Earnings Call: Q1 2014

Apr 23, 2014

Thank you for standing by, and welcome to the Arm Q1 Results Analyst Call At this time, all participants are in a listen only I must advise you this conference is being recorded today. Wednesday, 23rd April 2014. I would now like to hand the conference over to your speaker today. Mr. Ian Thornton, please go ahead, sir. Thank you, Helen. Good morning, everybody. Welcome to this call. This is Ian Thornton, I'm the Head of Investor Relations at Arm. On today's Q1 results conference call, we have Simon Seagulls, Chief Executive Officer and Kim Skull, 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 the call to a Q and A session. As a reminder, the presentation and press release can be found on the, Arm Investor Relations website at www.arm.com/ir. Before I hand over to the team, I just have to read out a few words with respect to this conference call and what we're about to discuss. Contents of this conference call are being directed only to those of you who have professional experience in matters relating to investments, and the information communicated on this call is being made available only investment professionals. Any persons present on this call that does not have professional experience in matters related to investments should not act nor rely on the contents of this call. The following conference call will contain forward looking statements, which are other than statements of historical fact. The company's actual results for future periods may differ materially from these statements they are based on current expectations and are subject to a number of risks and uncertainties. And on this note, I'll hand over to Simon. Thanks, Ian, and good morning, everyone. After an excellent year for Arm in 2013, we're pleased to announce this morning that we've built on that progress in the first quarter with strong demand for ARM Technology, leading to revenues, profits, and earnings in line with market expectations. Continuing demand for ARM products underpins our confidence in the long term growth of the business. The first quarter of 2014 saw particularly strong uptake of Arm's most advanced ArmVA Processor technology with 5 licenses signed by 4 semiconductor companies. These customers are planning to develop chips for automotive infotainment systems, Carrier Networks and high performance computing. During the quarter, we saw announcements from Marvell, MediaTech, and Qualcomm, on how they are developing multicore ArmV8 based processes, the use in mid range and premium smartphones and tablets. There were also announcements from Broadcom And Freescale who plan to deploy RBA based chips into data centers and enterprise networking equipment. RB8 is now the computing platform of choice for future chip designs, not just in mobile computing, but increasingly in consumer electronics, the data center and networking infrastructure. As we've seen in previous years, Q4 and Q1 can be susceptible to inventory ebbs and flows, especially in chip sales into mobile devices where Arm has a very high market share. For example, our Q1 2012 was impacted by an inventory correction in late 2011. Q1 2014 looks very similar with many semiconductor companies having reported sequential declines in Q4 2013, and this is reflected in our Q1 2014 royalty revenues. In addition, the reported process of royalty revenue includes a 1 off deduction of $5,000,000 from one of our customers due to over reported royalty revenues from prior years. Our Q2 royalty revenues will result from the sale of chips in Q1. It is common for the semiconductor industry to decline sequentially in the first quarter of the year, and market commentators generally regard the decline this year to have been similar to that of prior years. However, Recent indications from the semiconductor industry and arms customers suggest that Arm will benefit from an improving industry environment in the second half. Arm's pipeline of licensing opportunities remains healthy for both Q2 and the rest of the year. Assuming the outlook for the semiconductor industry in the second half improves as generally anticipated, we expect group dollar revenues for the full year 2014 to be in line with market expectations. Now I'll discuss the revenue drivers in the different parts of the business in more detail, starting with technology licensing. We signed 26 processor licenses in the quarter. These licenses were signed for a broad range of end applications from smartphones to enterprise infrastructure to wearable technology. 6 of the licenses signed with the Arm's Cortex A Series technology, This included 5 licenses for Arm's latest, Cortex A53 and Cortex A57 Processors, one licensee being a brand new customer to our AARP has also continued to see strong demand for our Cortic M class processes, which are used extensively in microcontrollers, and embedded connectivity chips and smart sensors and can be found in most of the internet of things and wearable devices that have been announced to date. 11 Cortex M class Processors were licensed in the quarter, including 4 companies taking their 1st Arm Processor license. Finally, arm signed 4 more Marley graphics licenses and 5 more POPs during Q1. POP IP is of IP that has been optimized to enhance the performance of ARM Processes, including Cortex A, Cortex M, and Marley graphics Processes. And now I'll switch to the royalty side of the business. Arms Royalty Revenues are reported 1 quarter in arrears, So our royalty for Q1 was generated from chip sold in Q4 2013. Underlying process of royalty revenue was up 8% year on year, compared to relevant industry revenues increasing about 6%. Our customers reported that they had shipped 2,900,000,000 ARM processor based chips. This 11% year on year increase represents an additional 300,000,000 chips. Many of these additional chips went into enterprise networking, infrastructure equipment and into microcontrollers that are embedded into everyday objects that are becoming smarter, such as watches, washing machines, touchscreen controllers, and the like. We saw the sale of ARM based chips into enterprise networking more than doubled year on year, and ARM based microcontrollers grow by more than 40% year on year. Continues to benefit from the sale of smart consumer devices such as smartphones, tablets, and digital TVs. Most of these product products have an application processor based on a Cortex A class processor, which typically has a higher royalty percentage per chip, and we saw a 30% year on year increase in Cortex A shipments. Many of these chips are replacing chips that were based on the Arm Eleven processor, which declined 40% year on year. And now I'll talk about the uptake of ARM Technology into the market. Q1 is typically a very exciting time for companies within the ARM ecosystem. Events such as the Consumer Electronics Show, Mobile World Congress, Embedded World, and the Open Compute Summit give our customers the opportunity to demonstrate their new technologies that will be going into the products and services that