Earnings Call: Q3 2014

Oct 21, 2014

Thank you for standing by, and welcome to the Arm Q3 Analyst Results Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question I must advise you that this conference is being recorded today on Tuesday 21st October 2014. Would now like to hand your conference over to your first speaker, Mr. Ian Thornton. Please go ahead, sir. Thanks, Ian. Good morning, everybody. This is Ian Thompson, meet of Investor Relations at Art. On today's Q3 results conference call, we have and Tim School, Chief Financial Officer. On today's call, Simon and Tim will take us through the highlights and comments from the quarter's results, and then we'll open up to a Q And A session. As a reminder, the presentation and release we found on the conference call are being directed only to those of you who have professional experience in matters relating to investors, and the information communicated on this call is being made available only to investment professionals. Any person present on this call do not have professional experience in matters related to investments that should not act or rely on the content of this call. The following conference call will contain forward looking statements such as other than statements that are spoken back, the company's actual results for future periods may differ materially from those statements and are based on current expectations are subject to a number of risks and uncertainties. And on this note, I'll hand over to Simon. Thanks, Liam, and good morning, everyone. Thank you for joining our Q3 2014 results conference call. This morning, I'll 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. Throughout 2014, we've seen very strong demand for arms technology with leading semiconductor companies licensing our latest products and increasingly deploying their on based solutions into a wide range of end markets. We've seen this continue through Q3 and the ongoing demand for ARM's products underpins our confidence in the long term growth the business. The third quarter of 2014 saw particularly strong licensing for Arm's most advanced technology. We signed 3 license for Maya, our next generation Arm V Eight Processor, 2 licenses for the next generation Marley graphics Processor, and another license for Cortex M7, our recently introduced processor for embedded applications, including the Internet of Things. This takes the number of licenses signed for Cortex M7 to 5. In addition, a major technology signed 2 subscription licenses, which grants them access to future products on arms processor and graphics technology roadmaps. Processor royalty revenue grew 11% year on year in third quarter, in line with the expectations discussed in previous earnings results earlier year. In royalty growth to continue in Q4. During the quarter, we saw many announcements from our customers about their new ARM based product developments smartphones and mobile computers, enterprise networking and servers, microcontrollers, and the internet of things. I'll go through some of those in more detail later. I'll now discuss the license. We signed 43 processor licenses in the quarter. These licenses were signed for a broad range end applications from smartphones and smart meters to base stations and bank cards. The and the other was for a family of Molly graphics processes that are still underdeveloped. Although they were an existing customer, this is a demonstration of their continued commitment to using ARM technology across a wide range of their products. 11 of the licenses signed were for ARM's Corte A Series technology. This included 7 licenses for ARM's ARM version 8 processes, 3 of which So 3 of which were for, one of our next generation processes, code name Maya. We've also continued to see strong demand prop M processes, which are used extensively in microcontrollers, embedded connectivity chips, smart sensors, and can be found in most of the internet of Bing of wearable devices that have been announced to date. 22 Cortex M Processors were licensed in the quarter and 10 of these licensee were companies taking their first ever ARM processor license. Finally, we signed 4 more Marley licenses. 3 for advanced graphics processors and 1 for our recently announced display processor. And we signed 5 more Pop IT licenses during Q3. POP IP is physical IP that's been optimized to enhance the performance of ARM Processes. 4 of these licenses will be used in the implementation of Cortex A53 Processors on CFMC's 28 nanometer HBC and HBM manufacturing processes Now I'll switch to the royalty side of the business. Arms Royalty Revenues are reported 1 quarter in arrears, so our royalty for Q3 was generated from chips sold by our customers in Q2. Processor royalty revenue was up 11% year on year, demonstrating the acceleration that we expected when we reported last quarter, making a comparison with the overall industry's complicated this quarter by the strong growth in in P. C. And server markets. These are still future markets for Arm, and so we didn't benefit from their growth. Excluding PCs and servers, the remaining market segment grew between 5% 9%. We expect the level of outperformance to increase in Q4 and into 2015. Our customers reported that they had shipped $3,000,000,000 on processor based chips in the 2nd quarter This 19% year on year increase represents an additional 500,000,000 chips. Of these additional chips went into embedded sensors, smart cards, and microcontrollers. Some of these chips are making the internet of is real today by enabling the world around us to become smarter and more capable from wireless payment in payment cards to wearables such as smart watches andometers and into more advanced manufacturing and logistics systems. With ARM based microcontroller growing over 55% year on year, we expect that the embedded segment will soon become a larger proportion of chip ship chip shipments than the mobile sync. As we only introduced the first quarter XM processor about 10 years ago, this is a remarkable achievement. Arm continues to benefit from the sales of smart consumer devices such as smartphones, tablets, and digital TVs. During the quarter, we saw the introduction of a sub-thirty five dollars smartphone. Phones like this are bringing smart mobile technology