Thank you for standing by, and welcome to the Arm Holdings Q1 Analyst and Investor Conference Call. At this time, all participants are in a listen only mode. There will be a presentation today, followed by a question and answer session, at which time, if you would like to ask any questions, you will need to press star and one on your telephone keypad. I must advise you that this conference is being recorded today on Tuesday the 21st of April, 2015. Now, I would like to hand the conference over to speaker today, Mr. Ian Thornton. Please go ahead, sir.
Thank you very much indeed. Good morning, everybody. Thank you for joining this call. This is Ian Thornton, Head of Investor Relations at Arm. On today's Q1 results conference call, we have Simon Segars, Chief Executive Officer, and Tim Score, Chief Financial Officer. On today's call, Simon and Tim will take us through the highlights and comments from the quarter's results. Then we'll open up the call to a Q&A session. As a reminder, the presentation and press release can be found on the Arm investor relations website at www.arm.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 related to investments. The information communicated on this call is being made available only to investment professionals. Any persons present on this call who does not have professional experience in matters related to investments should not act or rely on the contents of this call. The following conference call will contain forward-looking statements which are other than statements of historical fact. 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. On this note, I'll hand over to Simon. Thanks, Ian. Good morning. Thank you for joining our Q1 2015 results conference call.
I will run through the business highlights. Then hand over to Tim to provide some more detail on the numbers. Following Tim, there'll be some time for Q&A. First, I'll give a quick reminder of what happened in 2014, as this will provide important context when considering Q1 2015's results. For Arm, 2014 was a year of robust execution. We saw very strong demand for our latest processors, leading to another step up in license revenue. However, we experienced an end market inventory correction, which particularly impacted application processors in smartphones and resulted in lower than normal royalty revenue growth for Arm, particularly in the first half of 2014. At the start of the year, we expected royalties to recover in the second half, which they did. The first quarter of 2015 has continued where Q4 left off. Royalty revenues have continued to accelerate.
Processor royalty revenues and chip shipments both grew 31% year-on-year. Again, we need to consider the context. H1 2014 was the nadir of the inventory correction, so a big year-on-year increase was to be expected. Demand for Arm technology has remained strong, which is reflected in license revenue that remains at this higher level. As expected, Q1 license revenue is similar to Q1 a year ago. Remember that Q1 2014 saw 38% year-on-year growth. Looking through multiple years, our licensing revenue this quarter is still much higher than we would have expected just a couple of years ago. Overall, we're very pleased with these results. I will now discuss the revenue drivers in the different parts of the business in more detail, starting with technology licensing. We signed 30 processor licenses in the quarter.
These licenses were for a broad range of end applications, from servers to smartphones to sensors. We signed another ARMv8-A architecture license with a company developing application processors for mobile and computing devices. Eight of the licenses signed were for Arm's Cortex-A series processors. These included four licenses for ARMv8-A processors, including two for the latest Cortex-A72 processor. We have also continued to see strong demand for our Cortex-M processors, which are used extensively in microcontrollers, embedded connectivity chips, and smart sensors, and can be found in most of the Internet of Things and wearable devices that have been announced to date. 16 Cortex-M processors were licensed in the quarter, including with one important semiconductor company who has made a major commitment to using Arm processors in their chips. Previously, this company was developing chips mainly using alternative architectures.
Finally, Arm signed four more Mali licenses, three for advanced graphics processors and one for our recently announced video processor. We signed two more POP IP licenses during Q1. POP IP is physical IP that has been optimized to enhance the performance of Arm processors, including a Cortex-A53 on a 28 nanometer process. Now I'll switch to the royalty side of the business. Arm's royalty revenues are reported one quarter in arrears, so our royalty for Q1 was generated from chips sold by our licensees in Q4. Processor royalty revenue was up 31% year-on-year. This strong growth reflecting both the H1 2014 inventory correction and the ongoing acceleration that we have seen over the last couple of quarters. Our licensees reported that they had shipped 3.8 billion Arm processor-based chips. This is also a 31% year-on-year growth and represents an additional 900 million chips.
Part of this increase is a 25% increase in chips going into mobile devices. The number of ARMv8-A based chips reported as shipped has grown more rapidly than we had expected.
In total, about 130 million ARMv8-A chips shipped, not just into smartphones and tablets, but also into other consumer electronics devices and enterprise infrastructure. About 20% of Cortex-A processors sold were based on ARMv8. As anticipated, we saw strong take-up of ARMv8-A in premium devices, but nearly half of these chips went into mid-range and entry-level smartphones. Low cost implementations of Cortex-A53 quad-core have enabled very high performance smartphones costing less than GBP 200, and this is helping to drive volume of ARMv8. I met with some of you at Mobile World Congress in early March. There we witnessed many smartphone and tablet OEMs announcing ARMv8-A based mobile devices. I think this trend to more ARMv8-A is likely to persist. Our licensees are also deploying more and more Arm technology into markets beyond mobile.
