Earnings Call: Q2 2014

Jul 22, 2014

Good morning, everyone, and welcome to arms Q2 and H1 result Thank you for joining us this morning. Hopefully, you've had a chance to read the press release and a primed with some questions. We'll come on to questions later. I'm going to give a bit of an overview the business first. I'll then hand over to Tim, who will talk through some of the numbers, and then we'll do a Q and A up here in the chairs. So before we get going, I'll just refer you to the usual cautionary statements. I assume you're all very familiar with this, and we'll take it as read. So let me start by giving a bit of an update into what's going on across the business. As you have seen from the release, our revenues in dollar terms were up 17% year on year. And now in this period, the dollar sterling exchange rate moved against us. And so in UK terms, in sterling terms, our revenues were up 9%. The performance of our business was driven very heavily by very strong licensing, up 42% year on year. And royalty in this period was up 2%. And I'll come back to that later. In terms of licensing, this has been one of our strongest quarters ever with 41 licenses signed across a very broad range of technology, including 2 licenses for product we haven't actually announced yet. I'll come on to those a bit later on. Now, despite the exchange rate headwind, our earnings per share was up 11%, and we've declared today the interim dividend up 20% year on year. Now, let me come back to Royalty. As you'll have seen, in recent quarters. And that's been driven by a number of factors, many of which have been anticipated. There's been seasonality in our numbers. Q2 is ordinarily, a weaker quarter. There's been some industry cyclicality and actually a tough comp year on year. 12 months ago, we had a very strong quarter in royalty performance. Consumer markets. When I talk about consumer, I mean phones, TVs, DVD players, digital cameras, and the like. And when we look at the of arms royalties, about 80% of the royalty value comes from these consumer driven markets. And so when there is a site there, our royalty revenues are disproportionately impacted by that. And you can see that cycles are nothing new to Arm. We're showing here on the slide in the mobile sector alone, some of the peaks and valleys that we've experienced over the last few years And you can see that some of the peaks are higher and some of the valleys are, in fact, lower. And over the years, as we've been through these cycles, there have been a number of factors that drive the industry up and down. We've seen different product mixes. We've seen discontinuities come along. We've seen the anticipation of new devices drive the markets up and drive the markets down. And there have been a number of these kinds of factors have gone on over the last few quarters. In the last quarter, one such example is in China, where the operators are using subsidies to heavily drive the sell through of 3g Handset in anticipation OEMs, and that is one of the factors that's read through into our royalties. So there are a number of things going on. But the real question, I guess, is, are we at the Nadeer? Are we at the bottom of the valley, or are we still on a downward trend? And from what we see looking into the industry, talking to our customers, looking at overall trends, we believe that our licenses have already experienced a stronger Q2 for them that will result in stronger Q3, excuse me, royalties for R and that there is a momentum building that will carry into Q4 and beyond. So we think we are at or certainly near the bottom of this cycle. Now one factor that gives us confidence and underpins our belief in further strong royalty growth for Arm, is the strength of licensing of our advanced technology, our version 8 architecture products. We've now licensed version 8 products fifty times to 28 different companies. And when we look at some of the key 10 chip companies that build chips for smartphones have licensed version 8. 9 out of of the companies that build application processes for tablets have licensed V Eight in consumer electronics, TVs, DVD players, set top is it's 4 out of 5. And in enterprise networking, where we're growing market share, again, 4 out of 5 are the top guys who sell into this market have licensed version and as these devices come to market, as they end up in OEM products and deployed into data centers, this will drive higher royalties for ARM. And in Q2, as I mentioned, we started licensing new technology roadmap products that we haven't actually announced yet, and we have 2 product have been licensed. And today, these go by the code names of Maya and Artemis. Now, we're not going to give a lot of detail about those products a bit of a teaser. We'll, I'll talk about that more openly later on. In the meantime, if you want to know how to spell Maier, come see Ian afterwards, and we'll we'll give you that. So more on those products, another time. Now ARTEMIS and Maya are results fruits of the investment that we've made in R&D over the years. If you look at our headcount over the last 12 months, we've increased by about 500. And most of the people things that are coming out now, but we have many investments going on in many different product lines to help us drive the business forwards. The products that they're creating are going to help us sustain market share in markets where we're traditionally strong. In mobile, we see huge growth ahead of us. And we believe the products that we're building will enable Arm to maintain a very high market share there. It's going to help us gain share in some of our non traditional markets like Automotive, like the data center as cloud develops and in the networking, as I said, where we are starting to grow share. It's also going to help us capture a large share in new and emerging markets, in the internet of things in wearables, these are new markets which have much growth ahead of them, we believe, and many changes ahead of them, we believe the products that we're building will allow us to take a very our share there. So this investment, this continued investment in R&D is really important to us. Now, if you came to our Analyst Day in May, you'll have seen this slide. And just to give a recap here, all of those different technology areas, we grouped broadly into 3 different pillars: mobile application processes, enterprise infrastructure and embedded intelligence. And I'll just touch now on the progress in all three. When we phone market evolving over the next 5 years, how the different categories of smartphone will experience different growth rates over the 5 years and how the kind of different semiconductor devices our partners are building will power those devices. 