to the next billion consumers. This particular phone has both a multi core cortex A class processor and the Mali graphics processor. There are, of course, other arm cores in these types of phones making this a fantastic opportunity for both, both for consumers in developing markets to get connected for the first time and for Arm's future royalty revenues from the expanding market segment. Early in Q4, we hosted our annual technology conference tech call. Is a premium event, not just for ARM, but for the whole ARM ecosystem as it attracts developers, engineers, and thought leaders from all across the Street. This year, Tetcon was in early October, and we hosted about 4000 people, and I have the pleasure of meeting some of you there. Many new technology and product announcements were made at the event, demonstrating the continued innovation within the ARM Partnership. With strong demand from our technology from microcontrollers in the net of things, we introduced the Cortex M7 processor. This is the highest performance processor in the energy efficient Cortex M family, is suitable for a wide range of end applications. We have now licensed this technology 5 times, including to Appmail, Prescale and microelectronics. As part of our Internet of Things strategy, we also introduced the ARM embed IoT device platform, which includes two parts: Firstly, ENDED OS. This is a free operating system for IoT devices. This provides companies building and deploying smart as a controllers into their products with a lightweight operating system that includes connectivity standards support such as Bluetooth, Wi Fi and LTE as well as web protocols such HDDP and CoA. The other part is embed device server. This is software that resides the customer's server and creates the connection to the IoT device and allows them to manage their IoT network. And it enables high functionality services to be run across IoT networks, including data aggregation for analytics, enabling firmware updates across all nodes and Solven. We also saw many announcements around servers and networking infrastructure. HP announced 2 new ARM based service as part of their HP Moon Shop portfolio, including the first enterprise class 64 bit ARM based server. Based on the applied micro ex gene chip and another based on TI's Keystone 2 chip. TI's chip is interesting because it integrates DSP technology alongside a multicore ARM Processor, which created an SoC for application acceleration. PayPal demonstrated how they were using TI's Keystone 2 in an HP server to detect fraud across their payment system. We also saw the commercial availability of server software on our V8A based servers from canonical with Ubuntu, Jujoo, and Metals as service products. Also from IBM with their infomix database software. There was a lot more announced, but the last one I'll talk about today is high silicon and TSMC announcing that they fulfilled the 1st multi core Arm VAA based chip using TSMC's 16 nanometer FinFET process. The chip contains 32 Armcortex A57 processors running at up to 2.6 gigahertz, and will deploy it will be deployed in next generation wireless communication and routers. You'll find many more announcements on our website and on our partners, and I could talk more about them here. But in the interest of time, I'll hand over to Tim who'll provide further details on comments. Thanks, Simon. Good morning, everyone. Hopefully many of you will have a chance to have a look at the on Q3 earnings release. And as Ian said, the quarterly slide set is available on the website as usual. So I'll just add a few more comments on the numbers and on the guidance before we move to Q And A. So overall, Q3 dollar revenues at just over 320,000,000 were up 12% year on year with 13% growth in Processor Licensing in the quarter and 11% growth in Processor Royalties as Simon says, reflecting the acceleration that we discussed at the half year. A process of license revenue of $120,000,000 in included about a 60% contribution from backlog, which is at the upper end of the normal range but consistent with recent quarters. And backlog at the end of Q3 was slightly lower sequentially. With 43 licenses signed, including a number of backlog building deals. Looking at the expected conversion of backlog to rev in Q4 and the licensing opportunity pipeline for Q4, we expect backlog to be up sequentially at the end of the year and to be at a similar level as backlog was at the half. The usual backlog analysis can be found in the slides on the site. Looking at costs. Headline normalized OpEx in q3 was a shade under £87,000,000. Taking account of the credit of 1,000,000 arising from the revaluation monetary items due to changes in FX rates, and the impact of a stronger dollar on the accounting for derivative instruments offset by charges that did not occur regularly underlying OpEx in Q3 was approximately $89,000,000 compared with consensus of around $91,000,000. We continue to invest in our R and D teams and in our business in structure with our employee base increasing by just over 400 since the start of the year. And normalized OpEx in Q4 is dollars in line with current consensus. The group's normalized tax rate in Q3 was 17%. And the full year normalized effective tax rate still expect to be around 18% as we continue to benefit from the reduction in UK Corporation tax rate and the phased introduction of the Patent Box tax regime. Moving on to outlook, we enter final quarter of the year with a robust opportunity pipeline that points to both strong license revenue in Q4 and a sequential increase in order backlog. And with market data underpinning the short term outlook for royalty revenues, we expect group dollar revenues for the 4th water to be in line with market expectations of about $350,000,000. Thanks, Tim. And now let's go to Q And A. Thank The first question comes from the line of Garreth Jenkins. Please ask your question. Yes, thanks. A couple if I could. 