In Q1, they reported 1.3 billion Arm-based microcontrollers and smart cards, a 40% year-on-year increase. With leading MCU companies continuing to introduce more new designs, we expect our share of these markets will continue to grow. We also saw many more announcements around servers and networking infrastructure. Cavium demonstrated a comprehensive Cloud RAN application on its 48 core, 64-bit ARMv8-A ThunderX system on chip. EZchip introduced the TILE-Mx100, a high performance networking chip with 100 Arm cores, delivering scalability and power efficiency for data centers and carrier networks. Gigabyte Technologies introduced two new Arm-based boards for servers and enterprise infrastructure. One developed using Applied Micro's X-Gene chip and the other using Annapurna's Alpine chip. We saw strong growth of chip shipments into enterprise equipment in Q1. Although it may take a few more years for this market to become a meaningful contributor to Arm's overall revenues.
These design wins and the development of the ecosystem are important demonstrations that we are on track. Finally, I'll turn to our recent acquisitions. Last week, we announced that we had acquired two companies, Wicentric and Sunrise Micro Devices. Both of these companies will help extend our technology offering for companies developing chips for the Internet of Things. On the hardware side, Sunrise Micro Devices provide a family of radio IP that includes a prequalified, self-contained radio block and related firmware, which can easily be integrated alongside a Cortex-M class processor to provide wireless capability in the chip. Wicentric is a provider of the software protocol stacks that provide the communication layer to connect your wireless chip to the internet. In summary, we expected the strong business momentum to continue, and it did. I'll now hand over to Tim, who'll provide some further details on the numbers.
Thanks, Simon. Morning, everybody. Hopefully, most of you will have had a chance to have a quick look at Arm's Q1 2015 earnings release. Just to remind you that the quarterly slide set is available on our website as usual, which provides further backup. Again, in summary, without being too repetitious of what Simon's been through, overall Q1 dollar revenues, $348.2 million compared to consensus of around $340 million. Processor licensing revenue is GBP 109 million, slightly lower than a year ago. Following multiple periods of accelerated license revenue growth, which has been about 30% compound over the last five years. In line with previous guidance, we continue to expect license revenue growth of 5%-10% per annum in the medium term. Group order backlog at the end of Q1 2015 was down about 7% sequentially.
Based on the medium-term outlook that I just stated for license revenue growth, we would expect quarterly sequential movements in order backlog to be lumpy going forward, i.e., up some quarters, down in others. Q1 license revenue growth included a 55% contribution from backlog, which is within the normal range of 40%-60% that we typically see. Processor royalty revenue at GBP 167.5 million, up 31% year-on-year, as Simon said. Just a reminder that Q1 2014 included a one-off deduction of GBP 5 million relating to one of our major customers' over reported royalty revenues from prior years. If we exclude that, then the underlying processor royalty revenue growth in Q1 was 26%.
In the first half of 2015, we've been benefiting both from the continued growth in market share for Arm-based technology across multiple end markets and as discussed, relatively easy year-on-year comparatives against the first half of 2014, as Simon has explained. In the second half of 2015, we expect to benefit from the increasing deployment of Arm's Armv8 technology, ARMv8-A technology, our latest generation of processors in the newest smartphones and tablets. These chips typically have a slightly higher royalty rate than the previous generation. In Q1 2015, ARMv8-A based chips only made up about 3.5% of total chips reported, and we expect this to become a much more meaningful proportion in the second half. Moving on to costs.
Normalized OPEX in Q1 was GBP 100 million, which taking into account the slightly stronger dollar in the first quarter relative to guidance, is broadly in line with what we said in February. Most of the increase reflects ongoing investment in R&D. The Arm team has grown about 15% over the past year to just under 3,400 people at the end of Q1. With the majority of the extra employees being R&D engineers. Normalized OPEX in Q2, assuming effective exchange rates similar to current levels of around 150, are expected to be in the range of $102 million-$104 million. This reflects the ongoing organic investment in the business, a modest contribution in the second quarter from the acquisitions that have been announced recently, and the impact of the stronger dollar. The group's normalized tax rate in Q1 was 16%.
