officer; and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the third quarter ended September 30, 2025. Nick will review the financial results for the third quarter followed by the company's outlook for the fourth quarter and the full year of 2025. 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 are based on management's current expectations and assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements.

Additional information regarding these risks, uncertainties and factors that could cause results to differ appear in the press release that 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 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, 2025.

In addition, for a definition of the key performance indicators used in this presentation such as annual contract value, confirmed design starts and remaining performance obligations, please see the press release for the quarter ended September 30, 2025.

These key performance indicators are presented for supplemental informational purposes only should not be considered as a substitute for financial information presented in accordance with GAAP and may differ from similarly titled metrics or measures used by other companies, security analysts or investors.

Listeners who do not have a copy of the press release for the quarter ended September 30, 2025, may obtain one by visiting the Investor Relations section of the company's website at ir.arteris.com. In addition, management will be referring to the third quarter 2025 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 CEO, Charlie Janac.

Thank you, Erica, and thanks to everyone for joining us on our call today. In the third quarter of 2025, we achieved yet another record annual contract value plus royalties of $74.9 million, resulting in 24% year-over-year growth. We saw increased product adoption in [ chiplets ] and SoCs across multiple vertical markets.

AI applications accounted for over half of our licensing dollars in the third quarter reflecting the growing adoption of Arteris system IP technology from data centers to the [ Smart Edge]. We continue to see growing adoption of our product portfolio by top technology companies.

An example of this is [ Altera], which selected Arteris technology portfolio to streamline design workflows, optimize data movement and enable intelligent computing across data center, communications, vision, industrial applications, robotics, aerospace and defense applications. This includes our network on-chip IP products, including [ encore ] and FlexGen and the management platform for IP block integration and hardware, software integration automation, which [ Altera ] plans to use in designing their next generation of [ FPGA ] and SoC FPGA solutions.

Speaking of FlexGen, last quarter, we announced that [ AMD ] licensed the [ Smart NOC IP ] to provide high-performance data transport in AI chiplets across [ AMG's ] broad portfolio from data centers to edge devices. I'm happy to note that in the third quarter, [ AMD ] has ordered additional incremental licenses.

In addition to the Altera and AMD relationships, we added 4 other new FlexGen customers in the third quarter. Within the automotive sector, FlexGen was deployed by [ Dream chip ] a custom SoC design house for high-end automotive semiconductor design. Additionally, a leading automotive OEM adopted FlexGen for next-generation EVs.

Within the industrial sector, [ NANO Explore ] a provider of radiation hardened silicon technology serving the aerospace, defense, avionics and industrial markets, licensed [indiscernible] [ Smart Koc IP ] to address the demanding mission-critical computing requirements in space while supporting their product performance, team productivity, device reliability and meeting the underlying area and cost targets.

This represents another example of our products being used not only for applications on Earth, but increasingly in terrestrial orbit, where performance, safety, reliability and security are essential. These examples illustrate the broad applicability of our new FlexGen [ Smart Lock IP], helping design teams deliver on expanded needs of [ chiplets ] and SoCs.

Additionally, we expect demand to scale with rising design complexity and the move to advanced foundry nodes, particularly 5-nanometer, 3-nanometer, 2-nanometer and as we head into the [ angstom ] era of silicon. As the semiconductor industry accelerates efforts to increase performance and efficiency, especially driven by AI workloads and data centers and the edge, we are continuing to see a growing shift from traditional monolithic chips toward chiplets for multi-die SoC architectures, particularly for AI infrastructure and data center applications.

One of the key chiplets is the [ IO hub ] chiplet, which controls data movement across heterogeneous multi-die SoCs. [ Tubi ] systems license our [ Encore ] and FlexNoC interconnect IPs to develop just such an IHA chiplet where Arteris technology serves to control multi-die data traffic meeting the high bandwidth, low latency energy efficiency and total cost of ownership objectives while meeting the needs of enterprise computing in data centers and cloud infrastructure.

