Earnings Call: Q4 2014

Feb 18, 2015

Okay. Good morning, ladies and gentlemen. I'm Stuart Chambers, chairman of Arm Holdings, and it's my pleasure to Welcome you to arms prelim's announcement of our, results for 2014 full year. Which I'll be handing over very shortly to Simon and Tim to run us through. Just before then, couple of words of contact from me. This is, the end of my 1st year as chairman of Arm. I had some pretty high expectations. I have to stay coming in of how interesting, how fascinating indeed and how enjoyable it was gonna be and haven't been at all disappointed. And a pretty intense 4 months induction. Good to see if Patricia here and a few others. Spent that obviously traveling around looking at the various armored and also meeting, a lot of people. And I still in between board meetings, I meet Simon's team and indeed their teams. And every time I do, it reinforces the enthusiasm, the skill of the people at Arm, who continue to sort of push forward this arm story. So, very enjoyable 1st year. Just a quick summary of board changes last year. So John Buchanan stepped down. The beginning of the year as the chairman on on medical grounds. We also had, Philip Rowley and Eric Maurice stepping down as non execs. And joining the board last year was myself at the beginning of the year as the new chairman and also then John Lu joined from China. As our newest non executive director, and he joined in the fourth quarter. And the final, last but not least, board change was, as you may recall, Tim announced in May his desire to retire, looks kind of young for that, but such a plan. And, so he he his decision to retire this year, and, obviously, we're very, sad to be will be very sad to be saying farewell to Tim when the time comes. Nevertheless, we're absolutely thrilled and delighted to be able to welcome Tim's successor, which is Chris Kennedy, And Chris, I'm gonna embarrass by just asking to stand up and just wave, who's with us today. Very warm welcome, obviously, to Chris when he joined. In terms of the dates, the specifics of that not set yet, we're still working that through. So the handing of the baton will be defined. And as soon as we know those dates, we'll obviously the announcement, let you know. So, please don't ask them about dates where you can if you like, but they won't be able to tell you. And I think that's probably enough for me. So I'll hand over to Simon for our results. Thanks, Stuart, and good morning, everyone. Thank you for joining us today for Q4 and full year 2014 results. Before we start, I'll just refer you to the usual, cautionary statements and we'll take these as read. So it's been a great year for Arm. And what we're going to do today, I'm going to talk, give an overview of the business what's been going on, the progress that we've been making in our key markets. And then I'll hand over to Tim. He'll talk through the specifics of some of the numbers and then we have time at the end for Q And A. So let me start with some of the highlights of what went on in 2014. So it was a great year for execution. Our license revenues increased strongly, up 30% year on year, And there were record units shipped by our customers 12,000,000,000 chips containing ARM Processors were shipped by our customers and that drove the royalty growth in the business. And you'll see later on how those 12,000,000,000 chips have enabled us to grow market share in our key markets, mobile, embedded intelligence and enterprise infrastructure. As we look at this business going forward, we see more opportunities to grow share to make armed technology relevant in more and more markets. And so we've been investing in the business to capitalize on that, and we see further opportunities for continued investment as we go forwards. So with the performance of the of the top line, with the investment in the business, still though, our EPS grew 17%. And we've recommended an increase in dividend of 23% for the full year. So I think it's been a great year for execution. What I'm going to do now is just look at some of the key markets, and what's been going on. So let me start with mobile. Mobile is a market that's continuing to evolve, through last year. There was a bit of a sentiment that there's no innovation in in smartphones. And and I think that's not the case at all. We've seen a lot of innovative devices come through, and we're gonna see more, coming up shortly. The way in which mobile has developed is you can think of it as kind of 2 main markets. You have developed economies, where people have been using smartphones and mobile devices for a number of years. And in those markets, the platforms are getting more and more sophisticated, higher and higher performance, bigger screens, more pixels, greater connectivity, and the way in which people are using these devices is changing. It's not just the device you make a call on and surf the web, look up the football results, which I wasn't enjoying last night, but, it's now a device that you can use to interact with many other things. You can use it to, connect with your car to, you know, switch on the heating before you get in it. You can use it to connect with your home you can use it to open your front door, set your heating. There are many ways in which these mobile devices that people are carrying around are being used in more and more ways, and we'll see that that continue. Now on the other side is progress in developing countries where mobile phones are used very widely, but very few people have access to smartphones. That's changing as smartphones become less and less expensive. And we're seeing that that advance in really quite phenomenal ways right now. You can buy an unsubsidized LTE phone for $65. And that is a price point that a few years ago most people would think was just you're never going to happen. And as people get access to these devices for the first time, it's going to open up a world of information. The kind of information people can access is is very fundamental to quality of life. It's access to health care information, It's access to education in general. It's access to the market for products and services that they might create. So it's really going to change the way in which people access access the world. So we're really excited about about the developments in mobile, and long may that continue. As we look though at at mobile computing, it's more than smartphones. It's about tablets. It's about clamshells clamshells style, computing, And we're seeing progress, forearm in those markets, particularly as we deliver more and more compute power in these very energy efficient devices. So Smartphones. That's a market where we've maintained, our penetration. Now we place a lot of attention on the application process as a main CPU that is driving the intelligence in these devices, but the opportunity for ARM in mobile computing goes beyond that. It goes into the connectivity, the touch screen, these sensors that are interacting with other devices, and that, in combination drives the volume