12 months ago, we talked about our expectations for the adoption of version 8 of the ARM architecture for the adoption of our graphic technology and our video technology. And the progress that we've seen in the last 12 months really does underpin, our our belief in the growth and in the model that we spelled out, leading to somewhere between 15% 25% CAGR in our royalty revenue stream from mobile. And in the last quarter, the very strong licensing further gives us confidence in that model. So I'm more confident about that today than I was 90 days ago than I was 12 months ago. Our version 8 licensing, as I said, has been very strong, and we're expecting to see many new devices based upon a silicon build on V Eight later this year and into next year. When we look at progress on servers and positive thing, I believe, for ARMpowered Server chips. We've seen 3 of our licensees, AMD, Applied Micro Cavium, all through some fairly major announcements about what they're doing and the products that they're building. Early in the quarter, AMD demoed their first product, and they talked about their roadmap using their architecture license from Arm, and they talked about devices which are pin compatible enabling an accelerating and delivering very, very high compute performance with multiple very high core count devices. And most recently, we saw Applied Micro launched their products, tailored at high performance computing, but in a very low power and load. So we've seen a lot of silicon devices and we expect those to ship in real servers towards the end of this year as those devices start to get delivered to our customer's customer. So it's been a very strong quarter for progress in the enterprise. In embedded intelligence, nearly half of the licenses that we signed in Q2 were for our M class processes. These are the products we've designed specifically to target microcontrollers and very small and very power efficient systems on chip that will be in wearable devices, internet of things devices, and in embedded products everywhere. Now, those licenses, we don't have 20 licenses for CORTXM. We expect to come through into silicon over the next few years and contribute to the strong growth we're seeing in unit shipments of Cortex N is about 900,000,000 units in Q2 of cortex and class ARM based microcontrollers. As well as on the silicon side, we've seen some evolution in the ecosystem around the embedded space as well in the quarter. You may not be familiar with it, but the board in the middle board. Arduino is a development platform with a very large ecosystem around it, which has historically been based on very simple eight bit microcontrollers. The last quarter, we move over to higher performance devices. And similarly, Atmel, who have been a big driver behind Alto Reno as well, are evolving their ecosystem called Atmel hard to make it easier for their customers to move from very simple devices to more sophisticated, more higher performance, 32 bit arm based devices. So the silicon side is evolving lots of customers coming to us looking to innovate in this space as we all see, many of us see the growth of embedded as a real driver for the semiconductor industry. So in summary, we've made great strategic progress in the last 90 days, a strong licensing performance developments in our ecosystem really do underpin the long term growth opportunity for Arm. Licensing is a precursor to royalty. Licenses that we've signed today will come through in volume typically in a 2 to 3 year time period. And the 41 licenses signed in a quarter is really significant. 1 of our best licensing performances ever, and that does act as a very strong precursor for future royalty growth. Royalty in the short term has been impacted by various market conditions, but when I look at the activity that's going on, arm and our licensees have not lost market share anywhere. This is about the dynamics of the end market. It isn't about market share changes we're continuing to see as is evidenced by the 41 licenses, a strong uptake of our newest technology, and that will drive us into the future. And based on the conditions we can see today, based on what is going on in the market, we do expect a better royalty performance in Q3 and that momentum to accelerate into Q4. So with that, let me hand over to Tim to talk through some of the numbers, and then we'll get back into Q and Thanks, Simon. Morning, everybody. I think Simon has given us a sort of good overview of the licensing and royalty dynamics that have impacted both Q2 and what we should expect down the road in terms of royalty growth. So this morning, I'll keep it fairly brief, and just focus in on a bit more color on the P and L. Some comments and reminders about sort of balance sheet cash capital structure, sort of revisit a little bit the backlog dynamic because obviously an interesting licensing quarter in terms of the number of licenses, the movement in the backlog, the outlook for the rest of the year, So let's try and we'll give a little bit of color on that, and then just to reiterate the outlook, how we see the balance of the year. So as Simon said, 70 percent dollar growth, quite a tough headwind at the moment, with regards the currency. The Q2 effective translation rate was 165 in 2014 compared with 154 last year. That's relatively painful move. So that translated as Simon says into 9% sterling revenue growth. PBT therefore more closely aligned with that, again, up 9%. Now, that is after another as you sense headwind from currency of the mark to market when we revalue our balance sheet, revalue our forward contracts, at the quarter end. The FX actually moved from about 166 and some at the end of Q1 to 171 at the end of Q2. And that typically would result in us a mark to market charge in that environment. When the dollar strengthens quarter on quarter, you tend to get a credit. So yeah, in most quarters, it's plus or minus a 1,000,000 quid. This particular quarter with quite a significant weakening through Q2 of the dollar. It's 3,000,000. So on an underlying basis, OpEx, £85,000,000 in Q2 compared to our previous guidance and consensus of about so running a little bit under on an underlying basis. You'll see there the guidance for the third quarter, a little bit higher the sort of 90 to 92 range. We have been continuing as Simon said to hire to invest in the R and D opportunity. We're also investing in, if you like, the back office, the infrastructure, the IT, all of the things that underpin the future growth of this business. And Q3 also carries some costs that don't necessarily appear in all quarters. We have our big annual partner meeting in the third probably our biggest single marketing event that gets charged in the third quarter. We also closed a sort of bolt on acquisition the end of May, called Dualog, which you'll see you referred to in the back of the release, relatively small acquisition, but sixty plus people cost of those people will also be reflected in the Q3 numbers. So somewhere in this sort of early '90s, we would expect as a base case at current exchange rates. That then just driven a normalized EPS up 11%. The items in between there, I think as we all know, we're all getting less return on our cash at the moment. There are 1 or 2 bankers in the room who are looking a bit cheapest in terms of how much yield they're giving us on our cash, but that suffered a little bit. But on the other side of the equation, the tax rate in the is running at about 18% just over compared to just over 20 last year. And this is the dual benefit of the ongoing implementation of Patent Box, which is, as most of you know, is being implemented over 5 years and also the UK Corporation tax rate continues to be legislated down. So the tax tailwind continues, earnings up 11%. Also, in Q2, not only