Earnings Call: Q1 2015

Apr 21, 2015

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 question and answer I must advise you that this conference is being recorded today on Tuesday 21st April 2015. And now I would like to hand the conference over speaker today, Mr. Ian Thornton. Please go ahead, sir. Thank you very much indeed, and good morning, everybody. Thank you for joining this call. This is Ian. This is Ian Thornton, Head of Investor Relations at Arm. On today's Q1 results conference call, we have Simon Seagulls, our 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 quarterly results, and then we'll open up the call to a Q and A session. As a reminder, the presentation and press release can be found on the Investor Relations website at www.arm.com/ir. Before I hand over to them, I'll have to read out a few words with respect to this conference call and what we are about discuss. The contents of this conference call are being directed only to those of you who have professional experience in matters with to investments and the information communicated on this call is being made available only to investment professionals. Any person's present this call, who does not have professional experience in matters related to investments should not act or rely on the contents of his call. The following conference call will contain forward looking statements which are 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. And on this note, I'll hand over to Tom. Thanks, Liam, and good morning. Thank for joining our Q1 twenty fifteen results conference call. I will run through the business highlights and then hand over to Tim to provide some more detail on the numbers. Following Tim, there'll be some time for Q And A. So first, I'll give a quick reminder of what happened in 2014 as this will provide important context when considering 1 2015s results. For ARM, 2014 was a year of robust execution. We saw very strong demand for our latest processes, which leading to another step up in license revenue. However, we experienced an end market inventory correction which particularly impacted application as in smartphones and resulted in lower than normal royalty revenue growth for Arm, particularly in the first half of twenty fourteen. At the start of the year, we quarter of 2015 has continued where Q4 left off. Royalty revenues have continued to accelerate. Processor royalty revenues and ship shipments both grew 31% year on year. Again, we need to consider the context. H1 2014 was the nadir of the inventory correction and so a big year on year increase was to be expected. Demand for our technology has remained strong. We is reflected in license revenue that remains at this higher level and as expected, Q1 license revenue is similar to Q1 a year ago. Remember that Q1 2014 saw 38% year on year growth. So looking through multiple years, our licensing revenue this quarter is still much higher than we would have expected just a couple of years ago. So overall, we're very pleased with these results. I'll 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, service to smartphones to sensors. We signed another Arm V8A architecture license with the company developing application processes for mobile computing devices. 8 of the licenses signed were for ARM's Cortex A Series Processors. These included 4 licenses for ARM V8A Processors, including 2 for the latest Cortex A72 Processor. We have also continued to see strong demand for our Cortex M processes, 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 1 important semiconductor company who has made a made made commitment to using ARM Processors in their chips. Previously, this company was developing chips mainly using alternative architectures. Finally, recently announced video processor. And we signed 2 more POP IP licenses during Q1. POP IP is physical IP that has been optimized enhance the performance of ARM Processors, including a Cortex A53 on a 28 nanometer process. And now I'll switch to the royalty side of the business. Arms Royalty revenues are reported 1 quarter in arrears, so our royalty 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 3,800,000,000 ARM processor based chips. This is also a 31% year on year growth and represents an additional 900000000 chips. Part of this increase is a 20 has grown more rapidly than we had expected. In total, about 130,000,000 armed V8A 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 RMB8. As anticipated, we saw strong take up of RMB8A premium devices for 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 $200 and this is helping drive to drive volume of ARM VAs. I met with some So I think this trend to more on B8A is likely to persist. Our licensees are also deploying more and more armed technologies into markets beyond mobile. In Q1, they reported 1,300,000,000 ARM based microcontrollers and smart cards, a 40% year on year increase. Of these markets will continue to grow. We also saw many more announcements around servers and networking infrastructure. CAvium demonstrated a comprehensive cloud RAM application on its 48 core 64 bit Arm V8A ThunderX system on chip. EZ Chip introduced the tile MX 100, a high performance networking chip with 100 armed cores, delivering scalability and power efficiency for data centers and carrier networks. Gigabyte Technologies introduced 2 new ARM boards for servers and enterprise infrastructure, one developed using Applied Micro's ex gene chip and the other using Anapurna'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 2 companies, Y Centric and Sunrise Micro devices. Both of these companies will help extend our technology offering for company 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 case the 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. Good morning, everybody. Hopefully most of you will have had a chance to have a good look at arms Q1 15 earnings release, and just to remind you that the quarterly slide set is available on our website. As usual, provides further backup. So again, in summary, without being 2 repetitions of what Simon's been through, overall Q1 dollar revenues $348,200,000 compared to consensus of around $340,000,000. Processor licensing, revenue $109,000,000, slightly lower than the year ago, following multiple periods of accelerated license revenue growth, which has been about 30% compound over the last 5 years and in line with previous guidance, we continue to expect license revenue growth of 5 percent to 10 percent Granum in the medium term. Group order backlog at the end of Q1 'fifteen was down about 7% sequentially, but 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. 