of ARM Processors in mobile computing. And if you lead through the numbers, you'll see that about 47% of all the chips that were sold by our partners last year 1,000,000,000 was in mobile computing, obviously a lot more than the number of handsets. So great progress in mobile. Now we'll go to, embedded where it has been another great year. We've seen many more, chip designs by our licensees, very strong licensing of our Cortex N series on which most of these products are based, and very high volumes of chips a shift by our partners based on the existing technology. So the number of microcontrollers shipped was 4,400,000,000 which is a vast number of chips. That represents about a 24% market share. If you compare that to the same category definition last year, which was about 19%. So you see a growth of about 5 percentage points there. And it really is the number companies in this space and the breadth of the product offering that is really, really impressive. There are over 3500 different MCUs that you can buy right now from our customers. So whether you want a lot of flash, a little bit of memory peripherals, all sorts of combinations are out there provided by our partners, and that's creating a huge, kind of, portfolio that somebody looking to build an embedded product can now choose from. And there's just vast choice. So the right product for the thing that you want to build is out there. There's already a great starting point and scope for more performance, more integration, as we go forward. And when we look at the companies who are who are building microcontroller, Ready a great starting point and scope for more performance, more integration, as we go forward. We look at the companies who are, who are building microcontrollers, building these, these embedded intelligence devices, we see very strong penetration in arm of of everyone who's playing in the space. The top 10 companies are all shipping products based around Arm. And in total, we've licensed, around 200 companies in total, with Cortex M. And what many of those companies are doing is generating products for these new, emerging markets wearables, smart devices, IoT, which integrates different technologies in different ways to address new and growing markets. So we think as, as we look to the future, there's new ways in which this technology will be used, and it's a really fascinating and dynamic landscape. So now let me talk about, enterprise infrastructure where again, I believe it's been a really exciting year for Arm. Our market share in networking has doubled year on year. This time last year, we were talking about a 5% market share. Here we are today, and our data suggests a 10% market share. So great growth. And all of that is based around chips that have been designed over the last few years by our partners It's the culmination of work that's been going on for a long time, and all those devices shipping today are based on version 7 of the ARM architecture. What's really exciting therefore is as we look forward, new designs coming through based on version 8 of the architecture, which creates both greater volume, we believe, because With that technology, we can address a broader portion of the market, but also improve royalty rates, which will help our bottom line at the end of the day. And a great example of that is what HiSilicon have been doing. They have a device based on 32 CORTEX A 57s. It's a very high performance 64 bit compatible core built on the most advanced semiconductor process. They're shipping that. It's a great example of the kind of work our partners are doing around our technology, creating energy efficiency in something that's typically not been a market that's cared too much about that before. Also in servers, which is the other side of, enterprise infrastructure for us, it's been a great year of progress. We're seeing service shipping right now based on our technology. We're seeing great design work by our licensees, new customers coming to the fore, Qualcomm recently announced some of the details about the work they're doing. So we think there's going to be a great future here. In both these markets though, one thing I do want to stress is we're at the very early stages. These are nascent markets that have required a lot of investment for us to get here. And we're very pleased with where we are, but it's an area where we think through greater investment and continued focus, we can really help penetrate these markets and grow our share more rapidly. So this is a real area where we are continuing to place a lot of focus. Now what I've been talking about so far is is mainly the progress around our CPU technology, but we have a lot of other technology as well. By, turn to our our GPU, our graphics processors. It's been a great year for the adoption of, of our Mali GPUs. We believe we are now the number one graphics IP vendor in terms of volume shipping 550,000,000 ships our partners rather shipping 550,000,000 chips based on our Mali GPU. And you can see there that the growth has been really quite phenomenal over the last few years, and we see no reason why that growth can't continue at similar sorts of rates through 2015. At the end of the day, people need to build chips. And for a long time, we've been focused on creating physical IP to allow people to take their designs implement them on silicon with the highest performance and the lowest power. And we've done some analysis looking at the volume of chips which do actually contain our physical IP. This isn't a data that we typically publish, but the analysis shows, how the uptake of all the work we've been doing over the last few years is really paying off in terms of volumes. So 8,900,000,000 chips, and this is based on wafer analysis we believe last year we're containing our physical IP. And when you look at the range of technologies, it's very, very broad. We're seeing a lot of a lot of our IP being used to serve the microcontroller market. And so a lot of the volume here is based on microcontrollers which are manufactured on more mature technologies where the focus really is about small die size, a low cost, and ultra low power. It's an area where we've been innovating. We're also heavily focused on the overall performance and energy efficiency of the high performance CPUs on the leading edge processes because in those designs, people are trying to cram in as much technology as they possibly can within a power constraint. So whatever work we can do to, facilitate the implementation of those designs hitting gigahertz levels of performance for being able to go into a device, a handheld device that runs on a small battery that is really, really valuable to our customers. So if a lot of our engineers focus on that area, we call this pop IP, And we've seen strong adoption of that technology, which will drive future royalty growth for the physical IP side of our business. So that's kind of what's been going on, over the year as a whole. If I look specifically about Q4 for a moment, The licensing performance very, very