are we investing in our new R and D capability and innovation. We've also been reviewing as we look forward the mix of sort of skills and generate that we need in arm as we grow. So it's not all about going out and identifying the new. We're also looking at the rump and the mix that we have And that has given rise to around about 130 people leaving arm in Q2. Net headcount, obviously, up, but on a continuous basis, if you like, reviewing the skills mix, and this was a particularly focused exercise around doing that. There's a restructuring charge of 8,000,000 in the quarter. Moving on to the sort of the cash and the balance strong quarter cash generation, 87,000,000. You can see on the right there, the sort of cash journey that we've been on without sort of boring you with ancient history, the way Armas manages its cash we were cash collectors until 2003. We then managed the cash down, as you can see there, down to about £50,000,000 just before the world went into meltdown going into 2008. And we did that via a 3.5 year rolling buyback where we bought back about 16% of the share capital during that period. But when we went into the downturn, we sort of deliberately the cash write up. And as you can see, have broadly continued to do so such that we find ourselves now with £750,000,000 So I think with our cash balance, we have a lot of opportunity to invest. We have opportunity to do further NA, if we need to, and we have opportunity to continue to return cash to shareholders, probably on an increasing basis as we look forward. I mean, you can see the graph in the middle on the share count, looking back again over a sort of 9 year view, the share count has been flat And we said at the beginning this year that we continued, we continue to maintain a share count that what that will mean from here is a limited buyback current numbers, probably about 10,000,000 shares in a year. We did a little bit of that in Q2, 1,400,000 shares, 12,000,000 quid. And you can expect to see more of that as we maintain that flat share count. And on the dividend front, since we introduced the dividend back in 'four, We doubled it at the beginning and then have consistently grown it in the sort of 20% area, some years plus some years minus depending on what's going on in the market. And today, we're saying 20% in the context of earnings up, up 11 consensus earning the full year up about 15%, and our future outlook up, we think, around those numbers at least. So we're increasing the interim dividend by 20%. So as I say, backlog, I think it's just worth spending a little bit of time on, because lots of moving parts on light revenue. Here's a quarter where we beat expectations by about $15,000,000. We've signed, as Simon says, 41 licenses, I think the second time we've been through 40 licenses. And in a sense, yet, the backlog down 10% sequentially. It was down about 5% sequentially last quarter. So what should we be reading into all that? I think is, what seek to address So I think it's worth reminding ourselves over the last 5 years. Backlog has grown broadly 5x. What's been driving that. And even though it's been down the last couple of quarters, you can see it's as high it's pretty close to its historic high levels. And I guess the key drivers from the launch of version 8 of the architecture, a combination of things that really drive the backlog up. Architecture licenses, subscription licenses, a subscription license, just to remind those who's not fresh in the mind, is a license of multiyear license, often 3 years, sometimes 5 years that a company that uses Arm widely across multiple divisions and targeting multiple end markets often finds it attractive to take a sort of corporate wide license to a defined suite of our technology so they don't have to be negotiating individual licenses or individual processes all of the time. The way the accounting works for those licenses, because they incorporate technology to be developed during the period of the subscription, you can't recognize revenue in the normal percentage of completion way. You have to recognize it on a linear ratable basis. And so when you sign a subscription license, you get 5 years' worth or 3 years' worth of contract value in the backlog on day 1. And that backlog pertaining to that particular license will reduce on a quarterly basis through to the end of that license. In most cases, our subscription licensees will then renew at the end of that subscription. Most of them stay with that model once they've embarked on it. And therefore, after 3 or 5 years, the backlog will shoot back up again as they renew that subscription. And then it will wind down again. So that's been quite a powerful dynamic in that growth Also, the other key component of backlog is when you sign licenses with customers before you're in a position to deliver all of the things that they're signing up for. Clearly, you can't recognize revenue before you deliver products or you still have cost to incur to complete those products. And when you're an early or a lead licensee, which is a model we've used throughout Arms hitch 3. The value of the license will go into backlog and it will be transition from backlog to revenue as engineering milestones are met, contract deliverables are made. Therefore, inevitably, you go through a period of as I say, recognizing ratable from the subscription. And then and it just so happens that in the last couple of quarters, engineering milestones relate to the initial processes from the version 8 architecture have been met multiple licensees, multiple deliverables. Obviously, money goes from backlog into revenue do as that occurs. And then you look forward, you look at the new subscription you look at the subscription renewals. And in a sense, the cycle then begins again, as we introduce new technology, Simon just touched on a couple of the net wave of version 8 processes that are going to be coming to the market in due course. Lead licensees are already beginning to engage. That's driving out the backlog. And so what we say in the release is that we expect looking into the crystal ball of licensing in the second half. If you look at the mix of licenses between licenses that generate revenue in the short term, licenses that generate backlog and we expect the backlog to be rising in the second half from where we are, which I think will, by the time we get to the end of the year, I think will be a strong support for target license revenue next year. And you've heard me say many times that we don't expect to be growing license revenue 40% or 30% deep into the future. I grant you that this accelerated growth is lasting longer and actually higher than I have been signaling. This is very good news. But don't be disappointed if in Q3 or Q4, we're not growing licensing at 40%. If you look at the comparisons in the same way that Simon said that the royalty compares in Q1 and Q2 have been tough. The licensing comp payers have been easier. And you remember Q3 last year, we jumped through $100,000,000 of license revenue for the first time. Therefore in Q3 and Q4, license revenue compares will get tougher. So we see a world of accelerating royalty revenue growth year on year. But license revenue growth will be slower relative to the 42. These are the dynamics