Similarly, we expect the full year normalized effective tax rates to be around 16%, as we continue to benefit from the reduction in U.K. corporation tax rates and the phased introduction of the patent box tax regime. Looking forward, we've made an encouraging start to 2015, with more leading companies choosing to deploy our technology in their products. Assuming that the macroeconomic uncertainty, or assuming that macroeconomic uncertainty does not impact consumer spending, we expect group dollar revenues for the full year 2015 to be at least in line with current market expectations. In the shorter term, looking to Q2, relevant industry data for Q1, which is the shipment period for Arm's Q2 royalties, points to a sequential decrease in industry-wide revenues, broadly consistent with normal seasonality.
In this context, we expect group dollar revenues for the second quarter to be in line with current market expectations of around $355 million. With that, thanks, Tim. We'll hand over to Q&A. I'd, as usual, just ask that people ask one question at a time so we've got time to go around everyone.
Thank you, sir. As a reminder to the participants, if they would like to ask any questions, they can press star and one on their telephone keypad. They can also cancel that request by pressing the hash or pound key. The first question today comes from the line of Amit Harchandani from Citigroup. Please go ahead.
Good morning, gentlemen. Amit Harchandani from Citigroup. Thanks for taking my questions. Main question and a quick follow-up, if I may. The main question pertains to what we are hearing in the market today about a potential slowdown in smartphones in emerging markets. A few companies have talked about it clearly. You see Q2 in line with market expectations. Could you maybe give us a sense of what you're seeing out there in terms of low-end smartphones? Secondly, as a quick clarification, you commented on Armv8 becoming a much more meaningful proportion of shipments in the second half. Could you maybe quantify the same? Thank you.
Okay. Thanks for the question. In terms of the end markets and the potential slowdown in the emerging markets, that's something that people have been talking about for a while. That seems to be kind of mixed up with currency differences and the strengths and weaknesses of various currencies around the world. How that plays out for us kind of remains to be seen. As you know, we are quite a long way down the supply chain. We have been licensing our technology into the companies building chips for these products. What's going to happen in the short term is always hard to predict. I think the medium to long-term trends are still there. There is a migration to Armv8-based technology. All the semi companies supplying the handset OEMs are moving their roadmaps or have moved their roadmaps to ARMv8-A.
We expect to see this migration over time. We said before that we would expect the end-of-year run rate to be about 50% of handsets being based on ARMv8-A. I'd say, if anything, the progress in Q1 is encouraging. We might be ahead of that. We'll see what happens in the end markets. There's nothing to say that there's any major setback going on. There's a long way to go through the year. We can't control consumer spending. Whenever we have these calls, there's something going on in the world that may impact consumer confidence. This quarter is no different from the others. The long-term trends for us, I think, unchanged.
Thank you, Simon.
Thank you. The next question comes from the line of Andrew Dunn from Royal Bank of Canada. Please go ahead.
Thank you. I had a question on Armv8, just on the number of licenses and licensees. I think you've reported 68 licenses. Could you let us know how many licensees that relates to, and also how many of these licensees are actually shipping today? Thanks.
In ARMv8-A, the number who are shipping is nine, and that's up a couple from last quarter. Number of licensees, off the top of my head, I'm not sure, actually. We'll quickly do a lookup on that while we're talking.
Okay, thank you.
The next question comes from the line of Johannes Schaller from Deutsche Bank. Please go ahead.
Hi there, gentlemen. Thanks for taking my question. I was just wondering if you could really give us a bit more clarity on the outlook on the licensing side. I do understand that the business is quite lumpy on a quarter-by-quarter basis. If I look at your long-term messaging, it feels like that you said kind of around about 10% growth longer term previously. Now you're saying 5%-10%. I just really would like to understand better what the reason for that is. Is it kind of a long tail of revenues now phasing out from previous smartphone semi consolidation we have seen over the last few years. Is it more outside of mobile? I know you've always said it's slowing, it kind of feels like things are slowing a little bit more than what you anticipated. Thank you.
No, that isn't the case. I think we have talked now for a long time through this sort of accelerated licensing revenue growth of a more normalized run rate being into sort of characterized sometimes as mid to high single digits, sometimes as 5%-10%, sometimes around 10%. I said in February when we were up that the compound growth expectation for licensing that the market has over the next five years of 7.5% is the right place, and our guidance today is consistent with that. There is no change. As we've said over the last four or five years, the business was not going to grow licensing revenue at 30% forever. In most of Arm's history, it's grown at mid to high single digits, and that's kind of what we expect going forward. That's what's out there in the market.
Understood. That's helpful. Maybe a quick follow-up. Could you quickly update us on network royalties in the quarter, just how that grew sequentially and year-on-year if you're sharing that number? Thank you.
Year-on-year growth, I believe, was 45%. We ended last year with a market share of 10%, and we're continuing to expect that to grow through this year.
Thanks very much.
Just before we go to the next question, I just want to go back to what Andrew asked about number of companies who have licensed ARMv8-A, and the answer is 41. Next question, please.
