Earnings Call: Q2 2015

Jul 22, 2015

Right. Well, as chairman of Holdings, it's my pleasure to welcome you to our half year results for 2015. Just before I hand over to Simon and Ian, me just, restate our recent board changes. So as many of you will know, last year, Tim Score announced his desire to retire from full time work, although he seems to be filling himself up with with non exec work as we speak. And indeed left recently. And having previously announced that Chris Kennedy would be joining and taking over as our new CFO. We were able to further announce today that he'll be starting in a few weeks. In fact, on the first September will be his formal start date. And therefore, on this occasion, joining Simon to present these results will be in Thornton, who I think all, if not, definitely most of you, will know very, very well and needs no from me. So thanks again for coming, and, I'll hand over to Simon. Thanks, Stuart. Good morning, everyone. Thank you for joining us for our first half results and Q2 2015. Before we start, we'll just dwell on the usual customary statements. I assume you're all deeply familiar with this. Anyone who isn't, we can give you a bit of a teach in later, but I'm assuming we can take that as red. So let me, talk about the business. So Q2 has been a very successful quarter for Arm. We've delivered a strong business performance and made great progress towards our strategic goals. We signed a record number of licenses in the quarter, 54 licenses with 31 companies, and that is a record, which in a Q2 is in itself quite unusual. Our licensees shipped 3,400,000,000 chips into a wide range of end products, and we saw strong growth in all our key sectors. We also launched some major initiatives for us, thinking about how technology is used for the future, looking for ways to stimulate innovation and stimulate people's interest in the technology sector. We launched programs with UNICEF and with the BBC, and I'll come back to those later. And we've increased our investment in the business. We've been hiring strongly over the last few years because we believe there's a great opportunity ahead And this quarter really demonstrates the benefit of that investment. The strong licensing, the uptake of our latest technology really does reinforce that investment that we've made in the business to date, and we're continuing to invest hiring about 127 people during Q3 and making 2 acquisitions as well. So the net of all of this was 15% top line growth in revenue terms in dollar terms and 34% growth to be with companies looking to develop products for mobile devices. And that was that norm was continued in CUDA as well. And what was particularly key was that during Q2, we licensed all our next generation technology. So our R and D teams back at arm are working on the next generation, higher performance processes, processes optimized for power efficiency. And during Q2, we engaged with lead partners who want to take that technology before we've even finished building it, work with our work with us in a lead partner capacity, we work very closely to deliver the technology that they want to make their products successful. So again, this bears the fruits of our investment in R&D, the creation of new products, and we've teased a little bit with code names press release, Artemis, Grieve Kite, these are our product code names for our next generation, and we have more to come later on as well. So that licensing, the mixture of new products helped our backlog grow, but we also licensed mature products as well. That leads to turns revenue, and the combination of all of that led to one of our strongest ever quarters for licensing revenue. Now, although we haven't given details of the new products, the new processor products, what we did launch during the quarter was an IoT sub system and a new radio product called cordio. And I'll come back to that a bit later on. Now I'll the licensing that we do in any one quarter is with repeat customers. It's with people we've developed long term business relationships with. We work closely with them to understand their roadmap needs. We feed that into our product development to create our next generation devices. But what was particularly interesting in Q2 was there are also a number of new customers. In any one quarter, certainly of late, we do license companies who are coming to arm for the first time, and there were 12 during Q2. Over the last 12 months, in fact, there's been 40 customers of licensed arm technology for the first time. Some of them are new companies, startups. A lot of those focusing in the IoT space. Some of them are companies who've been building chips for many years, but only for the first time need to put a process alongside their analog technology. But there are also OEM customers who are coming to arm and licensing from us directly. Companies who want to more about the technology that's going into their product to be more involved in the specification and the development of the chips that are going into their products. And that is leading them to come and engage with us. So the licensing, as I said, the number was strong. 12 new customers now takes the total number of licensees to over 400 and nearly 1300 licenses that we've signed in total in the lifetime of the company. So all of this is covering a wide range of technology. It is just about mobile, mobile, very important sector for us, but we're seeing the adoption of our technology in many, many different areas, of digital electronics. As I said, mobile, very, very important to us, and we're always looking for ways in which we can improve our products to help our customers and our as customer deliver an even better mobile experience to consumers. It's actually quite incredible to look over the last 5 years and think about the journey that smart mobile devices have taken. And we take for granted every day being able to access the internet, get all the data that you want whenever you wanted on this thing that sits in your pocket the whole time. And let's face it, if you left at home when he walked out the house in the morning, you'd go back to get. It's incredible just how ubiquitous that has become in developed countries. If you just go back 5 years and think about the device you were carrying then, I personally was using a BlackBerry back then, fairly basic BlackBerry, it's great for email, but it couldn't stream video to it. The mapping solution in it was very primitive. Wine Forward to today, which very sophisticated, true mobile computers, high resolution screens, great processes, high speed data connectivity seems like a very different world from only 5 years ago. So this really is a mobile computer that we are carrying around with us today. And then just that 5 years, we've seen an 80 times improvement in the processing capability that we have at our fingertips, really quite phenomenal. Against that batteries of moved barely in that time they improve very, very slowly. Transisters get better, but through the combination of design, leveraging technology, that's how we've been able to deliver an 80 times improvement in compute performance. So the computers that we have today, these devices we carry around, increasingly, they're being powered by armed V8A Processors, Processors, which have introduced 64 bit processing capability, along with many other features. And right now, we're seeing in the devices that our licensees are providing into the mobile market, multicore, becoming the norm, many devices based around big little technology, and that's something that we introduced back in 2011. And let's face it at the time, there's a fair amount of skepticism about whether this was a good here or not, but I think we've proven that. And we're seeing big level devices all across the performance range. And we think that will range in time. So multicore is the norm big little and, version 8 porting end devices