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K. Charles Janac

Thank you Erica and thanks to everyone for joining us on our call today.
In the third quarter of 2024, we achieved a record annual contract value plus royalties of $60.5 million.
We also delivered positive free cash flow of $1.1 million making it our third consecutive quarter of positive free cash flow.
Our success during the quarter was in particular fueled by demand for AI driven enterprise computing and automotive SoC solutions, along with growing momentum in our other verticals. Business in the third quarter was primarily driven by increasing adoption of our technology by our current customer base. As an example, a top five global technology company increased their deployment of our various products to enable development of their high end, AI chiplets, and SoCs. This expanded engagement provides our customers with a broader access to our system IT. We expect to see designs from this customer used in a wide range of products such as hyperscale cloud data center applications as well as high volume consumer electronics.
Similarly, NIO, a pioneer and a leading company in the global smart electric vehicle market deployed our Arteris technology for its next generation of ADAS and LiDAR SoCs using our physically aware NoC technology to reduce silicon implementation risks and schedule.
This is yet another example of our continued success in accelerating automotive electrification and autonomous driving with over nine carmakers already using our terrace directly as the gold standard for functionally safe high end automotive computing.
During the quarter, we also announced the adoption of our terra NoC IP and SoC integration automation software products by tier four for intelligent vehicle SoC then sting for next generation of chiplet based AI solutions and very silicon for HPC data center SoCs. Majority of the new designs in the third quarter came from enterprise computing followed by automotive consumer electronics and communications verticals.
The demand for multiple type of AI chips and chiplets from data centers to endpoint devices including the smart edge continues to be a key factor in our success this year. Nearly half of our license deals in dollar terms in the year have enabled AI SoC development more than doubling year over year.
We continue to work with market leading customers to further advance our technology accelerating the broad shift towards smarter electronics. Accordingly, in October, we announced the addition of NoC tiling supported by mesh and innovation in our IP products to accelerate the design of AI SoCs by providing scalable performance power reduction and increased design reuse . By organizing network interface units or N I into modular repeatable blocks, both FlexNoC and Ncore IP users can replicate verified functional modules into larger AI compute clusters.
These support sophisticated workloads for vision, machine learning, deep learning, natural language processing including large language models and generic AI both for training and inference applications.
Earlier this year, we announced expanded support for Armv9 Architecture CPUs with our terrace Ncore IP extensions for joint customers.
Additionally, we announced a partnership with Andes Technologies to accelerate RISC-V associate adoption and are pleased to have been named by them as partner of the year.
We recently expanded our collaboration with SiFive announcing pre verified RISC-V solutions for data centers with our Ncore product, providing faster, lower risk SoC design for AI workloads and power efficiency requirements.
Moreover, Arteris joined the Synopsis arc access program. The aim is to provide interoperable and optimized solution for mutual customers using Synopsis processors and Arteris NoC. Our strategy of supporting mid and high end SoCs and expanding our footprint within large customers appears to be paying off. In dollar terms, the majority of our license deals in the quarter were with the TOP 10 technology companies as they create ever more sophisticated electronics that increasingly need AI enabled high performance and energy efficient SoCs. To further expand our footprint at large customers, we have broadened our focus to include the support of micro controller chips, many of which are now complex enough to benefit from our system IP technology.
These designs are numerous and are often produced in large volumes. As micro controllers are used to control the operation of electronic systems such as industrial machinery, automotive functions and IOT devices, they require low latency and low power consumption. To address these requirements, we have achieved the ability to create data packets with zero latency penalty for these types of devices.
This strategy aims to expand customer usage of Arteris technology from complex SoCs to the mid to operate microcontroller product lines and demonstrates the technological flexibility and scalability of our products.
We are also aiming to address an even broader set of designs in our large customers.
We believe the scale and scope of our long term opportunity remains robust, supported by our current products and strong product pipeline of new system IP technologies, as well as growing relationships with some of the largest and most advanced electronics companies in the world.
Our customers continue to innovate in exciting growth areas such as generic AI and autonomous driving using our various technologies.
Before I hand the call over to Nick, we're excited to have two seasoned individuals join our leadership team.
We recently announced that Joachim Kunkel joined our board of directors, having most recently served as a general manager of the IP Business Unit at Synopsis where he grew revenue from nearly zero to over $1.5 billion.
In addition, Ken Way joined as our terrace EVP of sales leading our global and application engineering force. Bringing with him a wealth of experience and industry knowledge gained from our chronics dialings free scale and others.
With that. I'll turn over to Nick to discuss our financial results in more detail.