The next question comes on the line of Pierre Ferragu from Bernstein. Please go ahead.
Good morning. You've got Matt Morrison at Bernstein here covering the call for Pierre. You guys posted another incredible growth in microcontrollers at around 40% year-over-year. I assume most of this is driven by penetration growth. How far do you think you can go on that front? What is your estimate of penetration today, and where do you see yourself in the next 2 to 3 years? Thank you.
Well, I think the growth has come from the very strong licensing over the last few years, continued licensing. I think we signed our 300th license in the quarter. The migration of our customers' product portfolios over to Arm and the growth of the 32-bit sector of microcontrollers. We have a high share there. Well, we have a very high share in the 32 space of microcontrollers. Overall in microcontrollers, it's 26% market share. How high they can grow? Well, plausibly they can go up to 100%. We will see the decline of 8-bit micros or continued decline of 8-bit micros over the next few years. 100%, that's going to take a very long time, and it's probably never in reality. 8-bit micros are going to be shipping for an enormous time to come. I think this growth of 32-bit in the microcontroller segment will continue.
We're at pricing points which are very low, 32-bit microprocessors in microcontrollers provide huge benefits. Higher performance, higher levels of system efficiency, much better programming environments, access to operating systems. I would expect most new designs that don't rely on legacy software to adopt a 32-bit microcontroller than an 8-bit going forward. You will see the legacy continue to come. I expect us to continue to grow share at the sort of rates that we have done over the last couple of years, and to continue to succeed in that market.
That's perfect. Thank you.
The next question comes from the line of Matt Ramsay from Canaccord Genuity. Please go ahead.
Good morning, gentlemen. Thank you for taking my questions. First off, I thought it was interesting the commentary that you had in your prepared remarks about the percentage of v8 shipments today that were in the mid-tier. I think a lot of us had assumed that the majority of that was out of Cupertino. Maybe you could talk a little bit about the mixture of v8 shipments today in the mid-tier versus the higher tiers and how you expect that to play out for growth for the rest of the year. Thanks.
When we look at the chips that our licensees have built based on ARMv8-A, what we've seen is a mixture of octa-core devices, big.LITTLE devices, but also many quad-core Cortex-A53 devices. It's those quad-core A53s that are going into many of the mid-range and entry-level phones. I think we talked about this through last year. The kind of product lineup from our licensees is very broadly penetrated with ARMv8-A. There are chips targeting the premium end all the way down to the low end based on these combinations of Cortex-A57 and Cortex-A53. Given the market dynamics of faster growth in the mid-tier, it doesn't surprise me the way we're seeing that come through. I think what we saw at Mobile World Congress was a lot of innovation across the whole spectrum of devices.
Innovation at the top, you'll see that continue to ripple down into the lower cost devices. When I look out over the next year as these devices start shipping, obviously the flagship products dominate the news. I think you'll see a lot of the mid-range phones shipping strongly.
Thank you. That's helpful. A quick follow-up for Tim. I think a lot of us assume over a period of time that a stronger dollar may be good for Arm financials, obviously it has a headwind to maybe some end device sell-through, which affects royalties. Maybe you could just give us the puts and takes from your perspective on a stronger dollar versus a weaker dollar and Arm's overall financial results through the rest of the year if things get better or worse there. Any perspective, they're helpful. Thanks.
We've indicated in the past that broadly speaking, a 10% strengthening of the dollar against sterling has a sort of 15% positive impact to our bottom line. That's obviously looking at the financials of Arm based on our dollar revenues and our sort of non-sterling costs. As Simon said in his remarks, how some fairly volatile swings around currencies may or may not impact consumer spending in various markets, is clearly beyond our control. The basic fact remains that Arm is a more profitable company when the dollar is stronger.
Great. Thanks very much.
The next question comes from the line of Achal Sultania from Credit Suisse. Your line is now open.
Thanks. Just one clarification on the v8 penetration. Obviously you're talking about 3.5% penetration in Q4. To me that implies almost a 35% penetration in the smartphone market, just looking at Q4 shipment numbers. Is it safe to assume that the average number for the full year 2015, and you talked about the exit rate being 50%, both those numbers probably have upside going forward?
Well, as I said, I think the penetration is a bit higher than we expected. There is some upside to that 50% exit run rate.
Right. Then obviously you talked about Armv8. Have you given any color around the big.LITTLE penetration as well along with Armv8?