in the tens of dollars, all the way up to the many hundreds of dollars. And based on the adoption that we seen, we stand behind this prediction that around 50% of smartphones being shipped at the end of the year will be based on ARM 8A. And of course, that's good for the long term trends in our royalty. Alongside that, we see continued uptake of our graphic technology. And again, based on what's happened in the year so far, we stand behind our earlier prediction of between 6700000000 units of arm based GPUs. And it's interesting to note that about 30% of smartphone SoCs are also based around Arm's physical IP. Done a lot of work on our processor optimizations to enable our customers to get the highest performance with the lowest power in the all this space of time, and we're seeing that come through now in some quite significant volumes. For what's coming now, I talk to many people who think who can't really imagine their mobile device getting better, and people that think it's going to plateau just like the PC industry did. Well, I don't think that the case at all. I think ahead of us, we'll see more and more higher and higher data rates into your mobile device. You'll see shorter latency and that's going to enable new use cases. And the really, the great thing about smartphones, are that they are open platforms. When you put all this hardware together, when you provide these capabilities, developers can then start to exploit them and think up new use cases for how to use this supercomputer you're carrying around with you. A few years ago, you wouldn't have thought that you might be using this device to unlock your house, control your central heating, order a pizza called a taxi. These are use cases that people weren't thinking ago, thinking about when I was walking around with a Blackberry 5 years ago, but now, again, it's common play. And I think when we unleash all of these new hardware capabilities to the developer community, we'll see more and more impressed in to interact intelligently with your surroundings and give you the information that you need before you thought you needed it. Exciting time ahead of us in the evolution of mobile. And it's one, back to my early point, that doesn't just rely on Moore's law. It doesn't just rely on transistors in better every 2 or 2.5 years. It's all about design. It's about integrating different technologies, optimizing for the use case And that's what has delivered a great user experience so far, and we'll do into the future. So mobile, very, very important to us. We remain focused on that, but we are very pleased with our success in other markets. And embedded intelligence is one that you hear us talk about a lot. We talk about cortex M series of processes, which really have become, we believe, the most widely adopted architecture in 32 bit microcontrollers. We have, that 213 licensees of Cortex M Now. Many, many companies developing products in 1000 of different product variants addressing different sectors of what is a very diverse end market. In Q2, there were about 1,400,000,000 microcontrollers based on ARM Technology, a growth of 60% year on year. Now that's really quite phenomenal, and we expect a rapid growth to continue. A lot of that is based on Cortex M and these very tiny chips at very low price points that we're going to see everywhere around us. But there are other applications that require more sophistication. They want to run complex operating systems and they need higher seen performance. And so we're also seeing Cortex A adopted in microcontrollers as well. And a great example is the latest ship from Xilinx. They have a product line called Zinc. Zinc integrates an ARM based processor subsystem with their FPGA fabric. And their latest product has a Cortex A53, it has a Marley GPU, and it's based on our a global IP supporting TSMC's 16 FinFET plus process. This is a very sophisticated device, can run Linux, can run complex operating systems, and one of the use cases for that right now is controlling wind turbines. So we're in chips that sell for $0.10 below. We're in chips that are in your smart mobile device giving you a supercomputer on the road, and we're at chips that going into wind turbines. The scale of the adoption of the ARM technology is as broadly as ever been, and we can only see it widening. Now, the growth of microcontrollers, as I said, it's been great. But when you now start connecting those microcontrollers with to the internet, that's what's going to lead to the internet of things. But bringing all of that technology together is quite difficult. So the need for low power radios is something we've been researching and looking into for a number of years now and led an acquisition that we did in Q2 of a company called Sunrise Micro Devices. There, what we've done is take their deep knowledge of building low voltage, low our radios and created an IP product to enable people to integrate the radios with the rest of their system. We believe in this way it's going to accelerate people developing our Internet of Things devices. So we've launched a radio product, we call it cordio, also during Q2, we launched an IoT subsystem, which integrates the processor with the memory subsystem and interface to the side world that people can use as a building block to again accelerate the development of IoT products. To test all of this out, we build ourselves a little demonstrator kind of partly for fun, but also to test out that it did all work together. We like to do that before we ship it to our customers. And what's shown here is a little Bluetooth LE beacon that we put together. As you see, diameter wise, when you look down on it, it's about size of a euro sent coin, very small. You could go stick it in the wall. It's got a tiny battery connected to it. It will last a very long time and can communicate with your mobile device when you're in range. So this was a experimentation vehicle. We built this in partnership with TSMC on their 55 nanometer process that's that they're optimizing for this kind of product. And to help roll this out to our customers, as well as TSMC, we're working with others, such as SMIC in China, Cadence, who are a tools company to help deliver this to our customers and enable to be used as easily as possible, which is predictable as possible, a result. So we're starting to licenses. And in fact, just after the end of Q2, we did our first license for this package, the radio and the IoT subsystem. For this time, not with the semiconductor company, it was with SK Telecom, a big Korean telecoms operator, and you might think, well, why do they care about this? They're a great example of a company looking at the internet things, thinking about how they're going to deliver products and services to their customers, drive traffic across their network. And as an example, the kind of company that we're working with is ecosystem expands all the time with thinking about the future of technology, how it's going to be used, who's going to use it, and partnering with us to make that a reality. Now networking is another area that's changing. Networking is moving from a world of, hardware, fixed functions to a more flexible software driven world. And that is a change that we believe benefits arm, and it's one that our business can support in a cost effective and efficient way. So it's an important market to us. You've heard us talk about it before. And we now have 12 partners shipping products and the growth in units, whilst in absolute terms is small, it's growing about 30% year on year. An important market for us, one that's growing and one that we are focused on. The volumes today may be low, but what's important of the design wins and the development of the ecosystem to make it very easy to use an ARM based SoC in networking equipment. So there's lots of work going on, on the software stacks that are required here, lots of great work going on