Earnings Call: Q1 2016

Apr 20, 2016

Ladies and gentlemen, thank you for standing by, and welcome to the Arm Holding's Q1 Results Analyst Conference Call. At this time, all participant lines are in a listen only mode. I must advise the conference is being recorded today, Wednesday, 20th April 2016. And I would now like to hand the conference over to your speaker today, Mr. Ian Thornton. Please go ahead, sir. Thanks, Callum. Good morning, everybody. This is Ian Thornton, Head of In the relations, Adam. On today's Q1 results conference call, we have Simon Seagulls, our Chief Executive Officer and Chris Kennedy Chief Financial Officer. On today's call, Simon and Chris will take us through the highlights and comments from the quarter's results, and then we'll open up the call Q and A session. As a reminder, the presentation and release can be found on the ARM Investor Relations website at www. Arm.com/ir. Before I hand over to them, I just have to read out a few words with respect to this conference call and what we're about to discuss. The contents of this conference call are being directed only to those of you who have professional experience in matters relating to investments and the information communicated on this call is being made available only to investment professionals. Any persons present on this call who does not have professional experience in matters relating to investments should not act or rely on the content of this call. The following call will contain forward looking statements, which are other than statements of historical fact, and the company's actual results for future periods may differ materially from these statements as they based on current expectations and are subject to a number of risks and uncertainties. And on that note, I'll hand over to Simon. Thanks, Ian, and good morning, everyone. Thank you for joining our Q1 2016 results conference call. I will run through the business highlights and then hand over to Chris to provide some more detail on the numbers. Following Chris, there'll be some time questions. So let me start with the business overview. Following last year's strong performance, we've had an encouraging start to 20 16. We've seen healthy demand for our technology from semiconductor companies and our bookings were the highest we've ever seen in the first quarter. Total Technology Licensing revenues were up 11% year on year and Technology Royalty revenues were up 17% year on year. The quarter, I saw many of you at the Consumer Electronics Show in Las Vegas and at Mobile World Congress in Barcelona. One thing that struck me at these events was the sheer ambition of our partners roadmaps and how they intend to use our current and future technology. For example, We've seen increased activity around next generation technologies such as 5g Communications And Network function virtualization autonomous driving and computer vision, virtual and augmented reality, artificial intelligence and machine learning. Arm has been investing for many years to create the technologies that will enable many of these future products. Those that follow on closely will know that at our Capital Markets Day in September last year, we announced a step up in investment to accelerate share gains in networking and servers and also to create new revenue in nascent markets such as the Internet of Things. Having made the step up in costs, we've now returned to a longer term cost trajectory. So where's this investment going? Over the past year, we have increased our headcount by 20%. We have more engineers working on our core road map working closely with our ecosystem partners and helping In networking, our software teams have been working as part of the OP NFP project to optimize their recently they're recently released, from the Hootra software. And we've been collaborating with Annea on the opening of the Faros lab in Sweden to enable the testing of networking applications. And with the availability of ARM based chips and ARM optimized software, our engineers and marketing teams are working with OEMs, operators, and end users to accelerate the adoption and them. By way of 2 examples, in February, Qualcomm announced a $280,000,000 joint venture, joint venture which will develop server technology for the Chinese market. And in March, Red Hat previewed its enterprise Linux software, server software running on Qualcomm's ARM based server chips. These are 2 of many examples across the ecosystem. In the internet of things, we have seen ARM based chips being used to improve productivity and efficiency in traditional industries such as agriculture and construction. Other examples, Verizon's THINGSpace platform has signed up 4000 developers and is boosting productivity in precision agriculture from vineyards to oyster farm. This month, a leading building contractor in the UK deployed smart sensors to reduce construction time, on major projects. A whole host of telecoms companies such as SK Telecom in Korea, Orange and Bouygues Telecom in France, Swisscom in Switzerland, Tata Communication in India, all announced plans to deploy nationwide low power wide area networks for IoT devices. All these exciting industry developments placed exacting demands on process of performance and power consumption. We will continue to invest in our roadmap. And in the next few years, we will deliver new technologies that will enable our partners to meet their ambitious goals for innovation. Now I'll discuss the revenue drivers in different parts of the business in more detail. Starting with technology licensing. We signed 39 licenses with 27 customers in the quarter. Over half of those customers were new Our Cortex A Processors run rich operating systems and applications in consumer and enterprise devices We signed 8 licenses for Cortex A Processors in Q1. 4 of these were armed V8A based processes that will be designed into Chip for networking infrastructure applications and future consumer devices. Our cortex R Processes run real time and deterministic control software by applications such as communication protocol stacks and safety critical systems. We signed 5 licenses for Cortex R Processors in Q1 and our customers will use controllers. Our Cortex M Processors are designed for low cost, low power chips, such as microcontrollers and sense We signed 22 licenses for Cortex M Processors in Q1, and these will bring advanced functionality to a huge of devices, including electric motor controllers, memory cards, motion detectors, and microphones. Our Marley processes bring advanced graphics and video capabilities to consumer devices. In Q1, a major semiconductor company signed 2 licenses for our latest Marley products. Our physical IP libraries help our partners build chips on the latest manufacturing process technology. During the quarter, we signed 2 major physical IP agreements with leading foundries. One of those was announced with UMC last week. Both of these extend our relationships by developing new physical IP products that chip companies can use when building products from 55 nanometers down to 14 nanometers. These contracts were backlog building