backlog will go up some quarters. It will go down in others, but we are very confident it is supportive of the licensing out look that's out there in the market, in 2015 and beyond. So reiterating the outlook licensing prospects in the 2nd half look good. They look good for turns business, as we call that yields revenue in the short term. And we also see the pipeline of opportunities generating upward pressure on the backlog. Simon's touched on royalty, industry data, guidance from our bigger shippers, looks positive for a pickup, which we would expect to benefit from in Q3 and Q4 and Q1 because obviously we are 1 quarter in arrears. So putting all that together, we see the, we see our full year dollar revenues being in line with market expectations, which are in this sort of 1.295 area at the moment, 1,295,000,000. So with that, we'll go to Q and So, perhaps I could ask in and A as we have been doing of late, if you could ask one question so we can get around the room and, perhaps state your name and affiliation. Brett? Thanks. It's Achal Suntania from Credit Suisse. Sam, you mentioned about a 15% to 25% growth in your smartphone royalty long term. And then we looked at that chart, which you showed about mobile, like the impact from mobile inventory correction, we expect a significant like a significant rebound like we've seen in the past, again, this year in urology revenue growth, when this inventory correction when you come out of this inventory correction in the second half of this year, because 15% to 25% growth is what you expect from smartphones. And then you've got additional share gains in enterprise and networking. So I'm just trying to understand why can't your royalty revenues grow like 25% to 30% in the next few years going forward? Yes, I mean, there may well be a strong rebound. I mean, that 15% to 25% is a 5 year CAGR, for just mobile, just for smartphones. As you say, when you layer on other things, potentially there's much higher royalty growth to come from that. It's all going to come down to the timing of when products come out that they're on when you look at a server or networking equipment, driven by very different market dynamics, very different timeframes than consummated by is. So adding it all up, they're all layers of royalty, which contribute to long term growth. The point I was making was specifically around, long term for smartphones. I think one thing to bear in mind on that is, yeah, one of the assumptions in that fifteen 25% is that by the end of that period, all smartphones entry mid and premium are incorporating version 8 of our technology. And that as what I've said is the one that yields the higher royalties. And actually today, that's a minimal contribution. So today, we're not really seeing the benefit. We're starting to, but we're not really seeing the benefit yet of the version 8 being designed into smartphones. So that is a longer term comment on that one sector. So would it be fair to say that you can outgrow the semi market by more than 15%, which has been your guidance long term? That's where I was coming from. Well, certainly we have in the past, and I think we've been developing a strategy for broader market penetration, broader adoption of ARM Technology, which potentially can lead to those kind of levels of outperformance in the We'll see. First, next question, gentlemen, behind you. Adequate from Bank of Marietta Merrill Lynch. Simon, your guidance basically seems to imply 10% PD royalty growth for this year. When do you see your outperformance going back to the 15 percentage points that you've talked about? Can we see that in the in 2015 considering your comps again to be easier this year? And secondly, do you see your year over year video royalty growth rate accelerating into the first quarter of next year? Considering this, your fourth quarter this year seems to have been affected by some of the push outs on the 4G space. So the question is about royalty growth. Yes, certainly, I think the reacceleration isn't something that just ends on December 31st, I think there's a, as we work through the inventory issues, one would expect to get back to something more normal but at the same time, you know, I would expect the regular seasonality, you can see from the shape of that graph that these cycles do come and go a, I don't know, 18 months or 2 year kind of cadence. So at some point in the future, I'm sure, will be impacted by some of that again. But the key for me is long term, are we delivering the right technology in these markets? Are we continuing to maintain share in very high share markets and grow new share and all of that is happening. So I think that supports the kind of long term model that we've outlined in the past. Thank you. It's Janardan Menin from Liberum. I'm just trying to paint a picture of your royalty rate, your percentage of royalty, as you transitioned out of arm 11. So arm 11 is now fallen by a 50% going press release and you're down to 3% And you and that's taken over by the cortex A class, and that's going to start transitioning to the VA are going forward. So, if you were to paint a picture of royalty rate going from say 1.1% when this journey sort of started and rise to somewhere in the 2 to 3 percentage range. Is this transition now the arm leveling finishing and the V Eight starting off? Is that an upward inflection moment in that graph, or is it a steady state you're sort of ticking on 1.2,1.3,1.4, I mean, whatever the number today. I'm just if you could give us a qualitative description of how you would see those transitions on your royalty rate? I think in the mobile space, in the smartphone space, I wouldn't necessarily inflection point because I think whilst we talk about V Eight being pervasive it is going to transition in. But I, but I think it'll be, faster than a very, I mean, I think there are 2 things. Smartphone mobile space, and then there's the overall blended. And I think it's more on the smartphone. I think in the smartphone, think, I mean, it will obviously depend very closely on the sort of V Eight ramp, but I think it's going to actually be quite noticeable within the mobile space. Then when you look at the overall armed royalties, it gets a little bit more submerged under the, the volumes of microcontrollers in our IoT type stuff. But I actually think it will become quite noticeable in the mobile space as we move to V Eight. So you're saying that whatever the trajectory of we're seeing in smartphones over the last say 2 or 3 years in the arm 11 to Cortex A transition, you'll probably see a slightly more accelerated rate of growth going I mean, I think what you're going to see is where arm 11 is used is in kind of feature phones right now. Feature phones are being replaced by very low across smartphones based on single core cortex A5, cortex A9. So it isn't moving to V8 yet. I think there's there's a generation maybe or 2 of the or maybe more actually of very low cost devices based on version 7 architecture where there's a less marked delta in the royalty rate. Maybe they moved to multicore over a couple of generations before going version but that is a ultra cost sensitive market to make a whole smartphone unsubsidized for $30 you know, you've really got to work at that. So it's, it