We haven't, as I said earlier we're seeing a whole spectrum of combinations of Cortex-A57, Cortex-A53, quad core A53s, octa core A53s, where one quad core cluster is optimized for energy efficiency and the other for performance. That's a big.LITTLE combination. Then the more sort of classic Cortex-A57, Cortex-A53 big.LITTLE combos. I think in the Armv8 chips, though, on average we're seeing a higher core count than we've seen in Armv7. There seems to be a trend towards more big.LITTLE.
Right. Just maybe one more follow-up, Simon. On the royalty growth, obviously you had 26% underlying growth this year, you talked about industry revenues growing 4%. Can you give us some color as to how much of that you're basically outgrowing the industry by 22%. How much of that is being driven by Armv8 or big.LITTLE adoption?
Not that much, really. When we think about the chip shipments growing at 31%, that's about higher volumes of mobile devices, it's about market share gains in some of these other sectors. The microcontroller units are up 40% year-over-year, for example. That's obviously a significant gain. It really is a combination of factors across all end markets.
All right. Thanks a lot, Simon.
The next question comes from the line of Eoin Lambe from Liberum. Please go ahead.
Hi there. Yeah, it's Eoin. A question on licensing and the cyclicality there. I think PD licensing was down 2% year-over-year in Q1 2015. I was just looking through my model, I think it was 2009 was the last time your licensing declined year-over-year. Over the last six years, you've had very strong growth there. I was wondering from a high level, what's driving the slowdown in licensing? Could you be saturating your Armv8 licensing pool? Do we need v9 to come before we see a material acceleration in licensing growth again? Just to follow up, could you tell us what the year-over-year change in the backlog was? How much was it down?
In terms of whether I think we've saturated Armv8 licensing, I don't think so. 41 companies, there's a lot who haven't licensed Armv8. I think we're at a pretty reasonable place in the adoption of Armv8 compared to previous generations of technology. I think there's a ways to go on that. You've got to remember that off the back of five years of 30% compound growth in our licensing, we're at a very high level now. We've been a bit of a broken record saying it's going to revert to the 5%-10% range over time. We think that is going to happen. Some quarters it will be up, some quarters it will be flat, some quarters it might be down a little bit. I don't worry at all about a sort of 2% down this quarter.
I look at the strength of our pipeline of sales opportunities, the strength of our product portfolio, and the roadmap products that we're developing but haven't announced. I see no reason to think why we can't continue to grow licensing in the kind of range that we've spelled out.
Okay. Just a very brief follow-up. Most of the early Armv8 adopters seem to be taking standard Arm cores, A57, A53. It looks like the next generation of big chip vendors will customize or will have customized implementations of Armv8 for the next generation products. Given that they have to do lots more work themselves when they use a customized version of Armv8, does that impact the royalty rate in any way whatsoever if they take Arm and do their own implementation or if they take standard Arm products?
Well, broadly speaking, the royalty rates from an architecture licensee or an implementation licensee are the same. Actually, just to go over what you said there, the very first licensees of Armv8 were architecture licensees. These were companies like Cavium, for example, who have created products that take Arm into new markets. It was in a wave of Cortex-A53, Cortex-A57 licensing. We're now seeing strong adoption of Cortex-A72. We only announced that a couple of months ago. We're expecting continued licensing adoption and then shipments of our v8a implementations. We expect to see architecture licensee implementations as well. These are all parts of our business model that contribute to the overall growth of Arm and the penetration of the Arm architecture into the broader semiconductor industry.
Okay, thank you.
The next question comes to the line of Alex Gauna from JMP Securities. Please go ahead.
Thanks so much for taking my question. I was wondering if you could give us some insights into the progress of some of your downstream partners in terms of ramping 14-nanometer and doing the development work on 10-nanometer, and how they are feeling about progress on that technology and how your architectures are performing within that context of the leading edge. Thanks.
Well, we're seeing product shipping based on FinFET technology, the 14/16 node is coming through. There are devices in the stores you can go and buy which contain those chips. There are networking products based on Arm that are coming out, chips that are shipping based on FinFET technology. It's a complex technology for sure. Between us and our ecosystem partners, I think that we're seeing Arm-based technology that is fully exploiting the benefits of FinFET. Of course, everyone's looking at the next generation. We are in early engagements, as we normally are, with the people developing the processes, looking at what the pros and cons are going to be of the next generation technology. Thinking about how that impacts our processor developments and our other IP developments so that we can take best advantage of it.
Through the collaborations that we have with the innovators in this space, making sure that the process itself is optimized for Arm-based SoCs. The depth and strength of our relationships with people doing process development means that when our processor licensees come to build their chips, we think we will have co-optimized the process, the processors, the other IP to optimally benefit from next generation FinFET technology. That is a set of deep collaborations that we have going on, a continuation of the work we've done for a number of years. We think that brings a lot of benefit to our partners.
