Earnings Call: Q4 2013

Feb 4, 2014

Okay. Good morning, everyone. Welcome to Arm's, full year 2013 and Q4 2013 results. What we can do this morning, I'm going to talk about the business, the progress we've made towards our strategic objectives. I'm gonna hand over to Tim who's gonna talk through some of the numbers, and then we'll go to Q and A. I'll take as read the, usual cautionary statement and we'll start talking about the business. So I think it was a very exciting year for Arm in 2013. We achieved some great milestones in our business with our technology, and I think one of the most significant being that our licensees sold over 10,000,000,000 chips containing ARM Processors. And that was a key milestone for us that takes the cumulative total now to over 50,000,000,000 chips and Penny Arm Processors since the company was founded just over 23 years ago. Now that's a huge number. It represents a massive diversity in the end markets in which Arm is designed. We see ARM technology being used in big high, high compute performance applications such as servers, in networking equipment in phones and smartphones and tablets, obviously, and also a growing, proportion of ARM Processes in very small, very low power deeply embedded and microcontrollers that are in a vast range of new and exciting markets. Mobility, smartphones, tablets remained a very important market for us. And in a year ago, we were forecasting that would be about 1,000,000,000 smartphones sold in 2013. That indeed seems to have been the case. Our estimates, show about 1,100,000,000 smartphones were sold taking the total now in use around the world to about GBP 2,000,000,000. Now the growth of smartphones, the growth of tablets has been very strong we've seen tablets out shipping PC notebooks in 2013 as well, because these devices are the way in which people want to interact with the internet want to interact with each other. And I think there's going to be a continued growth of these markets that we'll come back to. In 2013, we also saw some key milestones in terms of our technology and the growth of new markets. As far as our technology goes, we saw the first on version 8 architecture product shipped. These are our processes that add 64 bit processing capability. And we received our first royalty from those. We saw our first royalties from 20 nanometer physical IP as our partners moved to advanced processes. We've also seen growth in new markets ramp. There's a lot of buzz and hype at the moment around the category of wearable devices And recently at CES, you just saw, a plethora of new devices all based around Arm Processors which are exploring this product category. And I think we're going to see a lot of growth there in years to come. That is a subcategory of the internet of things, which again is in its infancy, but I think set to grow very, very strongly. And right now, what people are using are ARM based processes. They're using the chips that have been designed by our licensees, they're embedding them in devices, and they're very quickly getting to market with new, and exciting products. And as these markets mature, we're expecting that as the internet of things runs unarmed today, a vast vast majority of that is going to run on these armed in the future. At the other end of the compute spectrum, we've seen progress in enterprise networking and servers All of this data that smartphones and tablets and IOT devices are producing. It needs moving around. It needs storing and processing, and we're seeing traction, for our armed technology into these markets as well. So with this success of this business, that's led to record revenues, record profits, and we've been continuing to invest in our technology. We added over four hundred people into the business in 2013 to help us capitalize on the new opportunities in front of us. So it was a very exciting year, so a busy year. Q4 rounded off that year with, great progress a very strong quarter again in terms of licensing. We saw 26 processor licenses, and that helped create 121 licenses for the full year. Within that, there were 4 Marley licenses and in the quarter, our licensee shipped 2,900,000,000 ships. As the most ever shipped in one quarter. Now there's a lot, made at the moment of the slowing of growth in the high end smartphones, and indeed that appears to be the case. But despite that, still, we had record unit shipments because of the vast number of end markets in the time technology is used. The performance of the licensing and the royalty growth led to 15% year on year revenue growth, and through that performance of the business, we're able to, keep investing in the business while we increase returns to our shareholders. We've just announced we increased our dividends to by 27%. So if we look into what's behind, royalty at the moment, typically, you're used to hearing us talk about how arms out performed the industry and indeed through 2013, that was the case. The Semiconductor industry only grew by about 1% in 2013. Your arms royalty revenues grew 19% that have continued to strongly outperform the industry. In Q4, that outperformance was lower. Our arms royalties grew about 7% year on year, the industry grew about 2 to 3% in that time. But overall, for the full year, another very strong performance for royalty growth. Again, you're used to hearing us talk about progress within mobile and progress outside of mobile. And now over half the chips that are shipped by our customers, are used in applications that aren't mobile devices. They aren't smartphones. Or basic cell rental tablets, they're in things such as consumer electronics. And it was about 2,000,000,000 chips, shipped into products like digital cameras, digital TVs, DVD players, a vast range of consumer electronics, and about CHF 3,500,000,000 shipped into enterprise networking applications, and embedded computing is very small microcontrollers I was talking about. Smartphones though remain a very important and a very valuable market, 2 arm and one we're expecting to continue to grow. Growth in 2013 was strong. We're expecting 15% maybe as much as 20% growth in 2014. And long term, a compound annual growth rate of about 10%. So this market is going to continue to grow and continue to be profitable for Arm. Despite the slowing of growth in the high end, what we're expecting over time is a rapid growth of entry level, mid range phones, priced such that, literally billions more people can get access to these devices, and that creates a very valuable opportunity for Arm. If we look into that, you can see the graph on the right there showing, our expectation of growth rate of these different market segments of smartphones. At the top, the premium end, we're predicting