will be a while before all the latest greatest technology does ripple down. Probably going to happen over time, but I think the first transition in that feature phone space is from ARM11 based feature phones to cortex A5 cortex A9 based, single core smartphones. Maybe we'll keep working back through that way, Ian. Is from JP Morgan. Just coming back to this royalty cycles that you've shown in the graph. Historically, your royalty tended to go along with what happened in the industry, whereas the semiconductor industry, if you've noticed from the first quarter has had a very I mean, in fact, except maybe Q3 last year, there's been a fairly strong performance in the semiconductor industry. So why has our performance been slightly deviating from the semiconductor industry and following on from the earlier question. Overall, if you do 10% royalty growth this I mean, you're not guiding to that number, but I mean, you know, 10%, 12%, you're going to be in single digit outperformance versus the industry, which hasn't been the case for the last 5 years, I mean, 8 years as such. So why is this year so different from past years? I think when you look at the semiconductor industry as a whole, all of it through this year, with the retirement at Windows XP that has driven more recently a bit of a resurgence in PCs perversely, which obviously we are much less exposed to. Certainly when I talk to CEOs of Semiconductor Companies, no one's exactly high fiving about the growth rate of the semiconductor industry for them over the last year or in fact multiple years, it is slow growth and share is being moved around between companies. There's a lot of consolidation going on. So there've definitely been some bright spot there. But for the markets we're exposed to, as I said earlier, we haven't been losing share, therefore, this is about end unit shipped, which just ripples through for us. Now we're not in control of that. The only thing we can govern is the rate at which we're licensing new technology and the adoption of it into the market and the build of the ecosystem to make that easier over time, which is where our focus has been. You're not saying this is because of this trend of the slowdown in the high end, mid to end handset market versus the low end. So you since you can actually see where the royalty growth is coming for or lack of royalty growth within that mix. Can you say that that because the low end has been growing very fast and you're very highly exposed in that that segment of the market, whereas some of the high end players have been much slower. So are you seeing that trend impacting this? Well, as you say, we're in all of those devices, so we move with that market. And, there's no magic that disconnects us from those end market trends to our royalties, that's highly correlated. Now we're in such a high market share position. Brett? Thanks, Ed. Brett Simpson, the arity research. Just a quick question for Simon. There's been a big debate in the history over the last year or so about sort of Moore's Law no longer given the sort of economics it once did. And I guess if I look at 20 nanometer, which coming up for ramp up fairly soon, the wafer price increases we're hearing are is is pretty dramatic. And I just wanted to get a sense because the the the dye sizes we're seeing at 29 a meter are pretty similar to 28 high K, which would mean, you know, there's going to be cost pressures for chip makers. What does this really mean for, for arms business and royalties, particularly for mobile, for mobile chip prices? You know, or do you think we're going to go through a period of inflation for, you know, high end mobile chips as we go into 29 nanometer and then other other nodes beyond that. Yeah, I mean, there's some fundamental economics here, right? It is 20 nanometer is more complex process. There are more process steps, the scaling that 20 nanometer has achieved isn't what the historic trends have been, and therefore, the price per hasn't been on the same curve that we've enjoyed for decades. There is no getting away from that. And somewhere along the supply chain, someone's going to pay for it. Yeah, the equipment that the fab's put in more and more expensive, the R and D cost to build the chip, more and more expensive, it's got to be funded somehow. I think this isn't new news. I mean, people have been talking about this for a number of years with 20 nanometer. And I think what we're going to see is the number of people that adopt 20 nanometer is relatively low compared to most, process geometry transition points you'll see more people stay on 28, innovate more around design. You'll see the foundries create variance of 28 nanometer to make sure that improvements can be delivered, and we've already seen some of that. And we've seen for a number of years that the big investment that's been going on into next Generation transistor technology to provide that big jump up in performance and area scaling and voltage scaling to really give you the benefit for the cost. It's all about fundamentally transistors are about what benefit can I get for how much do I have to pay? And if that's in the right direction, then you can sell your for more. So I think we're in a transition period. I think the industry generally is looking to get to FinFET's next generation technology as quickly possible. And therefore, you'll see fewer people on 'twenty. But the inference for your business is obviously a chip ASPs the mobile prices, the chip prices, particularly the high end, because they've been fairly stable over the last couple of years. Do you think that's going to change as part of this transition? Well, if the cost is absorbed in the chip price through, then on those very high end devices, you should expect them to get more expensive At the same time, with 28 nanometer becoming more mature, more volume may be run on that than, again, in an ordinary mode, you know, you might see downward cost pressure on that through, you know, the regular kind of economies of scale that the center of production industry delivers. So the net of that, exactly how the net of that plays out, it's kind of TBD. If I can just add a quick follow on for Tim. Tim, if I go back 6 months ago, your core royalty units were growing triple digits year on year. We've seen quite a big decline just in the growth the last couple of quarters I'm just checking, is there any one off events here, inventory events that you think might have caused such a sharp decline in the growth, or, you know, in your view, when you look at the landscape and, was inventory a factor at all in such a market decline in the Cortex unit growth? Well, I think inventory is a factor. I think also probably integration is a factor. I mean, there's no, there's no kind of one off strange thing that we're not sharing with you. As Simon said, to some extent, with the market share, we which is very, very closely correlated to what's happening in the market overall. I mean, clearly, you know, why are we growing at 2% not 20%. I mean, I think a lot of that is around the inventory and what we've seen in that top end. Hi, thanks. This is Samantha from Redburn Just two quick questions. One is, on, could you talk a little bit about your value of your sovereign enterprise, royalties how