Okay. You mentioned a couple times on the call servers networking. You made some highlights, Cavium EZchip, for example. How much work are you doing directly with the system ODMs as well? Is that an opportunity that's evolving nicely for you or not? Thank you.
Yeah. We have ongoing discussions with networking equipment companies, for example. We've seen the growth of Linaro, which is the organization that we set up to create some of the software componentry that's required for the enterprise. That organization is going very well. We're seeing more and more partners join. We're seeing more and more contribution of engineers. The engineering team is growing. On the whole, the ecosystem is developing. The end equipment companies, some of them are getting involved in that themselves. We're seeing this broadening out of the ecosystem that is driving the Arm architecture into some of these markets. I'm very pleased with that progress.
Okay, great. Congratulations on the strong start to the year.
Thank you very much.
The next question comes from the line of Andrew Humphrey from Morgan Stanley. Your line is now open.
Hi. Thanks for letting me on. Just a quick question on servers, if I may. You have several deals signed that have yet to start shipping. Clearly some of the opportunities you've highlighted there in the past you're looking to address during 2015. I just wanted to, I guess, get confirmation of whether that can be a material driver one way or the other for royalties this year, and how much of a delta that could be to your overall expectations on royalty.
I don't think that server shipments are going to be a material driver of royalty this year. I think we're still in the development phase of that. You can buy an Arm-based server right now. It's great that companies like Gigabyte have announced more boards based on ARMv8-A for the server space. It's progressing forward. I don't think it's going to be a meaningful driver of royalty revenues this year. It's probably more into 2016, 2017.
Okay, thanks. Maybe one follow-up. Just kind of talking about your expectation for 15% outperformance of the industry. Looking at
Second half, this is on the mobile side. Looking at the second half of this year, given that we have a lot of V8 devices now in the market, would it be fair to assume that your outperformance of the industry in the second half could be greater than that 15% long-term figure?
I think 15% above industry is obviously something we've achieved looking back a number of years, something we expect to achieve looking forward a number of years. Obviously, we're going to go through phases where the growth is stronger or weaker than that. I think looking at, as we said in February, looking at 2015 and 2016, I think there's a good chance that we're going to go through a phase that's stronger than the average. Partly because of the comparison against the inventory correction of 2014, partly because of the trajectory of the V8A ramp.
Very good. Thank you.
The next question comes from the line of Youssef Essaegh from Barclays. Please go ahead.
Hi. Thanks for letting me in the call. Just a quick question, still on the server front. I'm asking in the context of AMD's announcement last week that they would be exiting the dense server space, which seemed to me to be where they were trying to concentrate their Arm server efforts. If you just give us a quick review of where do we stand from a vendor commitment point of view, that would be great. Thank you.
Sorry, vendor servers, you mean?
No, sorry. We've seen a lot of announcements of companies that make server chips on board with the Arm 64-bit drive over time. Some of them have dropped off the race, including, for instance, AMD last week. I'm just wondering if you can give us a little bit of an overview of where do we stand in terms of, are we still very committed, and if we have any clarity on the first response from the end market from companies that would be adopting Armv8. Thank you.
Well, I think the level of interest we see in Arm-based servers remains very high. I don't think AMD had gone as far as to say that they were dropping out of the Arm-based server market. I know they Oh, I see. Sorry.
Sorry. Just to clarify my point. What they have said is they are exiting the dense server space, this is where SeaMicro was bringing added value, I was thinking that their effort of [668 core] sort of chips would be in line with the effort to bring Arm into the server space.
Okay. Well, I think generally, as I say, the end demand for Arm-based servers remains very high. Everyone I speak to absolutely wants an alternative. We've seen announcements over the last little while about products based on Arm, with chips from EZchip and Annapurna, continued success for people like Cavium. A lot of interest there. We're still building out the ecosystem. We're seeing more boards. I'd say overall the progress is positive. It's going forwards. I think we are going to see more products. We are going to see more semiconductor devices from different partners through this year. For me, there's always going to be ups and downs as we go into a new market like this. I think we're broadly on track for where we wanted to be.
Thank you. Can I just have a quick follow-up. You mentioned that a major microcontroller vendor has decided to join the Arm camp this quarter. Is there a way for you to elaborate a little bit more?
Well, when they've got public products that they want to talk about, I'm sure they'll talk about them publicly. For now, we're going to have to be a bit vague on that one.
Okay. Awesome. Thank you very much.
The next question comes from the line of David Mulholland from UBS. Please go ahead.
