Earnings Call: Q4 2015

Feb 10, 2016

Good morning, ladies and gentlemen. Stuart Chambers, chairman of Arm. It's my pleasure to welcome you to our 2015 results presentation. Let me just first kick off with a couple of board changes, which, we've made since I I saw you last, which was at the half year. Chris Kennedy, obviously, are fully on board now. Also, Lawton Fitt has joined the board, as a non executive director, but also as a replacement Kathleen O' Donovan as chairman of our audit committee. And we've also had Stephen Pusey join us, who'll bring a welcome global technology, approach to our board. So those are the board changes. Let me now turn to the company. Just briefly, Last year, we celebrated our 25th anniversary, and Simon and the team had a whole series of events around our various locations. Clearly, you know, thanking if if nothing else, our employees for the tremendous progress we've made. And and in that 25 years, a lot, many, many very successful years of progress. Now clearly, it is our intent to, look back at our 50th anniversary at a second quarter century of, of similar success. Now to do that, of course, we have to do 2 things. We have to deliver today, tomorrow, next week, next month for our customers, on the execution of our of our various technology roadmaps, and we need to keep on doing that, flawlessly. But secondly, it's very important. Of course, we have a long term perspective on strategy, and we have long term strategic objectives. And as a part of that, at the Investor Day last year, we talked about accelerated investments in order to make more progress, further down the road. And, of course, those are very important things for you're doing. So I'm without further ado now. I'll hand over to Simon who will, cover both of those things are performance in terms of 2015, but also importantly progress against some of our medium and longer term objectives. Thanks, Geir. Good morning, everyone. Thank you for joining us for a start Let me just refer you to the usual, cautionary language. And if you need any assistance with that, then please see us later on, So, here today to talk about our full year results, our Q4, and Looking back on 2015, it was a very, very busy year for Arm, and the Arm Partnership. And in that, I'm really thrilled with the progress that we've made. On delivering to our long term strategic objectives, which are around collaborating with business leaders to develop the technology going to be required for the products of the future. I think we made great progress on that in 2015. When we boil that down to the numbers and we'll talk more about that later, Q4 was very strong for us and ended a strong year of great performance. We ended the year with nearly $1,500,000,000 of revenue. And in Q4, our licensees shipped 4,000,000,000 chips containing our technology. The total volume shipment through the year, was roughly 15,000,000,000 chips. So that's a huge number. And Q4 was the first time that we've broken that 4,000,000,000 in a quarter barrier. So very large volumes That's resulted in strong royalty revenue growth. The volume growth in the year was about 23%. And the royalty revenue growth was 31%. And the reason for that difference is the increased on content in some of those chips. And the increased royalty rate that we're able to command because of the value that our technology adds into those devices. So the business performance, led to strong cash generation. That's enabling us to recommend a 25% increase in our dividend because of the profitability and performance of the business. So those results happen because of the long term investment and the long term view that we take in growing the business. And the invest in the investments that we've made for many, many years, resulting in products that are licensed in the year, and volumes are shipped to the ships in the year. But it all comes about through the work that we do in our R and D. Now at the Capital Markets Day, we talked about, some of those investments that we're going to make in the future. Armarly is a long term business, and we're thinking today about products that will be shipped in 5, 10, even 15, maybe 20 years' time. We have products shipping today via licensees based on technology we were designing 20 years ago. So this really is a long term business, and we have to take a long term view, on investments. So I'll talk briefly about some of these areas now. So starting with mobile, clearly, the growth of smartphones is slowing down. This is something we've been anticipating for a long time. It's obvious that this is going to happen. But as we look to the future and how, the mobile computing market plays out, we see continued opportunity for more compute performance, more arm content in the mobile computing devices of the future. That's going to come about, again, through work we do within arm, but crucially it comes about through collaboration with our partners, the way we work with leading companies in this space, to take what we do, to amplify what we do with all their own intellectual property and their own work. So that collaboration, which is a crucial part of Arm, continues to play a role in the evolution of our products in all spaces, but especially in mobile. In networking, in in the enterprise segment, in networking and in servers, we've outlined before the opportunities for Arm and the Arm Partnership to grow share. And we've seen good successes in that in 2015. What we're doing to accelerate that is further investments in the software ecosystem. There's a lot of software that's going to run on these processes in the data center, in the network, and our investment right now is about enabling that to be optimized for the ARM architecture to fuel that growth. Again, we're doing some of that work internally, and we're partnering with leaders in this space, to make sure that the right code is optimized in the right way for the right workloads because our partners understand, the details of that are much better than we do. So partnering again, very crucial for our growth in this space. Now turning to embedded, all around us, we're seeing more and more devices become connected and more and more devices become increasingly intelligent so that they can make sense of the world around us and share data with other devices to gain real insights. Now all of that is enabled by tiny low cost, microprocessors embedded in microcontrollers will suffer a very small amount of money, but that low, low cost leads to very high volumes, and this trend of embedded computing in all sorts of applications is going to be a real driver of technology over the medium to long term. What we've seen is a migration in this space from very simple technology, AT and T seen bit architectures produced by others, 2 more sophisticated 32 bit microprocessors, and this is where arm and the arm partners have really taken a leap. We are continuing to enhance that lead through R and D and our products and again, partnering with others to bring the right technologies together to solve some of the security issues that arise when suddenly everything is connected. The three areas in which we're investing in both hardware and in software to grow the opportunity for us. And as we do this and we look at the spike of the market, these are big, growing markets. When you take just these 3, and obviously, we're involved in other markets as well, and we'll come onto some later. In terms of these silicon content, the devices that will be sold by our licensees, these three markets alone add up to $120,000,000,000 of silicon. That's $120,000,000,000 in 2020 growing from, today. You can see you can do the math there. The increase is about another $30,000,000,000 worth of silicon. Compared to 2015. So these are big markets, they're growing markets, and they're all markets where the computing requirements are growing. And these are perfect markets for Arm and our partners to address. So back to mobile for a moment, The devices that you're all carrying today, I'm guessing that everybody