1 technological related and, and will maybe financial. Just technologically, you know, we've seen the introduction of, Google Android runtime I just wondered whether you feel this is a potential risk to the ecosystem going forward or whether it doesn't really move the needle so much for you, does it open up the barriers to entry a little bit more for your competition to try and re penetrate? And then secondly, just in terms of finance I think you said historically that q 4 would set the tone for 2015, and I know it's very early on the but can you give us some sense of how you see the year progressing into next year? All right. So on the Chris the Google runtime technology, that is a technology that enables applications to be written independent of the hardware, just like Downbick did in previous versions of Android. And Art definitely does a better job of that than Dalvik did. But at the end of the day, there are many, many applications written to run natively on ARM, anything that why it's really high performance is written, using native development. So an arm binary is created. That may change over time with the advent of art, but with given how many devices there are out there that are running on processes today, just given the overall traction that we have in the market, I can't see that dynamic changing of that much. Right now, any application that is running on a device that doesn't have an ARM processor, you using emulation. That lowers performance, makes the user experience worse. So whilst so long as we keep innovating and our partners keep innovating around what we do, that I don't see really the dynamic changing very much in the end market. Yeah. Garrett, I mean, on 2015, I mean, as you know, we sort of typically, you know, we'll guide on 2015 in February, but I think probably for us, the key, the 2 key metrics that we're looking at as we go towards 2015 would be the Q4 royalties which will form the base obviously for 2015 royalties and 2015 royalty growth. And following the Accelerate to 11% in Q3, and we are expecting mid teens year on year growth in Q4. Which we think will set us up nicely as a platform for 2015 royalties. And I think, you know, the 2014 royalty number, you know, we be achieved largely without any meaningful contribution from version 8 shipments, which come with higher royalty rates. And we do expect the ramp up devices including that technology to really start at the end of this year. And start to have a real impact on 2015 royalties. So we think royalties are in good shape across the multiple markets. And again, just reflecting on the backlog commentary, we expect to exit 2014 you know, with a backlog that supports the license revenue targets that are out there in the market now for next year. So, you know, early days, but it looks encouraging. Thanks. Next question from the line of Andrew Gardiner Please ask your question. Thanks very much. Good morning. I just had a question on the royalty side of things. You highlighted in the quarter that comparisons are a bit tricky given the strength in PC and server demand that we saw in the second quarter for the industry. Just wondering if you've got if you can put any sort of further numbers around it perhaps to sort of more your current addressable market, if you will, as to how that would compare to the 11% royalty growth that you've seen? So mobile grew about 5% Consumer device is about 6%. MCUs were about flat. So overall, when you look at the key strategic markets for Arm, the outperformance was quite strong. Okay. That's helpful. Also, just specifically within the quarter. You mentioned the strength in enterprise infrastructure. Chips got into that vertical. I understand it's early days and you were looking about 5% market share or so last year. But just any additional detail in terms of specific verticals where those are heading and perhaps what's driving the uptick and therefore an outlook over the coming quarters coming years for how that business should progress? Thank you. Well, in the 3,000,000,000 ships shipped in Q2, and obviously that we've reported for the royalty. In that, there was about a 35% year on year growth of enterprise infrastructure chips. So we reported at the end of last year about 5% market share. We're expecting that to continue to grow. And it's really about the the rollouts of next generation wireless technologies. Many of our products are being used in base station and as they get replaced, that's good for the uptake. And then just generally, the growth of mobile devices, the coming growth of the internet of things, puts pressure for an upgrade of network infrastructure and people want flexibility in the designs of that to silicon designs they're putting into those products. And so ARM's model is highly applicable for anyone designing products in that space. Your next question is from the line of Pierre Ferragu. Please ask your question. Hi, good morning. And thanks for taking my question. This is just in the chat on behalf of from Bernstein. I had 2 very quick questions. 1 on licensing and 1 on royalties. So on licensing, it seems fair now to expect that the level of backlog probably does not get back to the 2013 peak level. Would you expect over 2015 for it to start to come down or it maybe remains flat at the H2 2014 levels? And then could you possibly share a bit more color around, if you still expect 1 10 percent licensing revenues growth and what drives that? And then I have a follow-up on royalty. I mean, on the on the licensing side, I mean, as you say, we've seen, you know, really quite exceptional backlog growth and license revenue growth in recent years. And I think we've been very consistent in painting a picture of life revenue growth sort of moderating into its more historic range in the sort of high single digit 10% level. And I think as that happens, you will see backlog you know, be be flatter in some quarters it will go up and some some quarters it will go down. But we we certainly would expect backlog to, underpin that type of level of license revenue growth. And I think in terms of, you know, what is what is driving that? I mean, as you know, Arm now has a very large installed license base of over 350 companies, many, many of whom have the ability to use ARM technology more widely than they already use it, and most of whom will want to keep upgrading their use of ARM technology to, you know, the next generation, the latest processes and we expect that the combination of that plus, you know, some continued new entrants into the armed family to drive the licensing And then very quickly on