we'll be enjoying as consumers in the years to come. Having attended some of these shows personally, and met with many of our customers and ecosystem partners, the impression I came away with was that the adoption of our technology is broader than ever, and it is helping to accelerate innovation everywhere. As examples, as carrier infrastructure moves to heterogeneous networks, Arm is being used in new designs from small cells to base stations to virtualized networks in servers. As data centers and cloud computing companies look to optimize their services, so opportunities for ARM based servers are being created. We're now seeing the 2nd generation of wearable and internet of things devices, They are well thought through in terms of design, have good build quality of hardware and provide easy to use software services. This is still a very fragmented end market, but with many of the chips going into these devices being based on ARM, the benefits of our ecosystem make it easier for developers to create new products. And we are seeing more innovation within mobile devices too. Entry level smartphones are now available unsubsidized for less than $50, making them affordable for the largely untapped consumer markets in India, Africa and South America. Premium mobile devices are becoming increasingly used in enterprise applications, and with productivity software such as Microsoft Office, being available for ARM based computers, we anticipate further penetration of the enterprise. Finally, we have continued our investment in R&D, and have grown the engineering teams working on advanced processes and graphics products. We hired 120 people in Q1, we expect investment to continue in Q2. We were pleased to be named as one of the UK's top employers in 2014, by the Top Employers Institute based on independent research conducted by the Corporate Research Foundation. ARM's technology roadmap developed and deployed by about 3000 highly skilled and experienced engineers and sales and marketeers and professionals in the areas of legal, HR, IT, and finance. It's vitally important that we recruit and retain the best people, and this award reflects our dedication to make Arm a great place of the work. I'll now hand over to Tim who'll provide further details on the numbers. Thank you, Simon. Good morning, everybody. Simon's obviously given an overview of the key financials. So I will provide a little bit more color on the numbers obviously a lot more detail, both in the release and in the normal quarterly slide set, which is Ian said at the beginning, is on our website now. So as we've seen, overall, Q1 dollar revenues at just over $305,000,000, up 16% year on year. With strong growth in both Processor and physical IP license revenues, which were up 38% and 30%, respectively. And 16% dollar revenue growth translated into 10% year on year sterling revenue growth and the dollar was weaker in Q1 2014 at 163, than a year ago when it was 155. Process and license revenue of $112,000,000, driven by both a large contribution from backlog and by strong turns business as we licensed 6 High Value, Cortex A Class Processors and 4 Marley graphics Processors. Backlog, quarter backlog is down about 5% sequentially with approximately 65% of Q1 license revenues coming from the backlog. As those who follow on closely will know, the typical contribution from backlog in most quarters is in the range of 40% to 60%. So slightly above the top end this quarter as, contract milestones were achieved on some of our advanced processes, thereby releasing revenue from backlog on a percentage of completion basis. Looking at the expected conversion of backlog to revenue, over the rest of this year and the pipeline of licensing opportunities that are in view, we would expect order backlog at the end of 2014 at the end of this year to be at a similar level, as the backlog at the end of Q1. So backlog expected to remain broadly flat from here over the balance of the year. Simon touched on, underlying process of royalty revenue grew 8% year on year. Slightly ahead of relevant industry, which grew around 6%. This degree of outperformance is lower than we have seen in previous quarters. Mainly due to the unwinding of the incorrect correction that has been widely reported and as Simon said impacted many of our customers in the fourth quarter, of 2013. And in addition, the reported process of royalty revenue includes a 1 off deduction of $5,000,000 from one of our major customers due to over reported royalty revenue from prior years. Looking at the cost side, normalized OpEx, Q1 was $84,300,000 as we continue to invest in the development of more advanced processes for computing servers and enterprise infrastructure Given this ongoing investment in our R and D teams and in our business infrastructure, we would expect normalized operating expenses in the 2nd quarter, assuming effective exchange rates are broadly similar, to be in the range of 86 to GBP 88,000,000. A quick note on interest income, you would have noted that in Q1, that was GBP 3,000,000. And given the lower interest rates that are available on new deposits. I would expect the quarterly interest for the rest of quarterly interest income for the rest of 2014 to be around the GBP 3,000,000 mark or ever so slightly lower, despite increasing net cash On the tax front, the normalized rate in Q1 was 18%. And we are reiterating our guidance for the full year effective tax rate of around 18% that level. As we continue to benefit from the reduction in UK Corporation tax rates, and the introduction of the Patent Box tax regime that we've talked about before. Normalized PBT in Q1, up 9% year on year, And earnings up 5%, which reflects the unusually low tax rate in Q1 2013, which was 16.5%. And you may recall that Q1 2013 benefited from if you like, 2 tranches of U. S. R and D tax credit, the U. S. Government was late in legislating the 2012 tax credit and we got the 1st year of the 2013. In this particular quarter, Q1 2014, the U. S. Government has not yet legislated the 2014 R and D tax credit that our Q1 tax rate includes no U. S. On the tax credit compared to last year where it included 2 tranches hence, the Q1 rate being a little bit higher. But as I say, full year tax rate expected to be, around 18% Looking forward to the rest of the year and really reiterating what Simon said earlier, given the strength of the order backlog, which remains at very close to historically high levels and the licensing opportunity pipeline together with the indications from the industry that the prospects of the second half looked brighter than the first half. We would expect group dollar revenues for the full year to be in line with market expectations. And with that, Your first question comes from the line of Garis Jenkins from UBS. Please ask your question. Yes, hi. Thanks for taking the question. I guess a couple if I could. Firstly, I just wondered if you could talk about progress on 64 bit and some of the design activities that you're seeing and when you expect that really to