about a 4% CAGR out to 2018, with much higher growth rates at the entry level and at the mid range. Now right now, if you go out to buy a smartphone, About 95% of them have, an ARM processor in the application process, almost all of those now, our cortex a processes. You'd find it really difficult to buy any sort of phone that doesn't have an ARM processor in its modem, but in combination, given a struggle to buy a phone that does not have at least one arm processor in it, and usually many more. And as these markets grow, we're seeing a greater opportunity. About 70% of the chips inside smartphones integrate both the modem and the apps processor, and that helps reach a lower price point that is helping, enable growth at the entry level and the mid range. Now the the common, complaint we get is that while those those devices are cheaper, you're going to take less money than you would at the high end. And while the glorious thing, if everybody on the planet spends $700 on smartphone, it just isn't gonna happen. And the growth of the entry level, the growth of the mid range is a great thing because they represent a big opportunity for additional arm content in these devices. And what they're replacing very simple voice only feature phones, which have a single arm processor. And but they're going to be replaced over time by smartphones. Some of them may be more basic than than the high end we know today. But there's more on content in there. We'll take say processes, graphics scores, the chips to build on advanced processes, which often use our physical IP. As we go forward, we'll see big little configurations of processes, again, increasing arms royalty, the adoption of 64 bit processes, across the entire product range at some point in the future. So this growth, represents a valuable, revenue potential for Arm, And we believe mathematically supports our, estimated growth of, revenues from smartphones out to 2018. Now the other side of mobile computing right now is tablets. Tablets had a very strong year in 2013. As we can see there, out shipping laptops, and Ultra mobiles, sorry, tablets and Ultra mobiles between them out shipping laptops. And again, the growth rates expected in this category are very strong. We're expecting a solid growth in 2014 and out to 2019 again, this 5 year window that we look at, a 20% compounded growth rate of tablet, and you can see how, the growth just starts to swamp conventional, legacy laptops over time. When you look at desktop PCs, again, you see the growth there very slow, minus 5% CAGR. Our desktop PCs aren't going to disappear. There's always going to be a need for those But the way in which most people are using computers most of the time is via smartphones, via tablets, and that's why the growth rate is so strong. Again, virtually all of those are using our processes today, and we expect that to continue as, again, the the market, splits into different categories. There will be premium tablets. There will be low cost tablets. The low cost tablets that they are all using arm. And that is enabling billions of more people to get access to this technology. Now one area I've been particularly pleased with progress on in 2013 is the adoption of ARM Technology into enterprise networking. This is a big market today and will grow to about a $20,000,000,000 silicon pan in 2018. And that's about the same size as smartphone application processes. So this is a big semiconductor market, and it's for products that form the infrastructure of the cloud and the high performance switches that are required to move all the data around the internet. This is a market that's served by a relatively small number of semiconductor companies, And all of them, or almost all of them, have already announced products, based on our technology. And in fact, 4 of them are shipping and paying royalty. What's that led to in 2013 is about a 5% market share for Arm in, Enterprise Networking, and that may not seem like much, but that 70,000,000 shifts, and that's about twice what it was in 2012. So the growth rate is strong, we've been working with our partners. Our partners been working very hard on designing the right technology, winning the sockets in the enterprise networking equipment companies, And we're starting to see growth, and we expect to see more products brought to market based on Cortex A15, based on ARMurgene architecture, in 2014. So this is a market we've had good success in 2013 and when we expect to continue to grow. Similarly, in servers, I think 2013 and very recently has been, been a good time for progress, in for farm technology and service. This was a strategy that was always going to take a long time to play out. There's a discontinuity that comes from the changing workloads of servers and that creates an opportunity, to change the way in which servers are built to move to much more customized chips that are specific, to the task, that the server is trying to process. And that is what the ARM Partnership does very well. Taking high performance processing technology from ARM integrating it with IP and know how, in our customers, to choose the tailored solution that's optimized, for the workload. We look back over the last couple of years prior to 2013, we're in a very early pioneering phase where some of our partners were looking at this discontinuity and looking at how to take advantage of the opportunity that came from that discontinuity. Through last year, there were about 15 different companies building chips and looking at designs based on our technology, what we're expecting this year is that growth to accelerate a unit start to ship, and based on all the software work that we're doing, rural servers actually deployed. Now I think it was one of the most exciting developments very recently with last week. We announced a partnership with about 12, 14 other companies, that really demonstrates the ARM ecosystem in action. What we've been looking at for a long time now, this activity has been going for about a year is how to ensure some degree of standardization make it much easier to port software to an ARM based server. And so in conjunction with some big companies that play in this space, people who build servers, people who buy servers, people who write software for servers. Collaboration has formed to create a standardization effort, for the server based system architecture. That many, on base server designs will conform to and therefore make it easier to support and run software. And of a couple of announcements recently, AMD just announced their Opturon A1100 series that's compatible with this new standard, applied micros, similarly, their designs are compatible with this standard. That's gonna make it easier