In the quarter, we also saw increased adoption of chiplets for high-end automotive applications, including our recently expanded multi-die solution. For example, one of our advanced automotive semiconductor customers shifted from a single chip to multi-die SoC architectures for their next-generation ADAS design, leveraging [ Encore ] and FlexNoC IPs for underlying data movement.

Aside from various automotive semiconductor companies, we also saw expanded adoption of Arteris technology by automotive OEMs. Two of the top 5 EV automotive OEM companies expanding their use of silicon proving our terrorist technology with functional safety for their next generation of vehicles, which increasingly include a wider array of advanced electronic functionality.

Given the accelerating demand for increasingly advanced chiplets and chips from the AI surge in the high end to the growing needs of advanced microcontrollers, the needs for more specialized computing is becoming increasingly evident.

This trend drives a broad range of specialized processors or [ XPUs], for a growing number of applications by providers who increasingly rely on Arteris technology for their underlying connectivity and data movement. With our growing ecosystem, we recently announced an expanded collaboration with [ Alibaba Demo Academy], enabling better integration and optimize performance between the risk 5 CPU cores and our data movement system IPs.

This collaboration is intended to further enable mutual customers to more efficiently design AI server communications and automotive chips. Such ecosystem collaborations help enhance support for end customers, enabling them to accelerate their pace of innovation, with recent example being Axelera AI, a provider of purpose-built hardware acceleration technology for AI inference.

They recently expanded the use of Arteris to help accelerate computer vision for edge devices using our technology to help achieve high bandwidth, low latency and scalability requires to optimize their next-generation inference products.

The need for ecosystem collaboration is also evident as industry standards continue to evolve. In particular, AI data center infrastructure needs are rapidly evolving, driving demand for purpose-built solutions that can better support rapidly expanding AI workloads. To better meet the associated demand from customers, Arteris joined the Ultra Accelerator Link Consortium, or [ UA Link ].

The goal of this organization is to establish an optimized, scale-up ecosystem across multiple AI accelerators with Arteris NOC-IP serving as data movement transport in chiplets and SoCs. We joined with other companies in the consortium, such as AMD, Astera Labs, AWS, Cisco, Google, HP Enterprise, Intel, Meta and Microsoft, all of whom deal with high-end computing and some of whom are requesting the related support in our products.

Lastly, I'm proud that Arteris continuous innovation was recognized with yet another award this time as the winner of the most innovative technology company of the year by the 22nd Annual International Business Awards, while also being recognized for new FlexGen [ Smart Kok IP ] and Magillem registers integration automation software product, both announced earlier this year.

We believe the scale and scope of our opportunity remain robust, supported by our current products, and strong pipeline of new data movement system IP technologies as well as growing relationships with the largest and most advanced electronics companies in the world in collaboration with a broader ecosystem.

Our customers continue to innovate in exciting high-growth areas across multiple applications from AI data centers to the edge, autonomous driving, advanced communications, consumer and industrial use cases. Many of these customers are increasingly turning to our products and solutions to support their innovative designs. With that, I'll turn it over to Nick to discuss our financial results in more detail.

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, 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 3Q 2025 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 third quarter meeting or beating our guidance on all financial measures. Turning to Slide 5 of the presentation. Total revenue for the third quarter was $17.4 million, up 5% sequentially and 18% year-over-year and above the top end of our guidance range.

Notably, trailing 12-month variable royalties was 36% higher year-over-year. At the end of our third quarter, annual contract value plus royalties was $74.9 million, up 24% year-over-year, above the top end of our guidance range and at a new record high.

Remaining performance obligations, which is our contracted future revenue at the end of the third quarter was $104.7 million, representing a 34% year-over-year increase, a new high and exceeding the $100 million milestone for the first time. Non-GAAP gross profit for the quarter was $15.9 million, representing a gross margin of 91%. GAAP gross profit for the quarter was $15.6 million, representing a gross margin of 90%.