have a meaningful impact? On your business. We've obviously seen the first launches and it's come to market in smartphones. I just wanted if you can talk about the progress there? And, secondly, I just wondered whether I think historically talked about 19% growth or the higher end of your prior, royalty, PD royalty revenue growth rates as a target for this year, should we still expect that for the full year? Thanks. Okay. Thanks. Thanks, Gary. So, I'll talk about you first part questionnaire about, 64 bit. And if I could just generally ask people to ask one question at a time, and then we'll be able to get around to everyone. So overall progress in deploying on version 8 arc of the architecture, is going very well. We've had a very strong licensing as seen in the numbers here. And we've seen a number of exciting product announcements from some of our licensees at Mobile World Congress recently we saw 3 key announcements from Qualcomm, from Marvell from MediaTek talking about, on version 8 based chips for mid range and high end smartphones and tablets. Now those devices will take time to conclude. They'll take time to get into products, take time ship, but I think we're, in good track in, generally, in terms of the deployment of version 8 of the architecture. Yes. And on the royalty front, Gary, you're right. I mean, at the beginning of the year, we said that we expected full year royalty revenues to be similar to what we've seen in the last 3 years, which, have been sort of 18.5% last year. And then 17.5% and 22%, which people averaged out concluded was about 19%. I mean, we remain confident in full year royalty revenues. And as you've seen, we've reiterated guidance for the full year And I think probably there are more industry data points that are supportive of the strong second half now than we had in early February. So yes, we remain confident about full year royalty revenue growth. Your next question comes from the line of Matt Ramsay from Canaccord Genuity. Please ask your question. Yes, thank you very much. I guess on the printed quarter, either for Simon or Tim, I think many of us were expecting slower year over year growth in royalties, to get inventory correction. However, I guess I was a bit surprised in the narrowing out of the out performance band versus the industry growth rate. Maybe you could talk a little bit about the narrowing of that band, I guess, maybe naively I expected the sort of market data from Q4 actuals for the industry to sort of mimic what your performance was and it seems that that magnitude of our performance narrowed a bit. So any help there would be appreciated. Thanks. Well, these things do ebb and flow by on, how the market is performing based on mix, based on a variety of factors. It's something hard for us to to call exactly what's going to happen. I mean, overall, we've seen an increase in volume, 300,000,000 more chips in Q1. Than a year before, and that is still ahead of where the market is. Yeah. Performance comes as we gain market share as more on processes per device, are put into end products. We're seeing very strong growth in the microcontroller end, of course, which is a sort of one for 1, kind of relationship because of the more simplistic nature of those devices, but we're continuing grow market share there. So that outperformance is going to change from quarter to quarter. We're going through this period of inventory correction at the moment. And we would expect in the, in the longer term to get back to more sort of normal levels? Yes, Simon referred earlier, to the inventory correction in the first half of twenty twelve. Where I think our outperformance actually was very similar to the ones we've been experiencing. So we looking at, the sort of medium term outlook we we see no reason to change, the sort of our guidance and looking at history of our overall outperformance we see it continue to see a similar picture going forward. Great. And just as a maybe unrelated follow-up, On the licensing side, I noticed in the slide deck, the long term CAGR guidance was taken from high singles to 10% and it gets sort of a tiny move, but a nitpick in the positive direction. Maybe you could talk a little bit about the reasons for that longer term guidance change and if you still expect the 2014 licensing to outperform that longer term range, even with the backlog changing being down in the in the quarter for the first time in a bit? Thanks. Yes, yes. I mean, I think we've been very consistent, in saying that we don't see 30% license revenue CAGR as being the norm. And we have consistently painted a picture of sort of medium term license revenue growth around the 10% number. And there's no real change there. I mean, high single digits, 10%. I mean, I think it's sort of a little bit in the noise I mean, I think the question is, what does the transition look like from the 30% growth that we've seen to the, let's say, broadly 10%. And certainly as part of that transition, we would expect license revenue growth in 2014 to be quite well ahead of that medium term guidance. But I think as the business model develops further, we do believe that we almost sort of revert to a situation where royalty revenues are growing faster than license revenues, which is obviously not a position we've seen in recent quarters. Thanks very much. Your next question comes from the line of Sandeep Deshpande from JP Morgan. Please ask your question. Hi, thanks for letting me on. I'm trying to understand, within your business in smartphones and tablet mean, from what we know in terms of the inventory correction is that there has been a slowdown in the high end handset market, but the low end and mid market is continuing to do very, very strong, be very strong and we can see that, for instance, in media tech numbers. So can we try can I try to understand from you, as you understand it, why that low end, low end, mid end strength is not being seen in your royalty revenues? Well, I think it is. I mean, the volume growth year on year is quite high. We're seeing a mix of devices. And when we talk about inventory correction, we're talking about that going across a range of markets, not just being about handsets. As you say, the entry level end of the market is performing well. We think that is a market that is very valuable to arm and additive to what we're doing. And it's going to create a whole load of opportunities for more technology over time as that trend really takes off and people start using those phones and using them to interact with other devices. So I think to your question, we are seeing the positive benefits of that is just offset by the trends in many other markets. Okay. Thank you. Your next question comes from the line of Andrew Gardiner from Barclays. Please ask your question. Good morning. Thank you. Actually, my question is related to the last one as well. If we look at your the mobile units within your mix. So a flattish year on year, your overall royalty revenues up 8% year on year. And you've highlighted that a lot of this is sort