in the room has a smartphone at least one. The devices that you see, your friends, your family buying are all based on technology that we developed a long time ago. And through 2015, we've seen increased adoption of version 8 of the art architecture and come the end of the year, when we look back over 2015 as a whole, around half the smartphones that were shipped in that time, were based on version 8 of the architecture. Now that is technology that we started developing a decade ago. It's been in development a long time, We've produced process of designs based around V8. Our licensees, produce chips based around this, and now they're shipping in volume you can see through the year that the volume has grown. And in fact, in 2015, compared to what I said 12 months ago, the adoption of VAD in mobile was stronger than we expected. It's not just about V8s. We've seen increased the tax rate of our Marley graphics, processor. Very high volumes there, about GBP 750,000,000 and Mali processed is shipped by our partners in 2015. So the attach rate of Mali going up with a number 1 graphics architecture, and increase in the number of cores, the amount of compute power tax into these mobile devices that we're carrying around. So 2015 has really seen an increase in, the compute performance of these devices We've seen a growth of 8 core devices and even some 10 core devices now in smartphones, but all based on technology that we already developed. So what's coming next? So in Q4, our licensing into mobile sector was very strong. Very strong demand for our next generation products. There were 9 CPUs licensed by our partners, which are products we haven't actually announced yet. These go by code names there, cats and dogs and birds and flowers and things like that. Products we haven't actually launched yet, very strong demand for our next generation technology to provide the computing for next generation devices that hopefully will all be using. So our continued investment in this sector is leading to that technology and leading to the strong licensing in Q4. Now we've been evolving our technology for the high end. Everybody thinks about flagship devices, so you can kind of hero products, which have all this compute power in them. But there's a lot of growth ahead in low cost devices, in entry level and mid range smartphones. These are going to be the fast growing sectors or segments within the smartphone sector. And so we've been evolving our products through R&D Investments to make sure that we are well suited to address that portion of the market as well. Through 2015, we launched Cortex A35, a version 8 architecture processor, optimized for the needs of a sub-fifty dollars smartphone. That is a portion of the smartphone market that we think is going to grow very rapidly, and so we want to have the right technology for it. So we're not just focused on the very high end. We're focused on this midrange. These entry level devices. We're focused on wearable devices too. And the introduction, of our Marley 470 was a GPU optimized for these small screen devices smartwatches, IoT devices, small things with smaller screens. Again, this all comes about through our investment in R&D. We're able to, target our technology at different markets because we have the engineering manpower, the firepower. To create the optimized products for these different segments of the market. Now one of the other things that we've done is evolve the way that we're working with some of our licensees. As I mentioned, collaboration, partnership, these are the cornerstones of arm, and when you read through the release, you can see, the announcement of a program called built on arm cortex technology. Now what we've seen over the years is some of our licensees have some different needs of what they want to do. Some of them have, addressed that by taking an architectural license and making a huge investment in building a processor team, to build their own CPU core. The way we've evolved this slightly is working with some of our partners who are looking at Just a little bit of difference compared to our standard offering. We're going to be working with them closely on new products as they develop, to create a slight variance for what they need. We're doing that engineering work in collaboration with them. We're making sure that the software ecosystem supports that variance and satisfying the needs of our customers who want specialization differentiation may want to tailor their products in slightly different ways And as the end market gets more sophisticated, and we believe this is a great way of addressing those challenges. The Qualcomm is the first partner that we've announced today that we're working with in this way. I'm sure there are going to be others in the future, and it's a slight just a slightly new way of working with our partners just for making sure that we're what we're doing is is optimized for needs of our customers. Now moving on to to networking. We've spoken before about the changing needs of networking and the opportunity that that brings to Arm and the Arm Partnership A year ago, I was very proudly saying that our share of the enterprise networking space had grown to 10%. Or through that, through 2015, that went up by 50%. And we now have a 15% share of this market. So Very pleased with the progress in this space. In Q4, we saw a number of virginate architecture chips announced by our partners, There were devices from Broadcom, from Marvell, from NXP, leaders in the networking space. We're producing very sophisticated very high performance, in many cases, very high core count devices to meet the computing needs of the next generation networking equipment. This is targeting a wide range of applications that are local account devices, SQL account devices for scalability in our architecture, means that the ARM Partnership can address the entire space represented by networking. We've been investing in the ecosystem too. Processors are useless without the software that runs on them. And in networking, there are different requirements. Networks are becoming more software oriented. They're requiring more flexibility and requiring the capability to have different applications running on the same processor but isolated from other applications, and this is what virtualization value generates a container for an application to run it. So we've added features into our processes over the years to support that, and we're now working with the software ecosystem, again, in our partnership model. Create the software that the next generation network will require. And that key component of that is what's called OPNC. I won't bore you with the technical details of that, But if you think of that as a software platform to enable, the functions that are going to be required by the next generation of networks, And that is a very key component, and we're optimizing that to run on the art architecture. Now at the Capital Markets Day, we set out a goal of achieving a 45 percent market share in the network in space by 2020. And the way in which we'll communicate our progress towards that is through what Ian calls the Smarty chart, which is breaking the market down into different segments. Each of the Smarties on the chart here represents a leading company in this space. And if we had high success in all of those, we end up with an 80% market share. So this is a way of, segmenting the market and showing our progress within that. The color codes mean a red. We have nothing going on there yet. And the amber means there's a design win. Green means somebody started shipping, and although there's no blue on there, when you see the dots turn blue, means the majority of their product line is based on ours. So we will do updates on this as we go, and for this last quarter, We've seen, products shipping in the wireless access space. So one of the leading companies has turned green there, and we have some design wins in two other areas, which are important in this market. So I think in 1 quarter, that's pretty