Earnings Call: Q3 2015

Oct 21, 2015

Thank you for standing by, and welcome to the Arms Holding Q3 2015 Call. Please be advised that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Mr. Ian Thornton. Thank you. Thanks, Tiffany. Good morning, everybody. This is, Ian Thornton, our Vice President of Investor Relations at Arm. On today's Q3 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 on the quarter's results, and then we'll open up the call to a Q And A session. As a reminder, the presentation and press release can be found on the Arm Investor Relations website at www.palm.com/ir. Before I hand over to them, I have to read out a few words with respect to this conference call and what we are 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, the information communicated on this call is being made available only to investment professionals. Any person present on this call who does not have professional experience in matters related to investments should not act or rely on the context of this call. The following conference call will contain forward looking statements, which are other than statements of historical facts, The company's actual results for future periods may differ materially from these statements as they are based on current expectations and are subject to a number of risks and uncertainties And on this note, I'll hand over to Simon and Chris. Thanks, Ian, and good morning, everyone. Thank you for joining our Q3 twenty 15 results conference call. I will run through the business highlights and then I'll hand over to Chris to provide some more detail on the numbers. Following Chris, there'll be some time for your questions. At the beginning of this year, we told you that we would continue to gain share in our target end markets of mobile computing, enterprise infrastructure, and embedded intelligence, and that we would target new and growing markets by investing in future technology. And that is exactly what we've done in 20 15. We've seen the latest arm technology be rapidly deployed across smartphones and tablets, increasing the royalty percentage per chip. We've seen more companies start to ship ARM based chips in networking and servers, and our share of microcontrollers and smart cards has continued to grow. And throughout this year, we have announced new technologies and ecosystem relationships that extend the leadership position of the ARM Partnership markets where we are already strong and advances further into markets where we are pioneering. Q3 was another quarter of progress against this strategy. We saw particularly strong royalty revenue growth, driven by more chips with higher royalty rates and ArmV8, Octacore and Mali shipped in ever higher volumes. We saw a major semiconductor company ship its first arm based chips for base station equipment. We saw a major semiconductor company demonstrate its first chips for servers. And in the quarter, Arm signed lead license agreements with partners for the next generation of products, and we announced in plans to accelerate our roadmap to 2020. In August each year, we hold the ARM Partner Meeting and this is now a major industry event. It is a conference that we host in Cambridge where over 600 senior managers from our partners across the ecosystem, gather to discuss the future of computing and jointly how our roadmaps can deliver it. We saw tremendous engagement between Silicon Software And Cloud Companies and a real enthusiasm for them deploying the ARM architecture across all application areas. The ARM partner meeting informs our strategy. And this year at our Capital Markets Day in September, we unveiled new investments that we believe will generate around $200,000,000 of revenue in 2020. We're investing in mobile to meet the demand for continuous innovation in the handset market We're investing in networking and service to accelerate our market share gains, and we are investing in internet of things businesses to create new revenue streams. The internet of things will smarten our cities, homes, places of work, and bring new efficiencies to health care, agriculture, and transportation. It will change the way we interact and bring business opportunity and economic growth. To deliver on this potential, ultra low cost centers will have to implement very complex security protocols. This is a technical challenge for our industry, and one that brings opportunities to Arm and our partnership. By delivering cost efficient solutions that enable secure systems we will create brand new markets for our processes and software. In July, we announced the expansion of our security offering with the acquisition of a company called Sansa Security. Together with ArmTrust Zone And Embedd device platform, Sansa's technology enable trusted embedded devices that boost the protection of data and content in any connected application. Also during the quarter, IBM, Microsoft Azure, and Salesforce dot com, each announced that their cloud based analytics platforms would support embed I'll now discuss the royalty drivers in the different parts of the business in more detail, starting with technology, royalties and so revenue drivers. Palm's royalty revenues are reported 1 quarter in arrears, so royalty to Q3 was generated, from chip sold by our licensees between April June. Our partners reported that they had shipped 3,600,000,000 ARM processor based chips up 20% on last year, including 30% growth in microcontrollers and smart cards, 20% growth in smart mobile devices, and 20% growth of chips into networking equipment. We saw strong royalty revenue growth in mobile, driven by continued adoption of Arm V8A, higher core counts and Marley Graphics Technology. Processor royalty revenue was up 37% year on year and physical IP royalties were up 31% year on year. And Chris will give some more color on year on year growth later on. Across Mobile, home and enterprise segments, Our partnerships $215,000,000 on V8A chip, which was approximately 35% of our Cortex A volumes. At the start of the year, we expected that armed VAA would appear in around 50% of smartphones in the final quarter of 2015. We actually passed that milestone in Q3 when around 60% of smartphone chips were based on Arm V Eight A. Shipments of multi processor chips with our big little technology doubled sequentially. We expect the amount of our content in mobile devices will continue to increase through 20 16. ARMBA Day penetration has further to go, and multiple vendors have recently announced octa core solutions aimed at mid tier devices. Our graphics technology has also continued to gain share. We now expect that Marley Shipments will be at the upper end of our guidance for full year 2015 which was 600,000,000 to 700,000,000 units. Yesterday, we announced the latest addition of our range of Marley GPUs, the highly efficient Marley 470, which addresses entry level smartphones, wearables and IoT devices. Announcements from our partners indicate that the diversity of our chips will continue to increase over the long term. Earlier this month, ST Microelectronics announced that it will transition some of its automotive products to the ARM VADR architecture and Qualcomm demonstrated its first ARM based server chip. And now for licensing. The increased adoption of ARM Technology was evident in our process of licensing. We signed 38 process of licenses in the quarter, 14 of those being with new customers. We also saw continuing interest from OEMs who are building up their in house design expertise And in Q3, we licensed the OEMs in the mobile home and enterprise sectors. 