Arteris Hits Record ACV and Royalties Surge 67% as Data Center Overtakes Auto as Top Licensing Vertical
Q1 2026 Earnings Call, May 12, 2026
Arteris delivered a clean beat across its key metrics in the first quarter of 2026, but the more consequential signal for investors lies beneath the headline numbers: enterprise computing, driven by hyperscaler and AI data center chip design, has now surpassed automotive as the company's largest licensing vertical, a structural shift that has been building for several quarters and appears to be accelerating materially into Q2.
Record Metrics Across the Board, With Royalties as the Standout
Total revenue for Q1 2026 came in at $22.9 million, up 39% year-over-year and above the top end of guidance. Annual contract value plus royalties reached $92.8 million, also a record and 39% above the prior year period. Remaining performance obligations hit $118 million, 33% higher year-over-year, with just over half expected to convert to revenue in the twelve months beginning April 1, 2026. Non-GAAP gross margin held at 87%.
The most striking number was royalties. Trailing twelve-month royalties reached $7.9 million, up 67% year-over-year. But CFO Nick Hawkins disclosed during the Q&A that on a straight year-over-year first quarter basis, royalties were actually up over 100%. The number of customers reporting $250,000 or more in quarterly royalties has grown from one a year ago to three currently, which Hawkins framed as evidence of a "rapidly diversifying and growing royalty revenue stream." Royalty reporters now span automotive, consumer, enterprise computing and aerospace and defense.
Enterprise Overtakes Auto — A Structural Shift Worth Watching
For years, automotive was Arteris's dominant licensing vertical. That is no longer the case. Hawkins confirmed that enterprise computing, which houses the company's data center and HPC business, is now the largest vertical by license generation, running "slightly higher than automotive," with both in the 30% to 35% range of ACV. CEO Karel Janac noted that two-thirds of all customer engagements are now into AI chips.
Specific wins disclosed in the quarter include a leading global hyperscaler that expanded its use of Arteris network-on-chip technology for its next generation of data center chips, and a second leading global memory supplier that licensed Arteris system IP to accelerate high-bandwidth memory chip development. A top-five U.S.-based hyperscaler also licensed Arteris's newly acquired Cycuity cybersecurity technology in the quarter.
On the royalty duration question that matters most for modeling, Janac was direct: data center AI design cycles run roughly two to three years from license to royalty generation, faster than automotive which can stretch to six years, but the flip side is that product lifespans are correspondingly shorter. "They rise quicker and they also die quicker," Janac said. The offset, as analyst Kevin Cassidy of Rosenblatt noted and Janac confirmed, is that these are high-priced chips at advanced process nodes, which structurally supports higher per-unit royalty rates.
April Was the Strongest Deal Month in Company History — By a Wide Margin
Perhaps the most attention-grabbing data point of the call came from Hawkins in the Q&A, when he described the start to Q2 in unusually specific terms: "We actually had the strongest April on record in terms of deal flow by a significant margin. Something like 4x bigger than the next biggest April we've ever seen." He added that the company has a strong pipeline and is watching to see whether the momentum persists before committing to further guidance increases. For a company that, by its own characterization, tends to guide conservatively and does not like to "get over our skis," this disclosure is notable.
Full-year 2026 guidance was raised on both top and bottom lines. Revenue guidance moves to $91 million to $95 million, $2 million above prior guidance, representing approximately 32% year-over-year growth at the midpoint. ACV plus royalties is now guided to exit 2026 at $102 million to $106 million, also $2 million higher. Non-GAAP operating loss guidance improved by $0.5 million to a range of negative $8.5 million to negative $4.5 million. Free cash flow is guided at positive $5 million to positive $9 million for the full year. The company continues to target non-GAAP operating profitability as early as the fourth quarter of 2026.