good progress, and we will give further updates as we get more design wins as products start shipping and hopefully as more of these companies move more of their products towards arm. Now the data center is a very important market for Arm. It's clearly a lot of computing is going on in the cloud, and we believe that there is a greater opportunity for Harmony on partners to target this space. The ARM technology is going to allow greater flexibility in the kind of processing that's done in the cloud, with the added benefit of greater energy efficiency. So this is an important market, and the ARM partnership is driving a lot of innovation in this space. Program in 2015 was pretty good. We saw more chips designed by our licensees to target this space, we saw the shipment of armed servers, and we saw a lot of work going on around the software ecosystem that's required. This recently in January, AMD, as another example, gave an update about their product road map, introduced more products based around the art architecture, targeting this space. Again, it's all about software. Processors need software to run on them. And for, some time now, we've had a big investment in this space. Again, work we do, work we do through the ecosystem, work we do with our partners. And now all the major Linux distributions that are important for this market are optimized to run on arm. Not just about the operating system, you have to think about the workloads, what the server is actually doing. And there's lots of different software that runs in a data center. We're picking off the key workload packages. We're optimizing them. So that somebody building a data center has choice about the technologies that they put in there. All of this work has led to real deployment. There are now 3 tier 1 companies, deploying operationally, deploying ARM based servers. So this isn't kind of an experiment in the backroom, This is real production, operational deployments of ARM Technology. And there are 3 Tier 1s in different countries and in fact, different continents. There's one in China, there's one in North America, there's one here in Europe, using armed technology to, provide better flexibility around their service, to their customers. So we're really pleased with that progress. Now I want to talk about embedded that is a very broad space with lots of different, products in these, these, in most cases, very low cost microcontrollers. I'm very pleased with our progress there because Arm is the number one architecture for embedded. Now there's been a migration over the years from these simple 8 and 16 bit microcontrollers, more sophisticated 32 bit microcontrollers, and the arm architecture in that 32 bit space, which is the fastest growing, is, it does have number 1 market share. So we're in the number 1 in 32 bps. And when we look at, the dollar value of that market in total, again, we have the number 1 market share. Our shipments into this space have gone up 25% year on year. And in that time, shipments of 8 and 16 bit base microcontrollers have gone down 5%. So again, we've been gaining share in this space. What we've seen in 2015 is more sophisticated microcontrollers. Microcontrollers based around cortex M4, That's a process that adds DSP capability into the microcontroller space. Products based on Cortex M7, this is a a super scaler processor. And if you ask people 10 years ago, would you see a super scaler processor in a microcontroller? They would probably say you on that, But our technology, even how efficient it is, how small it is in terms of dye size on silicon has enabled that to happen. That's delivering a lot of performance into a field, which is typically relied on just the bare minimum you can possibly send the transistors up. But this architectural shift, the work we're doing in our products, the work we're doing in our ecosystem, is enabling far greater performance into a, a category of electronics, which, in the past, has been very constrained by the performance that you had available to you. We're continuing to add capabilities. We're thinking about how these devices become connected. During 2015, we launched the cordial radio We saw our second license of that in Q4. We're bringing some of the security features that were previously only available in our application processes down into microcontrollers with the Z8M variant of the ARM architecture. And again, we're licensing that for people. So a lot of progress in this space, and it's growing rapidly. So why though do you want a 32 bit processor? 8 16 bit micros shipped by the billions. They've been around forever, and we'll probably ship for a very long time to come. But why do you, why do you need this ship to, for 'thirty two. As I said, APES technology, great. It's been around for a long time. Volumes are a very large What they do though is, they enable very simple devices. So if you want to put a screen on something and have a little LCD with some numbers on it, I think 16 bit micro is not a bad way of solving that problem, but it's a very simple device, hard to program. If you ever want to use the code for something else, you want to find engineers who can program it, that's pretty hard. So these devices tend to be, you know, written once, black box, and never touched again. And the functionality that you can provide is relatively simple. You see in 16 bit micros in street lights, where maybe you've got a very simple sense of just working out off in a central lineup. In something like a blood glucose monitoring device, again, you might have a screen reader to have yourself and it says, The answer is 5.7. I don't know if it's good or bad, but that is the answer. Do something. In cars, lots of microcontrollers in cars, helping the functions of unconnected, devices. So the, the sealer and the rev counter, and the display, you know, all, separate devices, which just need a little bit of control, but maintaining the current base of these devices and what you can subsequently do is very, very limited. And we saw the shift of 32 bit coming. We anticipated that you could build a 32 bit microcontroller in the future, and that future is now for the price of an 816 bit micro. And once you've got a 32 bit processor, there is just so much more you can do. You've got more performance. You can use modern programming languages. You can hire engineers who know what a code for it. You can run an operating system. So you've got a lot more performance and capability available to you. And as a result, these devices are becoming much more sophisticated. You can now have a streetlight, which is connected, isn't just switching itself on and off, but if the bulb breaks it, dials up some help and somebody comes and fixes it, It can think about the, the environment. It can think about how it interacts with other street lights and other, infrastructure in a city. The glucose monitoring system can now pair with a smartphone. It's the data that you capture can now become useful. Because it can get broadcast somewhere in the cloud. Some analysis done. Your blood glucose was 5.7 on a Monday morning at 9 o'clock. How's that compared with every Monday morning at 9 o'clock path. Data can now become more useful because you've got more processing power locally to do something. And in the car, we're seeing a real revolution about, of the technology in a car. He went around CES a few weeks ago, lots of floor space given over to to Automotive, and people are thinking really creatively about how to use embedded computing given you've got more performance now, in creative ways. So talking of cars, this for us is a really interesting market. And it's one where the semiconductor content, the interstate, is going to grow quite significantly. This in, in 2020, in terms of the portion of the semiconductors in a car that Arm could address grows to a $15,000,000,000 market. So there's a $15,000,000,000 worth of silicon, essentially all of which could contain on technology. But that's a materially large market for us, and it's one that's growing. When you