in Lynaro, whose membership increases. And there are big names coming to Lanaro. I recommend you have a quick look on the website. You can see the names coming there, new companies join up on a pre regular basis. And we've had a great collaboration across many of our partners to build a demonstrator around what's called the open NFV, open, because it's open and network function virtualization, which is part one of these new technologies that are going to power the networks of the future and give the flexibility to deliver the performance and deal with the changing needs of the load that's put on the network. In servers, again, we believe great progress towards our goal of around a 20% market share in 2020. In Q2, we saw computex, and in Computex, there were many design wins announced for people using ARM based silicon in companies like applied micro, Cavium, Anapurna Labs, are just some examples, and gigabytes who physically make boards and servers announced products based on all those 3 companies, chips. So we've seen products being announced, and we've seen data showing an HP moonshot system, one that's got a chip in from TI with a Cortex A15 and a DSP integrated in 1 low power SoC, and they've rewritten their fraud analytic algorithms. To utilize the fact efficiency that you can just never get in a conventional server. So this is enabling them to do analytics at a rate that they just couldn't do previously. And with a huge reduction in power consumption. They get about 85% reduction. So the results here are great. We're also seeing the rollout of developer clouds. We're seeing the rollout of, the servers and people really putting them into use. And this example here, of the Barcelona Supercomputer Center, where they have a high performance computing environment to enable researchers to run these kind of algorithms that study the weather and all sorts of deep data type of applications. So great progress in service as well. We said it was going to be a long journey. It's going to be a long journey. That's all about today what's going on, what's going on in the established market, in the established world. I mentioned our partnership with Uniserv at the beginning. And One thing we really believe in is that the technology we're developing shouldn't just be for people in developed countries. We believe that technology should enable opportunities for everyone. And behind that then, we've been working with UNICEF and we launched a challenge during Q2 back in May with UNICEF and Frog who are a very well known design company based out in California. To launch to say to people all around the world, using all these low cost electronics, using easy to deploy software, using smartphones using cloud computers, what can you do with all of this to create wearable devices that we're going to solve real world problems for people in developing countries? So we've launched this competition. The uptake so far has been very, very strong. We've had about 700 people come to the site, download the information and register their in it. It's going to run through this year. Some of our staff are getting involved in mentoring the teams that are coming together, and come the end of the year, will now surprise, which is like $15,000. And we hope to see some great innovation. And when you look at some of the ideas that are being posted there, it's just things that you wouldn't think of if you're targeting people who live in cities like London. So we're very proud of this work, and we believe it's going to expand the use of ARM technology and as I say, enable opportunity for everyone. Now one of the other things we passionately believe in in Arm is getting young people interested in STEM, in sciences, in computer science. And this isn't just altruism. We want to hire the people at the end of the day to come into harm who know what they're doing and have a real interest and a real passion for what we do. We hire a lot of graduates and we train them up to become the engineers that we need. We've had about 60 join us in Q3 so far because it's kind of graduate in make a season. But we want more. We want more in the future. The world's going to need more engineers and Arm's going to need more engineers. So we've been working with the BBC, and supporting their new year of coding, to create a product called the microbit. The micro bit is a very small, I mean, the size here doesn't really show it off its outside of box and matches, a very small computer that's going to be given away to school children. So in September, there's going to be 1,000,000 of these given away to school children around the UK. And it's something that we are, again, really proud to be involved in. And if you go back in time back to 1985, the BBC, was instrumental in creating Arm. They created a program to enable people to learn about computer science. They work with Acorn. In fact, the reason Acorn existed from where Arm came is because of the BBC micro. That inspired generation of engineers, certainly inspired me to get involved with it. I used to have one of these. So Bigs, bulky, cost me £400, which in 1985 was a lot of money. If you roll that forward to today, that took over £1100. Now, you contrast it. Right now, we're about to give away a 1,000,000 microbits. It's got much more compute power. It's tiny. I can remember trying to take my BBC micro on the back of my bike around in the mate's house, heavy, high probability of accident. This thing is tiny kids can play with them. They can, you know, if it breaks, get another one. We really hope that this is going to inspire the next generation, and maybe 15 years on, another company like arms come from this. So in summary then, Q2 has been a strong quarter for ARM. The first half has really carried the momentum that execution on all our strategic benefits of the multi year investment in R&D that we've been doing over the last few years. We've seen the licensing of our latest technology to many companies, not just semic it up to companies, but we're seeing a broadening of our customer base. And along the way, we've been able to that success has enabled us to increase cash returns and keep investing in the business for the future. So at that point, I'm gonna hand over to Ian, who's gonna give you a bit more color on the numbers. Thanks, Kate. Oh, thank you, Simon, and, good morning, everyone, after 29 quarters sat there in the front row. It's great to have it finally have the opportunity to, to stand up and, and, present some of Arm's results to you. So Simon has already given you an overview of, the royalty and licensing dynamic for the quarter and has also sketched out, the the opportunity for us over the next few years. So I'm gonna keep this study short, I know that you really want to get onto your questions anyway. But what I will do is just give a bit of color around the P and L about cash for the quarter, just quickly walk through outlook, and then we've got 2 dates for your diary. So as Simon mentioned, revenues are up 15% to, 357 $1,000,000 year on year. Now of course, as you know, that through the quarter, we did see a weakening of the dollar versus Sterling, but we're still benefiting on a year on year basis from a stronger dollar. So, the effective translation rate, Q2 just gone was 156 versus 165, from a year ago. And so when we translate that 357 into sterling, we end up with 1,000,000, which is up 22% year on year. As Simon mentioned, we hired 127 new people during the quarter, which is up the beginning of the year, and as a consequence of these extra hirings and this investment in the business, our underlying, operating cost were about £104,000,000, but because of the, the change in, the exchange rate, when we mark to market at the end of the quarter, we some of our longer term contracts, we ended up with about a GBP 4,500,000 FX credit. So the, the normal operating expenses that we've actually ended up reporting is