5% contribution from backlog, which is within the normal range of 40 to 60% that we typically see. Processor royalty revenue at $167,500,000, up 31% year on year. Simon said, just to remind that Q1 'fourteen included a 1 off deduction of $5,000,000 relating to one of our major customers over reported royalty revenues from prior years. So if we exclude that, then the underlying process of royalty revenue growth in Q1 was 26%. And in the first half of 'fifteen, we will be benefiting both from the continued growth in market share from base technology across multiple end markets and as discussed, you know, relatively easy year on year comparatives against the first half of 'fourteen as Simon explained. In the second half of twenty fifteen, we expect to benefit increased deployments of V Eight technology, V Eight A technology, our latest generation of processors in the newest smartphones and tablets. And these chairs typically have a slightly higher royalty rate than the previous generation. In Q1 'fifteen, A based chips only made up about 3.5 percent of total chips reported, and we expect this to become a much more meaningful proportion in 2nd half. Moving on to cost. Normalized OpEx in Q1 was 1,000,000. We 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 investments in R&D. The R and D was growing about 15% over the past year to just under 3400 people at the end Q1, with the majority of the extra employees being R And D Engineers. Normalized OpEx in Q2, assuming effective exchange rates similar to current levels at around 150, are expected to be in the range of 102 to 104,000,000 and this reflects the ongoing organic investment 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%. And similarly, we expect 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. So looking forward, we made an encouraging start to 20 15 with more leading companies choosing to deploy our technology in their products. And 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 And in the shorter term, looking to Q2, relevant industry data for Q1, which is the shipment period for armed Q2 royalties pointed to a sequential decrease in industry wide revenues broadly consistent with normal seasonality. And in this context, we expect group dollar revenues for the 2nd quarter to be in line with current market expectations of around $55,000,000. So with that. Thanks, Tim. We'll hand over to Q And A. And 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. The first question today comes from the line of Ahmed Harchandani from Citigroup. Please go ahead. Good morning, gentlemen. I'm a search and learning from Citigroup. Thanks for taking my questions. A 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 and emerging markets. A few companies have talked out 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 And secondly, as a quick clarification, you commented on V Eight becoming a much more meaningful proportion of shipments in second half. Could you maybe quantify the same? Thank you. Okay. So thanks for the question. I mean, in terms of the end markets and the potential slowdown in the emerging markets. I mean, 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 of various strengths and weaknesses of various currencies around world. You know, what's 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 company's building chips for these products. And what's going to happen in the short term is always hard to predict, but I think the medium to long term trends are still there. There is a migration to VA based technology. All the semi companies supplying handset OEMs are moving their roadmaps or move their roadmaps to armed VAA. And so we expect to see this migration over time. We've said before that we would expect the end of year run rates to be about 50% of handsets being based on V Eight A. I say, if anything, the progress in Q1 is encouraging, and we might be ahead of that. But I we'll see what happens in the end markets. There's nothing to say that there's any major setback going on. But there's a long way to go through the year. We can't control tumor spending. And there's whenever we have these calls, there's something going on in the world that may impact consumer confidence, and this quarter is no different from the others. But the long term trends for us, I think, unchanged. Thank you. The next question comes from the line of Andrew Dunn from Royal Bank of Canada. Thank you. I had a question on V Eight, just on the number of licenses and license fees. 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? In VAT, the number who are shipping is 9 and that's up a couple from last quarter. A number of licensees off the top of my head. I'm not sure, actually. We'll quickly do a look up on that while we're talking. The next question comes from the line of Johanna Shala from Deutsche Bank. There, gentlemen. Thanks for taking my question. I was just wondering if you could really give us a bit more clarity on the outlook licensing side. I mean, I do understand that the business is quite lumpy on a quarter by quarter basis, but if I look at your long term messaging it feels like that you said kind of round about 10% growth longer term previously. Now you're saying 5% to 10%. I just really would like to understand that what the reason for that is? Is it kind of a long tail of revenues now phasing out from previous smartphone the consolidation we have seen over the last few years, is it more outside of mobile? I know you've always said it's slowing, but it kind of feels things are slowing a little bit more than what you anticipated? Thank you. Yes. No, that isn't the case. I think we talk now for a long time through this sort of accelerated lighter revenue growth of a more normalized run rate being into sort of, you know, it characterize sometimes it's mid to high single digits, you know, sometimes it's 5 to 10%, sometimes around 10%. And I said in February when we were up that, you know, the the compound growth expectation for licensing that the market has over the next 5 years of 7.5% is the right place and our guidance today is consistent with that. So there is no change. As we've said over the last 4 or 5 years with the not going to grow licensing revenue at 30 percent forever. And in most of ARM's history, it's grown at mid to high single digits and that's kind of what we going forward, and 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 Royal in the quarter, just how that grew sequentially and year on year if you're sharing that number? Thank you. So year on year growth, I believe, was 45 percent. 