Cycuity Integration Early but Promising, Aerospace and Defense Now Nearly 10% of ACV
The acquisition of Cycuity, a chip cybersecurity company that closed during Q1, is still in early integration — Janac noted the company only effectively began operating it in mid-January — but the initial signals are constructive. Government-related orders that were in flight at close were completed, and Janac described "very, very promising deals from the commercial side" developing in Q2. Hawkins added a strategically important datapoint: aerospace and defense, partially as a result of Cycuity, now represents close to 10% of ACV, making it a meaningful and growing third vertical behind enterprise and automotive.
Arteris's core thesis for Cycuity is distribution leverage. With over 200 semiconductor design customers already in the installed base, the company sees a substantial cross-sell opportunity. "We think that all of our customers can use the Cycuity product," Janac said, pointing to interest already emerging across data center, aerospace and defense, consumer, automotive and communications verticals.
Automotive Wins Remain Solid Despite Losing Top Billing
Despite ceding the top licensing spot to enterprise, automotive remains a significant and active vertical. The quarter included an expanded deal with Renesas deploying Arteris system IP for the R-Car Gen 5 SoC series, which targets advanced driver assistance and automated driving and delivers AI performance of up to 400 TOPS, with multi-die chiplet extensions using Arteris network-on-chip technology. Janac also expects automotive to "continue to be a pretty solid royalty generator" given the high volumes involved, even as data center chip ASPs are individually higher.
CFO Departure Adds Near-Term Uncertainty
Arteris also announced that Nick Hawkins, CFO for the past seven years, will retire effective August 31, 2026. Hawkins will lead the company through the Q2 earnings report and serve as an adviser post-retirement to facilitate transition. The timing is manageable in the sense that the company has guided Q2 explicitly and will have Hawkins through that report, but a CFO search and transition during a period of accelerating growth and increasing deal complexity is a risk that investors should monitor. No successor has been announced.
Chiplet and Multi-Die Products Expected in Second Half
On the product roadmap, Arteris is working with early adopters on two products targeting optimized chiplet and multi-die system IP, which the company anticipates deploying in production during the second half of 2026. These are aimed at AI, HPC and ADAS designs. The company also announced a collaboration with MIPS, which will use Arteris FlexGen smart NoC IP and Magillem SoC integration automation software for physical AI chip development across automotive MCUs, ADAS, robotics and embedded computing.
Q2 2026 guidance calls for 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, and free cash flow of positive $2 million to positive $8 million. The company also disclosed it will no longer guide quarterly free cash flow, citing growing deal size creating quarter-to-quarter variability it considers unhelpful to model, a reasonable but worth-noting change in disclosure practice.
Arteris, Inc. Deep Dive
The Business Model: The Tollbooth for On-Chip Data
Arteris is a pure-play provider of system-on-chip network-on-chip interconnect intellectual property and system integration software. As semiconductors become exponentially more complex, moving data efficiently between computing elements has become the paramount engineering bottleneck. Arteris provides the digital highway systems, comprising the routers, switches, and transport protocols, that allow processing cores, memory banks, and hardware accelerators to communicate fluidly on a single piece of silicon or across multiple dies. The company operates a classic semiconductor intellectual property monetization model with a dual-engine revenue structure. First, it generates upfront licensing and support fees during the architectural design phase of a semiconductor project. Second, it collects high-margin production royalties once the customer finishes designing, qualifying, and ramping the chips into high-volume manufacturing. This structure creates a highly sticky, recurring revenue stream, reflected in its annual contract value plus trailing twelve-month royalties, which reached a record $92.8 million in the first quarter of 2026.
Customers and The Competitive Landscape
Arteris serves a highly diversified and blue-chip customer base that spans automotive tier-one suppliers, hyperscalers, artificial intelligence startups, and traditional semiconductor giants. Publicly disclosed customers include Advanced Micro Devices, Meta, Mobileye, NXP, Renesas, and a roster of automotive original equipment manufacturers such as BMW and Honda. The company is particularly dominant in the automotive advanced driver-assistance systems market, where management and industry analysts estimate Arteris holds an imposing 70 percent to 80 percent market share. This dominance is driven by the rigorous functional safety requirements of the automotive sector, which aligns perfectly with the pre-certified nature of Arteris's network-on-chip solutions.