Nick Hawkins

Thank you, Charlie and good afternoon everyone.
As I review our third quarter results today, please note that I'll be referring to GAAP as well as non-GAAP metrics.
A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website.
Also as a reminder, I'll be referring to the 3Q 2024 earnings presentation which can be found in the investor relations section of the company's website under the events and presentations tab.
Turn to slide four of the presentation. Total revenue for the third quarter was $14.7 million up 11% year over year, and at the midpoint of our guidance range. At the end of the third quarter, annual contract value or ACV plus royalties was $60.5 million, at the midpoint of our guidance range and a record high for the company. Remaining performance obligations or RPO at the end of the third quarter were $78.4 million representing a 25% year over year increase, also going to the highest level we have ever reported.
GAAP gross profit in the quarter was $13.3 million representing a gross margin of 90% non-GAAP gross profit in the quarter was $13.5 million representing a gross margin of 92%.
Now turn to slide five. Total GAAP operating expense for the third quarter was $21.2 million. Representing a 4% year over year increase, non-GAAP operating expense in the quarter was $16.8 million flat both sequentially and year over year.
This reflects the team's continued focus on prudent management of our operating expenses. As we look ahead, we will continue to limit spending to strategically critical areas while investing in profitable revenue growth.
GAAP operating loss for the third quarter was $7.9 million compared to a loss of $8.5 million in the prior year period and $7.4 million in the second quarter. Non-GAAP operating loss was $3.3 million, which is better than the top end of our guidance. This represents a $1.2 million improvement compared to the prior year period and a slight improvement sequentially. Net loss in the quarter was $7.7 million or diluted net loss per share was $0.20.
Non-GAAP net loss in the quarter was $3.1 million or diluted net loss per share of $0.08, based on approximately $39.3 million weighted average diluted shares outstanding.
Moving to slide 6 and turn to the balance sheet and cash flow.
We ended the quarter with $54.5 million in cash, cash equivalents and investments. Free cash flow, which includes capital expenditure was positive $1.1 million. This was above the midpoint of our guidance range and in line with the company's goal to be free cash flow positive for the full year of 2024.
I would now like to turn to our outlook for the fourth quarter and for the full year 2024 and refer now to slide 7. For the fourth quarter of 2024, we expect ACV plus royalties of $63 million to $67 million, revenue of $14.7 million to $15.7 million, with non-GAAP operating loss of $5 million to $4 million, and non-GAAP or free cash flow of negative $0.9 million to positive $1.1 million.
For the full year 2024, our guidance is as follows. ACV plus royalties to exit 2024 at $63 million to $67 million up over 16% year over year at the midpoint. Midpoint unchanged from the prior guidance. Revenue of $56.9 million to $57.9 million, increasing the midpoint of our guidance by $0.4 million. Non-GAAP operating loss of between $17.1 million to $16.1 million, improving the midpoint of our guidance by $3.4 million, and non-GAAP free cash flow of positive $0.7 million to positive $2.7 million, which is $1.6 million higher than the prior guidance at the midpoint and represents an improvement of $18.9 million year over year.
We are very encouraged by our top line trajectory and by our effective cost management in the first three quarters of the year, that resulted in strong performance for the third quarter and improved guidance for revenue, operating income, and free cash flow for the full year.
We are particularly excited about achieving positive free cash flow for three consecutive quarters.
With that, I will turn the call over to the operator and open the deck for questions. Operator.

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, we are now, we will now begin the question and answer session.
(Operator Instructions)
Joshua Buchalter from TD Cowen.

Joshua Buchalter

Hey guys, thank you for taking my questions and congrats on\ solid results in a choppy backdrop.
To start and speaking on the of the choppy backdrop. I mean, this has been an interesting earnings season with China Auto is positive and the rest of the world, we, maybe you could spend a couple minutes talking about, you know, in that, in an environment where China continues to take share in the global auto market, and is that a net positive or is that a headwind for you guys? Because you know, obviously one of your lead customers mobilize, had been losing share in that market. But also there's a lot of local vendors that are also building up their semiconductor portfolios where you have partnered. So I'd just be curious to hear your view on that backdrop and the impacts your business. Thank you.