and there was a lower portion of revenue from terms this quarter in our physical IP business. Therefore, this quarter, we are reporting lower fiscal IP licensing revenues than the usual run rate. We expect that revenues will improve from Q2. Now I'll switch to the royalty side of the business. Arms royalty revenues are reported 1 quarter in arrears. So royalty for Q1 was generated, from chip sold by our licensees in Q4. Processor royalty revenue was up 15% year on year outperforming the semiconductor which declined 3% in the relevant period. Processor unit volumes were up 10% with strong growth seen in ARM based microcontrollers and smart cards, grew 20% on chips more than doubled year on year to reach 280,000,000 units. We estimate armed V8A chips account for approximately 65% of the smartphone market in Q1. We saw growth in the number of chips containing multiple armed V8A processes, such as the octa core chips sold into mobile phones. These amounted to 100,000,000 units in Q1, roughly 25% of the smartphone market. Ultimately, we expect to see ARMV8A in all smartphones and many other devices too. In the last few months, we've launched two processes that help expand the breadth of ARMV8A adoption. The Cortex A35 is the smallest and lowest power processor that supports the full RB8A architecture, including 64 bit instructions. The Cortex A32 Processor reduces the size and power further by supporting only the 32 bit instruction set within Arm V Eight A. These new technologies from Arm will help drive higher royalties per device from billions of low cost smart and connected devices. I'll now hand over to Chris, who'll provide further details on the numbers. Good morning. Hopefully, many of you will have the chance to have a quick look at our earnings release and the quarterly roadshow slides are available on our website as usual. Q1 dollar revenues of $398,000,000 were up 14% year on year, with 11% growth in technology licensing and 17% growth in technology royalties. As you know, quarterly licensed revenues are lumpy. Processor licensing had a particularly strong quarter, up 24% year on year to 135,000,000 whereas physical IP license revenue was down 46 percent year on year to $13,000,000. This resulted in overall licensing growth of 11% and we have a good pipeline of opportunities to underpin both Processor and physical licensing growth for the balance of the year. Approximately 40% of our processor license revenue came from backlog in the quarter, and this is at the lower end of our typical 40% to 60%. Bookings were strong for Q1 and group backlog was down around 5% sequentially. Processor royalty revenue was $192,000,000, up 15% year on year, reflecting continued market share gains and the increased amount of ARM content being deployed in mobile computing and enterprise devices. Process at chip shipments grew 10% year on year, and revenue grew faster than unit shipments as armed version 8, Marley and Octacore all gained share. The smartphone chips reported in Q1, ARM VA had around a 65% share, Marley, around 50% and Okta, around 25%. Physical IP royalty grew 38% year on year due to the increase in shipments of wafers using ARM's physical IP at advanced nodes. These wafers are typically more expensive than older nodes and therefore yields a greater royalty per wafer. Normalized OpEx in Q1 was $132,900,000, up 33% year on year, and adjusting for foreign exchange broadly in line with our guidance. There were 2 main drivers of the increase, Firstly, our accelerated investments have resulted in a 20% increase development. And secondly, sterling has weakened significantly against all major currencies, particularly the U. S. Dollar As a reminder, around 40% of our OpEx is in sterling, 40% is in dollars, and around 20% in other currencies, whereas income is over 90 percent dollar denominated. A week of sterling increases cost in sterling terms, but overall gives a net benefit to ARM. Excluding the impact of currency movement, OpEx is just 1% higher than in the previous quarter and at the upper end of the Q1 guidance given the last quarter. Assuming exchange rate at current levels of around $1.42 to the pound, OpEx in Q2 is at expected to be in the range of 1000000 to 1000000. This reflects the return to quarter on quarter increases in line with historical levels. The group's effective normalized tax rate was 15% in Q1, and we expect the full year tax rate to also be around 15%. And as a result, EPS grew 15% year on year to 8.2p. Now on to the outlook. The licensing pipeline for the rest of the year is robust with leading semiconductors, companies and equipment manufacturers looking to license Arm's most advanced technology for the next generation product. Macroeconomic uncertainty remains and could influence consumer and enterprise spending on Semiconductors in 2016. And based on current conditions in the Semiconductor industry, we expect group dollar revenues the full year be in line with market expectations. Great. Thanks, Chris. And now we'll hand over to Q and As usual, if you could ask just one question at a time, please, we'll be able to get everybody's question in, and we can come around again if you have follow-up questions. Yes. So operator, do you want to open the call to questions now, please? You. Your first question today comes from the line of Matt Ramsay from Canaccord Genuity. Your line is open. Yes, you very much. Good morning, gentlemen. Simon, I guess a 2 part question from me and congratulations on the strong execution and a pretty choppy macro. But I guess with only a 25% or so penetration of opticore in a smartphone market so far. I guess where do you think that penetration can get through the year and how big of a driver of earnings could it be royalty growth. And I guess on the flip side, tons of moving parts last night with Intel. But one of the things that stood out to me in their results was 60% growth in their networking business year over percent growth. And it strikes me that as RV8 compares, it a little bit tougher as we move through the year that the networking revenue might need to be a bit robust for you guys to keep, royalty growth rates high. So I wonder maybe you could just walk us through the differences in the growth rates you've seen in your net working business versus Intel, I know it's very different products and sort of what the growth rate of that business could be over the medium term? Thanks. Okay. Thank you very, ignoring my request. I only asked one question, but we'll cover that by 6. First of all, so on the question about Octacore, as we said in first quarter, penetration was around 25%. That's grown fairly steadily over the last year. You know, a year ago, Q1 2015, it was less than 5% penetrated that grew through the year. Full year 'fifteen was about 10%. Full year 'sixteen, obviously, it's hard to say it's going to depend on the and what handsets get sold, etcetera. But it wouldn't surprise us for 4 years to be about 30%. And we do see room for growth of octa core, for some time to come. If you were thinking, where might V8A penetration go in the full year. As I said a moment ago, it's about 65% for Q1. 