just over 1,000,000, up 13%. So with sterling revenues up 22% and sterling costs up 13%. This has been a very good quarter for profit profit before tax, up 32%. The, effective tax rate, in Q2 was a little bit high than it was in Q1 at 16.4 percent, but we still think that the effective tax rate for the full year will be around about 16 dollars. And so that's ended up delivering a normalized EPS of about 7.3p, which is a little lower than in consensus, but that's mainly because most of the analyst notes that we still have in consensus or analyst models still in consensus still have a, an exchange rate from Q1 and also a tax rate similar to Q1s as well. So Q2 was also very strong quarter for cash, with a cash generation of 1,000,000 And through the quarter, we did, as I mentioned, we announced a couple of acquisitions, 2 acquisitions, Y Centric and Sunrise micro device, taking to 8, the number of acquisitions or teams integrated, over the, the last eight quarters. We also bought back 4,000,000 shares, taking to 10,000,000 shares over the last 12 months. And if you recall, this is a limited buyback program, with the intended goal of keeping the share count flat over time. And indeed, if you look back over the, from June last year to the end of June this year, indeed, the share count is indeed, broadly flat. The, we also have announced that the, over the last 5 years, sorry, the, we've grown the dividend by about a 25% CAGR, and indeed the interim dividends, that we've, just announced as well, is consistent with that long term, trajectory. So the, they ended up with cash at the end of the quarter, being around about GBP 904,000,000 That's actually down a little from the GBP 922,000,000 reported at the end of Q1, partly because of the at M And A, partly because of the share buyback, but also because we paid the final dividend of 2015 from 2015, 2014, sorry, in this quarter. So just now to outlook, so as I mentioned on the previous slide, the underlying normalized operating costs for Q2 were about GBP 104,000,000 Now most analysts when looking at arms cost going forward, we usually increase our cost by about 1,000,000 per quarter but as Simon mentioned, Q3 is a little bit ahead of that usual run rate because this is the quarter where we do our our graduate intake, and so headcount increases by a little bit more, in, in, in Q3. And so we're guiding, 106 to £100,000,000 for costs in Q3. For the, for revenues for the full year, now this is a that the macroeconomics don't really change and that there's no further impact on either consumer spending or, semiconductor industry confidence. But looking at processor licensing, the opportunity, pipeline for future licenses is robust, and that's encouraging for both license revenue and also for backlog in the second half. Our H2 royalties are generated from a chip that are sold in Q2 and Q3 because we recognize our royalty revenues 1 quarter in arrears. And so standing here on the 22nd July we're effectively foursix the way through that, that period. There's already some industry data for, for the 1st 2 months rate and May. And that indicates that, Q2 for the industry will be up, slightly sequentially, about 2.5% sequentially, but our arm should do a little bit better than that because of, the, increasing penetration of ArmV-eight, and Marley, and chips with high core counts going into mobile devices, and then, our ongoing share gains beyond mobile. And so taking those 3 things together, we think that for the, for the full year, our, our US group cost should be cost could print revenue, sorry, should be in line with market expectations of about £1,480,000 sorry, for $1,480,000. So as I said, 2 dates for the diary. On 15th September, we have our normal, normal analyst and investor day, this is here in London, and you can see we have most of the senior team presenting, including, of course, Chris Kennedy, who'll be joining us on the 1st September. And we'll be taking a deeper dive into some of the opportunities Simon talked about, this morning. And then between 10th 12th November, arm hosted its technology conference, which is I think a unique industry event where thousands of engineers, come together in Santa Clara, to, to talk about, and, and to hear, find out about, armed and our, and our partners, roadmap and strategies going forward. And so in parallel to that, on the afternoon of 11th November, we have an an investor event where we gather together some of the arm execs and some of our customers' execs to talk about their plans, for their arm technology going forward over the next few years. Details of that are on the website, as well as on this slide, and you can, you can sign up and register for those events there as well. And with that, I'll hand over to Simon, who's going to chair the Q And A. Thanks, Ian. Not bad for a Tesco, was it? Okay, so we'll go around the room. We have some mic If I could, as usual, just ask that we go one question at a time, so everybody gets a chance. Actually from Credit Suisse. Simon just generally, obviously, you benefited a lot, recently from the inventory correction we saw year. Now there are some recently, there's some charter in Asia that we may actually see some more inventory correction probably in Q2. I'm just trying to see, are you basically seeing that, at your customers at this point? And then secondly, just taking that along, should we actually expect more of these inventory corrections from time to time because the growth rate in the smartphone industry in general is actually coming down, and we're still getting used to slightly lower lower growth rate as opposed to what we saw actually 2 years back or or 18 months back. So as Ian was saying, in terms of the data points that we've seen, that supports, where the mark it is at for our numbers through the rest of this year. I can remember it might have been 12 months ago standing here, and we showed a graph of kind of industry cycles over the years, and certainly there are peaks and troughs to that. And I think it'd be a brave man who say that there will never be any inventory correction or oversupply ever, ever again. I'm sure that's probably going to happen at some point. For now, we're in the middle of earning season or really quite the start of that. So we're going to be looking at what our licensees say. We're in an early stage of, in fact, collecting royalty from our customers right now. But as we sit here now, there are no data points to really change our outlook for the rest of the year. It's gonna leave it on there. Thank you. It's Andrew Dunn, RBC. There's a line in the statement which talks about a subscription license being signed with a major shine these OEM. Are you able to say anything more about that, the cyber sort of end markets that customer might be addressing and also make perhaps more broad a little update on the importance of China, to army. Thanks. Yeah. So if we had been in a position the same, what we would have done, but Generally, as I said in the presentation, we're seeing, OEMs take more of an interest in the technology that's their products and really wanting to optimize that to deliver the best experience to consumers. And that was an example. China is an important market to us. The Chinese government's invest significantly in developing its technology sector. There's a lot of money going into Semiconductors, manufacturing and design, and we have a very strong team on the ground, work with the companies who are emerging to support what they want to do. So important market to us represents a reasonable portion of our revenues. And it's one that we're expecting to grow over time. And so as part of our recruitment and the evolution of our organization, we're making sure that we're best to work with the market as it develops. Thanks. It's, Caitlin I had a question on the relative performance versus the semi industry, I think, in this presentation, you did not have