royalties, could you please give a bit more color on how inventory than mobile over the quarter? And then would you expect for the next 4th quarter? And if there is a risk of maybe another inventory collection based on media takes outlook? Yes, it's a bit hard to too cool for us. You know, we're looking at our customers outlook statements, you know, as much as anyone else, you know, we have visibility in that. I mean, it was quite encouraging to see CMI's comments overnight about inventory at normal levels and right in the middle of the range that they would expect We're seeing, royalty acceleration as we anticipated through this year. And for the various data points that we've seen so far and from talking to our customers, you know, gives us the confidence in in underpinning our outlook for Q4 and continued acceleration of royalty. Beyond that, we're always subject to supply and demand fluctuations, which can lead to inventory blockage in the pipe. But we'll obviously take that as it comes and manage through that as it comes. But the long term with the growth in the end markets with the further adoption of VA and with the shipment of VA going into next year gives us confidence for growth in royalty. Next question from the line of Kaikal Kolchard. Please ask a question. Yes. Hi. Thanks for taking the question. The first one was really Tim, I wanted to connect on what you said that the Q4 to growth rates kind of sets the tone for next year. And I think you've been commenting that you expect something like 15% or mid teens growth in Q4. I guess is, you know, you've come off high 20s, low 30s growth. Obviously, it is slowing from, but that sort of level guess my question is at which point, or what would be the drivers? Could we see an acceleration of royalty growth maybe a sort of 20 ish percent, is it just VA adoption Is it networking really coming in? Or kind of what should we look for to kind of potentially see the royalty growth reaccelerate? Closer to levels that you have seen or shown in the past? And the second question is just on the tax rate, I think you were alluding to sort of 'eighteen or slightly below, longer term, what sort of target tax rate should we, look at Thank you. Yes. Well, I think in terms of medium to longer term royalty growth rate, I mean, as Simon said, I think, 2015, you know, we're starting to benefit from the impact of the version 8 shipping for the first time. We've spent quite a lot of time talking for the last 12 months about, you know, how we see the development of armed royalties in smartphones. You know, as, you know, assuming that smartphone CAGR device CAGR for about 10% over the next 5 years, you know, we see armed royalty revenues in smartphones, you know, growing at approximately double the rate of the devices, because of the the mix of Arm Technologies being designed into these products and royalty rates that we will be earning on those products. So I think, you know, smartphones themselves, we continue to see as a a contributor going forward. And then of course, you know, there are a number of other markets where our share is currently fairly nascent. We touched an enterprise networking earlier, and the licensing there has been very strong. Yeah, the volumes, we expect continue to grow and embedded. And I think kind of all of this is, I think, strongly underpinned by the fact that our license revenue has been growing at 30% per annum for the last 4 years. Which I think, again, it's it's very supportive of the medium term royalty outlook. So I think, you know, there are multiple as multiple layers of growth, but no real change in our expectation of royalty rates, royalty growth rates going forward. I mean, on the tax side, you know, there's still, there's still a notch or 2 down in the UK Corporation tax rate. From earlier budgets. And we're also only partway through the implementation of the patent box regime. So I would expect all other things being equal and no change in legislation for arms tax rate to be in the mid teens in a couple of years' time. Your next question comes from the line of Andrew Humphrey. Please ask your question. Hi, thanks for taking my questions. Just a couple if I may. Firstly, on, I wanted to ask a bit about microcontrollers and the market there. We've obviously seen some weakness some players reporting into that market at the moment. So I wanted to ask what is your exposure in microcontrollers, autos, industrials, those sorts of markets and how far do you expect we could see some kind of impact from inventory correction over Q4 and Q1? And my second question is on royalty growth in Q4, you're guiding for 15%. That's in a quarter with what we're expecting to be a pretty strong Apple ramp. Could you maybe talk a bit about the other factors that could be holding that back from being a higher growth rate in for. Okay. So in terms of our exposure to pro control market here. So that's quite significant growth for the arm community. And when we look at what our partners are saying, you know, there there are some mixed results out there, for for sure. But those, it would seem with with a greater, exposure to the arms side and microcontroller market, it seems to be doing a bit better than those who are. So there may be some share gains moving around. There may be some supply chain issues, but again, just going back to the point that TI made overnight and there are big shippers in this market as they're seeing quite they're seeing what they described as a normal market. You know, we'll see how more as more people report, how that changes. So, you know, we are quite, quite positive in our outlook for future on technology into microcontrollers. There are many, many customers of license cortex M. We've seen strong uptake, of course, XM7, which we only announced a couple of weeks ago, 5 licensees of that. And on our TEDcon event a couple of ago ST demonstrated silicon based on core XM7. So that in conjunction with the other family members leading to quite strong growth of market share gain from in MCU. Yes, but I think in terms of Q4 rolled I think there are multiple factors. I mean, I think, you know, there's quite, if you look back over time, there's quite a lot of what you might define as normal seasonality in the trajectory of arms rolled And