2016 could be 70% to 80% exit rate around 80%, maybe as much as 85% for the full year. So your second question was about networking. Networking volume for us grew about 10% year on year. A lot of that is still, chips based on RB7. As you know, we've spoken about a lot of licensing activity, in the networking space over the last couple of years and we're expecting on VA based chips to come through. So we think, networking will be a driver of royalty, in comparison to, Intel that you mentioned in that businesses are completely different. So, I'm not going to spend too long trying to draw a comparison between the two of them. We feel good about what's going on for in networking, the long term driver or medium term driver, rather, is about 5G and overall increase sophistication of the equipment that's going to be required to deliver the kind of, bandwidth and amounts of connectivity that 5G necessitates. I think we're in a very good position for the armed partnership to service that. Thanks, Simon. I appreciate it. The next question is from the line of Garraf Jenkins from UBS. Your line is Thanks. I'll just keep it to 1. You've done a great job in gaining market share in the last few years in graphics. Wanted whether you can talk about some of the technological aspects of how you mote that business off a little bit and make it sticky. Through GPU CPU coherency, or any other efforts that you see over the next 2 years that you can maybe make that more defendable potential competition? Thank you. Yes. So, really a lot of that is about engagement with the ecosystem them. So we have a strong effort around, the developer community, making it easy for people to write their applications that utilize the benefits of the Mali architecture. So we do a lot of work on tools. We do a lot of work generally on in enabling that ecosystem. And that is one of the ways in which we do increase stickiness around our product. As you know, fundamentally, GPUs implement a 3rd party standard, Open GES is controlled by the Cronos group that we're a member of and very active in driving the standards forward. And then ultimately it's going to come down to execution on building the best performance and the most power efficient cause with the right mix of features for different markets. You mentioned, GPU Computing. There are going to be markets where that's important. And we're expanding our road map to have some GPUs with those features in for those markets and some GPUs with those features out where there's more price sensitivity and power sensitivity. So it's not the mix of all of those things, having the right product, but crucially engaging in the right way with the ecosystem. Can I follow-up on that, Simon? Just one, Sarah. Thanks. So do you feel that your GPU can scale to performance levels that are high enough to compete with I guess, high end graphics companies that we see standalone, the likes of Nvidia, etcetera, and the compute side? I guess the way we look at it is not so much. Can we compete with company X? It's more about market opportunity. And Is there a large volume market opportunity that we think the ARM Partnership wants to serve with IP licensed from us So we're looking at different markets and making sure that, if we think that's a viable market that our business model serves, then making sure we got the right products for it. So there are there are always going to be some applications where the volumes are so low that they're not served best through an IP model and there's no point in us making some, enormous product that's only used by 1 or 2 people in the volumes alone. That just doesn't fit our business model. So we're looking at where the volume is going to be. We're looking at how the markets evolve and driving our roadmaps accordingly. That's great. Thank you. Good morning, guys. Thanks for taking the question. Just one on the mobile side. At the time of 4Q results, you'd highlighted that think 9 companies had licensed the next generation cortex A processor. I was wondering if there was a, any more at activity there in terms of lead licensing? And is this something that we're likely to hear more of perhaps later this year? Or is it a little further out there, into 2017 perhaps? Well, we haven't called out particularly the, which products were licensed and the licensing of advanced technology in this quarter. But as ever, there are new products that we're developing. We will announce those in the fullness of time in the last two quarters. We've launched at least 3 CPUs. And seeing very strong demand for that and very strong interest in the high end of our road map. So we'll reveal more details of that as it comes and be explicit about the licensing, as it goes. Okay. Thank you. Line of Kai Korshell. From Merrill Lynch. New guidance at the Capital Markets Day in September last year. I think you guided to about $40,000,000 in incremental revenues this year. Do you have any visibility at the stage about the phasing, and then also around kind of which end markets and also which maybe segments we should expect those incremental revenues to come from and just to confirm, that will be incremental based on the OpEx investments that you have been carrying out in the last 6 months? Thank you. So the Capital Markets Day, we talked about GBP 50,000,000 of incremental cost ramping up over the year and then generating $200,000,000 worth so £40,000,000 of cost, ramping up over the year. Then $200,000,000 of revenue in 2020, we didn't actually give an explicit revenue guidance for the 1st year. So when we've given our guidance, now, which says total revenue, we're comfortable, but be in line with market expectations. That includes the incremental revenue that's coming from those investments. And if you go back to the Capital Markets Day, revenue this year is around, the continuing revenue from some of the acquisitions we made last year, such as SAMHSA, together with some early licensing wins, in the other markets, actually the big ramp up in the additional 200,000,000 will come in future years on the licensing side. And actually, I'm just looking at this slide where you have said $40,000,000, which is a slide 94, just wanted to clarify that, that that is mostly licensing and M and A, I guess? I think the million you're referring to there is the million investment that we were talking about incrementally making through this year. And as Chris said, that, that's products for the networking and service space. And it's new product for IoT. We talked about our software platform around embed. That development is going very well. We're seeing very strong interest and pick up across the industry in that. I mean, I think if you know, your questions around, how we're doing on those investments, as you'd expect, we do a fairly frequent look back at how the spend is going and how the revenues are going. And, you know, it's exactly where we were planning it to be. From the latest look back we've done. Is from the line of Francois Muneet from Morgan Stanley. Your line is open. Hello. Yes, congratulations on the great quarter despite the weakness