strong. Through the full year, last year, we signed 163 licenses. That is a record, and that was helped by very, very strong licensing performance in Q4, fifty three licenses signed, again, a quarterly record. And within those 53 licenses, we saw strong adoption of version 8 architecture products, and we saw more Marley graphics processes in there as well. And if we look at the customers who are licensing this technology, it's a very broad range, but there's a lot of business with the Tier 1s, and we work very closely with them, and it gives us great confidence about how these licenses flow into royalty downstream. Now our customer base, though, is evolving, and one of the fascinating things about my job is the the range of different companies that I get to go and talk to about the range of different work that they're doing all based around our technology. And when when I think about the customers who are licensing our products, it's a very strong repeat business. We have a very loyal customer base. Because we're delivering the right technology. We always have new customers coming to Arm, you know, people who maybe didn't need a microprocessor before in their products. Are adopting arm for the first time, but we're also seeing some diversification away from the traditional semiconductor companies. We're seeing some OEM companies making end products are wanting to get more involved in the design process, wanting to have more control over the technology that's in there. And so people are starting to access our technology and looking to see what they can do in a more vertically integrated way. This is a a way of the world right now, the way that the industry is evolving, and we're evolving our business models and our focus on our customer base to move with that and to continue to prosper. And then we're also seeing, through the through this licensing the fruits of the investment in the technology roadmap over the last few years. Now through last year, we kind of teased you a bit about a product called Maya, Just last week, we did the formal announcement of that. That is now a CORTEX A72. And we rolled that out with, in fact, a complete suite of IP. Graphics processes, optimized video and display processes, physical IP to facilitate that implementation. A complete platform, and that is what our our partners are asking us to deliver. So we've organized the company around this this platform of technology, this this joined up solution because that's what our customers want, and that's what you saw in the announcement last week. So Maya has become called XA Seventy 2 and is delivering phenomenal Foretex N7, and this is a very sophisticated processor designed for microcontrollers. I think probably the most sophisticated, the highest performance processor that you can find in an MCU. That again, is broadening the applicability of ARM Technology. And then also, I want to tease you a little bit more about 2 new products that you'll be hearing about later this year called Teal And Grieve, I see we have a third theme going through our code names here. And these are more focused towards, again, the embedded space where we see a lot of opportunity. Now the reason for pointing these out, these are products we've been working on. We are working on on a roadmap for engaging some cases, would lead customers for the first time, but all of these products were licensed in Q4, as part of the 53 licenses that we signed. Now turning to the royalty, a year ago, we were forecasting a slower royalty growth in the first half of the year. An acceleration in the second half of the year and feedback from you all was okay. Let's see it happen. Well, I think that, that has happened we reported growth in Q3. We're reporting growth along the lines of what we anticipated in Q4 as well. So 16% year on year growth for Q4 royalty. That was driven by very high volume. We have 3,500,000,000 chips containing ARM Processors shiplier customers in Q4 rounding out that 12,000,000,000 unit year. And then when we look at those key markets, we've seen growth in again, in adoption of our counting out that 12,000,000,000 unit year. Then when we look at those key markets, we've seen growth in again, in adoption of our technology growth in share. And you can see across the three mobile, embedded, and enterprise, a significant growth in share and volume, from all of that activity by our, by our customers. And then again, within that, we've seen growth of version 8 architecture product based shipments. We now have 7 customer shipping of the 8 based processes. That compares to 5 in Q3 last year. So another a couple of partners shipping. The volume though is still small, about 50,000,000 units of the 3,500,000,000. So it's a small percentage. And a lot of those are shipping into mobile devices, but we are seeing shipments into enterprise as well, and 315. We expect the volumes to grow and we expect to get in the diversity of the use to increase as well. Mobile is still a very, very important part of our business. We're designing a lot of products specifically for mobile, and it's really interesting to see how the products are developing right now. Mobile World Congress is just around the corner. We're expecting to see many new products based on V Eight announced by, by OEMs and shipping soon, But actually, right now, here, we have a collection of, in fact, a subset of all the VA based phones, which have been announced so far. These are announced And you can see there are quite a lot of them, but also what really stands out is the price points. You know, some of these devices cost, as little as $100 and they go all the way up to to the premium point. And we talked before at the Analyst Day last year about how version 8 should ripple through the entire spectrum of mobile devices very, very quickly. And you're seeing here low cost devices, premium devices, adopting V Eight already. So that gives us confidence of the uptake of V Eight in mobile. So great progress in 2014, and I believe that points to future growth for the business as as all of this work that we're doing comes through and our partners take what we do, integrate it with what they do and create compelling solutions for these various end markets. We've been doing work on on how we see the markets growing, ahead of us, and in the appendix, appendices of the slides that you've got there, You can see we've done some work updating the data, updating the anticipated volumes, updating our view on the market size out to 2020, which is 2 years further than the data that you've seen before. And you see these key markets of mobile, embedded, and enterprise we're now anticipating $25,000,000,000 worth of silicon in each of those 3 markets. So, quite significant growth compared to our previous forecast, which only went out to 2018. And within those, again, we are more confident that we can achieve very high market shares than we were 12 months ago because of the progress of the business, because of the way our partners, have taken what we've done and innovated around