of can be or some of this can be attributed to nonmobile growth. But given that again, you pointed out microcontrollers, it's sort of 1 for 1. It's a lower royalty generator. Can you help us a little bit in terms of the pricing that you're seeing within Royal within mobile? I know it's a sensitive topic, but just in terms of the impact from steady increases in Cortex A class and in particular 64 bit in the metrics, is this sort of pricing trend something that we can expect to see continue later in the year? Well, broadly in mobile, I mean, we've seen pricing being fairly flat, over the last little period. In terms of the rollout of VA, we're still at the very early stages of that. I mean, there's very few devices that actually contain that right now. So this is about mix. We're seeing lots of integration of devices at the low end at the mid range. We're seeing single core devices with multi arm processors and integrated modems and connectivity, in a single device. So there are lots of parameters moving around here. Okay. Thank you. Also, just quickly on one of the slides that is sort of a regular feature in the deck, you're talking about Page 11, the licensing driving market share. I'm just looking at the sort of number of companies re equipping in terms of licenses in the quarter, you're highlighting 5 there for 1Q in total, whereas for the full year last year, it was only about 12. So it looks like this trend continues or is even accelerating if we look at 1Q? Can you help us with any color around those trends? Yes, I mean, you look at the number of licenses we signed in the quarter 20 that's quite high. We're seeing continued uptake of the technology across a wide range of end markets. So to us, that's sort of business as usual. Okay. Thank you very much. Your next question comes from the line of Adithya Matuku from Bank of America. Please ask your question. Good morning guys. Thanks for taking my question. My first question is on the backlog. I would have expected your backlog to have gone down as you go through 2014 as you recognize the on VA licenses, but you're saying it's going to remain flat, basically implying that your licensing pipeline is very strong. I was just wondering if you could provide some color on your licensing line and on the puts and takes in the backlog as we go through the rest of the year? Yes, I think I think it's worth pointing out that the VA to licensing cycle is in its relatively early stages. We've done sort of 30 licenses plus compared with well over 100 in V7. So you're still going to we're still going to be signing licenses through end of this year where processes are already in, if you like, announced, that are going to drive some level of backlog as well as, turns business. And of course, generally, as you know, we have mean, our technology roadmap is a continuum whereby we are regularly bringing out new processes and at appropriate time, we'll be announcing new processes that as they start to get license, we'll also be driving backlog. So our commentary obviously comes from insight into the planned engineering work that will achieve contract milestones and release revenue and also from insight into the discussions that we are having and expect to be having during this year that generates both turns and backlog revenue it's a kind of a bottoms up analysis. But again, there are many moving parts, to the relationship between backlog and life revenue. But our overall view of that is that we end this year with a backlog and very similar to where it is now. Next question comes from the line of Francois Meonea from Morgan Stanley. Please ask your question. Yes. Hello, guys. I'm afraid I have to ask a question again about the backlog, Tim, because this is probably the first time in a very long time that you've been so specific about guiding for backlog to go down year on year. I mean, 5%. It's nothing. So how should we read this? Is it your I mean, you showed cautiousness about this number and as we've seen in the past 2 years, growth has always been much stronger than what you are trying to lead us. So is it extra cautiousness or are you really reading something different this year on our share really, really forecast for like 8%, 10% growth in licensing revenues and maybe less next year? Well, I think as you know, the order backlog has gone up significantly and consistently over the last couple of years. And as I explained earlier that we envisage a transition from 30% license revenue growth to somewhere closer to 10 And as part of that process, I think that the backlog sort of levels out and doesn't keep growing significantly. I mean, I think the reason we draw out today that obviously with a 5% sequential drop, and it being relatively flat last quarter, you could take away from that, that we could expect a series or quarters where the backlog would be on a downward trend. We don't see that. So the point we're making today is that we actually see the backlog being similar at the end of the year to where it is now, which is our historic historically high levels and supportive of, continued license strength, but not at the 30% class CAGR. So basically if I conclude, if you have licensing growth slowing to say 10%, which is still extremely good, and royalty growth around 15%, 20%, then the average growth of the company is more in the tune of 15% then? Long term? That would be an analysis. And as I said earlier, I mean, we I expect to I expect to I expect us to revert to an environment where royalties, as you say, are growing in sort of mid teens and above and licensing is growing at Broadly 10. And that's driving earnings growth in the future, similar to that, which we've seen in the past. Okay. Thank you guys and see you at the Analyst Day. Your next question comes from the line of Achal Suthania from Credit Suisse. Please ask your question. Thanks guys. So on the chipset pricing trends, especially in the smartphone market. In the last couple of years, we've seen very aggressive pricing in the lower end of the smartphone market. So guys like MediaTech and Spectrum, how should we see that trend evolving as we, as we see actually more and more higher end processors being used even in lower end devices So with use of, like, Okta Core And Quote Core Processors in lower end devices, are you seeing some level of moderation in chipset pricing from your customers? As I said earlier, we've seen, chip pricing stabilize across the spectrum of entry levels at high end, over the last little while, Generally, the trend is that existing chips get cheaper and customers introduce new products with greater functionality, to help reset the pricing and provide more value. I see no reason why that trend wouldn't play out here in in smartphones, no matter where they are in the spectrum of performance. Just an update on Mali, obviously, I think you gave a number of 400,000,000 units last year. Have you given any color around what the number is for Q1 or what target is for full year 'fourteen? Well, in the Q4 results, we said we expect between 500,000,006 