in smartphone, we're really well done. I was wondering what's your what's your view on competition at the moment? Because there's a big competitor in Santa Clara, which is a reducing headcount by 12,000 Well, your headcount is actually increasing by 20%. It's pretty clear that you're making an R and D push this year for a reason in sales versus net crushing and intellator. Thanks. What's the view, maybe it's a bit early, let us know, about 2017, is it worth making an incremental push in 2017 to nay the competition or or basically is in extra investment in 2016 and off? Well, Yes, we are planning on expanding generally over the next few years. Extra investments that we outlined last September on the only source of growth, in terms of R&D in the business. You know, you've seen us grow quite significantly over the last few years, and we do expect over the coming years to keep expanding What we saw explicitly last year was, based on the success that we were having in those markets, the opportunity to push ahead. Mean, we view competition quite broadly in different markets. There are different people who we compete with. In the microcontroller space that's very fragmented as an example. And so some of the work we're doing is to help defragment that and create some standardization around the arm architecture. In networking, competition there is different. There's the incumbency that we need to address, we're going to make sure we've got the right product that we're working with the right ecosystem and that's where those investments are going as well. So when I think generally about how we've expanded over the last few years, it's been about deploying resources in a way that helps us sustain our, in a very strong position that we've got in the mobile market, whilst broadening the success we've had in other markets as well. It's incorrect as some people do. I know Francois, you know, I'm very, very well, but a lot of people are still assume that we are, completely dominated by what goes on in mobile. But as you've seen from the numbers here, it's 45% of the units. We are having quite significant success outside of mobile investments that we spelled out to really capitalize on that yet further. Okay. So if I translate that into the numbers for next year, we should see operating leverage come back to the numbers next year? Well, I mean, the operating leverage is going to be a function of where revenues go, obviously. And part of that royalty that we can't control at all other than say very much, but at all. But in terms of continued investment in head count. We're expecting after the step up that we've gone through, for growth rates to return to more the kind of typical growth that you've seen on a quarter to quarter or year to year basis from it. Question is from the line of Sandeep Deshpande from JPMorgan. Your line is Yes. Hi, thank you. Simon, maybe two questions. Firstly, on the mobile market itself, do you think you've now seen the worst decline in the mobile market and now from here on? So, because we can't see you can see the numbers reported by your customers that the biggest decline is over and there will be stable trends from there into the next quarter in the mobile market or do you still expect based on what you're seeing in industry reports, etcetera, this may go down again in the following quarter. And a follow-up on the server slash networking part, what are you I mean, yes, you are trying to break into the and you have got some wins with the data center guys. What about in the networking market itself or virtualized servers for the networking market? Thank you. Okay. So to your first question, in terms of mobile growth, Yeah, we're looking at the industry reports that are coming out at the moment. I haven't actually seen a number for a unit growth in Q1, but the forecast for the year is still in that 6% to 7% growth rate range that we were talking about, 90 days ago. So 2016, it looks like it's going to pan out at the moment based on the forecast from what everybody expected. From one quarter to the next, to be honest, I really do not spend a lot of time worrying about that. Totally outside of my control, it will be what it will be. We think in the long term, smartphones are going to continue to grow. We're going to see increased functionality within those smartphones is going to drive the demand for more computing performance and more sophisticated processes, from arms partners. We're seeing core counts go up. We're seeing increased adoption of Okta. We've seen some Deca core products launched, just just in the last few weeks Mediatek launched their X20 and X25 products, which have 10 cores in them. So that is a trend we're expecting to continue. From one quarter to the next, you're going to get fluctuations within that. You know, really don't spend a lot of time trying to analyze it. Your second question was about, supporting virtualization in network servers. I think was that right? Yes, I mean, what I'm talking about is in the networking market, the networking market looking to virtualize altogether. And where the arm is going to be positioned as for servers in the virtualized networking market? Yes. So we built features into ArmV-eight to support more virtualization. We talked a moment ago about the work we're doing in the OPNFE world to make sure that the software stack that utilizes those walk that that is optimized to utilize those features and create efficient implementations of that. We're doing a lot of work both directly in arm across our partners within Lennaro on making sure that all the open source software to support efficient running of virtualized networks on army is all there and all well supported. So that work is a good example of where some of our increased investments is going. We're happy with progress on that and see no reason why on technology can't be used. To implement that class of networking product, which is going to be really important to deliver the performance that 5G requires. Your next question is from the line of Brett Simpson. Your line is now Thanks very much. Simon, just looking at consensus for PD royalties in the June quarter, I think it's about $185,000,000, which is coming off a $192,000,000 base this quarter is about 3% down Q on Q in dollar terms, which suggests pretty healthy seasonal period. But when I look at the March quarter for the industry, we've had an earthquake in Taiwan, the Tucai capacity at TSMC, And I think we all know that iPhone builds have seen big cutbacks in the March quarter sequentially. So when you say you're happy with consensus estimates, can you perhaps talk why you see it being so strong, despite some of these headwinds that's clearly impacted the sector? And maybe just a follow-up as well. Looking at Q1, can you maybe just talk about where we are with V8 and Mali and Okta as a percentage smartphone units in the Q1 period? Thank you. Okay. So when we talk about, in our outlook statement, there about being, expecting group dollar revenues to be in line with market expectations. We are talking about the full year there. And again, one course is next. That