it because of the way our ecosystem come together to create all the other technology that you need to turn these microprocessors into an end product, that is compelling for various different, end use cases. So we have an opportunity to take a significant market share here, and that's what we focused on delivering. So in summary, we had great execution in 2014. I think it was a great year for Arm. That strong licensing helped deliver 17% growth in earnings per share. And that was against a headwind of foreign exchange rates against us and inventory issues, particularly in the mobile segment. We're going to continue to invest. We're going to continue to innovate in our product roadmap because that's what our customers want us to do. Everyone is looking to the future, the next generation, and the next great technology from Arm that they can use to build the compelling products that their customers want in turn. So we see those opportunities to invest, and we're going to continue to do so. So with that, let me hand over to Tim, and he's gonna walk you through some of the numbers. Thanks, Simon. Good morning, everybody. I think that's a very comprehensive overview of both the fourth quarter and the full year. So I will seek not to be too repetitive and just provide a little bit of color on some of the numbers and probably more importantly help us think about 2015 as we refine and tweak our models. So yeah, as Simon said, in summary, 4th quarter, good quarter really across the board, 18%. Revenue growth in U. S. Dollars. That's in Q4, 19% sterling. So the FX was is a little bit more favorable. We're not on a full year basis. As Simon said, process of licensing up 30%, record number of licenses signed, big contribution from the licenses in the business to the revenue you've heard me talk before about typically 40% to 60% being contribution from backlog into revenue in this particular quarter. 60% of revenue came from the turns business. But we were particularly encouraged that at the end of the year, the backlog is up sequentially about 5%. We said at the half and at Q3 that we would expect the backlog be sequentially up at the end of the year and probably up and where it was at the half. And that is indeed the case. So that's good news. I think Simon has given the narrative on royalty. We know it was a slow period in the first half. We pointed to acceleration when we were up in July. And we characterize that acceleration as a 10% growth in Q3 and a 15% growth in Q4. We delivered 11% in Q3 and 16% in Q4. So very, very much in line with our expectation. And I'll touch on in a minute where we we think that's going to go going forward. Normalized OpEx in Q4, higher than guided at the end of Q3 and higher than consensus, which emerged about 63 sorry, 93,000,000. The difference is really 2 fold 1, strengthening dollar through Q4, has had an impact obviously on the translation of our U. S. Dollar costs into sterling. And also with the strong revenue performance in Q4 and the very strong bookings performance, the incentivization provisions that we've been building up through the year, trued up in Q4 because the Q4 outcome was stronger than the build up through the year. And we'll talk about how that OpEx transitions into Q1 next year and full year 'fifteen in a moment. So that revenue growth gave rise to a 25% year on year improvement in PBT and a 36% improvement in earnings Those of you who have had a chance would have noted that the tax rate in Q4 2014 is lower than it was in Q4 2013. And that in summary is as a result of the U. S. R and D tax credit getting legislated this side of the year end, which doesn't always happen. And you can't take that benefit into account in your full year, in your forecasting through the year unless and until it happens. And you may recall some in earlier years, it slipped over into the following year. So that's why the tax rate is lower because Q4 takes the benefit of the catch up on that. So that's the 4th quarter. I mean, in terms of the full year, as Simon said, the FX has actually been against us through the year on a full year basis. Last year, the effective rate was 156. This year, it's 163 on a full year basis. So 16% license revenue growth, sorry, total group revenues in dollars translated to 11% growth in sterling revenues, in the full year. Strong licensing. I think that's been well covered. Strong market share gains in royalties, but offset early on in the year by some of the inventory issues. Giving us an 8% full year. Normalized PBT full year basis up 13, significant investments in the business 461 net increase in our employee base, 16% increase in arms headcount over the year. So a lot of investment in the future going on. And that's driven a 17% increase in earnings. And again, so back on the tax issue, as you know, we're on a sort of multi year reducing tax rate trajectory. Final rate, this year, just under 17% versus 20% last year versus 25%, 26% the year before. And this is the phased introduction of the patent box. Which is a 5 year implementation program. And so looking into next year, I would expect the rate to be lower again. Probably around 16%, all other things being equal, you know, may maybe marginally under. Strong performance again in cash, ending the year, just over 860,000,000. As Simon said, the full year dividend increased by 23%, obviously subject to the shareholder approval at the AGM. You may recall that we increased the interim dividend by 20% And we've increased the final dividend by 25% manifestation, I think, of the board's confidence in the prospects as we go into 2015. And as signaled at the beginning of last year, we have been we reintroduced the share buyback program limited share buyback to maintain a flat share count. And during 'fourteen, we bought back just under 8,000,000 shares total outlay about 67 1,000,000. Just a quick reminder on the sort of correlation and the relationship between our investments in R&D and license revenue growth trajectory. Now you can see looking back on a sort of 7 year view that we've had group license revenue 20 percent CAGR. And I mean, it's a 30% CAGR post the downturn. And through that period, our investment in R&D has been 17%. And you can see from the top chart that there have been periods where we've been investing in R&D through cycle, even though license revenue has been down year on year as it was in 2009 and as indeed it was in 2008. And, you know, as as we look forward, you know, this correlation between, you know, license revenue growth and increase in R&D will continue. It's not a direct time match. But as we think about the license revenue growth normalizing to the level that we've been signposting now or through this 4 or 5 years really of mid to high single digits, 10%. You would expect over time that the investment in R&D will normalize along with that, but that won't be necessarily this year next year. And as Simon said, we have significant opportunities to invest to accelerate our penetration for in some of these new markets. So, yeah, with