the chart in there, but just wondering because in, in mobile it seems, Aviation adoption still fairly limited to the high end. I think low and mid range, it will come eventually. So I'm just wondering, from a directional perspective, how do you think, or how should we think about, your relative performance against the semi industry, bearing in mind that demand. So I'm just wondering about, for the next couple of quarters, how should think about that. Kind of increase or go up further from the last couple of quarters. Is it going to stabilize at a high level or maybe slow some Thanks. Well, our royalty revenues in Q2 were up 31% year on year. The semiconductor industry for the same, at the same or the relevant period, just Q1 and Q1, was up in dollar terms 4%. So that would, optically look like a significant outperformance worth of the industry, but to a certain extent, we had to bear in mind that, last year, we had a sort of easy comps because of the inventory correction. So going back over sort of 2 years, then our royalty revenue growth over the last 2 years has been, about 16%, 17% and the been sort of 3% to 4%. So you're kind of still seeing that sort of around about a 15% outperformance versus the industry. I think certainly over the next few periods, then we should continue to see a similar sort of level of outperformance because as well as gaining share beyond mobile. Within mobile, we're still very much in the early days of RB8 penetration. Of course, that typically delivers a higher to revenue per chip. Also, Marley, our graphics technology is gaining share that adds a higher royalty as well. And as we see more chipped with, higher core counts, typically if you have an octa core, you need to own processes, and that will typically deliver a slightly higher royalty as well. The combination of those things means that even within mobile devices, then we should be able to get, our Aussie revenue increase continue to increase. So I think that outperformance should continue for a while. And then the crystal ball gets cloudy in the sort of the outer years as to when the growth from enterprise networking and servers start to contribute, in the future. That's all. [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Yes. Thanks. Good. A few questions. In terms of networking, I think you say that your revenues are up 30% year on year, in units? In units. Right. So do you have any number on the market share compared to last year, which was around 10% just to compare. It's gone up then. So we, we haven't done quarterly update on that, you know, we think that 10% probably trend stores about 15% through this year. Okay. So 50% increase. Okay. Now in terms of backlog, It's good to see that team score has not left any surprise for the next year. I know where he is this way. So it looks like the backlog was actually the up quarter on quarter, should we say nearly for sure that Q1 was the trough, basically, And that given the pipeline you've given, you know, it should kind of at least be flat for Q3 and Q4. Well, Sami, how we've said before, licensing is lumpy. There are quarters where people sign long term subscription deals. There are quarters where people are signing, shorter, shorter term deals for mature technology. And when you're talking about the number of licenses in a quarter that we are, there's no, that can move around all over the place in a quarter. A lot of our license revenue comes from backlog. That's in a sort of 40% to 60% range. Q2 was consistent with that. And we think looking out, if you stand back from it, you're going to see a smoother progression. That sort of 5% to 10% growth in licensing over time. Backlog obviously needs to grow fundamentally to support that. And we think the opportunities are there to make that happen. On a quarter to quarter basis, you'll see lumpiness around bookings, and depending on the mix of new technology, old technology, either more or less of that comes into turns revenue. So that is going to be a dynamic thing, has been in the past, and it will be in the future. And as I mentioned in my as well. When we look at the pipeline for this year, it's in the license deals that we have visibility on for Q3 and Q4, are encouraging both for license revenue and for- and for backlog this year as well. Okay. And the next question, is about V8 We are 2 new worlds in the press release. 1 is called Artemis, and the other one is called Guide. Does that mean that V Eight is actually into more or different end markets than the one we know about. Is that, is that the plan? Well, it might do. We didn't say what those for, we've talked about ARTEMIS before, if you, but if you go back in time, we developed when we introduced the 7 processes, that started in mobile. We produced B7 processes for other markets over time, up until yeah, until we formally give a product name to Artemis and all the rest, we've only got 3 V8 products out in the market. They're all largely focused mobile and the high end, a historian, and my historian friend is no longer with us, might look at that and go, okay, well, over time, you know, I'm going to create VA to address more of the product lineup, and that wouldn't be a bad assumption to make. Maybe some of those are in the code names, but we'll tell you later. And that carries as well a slightly higher royalty rate? Well, yes, I mean, B8, a lot of my royalty room. Just checking. Thanks. What's your view on Microsoft Windows 10? Do you think that would create opportunities for ARM? Well, I mean, how the market's going to react to Windows 10? I'm not going to make a prediction for, what we seen is the PC market appears to be slowing. We think that consumers generally are enjoying the computing experience that you get from a smartphone more and more. We think there's a great future in providing more technology to make those devices even better. There's, there's, for a very long time to come, there's going to be a need for PCs, and our processes are used in PCs. There are typically a few armed processes in each one of them. But how the market's going to react to Windows 10, that's not really, I'm not really in a position to make a call on that. Thanks. A couple of questions. Firstly, on, application processor ASPs historically, for the past few quarters, you said that the trend is flat. TSMs in the Q2 said they're expecting smartphone content, their smartphone content in 2016 to go up in the high end and in the mid range. So I wondered if you could, share your observations whether you agree or disagree with TSMC. The second question is more on, OEM vertical integration. Not sure if there has been a quarter where five OEM signed up, signed up with Arm. I suppose more OEMs coming in as good for business, but, I wondered how the same companies react to this trend, whether they start seeing you as an indirect competitor. I suppose in mobile, you know, they don't have much of an option, but some of the newer end markets, they might choose to, give your competition a shot just to make sure they can offer something different to what the OEMs can build in house with Arm. Thanks. Okay. So to your first off two questions. In terms of TSMC, I mean, remember that they manufacture wafers containing other people's design ends, and if more people choose to manufacture with them or someone else, that doesn't really, that's about market share shift in the foundry space. In terms of the content, as we've explained a number of times, we think there is a trend towards more processors, more graphics processing, more integration in mobile, and therefore, more arm content in mobile device whether they're high end devices or low end devices. So that's the trend that we're looking at where a licensee of Alskets, their chip manufactured is secondary to that. It doesn't really affect the outcome from our perspective. In terms of, OEMs, I think, to your question about whether that changes the competitive