for the industry to adopt ARM based servers and get software running more quickly. So this is a great demonstration of the kind of thing that Arm can uniquely do, help work with people who compete with each other to solve common problems and make it more efficient to deploy new technology. Now the other end of the computing spectrum are these very small microcontrollers. And through last year, in this embedded space, there were over 3,000,000,000 chips sold containing ARM embedded processes. A lot of those are based around the Cortex N Series. This is a series of products we've designed specifically with this market in mind and is now about 160 companies, with licenses to process and technology. What many of them are doing are building devices that integrate a sensor, which is largely an analog device that's sensing something from the environment, the temperature or humidity or, the road shaping, integrating those sensors, with a processor that can make sense of the data that's coming from the center, and then with a radio that's performing some form of connectivity up to the cloud. Share in MCU is about 20% over 20% now. And what we've seen over the last few years is the migration from very, very simple, what's called 8 bit Processors, the much more sophisticated 32 bit processors, I. E. Arm, and that gives more compute power it makes it easier to write software. It makes it easier to maintain software. Because we're able to deliver 32 bit performance of all those benefits, at very, very, very low cost. There's a the fastest growing segment of MCU is 32 bit, and we're very well placed to take advantage of that. Similarly, with the radios and our heritage in mobile, many of Avan's partners are using ARM Processors in their radio devices, and processing the protocol stack, processing the data that comes in, informing the connectivity of this sensor MCU combo up into the cloud. Now there are many examples of how these devices are being used, on display at CES a couple of weeks ago. Everything from basketballs to watches and wearable devices just a whole plethora of end devices that are being made. And this category, I think, is going to grow very, very strongly. We're seeing lots of experimentation in wearables. Which ones take off, which ones failed is hard to say, but I think what's really interesting right now is just how much experimentation is happening, and it's enabled because the access to the technology is very low cost. The access to cloud based storage and processing is very low cost. And all of this is coming together to create an environment where many, product experiments can be run simultaneously, and we'll find out which ones are the most successful more quickly. So this is a really interesting space wearables is going to grow to a very large market, more than 200,000,000 units is our expectation in 2018, and we expect that Arnold has a very large market share of that. So as we look generally at the expanding opportunity for Arm, we see within smartphones, application processes. That's a large Silicon market today, about $13,000,000,000, growing to about $20,000,000,000 in 20.18. And there are multiple opportunities, for armed royalties within that statement. We have a very large market share today, but as the market grows, there are more opportunities for for our royalty bearing unit as these devices move to 64 bit and as they become more sophisticated. Enterprise networking, as I mentioned earlier, grows to a market that's about $20,000,000,000 in 2018 as well. From about $13,000,000,000 today. We have a very low market share there right now, but as I explained earlier, that's grown from about 2.5% year before. And as those devices are built out, again, there's more opportunities for ARM Royalty, Cortex A15, moving to version 8 architecture, multiple processes in these very sophisticated devices. And then within Embedded, this is a market where we have pretty respectable market share today, about 22%. The size of that market today is about $14,000,000,000 of silicon Now these devices are very, very low cost, so that's 1,000,000,000, literally tens of 1,000,000,000 of different devices. The semiconductor TAM grows again to about CHF 20,000,000,000 out in 2018, and we expect to see Alms market share grow again, generating very profitable royalty streams from that market as it grows. So these are the 3 ways that we look at the expanding opportunity for our the arm content in all of these devices is different, but represents a big opportunity for arms royalty streams to continue to grow. So in summary, I think 2013 was a very exciting year for us. We made great progress on a number of fronts. In delivering our technology, in working into these new and exciting growing markets, and that has led to a very strong performance of our business. Right now, the the smartphone market may be slowing at the high end, but it's still a very large and very valuable market. And I've explained how as the entry level, as the mid range grows, that represents a valuable, royalty stream to us. Despite that growth and a slowdown of the premium end, in the second half of the year. The design wins that we've been working towards in Enterprise Networking, particularly in servers starting now are a great opportunity for future royalty growth. And that embedded market is growing very, very fast. The uptake of Cortez ends at that end of the market has been really, really strong. And we're seeing just lots of devices start to ship. So all of this blends together, I think, to a great opportunity, arms, fundamental business model is intact. We're able to respond quickly to new opportunities that they emerge. And I think that creates a great potential for future, very strong businesses we've had in the past. Good with that. I'll hand over to Tim. Thank you, Simon. Good morning, everybody. If I look a bit miserable, I've developed a little bit of a lergie over the last 12 or 18 hours. So if I you've seen me sprinting from that platform out of doors, not because I don't like you or I'm not enjoying myself. But I think we're in, I think we're okay for the next hour or so. As usual, I will be a fairly brief. I mean, there's a lot of financial information in the release. There's a lot of financial information in the, in the slide deck that you help you with your models. So I'm just gonna focus on the brief highlights of Q4. Talk a little bit about the exceptional item that most of you might have noticed going through the Q4 results. Look at the full year and then, focusing on the outlook So for Q4, you've read the headlines, revenue growth of 15% again, very strong licensing and said, well ahead of expectation, royalty, slower growth, a little bit behind expectation. So