split, as you know, we don't guide for the breakdown between licensing and and royalty revenues. So we're talking about the full year. As you say, there are things that have gone on. There was the earthquake that affected TSMC capacity. I believe they've largely recovered that situation right now. There's, of course, a tragic earthquake the other day in Japan. Our understanding is that both Sony and RENASIS are impacted to some degree around that. And they are things that may well affect that. And that's why in our outlook statement, we talk about, being comfortable with that guidance modular the macroeconomic environment and that's the sort of thing that plays into it. But in terms of overall demand for our products, we have very strong pipeline of licensing opportunities. And the big companies that we work with are investing for the future and investing to win is always going to be something that happens that that is outside anyone's control. And that's why the macro factor does play into it. Second part of your question was about, breakdown of VA, MARly and Okta in Q1 smartphone shipments. Was that That's right. Yeah. Yes. So, our estimate of that is V8A in about 65% of handsets. Mali in about 50% and Okta in about 25%. That's great. Thanks very much. It. The line of Amit Harchardan with Citigroup. Your line is open. Good morning, gentlemen. I'm with Harchandani from Citigroup and a question, if I may, on your mobile royalties. You've seen over the years, the move towards making silicon in house for some of the larger sales, such as Apple and Samsung. And in the past, for example, we have looked at mobile royalties as a percentage of ASPs and there has been talk about ASPs declining or gradually coming down. But my question is as you move towards increased sourcing of content in house as opposed to merchant silicon. How does that impact the way you drive your royalties from these customers? And is there any incentive to move away from percentage to maybe flat pricing? That in turn would encourage greater uptake of ARM based content. So if you could just talk about the impact of moving away from merchant silicon to in how silicon that would be helpful. Thank you. Okay. So as you say, there are companies that do this. There a lot of companies that don't do this because the merchant market is still supplying a lot of silicon into the handsets. The, the concept of kind of OEMs building their own silicon is something that we've dealt with in our business model for many years. This isn't actually new to us. It's been a situation. It's been around for a long time. And we have ways of modeling the cost of chips. So that the royalties that we get from somebody who's who's building a, who's building silicon via an in house supplier, is paying to the first approximation the same royalty as somebody would, if the silicon came from merchant supplier. So that is a very well trodden path for us. We're used to dealing with it. And is we have models for that. So if I could just get a clarification around that, nothing really changes as we move towards the greater adoption of VA, Doctor. Koh and Mali, it still remains the same tried and tested approach that you followed in the past. Yeah. I mean, that we're not seeing any big shift away from our conventional models. I mean, it's something that does evolve all time. As you know, we've, we've changed the rates around the newer technology, reflecting the value that it brings. And our business models do evolve as the industry evolves, but there's no big, sort of, step function that's going on or that we anticipate to go on. Thank you. Hey, gentlemen. Thanks for taking my question. It looks like the adoption of V Eight in mobiles may be trending a little bit behind what you initially planned. Sounds like more of the low end stays, on V7 at least for a while. Also for Octacore, maybe there's bit of incremental less incremental adoption this year than we've seen last year. Just wondering if you could share with us some of your thoughts around the reasons for that? Is it costs from the client side? Is there technical reasons for that? If you could give us a bit of an update around that be helpful. Thank you. No, I mean, there's no technical reasons for that. I mean, I think that, we're not a million miles away from where we thought we were going to be And the number of smartphones in a quarter that have got a VA versus a B7 is down a mix shift fundamentally. What we've seen for quite a long time probably over a year now for probably about 18 months is a shift to V8 based chips from the supply chain. Now at the very low end where there are, where there is a supply of V7 based chips that are very low cost, you're going to see those get worked through the channel. But I don't think there's any change in our view that in the long term, we expect all smartphones to move to V Eight. When we set that out, we said that was going to be a multi year journey. The initial uptake, very, very rapid, uptake or mix shift slowed down maybe a little bit. But we think through this year, we'll end the year with about 85 80% to 85% of smartphones being VA based. And it's going to assume to over the next couple of years to 100%. So again, 1 quarter to the next, things will speed up, things will slow down, not something that I can control, not something I worry about too much the numbers are, what the numbers are, it's very much an output of what happens, but the trends unchanged. That's I mean, okay, on VA, you seem to be quite confident. If you just look at Doctor. Cortez as a quick follow-up, I mean, targeting 30% maybe by theendofthisyear, 60% longer term. Is there any kind of view you have, if that's a gradual steady progression towards the 6th year over time? Or should we expect something that is a bit kind of out of line for next year? So positive or to the negative side? I think there will be a fairly steady progression on there. Again, not expecting any big step. As the as chips move to more advanced process geometries and economic to put more cores into each chip at same or small incremental price. Then I think we're going to see functionality of smartphone chips go up at the entry level all the way up. So the high core counts are going to trickle down. We think get to 50% to 60% over the next a few years is entirely feasible. Your next question is from the line of Ewan Lam from Liberum. Your line is open. Hi, there. Yeah. It's Owen, and thanks for letting me ask the question. Accounts receivables increased, I think, 54% year on year or 1,000,000 and accounts receivables is now growing at more than 2x revenue. Has there been a change in the revenue mix or accountancy accounting policy to lead to this faster growth and accounts receivable? No change in policy. The increase is sort of a good news story and reflective really of the great bookings quarter that we that we had on the licensing side. So it's just a function that if you close a number of deals in the last couple of months of the quarter, then you're going to have a big receivable balance at the end of it. Okay. So we shouldn't expect any difference in