100,000,000 units of Mali in 2014. We haven't given a breakout of the numbers in Q1, but we believe we're on track to achieve those kind of levels. Thank you. Your next question comes from the line of Samantha Waihi from Redburn Partners. Please ask your question. Hello, can you hear me? Can you hear me? Hi. Sorry, I don't know what happened there, but for taking my question. I have 2 quick questions. Once, essentially on the royalty, you guys should achieve on licensing in the internal things and the server market essentially. So there are 2 other buckets outside of smartphones. Essentially, your licensing has been fairly strong in past and you could still guide to about 10%, but my understanding is that probably a bigger proportion of the licensing demand will now be coming from the non mobile traditional sector. So my question is that do you still believe that your royalty revenue per license should remain at the similar levels to what we saw in the smartphone side? Or should we be assuming a lot more licensing for a similar level of royalty? I just want to kind of, temper probably my own enthusiasm on how extrapolate the strong licensing into royalties over the next 3 to 5 years? That's my first question. Okay. I mean, I think in terms of the financial structure of our contracts. There's been no significant changes in that. So the kind of rates that we've established in the market over the last 20 odd years of ARM kind of pertain for the future. What we're seeing historically is as we sign license deals, customers typically have a 1st end product in mind but then often use the same license for multiple different designs. So you get a kind of fan out of, one license driving multiple products and hence multiple royalty streams into Arm. And again, I see no reason why that wouldn't continue. At any moment in time, we're licensing big companies with multiple product lines, who over time will find uses for the technology that nobody anticipated when they sign a contract. And then we're licensing small companies who are starting up and just have a single product line and are, trying to establish themselves in the market. Again, I don't think that mix has fundamentally changed, over the last little while. So I would expect to see sort of future in terms of how licensing translates into royalty to be very similar to how it's been in the past. I guess, the reason I was asking that is because in the smartphone industry, at least the chip suppliers are quite consolidated, whereas in the in the rest of the market, there is a lot more fragmentation, I guess, but I see you still believe it should remain similar to us, right? Yes, I think that's all about the point in the life cycle of a market. Once upon a time, there were lots and lots of companies licensing arm 7 to build GSM base bands. And, that consolidated down into a smaller number. We've seen the number of people developing chips for smartphones increase and then consolidate down. We'll see other ways of that, I'm sure. We're on wave of that in IoT right now. Clearly, where there are lots of companies, looking to develop products for that market now. It's a very broad market. So it probably does support lots of people doing it. And you'll see similar trends in other markets such as servers. So I think, again, that's all about the cycle where we are in the lifetime of any particular class of product. Okay. And just very quickly, my second question is, mean, listening to the recent conference call comments from TSMC, ASML, etcetera, this it suggests that the that your ecosystem players, the foundries are spending a bit longer time at 20 nanometer, versus transitioning into 14, 16 nanometer. So just wondering whether, in your view, is this more of a reflection on the demand environment in essence, the stay on internal things and and just low and medium phone demand? Or do you think, are you at all worried whether your ecosystem has currently the capability of moving to 16, 14 nanometer in time to compete with Intel? Well, the short answer to that last part of the question is no. I think there's a lot of activity going around on and around the development of FinFET technology, the proving out of the technology, the creating of design environments, so people can build chips And to me, that all seems to be progressing very well. I think what you'll see is some of the older technologies, particularly 28 nanometer, stay around for a long time and maintain applicability as the cost goes down, in a wide range of markets. So again, this is, in some ways, nothing new. FinFETs introduced a whole new loan of technology challenges, the industry They're new to the industry, but the industry is very well set to address these and bring these new technologies to market. So, yeah, that's about timing. But I guess if Intel is already there, I'm just wondering whether you still believe that on a performance power ratio, you would be competitive for them with them in the next 2 years as Well, there's there and there's there for building highly integrated SoCs, and that is what the foundry industry does well in terms of bringing technologies to market. And I am confident that half foundry partners will do that for FinFETs and beyond. Thank you very much. Your next question comes from the line of Andrew Dunn from RBC Capital Markets. Please ask your question. Thank you very much. Good morning. If I can ask something just around Enterprise Networking, you're obviously seeing very strong growth there from a low ish base. And you indicate number around 150 percent growth rate for this period. Could you just perhaps give us a little bit more detail in into what's driving that growth? What sort of IP you're selling into that market? And perhaps which segments you're seeing a good growth in, in that new market for you? Thanks. Yes, as you said, the uptake of ARM into enterprise networking has been very strong. The units in Q1 are more than twice that of the year before. It's in a range of end markets. But what we're seeing is with the increased, generally with the increased bandwidth requirements, as 4G smartphones and tablets are deployed, that is driving generally an upgrade in the network. And as we see more and more smartphones, that's going to drive a further upgrade. So people are looking at the long term, they're looking at what processor architecture to base the future on. And given the strength of the Arm ecosystem, for a lot of those many as they're concluding that Arm is the right choice to make. So it would be early stages of deployment into this market, but progress is very good and growth is good. Where we're seeing the technology, there's a lot in, in, mobile infrastructure, both small cells and large cell base stations, in wireline, in corporate networks, and in the most of conventional access point technology. So it's across a broad range. We've seen a couple of recent announcements. We've seen free scale in terms of what technology they're using, the products that they announced recently are based on, CORTEX A57, one