Thanks. Just two quick questions, if I may. Firstly, we've talked a lot about Armv8 in terms of the penetration and doing very well at 3.5% on a unit basis. Can you give us some clarity as to how much it might be contributing of your royalty revenues, even if it's just a ballpark at this point? Secondly, on the acquisitions you've done around communications IP, I just wonder if you could talk a bit about what the key focus areas are for that. Is it just Internet of Things, or are there any other areas you think you can take that into over time?
Yeah. David, hi. Tim on the royalty. Yeah, not surprisingly, 3.5% unit shipments translates into a higher proportion of value. It's meaningful, but we're not disclosing the precise number at this point. On the acquisitions, Sunrise Micro have a long track record in building very low voltage, very energy efficient radios. We're looking to use that technology as part of our product offering for Internet of Things, which would include wearables, but also sensors deployed remotely running on very low power supplies. Maybe from solar cells or scavenged energy. Energy efficiency is a huge driver for the deployment of IoT, and that's what a lot of this technology brings. We'll be able to optimize the software stacks with the radio, with the processor, and provide a very complete offering there.
A key technology driver around that is Bluetooth Low Energy, that we think is going to be a key communication standard for IoT.
Just one quick follow-up on that. Can you possibly comment, obviously you knew the company very well in the past, but was the acquisition driven because it's something customers were increasingly looking you to provide, or just something that you've decided this is the right strategy going forward?
Well, a bit of both really. We're seeing demand from customers who want to be able to take building blocks around standards such as Bluetooth LE and integrate them in their chip in a rapid and as risk-free way as possible. By us having a proven implementation, then it enables customers to get to market quickly. We think it's important for our strategy of helping accelerate IoT and our strategy and our desire to profit from the growth in IoT. It's as much about responding to customer demand as anything else.
That's great. Thanks very much.
The next question comes from the line of Brett Simpson from Arete Research. Please go ahead.
Yeah. Thanks very much. Simon, Intel recently launched a new family of chips under the brand Core M, which on the face of it has got very similar die size to a lot of the 64-bit apps processors and around 80 millimeters squared. It's supporting fanless designs, two-in-ones, and notebooks like the new MacBook. Can you maybe talk about how the latest V8 apps processors might compare with Core M in terms of performance power? Whether we're going to start to see the Arm community get more aggressive this year in these types of markets going head to head with Core M. Thanks.
We think what we have in the current lineup enables people to build clamshell form factor devices. In fact, just recently we've seen new Chromebooks launched based on some chips from Rockchip really optimized for power and low cost. I think some of those end Chromebooks sell for about $150. We are helping enable very low price points there. We think about Cortex-A72, and its scalability from single core up to quad and octa-core implementations. I think we have a technology that can enable processors to deliver the performance at the power consumption required for a great consumer experience of a clamshell device.
Now, whether Arm's partners get aggressively into this space, as you say, well, it's entirely up to them, and it's based on how they view the prospects of competing and profiting in that market versus other opportunities that they might have. I think our technology stands up to that sort of end application area. If our partners want to go there as Rockchip are doing, then that's great.
Simon, maybe just as a follow-up. When I look at the royalty rates you're now achieving particularly with octa-core configurations in 64-bit, it's clearly we're seeing we're in a phase now where rates are going up, which is great. Where do you think the limits long term might be where chip makers can actually pay for Arm IP? You've created recently a systems division, which is not something we've seen historically. Do you think there's scope for Arm to perhaps start getting paid for royalties outside of the silicon domain? Maybe higher up the value chain at the services layer looking at key opportunities going forward.
In terms of the affordability of licensed IP, as we've spoken about many times before, we are at pains to make sure that our model is affordable by our licensees and that we never become egregious in what we are trying to extract by way of value, whilst at the same time getting paid for what we do. Developing these complex SoCs requires a lot of complex building blocks that go inside the chip. If it's more economically viable to outsource that through the combination of upfront license fees and royalties, then companies are going to do it. As these chips get more and more complex, there is the opportunity for us to be the outsourcing partner for a lot of the building blocks that don't differentiate the end product.
At any one time, our licensees can focus on the things that are greatest value add and bring their own skills to bear. It's hard to say what is the limit of it. It all ultimately comes down to the fact there is a cost of the R&D that goes into the creation of those building blocks. That needs funding. The outsource model is a very effective way to do it. I think growing complexity is something that helps drive our business and will drive our future growth.
On the systems division you've created and getting paid outside of sort of silicon today, do you think there's even a scope for Arm to look beyond the current business model and maybe get paid high up the value chain from services companies?
Our systems, we have systems IP, so that's some of the interconnect products, for example, that people need to hook up a processor to memory and a GPU. We've had that within the company for a long time. In our IoT work, there we are looking to create software products that are licensed to non-conventional Arm customers and get paid for that. Develop different business lines for Arm. Yeah, I think there is the opportunity there. We are looking in that case of IoT to build upon the broad deployment of Cortex-M. The Sensinode acquisition, for example, is another way in which we add some more value there. But the software components that provide the control and the management functions of an IoT device is an area where we're developing technology, and we hope to get paid for it.