if you look at sort of Q4 uptick on Q3, it's fairly routinely in the sort of ten $1,000,000, you know, up up to $20,000,000 on lower absolute numbers. I mean, I think, you know, these sort of new product launches are helpful and will have some impact. We'll probably have more impact in Q1 'fifteen. But I think there are and obviously we're also looking at the guidance in some of our major shippers as to what happened in their guiding for their third quarter. So, yeah, we've got quite good data points on the Q4 outlook. Okay. That's very helpful. Thank you very much. Your next question comes from the line of Brett Simpson. Please ask your question. Yes, thanks very much. For Simon, how should we think about VA Pennant smartphones over the course of 2015. Most of the new low end LTE chips ramping this core in China are already supporting 64 bit. And I'm just wondering whether that's changed your thinking on the penetration curve of V Eight for smartphones over the course of next year? Yes. I mean, as we said, about 1% of our process of shipments are based on V Eight. And again, this is going back to ships that were shifting in Q2. We do expect that to change seen many announcements of, mobile oriented chips from customers based on Cortex A57, Cortex A53, alone altogether in various combos. So there are basically a lot of devices based on VA, which are ready to come to market. And I would expect many of the devices new devices sold next year to be based on VA chips. So we're going to see an increase increase in the smartphone share moving towards the 8. Exactly how far that goes next year, but hard to say. What we said at the Analyst Day earlier in the year was over a 5 year period, we'd expect pretty much all smartphones top to bottom in the range to be based on VA. And I think next year we'll make good progress towards that. Okay. And let me just following up Microsoft has announced Windows 10 and they talk about unifying apps. And it seems to be CPU agnostic. So I'm just wondering whether you expect full support for ARM on Windows 10, not what we saw with Windows A with the RT version. How should we think about arm on windows, as this starts to roll out at some point next year? Yes. I mean, from what they've said that they, appear to want a unit application environment and whether you're, experiencing Microsoft on a on a game station or on a phone to to have a very similar experience. That would suggest, architecture, an architecture agnostic way of developing applications. But as far as I'm and disclose a huge amount of detail about that. But if that is indeed the case then, that would create additional opportunity for us. Maybe I'd just ask a slightly different way Simon. So next year, we're going to see a lot of 64 bits apps processors and FinFET is coming maybe towards the second half of next year. How do you think that this positions arm for mainstream computing? Or is there something on the hardware side that you think your partners are missing to really compete with Intel and its new Broadwell platform? No. I think there is nothing to stop. The creation of ships that deliver enough performance to exist in a more conventional computing environment. I mean, if you look at the chip that's high silicon announced with TSMC on 16 FinFET 2.6 gigahertz multi core, I mean, that is a very high performance chip. And there are others being built by other licensees. So, we've said all along that I don't see that there's an issue about performance. We're seeing some mobile computing. The Chromebooks, for example, have provided great user experience based on ARM. Performance is not an issue there. It's not an an issue in any tablet. I don't know any tablet user complaints about the performance of their tablet and there being some lag in the user interface. So performance is not an issue. I think the question in conventional clamshell style computing whether that's a market that's big enough with the growth prospects for, our semiconductor licensees to warrant spending their time on it. You look at the projected growth rates in the industry for laptops, over the next 3 or 4 years, you know, it looks like they will grow back to where they were in about 2011. So it's not the most dynamic market in the world. Most of our licensees are focusing on other areas where they can, leverage their ability to innovate. Your next question comes from the line of Sandeep Deshpande. Yeah. Hi. Thanks for letting me on. My question is following on to some of the earlier questions. I mean, you're talking, you're highlighting that your growth next year will be depending on, of course, where the smartphone market grows, but then smartphone market plus, based on the VA architecture. But what you're seeing overall in the handset market is this rush towards the bottom in terms of, ASPs coming very rapidly outside the Apple ecosystem on the handset market. So are you actually saying that in this environment, that you're even though the customers shift to create architectures on the handset that they are going to start charging higher ASPs and how does that work economically in an where the ASPs of the handsets keep coming down? And then I have one follow-up. So the way we look at this is, with lowering ASPs of handsets, we can increase the number of people in the world's opportunity for multiple all, multiple royalties for Arm due to the technologies that are in there, the aim of the higher royalty rate, multi core products, the addition of Marley graphics, the addition of physical IP creates an opportunity for multiple royalties for Arm. And when we look at those dynamics, as we've modeled out and shared the analysis in the past, we see that they're supporting our projections for growth rate in in mobile royalties overall. So, yeah, that progression is pretty much going as we expect it to. And we think the opportunity for growth in volume is a great thing. And then follow on, I mean, just, again, Simon, respond, you know, something you've already highlighted or rather responded to, but there seems you're just coming out of this inventory correction associated with potentially Samsung's loss of share in the high end handset market. At the same time, you're seeing some clearly some signs of whatever, I mean, somebody talked about the