6 of the licenses signed with our Cortex A class processes based on the armed V8A architecture, of which 2 were the lead license agreements for future processes that we are still developing. We also signed 6 more licenses for Mali, including our next generation graphics processor code named Mimi. We also signed 18 licenses for Cortex N Class Processors, taking the total number of licenses signed for this technology now over 330, with more than 220 companies. And so to finish, The success we have seen so far in 2015 all stems from the investments we have made over the past 25 years. As announced at our Capital Markets Day in September, we are accelerating our investment in areas such as enterprise and IoT. Most of this investment is in the form of additional engineers. We are hiring a mix of industry veterans and recent graduates as well as adding experienced design teams via acquisition. Our ability to recruit and retain top talent puts us in a great position to continue to execute on strategy and deliver superior returns for shareholders over the long term. I'll now hand over to Chris who will provide some further details on the numbers. Good morning, everyone. Hopefully many of you will have had a chance to have had a look at this morning's earning release and as usual, the quarterly road show slides are available on our website. Overall, Q3 dollar revenues at 375,500,000 were up 17% year on year. Within that, Processor licensing revenue was $125,900,000, 5% higher than a year ago. And following 5 years of accelerated licensing growth, which grew at 29% compound between 20102014, we've seen a slower growth in 2015. We continue to expect licensing revenue growth of 5% to 10% per annum in the medium term and Q3 was within this medium term range. Physical IP licensing revenue was $19,200,000, down 14% year on year. Physical IP licensing has declined in Q3 2015 compared with prior quarters as we complete agreements relating to 28 20 nanometer nodes and are starting to transition to delivering the next generation of technology at 16, 14, and 10 nanometers. We now expect Q4 physical IP licensing revenue to be at a similar level to Q3. Group order backlog at the end of Q3 2015 was down about 7% sequentially. Q3 license revenue growth included a 60% contribution from backlog, which is at the upper end of the normal 40 sixty range that we typically see. Looking at the medium term outlook for license revenue growth, we expect quarterly sequential movement to backlog to continue to be lumpy. Processor royalty revenue was $185,600,000, up 37% year on year. In a period when the industry declined about 2%. This is the largest outperformance of arms royalty revenues versus the industry that Arm has seen since 2003. This outperformance is partly due to the weak comparator. You'll recall, we saw an industry correction in 20 14 that resulted in slower than normal growth in Arms Royalties. The underlying outperformance is due to recently launched Arm V Eight A based chips, which delivered a combination of premium chip pricing and an elevated royalty percentage per chip. If you look through the cycle to Q3 2013, which was also a strong quarter, we see a 17% 2 year compound annual growth rate in processing royalties, which is a trajectory consistent with what we believe we can deliver in the longer term. Normalized OpEx in Q3 was 1,000,000 in line with our guidance in reflects ongoing investment in R&D, including the operating costs of the Sansa acquisition, and the ARM team has grown 19% over the past year 3850 people, with the majority of the extra employees being R And D Engineers, specializing in processor and physical IP development. Q3 costs are also impacted by the strong dollar, with about a third of our costs being in U. S. Dollars and therefore being translated into sterling at the higher rate. As a reminder, as a rule of thumb, a 10% movement in the U. S. Dollar to sterling exchange rate has a 15% impact on EPS. Normalized operating expenses in Q4 2015 assuming effective exchange rates similar to current levels are expected to be in the range of 1,000,000 to 1,000,000 reflecting ongoing organic investments in the business and a contribution from recent acquisitions. The group's normalized tax rate in Q3 was 16% and the full year normalized effective tax rate is also expected to be around 16% as we continue to benefit from the reduction in UK Corporation tax rates the phased introduction of the Patent Box tax regime. And now on to the outlook. Armint is the final quarter of 2015 with strong growth in momentum and healthy licensing pipeline. With industry and customer data underpinning the short term outlook for royalty revenues, we expect group dollar revenues for the full year to be in line As usual, if I could ask you to just ask one question at a time, we'll be able to get everybody's question in, and we can come around again if you have follow-up questions. So let's start with the first question. Please press the pound or hashtag key. Your first question comes from Garrett Jenkins. Please ask Could we go to the next question maybe, Stephanie? Yes. One moment, please. Yes. Our next question comes from Matt Ramsay from Canaccord Genuine. Please ask your question. Thank you very much. Good morning, gentlemen. Congratulations on the really strong results, on the royalty side. Simon, I think I was a little bit surprised to see the 60% penetration of V Eight within the smartphone ecosystem already. I know you guys had given some updated targets on where you thought that penetration could go exiting this year and next, maybe you could give us