dynamic for I don't think it really does. The beauty of the arm architecture is that our business model means that lots of people can get access to it of people can innovate around what we do. Now there's a big ecosystem around Arm, writing code, providing other products, other technology software that relies on the arm architecture. And it's that that people look to optimize in different ways. And whether you're a merchant semiconductor company or an OEM, your approach to that is going to be different. So we see this as a great overall trend because the more people innovating, the better the outcome at the end of the day. There's obviously some consolidation going on in as, so this broadening of our market is good for us in that perspective, but keeping the number of people innovating high I think is the best thing for the products at the end of the day, and that has benefited arm greatly, and is enabled by our business model. Just there. Yep. Sorry. It's Owen from Liberum. Just a question. You've maintained your full year outlook your full year U. S. Dollar revenue. I'm just trying to correlate that to your key customers. If I take the consensus numbers for, say, customers or partners TSMC numbers have crept down over the last media tech numbers have crept down, Samsung numbers have probably come down. And Apple after last night's numbers will probably come down a bit. I'm just trying to square off, you're maintaining your full year outlook, but your key customers are kind of cutting or reducing their outlook. Was wondering what's the difference here. Did you start the year with a lot of upside in your royalty numbers? Mean, when we're looking at the 2nd half, as I mentioned earlier, we're already to certainly 4, 6 of the way through H2 on the royalty side. And, and so we've got data already regarding, you know, some of our customers and what they're going to be paying us in terms of their royalties. And because of things like increasing penetration of V8, increasing penetration of Mardi Graphics, then we're actually getting a higher royalty from some of the chips that our customers are selling. So I can see a route to getting to the, you know, the Ralty, expectations in consensus. Consensus is basically is, if you provide a 20% year on year increase in royalties for the second half versus the first half. And on the licensing side, again, because we've got good visibility of the licenses that we're likely to sign in the second half. We can then, make some assumptions about which one of those deals are going to be made based that past experience, and the combination of those gives us confidence in license revenue and backlog for the second half. So adding all those up, we can see that the $148,000,000 is indeed an achievable number. Thanks, sir. And then just a brief follow-up on the consolidation. Could if 2 companies arm customers emerging in this year, could that lead to a delay in them signing a new license agreement once they, as they try to work out their roadmap? Could that licensing deal slip into next year? We haven't typically seen that as a factor when companies merge, you know, this is not a new phenomena. It's been something been going on for a long time. Typically, when we see big companies merge, you see more usage of ARM Technology as companies look to consolidate costs, and align on a single road map going forward. So I look at the consolidation that's going on and few of the positives, and you where you would. But when you look at the complexity of the chips people are building, you need scale. And when you look at the cost of manufacturing, you need fail. And so having big companies being able to make the investments in the R and D that's going to be required to keep technology moving on, this is a positive thing for the industry, and we expect that's going to translate into a positive result for ARM. Thank you. Yeah. It's, Garreta. A couple if I could. The, the OpEx, going up in, in the quarter, you talked about graduate recruitment. I just wonder which areas you'll point the graduates or just generally the hiring to, what are the new areas that you're kind of investing in for the longer term? So that's the, the first question. Second question is just to follow-up on an earlier one. Can you just confirm that Artemis, Grieve, and KITE for like for like product the sort of royalty rate pickup that we should expect from that. And then the last one's just on the server market and, sorry. I'll pause on those 2. I'll pause on those 2. So your first one was about I mean, Q3, we recruit a lot of graduates. We look for people who we think have the right technical skills and the aptitude to be flexible as they come into alarm because what they're going to be doing in the future is going to be very different from what they're going to be doing today. So we have a long track record of recruiting graduates, moving them around the organization, and growing our own talent from within. At the same time, we hire people mid career. We hire people with senior career as well to make sure we've got a mixture of homegrown talent and, you know, a deep and broad gene pool. Our, when you look at our headcount profile, about 70% of our employees are technical engineers developing our products, and we maintain a high, high proportion investment in R&D. And that's what these graduates are doing in the main. They are coming into our R and D teams, learning about microprocessor design, learning about graphics design, learning about Silicon implementation, learning about software, which are all the things that we do. So where these people end up working is, you know, simplistic you can look at our revenue breakdown and go, well, that's roughly where the people are going. But as I said, we are looking for flexibility in the people that we higher so that we can change the company in response to the needs of the outside market. But that investment in R&D has been very important for us because the company really exists, from the quality products that we produce at the end of the day, and, you know, you're seeing that come through here. In those products to your second question, you know, their version A architecture, we have worked hard to establish a higher royalty rate for version 8. And on different markets, support different royalty structures based on the dynamics of the selling price and the profitability of the end markets. But overall, the trend is towards higher royalty rates for version 8 Just gentlemen, if I may. So it's, Lee Simpson, Stifel. Just three quick ones from me, actually. I think I saw a 10,600,000 Renato related charges. Just wonder what they were going forward. In the out quarters. Second to that, a lot of the hires that you've taken on have been UK and U. S. I just wonder if that was indicative of a new architecture coming 20 16, I. E. It's not India that you're hiring in at this point. And maybe thirdly on PIPD, you talked about the footprint increasing, I think, 30% of patch in smartphones. And yet the backlog split is down noticeably in this, I mean, in mainly Q on Q. I'm just wondering if there's an order book gap that we Q2 perhaps related to node migration at big customers? Thanks. First question, I think, was the Lenovo charge is a, I think it's a 3 year subscription fee to fund the NARO and to keep that going, but all of the, that the main, the main, companies that are partners that certain are opaque to fund and keep it going. So that you'll look back over two years ago, you'll see a similar charge. In terms of where the people are going, I mean, we do, the I'd say that, that biased towards U. K. U. S. Is, probably reflects where we have more of our engineer is working on, on process of development. So I'm just now trying to remember your question. Your third question was on So, we've had a lot of success developing our pop IP, which our customers used to optimize their processes. There were a