microcontroller market, but there are signs of softness overall in the semiconductor market. Are you saying at this point, you're not taking a stand on that and you'll see how it progresses rather than saying that, well, I think it's not going to impact 2015. I think for now, we will wait and see how things progress, really. And looking at the overall trends and market share gains from all very positive, you know, back to the microcontroller thing that the industry was flat year on year microcontrollers, but the shipments of ARM based chips in microcontrollers went up 55%. So there's a market share gain there that we are enjoying and those trends appear to be in our favor. Your next question comes from the line of Matt Ramsay. Please ask your question. Thank you very much. Good morning. I guess the first one on royalties in Q4 and the Q1 in particular. Maybe Simon, you could talk a little bit about, it seems to me there's chair shifts dynamics, obviously, at the high end of the smartphone market between, OEMs that typically use merchant silicon and OEMs that use their own silicon and the royalty recognition dynamics might be a little bit different for those. So maybe you can talk about how that maybe weighs on the growth rate for Q4 and Q1 for royalties. Thanks. Well, I mean, in terms of, our business model, in serving people, the the merchant silicon players and people who are more vertically integrated, there aren't any meaningful differences there. So if there is a share shifts around these players, that wouldn't make too much difference to, arms royalty. You know, what we more focused on is the end market trends and overall growth of handset shipments. All right. Thanks. Maybe we can get into the little pieces of that one offline. And then I guess I just wanted to follow-up in addition to the the VA, dynamics that people have asked about. Into next year. Maybe you could give a bit of an update on Big Little as a trend, both from a software support point of view, but also from a traction within your year end market licensees? It'd be nice to kind of get an update on that as we've not heard about it in a quarter or so. Thanks. Yes. I mean, in terms of big level adoption, I mean, many of new devices that you're seeing launched by, our licensees into the mobile segment are combo A57 to A53 chips. That's becoming a very common configuration. It in big level configuration and utilizing the software that we've created over the last couple of years, which very efficiently allows task to switch from one to the other. And so one reason why we haven't long as I'm talking about it is because it's kind of becoming a norm. And so, you know, not not something to particularly, underscore. Thanks very much. The next question from the line of Jardan Menon. Please ask your question. I have a question royalty mix and then a short follow-up on licensing. I was just looking at the mix by processes series, comparing that, say, with a year ago. So, and in the current quarter, you reported that Cortex is 18% of unit shipments. And it was actually 18% of unit shipments a year ago as well. And in the meantime, you have the 7, which was, say, 27% and has dropped very slightly to 26% on a year on year basis. Is. And you also still have material shipments on Arm IX, etcetera. I presume this mix has also an impact on your average royalty rate So I was just wondering, what is the timeframe for some of the ARM 7 shipments to drop off? I presume most of that goes into the baseband Is there anything in the market as the conversion to LTE or, you know, further on, that will necessitate, baseband companies moving some of that out into Cortex A. And also, I'm not sure what is driving the 16%, sorry, 40% of ARM9, but it Is that likely to move to Cortex A as well? And what would be the time frame for some of that to happen? Well, I mean, in terms of the longevity of those designs, some of the products that are on and R9 are designed into are going to keep shipping for many years. And as long as they do that, that's a good thing because that is just a pure profit royalty for us. So, you know, I on a quarter by quarter basis, I don't look at these numbers and they are good, you know, on 7 strong up at last. I mean, that isn't something that we're necessarily rooting for because there are some designs there, which can go on and ship for a very long time to Arm 7 is used all over the place. It is used in some modems. I think actually, less so these days. Maybe at some low end modems, but with the shift to 3g, 4g, all the different flavors of 4G, it does typically require higher processing. And so some of those designs are moving on to CORTEX A and CORTEX R effect. So as more of the modem space does move on to more advanced technologies, you would expect greater volumes of those designs. Now in terms of the overall mix, that is less of an issue, we worry more about the volume than we were than we would the absolute mix effect. The mix does impact the average. But I'd say that average is moved around more by the continued very strong growth of Cortex M. Again, that's a great thing because it's enabling us to be used in areas of technology where we hadn't been historically strong. So that mix shift isn't massively important to us. The other thing to know about ARM 7 is that it's used in a lot of smart card applications. You know, they have been very, very high volumes. They're very, very inexpensive chips. But again, that is, that's a good thing for us. Reflects the fact that we've got the right technology for that particular application. And if that shifts for another decade, then frankly, that's happy days for us. Understood. That's very clear. Just a brief follow-up on licensing. You know, your licensing growth fell to 13% and this is the lowest in about 4 years. So after doing 30%, 40%, etcetera, for a long, long time. You're down to about 13%. On the other hand, you sound quite bullish about the out look for licensing into Q4 as well. So I mean, I'm just clarifying an earlier question. Is, are we is 2015 likely to be a year of normalized licensing growth, which is, say, in the 9%, 10% range. Or does a strong Q4 lift you up? We have consistently painted a picture of it trending back to the leverage you talk about. I mean, I think the