Now turning to Slide 6. Non-GAAP operating expense for the quarter was $19.5 million. We continue to reinvest a portion of our top line growth into technology innovations, solution support and our global sales team. Total GAAP operating expense for the third quarter was $24.4 million. We believe that our ongoing investments will help accelerate our top line growth in the coming years.

At the same time, we are delivering operating leverage by controlling G&A spending, which has now remained broadly flat on a non-GAAP basis for over 3 years. This has resulted in a 15% improvement of non-GAAP operating expense as a percentage of revenue for the year-to-date compared to the same period in 2023.

Non-GAAP operating loss in the quarter was $3.5 million, in line with our guidance. GAAP operating loss for the third quarter was $8.7 million compared to a loss of $7.9 million in the prior year period. Non-GAAP net loss for the quarter was $3.8 million or diluted net loss per share of $0.09 based on approximately 42.7 million weighted average diluted shares outstanding. GAAP net loss in the quarter was $9 million or diluted net loss per share of $0.21.

Moving to Slide 7 and turning to the balance sheet and cash flow. We ended the quarter with $56.2 million in cash, cash equivalents and investments, and we have no financial debt. Free cash flow, which includes capital expenditure was positive $2.5 million for the third quarter, above the midpoint of our guidance range.

I would now like to turn to our outlook for the fourth quarter and the full year 2025 and refer now to Slide 8. For the fourth quarter 2025, we expect ACV plus royalties of $74 million to $78 million, revenue of $18.4 million to $18.8 million with non-GAAP operating loss of $2.3 million to $3.3 million and non-GAAP free cash flow of $0.2 million to $3.2 million.

For the full year, 2025, our guidance as follows: ACVs royalties to exit 2025 at $74 million to $78 million, an increase of $1 million compared to our prior guidance. Revenue of $68.8 million to $69.2 million, also an increase of $1 million compared to our prior guidance. Non-GAAP operating loss of between $12.5 million to $13.5 million and non-GAAP free cash flow of $2.5 million to $5.5 million.

We remain encouraged by our strong deal execution witnessed by the 34% year-over-year growth in RPO at the end of the third quarter. We are seeing promising signs of accelerated interest by some major customers to increase their outsourcing of system IP products to our tariffs, which we believe will help accelerate growth in our license and royalty revenue, ACV plus royalties and positive free cash flow.

With that, I will turn the call back to the operator for the Q&A portion of the call. Operator?

[Operator Instructions]. Your first question is from Kevin [ Harrison ] for [indiscernible].

Charlie, congrats on the results in the [ Altera ] announcement. Can you just talk a little bit more about Altera? Are they fully away from using internal interconnect teams? Or is there still more opportunities for you guys to expand there?

I think there's more opportunities. Basically, the application is for FPGAs and FPG SoCs. So [ Altera ] is using their own interconnect in the FPGA matrix, and then we are used essentially in the SoC part. But Altera business is going to continue to evolve and grow and we believe that there's future opportunities, but this is a major milestone because Altera, as they spun out of Intel chose to go with Arteris for their primary system IP requirements. But yes, there is more potential going down the road.

Okay. Perfect. And then since the initial discussions with AMD and the initial order announcement, it seems like it took about 1 quarter, maybe a little bit longer for them to expand the use of your products. So what were they kind of most impressed with that led to increasing usage in such a short time frame?

Yes. I mean, AMD is a big company. The deal in the second quarter was for their -- basically their central engineering group. And this -- the third quarter deal was basically for another group. And Altera is -- I'm sorry, AMD has many groups to -- for us to work with. And so there are also additional opportunities at AMD, and we're very much looking forward to helping them accelerate their chip deliveries.

Got it. Got it. Okay. And just one more if I can. You talk -- can you just talk a little bit more about the importance of reliability and safety when it comes to interconnects and the importance of it in some end markets like space as you guys mentioned? And I think you guys have done a very good job on this front, but do you see this as this focus as really a competitive advantage for you guys?