that, let's look forward to full year 15. And just sort of talk you through the outlook and how we're seeing it at this stage. It's early days, it's February 11th. We've got a long year ahead, but we are comfortable with the consensus that's out in the market. It's 1.7,1.4. So we tend to shy away from guiding specific revenue streams We do believe that the growth that's assumed both in terms of licensing and royalty currently in those, in those expectations is broadly sensible. I mean, license revenue growth is in there at about 9% royalty revenue growth is in there at about 21% I say it is early days. I think if we were doing a sort of probability on that analysis on that right now, we'd probably point to upside risk being on the royalty side, against that consensus, with maybe some offsetting downside risk in licensing, but really early days to call that. So overall, 1.47. It seems like a good place to be going into 2015. And then looking at that on a Q1 basis, we see that the acceleration in royalty revenue growth continuing. On an overall revenue basis, we're pointing to about 10% year on year. As you punch those into your models, you'll see that that that really points to license revenue being at a similar level to Q1 last year. Again, it's early days in the quarter. Some licenses will sign in Q1 that we thought might sign later and vice versa. But I think as we look at this full year license revenue growth of about 9% or 10%. And as we look at the quarterly phasing of how backlog turns into revenue, and how we see our pipeline turning from deals in view to sign deals. We think that at this stage, position in Q1 as broadly flat with Q1 last year, I think is a sensible place for us to start the year. So that's kind of how we're seeing the full year and the sort of Q1 relationship on costs. We're guiding to sort of at broadly current rates, I. E. In the early 150s, we're about 153 today, we would see Q1 costs in that sort of 98 to 100 range. I mean, relative to Q4, the truing up of the incentive stuff will incense disappear and normalize. But obviously, most of our people were, you know, there was some wage inflation going on with effect from 1 January. So that gets built into the Q1 numbers as we think of the transition from Q4 to Q1. So we're pointing to round about 100,000,000 just under for Q1 OpEx. And with that, I think we'll move to the Q And A Just one question first, Francois, and then we'll have room to, keep running the whole room. Yes, how do you feel about the phasing of royalties and licensing during the year? It looks to me that the comps are relatively easy for royalties in Q1, Q2 because last year, it was like single digit, which was very low video, very high standards, So is it more like, basically, 25% H1 and then going to 15% and maybe licensing a bit different? So quite lost out and then accelerating at the end of the year? Yeah. I mean, that that sort of shape wouldn't surprise me as you say that the comps on royalty in the first half of the year are a bit easier. So percentage wise, that will look definitely flattering. But the strength is there in terms of the licensing that's been happening. So I think in terms of the overall trend, if you look at absolute, you know, we're on a growth trend here for the future. And licensing, yeah, licensing is always a lumpy business. I know we've had, you know, you're sort of bored of us telling you that and, you know, but it keeps growing 30%. But, you know, it is a it is a lumpy business. We have licensed a lot of technology over the last few years. So As as we exit, what you characterize as easier comps in the first half into the second half is more likely to benefit from diversion 8. So the growth may not be as lopsided as you may think just by looking at the outcome compared, because I mean the exit rate of V Eight is clearly going to be much higher and the entry rate and it's going to be on a we don't know the trajectory because it depends what consumer enthusiasm is for these products, but it's certainly in the big considerably higher at the than the entry, and that is obviously going to help the royalty through the year. Sorry. Hi. It's Garret Jenkins UBS. A couple of quick ones, if I could. Just on the 64 bit while we're on that subject, I think on a recent call, you talked about it will make you put one of your managers talked about 50% of unit volumes potentially coming from 64 bit. Through the average of this year. And I just wonder whether that's the number that you feel is appropriate or the way you do the active rate in terms of penetration on mobile. Specifically. And then just secondly, I think in the past, you've talked about continuing, sorry. A very quick answer. It's a long question, but a quick answer. Market share gains historically you've talked about sort of historic treatment you've delivered. Is that still the thought process going forward. So on the 60 bps rate, yeah, I think that the 50 percent more points to the exit rate And as we think about that blending through the year, it's probably more about 30 on the 64 bit rate. Yeah, I think that the 50 percent more points to the exit rate And as we think about that blending through the year, it's probably more about 30% of mobile devices being based on V Eight on average through the year. And in terms of the year on year increase in share, you know, I think a couple of percent per year is to be, well, shouldn't be surprising over the next few years Thank you. It's Kai Questions from Merrill Lynch. I just want to connect on the, on the relative growth commentary. So I understand, obviously, the comps are different. If I look at smartphones though, even in your Q1, which basically the industry's Q4, I believe Apple's only a large volume player that really is shipping 64 bit in volume. So I think that was about 20% of the units. So as we go through this year and the adoption in those other 80% of 64 bit materializes, you know, would couldn't your royalty growth accelerate meaningfully north of 20% if you're assuming you're doing 20% in Q1, just because we're still at a very low point in the adoption cycle. Thank you. So the point Tim was making, we're expecting to see more products launched based on version 8 of the ARM architecture. And Mobile World Congress is the 1st week of March. Typically, products start shipping thereafter. Unit volumes tend to be more back end loaded. You know, you've got various seasonality that goes on, and hence, you know, that's why we're anticipating greater run rate of VA based devices handsets towards the end of the year. So exit rate at about half half the handsets being based on V8, half based on V7 and earlier, but growing through the year, 30% on average. That's what we mean. Morning. It's Nick James from Numis. You talked about the customer base kind of broadening and engaging with OEMs and having vertically integrated OEMs and you're evolving the business model to respond to that. Can you just kind of expand in terms of what that means in terms of the deals that you're doing, the