the cash conversion or working capital out flow? Is it still receivables? No, it's the short answer. I think when you look at our cash conversion, it's sort of the somewhere between 90% 110% depending on license growth. So when we've got high license growth period and you can see that over the sort of the years from 2012, 2014, that's when cash conversion was a bit more than percent, it then trended down as we those licenses as we delivered on them and the payments, became due. And so it'll bounce around 100%. I don't see any reason why it won't, you know, on average, I'll grade, I'll grade multi year on be 100. Okay. Thank you. Question is from the line of Vijay Anand. Your line is open. Thank you. I had a question on the server market, specifically your thoughts on competition from power architecture. We've seen some statements from Google pretty recently that they've made much more progress in porting their software on the power architecture than unarmed. So just wanted to get your thoughts on how you see power as a competitor, and whether you see them as a rate in terms of achieving your 25 percent market share target by 2020? Well, I think server market could well be, much more fragmented in the future than it has been, but, obviously, IBMR a very long term player in this market. The power architecture has been around a long time. It's been in service since about 1995. So it has something of a track record in this space. It was designed for that market in the first place. IBM created the org to help push that into the future. But, you know, I look at the ARM Partnership and the number of silicon vendors and the, coming together the ecosystem that we have in the data center space. And there will be competition in the future. But I think what's been going on around other architectures doesn't change our view of where we could get to. Okay. Thank you. The next question is from the line of Robert Lamb. Your line is open. From Jefferies. My question just following up on Owen's question about the trade receivables and just the mix there in terms of the amounts recoverable on contract. Went up obviously at the tail end of last year and it's come down this quarter, but it's still a bit higher, I guess, compared to what we've seen over the last few years. And I just wanted to understand what or the business dynamic that's been going on that's caused this to increase? And is it fair that the reason it's come down is because it's now converted into trade receivables? And if so, it just seems like the cash collection on this seems a little bit longer than the normal. So I just wanted to understand, is it linked to the new investment cycle any color here would be great. And so as you said, the A rock came down this quarter and I know the request about it going up last quarter. And what I said then was it's really down to the timing of the quarter end and how that, stack with milestones in the license agreement. So, we were expecting it to come down. It has come down. That's what I said. It would happen when we last, when we last reported. At the same time, you know, we're signing new contracts that will serve to increase a rock. So, Again, I'll get back to the sort of the comment I made about accounts receivable. It's really to do with the timing of payment milestones and the there's no change in the business model. There's no change in policy. It is the normal ebb and flow of the, of the licensing process. Us. Okay, great. Thanks for the clarification. Question is from the line of Lee Simpson from Stifel. Your line is open. Great, thanks. Good morning. Thanks for letting me on. Just a quick one again on OpEx, if I could. Just want to RFI, what do you mean by historic OpEx growth levels? Really just trying to understand what the underlying headcount implications might be growth there. Before wage inflation? And how does that seg with medium term needs for servers investment and investment in the embed and computer business? Yes, I mean, when you look back over time, 16 around sort of a 5% to 7% increase in headcount and then you've got the wage inflation on top. So it sort of translates into high single digit. So that's what we're talking about for the investment. And as we've said, the big we announced a big step up in September, we wanted to flag it that's worked its way through now and we're returned to that more normal level of headcount and wage inflation. And as you know, the majority of our cost is people. So it's a headcount driven number. Okay. And that 5% to 7% headcount increase, is it skewed to server space in particular is it skewed to the embed incubator? Is there any color you could give in that? Mean, it's quite broadly across the business. You know, what we've, what we explained on the call just now is how, you know, we're investing in core roadmaps. So driving our processes, our GPU, our physical IP, to create the next product to enable server networking and mobile devices to to be implemented. It's on, the ecosystem around networking service particularly. And it's into our, IoT team, they're looking the embed platform. So it's quite broad. I wouldn't say it's more in one area than the other, but on those new fronts, That's where the that incremental investment is mainly going. And your next question is from the line of Anil Doradla from William Blair. Your line is open. Hey, guys. Thanks for taking my question. Simon, one quick question on the software ecosystem for the data center market. The server market. Obviously, you're seeing a lot of investments. Some of your chips and vendors are investing quite a bit. When we step back and looking at the big picture, how ready do you think, these, the arms over chips are ready to take on perhaps the whole system. Can you share which areas that still need a little bit more work on the software ecosystem? Thanks a lot. Well, that it's hard to pinpoint a big area where that we need to go work on what we've been doing is working through with people as they are, looking at particular workloads, looking at particular deployments, and seeing where the gap is and where we can optimize to get an even better implementation. So there's been some broad kind of foundational work around the basic Linux infrastructure, the infrastructure that you need if you're a manager of a data center to install a server and manage it. And then it's down to particular workloads. What we what we showed in what we're showing in the road show slides, are different workloads that we're looking at from, storage to, web serving, going up through data analytics, etcetera. So we're kind of knocking these off and they're very much driven by, our partners and where they see opportunity, where end customers want to use ARM based servers. We're getting quite focused on optimizing particular load. So it's not any one big thing. It's in fact lots of little things. And when you come down to it, is often the case. Next question is from the line of Martin O'Sullivan Sandcast. Your line is open. Yes, thanks very much. Actually my questions have been asked, but I was just wondering if you could give us a sense for how the