The competitive landscape is defined by a mix of internal engineering teams and massive electronic design automation incumbents. For decades, the greatest competitor to Arteris was in-house development. Semiconductor companies routinely built bespoke interconnects for their proprietary chips. However, as complexity has scaled, the cost and risk of internal development have made commercial off-the-shelf interconnects vastly more attractive. In the commercial arena, Arteris competes with the interconnect offerings of intellectual property giants such as Arm, Synopsys, and Cadence. While these conglomerates bundle interconnect intellectual property as part of broader architecture or software suites, Arteris differentiates itself by remaining fiercely independent and specialized.
The Switzerland Competitive Advantage
The fundamental competitive advantage of Arteris lies in its vendor neutrality and intense specialization. Unlike Arm, whose CoreLink interconnect is inherently optimized for Arm-based processing cores, Arteris operates as the Switzerland of semiconductor intellectual property. Its network-on-chip architecture is agnostic, meaning it offers seamless interoperability across any processor architecture, whether Arm, x86, or RISC-V. It interfaces smoothly with any third-party intellectual property block, any electronic design automation tool suite, and any semiconductor foundry. This flexibility is vital for designers building heterogeneous architectures that mix and match best-of-breed components from different vendors.
Furthermore, the company's sole focus yields technological superiority in the form of physical awareness. Traditional interconnect design often led to a mismatch between logical architecture and physical layout, resulting in costly redesigns late in the manufacturing process. Arteris tools, such as FlexNoC 5, bridge this gap by predicting physical routing challenges early in the design phase. This saves customers millions of dollars in potential tape-out failures and drastically accelerates time-to-market. The combination of neutrality, deep specialization, and the high switching costs inherent to fundamental chip architecture creates a profound economic moat. This strong market position is consistently reflected in the company's robust gross margins, which track in the 86 percent to 92 percent range.
Industry Dynamics: The Chiplet Era and The Connectivity Bottleneck
The semiconductor industry is currently undergoing a structural architectural shift driven by the physical and economic limits of Moore's Law. As shrinking transistors on monolithic silicon dies becomes prohibitively expensive, the industry is pivoting toward chiplets. This approach involves breaking down a large, monolithic chip into smaller, specialized functional blocks and stitching them together in an advanced package. While chiplets solve the problem of manufacturing yield and cost, they dramatically exacerbate the connectivity problem.
Moving data between separate chiplets requires far more complex networking protocols, cache coherency mechanisms, and routing logic than traditional on-chip communication. This dynamic expands the total addressable market for Arteris exponentially. The sheer volume of data being processed by artificial intelligence workloads requires sophisticated interconnects to prevent the processors from starving for data. However, this opportunity also brings threats. The primary risk is that the transition to standardized chiplet interconnects, such as the Universal Chiplet Interconnect Express, could eventually commoditize certain layers of the networking fabric, forcing Arteris to constantly innovate up the stack to maintain its high-value proposition.
Next-Generation Growth Drivers: AI, Chiplets, and Cybersecurity
Arteris is actively commercializing a suite of next-generation technologies designed to capture outsized revenue growth in the artificial intelligence and chiplet markets. A prime example is FlexGen, the company's smart network-on-chip intellectual property engineered specifically for high-performance data transport. In a landmark validation of this technology, Advanced Micro Devices selected FlexGen to power data movement across its portfolio of artificial intelligence data center and edge chiplets, integrating alongside its proprietary Infinity Fabric. The company is also seeing broad adoption of Ncore, its cache-coherent interconnect, which is essential for advanced server input/output and autonomous driving systems.