activities that you're doing with those types of customers? Yes, I mean, as you go talk to different people in people at different points in the supply chain, exactly what they want to do, how they want to go about design, how they want to engage with other people in the supply chain is slightly different. So we have to think about, what deliverables we provide to a customer who might not want to go all the way to design or all the way to manufacturing might want to do more of the upfront design. So we kind of think about the, the package of components that we deliver to then, the rights they have to use those, the rights they for other people then to supply silicon. So it gets, it gets boringly complex in in our license agreements. But, you know, we're we're trying to get that right, recognizing that the way in which the industry is evolving, is something that we have to, respond to. One of the questions. Is your value add higher in that relationship than it is in a traditional chipmaker relationship? And can you take more value out of that relationship? I don't think that the value per device changes necessarily as we move around the supply chain there. We have a view of what an arm processor is worth in a chip that goes into a device, and who is doing the design on that is that doesn't make much difference to that. Thank you. Good morning. It's Andrew Dunn RBC. Just another question on VA, if I could, I'm actually networking because you've doubled your share this year from 5% to 10% and it's all pretty much in version 7. So first of all, do you have a target for this year for networking in terms of market share? And secondly, when do you think we start to see version 8 shipping in volume in that market? Thanks. We we haven't got a specific number out there for market share. Excuse me. I will look away next time. I could I could I could just hear a market share and coming on. Yeah. Over you. That's right. Yeah. No. We we haven't got a concrete number out for for growth this year, but, you know, I think what what I was talking about in the presentation was about the the adoption of the technology and and how you get significant market share and what we need to do with the ecosystem to really make that work. So, you know, we we've seen good growth to to maintain, you know, high growth levels and get to the the kind of share that ultimately we wanna get to. Is going to require, you know, more of more of all the other technologies to come together, especially with this move to to 64 bit. Follow-up if I could. You said, I think you can target a sort of 30 ish percent by 2018 market share. Do you still stand by that target? Yes, we think that's achievable. Thanks. Andrew? Good morning, Andrew Gardiner from Barclays. Just a question on the licensing side. At the last set of results, you gave us a bit more detail or insight into some of the drivers beyond just turns and, and backlog, talking about sort of moving parts behind subscription and renewals and those kinds of factors. Just given the strength that you've seen in 4th quarter and then absolutely, it's like seasonal weakness into 1st quarter and expecting it to accelerate through the year. Can you give us any further insight into your visibility there around some of these factors, be it renewals or or subscriptions and how that's flowing through? I don't think anything's fundamentally changed. I mean, the longer term agreements you know, that as we sign those, you know, we know when they come up for renewal. We know the kind of technologies that we're bringing to market. So I don't think there's been any change in, you know, the sorts of agreements that customers want to want to engage with us on. You know, we've seen a big uptake in such subscription licensing. You know, we saw more, more architecture licensing. You know, there's been a sort of surge of that, and I think things are more kind of stabilized back to normal kind of mix. Right now. Yeah. And I wouldn't really, I mean, use the word seasonal. Although we are obviously guiding Q1 license to learn to you, I don't it really a seasonal issue per se. I mean, it's more, you know, you look at product deliveries therefore, how does revenue recognition get transferred from backlog into revenue? And what is timing of your opportunity pipeline licenses you've got in view and you're negotiating when do they crystallize in? So I think we've talked as I said earlier, a lot about kind of lumpiness of licensing. I think as we embark on a period of 7%, 8%, 9%, 10% license growth. And I mean, I think the market's got an 8% compound in there for the next 4 years. I think we have to expect a little bit more lumpiness relative to this 4 or 5 year period of 30% license revenue growth. So hopefully as we go forward, there won't be too much angst and over analysis of the quarterly licensing move. I think a few years ago, we introduced those charts sort of show total licenses signed per annum, you know, 5 or 6 years of you know, steady increase and you compare that with the amount of quarterly that we had around, you know, oh my god arms gone from 20 licenses to 17, you know, I mean, I don't want to trivialize it, but it kind of really doesn't matter. So it's really more about the timing of when deals turn into revenue and when backlog turns into revenue. But the the deals themselves, I don't think there's any particular change in the mix of them. And things like renewals and subscriptions are much more of they have much more in built on backlog than they do on revenue because as we know, yes, subscription, 5 year deal, full value goes into on day one gets transferred into revenue linearly over 5 years, assuming it's renewed, which it usually is, the backlog goes back up here and comes down gently over 5 you know, you got all those things going on within it. Sandeep Deshp Morgan. Just a quick question on the server market. And other new markets that you are targeting and what progress you are making in those markets and what you particularly in terms of customer engagement in those markets? So in terms of server and progress there, we we've seen the the moonshot product launched. That's great. There are 2 flavors of that. One is based around the Applied Microchip, and there's another based around the chip from excess instruments. And people are are experimenting and putting those boxes in their data centers and using them to analyze data in in really quite interesting ways. The, the the TI based flavor is being used to do analytics a way that you just can't do it on a conventional server system. So it's really demonstrating benefits of taking an SOC approach to building a chip for a server that's sitting in a data center. So, yeah, that's obviously focusing around the main kind of computing element of the data center. But we have other customers looking at all the other places where intelligence sits in the data center, how you manage the network, how you manage storage, how you just manage data flow around these lots of experimentation going on there. And the breadth of