recent acquisition and integration of Sansa is going and whether there have been any notable milestones achieved with regards to Sansa, particularly with regards to IoT security? So integration and working with that team going very, very well. We've expanded that a little bit. We put more heads into Israel. We have merged that theme in with the rest of the guys who are working on the IoT area and, with the within part of our business that's focused on systems IP, some of the hardware security features that came from sensor have been merged into that. So very happy with how that's going, and the integration of that team. I'm sorry, there was a second part of your question, I think. There wasn't actually no, it's just really with regard to ID security, how that's progressing. Okay. Okay. Thanks very much. Thanks. Question is from the line of Jerome Romal. Your line is open. Yes. Good morning. I got a quick question, Simon, concerning your new agreement with TSMC on 7 nanometer node. Specifically the part on the high performance compute system on chips. Should we read that you are maybe more aggressive targeting server than networking with 7 nanometer node? Or should we expect next kind of acceleration of design wins due to the 7 nanometer or maybe just the 16 nanometer node will be in to see the ramp up in sales? So I don't think that our well, our expectations of growth aren't dependent on any particular process node. We have, for many years, engaged with TSMC and others on advanced process technologies on looking at, how those process technologies are developed and the co optimization of our processor with their process. So the work we have going on on 7 nanometer, 10 nanometer and below is a continuation of that work. It's making sure that we kind of trail glaze with our foundry partners the implementation of ARM based SoCs on their high end, processes so that when our mutual customers then get to it, They know they can rely on the results and know that we have worked together to make it easier and make the result more deterministic. So the work that we have going on on 7 nanometer is really an extension of that. It's going to help with the high performance compute market with servers with high end networking, but it really is just a, I think, just it's a continuation of our, sort of, modus operandi of how we work with those partners who are developing advanced manufacturing processes. Okay. Thank you very much. Line of Alex Duval. Your line is open. Yes, hi, everyone. Alex you are from Goldman. I wondered, can you talk a little bit more about arm's ability to benefit strategically from the buildup of the semis industry in China. We know there are significant plans to invest in the industry there. Perhaps catalyze a bit by the issues ZTE has experienced in terms of sourcing components. And then related to the China question, I wondered if you could give some more color on the consortium that was announced of Alibaba, FITIUM, Baidu, etcetera, working with Almond Cloud Computing with some institutions in China. Many thanks. Sure. Yes. So, as you know, the Chinese government has an initiative around developing local semiconductor companies, and ensuring that more devices are sourced locally than are imported. I've seen data that says that China imports more as semiconductors by value than they do oil. So that, that has been a priority for some time. We've seen the growth of local companies, companies like Spreadtrum for example, rock chip, all winner, we've seen the growth of within Huawei, their team, high silicon, are developing some of the advanced chips in the world right now. So that's a, a development that we've been close to, for a long time, and we've been operating in for 15 years or so by now. And have a team on the ground working very closely with those Chinese semiconductor companies providing support and helping enable the innovation that they want to achieved locally, obviously by using armed technology. It's, it prevents somebody from needing to reinvent the wheel because so many chips have microprocessors in them. There's so much software in the world that runs an arm. It enables anyone anywhere to build chips that can then sell into a global market. So our business model is very, supportive of the objectives of the the Chinese semiconductor industry, we're seeing them invest a lot in manufacturing at the same time. So then how those chips are going to be used. Again, there is an initiative in China to ensure that there's server infrastructure for the banking industries for the local cloud companies, etcetera, is served locally. And that led to of arms participation in what's called the green server alliance, which got announced last week. That again is something that's been some time in the making, sponsored by MIIT in China, where their Vice Minister, Vice Minister Hway, gave the opening speech of that event last Friday And there are a number of companies involved. Arm is a platinum member of that. You mentioned some of the companies there, Alibaba Baidu, Dale, the new joint venture company between, with Qualcomm is involved in that, H3C, a Huawei, Lenovo, fighting. Lots of companies, big names are involved in that. It's an important initiative to develop local server infrastructure that is both energy efficient, and open by way of platform and participate Super helpful. Many thanks. Thanks. That's from the line of Douglas Smith Your line is open. Yes, Simon, there was a line in the press release about increasing R&D to develop generation processor technology. What do you think ARM processor technology will be in 5 years' time? What is the What is the roadmap going forward for the next generation? Well, our roadmap's always been driven really by maximizing the benefits of process technology and enabling, next generation applications to be implemented as efficiently as possible, and we take a systems view on that. So isn't just about raw instructions throughput or number of threads within the process, we're looking at system designs. We're looking at the applications that are going to be run-in terms of workload. And what's the best way to partition that across a CPU or GPU specific accelerators? How you optimize data flow around the chip on an off chip to minimize power consumption. And so as an overall theme driving our roadmap, they're the things that we worry about. In terms of specifically where our road is going. If you look back over time, when we introduced Cortex as a technology, we created specific architecture variance to enable the application processes, the real time processes, the microcontroller processes, to have the right feature sets yet be have architectural consistency across them. More recently, we've seen at the high end of that And as we've achieved success in the enterprise space, we've, at the high end, V8A, there are some processes with more enterprise level features in them than the ones that we developed in the mobile market, which is only features. So we've seen a kind of a split of the roadmap up the top there. And I expect those to really be the trends over the next 5 years. As we're more successful in enterprise, I think that's an area where we'll push on performance, we'll look at the different workloads, but that are being run on arm. And that will probably drive some evolution there. And meanwhile, the rest of the roadmap, again, focused on that system efficiency, and delivering the best performance of the lowest possible power. Great. Can I ask a follow-up on a previous question someone asked? On the TSMC 7 nanometer high performance computer on the press release. I mean, obviously, data center is one of the few areas where you're not really, there yet. And I think there's still some skepticism out there. Is the thinking that it'll take until 7 nanometers until the arm architecture can really compete against the supplier who's dominant in that space? Well, as I said earlier, it's we don't think that we need wait for 7 nanometer processes to come along before we get anywhere in the service space. In our a roadshow slide, if you have a slide, 25. 