some updated thoughts on that given maybe the faster adoption of the 8 in the mobile ecosystem than we have maybe expected in the past? Thanks. Sure. So Yeah, the uptake of the 8A has been very strong. When we entered the year, we thought that, you know, we see raft of new devices launched at Mobile World Congress and that happened. And then for them to ramp through the year, so we'd be at about a 50% penetration level come the end of the year. Good news is that's happened sooner than we thought. And so we've passed that. We're at the 60% level in Q3. And we think from the end of the year, it could be, as much as 75% as the kind of exit run rate. What we're seeing is the adoption of V Eight across the breadth of semiconductor devices that go into mobile, many low end devices, being launched with V Eight and we're seeing rapid update uptake in the market. So this is good because it's a driver for, increased royalty percentage rates. The chips as they're introduced, new products from any semiconductor company typically command a higher ASP at the start of their life cycle. So you're getting a compounding effect there of the higher chip price and the higher royalty percentage. So that's not going to last forever, obviously. But, it was, it was very strong in Q3, and we think the, that the year will end strongly on this. But still further to go through 2016, and we'll see that penetration continue. Thank you. If I could sneak in a follow-up for Chris. Obviously, the OpEx side is ramping as you outlined and some new investment initiatives for Q4 and next year, you now sort of laid out where Q4 OpEx is going to be. I'm not sure consensus fully reflected some of the increased operating costs you guys had laid out at the Analyst Day. Maybe you could walk us through how you see OpEx expanding into next year and maybe what run rate we should start with to model 2016? Thanks. So you're right. I don't think consensus fully reflected what I said, at the Analyst Day, we said we'd add a £5,000,000 of cost in Q4. That obviously gives you, you know, that exit rate of 1000000 to 1000000 And really that should be, you know, your starting point for looking at where, 16 will be obviously factoring in inflation within that and the ramp up of costs that we flagged at the Analyst Day through the year. All right. Thank you very much guys. Your next question comes from the line of Kai Corsett from Merrill Lynch. You may now ask your question. Yeah. Hi, can you hear me? We can hear you. Good morning, Kai. Excellent. Yes, good morning, gents. Yes, just one on the, on how to look at the sort of multi core penetration rates. I appreciate the VA penetration, but it seems there's on top of the VA driver there's another step up in royalty rate once we go north of 4 or quarter. So I'm just wondering, would you happen to have any data on what think the penetration rate in mobile is currently of chipsets with more than 4 cores because it seems like we're only at the beginning of of that penetration cycle, particularly in the mid range and in the low end. And the other question was just quickly on licensing. I just wanted to clarify, should we expect Q4 licensing revenues broadly in line with the third quarter? Or should we see the sort of typical seasonal uptick versus Q3? Thank you. So on the penetration of OktaCore, we think in Q3 about 20% of the smartphones that were shipped were optical. Excuse me. But if you look at phones being launched and we crawl over this data and look at our analyst reports, we think it was closer to 40% of, the phones launched. So this is across all SKUs, were octa core. So, you know, we think that one in five rate that exists right now is going to grow. Bit hard to say exactly where it's going to go to, but we think that the trend is in the right direction for further adoption of OktaCore and big level. And the second part of your question was was seasonal licensing. Licensing. Yeah. So we do expect to see a bit of seasonal uplift in Q4. We normally do see stronger licensing quarter in Q4. So we do expect to see some growth there. But I think, you know, compared to where consensus is maybe. We might see stronger royalty and maybe not as strong licensing compared to what is in the models today, but as we've said, we expect to hold the full year numbers. Thank you. Your next question comes from the line of Andrew Garnier from Barclays. Please ask your question. Hi, Andrew. Thanks very much. Good morning, guys. Just to follow on to those first two questions. I mean, we've talked through VA, we talked through OktaCore. You all mentioned that Mali is trending towards the higher end of your expectations for the full year. Is that purely smartphones? Are there other devices where you're seeing adoption rise and just how are we thinking about that as we go into next year as well? Mainly, it's growth in smartphones. We're quite strong in digital TVs, although digital TV TV sales generally seem to be a bit flat at the moment. So it's mainly growth in smartphones. And we think medium term growth prospects for Mali is very good. We've seen a very strong response to the launch of our Mali four seventy products and that's something that we're designing specifically to target, wearable devices, IoT devices, things where you need some level of graphics, but you don't need full blown or bells and whistles, high power or high performance rather. So for this year, as I said, we're going to be at the upper end of that $600,000,000 to $700,000,000 range, maybe even a smidge over $700,000,000 if things go well in Q4. With continued growth into next year. Thanks very much. Your next question comes from the line of Sandeep Deshpani from Morgan, JP Morgan. You may ask your question. Thanks for letting me on. Simon, could you talk a little bit about, you've talked about the 25% market share in the server market. And you said that at your, meeting that you held in August, that you've seen a lot more interest in the cloud, in terms of how we should be looking at the roadmap of ARM adoption in the server. So, any particular milestone tones that we are looking for? That's my first question. Okay. And so yes, at our partner meeting in August, we cover a wide range of technology. But there was a lot of interest in arming the data center generally in bringing data into the data center and then processing it there, where people are looking for alternate solutions, people are looking to, achieve greater levels of efficiency, particularly power efficiency, as they scale out the processing around IoT and obviously with the trends behind mobile. So