that product offering on the microcontroller front is really lowering the barriers to innovation because there is a chip that that's fit the purpose for so many different end applications right now. If you went to CES, you can see how people are very rapidly innovating and building, products can get them to market quickly using low cost devices, all the infrastructure that exists in the cloud, but cloud based services. You can use your smartphone to talk to it. You can manufacture it out with 3 d printer on your desk. It's is driving a rate of innovation that's really quite fascinating. And some of the products won't work, some of the products will work, and then they'll move into bigger scale production. But I think it's fascinating right now to look at how much innovation is going on and how the advent of all this technology is lowering the cost of doing that. And it's allowing more people to bring their ideas to life. In that server's comments that you made. Are you saying that you are focused now on the networking side? As we talk more about fabric and monitor and storage rather than the core of the server market. So it has changed its focus? Or is it that, you know, your first kind of expense no, these things are going on in parallel. I mean, the beauty of what we do is that our products can be used in combination with our licensees technology to create a different solution, but a CORTEX A 57 could be used in a networking application be used in a core processing application and it's down to the configurations that our customers build and the integration of their own their own IP and the market that they wanna go focus on. Our customers build and the integration of their own their own IP and the market that they want to go focus on. The great thing is we can build a product that's suitable for those different areas. Now for us, what we then work on is the rest of the ecosystem. And what do we need to do to support growth in these markets? What do we need third parties to work on? How do we go and and and create that, and make that happen? So we aren't you know, it's not like we were focused there and now we're focused there, you know, we're trying to be as broad as we can, and I think our model promotes that. Just behind you. Thanks. It's Achal Sultania from Credit Suisse. Tim, one of the slides on OpEx, you talked about OpEx growing more or less in line with the licensing revenue growth over the last few years. And obviously, licensing growth is likely slow down to more normalized levels, but royalties is probably going to grow much faster than that. So should we expect that the gap between your between your overall revenues and OpEx should start to widen from here going forward over a long period of time. I think over a long period of time, that's probably fair. I mean, before the downturn, of the beginning of 2000 and 8 and 9, the model was licensing grows at 10% royalties grows at 20% and there's margin leverage In the last 5 years, we've in many of those years seen very strong lives of revenue growth and good royalty growth. I think the point is that, you know, over time, there clearly is a correlation between the amount of products you're developing for the market and therefore the license revenue you're generating and the amount of investment you make in R&D. But I need to be clear that it's not time aligned specifically. We've been painting a picture here of a lot of opportunity to increase and hopefully accelerate our share into some of these nascent markets. And clearly to do that, we need to invest. But I think the general way to think about the R model holds good that investment in R&D relates to license revenue growth rate. And if you're then on, if you're on a return to the royalty rates that we typically see before the first half of last year, cycles aside and they're always cycles and we always go through short periods of lower royalty growth rate. Yeah, but I think, you know, as we return to the 40 growth rates that we're painting here, yes, I think the margin leverage and increasing profitability continues. And over the period, we just been discussing the operating margins gone from the early 30s to now getting its head over 50. Hi, there. It's Owen from Liberum. A question on your royalty presentations for 2015. In your 21 percent year on year growth in royalties, how much implicit shared? Do you expect Intel to get in smartphones in the second half of this year or Intel's Spreadtrum Rockchip? I'm just trying to bake in what's in your view of 20 21 percent share. I do believe they can get similar share as they got in tablets in the second half of this year. And if they don't get there, is there upside to your 21% royalty growth this year? So we're not assuming any significant market share loss in smartphone in any of the numbers and an outlook that we've given today. I think we've got an excellent portfolio of technology that's going to enable arm and our licensees to continue to succeed in that space. So we're not baking in some big share loss therefore, there's not the opportunity if that doesn't materialize. I think over over the the, foreseeable future here, over the, you know, the life time of the the products that we have, our shares there are looking good. It's all about the long term, and that comes down to the amount we invest in R and D to make sure we've got the most competitive technology out there. Just a very brief follow-up. You gave the backlog went up quarter on quarter year on year. How did the backlog change between 2014, 2013? It was lower at theendof1413. But I mean, like license revenue, backlog has gone up sort of relentlessly for 3 or 4 years through the version 8 sort of upgrade and licensing cycle now the way the business works. I mean, if that backlog didn't go down, then we'd have some very disappointing customers because we wouldn't be delivering any technology to them. So that the reason you get fluctuations in backlog is because you license new technology that you can't you can't deliver it in full. So it goes partly into partly into revenue, then you deliver it and the backlog goes down and then you introduce new technology. And as Simon said, we've got sort of a rich portfolio and rich plans for introductions of new technology over the next few years, which are going to drive the backlog up, but it's going to be a sort of a wave effect. And I think in an environment of 8% to 10% license revenue growth, you're probably going to see more lumpiness in backlog on a quarterly basis than you saw through the sort of relentless period of accelerated licensing and backlog growth. The lower end and the impact that ties on your royalty's growth, but clearly as shown today, for example, there's a $100 phone as well out there that posts a VA architecture. So could you maybe just comment on the adoption trends you're seeing in low end smartphones in terms of arm based content and how that is potentially helping you mitigate the so called pressure or the the pressure that we have seen, the smartphone ASPs overall. Thank