big are they as a mix of your overall royalty revenue at this point? And, could and how much could that grow to in the next 2 years, do you expect it to reach to about 25%, 30% of overall royalty mix in this near term basis or not? In a 1 to 2 year period, no. In terms of volume, the volumes of those are dwarfed by microcontroller. They're dwarfed by smartphone chips. Now they're large, valuable chips multi core, version 8 architecture. So they're valuable on an individual basis. But I think over the next couple of years, as volumes start to grow, it's not going to create an enormous additional layer of royalty for us. Now out in time, our expectation is we grow 10% to 15 end market share here. So it should, at that point, it should start to be more meaningful, but I think in the next couple of years, measure the success on the design wins and the overall ecosystem development as opposed to really trying to spot that in the numbers. Could you give us a bit of color on the value of that is for you at this point of time as percentage of your royalty? I mean, last year, we said that enterprise networking was 5% in unit terms. I think on average, the yield from that is higher than the blended. I think we have also said that if you look at the kind of Q4, the annualized is probably closer to 10% rather than 5%. And you saw, again, strong growth in Q1 in unit terms. So that gives you a feel for where we're heading, but we're not going to sort of give you values and unit by sector. Okay. And one quick question on the cash capital structure. I mean, this is a very useful slide to looking at the net cash account sector. I'm just wondering, obviously, your cash will probably grow from current levels as your earnings grow, And if you maintain your share count, is the only way you return cash shareholders is via dividend going forward in a material way, or is it, do we a lot more M and A happening in the medium term? Well, I think, well, 2 headline comments there. One is we've stated repeatedly that over time, we see the dividend payout ratio increasing. Okay. And that that continues to be the plan of record. We're non committal on timing and quantum. But we do see the payout ratio. We think it's consistent with this business model, you know, with the operating leverage, the expansion. Secondly, you know, we confirmed in February that we intend to maintain a flat share count. That doesn't mean that's the limit of our buyback in a sense ambition or option forever. If we think it's the right thing to do to manage the cash buyback out in the future, we will do like we did between 20 5 in 2008 when we bought back 16 percent of the shares. So we're not saying that's the maximum we'll ever do. But we did confirm in February this year that we have a specific plan to maintain a flat share account using the buyback. That doesn't mean to say we're not going to do more buyback in due course. So in other words, you'll be returning the cash. The despite this, I mean, even if you maintain a flat share count, you will have an excess amount of cash, which should keep developing over the next 3 to 4 years. Do you keep that on your balance sheet or do you return it, or do you buy some stuff with that way, you're going to see a combination of an increasing payout ratio, at least buyback to maintain a flat share count. You're going to see a lot of investment in the business you're probably going to see some level of continued M and A as you have done. But in terms of precisely what level of cash we're going to run with over the next 2, 3, 4, 5 years, you know, we're not being very specific on that. I mean, I've said to investors multiple times, we don't plan to build a cash pile for the sake of a cash pile. Now, we can debate what a cash pile is in arm terms. But the conversation there says, we don't see a need to have materially more cash on advancing than we currently have. From Citigroup. My first question pertains to your backlog evolution. I think at the end of Q1, we said backlog would be flat till the end of the year. Now, we have talked about rising backlog. I would just maybe like to understand your thoughts on where do you see backlog ending up at the end the year. And more importantly, as you look longer term, obviously, backlog has outgrown licensing significantly. And at some point of time, you would expect the trend to stabilize maybe even reverse. So I'm just trying to look out as we look towards the coming years with licensing growth maybe tapering off, would we expect more of a stabilization in backlog, or would you expect backlog to sort of continue maybe gradually coming down with the next law fears, what's your thought on backlog evolution? Well, I think in time, and backlog is a more lumpy concept because of the revenue recognition rules. Okay. It's a more lumpy concept than revenue recognition itself. But if you kind of look through all of the accounting, in reality backlog has to broadly grow at the same rate of license revenue out in time. I mean, that's because, you know, because backlog represents typically somewhere between 40% 60% of our license revenue, there is inevitably a close correlation. But you've seen in this period of high revenue growth that backlog has grown much faster up because of the reasons that I went through. So, you know, it's very hard to call backlog on a this quarter, that quarter. What we're saying is, we expect given the amount of revenue recognition based on product deliverables that have come out of the backlog in the first half, and based on the pipeline that we see of licenses, the mix between revenue generator short term and backlog builders. Half, we expect the backlog to be higher at the end of this year than it is now. Would it be precisely where it was at Q1 we'd have to see. I mean, obviously, our, when we spoke about that in April, we weren't really, we wouldn't particularly have been predicting the backlog will be 10% down in June. I mean, what happened in practice was if you look at the mix of deals that were in flight in June, the revenue bearing ones kind of signed. And some of the backlog building ones have moved into the second half. If they haven't gone away, we expect them to happen this year. That's going to be good for backlog. Do I know what backlog is going to be at the end of the year? Not precisely, but it looks positive. And over the next few years, would you expect backlog to be stable? I think it'll move it's going to, as you say, it's going to normalize as license revenue normalize as well, but there'll be a different time 1. And maybe it's a quick follow-up if I could. FX has been painful. Clearly, could you maybe remind us if there are any tools available at your disposal to mitigate the effect? I mean, I know it's very difficult. Something it, but how should we think about it? Am I a magician? You're not a magician. Clearly, you're not. And that's why I said, you know, the factors outside your control, but there anything in terms? We had a non exec on the board, actually. He was just, unfortunately, he retired after 9 years. He was a magician, a member of the Magic Circle, but I don't think that he could, eradicate FX movements. I think hedging, this and that, you can smooth the impact. But the fact is Arm is a less profitable