exact rate of transition between the 30% and the 10% you know, we will see what happens. But I mean, clearly, we're now moving into a world of, you know, much tougher comparisons because it was in the second half last year where license revenue sort of took a jump in the, you know, from the 80s per quarter to 2 to over a 100. So, you know, we'll see I think, as I said earlier in the call, I think the backlog position at the end of this year is likely to underpin the currently expected license revenue growth for 2015. Got it. Okay. Thank you. The next question is from the line of Ajal Sultania. Please ask your question. Thanks. Thanks for taking my question. So first on the outperformance think, Simon, you've consistently delivered about 15%, 20% royalty outperformance versus industry growth in the last 3, 4 years. And now in this quarter, it was only about 5%, 6% based on the industry growth. If you just look at mobile and consumer devices, But I think long term, you're still saying 15%, 20% is doable. Is that all going to be just mainly driven by the transition from to towards VA architecture, or is there something else which can also, help you get to that 15, 20% outperformance? I think it's a number of things. It's adoption of V Eight and it's growth of market share outside our conventionally strong markets. So with more microcontrollers, for example, being ARM based, that would point to outperformance in the microcontroller segment with growth of market share in enterprise networking, see a similar effect with the growth of the use of ARM in servers. Again, that would point to an outperformance. So if we gain share, believe our product portfolio and the way we engage with our licensing points to us gaining share in these other markets, then that would further out the things of the industry. Thanks. And maybe a follow-up on the Malu traction, So we've already seen strong share gains for Mali outside one of the biggest Chipset vendor, which obviously is using their own in house graphics I think on the mobile side, do you expect that there is still some more room for share expansion or are we already getting close to a ceiling on set of things? Well, I think there is a scope for further share gain in graphics. There were another 4 licenses of Molly in the quarter. One of our significant partners took a subscription license to feature Molly Technology so I think the trends are there to suggest that further market share gains for us in graphics. Great. Thanks. Thanks a lot. Your next question comes from the line of Ahmed Hamhan Sandy, please ask your question. Good morning, gentlemen. That's Ahmed urchandani from Citigroup. Good morning. Just maybe a couple of clarifications and a quick question, if I may. Firstly, earlier in the call, I believe you mentioned that if the device CAGR grows at, say, 10% or whatever rate you, you hope to have royalties growing at twice of that rate. Is that is my understanding correct? That's what you said? That's what we said. And that was, that was contrary on a 5 year view. And that that devices, when you talk about devices in that packet, you're including smartphones and tablets? That that was a comment about smartphones. Perfect. And it's by the way, and you may have seen Amit that there's a slide in the deck that we've been talking to for, I don't know, 3 or 4 quarters now. Which really summarizes that. So in a sense, it's no new news, but we're reiterating the fact that, you know, if we're if we're entering a 5 year growth phase of about a 10% device growth in smartphones. We think our royalties from smartphones grow at approximately double the device Perfect. Yes. That's what I thought. Just wanted to clarify. Secondly, I think also in response to another question, in talking about Arm moving conventional computing. Your view is that it's really a function of the growth rate that you see in the conventional computing market, but terms of hardware, software compatibility, for example, arm on windows or even say arm on macOS, there is nothing in terms of technological advancement that still needs to be carried out for, say, for me to see an Arm based chip in a conventional laptop. It's really a punk of the growth rate of the market? Well, no, what I was trying to say was that from a performance perspective, is nothing to stop an arm licensee creating a chip that would deliver enough performance to be used in a conventional laptop style computer. Whether that in our opportunity in terms of growth rates for one of our licensees to attack that. And then obviously software compatibility, which is a completely completely different issue. But the question I was being asked was I think about performance. So I was just trying to answer it from that it. Thanks, Simon. And maybe just on software compatibility, how much more work needs to be done on that front in your view, or you think we are pretty much there, or is are there a few more hurdles to come? You you mean in a in a In a software world. For example, if I want to say the macOS to run on ARM or say Windows 10 to run on ARM, is there a substantial amount of technological work that needs to be done for that, or is it is it something that is manageable? Relatively quickly if the manufacturer decides to do so? Well, I mean, I think that's more a question you need me to ask you of the Apple. But, based on the earlier ports of windows to arm, it shows that it's it's a tractable problem, one that can be done. Again, it's down to whether those companies see an opportunity there to create differentiation or customer benefit around a different architecture platform, but that is entirely up to them. Examine. And just very quickly, could you give us an update on physical IP, please, where does the traction over there stand with the large fabless chip makers, particularly as we continue this whole march down to the advanced node? Thank you. Well, with the progression to advanced nodes, designing chips, manufacturing them becomes are much more complex. And so our partners are looking to us to provide assistance in helping achieve best performance and lowest power in their implementations of our technology, which is why our POP IP has preferred for some time now. And you see that kind of coming through in the licensing