combination, you know, about 10 ahead in dollar terms on the market. And despite the normalized OpEx in Q4 being a little bit higher, than we and you were expecting, that's driving PBT growth of 19%. In that 88,000,000, you've got some mark to market impact of the normal reevaluation of the monetary items and the forward contracts, etcetera, and a little bit of, a little bit of bad debt provision some truing up of sort of bonuses and commission payments. So then it's a little bit higher. But most of that is not run rate so that when we look into Q1, despite the fact that obviously there's some wage inflation coming in from 1 Janice, which is when most of our folks get their pay increases, you know, the guidance for next quarter's OpEx is obviously somewhat lower, than than the Q4 than the Q4 outturn in the sort of 84 86 range. And the combination of those two factors has driven earnings growth of 30%, benefiting some extent, I mean, the difference between the 1930 is to a large extent made up by tax, because we're now getting, if you like, the first 60% of the benefit of the Patent Box regime that was introduced last year. So our tax rate is down, from twin late twenties to around about 20. And we'll look about we'll talk about the full year a bit later on that. So you may have seen in the release in the IFRS numbers there was a, an impairment charge, exceptional item, non cash, and I just wanted to sort of give you, the context. Briefly cast your mind back to this time a year ago. Many of you recall that MiPS Technologies had an activist shareholder on their register. And it was very clear that, you know, that, that business was going to change its shape. And really the headline value in mix was was the patent portfolio. That is a patent portfolio that had been developed over the last 20 years, very close to our heartland, 32 bit processes. And we, along with other companies, were not very keen about the notion of that portfolio getting into the hands of, for example, of Patent Control, because, you know, over the long term, that could have caused quite a lot of disruption, to the ARM ecosystem. So we felt it's very important to, neutralize the potential impact of that. And we clubbed up with a couple of handfuls of other major technology companies, and acquired rights to that portfolio, $350,000,000. Our share you may recall was 167 and a half. And we viewed that and how we told you about it last year was effectively that was a lifetime insurance policy as far as we were concerned. Against, costs that would have been incurred down the road at that time. So I got into the wrong hands. The way that was accounted for but it is in the balance sheet split between a $67,000,000 intangible asset as it says there, which has been written off over 8 years, which is average life of the patents. And an available for sale financial asset, which represented the fact that typically these trusts that hold these patents often embark on licensing programs, that yield cash and the cash is returned to the participants. And obviously given our contribution, if we were well placed to receive that cash. So rather than it being, you know, written off at that point, or a larger intangible asset, it wasn't available for sale, during this year, for a number of reasons, around the participants in the in the consortium and around discussions of what the parameters of a licensing program might look like and, the the the type and size of companies who might take licenses, it was decided by the trust to not license the program, to not do a license loan, but to put it up for sale. And for us, we see incremental long term strategic benefit in only no patents outright than having the rights to to license them. So for a fairly nominal incremental cash outflow of 4,000,000, we have now brought that Pan portfolio inside of ARM, and it's adding broadly 500 patents to an existing portfolio that that was about 3000. So it has the effect, of in accounting terms of impairing that financial asset. But in cash terms, what's actually happened is the lifetime insurance policy we bought for $167,000,000 for an extra 4. We've now improved because there are lots of things you can do with your own patterns in terms of defending your position out into the future, that you can't do if you only have rights to them. So That's the that's the detail on on the exception item non cash and non recurring. So for the full year, briefly 22 percent revenue growth overall, 32% licensing. I mean, licensing, as we all know in here, is a revenue stream that in the history of ARM, has grown, you know, closer to 10% 30%. But for the last 4 years, it's grown at 30%, which I think represents the fairly dramatic increase in arms addressable market, and the fact that a very wide range of semiconductor companies now feel that they have the opportunity to deploy our technology in multiple markets. And that's been driving very strong licensing growth. And, you know, we have been I know fairly serially beating licensing expectations, but, you know, it remains a lumpy concept. We only do 20 or 30 licenses a quarter. So, but it looks strong, and we'll cover that in the, when we look at the outlook. Overall, for the full year, as Simon says, you know, another strong year for for royalties overall. Clearly, as Simon said, we've seen some slowdown in the back end. And again, we'll look at that when we come to outlook. So 22% revenue growth, 32% growth in normalized DBT, in spite of the fact that this is probably the singular biggest year of investment that we've made in the business We've increased our overall headcount by over 400 people, this year, and we've invested in sort of business infrastructure. That is absolutely crucial. For supporting this rapid growth that we're enjoying. So it's been a big year of investment, but the operating margin gone up from about 46% to 49%, notwithstanding that investment. And again, because of the tax, a 32% increase in PBT becomes a 40% increase in earnings effective tax rate on a normalized basis in 2013, about 20%. Expectations for 2014, about 18%, because we get for the patent box regime is being implemented over 5 years. You've got 60% of the benefit in year 1, and another 10% in each of the next few years. So you can expect our tax rate, as I've said before, to gradually edge down over time. Strong year for cash, net cash generation over 300 well, 344,000,000. We end the year with 700,000,000 net. No debt. Simon said we've increased the dividend by 27%. And we've also said in the statement that we intend to we're confirming that we intend to maintain a flat share count over time. I mean, in reality, if you look back on a 9 year view, which is, I know there are some places in