think about the number of cars in that are going to be manufactured in 2020 and you divide that into GBP 15,000,000,000 you get a as an average silicon content per car, of a $150. And that may not sound very much, but if you compare that to smartphones, It's about 7 or 8 times the amount of semiconductor content relative to a Smartphone. So the volumes might be lower, but this and certainly in a hiring card, gonna be a place where there's a lot of computing power, and there are a lot of semiconductor devices, in all all areas. Whether it's sensing whether the doors close properly, sensing whether you're about to hit the car next to you as you open the door and doing that for you so it never happens. Whether it's just unlocking the door or with the plethora of cameras that you're gonna see, in cars, making sense of what is going on around you. There is a growing need, intelligence in a car. You can't defer all this to the cloud because you need real time response and the latency through the network is not going to let you do that. So you're going to need a lot of, processing in a car, And as we're saying here on the slide, we anticipate a car really turning itself into a supercomputer on the wheels. Lots of compute power in that and lots of our licenses are are looking at this space and looking at how to address that. And a great example was shown by NVIDIA at CES, they launched their product called DRIVE PX2. This box here on the, lower right of the slide. Big thing is water cooled. It's got lot of compute power in there. So a couple of chips that they have developed, with a lot of microprocessing power. Within, each of those chips are 8, Cortex A 57, and 4 of, NVIDIA's own implementations in the arm architecture. They call it extender. So 4 Denver's, 8 core Tex 857 times 2. There's a lot of computing power putting to the car, but it's what you're going to need If you wanna ultimately have a car that can drive itself, work out what's going on, work out is the pedestrian about the crossover, ladies and gentlemen, set out what this guy in the next lane about to do. What the lane doing. That is a computationally really hard problem. Now I sat in a self driving car, and, you know, you can just see how much more compute power is going to be required to really do that seamlessly and safely every day of the week in every particular, any certain circumstance that the car might come across. So semiconductors in the car going up. Again, it's a big growth market, and it's a great opportunity for Arm to address it. With our innovative technology and our partnerships. So what this is going to result in is we think about 100x increasing the compute power in the car over the next 5 years. If that sounds like a lot, compare that to what's happened in smartphones. We look back over the last 5 years of smart home evolution, and we see a similar growth in compute power. We've shown you some of the data before, but it's it's 80 to 100x Over the last five years, growth in compute power is something you carry around with you and run off a battery in a 20 years I would have seen in feasible 20 years ago. So the small thing did that, and we think that's going to happen in cars too. Working with our partners, we're leading the way on that. We're working with people looking at, in vehicle infotainment into ADAS system. This is about providing the driver with more information and Again, anticipating what's happening. Shassy drive system is just setting it up everywhere, in cars. We're collaborating with OEMs too. There's a lot of, of investments going in across the industry to address the challenges of next generation cards. And as a company that thrives on partnership, this is a great place for us to be We don't work with these companies. People want to work with us to solve these next generation challenges. Revolving our products, and we're evolving the way we design our products to make them suitable for safety critical systems, another big task is a safety critical system. It requires innovation and technology, innovation in our partnership, innovation about the way we work, and we're very focused on that, since we see what's noted as a big growth factor for the future. So as I think about the way the use of embedded technology is going to grow over the coming years, You can see lots of places where today's products work really well, but tomorrow's challenge is different. Tomorrow's challenge requires more compute power more innovation in devices, more creative ways of bringing vision, cameras, computing, connectivity into the cloud together to provide the kind of compute power that we're going to need in our next generation devices, whether they're in our POP Air in our, in our driveway or just the infrastructure of the environment, the connectivity between a car and a traffic light. Just the traffic light telling the car to stop instead of having to work out that the lights are on red, and it's all about connectivity and it's all about embedded computing. We wanna make sure that we've got the right product for all of those technology spaces, and that's why we're investing so much in our R and D capability to address that future needs. So we outlined that back in September, and we're executing on that. And the licensing that's being driven today comes from products that we've already built. So that is the history we're thinking about the future. We're only going to do that through, our own work, but crucially collaboration with our partners, building our, our ecosystem, and working on the things that then help accelerate the gains you saw us talk about investment in software, investment in the ecosystem. That's critical for us to address that market. We're going to keep focused on that. And then finally, that translates into money. It translates into growing revenues It translates into growing profit, as we provide more value, we get paid for that, and you've seen that effect in 2015 in the strong growth in our royalties. So with that, let me hand over to Chris. He's gonna go through some of the numbers, and then we'll be back a little later for some Q and A. Simon, good morning, everybody. I'm gonna start by taking you through the quarterly numbers. It was a strong quarter, as Simon said, dollar revenues were up 14% and that was driven by strong royalty growth from the adoption of all of that advanced technology, but in smartphones that Simon talked about, as well as the share gains we're making in markets beyond mobile. That coupled with that was coupled with flat licensing off the back of a very strong 2014. And the royalties were also helped by royalty catch up from one of our partners who, had underreported prior years, and we had a royalty catch up of around $9,000,000. So that 14% in dollar terms was helped by the strong dollar. Sterling revenues were up 19%. And operating costs were 124,000,000, and that year on year increase was driven by an increase in R&D. Which was 37% up in the quarter year on year. So as a result of all of that, normalized profits were up 17%, normalized EPS up 14%. I've locked this amount a second here somewhere. The full year picture reflects the same trend as the quarter. Total revenue is up 15%, 22% in sterling terms. And at the same time for the year, our normalized OpEx increased by 20% And that's due to the investments we're making to maintain our pace of innovation and accelerate the market share gains in our target market. R and D and as as a as a reminder, R and D investment accounts for half of our OpEx, and that grew 28% in the year. And that means for the other costs, the other 50% increased by significantly less, around 13%. So they're growing at a lot less than our sterling terms and our revenues are. And you can see from the chart, if you, if you look at the engineering, the headcount we've added in the year, We've added twice as many engineers, although engineers are growing twice as such as our non engineering headcount. So that, that, that OpEx, you need to think about it as running costs for the business, investments