we from the silicon that has been introduced to date, we've had good progress. We're seeing deployments of devices. And then as we explained at the Capital Markets Day a few weeks later, We see that as a we see that momentum as validating our strategy and hence now is the time for us to accelerate further and make further investments on software side, and at the system level and helping with benchmark and all sorts of activities that are going to accelerate deployment. And that leads us to a view of being able to get to a 25% market share in 2020. So in terms of specific milestones, I think, looking for, silicon devices, and it was great to see, Qualcomm's recent announcement of the chip that they have built. That looks very high performance. So look for the deployment of that, look for the announcement of other silicon devices from other partners. And then it's about deployment. We'll see more trials better benchmarking and volume growing over time. So we'll obviously give updates on that as we go through our acute quarterly results, over the next couple of years. Thanks, Evan. And my follow-up, just a quick follow-up on this issue of, you know, your royalties, you clearly had a very strong royalty quarter. I mean, the market was concerned because the ongoing semiconductor inventory correction. Have you done any work with, you know, there were these public announcements from many of your major customers indicating slowdown, whereas you've seen significant strength, not just in units, but also in royalty per device. So how so considering what they said to the market and versus what they have reported to you, Can we have you done any sort of analysis between was there actually a slowdown and you have grown because of growth in other markets which were not there for earlier on or it's mainly the growth has come from the royalty per device, which is not entirely true, of course, because your units have grown as well. So could we try to understand what is actually underlying what was actually under happening underlying as such? So I think the growth has been multi dimensional. We've seen strong growth in embedded. And, you know, we've done lots of licensing and cortex M to lots of companies. Those devices are coming through. And volume is growing. Obviously, they're low cost devices. We're seeing despite the slowdown in the growth of of handset units, greater arm content as we've explained previously and that's helping, royalty dollars. And then growth in other markets as well, such as networking, which from a relatively small base, was still 20% year on year in terms of unit growth. So it is quite a broad, broad set of markets where we're seeing growth which is a reflection of the diversification of where Arm Technology is used. At the Analyst Day in September, I was trying to point out how the licensing has evolved over the last, many years, with companies taking arm technology to address markets other than mobile and that is starting to see it come through. So we're less exposed to any one market, mobile, obviously, still being the largest in terms of dollar contribution. But if you look through the press release and you see the breakdown of the units by different market segment, you can see that in round numbers, about 40% of the units are in mobile, 60% are in other markets, and those other markets are growing strongly for us. So it's a breadth. It's the breadth that is helping us. Your next question comes from the line of Jerome Rommel from Exane BNP. You may ask your question. Yes, good morning. One question, Simon, you mentioned SD Micro is indeed moving to a ARM processor for Automotive. But when we talk to free scale, they basically say the same that their client are also asking them to shift from power PC to arm. So we previously to identify the automotive market to be a great opportunity for ARM, but probably beyond 2020, do you think we might see a kind of acceleration from that perspective and maybe you will see automotive contribution to accelerate before the end of the decade? Well, yeah, certainly I won't be complaining if that is the case, but, and yes, you know, we're seeing adoption of the art architecture in different places. And with different companies and definitely, you know, freescale is an important significant, licensee about who've been using more and more arms technology and more and more end markets, which is very good for us. Think about the automotive market though is designing cycles are very long. The rigorous testing that you have to do for safety reasons and robustness because of the range of, of kind of conditions that cars are used in across the world. You know, it does mean that the cycle is very long. It's not quite like consumer electronics. And so, you know, that means that we think about that on a much longer timeframe. But clearly, cars are changing. Cars are becoming a bit more like consumer devices. There's a lot more electronic content going into cars. And we do see it as a big growth market, but it's on a slightly longer trajectory than some of the other markets that we're targeting. Okay. Thank you very much. Your next question comes from the line of Amit Harshandani of Citigroup. You may ask your question. My question relates to licensing. We saw in this quarter again some OEM taking up ARM licenses, you're talking about a 5% to 10% growth medium term. Could you give us a sense of how licensing is shaping up between your direct customers or the chip makers that you originally licensed to and some of these newer customers, maybe from even newer geographies. That's my question? And I have a follow-up. Thank you. I mean, the majority of licensing that we're doing is to summing it the companies. What we see, excuse me, OEMs wanting to do in some cases is, getting involved more in the design of the chips, but ultimately get build and manufactured by, traditional semiconductor companies. And in some cases, they want to do the whole design themselves and leverage the disaggregated foundry space to, to get chips built. So it really is a variety of approaches people are taking. But the majority of licensing we are doing is still 2 semiconductor companies. Over the next few years, that may change. Obviously consolidation is a theme of the semi industry at the moment. And I think and that will play out over a number of years. Good news is that, in terms of that end equipment, It's good from our perspective to see more OEMs directly interested in that technology. Greater software content in the equipment that they're building. That's especially true in networking, and