K. Charles Janac

So, yeah, I mean this, so this discussion, it's kind of difficult to to get ahead of time, right? And so we, we have, our strategy has been to be in as many projects as we can capture, and so we are in startups, we're in automotive car manufacturers, we're in tier one, and so, regardless of, of market share shifts, Arteris should benefit. But you know, we, we do have a strong presence in the, in the China automotive market. I think NIO was kind enough to allow us to announce that they are using us for some of their, some of their automotive SoC projects, right? And there's, there's a number of others, and, and so, you know, from our, from the Arteris perspective, it doesn't make a whole lot of difference. However, you know, the Chinese have put a huge amount of effort in their electric vehicles there. Very nice vehicles we've been in a number of them. But because of the, the tensions, you know, the the rest of the world is going to probably throw up some protective barriers, right? And so I don't know how much the market share is really going to is going to shift except that, you know, the electric car inside China is going to be the the, you know, eventually the predominant technology.

Nick Hawkins

Can I just add a little bit of color to Charlie's excellent comments?
Josh, there are, I mean, as you rightly point out, we have a very small number of, of Chinese auto OEMs that we can actually we're entitled to use their, their names. But you recognize most of the names that we, we, we do have if we are able to able to tell you some of the ones that we can tell you that are in that that area that that Chinese auto area that are public include Black Sesame, which I'm sure, you know, Horizon Semi Drive, those are all very powerful vendors in that, in that space. But there are many others we can't mention. Unfortunately, on the subject of mobile excellent question Mobil is obviously facing a few headwinds and, and and also is, is facing some headwinds specifically in China, but Mobile is still very strong. It's, it's one of the strongest in the market. They have an excellent set of, of products. There, there is, there has definitely been some headwind to our, our royalties as you've seen and we've talked about in previous calls, solely derived from Mobile Iwe shipments in the 1st and 2nd quarters. To an extent that was, started to be remedied in the third quarter. But the, the whole impact of, of short, let's call it short, royalties from mobilized versus our previous expectation, has a less than 1% impact on revenue for the whole year. So it's not as dramatic as you might think.

K. Charles Janac

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

Joshua Buchalter

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

K. Charles Janac

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

Nick Hawkins

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

Joshua Buchalter

Thank you both. Appreciate it.

Operator

Kevin Garrigan from Rosenblatt Securities Inc.

Kevin Garrigan

Yeah. Hey Charlie Nick, good afternoon and let me echo back and grab some solid results.
Going off of Josh's question on the Chinese auto market. So I guess a different way to kind of ask the question. Are you seeing design activity in the Chinese EV market increasing at a faster clip versus other parts of the world? And I think you guys had mentioned the average time from waisting to production for automotive is about 2.5 to 3 years. Are you seeing these Chinese customers looking to accelerate that time line?

K. Charles Janac

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

Kevin Garrigan

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

K. Charles Janac

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

Kevin Garrigan

Yes. Okay. Yeah, that, that makes sense, and then just last one, if I could and congrats on the announcement of, of the NOC tiling, how is kind of customer feedback been for this product?

K. Charles Janac

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

Nick Hawkins

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

Kevin Garrigan

Okay, perfect. I appreciate the color guys. Thank you.

Operator

(Operator Instructions)
Gus Richard from Northland Securities Inc.

Gus Richard

Yes. Thanks for letting me ask some questions and let me add my congratulations on the quarter. The cloud service providers are designing their own A sixes quite a bit of data suggesting that those are in flight and starting to ramp, and I'm just wondering if you could talk about, you know how many of the top ESPs you're involved with now or maybe even better yet. How many of the TOP 30 tech companies that actually design chips you're involved with?

K. Charles Janac

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

Gus Richard

Got it, and, and you had a large deal with one of the top five tech companies. This deal to expand the use of your products. Correct.

K. Charles Janac

Correct. So this would be one of the yes. So this would be one of the large Hypers scalers. Yeah.

Gus Richard

Got it, and then Nick for you, you know, I calculate your from cash flow, your bookings were on the order of like $23 million to $24 million, am I in the right zip code?

Nick Hawkins

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

Gus Richard

Between Q3 and Q4 or Q2 and Q3.

Nick Hawkins

Q3 and Q4.

Gus Richard

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

K. Charles Janac

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

Gus Richard

Okay. Got it, and have you recognized any revenue on that product at this point?

Nick Hawkins

Not yet. No, it's more of an early access, more of an early access thing at the moment, Gus, so revenue will follow in due course.

Gus Richard

Got it. That's it for me. Thanks so much.

Nick Hawkins

Thanks Gus.

Operator

There are no further questions at this time. I would not like to turn the call over to Charles Janac, for closing comments.

K. Charles Janac

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

Operator

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

K. Charles Janac

Thank you. Bye bye.