Thanks very much.
Thanks.
The next question comes from the line of Martin O'Sullivan from Stifel. Please go ahead.
Thanks very much. I had a question about the Mali unit growth guidance of 600 million- 700 million this year. Clearly very strong growth on the year, and clearly cements Arm's position as the number 1 graphics IP vendor. I'm just wondering if you can give us a sense for what's driving the growth there. Whatever you can give there would be good. Thanks.
Well, it really is all of those. The strength of licensing of Mali over the last few years is into many different end markets. Just like we've seen on processors, the unit growth, the royalty growth, comes from a layering of success in different end markets and different design wins. This current round of smartphones, there are many of those which are designed in with [around Mali]. That's going to help contribute to that growth this year.
Okay, great. Thanks very much.
The next question comes from the line of Chetan Udeshi from JP Morgan. Your line is now open.
Hi, thanks. A couple of questions, Simon and Tim. Firstly, there was this question earlier on this weakness in mid to low-end smartphone market. We've seen that in TSMC's 2Q guidance as well. Can you talk about to what extent you have or not have taken that into account when you've given your full year expectations to the market? Secondly, on V8, of course you're not giving any specific royalty contribution in terms of dollars from V8, but can you talk about a like for like increase in terms of royalty per unit that you are seeing with V8 based on shipments that you've already seen on V8? Last question would be, some of the major semiconductor companies selling into mobile market have indicated a pricing pressure to some extent in this market.
How have you seen that in your numbers yet, or how do you expect any impact from that on your royalty growth? Thank you.
Okay, three questions in there. Firstly, about low-end and have we built that into our guidance? I would say yes. As we provide guidance, we're looking at the data points that we have, and extrapolating as best we can from what we know. All market commentary is taken into account in there, and that's why we're pointing to the sort of seasonal decline next quarter in the royalties. V7, V8 royalties versus the previous generation. We get more from a V8 chip. We've talked before about the increased royalty rates that we get for V8 processors. Many of the chips that we're seeing containing V8, as I said earlier, high core count, integration with lots of other things. The royalty per chip from those can be quite strong.
Adoption of Mali, strong Mali growth this year as we're expecting, as an example. Very simplistically, I think in the mid-to-high-end smartphone chips, we would expect to see vying for share. The good news on that is that it drives innovation and it drives better value, and a better experience for the end consumer. That does put pricing pressure on ASPs, and given that our royalties are typically a % of that ASP then, some pricing war breaks out and drives pricing down, then we aren't obviously immune to that. We haven't seen any big factor in that in the last quarter. We're not expecting any major shifts in the coming quarter.
Thank you.
As a reminder, if the participants would like to ask any question from keypad and wait for the name to be announced. The next question comes from the line of Aditya Matuku from Bank of America. Please go ahead.
Yeah. Good morning, gents. A couple. Tim, firstly on your comments on seasonality into the second quarter. Given the launch of the Galaxy S6 with 64-bit and the much better reception for this phone relative to the S5 last year, don't you think your two key royalties could do better than normal seasonality? The second question is for Simon on the acquisition of Wicentric. Do you have any plans to increase the range of your portfolio to other connectivity technologies such as Wi-Fi and the broadcasting standards? If you could give any color on that would be helpful. Thank you.
Yeah. I think normal seasonality in the semiconductor industry is typically mid single digits. That from an industry standpoint is what we see. If you look at Arm's royalty revenues in Q2 versus Q1, track that back over multiple years, you'll see that those royalties tend to be flat to down in line with normal seasonality. Where our Q2 royalties come out versus quote normal seasonality, we will see. If there are particularly strong products, then they will obviously have a positive influence. At the moment, relative to the previous question, we are basing our guidance on the industry data that we see, and it's obviously very early on at the moment in the quarter for us to have specific royalty data. Yeah, normal seasonality for Arm Q2, Q1 is typically flat to slightly down.
In terms of the question on Wicentric, their expertise has been around Bluetooth. Our goal is to have the technologies that our licensees want to deploy in IoT. We believe that Bluetooth will be a very common standard that's used. Then again, there are opportunities for around Zigbee, potentially opportunities around Wi-Fi. We'll see how that develops. For now, Wicentric is a very small company. We're looking to scale up what we've acquired, integrate it into an Arm system, and get it deployed to our customers.
Perfect. Thank you.
There appear to be no more questions. I just want to thank everyone for joining the call today, and we will see you for H1 results later in the year. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.