Beyond data transport, Arteris has aggressively expanded its total addressable market into semiconductor cybersecurity. In January 2026, the company closed the strategic acquisition of Cycuity, a leader in hardware security assurance. With hardware-level vulnerabilities increasing by more than 15 times over the last five years, security can no longer be treated as a software-only afterthought. By integrating Cycuity into its portfolio, Arteris has uniquely positioned itself to offer secure, mathematically verified data movement across the chip, presenting a compelling cross-selling opportunity into its existing automotive and aerospace customer base.
Emerging Threats: The Rise of Baya Systems
While Arteris enjoys a dominant position as the independent interconnect leader, the lucrative economics of artificial intelligence hardware have attracted credible new entrants. The most notable emerging threat is Baya Systems. Founded by veteran semiconductor executives, including former Arm leadership, Baya Systems is targeting the precise bottlenecks of artificial intelligence and high-performance computing data movement.
Baya operates with a software-driven approach through its WeaverPro and WeaveIP platforms, utilizing unified fabrics designed for advanced multi-level cache coherency and ultra-efficient chiplet integration. The company has already demonstrated formidable momentum, securing strategic partnerships with major industry players like Intel and Semidynamics to optimize interconnects for the rapidly growing RISC-V ecosystem. Unlike university science projects or highly speculative ventures, Baya possesses the technical pedigree and the ecosystem alliances required to challenge established interconnect architectures. While Arteris remains entrenched in high-volume production, Baya's focus on next-generation artificial intelligence workloads and advanced topologies represents a legitimate competitive force that will require Arteris to defend its technological lead aggressively.
Management Track Record: Path to Profitability
Under the leadership of Chief Executive Officer K. Charles Janac, Arteris has executed a deliberate and highly disciplined growth strategy over the past several years. Janac has successfully guided the company from a specialized startup to a publicly traded entity with its intellectual property deployed in over 4 billion chips worldwide. The management team has demonstrated a shrewd ability to anticipate architectural shifts, evidenced by the timely acquisitions of Magillem for system integration automation and, most recently, Cycuity to address hardware-level security demands.
Financially, management has balanced aggressive research and development investments with rigorous cost control. Despite the intense capital requirements of supporting artificial intelligence and automotive scale, general and administrative expenses have remained remarkably flat on a non-GAAP basis for over three years. This discipline is bearing fruit in 2026. In the first quarter of 2026, the company reported 39 percent year-over-year revenue growth, reaching $22.9 million, while simultaneously narrowing its non-GAAP operating losses to $2.5 million. Management has articulated a clear, credible trajectory to achieve non-GAAP operating profitability by the fourth quarter of 2026. The upcoming retirement of Chief Financial Officer Nick Hawkins later in the year introduces a minor transitional element, but the underlying financial engine management has built appears structurally sound and increasingly leveraged.
The Scorecard
Arteris has successfully positioned itself as the tollbooth for data movement in the modern semiconductor era. By providing vendor-neutral, highly specialized interconnect architectures, the company solves one of the most acute engineering bottlenecks in the transition toward artificial intelligence workloads and multi-die chiplet architectures. The dual-engine business model of upfront licensing and long-tail production royalties creates a high-visibility, high-margin revenue stream. With an estimated 70 percent to 80 percent market share in automotive advanced driver-assistance systems and a growing footprint among hyperscalers and top-tier semiconductor designers, the company operates from a position of entrenched strength. The recent acquisition of Cycuity further differentiates its offering by adding critical hardware-level security assurance to its interconnect fabric.
The primary risks to the thesis lie in the evolving competitive landscape and the pace of architectural commoditization. While internal engineering teams and giant incumbents like Arm and Synopsys remain the traditional competitors, the emergence of highly credible, artificial intelligence-focused startups like Baya Systems indicates that the interconnect intellectual property market will face continuous disruption. Nevertheless, management's disciplined cost control and successful execution of major design wins provide a clear line of sight to operating profitability by the end of 2026. For those seeking structural exposure to the exponential rise of semiconductor complexity without taking a bet on a specific chipmaker or artificial intelligence accelerator, Arteris presents a highly compelling, foundational asset.