a greater adoption of the arm architecture. So we think that helps, cement our position, the more code that's written for Arm, then, the greater position that we're in. So we are supporting that, and we are supporting this, or working through this trend of the semi industry that I feel is kind of going on at the moment. Thanks Simon. And as a follow-up, if I may At the Analyst Day as well, you talked about the mobile computing opportunity. And one of the topics that we've talked about is use of ARM in content creation devices or clamshell form factors or basically stepping up as the Arm performance improves. Could you give us a sense of how talks are shaping up on that side? What's the level of customer interaction, or how do you see the adoption shaping with regards to sort of clamshell or content creation devices or laptop like devices based on the ARM architecture. Thank you. Well, you know, we're seeing some, some products starting to be announced, which, there was one of the recent devices, recent devices that, Google announced with their new Nexus lineup It was more clamshell like form factor. We're seeing other companies build Android books So again, more, 2 in ones based on Arm. So, you know, we think that the performance is there. We think, software is coming together with more processing more data storage and online access to some of the more traditional productivity apps then, this is a trend that suits as well as a user of computing. You can be carrying around with you a much thinner lighter and lower power and longer battery life device, which is going to enhance productivity. So we think performance is getting there. We think the devices are, that we see in design are going to be really interesting. And we think this is another market that Arcan potentially gain some reasonable sharing. Thank you, Sam. Your next question comes from the line of Francoise from Morgan Stanley. You may ask your question. It's Francois, actually. Right. So I've got two questions, if I may. If I look at your V Eight units, but 20% I reckon are from non smartphone. So it's about 40,000,000, 50,000,000 units. Could you maybe describe a bit more about what's really hot within those 40,000,000, 50,000,000 units the first question. The second question is about the data you have access to and we don't have access to, which is the underlying prices of chips going to smartphones? What is the trend as prices stabilized? So in terms of, VA units, not in smart phones. I think you're about right. I think in that, I think about 20% aren't in smartphones, about half of those are in tablets. 10% are in other things. Other things might be digital TVs, might be networking equipment, might be some server chips, small volume, but some there. So, you know, you're about right with that split. And yeah, just as we saw with V7, the V7A processes that we introduced found their way into into other markets, As we've seen greater success in enterprise, we are evolving our roadmap to add features into our cause for enterprise that are more, more targeted towards that market. So, we are, again, off the feedback that we get from our partners at our partner meeting, involving our roadmap to support, what they want to do with it with our technology. Your second question was about the data that we have and you don't. So we're going to keep it that way. In terms of ASP, you know, as I was saying earlier, with new products being introduced, you know, we're in a period now where, typically, as is typical when you, semiconductor devices are introduced, they do come in at a premium, and some of the devices with a lot of content, high core count, high graphics capability, video capability, very sophisticated devices. Are seeing some of those with higher ASPs, than some of the more mature devices you can get, 3g entry level, yeah, baseband plus apps processes or a very small amount of dollars these days, but the the high end devices are, 4 or 5 times that right now. I'm sure that, that pricing will come down over time because it does. But as is the way, the semiconductor players in this space are always looking to put new functionality into, to reset that pricing and maintain ASP. So we're in a period right now where, on average, it's probably gone up a little bit. But that's probably temporal and we'll be back to what I think is when you look back, over the last few years, fairly flat pricing, fairly flat ASPs, for smartphones. Thank you, Simon. Your next question comes from the line of Garreth Jenkins of UBS. You may ask your question. Yes, hi. Thanks. Hopefully you can hear me this time, gentlemen, thanks for taking the question. We can. You got the mute button under control now. Think I was kicked off actually, but there we go. Just a couple if I could one high level and one maybe a bit more detailed. I just want as you move to non traditional business models with embed server in particular and security software, whether you feel the need over and above what you've already announced in terms of investment into channel distribution, you know, new sales teams to kind of directly address the OEMs that you're dealing with. I think you cited you're working with GE on street lighting and, you know, I think you're you know, you in your networking slide, you talk about OEMs rather than chip makers. So that's the first question and then maybe a quick follow-up on something else. Yes, I mean, our traditional sales channel is targeted at semiconductor companies and we've built a very efficient mechanism for licensing semiconductor IP to semiconductor companies. And as we branch out from that, then, yes, we are expecting to more file sales channel, you know, accordingly. Different customers, sales cycle is different, different approach. And we are learning our way through that right now. So as we are evolving some of this, we have you know, ring fenced some of the the R and D expertise to create the products. And we have ring fenced and, commercial resource as well. Going to target this new and different market for us. And as, hopefully we are successful with this, will grow the investments in both the R and D and the channel at the same time. Okay, great. And just quick follow-up. Just on the base station product that you've just launched, which I presume is high silicon. Could you talk about the core count or the, you know, process accounts on onboard, a typical base station and, you know, presumably the chip ASP is materially higher. Can you maybe give an example of one of the products you've just launched? Thanks. Well, so this isn't products we've