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've licensed on VAA. And the answer is 41. Next question please. The next question comes from the line of Pierre Ferragu from Bernstein. You've got Matt Morrison at Bernstein here covering the call for Pierre. You guys posted another incredible growth in microcontrollers around 40% year on 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 for 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 300 in the quarter. And the migration of our customers' product portfolios over to Arm and the growth of 30 the 32 bit sector of microcontrollers. We have a high share there where we have a very high there in, microcontrollers in the 32 space of microcontrollers overall in microcontrollers. 26% market share. How high that can grow? Well, plausibly that can go up to percent. We will see the decline of eight bit micros over the next your continued decline of eight bit micros next few years. But you know, 100% that's going to take a very, very, very long time and it is probably never in reality. APIP micros be shipping for an enormous will continue. We're at pricing points, which are very, very low and 32 bit microprocesses in microcontrollers provide huge higher performance, higher levels of system efficiency, much better programming environments, access to operating systems. So 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, but you will see the legacy continue to come. So I expect it to continue to grow share and the sort of rates that we have done over the last couple of years. And to continue to exceed in that market. The next question comes from the line of Matt Ramsay from Canaccord Genuity. Please go ahead seeing the commentary that you had in your prepared remarks about the percentage of VA shipments today that were in the mid tier. I think a lot of us had assumed that the majority of that was without a Cupertino. If you could talk a little bit about the mixture of the 8 shipments 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. Well, when we look at the shifts that our licensees are built based on VA on V8A. What we've seen is a mixture of Octor core devices, big little devices, and but also many, cord core cortex API devices. And it's those core A53s that are going into many of the mid range and entry level phones. So I think we talked about this through last year. The kind of product lineup from our licensees is very broadly penetrated on V8A. So there are chips targeting the premium end all the way down to the low end based on these combinations of cortex A57 and So given the market dynamics of faster growth in the mid tier, it doesn't surprise me the way we're seeing that come through. You know, I think what we saw at Mobile World Congress was a lot of innovation across the the whole spectrum of of devices, innovation at the top and you'll see that continue to ripple down into the lower cost devices. So when I look out over the next year as these devices start shipping, obviously the flagship products dominate the news But I think you'll see a lot of the midrange phones shipping strongly. Thank you. That's helpful. And then 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, but obviously obviously has a headwind to maybe some in device sell through, which affects royalties. You could just give us the puts and takes from your perspective on a stronger dollar versus a weaker dollar and arms over financial results through the rest of the year if things get better or worse there. Any perspective? They're helpful. Thanks. Yes. Well, we we've indicated in the past that a broadly speaking, a 10% strengthening of the dollar against sterling has a sort of 15% positive impact to our bottom line. You know, that's obviously looking at the financials of ARM based on our dollar revenues and our sort of non sterling costs. You know, how as Simon said in his remarks, you know, how some fairly volatile swings around currencies may or may not impact consumer spending in various markets it's clearly beyond our control, but the basic fact remains that arm is a profitable company when the dollar is stronger. Question comes from the line of Achal Suthania from Credit Suisse. Clarification on the VA penetration. So 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. So is it safe to assume that that the number, 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. So there is some some upside to that 50% exit run rate. Right. And then just like obviously, you talked about VIT, have you given any color around the big little, penetration as well along with V Eight? We haven't, but as I said earlier, we're seeing a whole spectrum of combinations of core X-eight fifty seven core X-eight fifty three cordcore A53, octa core A53s, where 1 core cluster is optimized for energy efficiency in for performance. So that's a big little combination. And then the more sort of classic Cortez-eight fifty seven, Cortez-eight fifty three, big little combos I think in the V8A chips though on average, we're seeing a higher core count than we've seen in V7 and there seems to be a trend towards more big level. Right. And just maybe one more one more follow-up, Simon, on the royalty growth, obviously you had 26% underlying growth this year and you talked about industry revenues growing 4% Can you give us some color as to how much of that, like you're growing, you're basically outgrowing