number of new licenses signed in Q2. There are a relatively small number of semiconductor manufacturers' foundries, and as they develop new variants of their process technology. We typically engage with M and A license to develop physical IP that supports that process. And over time, that the development of the technology as it matures can take can actually take a couple of years So the licensing in that and the flow to royalty is slightly more complex than it is trends. Yes, just on that one. Thank you. Sakaiya from Barclays. The quick question on, on FX. You, you reported an, an effective FX rate of 156. If you look at the average over the quarter and, whatever the answer was expecting, actually, there there is a good appetite. Can you remind us, why is it so different? Why did we get so wrong in our modeling? We have to bear in mind that, in the quarter, 57% of our license revenue came out of backlog. And revenue out of backlog comes out of backlog, and at the same exchange rate it went into backlog. So deals that were signed here a year ago would have been going in at 16170. And so they're coming out of those, that higher exchange rate, and that's something that is, not something that you're going to be able to model particularly easily, and clearly that then gets combined with whatever deals are done during the quarter at the moment those deals are done. And obviously, the exchange rate moves around in the quarter. Again, that's something that's going to be, very, very hard for you to model. Also, we as we receive royalty reports, they're recognized that the the rate on the day. So again, if the if the rate moves around during the quarter, for big report turns up on a day when the exchange rate's bad, nothing we can do about that if it's good. Hey, Hope. Okay. And, in that text to you, since you have visibility into your backlog and licensing, revenue over the next couple of quarters, is it going to be the same sort of rate that will be coming out of, of, of, of the backlog, in the licensing, in the So basically, the disconnect as the, the, the actual rate for the next couple of quarters, is it going to remain as it was this quarter, or is it going to be different? It can be because, obviously, if the rates stayed I think last I looked, it was about 155. And so if that was the rate, a stable rate going forward, we would still be taking revenue out of backlog that have been signed multiple quarters away. So there is usually a lag effect between, where the exchange rate is today and where it was. So in periods where the exchange rate is higher, we're taking we'll be recognizing revenue at lower exchange rates, and so therefore exchange rate exchange rate would be slightly better than the average for the quarter. But right now, where the exchange rate is generally speaking lower than it was 1 year ago, then it will be a little bit higher on average going forward than the exchange rate that you just go and have a look at the Bloomberg and what it's telling you today. Okay, we're not currently specular what the exchange rate is going to do over the rest of the quarter, I have no idea. So whether there is a disconnect between that and the average, it's impossible to call right now. I joined Pete from BTIG. Talking about consolidation, scale and opportunities, Brian Krzanich, if that's how you pronounce it, Intel CE Joe at their, results presentation called out the relationship between Arm and Oterra in his strategy commentary. In fact, it was the first thing said he said until could substantially enhance, Altira's arm based business. Are you entering a new phase of relationship with Intel. What can you tell us a bit more about that in terms of the consolidation and the opportunity and the scale? Well, in terms of what Intel and Altira do when they get together, again, that's, I've got no control over Intel have, licensed a lot of technology from us over the years and, ship actually quite a few chips more than a lot of people expect. Based on processes. Alterra have developed a strong roadmap of technology over the last few years that a licensee of ours for a long time, and have some great products based on our technology. What, what they have said is that they're going to continue ship those. Obviously, I hope that they do where that goes, hard to say. Your sort of follow-up question generally on consolidation. Truly opportunities might develop within this new management? Yeah. Again, we'll have to see. I mean, the kind of landscape for FPGA hasn't really changed with Intel's acquisition of Alterra. That is a market that's dominated by 2 players, traditionally, Alterra and Xilinx, both of whom are licensees of ours. I've now mentioned the Xilinx Zinc product there. They've been shipping FPGAs with embedded on, subsystems for a number of years. That's been successful business for them and we expect that to continue. Just move further back down a room. Sorry. So Rob Sanders from Deutsche Bank. Just a question on Marley. It looks like you licensed most of your addressable market in mobile How do you look at your Marley units in 2016 in terms of growth? Do you think that the growth rate could slow from your relatively de number in 2015? I think that's going to come down to the overall growth rates in mobile into the next a couple of years. As you say, we've had very, very strong licensing base, most widely licensed GPU out there. We are developing new products. Of course, we've got a roadmap there. We're investing in that roadmap, and we expect, as long as we execute, as long as we deliver, our customers are going to come and license the next technology from us. Obviously, GPUs are less broadly applicable than CPUs are. Many of these microcontrollers aren't going to have a GPU in them at any time, but we are seeing more and more things, having more and more sophisticated graphical displays. And so the market for graphics does broaden over time, and that's going to help us grow unit as well. So it's about the dynamics of that market and making sure we develop the right products, to take advantage of those dynamics. Hi, Sandeep Deshpande from JP Morgan Gasnu. My first question would be regarding your royalty growth in the quarter, you had about $31 royalty revenue growth in the quarter. What percentage of that growth would you accrue to the increase in to move the VA architecture, which is increasing the royalty per device. The reason asking is given this ongoing inventory correction, the units might go down, but that increase you see associated with a royalty per device will probably remain, to write through this year into next year potentially. So I'm trying to understand that. And the second question I have is on licensing. When we started the smartphone cycle 2009, 2010, there were maybe 15 to 20 producers of baseband chips and application processes. All of them contributed to your licensing revenues which were very strong through that 10 to 14 period. Today, we really have that, that industry consolidated very dramatically towards 3 players in both those segments, basebands and application processes. Maybe 5, if you take some the stragglers who are still in the market, does that not impact your future licensing in that market? So I'll take the second part of that first and maybe Ian wants to take the first part. We have now 400 licenses of our technology. We've just announced many new customers in this quarter And what's interesting is if you look at the, how long it took to acquire the customers, what you see is it took about 10 years to get the first 100 customers. Took about 5 years to get the next 100, about another 5 years to get the next 100, took 3 years to get the last 100. So despite the maturing of some markets, because of what we've done with our technology roadmap, we've been able to increase the number of end markets where armed can be used. And that's why new customers are coming to the Arm Partnership, and