for the future, roughly half and half. Again, as a result of the strong revenue and performance in normalized EPS grew by 25% to 30.2p. And we've continued to benefit from the Patent Box regime that the UK tax authorities introduced. And that's resulted in a normalized effective tax rate of 16.2 percent, all of that reflecting the high R and D investment we make. So we've had a strong 2015. We've outperformed the overall semis market, and that is not a new thing. This is something that Arm has been doing over many years. And this this chart just, indicates that. So on the on the left hand side, the the light blue line is the total number of chipped, shipped every year. It excludes memory and analogs. So then the green line is the number of those chips that have a processor in them. And the dark blue line is the number of chips that have an arm processor in them. And you've got the same data on the right hand side of the chart, expressed as a proportion of the total number of chips shipped. So you can see that the as as Simon said, that but the amount of processing power is increasing every year. So the number of chips with the processor in has gone from 25% of the overall market to 68% in 2015. The number of chips with an ARM based protester in that town has gone from 5% 21%. So what does that mean in terms of the compound growth? Well, the overall market has grown at 5%, the overall market with a processor in, it's run at double that rate. And then when you look at the number of chips with an ARM based processor in, that double that again. So we've been growing at four times the overall center's market rate for a long time, and we don't see any reason for that trend not to continue. So what does this trend mean for the addressable market in 2020. These charts are something you'd be familiar with from roadshow slides and from the website. They show the addressable market for ARM based Chips. And we periodically update these target markets, both for the growth rates in the markets that we're in already, but also for the increasing range of markets that armed technologies become suitable for. As a result of the most recent review, we've upped our target market by around 10% in both volume and value terms. And that's principally because we've we've started to receive royalty checks from processors in battery controllers, flash memory controllers, and smart sensors. So those weren't markets that we had previously put in our addressable market, targets. We're getting royalties on them. We think it's appropriate to include them now. And, we'll get we can get into the detail of these market forecasts, you know, you can talk to Phil or to Ian or to myself, and we can go through it on the roadshow. Now although we've increased the addressable market for 2020, there's clearly, uncertainty over the short term trajectory of smartphone handset volumes. However, following our 2015 strong performance through the adoption of the advanced technologies, C8, Marley, Octacore, and the fact that we see further opportunities for our our partners who adopted more of those technologies, we are very well placed to outperform the overall market. And then looking further ahead, 3rd party estimates for the smartphone market for 2020 have come down by around 5%. If you take those estimates, which equates to around a 6% compound growth from 2016 to 2020, factor in that increased adoption of our advanced technology, then we're still confident that we can grow the royalties from the chips and smartphones. By 15% compounds from 2016 to 2020. At the same time, we're continuing to gain share in markets outside of, of, of the mobile market. And so when you look at the royalty rate in all of our addressable market, we still believe we can grow at 15 percentage points more than the overall growth in the percentage market in that time period. And finally, we continue to expect licensing revenue to grow over the medium term by around 5% to 10% per annum as well. So as we set out in our Capital Markets Day in September, we're increasing our investments in R&D in 2016, flat accelerate the opportunity to gain share in our target markets. And we've also been investing inorganically as well. We've made 10 acquisitions in the last ten quarters. And that gives us the opportunity to further extend our growth. Turning to the balance sheet, we're committed to having a net cash balance over the medium term. And this reflects, our commitments to maintain the investments that's necessary for our roadmap and our partners math. And it also ensures that we retain the flexibility to act quickly and decisively in what is a very fast moving market where we see opportunities to further extend growth. Given the expected rate of cash generation, and the pipeline of opportunities that we see today, I wouldn't expect us to resort to external financing markets or any the future. The business remains really strongly cash generative. We generated 1,000,000 in cash in 2015. As Simon said, we're proposing an increase in the ordinary dividend of 25% which is in line both with our EPS growth this year and the historic trends of dividend growth over the last 5 years. And the board remained committed to growing that ordinary dividends in line with the growth of the business and maintaining the policy and maintaining share share count flat than maintaining that buyback program. And I think the combination of the investment we're making in 2016 and the ability to increase that dividend really demonstrates the arms ability to balance both the investments for the future and increasing cash returns for shareholders today. I'm going to conclude on the outlook. In revenue terms, we're well placed to outperform the overall semis market. Driven by that further version 8 penetration in mobile and market share gains elsewhere. Based on our current view of the semi market, we estimate that full year revenues will be in line with market expectations, although this does assume that the macroeconomic environment doesn't further impact the end market for our partner's products. And finally, we expect normalized OpEx of Q1 2016 between GBP 127,000,000 to GBP 129,000,000 as we continue the investment program that we outlined in September. So on that note, I'll come back to Simon to chat with you today. So just before we start, I'd point out your your expertise in asking compound questions. If we could start with a question, and then we'll, we'll get around the room, hopefully, for another stint. Problem. Thanks. It's Kai from Merrill Lynch. I had a question on the near term, and I appreciate you've you know, highlighted that you continue to expect, you know, to outgrow the smartphone industry to obviously take share in other markets. But to think about this year, it seems like optical penetration only 10%. So there's still quite a lot of tailwinds, I think. So I'm just wondering nobody knows what the semiconductor industry is gonna go out this year. Let's say it's flat, you know, what relative health performance of your total royalties you know, would you expect at this point in time? You know, I'll I'll guide him to the word outperform the industry by about 15 percentage points, and there's some fluctuation in that. So that seems to have been, the case for many years now, and we expect that to remain the case into the future. As you say, you know, we're in an interesting period right now where cooling what the industry is going to do this year is very hard. You know, the overall kind of sentiment out there around smartphone growth is is sort of lower than people maybe would have expected a year ago. But as you say, there's, a reasonable tailwind of more technology going into those devices, a firm based on what we have today, and then the long term transfer more and more compute powering devices. So as a working model, that 15 percentage point outperformance is what we have in mind plus or minus through, through a given period. We don't tend to get too head up about the quarter, the next quarter, the next 6 months. It really is