the industry by 22% how much of that is being driven by, by VA or big little adoption. Not that much really. I mean, it's, you know, when we think about the chip shipments, you know, growing at 31%, you know, that's about a higher, higher volumes of mobile devices and it's about market share gains in some of these other sectors, you know, the microcontroller units up 40% year on year, for example, that's obviously a significant gain. So 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 Ian Lamb from Liberum. Please go ahead. Hi, there. Yeah. It's Owen, a question on licensing and the cyclicality there. I think PD licensing was down 2% year on year in Q1 'fifteen. I was just looking through my model and I think it was 2009 was the last time year on year. And over the last 6 years, you've had very strong growth there. I was wondering from a high level, what's driving the slowdown in licensing? Is it are you could you be saturating your Versus VH licensing pool? And do we need V9 to come before we see a material acceleration in licensing growth again? And then just a follow-up, could you tell us what the year on year change in the back was? How much was it down? So in terms of whether I think we've saturated VA licensing, I don't think so, you know, 40 one companies, there's a lot who haven't licensed, on BA. I think we're at a a pretty reasonable place in the adoption of ARM BA compared to previous generations of technology. So I think there's a ways to go on that. You've got to remember that off the back of 5 years of 30% compound growth in our licensing, we're at a very high level now. And been a bit of a broken record saying it's going to revert to the 5% to 10% range over time. We think that is going to happen. Some quarters it will be up. Some quarters will be flat. Some quarters 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 and 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. And then just a very brief follow-up on the most early VA adopters seem to be taking standard of ARM cores, A57, A53, but it looks like the next generation of big chip vendors will customize or will have optimized implementations of V Eight for their next generation products. Given that they have to do lots more work themselves when they use a customized version of RMV Eight, 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. I mean, actually do, just to go what you what you said there, the very 1st licensees of VA were architecture licensees. These were is like Cavium, for example, who had create, who have created products, that take arm into new market It was in a wave of, Cortex A53, Cortex A57 licensing. We're now seeing strong adoption of Cortex A72 only announced that a couple of months ago. So we're expecting continued licensing adoption and then ship shipments of our VAA implementations and we expect to see architecture license 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 rule of semiconductor industry. The next question comes from the line of Alex Kvaaner from JMP Securities. Please go ahead. Thank 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. Shipping based on FinFET technology. So the 14 stroke 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. So it's a complex technology for sure, but between us and our ecosystem partners. I think that we're seeing on base technology that is fully exploiting the benefits of FinFET. And then, 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. And so through the collaborations that we have with the innovators in this space, making sure that the process itself is optimized for ARM based SoCs. So 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 process the other IP to optimally benefit from next generation FinTech Technology. So that is set of deep collaborations that we have going on, a continuation of the work we've done for a number of years. And we think that brings a lot of benefit to our partners. Okay. And then also you mentioned a couple times on the call servers networking. You made some highlights, Cavienne Easy 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. Yes. I mean, we have ongoing discussions with networking equipment companies, for example, we've seen the growth of Lanaro, which is the organization that we set up to create some of the the software componentry that's required for the enterprise, that 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. And so on the whole, the ecosystem is developing, the end equipment companies, some of them are getting involved in that themselves. So we're seeing this broadening out of the of the ecosystem that is driving the art architecture into some of these markets. So I'm very pleased with that progress. Okay. Great. Congratulations on the strong start to the year. The next question comes from the line of Andrew Humphrey from Morgan Stanley. Just just a quick question on servers, if I may. I mean, you have, several deals signed that have yet to start shipping. And 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 for royalties this year and and much of a delta that could be to your overall expectations on royalty? I don't think that service 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 gigabytes have announced more boards based on on VAA for the server space. So it's progressing forward, but I don't think it's going to be a meaningful driver of royalty revenues this year. Probably more into 2016, 2017. Okay, thanks. And maybe one follow-up. Just kind of talking about your expectations for 15% outperformance of the industry. Looking at second half, I mean, this is on the mobile side. Looking at second half of this year, given that we have a lot of V Eight 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 we I mean 15% above industry is obviously something we've achieved looking back a number of years and 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. And I think looking at as we said in February, looking at 2015 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 14. Partly because of the trajectory of the VAT ramp. The next question comes from the line of Youssef Asahi from Barclays. Please go ahead. 