of their products using 8 cores We've seen similarly very high core count devices from LSI. We've seen announcements from Broadcom recently, in terms of using the art architecture for very high performance devices. So many companies, in fact, most of the suppliers into this market are using our own technology, and we're very pleased with the progress. Your next question comes from the line of Johannes Schaller from Deutsche Bank. Please ask your question. Yes, hello. Thanks for taking my question. And if I look at your performance over TSMC, which is obviously quite important data point, Q4 now for your Q1 royalties. You've actually nicely nicely outperformed here. And if I take TSMC's Q2 guidance and also what they said in the second half of the year to me, it looks like that your royalty guidance actually looks relatively achievable from that cyclical, semiconductor recovery perspective. I was just wondering if give us maybe a bit more color on what you're assuming in your guidance, the kind of 19%, 20% in terms of structural drivers like higher royalty rates from VA or big little and share gains in networking. And if you think you're more conservative here or what kind of baked in from the structural side into that guidance? And I have a quick follow-up, if I could. Good. It's a quick follow-up. No, I mean, I think in guiding royalty revenue growth for ARM over any period, you're obviously factoring in a number of things. One of them is the industry environment, and we are seeing the same data points that you're seeing in terms of the expected improvement in the second half. I mean, recent TSMC guidance would be a very specific but supportive data point. Clearly, we're looking at the trajectory of percentage per chip that we will be earning on these devices. And again, in the sort of smartphone mobile and most markets, in fact, that is on an upward trajectory but it's a continuum. And, you know, Simon said earlier in V Eight, you know, we're at the very early stages, and that is that's a story that's going to unfold over a number of years. So we're obviously taking into account all of the factors that you would imagine we need to in terms of trying to forecast where our role is going to end up. And that's what brings us to the conclusion we discussed earlier about the likely full year royalty growth. Understood. And then a follow-up quickly. Just some gross margins were actually quite good in terms of year on year improvement in Q1. I think last year, they were on average flat. If you could maybe give us a bit more color on what drove the improvement and how we be thinking about gross margins for the rest of the very difficult number to, I mean, it basically moves within a very tight band of sort of 94.5 to high 95s. And on a quarterly basis to assess where it fits within that sort of 1% band is quite tough. I mean, suffice to say that on a medium to long term basis, as royalty revenues grow and drop through to the bottom line, then we would expect gross margins stay in the sort of mid-90s and if anything edging ever so slightly up. Got it. Thanks very much. Your next question comes from the line of Amit Harchandani from Citigroup. Please ask your question. On the search Nani from Citigroup and thanks for taking my question. My first question is, is really in terms of competitive dynamics We have heard one of your major competitors talk about making strong progress and even using part of a contra revenue philosophy to make inroads. So I'm wondering what you're hearing from your customers or what your sales guys are picking up from your customers in terms how they are thinking about evolving competitive dynamics in the mobile space? That would be my first question. Okay. Well, we in terms of what our customers are seeing is in a lot of ways, unchanged, our customers are focusing on competing with each other and competing with anybody else who's targeting the space, which of course is large and has a lot of potential for profit in it. Everybody wants to build the most highest performance, most power efficient process that they possibly can. So we maintain big conversations and relationships with our customers about, how our roadmap develops, how their roadmap develops and making sure that the features in our products and the specifications of our products are best suited for the end markets that our customers are targeting, that hasn't changed in the length of time I've been at harm. Everybody wants to produce the best thing. Everyone's driving very hard for the best technology. And in that competition is always good. It keeps everybody innovating. It keeps everybody focused on differentiation. And that's a good thing for our, and it's a good thing for our customers as well. So I think the fact that some of our competitors are using mechanisms other than just straight technology to compete in the market. It just means that everybody has to work hard to have the best product out there. Ultimately, through our business model, it creates a lot of choice, it creates a lot of differentiated devices. And ultimately consumers can choose which ones are the best and which ones are the most successful. Thanks, Simon. And maybe as a quick follow-up In terms of architecture licensing, just philosophically, when you look at V7 versus V8, do you see any change in the way customers are embracing architectural licenses, do you think it's being viewed much more favorably as a means for maybe greater differentiation, just if you have seen any difference in the trend for adoption of architecture licenses, 38 versus V7? Well, I think, the exact numbers off the top of the head, but certainly there were more architecture licenses earlier in the lifetime of V Eight than there were in V7. That wasn't that was driven more about, the, addressing different markets. So most of the early architecture licensees for VA. In fact, most of all the architecture licensees for VA have been looking at markets, but Arm hasn't traditionally served with our own base products. I wanted to get to market very early. So some of the early guys took an architecture license, companies like Cavium Companies like Applied Micro who really wanted to target the enterprise space, the data center, high end networking, which wasn't where Arnaud traditionally played, and that was a vehicle to enable into that market using ARM Technology. So that's been a great vehicle for us because it's allowed us to broaden the penetration of the ARMark etcetera into new markets. And we see that as part of our strategy for long term growth. So we never sort of sit back and look at the numbers and worry about that at all. It's part of our business model that allows a very broad adoption of our technology, and that's only a good thing. Your next question comes from the line of Lee Simpson. Thanks. Good morning, gentlemen. Just two from me. First of all, I wonder if you could update for us the adoption of arms SBSA spec for VA based server SoCs, I mean, especially as it relates to names like AMD and AMCC for And does this present a