launched. This is products that our license fee, are are selling, and I and I won't comment on your speculation on customer this year. Might be right, but you might not be either. The the the the chips that, that go into that space are, as you say, quite large. High forecast. You're probably in the, 16 to 24 core arena. So I'm just thinking off the top of my head for some of the chips I've seen in that space. We we've got, you know, I can think of a 16 core cortex a15 device that is that is targeting that area. And we'll see that kind of core count with the 8A processes as well. So that's, that's typically the kind of, process of mix. Right now. Thanks. And ASPs obviously with that larger die size, you would expect them to be a multiple of what you get through a smartphone ASV. Your next question comes from the line of Ian Lambay of Liberum. You may now ask your question. Hi, there. Yeah. Thanks. It's Owen. A question on the cash generation. Profit went up a lot year on year. I think 28% year on year, the cash generation declined, I think, 5% year on year. So I was wondering what the mismatch is there, why the decline in cash generation? Is it the unwind and deferred revenue and more licensing coming from backlog? And do we expect the cash generation to go back to historical levels? Owen, it's Chris here. I mean, yeah, first thing is you're looking at a quarter. So within a quarter, you you do get the impact, as you say, of backlog, reduction and therefore, lower cash conversion on that. You've also got just simply timing of cash receipts within a quarter, which are going to vary from quarter to quarter on the timing. I think the thing you've in the end, cash and profit is the same thing over the quarter of a license. So that's what we're expecting. We've had a number of years where cash has been greater than profit. And but as I said, the normal over the medium term cash equals profit. Okay. Thank you. And then just a question on consolidation. There's lots of M and A amongst your customer base. How does that impact ARMOUR? Presumably, there's no on royalties, but does it have any impact on your licensing? And if your customers are consolidating, will there be any sense in people further up to supply chain like an IP vendor like arm and an EDA company getting together to combat the consolidation further down the line? In terms of consolidation in the end markets, I mean, one thing that we're seeing going on at the moment is companies coming together to form very sizable companies who are going to have the scale to invest in leading edge technology and that is a good thing. What we've sometimes seen as these, as consolidation happens is You might have 2 companies who have licensed some technology might look at their entire portfolio and say, actually, it makes sense to enter into a subscription agreement and make a bigger commitment, to ARM Technology. And that can have the effect of, of accelerating royalty growth further. So from that perspective, it's a good thing. Obviously, you can look at it very simplistically and say, well, with fewer companies, the license and therefore licensing must come down. But I think that is too simplistic of you when you think about what the challenges are going to be for building complex leading edge chips on advanced technologies in the future. And on the other side of it, there are many startup companies who particularly are targeting IoT right now. We, did licenses with 27 companies in Q3. 14 of those were companies who had taken a license for the first time, and most of those were in the IoT space, most not all So there is a fair amount of new companies coming into the space. And not all of them might turn into multi $1,000,000,000 semiconductor companies, but some do. I can think back of companies who are significant, licensees and revenue companies from now who once upon a time, you know, we'd all never heard of. And they came from seemingly nowhere. And so I think there's quite an encouraging trend of more companies looking to smarten the products that they're building, add intelligence. And with the growing opportunity, for intelligent devices, I think we'll see that continue. And just on the merits of an EDA company and an IP company coming together? Is there any merits in that if your customer's consolidation? Well, I mean, the EDA industry is pretty consolidated at the moment. Anyway, there are 3 big ones and a few small ones, but the big ones keep buying the small ones. So that seems to be fairly consolidated. So in terms of the efficiency for us, there are a relatively small number of companies who we partner with to make sure that, whichever tools flow our customers want to use. They get a great result. So there aren't obvious synergies of a combination of EDA and IP well between us and the EDA companies. They want to talk about the past judgment on other IP companies, but for us, I think the position that we have right now is quite good. Next question comes from the line of Lee Simpson of Stifel. Thanks so much for squeezing me in there. It's Stifel, incidentally. 2, if I could, actually, just, I guess you've had a chance to look at the budget for 2016. It's quiet at departure from what we understand at least the developments around embed server. And really as you gap up that customer base from, let's say, just over 300 to 500, sorry, not customer base, the employee base to towards a sort of 500 run rate. Just trying to understand how quickly you get to that level. Is that stepped up opportunistically, as and when you see the right acquisitions to come in, maybe for sales channel, software licensing experience? Or is this done in respect to the sales line? How that matches to software licensing that you're doing? Well, as we think about the expansion of, the software side of around IoT, it's certainly not driven opportunistically. We're thinking about the platform of technology that is going to be required for IoT devices. We're we're not trying to solve every problems for IoT. We are doing what Arm does well, which is look for horizontal technologies that can solve a number of problems in a number of different markets, and we have a view on what, portfolio makes sense for us to have. And, you know, we'll look to develop that organically and through acquisition over the next couple of years. So that is the approach that we're taking to it. It's not one of just opportunistically seeing a chance to grab a company and doing an acquisition. We're much more thoughtful than that. Glad to hear it. Just also maybe on we're hearing about some operators now rebelling