All right. Charlie, Nick from Arteris IP, a recent IPO, that TD Cowen was involved with and really good story about on-chip interconnect IP and the growth of AI and particularly automotive chips for the industry. Charlie, maybe we could just initially kick off for the benefit of the folks on online as well, and I think we're gonna continue to get people streaming in here given the elevator capacity of the It's limited. It's limited, let's just say. Yes. Anyway, it's great to see you both. Thank you for spending some time. Charlie, if you don't mind giving a bit of an introduction to the company. Maybe not complete introduction, but just kind of an update and an update on the business. Yeah. We make connectivity components for essentially semiconductor-based electronic systems like cars, TVs, computers, those kinds of things. Specifically what we do is we deliver Network-on-Chip. We're the pioneers of using networking techniques inside semiconductor chips. Additionally, we make software that allows our customers to deploy their IP libraries, so we call it IP deployment software. Together with the NoC interface IP, there's some specific blocks that connect to the Network-on-Chip that make the chip work better, that makes up our system IP business. We're a system IP company. We're designing to about 70%-80% of all ADAS chips for automated driving. We see strong demand in machine learning, 5G infrastructure, consumer, and industrial. We've basically are in about 3 billion chips... 3 billion systems using our products. It's quite a bit. The drivers of our business are basically complexity of the SoCs that is increasing dramatically as SoCs are allowed to make decisions rather than just process data. There's also what I call the democratization of the SoC business, where the IP methodology has allowed system houses to be more successful in building chips. There's more companies building chips for their systems. It used to be that the semiconductor companies put out a chip and the people would program for it. Now people build a huge software and structure, infrastructure, and they build chips to support that software. Of course, the globalization's dead, so you got regionalization of the semiconductor industry between the U.S., E.U., and China. Finally, a lot of the players only do a portion of the design cycle, so I call that disintermediation of the semiconductor design cycle, and that speaks well for our IP deployment software. That's our system IP business, and we think we're the leader in that space. Just to add to that, Charlie, one of the things that a lot of people don't realize is the complexity of NoCs, you know, networks on chip, is increasing dramatically every single year. That pushes people our way to our solution, because you can't do it with simple discrete dies anymore. There's a scarcity of NoC engineers, interconnect engineers. It's very hard for people to build their own internal teams. No, it makes sense. I think there's a lot to dig into with your company, especially given the evolution in AI chips and also in the automotive market in particular. Right. That's going on with your customer base. My observation is that in the automotive market, all of your top customers are going through this transition from being what I would call microcontroller-centric companies to SoC-centric companies. Mm-hmm. Right? Right. If you're building an MCU, and you've been building one forever, and this is kind of the same MCU over and over again, you probably don't need a whole bunch of interconnect IP. Right. Make that transition to a much more diversified SoC that needs more capabilities at higher process nodes, and all of a sudden there's a build or buy decision that comes into play for the customer. The transition's happening quickly. They need on-chip IP. Is that the driver of the business basically, is they need that IP and you guys have proven at scale that the IP works and can provide them that service over a long period of time? Yeah, absolutely. You know, we see two types of teams in automotive, right? One is the team that has been building automotive MCUs forever, and their next project is a system on chip. Yeah. with a processor, machine learning sections and all that stuff. That's a very, very big step to go from those kinds of small devices to an automotive SoC. Then the other team is people who are used to building SoCs, but they don't know anything about automotive, so they don't know anything about functional safety, they don't know anything about kind of the automotive standards and those kinds of things. We essentially kind of bridge that gap and we deliver a functional safety-oriented technology called Resilience, which allows the chip to meet the different levels of ISO 26262 standard ASIL B, C, and D, depending on how far they wanna go. We've been early in developing those technologies and so we're designed into, I think we have about 36 automotive customers and there's more and more coming into the market because it's the biggest opportunity in tech over the next 20 years, I think. Yeah. I mean, you've shared through the whole IPO process and even since then, you guys have updated sort of the logo chart of where you are in automotive. Just for this audience, if you could just kind of remind folks the diversity of the customer base. I mean, it's kind of the who's who in auto semis. Yeah. We have, as I said, about 35, 36. 