Absolutely. I mean, basically, all the important data goes through our network on chips. And basically, if that has problems or doesn't work, the chip doesn't work. So customers are very risk averse in choosing system IP solutions because any problems there can cause major delays in tape-outs and field problems.

So we're being recognized as very much a silicon-proven company. I think now our installed base has shipped something like 3.9 billion SoCs and they all work. And probably some of the stuff used daily, probably has our Arteris [ connect ] in it. So yes, we are very much focused on reliability. We're very much focused on quality because if the system IP doesn't work, the chip doesn't work.

The next question is from Kevin [ Cassidy ] from Rosenblatt Securities.

Congratulations on the great momentum. Just on the UA Link consortium, what kind of timing can we expect for licenses to come out of that consortium and some of the players there?

Well, some of the players are already customers. But basically, the objective of the UA Link consortium is to essentially scale up data center solutions. And so we're basically developing technology to support that, and we're already involved in some of those designs, but we're basically following that consortium's protocol in order to support the data center scale up efforts that they are pioneered by the companies that we mentioned.

Okay. Great. And with the penetration you're getting within AMD and combining it with the Altera announcement, is there opportunities for [ Xilinx]? Or is that already included in your AMD &D discussion?

Well, [ Xilinx ] is an important part of AMD. And in fact, [ Xilinx ] was the first customer that was involved with us prior to the AMD acquisition. So [ Xilinx ] has been a long-time user of Arteris.

Your next question is from Gus Richard from Northland.

Real quick, you've had a number of design wins for a while. And just wondering the royalty relative to most mature IT companies is relatively low. Just wondering when do you expect that to start to accelerate?

Nick, do you want to take that one?

Yes. I will. Yes. Gus, welcome to call. So the -- it's a great question because as you and I have discussed in the past, the -- an increasing rate of customer design starts is a great indicator of future royalty growth because typically, there's somewhere between a 3- to 6-year lag between start of the design and mass production and scale, and it can take even another couple of years to get up to full scale after the mass production starts.

So it is definitely a heavy link between the 2. The -- we're already seeing that, and we're already seeing the beginning of the inflection on royalties. And there's one you'll see in our investor or Q3 Investor Day, there's a new additional piece of information on royalties.

And what's very interesting is number one, the growth of royalties is quite -- a variable royalties is quite impressive. And in fact, the growth year-over-year for the variable royalties in the trailing 12 months to the end of September compared to the prior 12 months ending September 2024 was up 36%, which is in line with what we've been saying in terms of the royalties growing at roughly 2x the rate of licenses.

And what's particularly interesting in that chart you'll see in the investor deck, is that we -- if you go back to 2020, which is quite an interesting start point because that's when we were dominated in royalties from [ HiSilicon], which has now, of course, gone to 0, we now have a higher rate of variable royalties in fact we have all year since the days of HiSilicon back in 2020 and now instead of being a one-trick pony where we had one customer making up 90% of our variable royalties.

We now have customers who between them have a greater royalty stream than the one HiSilicon. So we've got more diversity. We've got more people who are now the majors. So it's 5 majors and then another 50 smaller players. And so it's all up and to the right and growing very nicely. So we are starting to see that. I do see there's an increasing inflection point as we go through the next couple of years. So by 2028, you'll see an even faster rate of acceleration.

Got it. That was super helpful. And then, Charlie, for you, you guys talk about the top tech companies that you've penetrated, I was wondering if that's just for everybody to find what those companies are and then how many you've, at this point, penetrated? And then specifically in the [ AI ASIC ] crowd, are you starting to penetrate those, both U.S. and Taiwan?

Yes. I mean we basically, we define the large company to sort of top 20 semiconductor companies and then basically, another 20 of the largest system electronics companies, right? So that's -- we're kind of jokingly referring to that as the Arteris index. And we have, I would say, more than 50% of those companies as customers but not all of them are huge customers, right?

So there's still a long way to go in terms of expansion of our business. But obviously, with the AMD and Altera announcement, and there's a couple of others who don't let us announce who they are. One of which we also closed in the Q3. We did our best to be able to announce them, but they did not let us. So I think our progress in the top 40 largest technology companies is quite good. But there's a long ways to go.