about about the long term trend. Andrew Gardiner from Barclays. No question for you, Chris. Just on the, on the dividend and the return policy relative to the investment in the business that you're talking about, so 25% growth in the dividends, nothing to be sneezed at, but your your cash power does continue to grow. And you've talked about it. Your predecessors talked about it, that you doesn't need to continue to, have an ever increasing pile of cash on the books given the business model. That said, you've increased investment. You're talking about a pipeline of, potential M and A. You did full last year, sort of £70,000,000, £70,000,000 worth. Are you suggesting there's an increased appetite for inorganic, inorganic growth here, or, you know, what what kind of sizing should we be looking at as to why you're keeping your powder so dry at the moment? So as we said at the Capital Markets Day, we've Been through our 5 year planning process. We took a good, hard look. At the capital structure of the company, we compared that to our semi's peers as well. And took all of that thinking to the, to the board earlier discount of the year. I'll conclude that. The first thing to say is we are not our line with our semiconductor peers in terms of the amount of cash that's on the balance sheet. And the second thing I would reiterate is, you know, our uses of cash are It's first to fund growth, and it's organically or inorganically, second to maintain that strong balance sheet and then increase in cash returns for shareholders as well. So, you know, I think the words in the statement summits up really is we've done a good review in terms of the pipeline potential opportunities, and they are potential we're not signaling anything, you know, concrete around acquisitions. We're comfortable with the level of cash we have at the moment. Your point is, is, you know, well made. We don't want to sit on an ever increase in cash trial. The cash growth this year was relatively modest. Due to the, acquisitions we've made and the share buyback and the dividend will be cleared. And we'll just, we'll keep it under review and working on the statement, as we said, we'll take another look Yeah. Thanks. It's Nick James and Numis. I guess you wanted to ask on the it's called built on cortex, product, that seems to be all the first customer even answers previously been an architecture license. So, firstly, the first question was, is that for a product for mobile or non mobile? And the second is, is the revenue potential of this new type of structures selling to them different or higher or less than they're not used our previously, gain from that customer, that type of customer. So I mean, in terms of the specifics about what they're going to do with the technology, that's for them to talk about when the time is right. They are doing a analyst, they, I believe, tomorrow. And in terms of the revenue opportunity for us, these different licensing models at a high level have pretty much, an equal, royalty opportunity for us. So there's a radical shift here. Thank you. It's Achal from Credit Suisse. And one question on the adoption of, 64 bit and and big little. I think you gave some numbers for Q3, and now you've given numbers I think it was 215,000,000 64 bit shipments in the last quarter and now it's 240,000,000 And at the same time, we've seen the pivotal number go up from 70 to 75. Clearly, we're seeing a much faster adoption still on the VA side but very little, it's kind of still, much slower. Like, what are the things that are stopping your customers on getting on that big little thing much faster like something we saw with Sigma, which we had earlier last year, like, what are the things that they're possibly thinking about? I think a mistake you're making in the way of looking in those numbers is to assume that every chip that an ARM processor goes into looks like a smartphone chip. So smartphones are somewhat unusual in that the workload that they're running at any moment in time varies. You can have applications require lots and lots of performance, everything you want to throw at it, you can, and there are other applications which are very lightweight. But Big Little is a great way of dealing with, vastly different compute requirements in the same application. Now some of those VA chips are going into networking. Networking is about data going through at a constant rate. It's not doing one thing, one minute, another thing the next. In the way that networks are designed today. And so Big Little doesn't apply in that kind of market similarly in servers. These aren't applications, which are switching around and need the sophistication of big little to because they're running on a battery. So it's it's wrong to just go, be able to screw in a bit, pick a little screw in this, and, you know, that's good all bad. V8 is a technology that can span lots and lots of markets, and you see we're putting it into microcontrollers, a microcontroller to have a single CPU. It's maybe a superscaler along with M7, but a single CPU. And I'm going to see, I doubt that, yeah, never say never, but, you know, that isn't the kind of sweet spot for Big Little. So it's about application and which technology you need for which application, what we're trying to do with our technology road map is to provide the ingredients ingredients to work really well together. So based on what you're doing, you can choose the right amount of compute power right amount of everything else that you need and build a chip as optimal for that application. So you can't just say that the 2 should grow at the same rate. It's much more complex than that. Makes sense. That's clear. Thank you. Let's go across and move on. Thank you. It's Brett Simpson from Arity. Simon, just a quick question on industry R and D. Spend, if you look at some of your big licensees, they're making substantial cuts, a R and D, so Qualcomm, I think, they're cutting a $1,000,000,000 off their OpEx and They've just shut down their custom ARM CPU team on smartphones, Broadcom is doing similar things. And you can look look down the list of FreeScale NXP. And we haven't really seen R and D cuts on risk scales since the 2000s. So I'm trying to reconcile that with your outlook for licensing and why you think that's, we're going to see a growth year this year. Email, it just went through you know, what's the factors that get you there? As you say, there are, there's some consolidation going on, and there is, R and D trimming, you know, 1+1 is turning into less than 2, as some of these big companies being put together, and there's a maturing of the semiconductor industry going on. I think that is a that the trends that come from that play very well for our business because people are going to look at outsourcing more. They're gonna really focused on what is the value that the company brings. And we are the dialogue we're having with, with our big customers is about what else can we do so that they can spend their R and D on the most effective areas. But people are looking to stop doing the things that really don't differentiate their own products. And as a business, for whom the semiconductor industry outsources, that's a good trend for us. So that's one of the things that gives us confidence about the licensing in the in the near term and in the midterm. And there, for me, there is no doubt that the, different types of processing element the way in which processes will be used, in the future, you know, is just an expansion opportunity, and we wanna make sure we've got the right products. So that we can be the guy that, that these big companies outsource to with the right product at the right time, to, address these growing markets. And just to follow-up on that. So the industry is reducing R and D. You guys are raising R and D quite quite significantly. Can you just talk about 2 or 3 things as to why you think that's the right move for arm, you know, what's underpinning that increase in headcount? Well, as I was explaining in the presentation, it is about the