36, I think, automotive customers. Some of the names you would recognize are Mobileye, NXP, Bosch. We have a number of leading Chinese companies, Black Sesame, Horizon Robotics, Cambricon, and SemiDrive, right? Bunch of smaller companies that are doing automotive and then many that we are not allowed to announce, right? There are ridesharing companies, there are automotive OEMs, of which we've been only allowed to announce one, which is BMW, which we announced in the last quarter's earnings call. There are the tier ones, and there are semiconductors, and they are all designing chips in some form or the other. The car is becoming a supercomputer on wheels. We'll get back to the BMW conversation here in a second, but I think it's important for folks to understand the consistency of what you guys have been doing with some of these automotive customers as well. It's not just newly won designs. There are certain flagship and large customers in your automotive base that have done three, four, five, six generations of products. Mm-hmm. Have consistently used you guys. One of your largest customers was acquired by Intel and is now potentially going outside of Intel, at least partially. They had opportunities to explore different types of IP when Intel bought them and very consistently stuck with Arteris for a long period of time. Right. Maybe you could talk about that track record, what complexities happened with your customers over time, what the ASP for your solutions has done over time, and sort of the stickiness of the IP. Yeah, the technology is very sticky, particularly in automotive, because basically the interconnect is the data highway, the data backbone of the chip. If you were to replace the interconnect, you actually have to requalify the chip. Mm-hmm. The only time you can ever come out is between generations. We have the largest support force in the world for system IP. We have consistently delivered one new product per year, you know, some of that for the automotive market. We make two to three releases of every major product, update releases, per year. We've been able to address the needs of those kinds of customers. Consequently, we don't lose customers. You know, Mobileye, we've been in their chips, every one of their chips since 2011. We've been multiple generations of NXP chips, multiple generations of Bosch chips and those kinds of things. No, perfect. Nick, I wanted to. I think a lot of the investors are familiar with some of the really large IP businesses in semiconductors, Arm being the flagship one. Mm-hmm. There was always the licensing fee up front for the IP, the royalty stream that would come later. Your business has very much those dynamics, and then you have the additional piece of the IP deployment software on top. If you could just kind of walk folks through how the revenue model works, what the metrics are that investors should be following. I use Arm as the flag post because it was a large cap and people were very familiar with the model. Sure. If you could just compare and contrast what the metrics are that we should be following? Yeah. We have multiple streams of revenue. As you rightly pointed out, we have license revenue, which unfortunately for complexity is different if you're selling interconnect where it's ratable, so it's spread over the contract term, as opposed to IP deployment software, which is point in time because of the nature of the agreements currently. We'd love to move that to a ratable model too, but that takes a little bit of work. That's the one piece. The point in time element of that can ebb and flow, and we've seen a really strong Q1, as you saw in the outperformance, really strong Q2 in the guide anyway, sort of well above consensus. That's really down to the nature, the cadence of the quarters. The metric that we encourage people to look at, which basically removes that, the peaks and troughs, more peaks, obviously, than troughs, is to use what we call annual contract value, ACV, and we add on to that, trailing 12-month royalties. Annual contract value is simply the total fixed fees under contract divided by the contract term. If it's a $600,000 three-year license, it becomes a $200,000 ACV. Trailing 12-month royalty is kind of a proxy to revenue is the way we look at it, because it basically smooths out the point in time revenue versus the ratable, and it puts them on the same level playing field. Once you add in trailing 12-month royalties, you have a true revenue proxy. Last year, for example, we ended up with around $38 million of GAAP revenue. ACV plus TTMR at the end of the year was $50 million. They're quite different scales of numbers as well, but much more consistent. If you look at the development of ACV over the last, I think we've published numbers for the last two and a half years, it's a very, very consistent growth path. Whereas, due to a couple of very large point-in-time contracts in 2019, 2020, the GAAP revenue is a bit more lumpy. Or was. One of the things that caused a little bit of those lumps was a couple of things in China, right? Yeah. Charlie mentioned the globalization is maybe not dead, but under question, that's for sure. For sure. Yeah, exactly. So the challenges were around HiSilicon and around a couple of companies in the drone market. Yeah. If you might just walk through those and assure folks that it might have affected comparables, but the effects are essentially behind you. Yeah. HiSilicon was a May 2019 deal. It added. It was a $10 million point-in-time revenue on that day we signed the deal in or delivered the software back in May of Q2 of 2019. DJI was similar. It was added, and this is because they joined the notorious Entity List, and therefore we were unable to support them in the field. It was illegal for us to give them support, FAE support in the field to develop their use of the interconnect in their chips. Those had to be taken as point-in-time. If you look at 2019, huge revenue, huge bottom line, because it's pure $10 million right the way down to the bottom line. Same thing happened almost at the end of December 2020, which was DJI. It was a 7.5, just over $7.5 million dollar deal all point-in-time. So those are obviously bad comps when you get to the end of 2021. It looks like 2021 over 2020 is not really growing very much, which is again one of the reasons why we encourage people to look at ACV, because from an ACV perspective, both of those deals were treated as if they'd been ratable revenue, essentially. They were. So at the HiSilicon $10 million was spread at $3.3 million evenly over the three years, and it just dropped out last month. Yeah. There's also the effect of the China lockdowns a little bit, which affected some of the volumes. You know, China cannot stay locked down forever. Mm. You know, Shanghai has just opened up. The principal impact on us was that in China, the contracts have to be stamped with something called a chop, which is a stamp unique