business when there's a $2 to the pound than when there's a $1.50 to the pound. And that's never going to change unless We moved all of our people out of the UK and went into sort of dollar currencies. So there isn't any magic. I think we kind of have to in a way suck it up, we sort of, you know, we, as you know, we do a sort of rolling hedging program. But we are going to be less profitable. So I'm sitting here at 171 thinking I'm not a currency forecaster, but the future is bright for Hans's currency. But then I probably thought that at 165 as well, so we'll see. About, you know, we lose one way. We gained the other 7 years ago, it was 2 to 1. We then went down to about 145 and, you know, the FX adjustments were in our favor. We don't win prizes for that. We don't lose it. In terms of whether you would be reconsidering your rolling FX strategy. Is there something you're thinking in terms of hedging a bit more longer term or you just continue with the way things are? There isn't really ending structural. I mean, obviously, you can make long term bets on hedging. But what that means is you're you're going to make a big bet, which you may be very right or you may be very wrong. And I don't really think that's the game we're in. It doesn't really help I think we just have to accept the fact that we're more profitable if the dollar is stronger. So go dollar, basically. Can we keep moving on again? From Numis. Just a question on licensing and the engagement in new products. I guess, we used to think about new products from R being bigger, faster processes. And I I guess it maybe feels like that's kind of different now and that the opportunity looking forward is for why the pieces of semiconductor IP. So if you can just kind of help us understand the market opportunity for life looking forward? Yes, as you say, the bigger, faster process is kind of get the limelight. When we launched the version A products, the Cortex A50 series, that was big kind of here are our new big up into the right products. But in reality, we're developing products across our entire road map the time. It's processes, it's graphics calls, it's physical IP, it's a system interconnect components. I mean, the acquisition that we've just done is about technology that helps people put these very complex chips together, and we have IP for that as well. The sophistication of those products is going up all the time to enable people to build very high performance SoCs in a very area and power efficient way. So as over the last few years, the pervasiveness of the ARM architecture has broadened, it isn't just about the next generation processor for mobile. And we're looking at the next generation processor for enterprise networking, cloud servers, for mobile, for tablets, for, IoT devices, for automotive, there's just a broad range of markets that we're looking at And we've been building the business to capitalize on that opportunity. Over the last couple of years, we've stood here and talked about the increase in headcount And it's to enable us to create those roadmap of products, to service those markets and further broaden the royalty opportunity and some of that is now starting to come out. And I mean, I guess there's kind of new customers coming in and licensing arm. Is there a widening opportunity within existing customers all kind of dollars of IP licenses, with the new products coming through? I mean, there's certainly a category of customer. This has always been the case for Arm. Who either has multiple business divisions and they use arm in one place and then they start using arm in other places. That gives us growth opportunity or customers who having been successful in one place are looking to see where can they leverage, the technology that they're built into other markets. So again, that does broaden our opportunity. On the other side of that, you've got consolidation going on. And these things kind of balance out against each other. But broadly, the use of arm is getting wider we're targeting more markets, and that's why we believe there's great growth ahead. Thank you. Andrew Gardiner from Barclays. You spent quite a bit of time on the enterprise slide talking about servers and the latest product launches. I was just wondering if you could help us with a bit more detail around the networking side as well. If we go back to 2012, I think you had maybe 1, maybe 2 partners start to ship. Last year, it built even further up to, I think, sort of 5% market share is what you've had on your slides. But just as we've come through the first half of this year. Can you give us any sort of update around perhaps number of partners now shipping or number of subsegments within the enterprise networking space that's shipping just to get an idea of how that ramp is going relative to the licensing activity we saw a few years ago. Yes. I mean, nothing's fundamentally changed since we were here talking in detail about that at the Analyst Day, in May, you know, just a couple of months ago, I don't think you were here actually, but yeah, we talked a lot about Sorry. Caught me. Yes, sir. So turn up next time. So yeah, we talked a lot about and our prospects for growth and our anticipated market share. And over the last quarter, progress kind of expected to plan. As you said, over the last little while, we've done some of the licensing. I mentioned on the slide 4 out of 5 that the top chip companies provide this market, have licensed version 8 of the arm architecture. So we expect to see those market shares that we laid out actually a year ago, come to fruition over time. And perhaps, Tim, just a quick follow-up on the FX question, given that you're recognizing, as you say, sort of 60% -ish, in the most recent quarter licensing out of backlog. Can you give us a sense as to where the average dollar rate is for the current backlog just to get an idea of how that phases in over the next few quarters? I think the trend you've seen in the last couple of quarters effectively, the license revenue effective FX rate on translation better than or stronger than the weighted average of the FX through the quarter. Think we'll continue for a good while. Obviously, stuff that's going into backlog now is going in at 170. But obviously, most most of the stuff has gone into backlog has gone in in the 150s and 160s. So you're still going to see a translation rate that's, a little bit stronger than market. I think it's Garrett at the back. Questions have been answered, but just wanted on OpEx. If you could talk about next year in terms of budgeting, it's probably a bit early, but you've historically talked about percent of your revenue growth into OpEx. And I suspect given that you're bouncing back quite aggressively on royalty revenues we should expect a lower growth rate than that 50% of growth. So could you help us around overhead and personnel increases for next year? And then I've got a follow on for Simon sort of separate. Well, 2015 budget. As you say, we are quite early in the 2015 budgeting cycle as in, we haven't really started it in detail. What we are in the middle of actually is looking at our 5 year and you'll update of our sort of 5 year plan. And, you know, I mean, all things being equal, we would expect continue to be, you know, investing, both