opportunity that will, that will mature over the next 5 to 10 years. And because of the long term view we need to take on that, you know, we can't throw a CPU design team together to book a process or in 6 weeks, it's just not like that. V8 has literally been being designed for 10 years, and now we're seeing the volume come through. So we have to take that long term look. And it kind of related back to the balance sheet question as well. With the volatility, there's around, at the moment, with the uncertainty now is the time to invest. We've seen this in cycles in the past, where the companies that come out of these periods in a strong position and we've done this before, are the ones that invest through them, and we have the capability to do that. And looking at this opportunity ahead, I believe it's the right thing to do. Jacky Abajra, also, Arity Research. Given the strong year you've had in smartphones, you know, the increase in call counts removed to VA. I was just wondering if you could give a guide as how much of your royalty revenues is actually coming from smartphones this year. You mean in 2015 or your 2015? And also potentially the year on year, you know, move that you've seen? Guess, I don't keep that number in my head. We look at the split of the volume of ARM based chips, and there's a table in there. It's about 45% of the volume is mobile. I think, and again, we can maybe follow-up with, with the team here, it's about 60% plus that the dollars comes out of mobile. But we can follow-up, to see if we get some more accuracy on that. Good morning. Ahmed Harchandani, Citigroup. A question pertains to the investments that you're making in the business right now. And it pertains to share based payment. It was up around more than 75,000,000 for this year, more than 70,000,000 last year. You spent about 90,000,000 to offset share based dilution this year's settlements correctly. Is there a case to be made that These figures really no need to be considered as normalized in terms of viewing the investments in your business. We just wanted to hear about something. Thank you. Yeah. I mean, so the the clearly, we put out the IFRS, the IFRS figures alongside the normalized on the front page, so they're all, you know, it's completely transparent. But one of the reasons that we exclude the, share based payment from the normalized is that it is quite volatile because it depends on the share price at the at the time as well. So We we believe the normalized view is a better, way to be able to compare numbers over time and over multiple time periods. And that's why we get with the present and the way we do. But the IFRS numbers are basically who would like to use both as well. Thanks for carrying GBS. I just want to come back on the 15% outperformance. Versus the industry, which has remained unchanged this year through 2020. And despite having a very strong year last year for royalties, VA going better than you thought, and the smartphone market expectations coming down, what has changed to offset those that performance you put in last year and the smartphone market expectations, is it line of sight on some of these new areas of growth for you? Is it networking service you feel more confident on? What what's I was just underlying prudence originally, and that maybe the compound location would have been higher before. Well, a combination of most of those factors. You know, we, we, as as we show here, our our share in networking went up from 10% to 15%. That's the trajectory of growth that we're anticipating to continue. The increased content, in the devices, as we've talked about, the pale winds are more optical, more Marley, more VA, you know, are going to help that, help that revenue growth, and help, you know, what we believe will will transpire into roughly that level of outperformance. I mean, actually, the level of outperformance in Q4 was 17, I think. So the industry actually went backwards. 3% while we grew 14%. So, you know, there's variance in there. Obviously, most of this is out of our control. So we look at the the pipeline of products coming out, the way in which we anticipate they're going to be used in products sold, and we feel okay with that as a kind of guideline for the power, if you'd like, for our performance. And then if you think about the addressable market cycle, you know, it's like Simon put out, you've got you know, 3 very large mark markets, one of which is mobile, which, you know, the the estimates has come down by 5% for that market in, in 2020. So you've only got a third of your addressable market. It's going down a small amount. We we then recognize also the increased use of the, armed technologies in plant centers and, and battery controllers, and the flash controllers. So within the mix, that addressable market still very big. Everyone's focused on the mobile market and the immediate slowdown. So 2 things. 1, over the longer term, you know, that that slowdown doesn't impact the overall CAGR to 2020, as much as you might imagine, and secondly, we've got the other markets to address. Hi there. It's Owen from Liberum. A question on the economics of the built on Arm Cortech's announcement you put out this morning. And historically, the beauty of Armwares. You design it once and you sell it many times, and the model is very scalable and very high margin. With this new model for your taking more R and D and customizing for your customers, does that impact the margin potential of Arm if you're taking the cost? You have to have an R and D team for Qualcomm and all your big customers, would that be a lower margin model longer term rather than one standard product for everybody? Yeah. So, I mean, it it at one level, it sounds like a services business. Yeah. And what would you like me to build, sir? Here's my team and off we go, and we do it completely bespoke it's not like that. I mean, we're talking about fundamentally earth standard products, which might be a little bit different based on how our licensee wants to integrate it with their own technology on the same chip. So the scale of changes that we're talking about are pretty small, but they're going to result in a more optimized end solution. And the learning from that, you know, potentially can get rolled back into, our future products. So it's not completely, you know, we're gonna have a big, big CPU design team for every customer on the planet. It is about making some, some incremental changes, which we hope will result in bigger efficiency gains when the, the SoC is put together by our, by our customer. But it does require some additional engineering to do that. But I think we result in a better product, and, hence, hopefully, greater adoption by people who are ultimately gonna buy the products at the end of the day. Hi. It's David from UBS. I just wanted to come back to the automotive market, which you're talking quite a bit. More about these days. When you've gone into other markets in the past, networking microcontrollers with embed, you've often created software platform as an investment on that side as well to establish yourselves in these markets. Is there something we should think about you doing along those lines to establish yourself in automotive especially in things like safety and a lot of the new areas that are coming through? I I think over time, that may be something that that we look at you know, particularly when we consider the, challenges around securing all of these devices within a car, I mean, a car is becoming you know, the sort of mini, mini network, which in itself needs securing, and then a network device, you know, into the, broader, wide area network. But there are some security challenges around that, and we are thinking about the software content there. Maybe we'll do some of that. Maybe we'll work with the ecosystem. It's a problem that he's solving. But traditionally, a lot of the software that's running cars has been, you know, a closed box. And we've been looking, we've been in this market for a long time. I when I did design work