to each company. It's not the signature that matters, it's the stamp. People were not able to get to their stamps because of the lockdowns. That's all over. We could have done even better than the numbers that we announced, probably by a little bit. You know, that effect I think is gonna be behind us, I hope. Availability of stamps. Yes. There's. I'll scan them. Yeah. Yeah, exactly. They have to find the chop before it's available. Charlie. Thank you, Nick, for that conversation about the metrics. I think what's maybe more important to me is the pace of innovation in the product portfolio. Mm-hmm. You talk about bringing out new capabilities in the product portfolio year over year on things around cache coherency and other features that bring not just higher licensing costs, but hopefully higher royalties out the back end. How's the development been going? I know. How's the roadmap, everything delivering on time, I assume? And then the hunt for talent in the Valley is competitive, let's say. Yeah. How have things been going in building out the team and executing toward the longer term roadmap? Yeah. In terms of the team, so we've been in some sense diversifying our risk. Yeah. Because we now have about half our engineers in France. Right. We started as a French company, so we have a team in Campbell, a team in Austin, and a fairly large team in two locations in Paris, and a small team in Sophia Antipolis. We have some diversification there. The product portfolio is and we've been adding management for those teams as well. We've hired some very impressive leaders for some of those teams. In terms of the technology, you know, things are getting very complex, right? Yeah. You now have cache coherency, you have non-coherent traffic, you have machine learning traffic, and soon interchip links. Yeah. Where people are trying to get multiple dies to work as a single system. That makes the interconnect even more complex and introduces fourth data traffic class. We're essentially doing R&D for 10% of the SoC industry, right? We've been delivering all of those products. One of the things that we're focused on is on talent shortage because there are just not enough interconnect engineers whatsoever out there, right? Universities aren't producing any. There are some processor courses and a few courses like that, but there's no professor teaching system IP. The only answer is automation. Yeah. Our goal is to start automating some of these processes to a much higher level so that people can get their NOCs faster, with less manpower or same manpower and getting many more NOCs to be done of different types. Automation is kind of the direction for the evolution of our product portfolio. As I said earlier, our goal is to ship one major new product every year. We shipped one last year. We're gonna ship one this year. We're gonna ship the one after that. To update our products two to three times a year with enhancement requests from our customers. It's interesting you mentioned the fight for talent and the lack of talent in interconnect. That could be a challenge for you guys if your bigger customers or potential customers use their balance sheet to hire all of those people. It also can be a huge tailwind if they each can't find people, and they're just like, "Well, let's push these folks and have them go to Arteris," and the whole industry can benefit from that scale and consolidation and R&D outsourcing, as it were. What's that teeter-totter like? If you add up sort of last year's revenue, commercial revenue in just interconnect, not in IP deployment or non-interconnect IP, you have about $170. The business has grown there. The total market is about $600, so you have about $470 million of interconnects, right? That's a big opportunity for us to address some of that. Right. The customers, though, are having increasing difficulty keeping those teams together. It was okay when you had to do one type of interconnect, but now you have to do cache coherent, non-coherent, machine learning, and interchip links in one company working together as a single system for one set of products, and that's starting to be difficult. We think that all this stuff is going to get outsourced. The talent shortage is actually, you know, creating decisions in our customers that, "Okay, where do I put my best engineers? Do I put them on the processor side? Do I put them on the memory subsystem side, or do I put them on the interconnect and on the system IP side?" I think the talent shortage is actually kind of working in our favor 'cause we can deliver those solutions at a much lower cost than hiring your internal team. We have actually added some really significant people in the last. We've done a little bit of recycling to upgrading in R&D in the last year, roughly, starting with the appointment of the COO from Qualcomm, who's really the sort of SVP of engineering is a better way to characterize him. He's managed to bring in some people, some ex-Marvell people and others, who are really top people, and they've got great Rolodex. It kind of becomes sort of a virtuous circle in a way, because the more you attract the top talent in, the more people- Yeah From the outside see you as a good place to land. You just have to be competitive. You have to be competitive in some way or shape or form with the likes of NVIDIA and Apple, because, and Google, 'cause they all want the same people. It's not cheap. That, you know, we do use our presence in France as a lever. It's very valuable. It's about two-thirds of the cost of a and the same quality, generally speaking, as a Valley engineer. That's really interesting. I got to, I guess just finishing this one. Like wage increases with everything that's going on with inflation and whatnot, have you, Nick, contemplated that in the guidance for OpEx? Are there still, like, employee cost increases to come just from a wage perspective? Like, anything we should think of that there would be a step function there or? We've had the step function at the beginning of this year. Right. We raised on average around 5.5% globally. Because it's not just the U.S. that has wage inflation. It's France, it's all across