It's about a $1 billion, $1.2 billion market and we're about $68 million this year or something like that. So there's a long way to go.

Okay. Got it. And then the [ lord bolt ] more questions. When I go through cash flow on balance sheet, [ BlaBla ] and it looks like bookings were in the ZIP code of $32 million in the quarter, book-to-bill about $1.8 billion. So Nick, am I in the right ZIP code?

Yes. I don't want to comment on bookings otherwise, we open up a Pandora's box of future disclosure. So bookings, as you know, fairly lumpy. And so -- because we have very large customers these days. And so that can really create a false precedent if we start if we start disclosing that. So I'll have to allow you to do your own math on bookings, Gus.

Your next question is from Joshua Buchalter from TD Cowen.

Charlie, I thought your comments in the prepared remarks about more -- seeing more tractor from AI applications and specifically in the data center were interesting. Obviously, a lot's happened in the AI space over the last few months. Could you maybe level set us on how much of your opportunity over time you see coming from actually in data center versus edge device edge and embedded devices where I think that's been your bread and butter for a while?

Yes. I mean, basically, our thesis is that, over time, pretty much all electronic endpoints or edge devices are going to be connected to the data center. And so for each end point or edge device, there is some ratio of blades in the data center. And as everything becomes connected to the data center, these the number of chips that's actually in these data centers goes to a very large number.

So we're sort of following customer demand. And we are -- there's just a lot of attention on AI workloads in the data center. There's a lot of project starts. Obviously, NVIDIA is a very, very major player and it will continue to be a major player. But some of these system houses are also designing some of their own chips for specific data acceleration of specific workloads. They're working on specific AI workloads and those kinds of things.

So we see as a major opportunity, and we're working with those customers, and we're increasingly starting to pivot our engineering to address the issues that are important to these data center companies, hyperscaler companies that are handling the high-end AI workloads.

So over time, I mean, I think data center will be somewhere between 25% to 30%, maybe 35% of our business. But right now, AI is -- represents about 50% of all the design starts that we're involved with. So right now, there's a bit of a design start bonanza. But on a long-term basis, I would expect it to be about probably 35% or so.

Maybe, Nick, could you provide any comments or color on -- it seems like you're getting a lot of good traction from FlexGen, which comes with higher ASP on the royalty and I'm guessing the licensing side as well. When should we expect that to start being a sort of meaningful needle mover in the model?

Josh, just to be clear, are you asking that question specifically regarding royalties or more generally on license revenue?

It was more on the royalty side.

Yes. So I mean FlexGen is accretive to both ASP and therefore, license, but it's also accretive to royalties because it has more competence as a product than it's -- the more junior the [ Flex not 5 ] that doesn't have the automation feature.

So yes, if you look at somebody, for example, in who've just kicked off a FlexGen cycle or FlexGen deal with us, and most of those have come from the mid of this year onwards. And now you saw we had another 4 in addition to Altera and AMD in the third quarter. So it very much depends on the use case.

There are some -- most of the use cases right now are more in the server and FPGA environment which don't have huge volumes, as you know, there are some which are more involved in higher volume. We're early stages yet. We do expect a lot more penetration from FlexGen into some of the other areas that are perhaps higher volume.

And of course, the biggest royalty area for us, which is about half of our total royalties is actually from the automotive market. And so from a -- if you use FlexGen in automotive, for example, or [ rate ] design today and you start the design, it would be 2030 to 2031 before we started seeing the royalties from that. So there's a lot of pipe stocking going on in royalties from this.

There are no further questions at this time. Mr. Janac, please proceed with closing remarks.

Well, thank you, everyone, for your interest in Arteris. We're very excited about the current quarter, and we look forward to meeting you -- with you in the upcoming non-deal road shows and investor conferences in the quarters ahead and updating you on our business progress. Thank you very much.

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