25, right. It shows, you know, the a growing number of markets, which can be served as really as more performance as different ships come along. As shows growing from 2015 where we already address, the storage and web serving market to over time through the combination of many, many functions and process technologies, one of them, more and more of the market being being addressable by our technology. So this is one of the factors in it, but it doesn't it's not the case that nothing happens until 7 nanometer comes along. Sure. Actually, that was a slide that led me to my question because you have HPC Engineering as 2018, which is I think exactly 7 nanometer at TSMC? But that also has initial underway in the middle of this year as well. Right. Okay. Again, that's a kind of evolutionary thing. And your next question today is from the line of David O'Connor from Exane. Your line is Great. Thanks for squeezing me in guys. Simon, question for you. When I look at the 2016 royalty drivers, they're well understood and you've indicated that you're exiting the year at high levels of the V Eight. And then also you talked about the, in the medium term, 5 will be a strong driver, particularly new segments such as networking and servers when those architectures are rolled out. But that seems to be more like 2018 timeframe. So my question is around what you see as the royalty drivers for 2017. Thanks. So, yeah, I mean, 5G deployment really starts around 2018 and we'll go for a number of years. So it's going to be something that is a driver in that timeframe. In the meantime, there are many networking, applications, which are clearly being served by today. We've seen 10% year on year growth. We've seen royalties perform strongly driven by embedded, driven by mobile, driven by Enterprise And Home. And we're expecting those trends to continue. So we're going to gain share in many different markets. 5G is a new technology, but it's not like there is no evolution between there between 5G and now. Really what we're seeing with the develop of advanced networking equipment, it is more evolutionary. There's not just a big bang that comes along so often with, from 3g to 4g to 5g in between, you're seeing the rollout of more and more advanced technologies. So that's going to be a driver the next few years. Great. Thank you. Next question is from the line of Jaguar Bajuah Your line is open. Hi, thanks for taking our question. On the licensing side, probably a bit more near term, but given the receivables grew a lot in the quarter, would imply that, a lot of deals were done late in the quarter. So I mean, also when I look at the last time your mix of turns versus backlog in licensing was at 60% over the last 4 years was in Q4 'fourteen and the following quarter was quite weak for licensing And we can also see the next 6 month composition of backlog is at a relatively low level. It's down year on year. So this would imply given your, statements around robust licensing that your turns visibility is very good. So can you just talk about that given your historical trend that we saw in Q4 where the following quarter was quite weak? Just the confidence you have around robust pipeline? And then just secondly, on the Mali penetration, I'm just wondering how you see that exiting the year currently at 50%. Do you see that more runway to grow that And also the royalty rates that you see trending for Mali, do you see it, kind of staying at this rate or is there more room to grow that? And so just on the backlog, the backlog is actually flat, year on year. So, we're not down were down quarter on Q on Q. I don't think you can read too much into the mechanics of turns versus backlog in terms of what that means prospectively because prospective licensed income is all about the pipeline of deals that we have in our CRM them and we have pretty good visibility of what that's going to be over the next 12 months. And that's what that's what's behind the guidance that we've given around full year revenues. So Okay. I was just talking about the 6 month backlog. I think that's down here, but, okay. So same question was about Mali. I mean, our expectation is that Mali gets to about 60% penetration in smartphones over the the full year. So exit rate, I would expect to see about that level, maybe a little bit higher. Royalty rates, I mean, in Mali, you know, the journey there very similar to the processes as we add new capability, add new functionality. Expect to edge up royalties over time, but I wouldn't brace yourself for any big step change in that in the near term. That's very helpful. Thanks. Open. Yes. No, I just wanted to ask about the Chinese server opportunity, but someone has asked the question too. Thank you very much. Okay. So perhaps we can just make this the last question as we are running out of time. Your last question is from the line of Amit Arajangali. Your line is open. Thank you. Just a quick follow-up around your current thoughts with regards to M and A. If you could please share how you're thinking about M and A, any changes in thought process there or more or less consistent what you have said in the past and whether it's still more centered around investing around the software building up ecosystems? Any thoughts would be helpful. Thank you. Yes, I mean, there's no real change in our philosophy right now. We're looking at, what IP fits our model, what are the IP building blocks that people are going to need for their chip devices to address the future generation of needs. What makes sense for us to do, what makes sense for the ecosystem to do, from both a hardware and software perspective. So no real change on that. You've seen us do a number of acquisitions over the last little while. I'm very happy with how that's going and the philosophy that we're taking to it. Thank you. Okay. Well, Fred, we're going to have to call it a day there. Thank you very much. To everyone for dialing in today, and thank you for your questions. We will see you for Q2 results in July. Thank you and good morning. That does conclude the conference for today. Thank you all for participating. And you may now disconnect.