Europe. China is massive. You know, generally speaking, wage inflation's been running at about 7%-8% globally, as you know. Now not all that's flowing down to all of these positions. We have tried to stay competitive. I think it's important. To your question specifically, it is built into the guidance already. Okay. Please. Yeah. Hey, guys. Thanks for the time and taking the questions. I wonder, I know there's only so much you can say, but I wanted to ask about the BMW engagement. How meaningful, I guess, are your engagements with the auto OEMs? I guess it's somewhat surprising to see them engaging with you and the level of technical expertise in designing SOCs that complex. I know you don't really care who wins probably, but, you know, how meaningful are auto OEMs internal chip designs to your longer term business? Very meaningful. BMW was actually the first OEM who allowed us to say that they're a customer or user. But there's probably five or six others that we have as customers. Basically the car is becoming a supercomputer on wheels, and it's becoming an endpoint in a network or internet of cars, right? Electronics and software, the chip design architecture at least, is becoming very, very important. The car companies are generally not designing chips. They're either designing one or two IP blocks or they're just designing the architecture, and then they're having their partners do the chip design, right? This is actually not bad news for the semiconductor company and companies for the design houses. In a sense, they drive what is built and they kinda determine what IP components are used in those designs. For our strategy, dealing with the ridesharing companies and the car OEMs is very, very important. Also you're gaining a lot of knowledge at the end user system level, what is needed that can drive your development, right? It's also about having a faster learning than other companies. They're very, very important. Everyone in that automotive food chain is gonna do some level of chip design. Our approach actually is a ubiquitous one. We will address OEMs, we'll address tier ones, we'll address semis. As Charlie was saying, we have 36 or even 37, I think now, people in that space at all three of those levels. To your point, we I mean, of course, we care who wins. We hope it's gonna be the people that we service, and we want the good guys to win. We are relatively ambivalent on that because we supply that whole ecosystem. Yeah. I appreciate the comment. Just to follow up on that. You mentioned BMW is the one that allowed you guys to actually speak publicly. What's the hesitancy of some of the ones that you do larger volume with of being public about? You wouldn't think who they used for interconnect would be super secret. I'm just wondering the hesitancy to be public. The reluctance is that, they also buy chips from semiconductor companies, right? Yeah. They also are going to buy some chips from tier ones who are starting to design chips, even though slower than they should have. They just don't wanna upset the apple cart of their semiconductor supply chain. Plus, they're run by lawyers. I mean, frankly, you know, there's a lot of lawyers involved. I mean, it's a bit like, you know, you try and get a logo consent out of Apple. Yeah. I mean. Yeah. Good luck with it. Never been done. Yeah. I think there's an awful lot of that. It's an easy answer, is just to say, "No, we don't give that. It just shuts down the whole conversation, and you don't have to go on. Yeah. The real reason is that they. Some of them are afraid of, you know, saying, "Wait a minute. We're putting this investment in this OEM relationship- For sure. You're doing your own, you know, without Arteris. That's probably why. I think eventually more of those relationships. We're hopeful that most of those relationships will be allowed to become public. No, that makes sense. Really quickly, I think we only have a couple minutes left. We didn't get to the AI ML space, and I think we should spend the time we have left on that. Like, how is it different or similar to the automotive opportunity for you guys, and what's the pipeline look like there? Actually, the ADAS chips are ML chips, right? Yeah. They have to do image machine learning processing and those kinds of things. The machine learning market is much broader. We actually don't think that there is a machine learning market. We think that machine learning is gonna be a feature of every product. It's gonna make things a lot more usable and have people help with the complexity of dealing with these sophisticated systems. The reason it's different is that basically what you have is something called convolutional neural networks, which is basically mesh configurations. Yeah. Those have different traffic considerations. Do you think mesh is tree mesh, ring, whatever is the same? No. The peer-to-peer communications has some specific requirements, and so you have to deliver features for things like avoiding data packet congestion in certain regions of the mesh, and those kinds of things are helping people automatically assemble these very large structures and those kinds of things. There's some specific features that have to be delivered for that market, and we're doing that. Ultimately, that is the biggest market, right? It's gonna be. It's not gonna be. It's gonna be so big that it's not gonna be its own market. It's gonna be a part of every market. The majority of the customers there are merchant chip companies trying to sell into those markets, or most of them are, the majority of the opportunity is sort of with the broad hyperscale companies looking to build their own stuff? Yes. Fair enough. I would say the biggest license growth right now is from machine learning startups. Okay. Building specific edge machine learning SoCs for specific applications. No, it's super interesting. There's a lot that we could talk about. I think we're getting the red blinking dot of death here. Oh, yeah. Okay. from the clock. Thank you all for listening and, Charlie, Nick, it's great to see you. Okay. Thanks for spending the time with Cal. I hope you have a great day here. Okay. We'll be in touch. Thanks, Nick.