real design accelerator for fiscal year 2015 2016 for these early adopters? Or is this more a means to see other typical arm SSC makers coming in for late 2016 and beyond? And maybe as follow-up, we noted I think last week that Arm and Samsung have joined the board of the Fido Alliance. And just wanted to understand if this is an accelerator for TrustedONE adoption and what sort of roadmap plans you might have for trusts on vis a vis mobile payments and maybe the Fido Alliance use of non pass use of passwords? Okay. So in terms of SPSA, the main purpose of that work was to accelerate the deployment of SoCs, into the data center. The great beauty of the R model is that every customer of ours can design a chip that's different from any other customer. And when it comes to enterprise software though, there's great benefit in having some of the system architecture that is actually not differentiating. Standardized, so it's easier for software developers to write code that's going to run on these chips. So SBSA was all about standardizing the right points of the chip to accelerate software development and hence accelerate deployment of real systems. So it's less so about SoC development as it was about software development. We've seen the uptake of SBSA in the SoC architecture, by a number of our licensees. Those chips are coming to market now. And with a with a more clearly defined target architecture for software developers to work to, we should see more armed deployments in the answer in ARM based service sooner. So that's what that was all about. Fido, as you say, it's about again, it's an industry body that's about standardizing in the right way so that people don't reinvent the wheel the whole time. And burn their effort on things which are ultimately non differentiating very much akin to the ARM business model. Enabling people to spend their R and D differentiating in the right areas. We've, for a long time, seen that security in embedded devices is really important. We started work on trust owned more than 10 years ago, and are now starting to see that as a technology, it's really, really important. So Fido as an industry body is is one of the many industry bodies that we work with, to drive acceleration and standardization in the right places. And and as a growing area of mobile payments, it's important and that's why we're contributing to it. Your next question comes from the line of Vijay Anand from Espiritive Ortho. Please ask a question. Thanks for taking the question. I just wanted to go back to the backlog discussion and I was basically hoping you could talk a bit more about your product roadmap. It has been roughly 18 months since you launched the A53 and A57. So my question is based on your current thought process and customer discussions, at what point would you be looking to launch sort of the next generation of the 8 professors? Well, we have cortex A53 and cortex A57, lots of designs, in flight right now with our customers. We have, a healthy, set of sales opportunities ahead of us for those products. And I think we're going to see them very broadly deployed We are, of course, always talking to our customers about the next generation, about what learning we can take from the deployment of the current products what new design opportunities there are out there and how we can further optimize our products, to take the best advantage of these new opportunities At the right point in time, we'll go public on those and talk more broadly about what we're doing. But for now, they are NDA discussions with our customers. All right. And as a quick follow-up, I understand you said that tip pricing in mobile was relatively flat. But I was wondering if you can talk about the royalty revenue per unit in mobile, how did how did that trend in Q1? Yes. So overall, it's moving up. We're seeing more and more chips. We're using multicore devices. We're seeing, the volumes of Mali, as we were talking about earlier. Going up and the attach rate of Mali and mobile devices is increasing. So overall, there is an upward trend on the royalties per mobile device that we're receiving. Not today. All right. That's good. Thank you. Thanks. The next question comes from the line of Alex Gooner from JMP Securities. Please ask your question. Thanks so much for taking my question. Good morning. I was wondering, you've given a lot of helpful information around RMV-eight and you just touched on royalty revenues now. But I'm wondering seeing as how you've seen a faster than typical uptake of RMV-eight does that also imply in the latter part of this year, perhaps a faster than typical pull into the royalty impact from RMV-eight. And for the full year in terms of getting to normal type of average of royalty growth, Are you more optimistic about unit volumes or about royalty rates continuing to improve sequentially as they have here in the first quarter? I mean, I think based on, what we see going on in the industry, what we're seeing being reported, I think we're certainly more optimistic about units. In terms of the uptake of RB8, that has certainly been strong, being more rapid than it was at the early stages of the 7. And ultimately, with higher royalty rates there, that will start to go through. But, that is a trend that I think will see, play out relatively slowly, given the volumes of Armships, given the large numbers of microcontrollers based on single core B7 devices, you need to ship an awful lot of something else to really see the noticeable effect come through. So we always view our royalty streams as built up of multiple layers, the VA layer will start to grow and it's probably into next year before we start to see that in a real meaningful way. But the trends are definitely in the right direction. Okay. And Global Foundries and Samsung have announced collaboration on 14 nanometer. Their timeline seems relatively aggressive. I'm wondering how involved you are in that, how optimistic you are about them hitting their targets. And then similarly, when that really starts to work its way into benefiting you? So we have worked very closely with both Samsung and Global Foundries for a long time in working on physical IP to support their foundry businesses. And we have a range of IP that is targeted for both companies' technologies. I think the collaboration between Samsung GlobalFoundries is a very thing for the industry. It's going to provide more manufacturing choices, especially with leading edge technologies. I would hope that, a lot of our physical IP is used by the foundry customers who adopt that, to, to adopt those processes. So this represents a further opportunity for us. All right. Thank you. Your next question comes from the line of Dan Garner from Arete Please ask your question. Good morning guys. Thanks for taking the question. In terms of licensing, what are the next generation technologies that you think arm still needs to develop and license beyond what's available in today in V Eight. Can you give us a sense of what specifically you're focused on and whether