here, we've been throughout that journey, but on a 9 year view, we we actually have a flat share count It just came in, you know, one particular period in 05 208 when you bought back 16% of the stock. And the issue to your capital is now just coming back to the level of where we started that program. So the share count's been flat over 9 years. We intend to keep it flat. And in in in reality, what that would mean is a a limited share buyback program to achieve that which will be a sort of an ongoing, item. So quickly looking forward then before we get into Q And A, The release said the the the order backlog, which, as we know, has been growing very strongly, was marginally down Q4 versus Q3, but up about 17% end of 2013 compared to the end of 2012. So a combination of that high order backlog and looking forward into our opportunity pipeline of licensing looks encouraging, and we see another positive year for licensing in 2014. And of course, what this means is, you know, I mean, licensing is the key leading indicator, you know, for arms growth and for arms value. You know, there are no royalties without licensing. And so licensing is completely key. And the fact that we've grown licensing broadly 30% per annum over the last 4 years, I think bodes very well for royalties in the medium and longer term. And so what we're saying in this particular year, despite some of the slowness at the high end that we've been seeing, because of some of the penetration we're making to the new markets because still see mid and low end phones growing nicely next year, and we see the full year growing at a similar rate that we've seen over the last 3 years, which For those who have added up numbers and divided by 3, as one way of assessing that, it's about 19.3, or 19.5 But, you know, what we're actually saying is similar rates to that normal growth in royalties, what we expect. And therefore, overall, we expect the full year dollar revenues to be in line with market expectations, which are currently in the sort of 12 80s, high 1280s, 1.28. And that said there, assuming semiconductor industry improves are generally anticipated. I think most of us around here are expecting, a stronger second half than the first half we said we see no reason why that isn't gonna materialize for us. But, yeah, we'll we'll obviously have to see if it's early on in the year. So with that, I will throw it open to the floor. I can just say before we get into Q And A, you can out respect to everybody in the room if you ask a question. As opposed to 17. I'm I'm not just looking at you front. Then then we could move around and then and then come back to another Hello. We'll have 16 questions. Right. So, no, I would like to understand what's going on with the with the ASP, going from 4.8or4.9to4.5. So kind of 10% down. I I understand the mix effect, but at the same time, I think OpEx, a, shipments are doubled and embedded or microprocessor, microcontrollers are gonna be by only 35%. So if you could help me with some side, those numbers would be really helpful. Yeah. I'd say it this is about mix. Those core techs in, that core tech end growth is in chips, which are, you know, much less expensive than typically what cortex a goes into. And as we're seeing, you know, there's there's slowing of growth in a premium into smartphones. So, you know, one would expect that the the ASPs will come down a bit. So as well, you can call back seat. Well, as as we will know, you know, some of the devices are being built for below cost. Handsets, sell at lower cost than some of the chips for the higher end, you know, are specifically smaller. They integrate less technology. They sell for a lower ASP. I mean, that's good to be expected. Thank you. Sorry, thanks. It's Johan from Redburn. I guess, if you don't mind, could you give us, well, how many number of your license both in both the number as well as in value are coming out of China and Taiwan. And the related question I actually have is It's got to look at your licenses growth for the past 3 years. And or 3 years before that and compare it to the royalty growth. And I look at the licensing surprise this time around. I'm just wondering whether the royalties you make with the incremental license you're getting in the last 2, 3 years is lower than the average royalties you bought from licenses previously? That's an interesting question. I mean, I think that's not necessarily the case. I mean, a lot of the licensing that we've done over the last couple of years has been, versioning at the architecture, you know, both the architecture itself and the the, processes that we built around that. And, you know, they, you know, typically going into higher ASP devices. So I think one would expect the royalties from that to be at the higher end in terms of the split of licenses into China, I'm afraid I don't think that's off the top of my head, but roughly half our total business comes out of Asia. China is a growing area. For that, we're seeing increased, design activity in China. We're seeing the sophistication of the chips designed in China going up and up over time. I think that's that's partly a real trend of the technology industry. Are you more than a quarter? I'm sorry. Could I assume more than a quarter than some channels in Thailand? Yeah. Maybe mean, I think the, if it's the general line of inquiry is, has your licensing growth really been fueled by China? And is that like to lead to a lower conversion into royalty over time. I think the answer is not you don't see that. I mean, we've been licensing in China for really many years. And, you know, in the last 2 or 3 years, you know, material royalties are now being earned from Chinese licensees. But these were licensed 4, 5, 6 years ago. Yeah. This is not a new phenomena. I think if you look into this, you know, what underpins this 30% licensing growth is very broad in territory, and it's very broad in, you know, anticipated product that the market is being aimed at. So I I, you know, I don't I don't think there's a particular China focus to it, but it's it's helpful. Yeah. Thanks. I'm gonna get you some off of Merrill Lynch. She'll ask 2 questions. First one, can you maybe just talk about your PD royalty guidance, you know, 19, 20%. Maybe just give us the puts and takes in that, you know, how much of that is driven by share gains in non mobile, how much of that is driven by multi rate expansion, how much of that is driven by specific share gains in the big graphics or other elements, because I think, you know, given your recent performance in revenue growth, probably some people will look at that number and thinking it's a bit of a the stretch. The second part on licensing, I was just curious to have a bit of