in the R and D capability of this business. And as I describe it, the business infrastructure I mean, I think as we sort of think of our models, for next year, I don't, you know, I don't see a particular And we're obviously, we're going through a year of quite strong net increase in headcount, which will obviously flow through, into next year. But I don't see any fundamental change. Now I mean, precisely the trajectory of hiring and investment that we make will inevitably be influenced by how we see the market and the opportunity at the time. That's probably all I can say at this point of the cycle. Just to say though, we do see huge opportunity here and we are building the company for the future. So some of the infrastructure development that Tim mentioned, I don't know if that guarantees what you meant by overhead, but, or maybe you meant Tim and I. That is a really important part of the company. We have a lot of people working very hard on being able to enable them to get their engineering work done as quickly as possible and deliver on time to our customers with highest quality is really important. So we are looking at as we grow in a 5 10 year period, what do we need to do now to make sure we're successful there? And that obviously requires some investment on the assumption that we grow and we believe those growth opportunities are big. Now by that, I don't want to scare you into thinking, oh, look at the OpEx massively, we will do that in a measured sensible way, based on how the top line is going to grow. But we're also on the sort of we're very focused on the sort of effectiveness and efficiency and productivity of the people. I mean, if you look at the way arms OpEx develops, We tend to go through phases of investment and then phases of more sort of digestion and productivity. And then we've obviously been through a long, quite a long period now of investment in seizing this growth opportunity. And I think, you know, we are very focused as we look at sort of 5 year plan period of how we can actually make ourselves more effective and more efficient in everything we do. When you have time to sort of sit back and think about how you do stuff, there's always opportunities to be better and more effective. So I think that's going to be a key theme, which in, you know, financial terms will offset, if you like, some of the opportunity and the need to invest in seizing the opportunity. A completely different question just on IoT, going forwards. Can you talk about some of the steps that the industry is taking to maybe become a bit more harmonized. So things like the thread community and so on, and what arms place will be within that or whether we'll see a more fragmented world where imagination gets some market share, Intel gets some market share in arm gets some market share, hopefully the lion's share. Yes, I mean, fragmentation in IoT is clearly a risk. When you look at how devices, they're going to sense data, share that data and make their data available to services that might utilize that data. The easiest thing to do is to build a system. We think that's a bad outcome. And so we want to see accelerated adoption of IoT because it drives our volume. And to remove some of these barriers for data to be shared because we think there's a greatest return on all of this if that happens. So we are looking at at various activities for how, standardization appropriate standardization can occur around some of the technologies require for IoT and thread is one of them. It's about how do products from different manufacturers actually work with each other instead of require their own completely closed system, which is obviously very inefficient and likely to lead to more cost and lower deployment at the end of the day. Freds, one of those, we are talking to lots of people up and down the supply chain about these issues. We're looking at security, we're looking at encryption, we're looking at the standards that are going to evolve around this and what the role of actually government is in setting off in the right direction as opposed to the Wild West followed by massive control, which again, I think, will lead to a suboptimal solution. So there's lots of this. It's very early days for IoT. Given our desire to see a rapid acceleration of the use of ARM Processors here, we are investing to try and lower some of these barriers. Any other questions? Right. Just a follow-up. Your mobile customers licensees, can you perhaps talk about how many of those are double digit percent of sales customers? Because we're seeing a lot of consolidation in mobile, semiconductor. I'm just wondering, how concentrated your business now is with some of those folks getting bigger and bigger? I mean, in terms of, units, you can see the data there, you know, you know, who's shipping what and broadly speaking that the dollar's kind of isn't a million miles away from that. So there is some concentration going on, but there's a lot of competition there as well. I wouldn't say what the situation that we're in today is an indication of what's going to happen for all time, you know, rather clocked back 10 years, the people who are dominant then, you know, have changed. Question down the front. Just a quick follow-up in terms of the, the kind of licenses for example, your perpetual licenses, sometimes licenses are for per use, maybe for a term period of time. Have seen 41 licenses signed right now, but despite that the backlog went down simply because there was recognition from the backlog. So I'm just trying to understand whether it's essential not only to look at the number of licenses, but also in terms of the quality because I guess perpetual is more expensive compared say a per use compared to a term use. So just trying to understand how are you seeing the adoption in terms of these different flavors of variants of licensing? Is it more precise per use licenses? Is it more perpetual? So what's what's could you shed some color on that? Thank I don't think there's been any big shift there. I mean, typically, or not typically, I think the entire time of Arm, they're our newest product we don't license on a per use basis until they have been matured in the market for a while. And part of that is because we want to engage with people who are going to commit to our latest generation products and really work with them to make it successful. So I mean, your measure of quality, I don't use, I don't think of quality of our licensing. Every one of those license deals has an opportunity to turn into something big, but by your measure in terms of time frame of license, the newer technology is going to be on a much longer term basis than perhaps some of the older technology, but it's not to say that the older technology is always licensed on a per use basis either. There's a real mix of that, and that can change big time from 1 quarter to the other. But every one of those, typically, I guess, new companies, maybe 1st company to arm or a company that takes a first license to arm technology might engage on a smaller term just because of uncertainty. But you never know who's going to turn into a big company. Alright. Well, if there are no more questions, thank you all very much for coming, and, we'll see you out on the road. Thanks.