you. So some time ago, we kind of spelled out how we thought we were going to see the ASPs in the various sectors of smartphone kind of evolve, and how we expected the market to mature into the premium devices, mid range and entry level. And that is fairly accurately playing out as to what we expected. We haven't seen a big shift in ASPs in those 3 categories. And we have seen an uptake in the use of our technology in those 3 categories as we were anticipating. You've seen from the devices I showed earlier, low cost handsets, premium handsets based on VA based chips. Because over the last year or so, we've seen, our licensees who ship very high volumes into this space come out with a portfolio of products to address those different tiers with different amounts of content, multicore, big who ship very high volumes into this space come out with a portfolio of products to to address those different tiers with different amounts of content, multicore, big little, varying amounts of GPU, capability and video. And, you know, for for us, it's about keeping our our roadmaps up to date bringing out the next generation of technologies so that we can continue to, be all of assistance to our customers as they're looking to integrate new technology to maintain the ASP of their devices. So, you know, the innovation that we do helps keep those ASPs high if we didn't you know, you would just see a, see a big reduction in the price. So it's, I think this market is playing out, you know, certainly over the last 18 months or so as we expected it to. There are obviously lower cost ASP devices going into the lower end handsets, but the variation that you see in handset price I don't think completely ripples through into bill of materials, of course. That's behind. Thank you. It's Andrew Dunning and RBC. GT second question. Just on the balance sheet because you've, you sort of tantalized us at Q3 by saying that GBP 800,000,000 was roughly the right level from you wouldn't expect to grow that. 860 now, you've got the dividend and you talked about a limited share buyback, but those 2 together won't be enough to keep your cash level down. You probably generate around 400,000,000 free cash this year. So what extra steps might you be considering? Yeah. I mean, I think, you're right. I mean, we we we we are indicating that we don't plan to build a cash pass for a cash pass sake. Right? And we can debate in the context of arms growth opportunity in our business model what is a cash file But I think it's fair to say that we don't really see any need to meaningfully increase the cash from here and our plan of record is to increase the payout ratio of the dividend, which you've seen in today's numbers, there's some movement on that, 23% in dividend relative to a 17% increase in earnings. You've seen us do more buyback. And in due course, when we think the time is right, we will introduce if you like the next level of our capital structure messaging. But I mean, it will be consistent with what we've said to date. It will clearly evolve. It's regularly reviewed by the board it will clearly be closely related to our investment opportunity in the business as we go forward. So nothing new and incremental to add today I think it's fair to say that if you look out over the next few years, cash returns in addition to the investment in growth are going to be higher than they've been in the past. But yes, the timing and the mechanic of that TBD. Just behind you. Thanks. Johannes Fella from Deutsche Bank. Just wondering if you could give us a bit more of an update on Marley going into 2015. I mean, you had about 40% unit growth, I think, in 'fourteen, certainly, that was a nice royalty tailwind. If we look into 'fifteen, the trends for you at Samsung arguably look quite good, but then maybe at some of the other licensees, maybe media attack, they have a bit of a tougher start to the year. So could you just give us an idea in terms of unit growth, what we should back from Mali and also in terms of the dollar growth contribution to royalties? Thanks. I mean, in terms of units, you know, when I look at the growth year on year into the units from 2013 into 2014 and think forwards based on the licensing activity that's gone on, I think that those growth rates could be quite similar for 2015. The we've just announced more technology, more GPU technology. And part of that wasn't just about the graphics process or it's about having a complimentary video engine. A display process, in which allows you to bring all these visual streams together and put them on a screen. And that's making our our product offering more compelling for our customers. So we feel good about the product roadmap. And in the medium term, anyway, you know, we feel good about the, the volume that's going to, to flow through from all of that licensing activity in those in those units. We've never broken out the the royalty dollar contribution between, the the GPUs and and the CPUs, except in terms of round numbers, percentage gains of extra royalty that we might get. Basically think about a massive acceleration or deceleration from the trends you're currently seeing is roughly the same growth rate Yes. I think, I mean, the gross rate's not bad year over year. So, I think that's kind of steady as she goes. Hi. It's Stephan from UBS. I'm just following on a bit from the last question and one of your comments earlier on the use multiple bits of the online. So in the product launch that we did around Cortex A72 last week, we talked about our interconnect products. And at one level that's wired that hooks all these things together. But it's actually much more sophisticated than that. We have intelligence in that interconnect that's helping manage the on chip data flow, which can result in quite high power consumption. So we've put a lot of thought into how the building blocks, which on a PowerPoint slide look really simple and wire them up, how hard can it be. Actually, there's a lot of thought that goes into doing that intelligently a minimized power consumption. It's a bit hard to put in a into a presentation. But when we're in front of our customers, they get this they understand the details of it. And that those interconnect products, are growing complexity to manage the amount of data that's flowing around the chips. And the size, the pixel depth of the displays that we're trying to drive. Seems like it. Anyone? Well, if there are no more questions, thanks very much for coming today. And, good to see you. Oh, yes, one last thing. Thank you. Well, if there are no more questions, thank you very much for coming today and, look forward to seeing you. Oh, yes. One last thing. Thank you, Andrew. So our our Analyst Day is normally in May. Obviously, with the handover between Tim and Chris, we thought we'd better give Chris a bit of time to, get his feet under the desk and eject with our junket at Tim's office. So we're going to delay that a little bit and do that on 15th September. And we'll let you all know where the venue is going to be.