employee hiring is currently taking place? Well, as we said in the report, the, a lot of the employee hiring is going into developing our next generation products, a lot of it is going to our processor developments generally, CPUs, GPUs. But then also we're hiring into all the other teams who create all the other supporting technologies, the software compilers, the physical libraries to allow optimized implementations, and so on and support our customers. So we are recruiting across the board, to allow us to successfully deliver our roadmap and support our customers in the adoption of that technology. In terms of what's coming next, can't really talk about much about that today. But suffice to say, as we look at the adoption of ARM in, in the data center, into networking, into the continued opportunities that come from mobile. There are new technologies coming, new ways in which we can see for making these products more and more efficient in terms of their power efficiency, the way they use resources, the way they connect to networks, And so we see a lot of opportunities ahead to develop new products, which will help drive further licensing. And ultimately, help make better products that we as consumers enjoy. Okay, thanks. And as a follow-up on Mali, one of your competitors here talking about benchmarks, which demonstrates a significantly better power efficiency, particularly in gaming applications. I mean, clearly, you're still expecting to gain share in Mali this year, but Do you acknowledge that there's further work to do here in terms of the technology to bring to make Maani sort of be competitive again? Well, I think there will always be work to do to make these products better. I think Mali is very competitive. We're seeing very strong uptake of Mali into many mobile devices, and that's because the technology is very good. The graphics processes can be can occupy quite a significant area in an SoC So there is always work to do to try and make them more efficient as the demands for, GPU compute performance goes up and up. So again, this is an area where I think we have the industry has as many generations ahead of it, to, to provide scope for further optimizations and make products better. Your next question comes from the line of Jerome Ramal from Exane BNP Paribas. Please ask your question. Can you hear me? Yes, yes, we can. Yes, question. How far do you think the spec of the application processor in a smartphone will go beyond octo core 64 bit, what kind of performance do you think eventually we need in a smartphone, for 80% of the usage? Well, that's a very hard question to answer because, one of the beauties of smartphones is that the, software development environment is so open. And so as new features are brought out into the hardware devices, software programmers all over the world big companies, small companies, individuals working out of their basements can write code, write applications that exploit the technology and that helps create a pool for more devices. So we've seen applications come up the rely on smartphones that nobody was thinking about 5 or 10 years ago, and I don't see that, that trend is going to change anytime soon. So I wouldn't want to call when enough is enough in terms of performance, I think the way that, applications develop the way people use technology, has a lot of innovation left in it. And I think there'll be many, many generations where we're looking to provide more performance, in different ways to make these devices more efficient because software developers will keep thinking of new ways to use them. And as more and more, sensors get embedded into these smart devices, that further creates an opportunity for new applications. So, I don't see kind of the ingenuity there running out of steam anytime soon. Thank you very much. Okay. So I think at that point, we'll take one more question, if that's okay. Your next question comes from the line of Janadan Manon from Liberum. Please ask your question. Hi, good morning. Thanks for squeezing me in. Just two small questions, if I may. One is can you give us an update on the server market? I mean, where are you in terms of the ecosystem? And roughly by when do you think we can see commercial shipments of ARM based servers? Is that something we can see before the end of this year? Or is that likely to be more 2015 phenomenon? And the second question is on on Enterprise Networking, just going back to your answer to a previous question where you saw 150% growth, just wondering since that's quite a wide market, which goes from low end stuff like network interface cards, all the way up to base stations, routers, etcetera. The growth that you're seeing, where is it coming from? And more specifically in the current quarter, in the reported quarter, Was that a positive to your $0.047 of average royalty per unit? I mean, is it already adding to that? Or is the big additions going to come as you see more and more shipments to the switch and base station markets going forward? Okay. So let me just briefly talk about servers. I think progress there is good. We're starting to see silicon devices We're seeing a lot of effort go into software development for ARM based servers. I mean, recently as an example, We just saw Oracle introduced Java SE, which brings Java to many on base devices, and that's very important technology for servers, but again, SPSA as a vehicle for accelerating software development is also very important. And I think we'll start to see commercial deployment later this year. I've been saying that for some time. I still think that's on track to happen. And we'll start to see, volume start to take off, I think, probably next year, but I do expect to see commercial deployment this year. On enterprise networking, you mentioned that there's a whole wide range of end markets that could be targeted and where are we seeing success. It really is across the range. I mean, we've been in, kind of routers for a long time, more kind of commercial grade. We're starting to see use of arm in switches, in base stations, big base stations, small space stations, it really is across the board. And in that enterprise space, that is something that's very positive, for our blended average royalty rate, and we are seeing the effect of that. Mean, a lot of the bigger chips, as I was saying, are using multiple cores. There are large numbers of Cortex A15s being used, for example, in some of the bigger chips today. And that obviously has a positive impact on the royalty rate per chip and the average But again, given the volumes, this is one of those things where every little helps, and makes a small change, volumes grow, we are starting from a low base. We'll see that become more of a factor, but that's probably for years to come. All right. Thank you very much. Okay. Well, with that, thank you very much for joining us this morning. And we will see you all on the road and at the Analyst today on 20th May. Thanks very much. Thank you, ladies and gentlemen. That does conclude our conference for today.