color from you on comments you made on the press release regarding licensing that has been done with telcos and software companies, you know, how meaningful is that going forward? Sorry. I actually forgot the first part of your question. Oh, sorry. Yeah. Yeah. No. I mean, I think it's, you know, as you know, our armed growth is about layers. Mean, you heard Simon say that, you know, it is our expectation that smartphones generally continue to drive very meaningful growth. In the arms royalties, which is broadly consistent with, you know, the overall royalty growth rates we see. And in a in a 5 year view, you've heard us talk about driving a 15 to 25 percent overall royalty growth from from smartphones. And we do see you know, strong growth in 2014 in the medium and low end. So I I think you've got, you know, smartphones are still contributing well. I think, you know, Simon touched on a lot of money. Things like enterprise networking are now starting to be meaningful in 2014. You know, we've signed 200 quartet m licenses, in the last few years, a relatively small proportion of those are shipping to date, There's a lot of them just about to come to market. I know it's low end. You know, it's high volume, low value, but it all adds up nicely. And I think you know, towards the back end, we're going to start seeing some contributions from the V Eight in higher priced, higher chip price. But, yeah, it's a combination of, those factors that support our company. In terms of the growth of type of licensee, I mean, that's something that been going on for some time with, you know, arms history is obviously about licensing semiconductor companies. But over time, our commercial relationships with other people in the supply chain have grown. And he's seen really just an extension of that, you know, us developing relationships with other people who are either buying silicon or contemplating doing designs themselves or wanting to engage differently with the overall semiconductor supply chain. As they look to optimize their products, maximize their differentiation, you know, we we're a partner in that. Okay. One question. To each of you, if I could, Simon, I was doubting it from UBS. Simon, I just wondered if you could talk about Calceda's exit from the market and I guess whether you see more of an opportunity in micro servers and and sort of the data center opportunity rather than, sorry, enterprise files. Servers in the in the kind of medium term. And 1 per turn, just on the OpEx, progression through the year, should we expect kind of steady progress in OpEx through 2014 upwards, and related to that headcount, headcount forecast for the year. So in terms of the opportunity around servers, as I've talked about in the presentation, I I do see a big opportunity for us there. And I think, you know, when when I look at the amount of activity that's going on in that space, you know, I'm confident the products are gonna come out and they're gonna start to ship and they where they're gonna grow, Calceda was a pioneer in that field. They, you know, they entered this market very quickly. And, like many startup companies, they didn't get there. But I don't think that means that that's the end of the, the foray into servers with our licensees. What the opposite, you know, you've seen from the press release about the, the the system architecture that's just come out. Big players are looking at this space We talk to lots of people about the adoption of, arm in the data center because people want a different approach. They want to take advantage of this discontinuity about workplace. And they want a different approach to solving the problem. But I think the opportunity is is very real. And I think, the armed partnership in totality has made great progress on that in 2015. Yeah. I mean, in January on OpEx, I mean, we we are still investing in the business, and therefore, you know, from the Q1 base, you you would expect, OpEx to gradually go up quarterly with other things being equal. I mean, to what extent we invest in the business in this 12 months, you know, will depend to some extent on, you know, our view of the market and, you know, the speed of the appetite and how the overall market's playing out. We obviously have got a lot of control, almost total control, really, over the timing of our investments in in in people. But, you know, certainly, you know, there are a lot of opportunities here that, you know, we need to see. So we would expect it to be an ongoing investment period in 2014. This comes with a gentleman in front of you. Good morning. My name is Just on the smartphone thing, I guess, we're having 2 changes in the market. 1 is the gross is more from the low and the mid end. It also is the change in the supplier base for the Asian shipment because from the Western ChipMakers. Asians tend to accept lower gross margins, lower ASPs. Just wanted to understand how you're thinking about this impacting on chip prices and royalty rates? I mean, primarily the way we think about it is an overall expansion of the end market. Yeah, I think it's a great thing that you can today buy a smartphone, you know, out the door 0 subsidies for $50 in in China. That is going to put smartphones in the hands of many, many more people driving an overall long term upgrade in both the handset devices themselves, the network infrastructure that's going to process and move around this increased amount of data. So, you know, we look at the the long term trend of an increasing of units down the field and see that as as the good thing. There will be pricing pressure if the maturing market, you know, overall, so you would expect that. But with these low end devices, there's just more opportunity for our content. So the volume is good. The sophistication of the products going up consistently over time is a good thing for us. Yes. This is Anya from Credit Suisse. Just a clarification on the smartphone question earlier. Do you basically think about talking about 10% CAGR growth in smartphone volumes and you expect your smartphone royalties to grow at about 15 to 25% CAGR over the next 4, 5 years. Now Given that what we know about the volume growth and obviously, bulk of the growth is going to actually come from the lower end of the smartphone market. Would it be fair to say that all this, growth in smartphone royalties is actually going to come from, increase in royalty rates? As opposed to increase in the application process or market, price of the application process market. Would would it be fair stating, Sarah? But I think it's it's mainly a growth in the Arm content. So as I said in the presentation, and right now, we're looking at very low cost smartphones replacing basic voice only phones, which