with a large customer in Germany who was thinking about 2 arm processors and did they ever disagree with each other and turn the light on? Yeah, that was so they were running their software, and I bet you there's cars today with that system still in it. A lot of that software is homegrown and doesn't change very often. But in the future, it's going to become more open. It's going to need more traditional, well, traditional, what has become the conventional way of developing code. But you've got those security and safety issues to deal with. So this isn't gonna change over the line. Thanks. It's Varianin from Merrill. I had a question on the networking market. So share went up to 15% from 10% last year. My understanding is historically most of your networking share is in the enterprise market as relatively limited penetration in telco side. So I wonder if you can explain or help us understand the dynamic in 2015, whether we made, you know, any more progress on the telco side and how you expect that to evolve, looking ahead. Yeah. The, you know, what we showed there with the smart key chart was about the the penetration into some of those subsegments of of networking. Did we make progress in 2015, absolutely, you know, the, the telco side, the mobile operators are looking at how they deploy more flexible networks, how they deal with greater bandwidth, shorter latency, deal with the challenges of connecting billions of devices versus 100 of 1,000,000 of devices into a particular network. And that has implications through the whole network from the, from the edge where the device connects all the way back up into the cloud. So we're anticipating a world where there there's, today, there are kind of half boundaries between the end client device and network of the cloud. The future that becomes a much more smeared environment, and we are to do everybody working through that chain. Of opting our conventional partnership model as approaching the market, about those challenges and the thinking how that relates to our products. Who we work with or code we optimize, you know, that that's how that's coming together. But we do believe that, that will result in penetration in into sectors of the networking space that haven't traditionally used arm in the past. But, you know, I think it's going to become a necessity for those companies to think more about process our architecture because so much more of what they do is going to be around the software and the hardware coming together instead of a collection of close boxes that get wired together and then optimize through some control level. Yeah. Hi. It's Rob Sanders from Deutsche Bank. Just a question for Chris. Can you talk us through the increase in amounts recoverable on the contract in 2015, it seemed to be quite a big move. So the you're talking about the capital amounts receivable or the the amounts are comparable under contract. I mean, in the past, that's been because of revenue booked, but that is net milestones, but hasn't been delivered is is that maybe the reason why it's gone up quite a lot? So yeah. So so that is that is revenue booked where we haven't yet. Hit an invoicing milestone. So that is a consequence of so so to start with, there was nothing unusual about that movement. It is to do with the timing of the payment versus the timing of the delivery of the IP. And, so typically say under, as subscription contract people can be taking IP. We're recognizing the revenue, but actually we haven't invoiced them for next month, you know, subscription. So but I wouldn't read anything into that for me. It's within the normal tolerance of what we'd say. Any other question? Hi, Doug Smith from Agency Partners. One part of the business you didn't talk about very much in your presentation is physical IP. Obviously has a different customer base. What are you what trends are you seeing here? Maybe an update and Also, I noticed that the royalties there never seem to get bigger than the licenses. Is that something that's permanently the case or, Is it somewhat a different structure of how you how that business works? I think the when royalty is bigger than licensing, is is a is a timing thing. I remember thinking about 15 years ago that there will come a point in arms process of the business where royalties are so much larger than licensing, but the longer that remains the same, the better, really. And so in the physical IT business, we didn't go into it today, but, the way that works, we've got to do a lot of R and D on advanced process technology to create the library and send that, chip designers download from our website and build chips and take out and buy wafers. So again, there's a long, kind of disconnect between the R and D that you do that drives revenue recognition on the licensing line, and the royalties that come. What we've seen in that is, that is, is there a slightly different customer set? Do we follow the same supply chain? But in the foundry space, there's been a lot of consolidation there. There's a very small number of people innovating on the leading edge. We're working with them all on next generation, physical IP for the next generation process technologies. So meanwhile, the volume and the royalties is coming from the shipments of wafers with 20 eighttwenty FinFET technology on. And the adoption of those process nodes is very strong. So we're seeing good performance in the royalty side of the physical IT business. But the two things are, are unrelated. It's about developing the product. The volume comes in the future. Our engineers in that part of the business are very, very busy working on this next generation of processes. That is quite cyclical, you know, more of the lower cycles come around every 18 to 24 to maybe a few more months. So processes get introduced on that kind of clock tick, and that leads to some kind of cyclicality in on the licensing side. Actually, one quick question. I'm looking very far ahead. Is there ever gonna be a RMB 9 architecture? Well, if you look back in history, you can see the 3, 4, 5, 6, and 8, one might assume that that's coming down the road, but, you know, periodically, we do change our naming conventions. We have, R and D work going on, obviously looking at, you know, everything I was talking about today. The next generation of computing devices will have different performance requirements. You look at the way the architecture is evolved over the years, We've delivered more performance. We've delivered greater efficiency to take advantage of what can be manufactured in a cost effective way. So these two things are kind of related, and there's a lot of work going on with things about where that goes architecturally we roll that up into architecture products and then into CPU, etcetera, you know, TBD. That's, that's the fun bit for the future, but a lot of work going on in that right now. Any other questions? I actually got the loans. I'll catch you afterwards. I just wondered whether you took out your market share in 32, bit microcontrollers. I think last year, you said 65%, not the total market, but it was just 32 bit. Is that still a fair sign has tweaked on after that, but can you talk about your market share there and opinion if it it blends to that higher rate over time? And then Second question unrelated. Do you have any customers that are over 10% of sales for the full year last year? I'll deal with that one because it's easy. If we do, we have to declare it and we didn't. In terms of sharing in 30 cubic micros on thread, I don't a number in my head, but maybe when it's higher. It's, yeah, I'm sure it's higher, given the volumes there, but, number on top of my head, if I don't have it, it might look it up momentarily. So if not, we can follow-up with you on on that. Okay. Well, if there are no other questions, thank you all for joining us today, and we will see you either on the road or at our Q1 results in April. Thanks very much. Thank you. That does conclude your conference for today. Thank you for participating. Your line disconnect.