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 the ARM server efforts If you just give us a quick review of where the withstand from a vendor, commitment point of view, that would be great. Thank you. Sorry, Vendek servers, you mean? I'm sorry. I meant So, we've seen a lot of announcements of, companies that make server chips onboards, with the ARM, 64 bit drive. Over time, but then some of them have dropped off the race, including, for instance, AMD last week. So I'm just wondering you can give us a little bit of an overview of where do we stand in terms of we're still very committed and, if we have any clarity on the first response from the end market, from companies that would be adopting the RMB 8? Thank you. Well, I think the level of interest see in ARM based servers remains very, very high. I didn't think AMD had gone as far as to say that they were dropping out of the ARM based server market. I know they I'm sorry, just to to clarify my point. What they what they have said is they are they are existing the, then server space. And, this is where CMI crowe, was, bringing added value and, I was thinking that, therefore, to 668 core, sort of chips, would be in line with the, therefore, to bring the arm into the service space. Okay. Well, I mean, I think generally, as I say, the end demand for ARM based servers remains very, very high. Everyone I speak to, absolutely one alternative. We've seen announcements over the last little while about products based on chips from, easy chip and Anna Perner, and continued success for for people like Cavienne. So a lot of interest there. We're still building out the ecosystem. We're seeing more boards. I'd say overall the progress is, is positive. It's going forwards. And, you know, I think we are going to see more products. We are going to see more semiconductor devices from different partners through this year. And for me, there's always going to be ups and downs as we go into a new market like this. But I think broadly on track for where we want it to be. Thank you. Can I just 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 when they've got public products that they want to talk about, then I'm sure they'll talk about them publicly. But for now, we're, we're going to have to be a bit, bit vague on that one. Okay. 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 VA in terms of the penetration and doing very well at 3.5% on a 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? And then secondly, on the acquisitions you've done communications IP. I just wonder if you could talk a bit about what the key focus areas are for that. Is it just internet things or are there any other areas you think you can take that into over time? Yes, David, hi, Tim on the royalty. Yeah, not not surprisingly, you know, 3 3.5 percent, you know, unit shipments translate into a higher, higher proportion of value it's meaningful, but we're not disclosing the precise number at this point. And on the acquisitions. Sunrise Micro have a long track record in building very low voltage, very energy 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 a very low very low power supplies, maybe from solar cells or scavenged energy. So 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 software stacks with the radio with the processor and provided a very complete offering there. A key technology drive 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, 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 in a record and as risk free way as possible. And by us having a proven implementation that enables customers to get to market quickly. So 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, but it's as much about responding to customer demand anything else. That's great. Thanks very much. The next question comes from the line of Brett Simpson from Arete Research. Please go ahead. Simon, until we recently launched a new family of chips under the brand core M, which on the face of it, it's got very similar dye size to a lot of the 64 bit apps processors and around 80 millimeters squared. And it's supporting fanless designs 2 in 1s and notebooks like the new MacBook. Can you maybe talk about how the latest V Eight apps processors might have been hair with core M in terms of performance power and whether we're going to start to see the on community get more aggressive this year in these types of markets going head to head with core M? Thanks. So 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 a rock chip, you know, really optimized for power and low cost I think some of those end Chromebooks sell for about $150. So, you know, we are helping enable very low price points there. And then we think about core tech A72 and its scalability from single core up to, you know, quad and octa core implementations then I think we have a technology that can enable processes to deliver the performance of the power consumption required for a great consumer experience of a clamshell device. Now, whether arms partners get aggressively into this space, as you say, kind of, well, it's think highly 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. But I think our technology stands up to that sort of end application area. And if our partners want to go there as Rockchip are doing, then that's great. And Simon, maybe just as a follow-up, when I look at the royalty rates you're now achieving with particularly with Oktokore configurations in 64 bits. I mean, it's it's clearly we're seeing we're in a phase now where rates are going up, which is great. But where do you think the limits long term might be where chipmakers can actually pay for RMP. And and, you know, you've created recently a systems division, which is not something we've seen historically, do you think there's scope for armed to perhaps get start getting paid for royalties outside of the silicon domain? So maybe higher up the value chain at the service where looking at key opportunities going forward? So, I mean, in terms of the affordability of license 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 then we never become egregious in what we are trying to track by way of value, you know, 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 to the combination of upfront license fees and