have a single arm processor in them, doing not very much, as the smartphones get more sophisticated there's opportunity for a new cortex a processor replacing probably an on-site CD and I that was designed 20 years ago. There's opportunity for graphics processes. Over time, I think the whole smartphone market moves to 64 bit. So it's a blend of more opportunities for for armed royalty bearing processes within a within a smartphone that today doesn't exist. Then over time, the royalty rate goes up as basically for a bit comes in. So Andrew Dunn from RBC? If I can just ask the smartphone question perhaps a different way. I mean, your outlook for smartphone royalties hasn't changed in the last two, three quarters for us up until. But you did single out high end, slowing in the second half of last year. So were there any perhaps customer industry specific issues in the second half of last year that you wouldn't expect to repeat going forward. Well, I I think what we've seen is for now anyway, a maturing of that high end. Now I wouldn't write off the the possibility or innovation at the high end at all. In fact, I've been surprised that he didn't continue innovation at the high end, which creates demand for those products. But for now, in a period where yeah, constant replacement seems to have slowing down, and therefore, you know, people are living with their devices for longer. Isn't necessarily going to be the case that that will be like that forever. So that's the period that we're in at the moment. And that's been, yeah, anticipated through last year, and we saw it. Really happening in the second half. Thank you. Andrew Gardiner from Barclays. Just a question around licensing affiliate very strong year in 2013, you're guiding for another one in 2014. Can you just give us a bit of color about some levels coming out of backlog we're sort of off the record level in the fourth quarter. But as we look into 2014, can we continue to expect on the order of 20 to 30 per quarter and similar kind of, booking levels to to be coming through from that. I'm just sort of putting it in the can you put it in the context of obviously a very good couple of years for VA to Big Little, Molly coming on stream? That kind of thing. Is there enough activity going forward to continue to support that backlog? I mean, typically, when we look forward 12 months, we would expect, you know, about 50% of target license revenue to be an opening backlog. Some, you know, some quarters it's 40%. Some quarters it's 60. But I think 50 is a good. And although, you know, the backlog is, a little bit off marginally Q4 versus Q3. If you actually look at how the backlog was developed over the last 3 or 4 years, it's actually grown faster than the license revenue. And obviously, in a sense, that gap needs to be changed. So I think combination of that, and combination, you know, of how you would expect look at this is, which is, you know, by product, by customer, by value, you know, what does that pipeline look for in 20 look like in 2014? You know, that's what gives us the confidence. You know, I think V Eight, is relatively early in his licensing cycle. You know, we've done many, many more V7 licenses than we have V8. So although it's been grabbing a few headlines, it's still very early in this licensing cycle that will be a continued, you know, grower. And, you know, court exam is by no means, for example. And there'll be, you know, new processes coming out all the time. As you know, So, no, I think it, you know, but having said that, and I think we've ever tried to position license revenue as a 30% grower forever. You know, it's it's it will it will revert closer to, historic growth rate before 2009, in which you often heard me talk about mid high single digit. But I think, you know, there's going to be a journey from what we've seen to there over the next 2 to 3 years. Thanks, sir. It's fine, Jason. Thanks. And actually a follow-up question for the night. I think you said the backlog has been so significantly faster than even licensing. Of course, it's been a strong amount of momentum as non mobile people have been signing up. You're asking that too, but what is the rest of the backlog actually stopped? Do you send rates or loss in an environment that you alluded to that's licensing on the growth mid single digit and backlog actually starts to go down. I'm just wondering just because when you look at a 15 year trend line of licensing, the run rate of $100,000,000 is standard deviation above what we're used to. So I, again, just any concerns that backlog actually may start to pull But we move into this world where backlog is kind of a bit more lumpy and goes up. Some quarters it goes down. We've seen a fairly relent period of backlog, you know, growing, you know, really, very, very fast. You know, some of which has come into license revenue, but obviously a lot a lot hasn't, but I think it's part of the move from growing license revenue of 30% to growing license revenue at, let's say, 10 in the out years, you know, part of that will be a kind of flattening out of the backlog. And in the end, ultimately, of course, backlog kinda has to grow in sync with license revenue will be removed in time. This is from the gentleman in the front. Thanks. It's Vijay on the information by Resanto. A question on the networking market. You have a 5% share today. The analyst that you talked about, a target of 25 to 30% share by 2017, I guess, barring intel pretty much all the major networking centers have licensed down. So so the question is, are there any major roadblocks or major uncertainties, which can, I guess, prohibit you from hitting that target, or is it just about steady share gains from here? And related to that, the vast majority of the networking market is based on 64 bit. So would it be fair to say that the average priority rate in in the networking market is going to be higher than what we've seen in the smartphone market? Yeah. So to your question, right now, our market share is small, though that the chips that we we expect ARM based chips to replace that are using a variety of other architectures, a power PC, mips, some intel As you saw on the slide there, most of the people who are playing in in this space are using Arm Technology, and we would expect share gains over time. As you also point out, a lot of those applications are on 64 bit code. It's only very recently that ARM 64 bit products are out there. But again, that's gonna take some time to come through into silicon, and to broaden out the number of sockets that can be addressed. As that happens, obviously, with a higher royalty rate for 64 bit technology, you know, that benefits us. And in the meantime, there were a number