To supplement our financial results, which are prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core performance. These non-GAAP measures, which may be different than similarly-titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We define "Non-GAAP gross profit and Non-GAAP gross margin" as GAAP gross profit and GAAP gross margin, adjusted for stock-based compensation expense included in cost of revenue. We define “Non-GAAP Loss from Operations” as our income (loss) from operations adjusted to exclude stock-based compensation, acquisition costs and amortization of acquired intangible assets. We define “Non-GAAP Net Loss” as our net income (loss) adjusted to exclude stock-based compensation, acquisition costs, amortization of acquired intangible assets and gain on extinguishment of debt.

We define “Non-GAAP EPS”, as our Non-GAAP Net Income (Loss) divided by our GAAP weighted-average number of shares outstanding for the period on a diluted basis. Management uses Non-GAAP EPS to evaluate the performance of our business on a comparable basis from period to period.

The above items are excluded from our Non-GAAP Gross Profit, Non-GAAP Income (Loss) from Operations and Non-GAAP Net Income (Loss) because these items are non-cash in nature, or are not indicative of our core operating performance, and render comparisons with prior periods and competitors less meaningful. We believe Non-GAAP Gross Profit, Non-GAAP Income (Loss) from Operations and Non-GAAP Net Income (Loss) provide useful supplemental information to investors and others in understanding and evaluating our results of operations, as well as provide a useful measure for period-to-period comparisons of our business performance.

We define free cash flow as net cash (used in) provided by operating activities less cash used for purchases of property and equipment. We believe that free cash flow is a useful indicator of liquidity that provides information to management and investors, even if negative, about the amount of cash used in our operations other than that used for investments in property and equipment.

Other Business Metrics

Active Customers – we define Active Customers as customers who have entered into a license agreement with us that remains in effect. The retention and expansion of our relationships with existing customers are key indicators of our revenue potential.

Annual Contract Value (ACV) – we define Annual Contract Value for an individual customer agreement as the total fixed fees under the agreement divided by the number of years in the agreement term. Our total ACV is the aggregate ACVs for all our customers as measured at a given point in time. Total fixed fees includes licensing, support and maintenance and other fixed fees under IP licensing or software licensing agreements but excludes variable revenue derived from licensing agreements with customers, particularly royalties.

Confirmed Design Starts – we define Confirmed Design Starts as when customers confirm their commencement of new semiconductor designs using our interconnect IP and notify us. Confirmed Design Starts is a metric management uses to assess the activity level of our customers in terms of the number of new semiconductor designs that are started using our interconnect IP in a given period. We believe that the number of Confirmed Design Starts is an important indicator of the growth of our business and future royalty revenue trends.

Remaining Performance Obligations (RPO) – we define Remaining Performance Obligations as the amount of contracted future revenue that has not yet been recognized, including deferred revenue, billed and unbilled cancelable and non-cancelable contracted amounts.

Arteris, Inc. Reconciliation of GAAP Measures to Non-GAAP Measures (In thousands, except share and per share data) (Unaudited)
	Three Months Ended December 31,								Twelve Months Ended December 31,
		2023				2022				2023				2022
Gross profit	$	11,056			$	10,118			$	48,589			$	46,097
Add:
Stock-based compensation expense included in cost of revenue		170				88				556				562
Amortization of acquired intangible assets (1)		50				—				149				—
Non-GAAP gross profit	$	11,276			$	10,206			$	49,294			$	46,659
Gross margin		88	%			90	%			91	%			92	%
Non-GAAP gross margin		90	%			91	%			92	%			93	%
Research and development	$	10,663			$	10,318			$	45,128			$	41,167
Stock-based compensation expense		(1,668	)			(1,430	)			(7,324	)			(5,865	)
Amortization of acquired intangible assets (1)		(85	)			(85	)			(390	)			(340	)
Non-GAAP research and development	$	8,910			$	8,803			$	37,414			$	34,962
Sales and marketing	$	5,029			$	4,631			$	20,659			$	17,419
Stock-based compensation expense		(624	)			(445	)			(2,712	)			(2,123	)
Amortization of acquired intangible assets (1)		(57	)			(35	)			(228	)			(138	)
Non-GAAP sales and marketing	$	4,348			$	4,151			$	17,719			$	15,158
General and administrative	$	4,613			$	4,229			$	17,944			$	16,367
Stock-based compensation expense		(1,092	)			(647	)			(3,943	)			(3,142	)
Acquisition costs (2)		—				(527	)			—				(527	)
Non-GAAP general and administrative	$	3,521			$	3,055			$	14,001			$	12,698
Loss from operations	$	(9,249	)		$	(9,060	)		$	(35,142	)		$	(28,856	)
Stock-based compensation expense		3,554				2,610				14,535				11,692
Acquisition costs (2)		—				527				—				527
Amortization of acquired intangible assets (1)		192				120				767				478
Non-GAAP loss from operations	$	(5,503	)		$	(5,803	)		$	(19,840	)		$	(16,159	)
Net loss	$	(10,541	)		$	(7,215	)		$	(36,869	)		$	(27,387	)
Stock-based compensation expense		3,554				2,610				14,535				11,692
Acquisition costs (2)		—				527				—				527
Amortization of acquired intangible assets (1)		192				120				767				478
Non-GAAP net loss ( 3 )	$	(6,795	)		$	(3,958	)		$	(21,567	)		$	(14,690	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.29	)		$	(0.21	)		$	(1.03	)		$	(0.84	)
Per share impacts of adjustments to net loss ( 4 )	$	0.11			$	0.09			$	0.43			$	0.39
Non-GAAP net loss per share attributable to common stockholders, basic and diluted	$	(0.18	)		$	(0.12	)		$	(0.60	)		$	(0.45	)
Weighted average shares used in computing per share amounts, basic and diluted		36,816,597				33,596,146				35,675,689				32,578,776

(1) Represents the amortization expenses of our intangible assets attributable to our acquisitions.