performance of the physical IB business, which has been growing quite strongly. The business as a whole, has had double digit growth about last 4 or 5 years quicker with a better technology solution. Your next question is from the line of Lee Simpson. Please ask your question. Great. Thanks so much. I just wonder if you could maybe try and do a quick sum up question, just along the various strings that you've laid down in this call. It looks to me, so said mid single digit percentage rise in royalties Q on Q to Q4, that as we go into next year, pre the VA architecture, you're looking at a normal growth profile again of about mid single go back to base rail of high single digit percent growth. Is that the sort of complexion that you're happy to talk to right now with the delta being just how successful can can be at architectures be in the second half next year? Well, what we said Lee was that you know, we we expect mid teens year on year growth in Q4, which will then obviously form the platform for 2015 royalties. We expect the introduction of, you know, version 8 to to start to make a meaningful contribution. And I think, you know, Simon and I both answered questions about sort of multiple markets that we see contributing to that royalty growth rate. But you know, your, you know, your, your, your summary was, yeah, it was a, was a, was a fair summary. By lease by lease Simpson. Thank you very much. Just wanted to ask, could you remind us What is the tech focus per se or the end market focus again from Maya and Artemis? And maybe second to it looks as though you've got 3 lead licensees in Maya, if I'm reading this correct, but we haven't called out anyone an art message yet. And And thirdly, do we expect the usual 2 year lead time to silicon? In other words, is this the real entry point for high end compute for for ARM. Well, you are joining the dots there. I mean, in terms of Meyer and Artemis, licensing. I mean, at the early stages of a product like this, the I wouldn't read much. Actually, I would read nothing in to whether one of them was licensed in a quarter and the other one wasn't, you know, the next quarter might be the other way around. We do engage with a small number of licensees. We have talked about working with lead partners on the on Artemis in previous, calls. And, you know, I'm very happy happy with the lead partner engagement that we have on those products. In terms of what they're for, when they're going to come to market, what they're going to look like afraid you're going to have to wait and see on that one. And the usual 2 year lead time to silicon? Well, let's wait and on that one. Okay, great. Thanks guys. Thanks. The next question is from the line of Hannah Shala. Please ask your question. Yes. Hi there. Thanks for taking my question. Really one in connection to some of the questions that have already been asked. I mean, there seems to be certainly an expectation that we should be looking at a stronger increase in the mobile percentage royalty rate next year than we've probably seen in some of the previous years, maybe mostly on the back of V8, but if I look at some of the shipment schedules to me, it appears that for you, the positive V8 impact outside of Apple will be largely in the second half. And then on Mali, you will still gain market share, but maybe at a slightly slower pace than the very good pace we've seen over the last few years. So if you could just help us maybe a little bit if we should be really thinking about a stronger increase in the percentage rate in mobile from your perspective or how are you thinking about that? And I have a quick follow-up on as well? Yes. So, I mean, I think you are not a million miles away from believe how the uptake of the vehicle go through next year. It's 1% of our royalties right now. There's a handful of our customers starting to ship VA products right now. We would expect that to increase over the coming year. With a ramp of more VA based chips shipping. And that is one of the things leads us to believe that the royalty dollars will grow next year. So I think you're reasonably there on that. And then, just on OpEx, I mean, a bit of a maybe surprise, I would say, has obviously been on the current rate, which had a positive impact. If you could just give us a bit of color what your OpEx guidance for the fourth quarter implies on the FX side. Is kind of the 162 exit rate for the quarter, something along those lines or maybe a bit different than that? Yes. I mean, the way we express it, is that if it's, assuming effective rates similar to current levels and you know, currently it's sort of 161, 162. But obviously that can move it around both in terms of the translation rate and probably more meaning the the mark to market adjustment to the end of the quarter, which, you know, obviously depends on the rate prevailing at the end of the quarter. During the quarter. So, you know, there are there are some variables. I mean, Q3 was unusual. You usually, you know, the mark to market is sort of plus or minus a 1,000,000 this quarter it was more significant because the dollar strengthened considerably between Q2 and Q3 was 172 at the end of June 162 at the end of, September. That's unusual. Basically, if we are back to 162, the end of this quarter, then there shouldn't be much of an impact? No. I mean, I think, you know, I think for the purposes of modeling the rest of the year, you know, 92 to 94,000,000 sterling. It's reasonable plus or minus. Obviously, FX is a variable on that, but then, you know, there'll be other variables as well. Understood. Perfect. Thank you. So just to clarify one thing I said a moment ago, that's the 1% of VA was actually our unit shipments, not I think I said in the dollars, I actually meant the units. So with that, let's just have one last question, please. Your last question comes from the line of Andrew Dunn. Please ask the question. Unfortunately, do you know all my questions have been answered So I will leave it there. Thank you. Thank you, Andrew. Great. Thanks, Andrew. Okay. Well, thank you very much everyone for joining us on the call today. We will see you for full year results in February. Thank you. This does conclude our conference for today. Thank you all for participating. You may now disconnect.