against the use of open stack deployments. And that just makes me wonder whether or not we're actually going to see a gap or a slowdown some point in NFV rollout. So whether or not this could be something that you see coalescing now behind OP NFV instead? Yes, I mean, hard to call at the moment. I think, NFV generally is still in early days. I think there's a lot of complexity to NFE. I think, you know, when you get there, the the, the nivonna of NFE look great. The the technical challenges of actually deploying it are are quite complex. And, you know, as you say, there are a number of competing standards. We have people deployed looking at that, working out how best to optimize the difference, software solutions around ARM and working closely with the partners in Lanaro to make that a reality. And so we're staying close close with it. And, I think we've got very good support across the industry for, creating those optimized software solutions for our But I mean, if there was a premature ending, let's say, in initiatives on Open Stack, you don't think that creates a sort of air gap in any rollout schedules. I wouldn't have thought so. No. Your next question comes from the line of Aschel Sotanya from Credit Suisse. You may ask your question. Hi, thanks. A couple of questions. Simon, first on the penetration of big little. So in the press release, I see that you said talk about 70,000,000 units using big little. Which is about 10% penetration of your coxa shipments. Is it fair to assume that, like, what do you think that this number potentially could be long term, given what you're hearing from your customers in terms of adoption and the technology benefits that they're seeing with big little Like, could it be as big as we hit, not now, but at least in 3, 4 years' time? I mean, I don't think big little lends itself to every market. Although interestingly, we're in a discussion with somebody looking at the data center space recently who was, wanting to be able to scale up and down power based on workload. And Big Little is a great solution for that. But it's not something that works for every market. So I don't think you'd ever get to 100%. We were talking earlier about the growth of octa core, and that is typically implemented in a a big little configuration. So you're going to see a growth, I think big level growth, sort of tracking with octa quarter to an spent. But, you know, at the very price sensitive end, you're going to see lower core counts, and I think you'll see lower core counts for some time to come. So I think Big Little certainly has plenty of room to grow, but I don't think you ever get quite a one for one match in that, I don't think every VA implementation will be big level. Right. Understood. And one maybe longer term question I think you talk about royalty rates still having room for improvement, even after the big little NV at impact as you invest in your technologies like Artemis And Mirror, like, what are your customers exactly looking for in terms of functionality improvements from here on? Because I presume that the smartphones and tablets have already become very, very complex and advanced now. So what exactly in terms of feature sets are your customers asking from you to deliver on in these newer technology platforms? Well, I mean, it does depend on the market, obviously, but generally speaking, people are looking to use a new technology to deliver more performance with greater efficiency. Now greater efficiency can come from improved system design. It can come from scaling a processor, making, just learning constantly about how power is used in end systems and optimizing around that. So if you look at the way our product portfolio has evolved over the years, we have now a lot of technology around what we call systems IP, which is all the plumbing that you need to actually put a chip together which is sort of hard to show on a block diagram, but there's a lot of complexity in it, in terms of how you actually put the key building blocks together. So we're gonna continue, to evolve that. We're gonna continue to add functionality in media processing because in in handsets, in clamshell devices. There's a lot of media processing going on, be it, video, next generation video protocols, more graphics, more sophisticated user interfaces. And just fundamentally there's a, in that space, there's a need for more and more processing power, as your device tries to work out what it is you want without you having to explicitly tell it. So in the, kind of, mobile computing space, we see the need for more processing power and more power devoted to the kind of human user interface side of that. Obviously, in other markets in networking, it's all about efficient throughput. It's all about flexibility, over the software stack so that equipment can really benefit from SDN and NSE. And in the, in the kind of data center end, It's all about the ability to integrate the right sized processes with other acceleration features. So people are looking for technology solutions to help make that a reality So it's very, very broad, but overall, it's about rightsizing the performance, enabling the right compute engine to do the right task, and continually delivering more performance with better power efficiency. Thanks. And just one clarification. I think you mentioned the 75% exit run rate for VAT penetration within smartphones. Was it was it by the end of this year or next year, the 75% exit run rate? By end of this year. Thank you. Thanks, Andrew. Your next question comes from the line of Ajay Anad from Mirabhu. You may now ask your question. Simon, I had a question on the networking market. I think you said 20% growth this quarter. Which is a little bit slower than the 30% that we saw in in Q2. I appreciate it's difficult to draw trends from quarterly numbers, but I wondered perhaps it's a case of tougher comps or is there any other reason six rains the variation? And also, could you talk about how you expect the growth to trend, say, over the next 12 to 18 months? In the press release, you talked about a major new licensee starting to ship chips to the base station market. So would you expect similar sort of growth, a 20% type of growth, say, over 2016 or would you expect a faster growth? Thanks. As you say, from 1 quarter to the next, I wouldn't get too hung up on, whether, you know, 20, 25, 30 the trend is upwards on that. Seeing more semiconductor devices announced is good. This is a market that's obviously got a smaller supply base than some others. So there aren't 100 of companies in this space