royalties, then companies are going to do it. So as these chips get more and more complex, there is the opportunity for us to be the outsourcing partner for a lot the building blocks that don't differentiate the end product. So at any one time, our licensees can focus on the things that a greatest value add and bring their own skill to bear. So it's hard to say what is the limits of it. It still ultimately comes down to the fact there is a cost of the R and D that goes into the creation of those building blocks, that needs funding. The outsourced model is a very effective way to do it. So I think, growing complexity is something that helps drive our business and, and we'll drive our future growth. And 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 higher up the value chain from services companies? I mean, our systems we have systems IP. So that's some of the interconnect products, for example, that people need to 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 who that are licensed to non conventional armed customers and get paid for that. So develop different business lines for So yeah, I think there's the opportunity there. You know, we are looking in that case of IoT to build upon the broad deployment of core tech M, which the Sensenate acquisition, for example, is another way in which we add some more value there. But the soft ware 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. The next question comes from the line Yes. Thanks very much. I had a question about the Marley unit growth guidance of CHF 600,000,000 to CHF 700,000,000 this year. I mean, clearly very strong growth on the year. And, clearly, clearly, Cement's arm position. The arm's position is the number one graphics IP vendor. I'm just wondering if you can give us a sense for, what's driving the growth tell you can give there would be good. Thanks. Well, I mean, it really is all of those. The strength of licensing of Mario over the few years is over the last few years is into many different end markets. And just like we've seen on processes, 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 around Mali. And 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 low end smartphone market 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 given your full year expectations to the market? And secondly, on V Eight, of course, you're not giving any specific role contribution in terms of dollars from V Eight. But can you talk about a like for like increase in terms of royalty per unit that you are seeing with V Eight? Based on shipments that you've already seen on V Eight. And last question would be some of the major semiconductor companies selling into mobile market have indicated of have indicated a pricing pressure to some extent in this market. So how that how have you seen that in your yet or how do you expect to any impact from that on your royalty growth? Thank you. Okay. So three questions in there. So firstly about a low end and how we built that into our guidance. I mean, I would say yes. I mean, we're looking as we provide guidance, we're looking at the data points that we have and extrapolating as best we can from what we know. So yeah, all market commentary is taken into account in there and that's why we're pointing to the seasonal decline, next quarter in the royalties. The VA sorry, I've now forgotten what your middle was BH, BH royalties versus the previous generation. So we get more from ABH chip. We've talked before about the increased royalty rates that we get for VA processes. Many of the chips seeing containing V Eight, as I said earlier, high core count integration, lots of other things. So the royalty per chip from those can be quite strong adoption of strong Moly growth this year as we're expecting as an example. So very simplistically, I think in the mid to high end smartphone chips, we would expect to see mucking per 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 percentage of that ASP then, you know, some pricing wall breaks out and drives pricing down then, you know, we are obviously immune to that. But 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 The next question comes from the line of Adita Matuku from Bank of America. Then firstly on your comments on seasonality into the second quarter, given the launch of the Galaxy S6 with 64 bit and the much better of the for this phone relative to the S5 last year. Don't you think your 2Q royalties could do better than normal seasonality? And the second question is for Simon on the acquisition of Ycentric. Do you have any plans to increase the range of your portfolio to either connect technologies such as Wi Fi and the broadcasting standards. If you could give any color on that, that would be helpful. Thank you. Yes. I mean, I think normal seasonality in the semiconductor industry, it's typically sort of mid single digits that from an industry standpoint is what we see. If you look at arms 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. So where our Q2 royalties come out versus normal seasonality we will see, you know, and if there are particularly strong products, then you know, they will obviously have a positive influence. But at the moment, you know, relative to the previous question, we are basing our guidance on the industry data that we see and it's obviously very early on the moment in the quarter for us to have specific royalty data. So yeah, normalcy I think for our Q2, Q1 is typically flat to slightly down. And in terms of the question on Ycentric, their expertise has been in been around Bluetooth. Our goal is to have the technologies that our licensees wanting to deploy in IoT, we believe that Bluetooth will be a very common standard that's used, but then again, there are opportunities for around Zigbee, potentially opportunities around Wi Fi. We'll see how that develops for now. YCentury is a very small company. You know, we're looking to scale up we've acquired, integrated into an ARM system and get it deployed to our customers. So there appear to be no more questions. So I just want to thank everyone for joining the call today and we will see you for results later in the year. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.