that's why we're seeing design wins why we're seeing a strong licensing business and through that investment, we expect to see continued growth in royalties. I know we love mobile market, but we have been working hard to make sure that we are diversified in where the technology is used. And I believe that is that strategy that's been in place for many years, is working well for us. Yes. So in terms of the, armed VA, I think overall in our revenues up 31% year on year. Our units were up 26%, so very strong growth in the number of units as well as as well as the dollar values. If I look at the, the mix of RB8, bearing in mind that most of these, RMBS chip were sold, into Q1 or into devices that were sold in Q1, which is pre the launch of most of the premium smartphones If I look at the mix of Android, 80% of the chips going into Android devices were, quad core 850 So at the lower end of the, of the market. So normally a new technology like this, you would expect to come in at the very high end and then gradually over years move into the mid range and then move into the lower cost entry level devices. Apart from a very few number of high end devices, most of the volume seems to be actually coming at the low end and mid range smartphones. So I think there's actually from ArmV-eight, there's more mix to come through the year as we start to see more smartphones being sold in Q2 that are going into, say, more developed markets with, higher higher priced smartphones with higher priced application processes in them. I'll let you do the math to exactly the question that you're asking, which is what proportion of that 31% versus the 26% is ARMV8. But the answer to the question is it's not as much as you might think. Hi, Jaguar from Mariete Research. Just a question from your licensees. There's quite a inventory on their balance sheets at the moment, guys like MediaTek Qualcomm, Broadcom. When do you guys get paid your royalties? Is it when it gets shipped whether there's licensees, or is it when it gets recognized in the balance sheet? And then secondly, with the CORTEX A72 now entering the market, I'm just wondering, have you guys done any benchmark of your FinFET ships versus core M from Intel. And maybe how does that flow through to seeing customer sells their chip. So so when they get paid, we get paid. That's simplistically how the model works. There's a lot of complexity around that, but simplistically, that's how it works. And in terms of performance, yeah, I mean, we believe CoreTech 72 in a multicore configuration is a very high performance processor. We've worked with partner such as TSMC on advanced FinFET implementations, and we believe there's no reason why that can't be used in a variety of devices including bigger screen clamshell liked things. Now the only thing that stops that is whether any one of our licensees that as an opportunity that they want to go and explore? Is that market big enough? Is it growing? Is there an opportunity for differentiation? Is there a software solution, yeah, there are lots of factors at play, many of which we aren't in control of. For our part, we think we've done the work enabling processor technology that is of that class of performance that can be used in lots of places, the networking applications, the server these are all high performance, computing environments. If one of our licensees wants to go and pursue that market, then fantastic, but that's not something that we are particularly pushing ourselves right now. Thanks, Cara Changings from UBS. Just my question was on the server market. And, I just wanted, you know, looking back from where you set the 20% target and where you're going to, do you feel Intel's response has been perhaps more aggressive or they've been able to fend off your part, will be able to fend off your partners better than you thought previously, are you still comfortable with, you know, this offer ecosystem development, etcetera, to get you there? I'm just thinking, you know, the we talked about the lack of custom design chips from Intel. Now they're doing that more and more, they're kind of responding with lower lower priced, lower, you know, lower performance chips effectively. Thanks. Yeah. I mean, I think our, our view on arms opportunity in this market hasn't changed. You know, we think the, our business model enables many people to innovate and different, different solutions, and that many people addressing a market is going to give a variety of solutions that's broader than any company can do on their own. I think if, if competitors in that space do build different solutions, actually, I think that's it's the strategy here, and ultimately it's going to provide more competition into the end market and that's going to make servers better. So this is all good news for perspective. As I said, there are some great progress points in just, I think it was last week, Cavium came out with a whole raft of press releases of progress that they are having, some big cloud companies deploying ThunderX. Yeah, this is all progress and that the ecosystem is moving forwards as the market develops. It's all very, you know, chicken and egg. Nobody wants to write this software, unless there's the hardware, nobody wants to build unless there's a software and so on. So it moves together kind of in tandem and Lanaro where we've our commitments to Lanaro, is a place where a lot of that works happening. Yeah, just want to come down the front here and better make this the last question, just being conscious of time. Quickly, you say that you are comfortable with Q4 target of 50% of smartphone being 64 bit. You already shipped 1,000,000 in Q2, which was Q1, which is not far away from being already half of the smartphone market, assuming that most of your VAT is handset. Don't you think you're a little bit conservative on this target? And second question, we see more and more Octa core. We heard about the Deca core. What is the critical limit of what the smartphone application processor guys are going to do? Is it echo 10 call or do you think going forward we will see more calls? Hard to answer that last question. There is a theoretical limit for how much parallelism you can ever get out of an application. But, I think that we'll continue to see core counts go up as, your phone is doing more and more in parallel, processing what's coming in from the is work that can be parallelized and having multiple processes there when you're doing something that's really compute intensive, gives a lot of power. So, you know, I think for the time being, we'll probably see core counts increase and it's going to come down to this use model, which as I was saying during the presentation is something that is created by not us, and that's really the beauty of it, the innovation that can go on once platform is deployed kind of pulls through technology, more technology over time. So we'll have to see how that plays out, but I think going to be very, very interesting to watch. And your first part of your question was about the whether we're being conservative on keeping your shipments, let's hope you're right. But, you know, looking at it, and, you know, right now given, you know, what are some uncertainties out there in the market, you know, I think standing right now behind the 50 percent exit run rate, is, you know, feels about right for us. Obviously, of the 150,000,000, we have chips going to tablets, chips going to TV, there's TV sticks as well as sort of enterprise networking and servers. So the, when I, my best guess would be of where those 150 are going, but 130 into smartphones. And obviously, to Simon says, we'll have to see how how where those other chips get designed in over the rest of the year and what consumers actually end up buying to find out what the actual proportion is going to be in the Q4. Great. Well, thank you very much for joining us today, and, we'll see you on the road.