like there are with, with embedded, nor is this as mature a space for us as it is with, say, smartphones. But we are very pleased with growth we think the long term trends for this market bode very well for ARM. And our adoption will grow. The deployment of are made semiconductor devices by equipment companies will continue to grow. We show that at the Analyst Day, the color chart, the smarty chart, if you will, which talked about equipment companies using ARM, and we'll, we'll provide regular updates for that, which we think will take us towards our goal of 45 percent market share in 2020. Yeah, 1 quarter's next, that's going to be lumpy, but from what we can see progress is very strong. Your next question comes from the line of Brett Simpson of Arete Research. You may ask your question. Yes, thanks very much. Just a question, a couple of questions on V Eight A royalties, you talked about 250,000,000 units shipped in the quarter. Back of the envelope suggests translates to about 40% of PD Royalty sales. Did that sound about right? And then can you give us some indication what the with the average royalty rate, for V Eight based chips was in the quarter, and and what scope do you think you have to to get this rate to rise much from from here? Thank you. So in terms of percentage of PD royalty, that feels high for me, to be honest, we haven't worked that out. I don't have that on my head for that, that feels high. And in terms of royalty rates at VHF, Excuse me. You know, we we haven't disclosed that. So, you know, short answer to your question is no. We, you know, we think that the blend of, average royalty rate for Arm will go up as more chips, there's a greater proportion of chips, move towards V Eight. And there's scope for that in, more deployments of V Eight A. And we have some scope for that in the deployment of V Eight R as well. And, you know, you can see some some licensing going on there too. So we think that will, move us towards a higher blended royalty rate, over time. Okay. Simon, just maybe a follow-up on the licensing side. You typically launch a new architecture every, every 4 to 5 years. And I'm just looking through, V Eight, launched in in early 2011. Is it fair to assume we're going to see, at some point, fairly soon a new architecture, V9 architecture And if so, what do you think, our needs to add in terms of feature sets, going forward to drive uptake on that next architecture? Thank you. Well, we're always looking at what architectural features we might want to add. It is very important that architectures are stable because, we want to make sure that we build an ecosystem that supports architecture. If it changes too frequently, then you end up with it with of fragmentation. When we introduced V Eight, we announced that quite early in its cycle because of the because of the architecture licensing that we're doing, the move into more of the enterprise space and the need to get the software ecosystem on board. Having done that, then I think that, you know, potentially there could be a longer time or, you know, to that sort of 4, 5 year cycle, before we introduce an experiment at the architecture, we've always got work going on looking at how we add efficiency and all the things I was talking about, in answer to an earlier question, how we can do that from the from architectural features as well as through implementation. And just broadly speaking, we're looking at the evolution of, mobile computing. We're looking at the evolution of networking and features that they're going to support doing that in a more efficient way. When we have details, talk about that publicly, obviously, we'll, we'll be out in due course. And maybe just lastly, a housekeeping question, what portion of licensing sales came from backlog, versus, versus turns in the quarter. Yeah. So in Q3, that was, about 60%. So that's at the upper end of the range. But again, from one quarter to the next, that does move around in the sort of 40% to 60% range. 60% from backlog? Thanks, Brett. Your next question comes from the line of Robert Sanders of Deutsche Bank. You may ask your question. Yes, hi guys. Thanks for squeezing me in. I think this relates to a question from before, but I didn't quite catch the answer. It's regarding wafer pricing and how that's impacting die costs and therefore your royalty revenue, when you think about 14 nanometer foundry pricing, it's probably about as much as double as 28 nanometer was. I'm thinking that that could be quite a meaningful driver of your of die cost in there for your royalty. Have you actually tried to quantify this in terms of how it impacted your Q3 revenue? And I'm just interested think about how sustainable that is? And then second question would just be if you can actually disclose how many of your customers in the quarter represented more than 10% of sales? So in terms of, wafer pricing, certainly every time there is a new process introduced, It's more complex than the last. There are more processing steps. And the price of a processed wafer goes up and there is data out there. If you look at the GSA, for example, they publish reports on wafer pricing trends. There's quite a lot of data in there. FinFET is definitely the most sophisticated process that the world has ever seen. And one would expect wafer pricing to be higher, how much of that gets passed through to the end selling price is down to, our customers and we have no control over that. We'll be seeing at the moment. As I said earlier, is an uplift in ASPs, more around the functionality that's being introduced more than anything else. I would expect wafer pricing to go down over time, just like anything else. It tends to cost more when it gets introduced and it's new. And goes down over time. So we aren't Yes, we don't really factor in, process wafer costs when we think about how ASPs move ASPs typically are more driven by the functionality of the chip rather than the sort of bill of materials. And on your question on customers, we don't give a quarterly data, but that were none in 2014 and, for 2015, it'll be in the annual report. There are no further Okay. Well, if there are no more questions, then, thank you everyone for joining our call today. We will obviously be back in February with our full year results. And for those of you who are coming to our, analyst event at TechCon, we will see you out in California on November 11th, but thank you for your time today. This concludes our conference for today. Thank you for participating. You may all disconnect. Thank you, Stephanie. You're welcome. Have a nice day.