of designs out there with multiple contexts a 15s in them. That that generates a good royalty per chip. And those chips are are physically large and, obviously, have a higher ASP that helps really push the average up to 8% and that's important. So those chips, whilst they're much lower in volume than say the embedded space, have quite a lot of arm content in them, and I think represents a good office stream for us in terms of royalty. It's Adam Boller from Deutsche Bank. You previously talked about 15 to 20 percent PD royalty rate at 4 months versus the wider semi industry. We obviously came in at the higher end of that this year. When we look ahead to 2014 based on the outlook that you've given us today, is that still the case, or should we think fifteen and and slightly lower if anything. Yeah. Well, I think if you, pay the 19% that I talked about, and add your your your forecast to the semiconductor industry. You'll get the answer. And pro and probably that implies around 15%. Right? But I think, you know, it's these are long these are sort of medium term measures and trends we're seeing. You know, I'm I'm just not gross royalties that that rate every quarter. And I think I remember the first half of twenty twelve, it was growing at 5% or something. But, certainly, we don't see any reason why our long term relationship to the industry growth would change. And in fact, I know I could probably build a case for why it would improve given our penetration across these multiple markets, notwithstanding the fact that high end smartphones and smartphones in total slowed down over the last 2 or 3 years. But, you know, don't forget, in a period where smartphone growth overall has already been slowing, you know, from you know, 3 or 4 years ago, arms royalty revenues have been growing at a similar rate. I mean, we've already been more than making up for the slowdown in smartphone growth, in penetration in other markets. Thanks, Vanguard and Aperity. Given how fast Cortex A has ramped over the last 3 years, so 100% penetration of smartphones 18% units and 500,000,000, units per quarter. How how quick should you think, the 8 will ramp? Based on your understanding of when Android will adopt it. If you can kind of frame that for 201415, that'd be very helpful. Thanks. So I think the growth of the A and the growth of Cortex A aren't necessarily the growth rates aren't necessarily going to look the same. You know, Cortex A is used in a very wide range of end products, where most of them may move to 64 bit at the time, but there's no kind of burning need to do that. I think what we'll where we'll see VA adopted is, you know, strongly in networking in the service space. And over time, across pretty much, I think, the whole market of of smartphones. And once all the software starts to move or once software starts to move over to 64 bit, then, yeah, it's just easy to be compatible or easier if every device is compatible, running the same version of the software. But but I think that's a that's a long term trend. So I think, given the general very broad applicability of Cortex and our 32 bit architecture, still expect very strong performance there, and, you know, with a more gradual shift to see people there. I'd like to go back to, royalties for q 4 if you have still for Q1, if you if you've got any. I'm just looking at, you know, the thesis for over the last I think the end of this day, 2011, we're talking about the expansion of royalty rate, you know, more recently V Eight. Yet, your recent, very recent, royalty revenue growth has not been totally de correlated really unit growth and the deceleration within their market. So I'm just wondering, have you seen any meaningful impact from 64 bits in q 4, or is that really something that's gonna kick in q 1 going forward, or is there anything slightly different underlying that we should be aware of that we justify the deceleration in your PDP royalty revenue growth. Well, I think the total number of units containing VA in Q4 was was small compared to 2,900,000,000. It was a small amount. So to start seeing that come through, appreciably, is going to take some time. I expect VA shipments will increase through 2014 And it's probably beyond then that that you'll really start to see meaningful volumes and kind of be able to spot that given given the vast number of, our base ships are selling to other markets. 2,900,000,000 is a lot, to make an impact on. So, yeah, I think we're going to see it over time exactly when it's a bit hard to call because it's based on product shipments that are being made by companies a long way further up the supply chain than we are. But when it happens, obviously, we send a benefit from it. So you think there's time for one more. Yeah. You you can. Let me come in. Let's see. Let's see. Let's see. Let's see. Let's see. Let's see. Let's see. Let's see. Let's see. Let's see. Two more questions. There we go. Sorry. Repeat questions. These are repeat questions. So you've been, you've got a very, a very, very useful, I think, baskets of 3 end markets essentially where you see your royalty revenue potential being the application process for mobile computing, enterprise networking, and then the IoT and MCUs. In fact, that kind of highlights how the traditional non mobile is almost double in revenue potential versus the old mobile going forward. But if I look at your royalty revenue guidance in the medium term, you talk about 15% to 20% performance versus 10 giga3 percent semiconductor growth that means roughly about 18% to 20% royalty revenue growth. Now if I look at your, these particular baskets and I look at the mobile growth potential. That's about 10% CAGR unless you get a lot more content growth over there. So I would bet that a lot of your growth essentially going to be coming in the future from the non mobile potential, essentially. So I was wondering when you look at that, guidance which you've given on Enterprise Networking or MCUs, would it be fair to assume that you're expecting sort of a quadruple in market share or something of that sort in this particular space? What would be the underlying market share growth potential there, or what you're seeing from your licensing, which gives you the confidence? Well, if you take the the the 2 non mobile buckets, you know, we showed a 5% market share for enterprise networking and servers. It's one of the other gentleman pointed out that the numbers we put in the Analyst Day last May were more than kind of 17 ish percent in in 2018. So that's quite a significant growth there, in in embedded, we're at 22% growth for 2013. That was up from, I think, about 18% in 2012. So we're seeing steady gains there. We've done a lot of cortex in licensing over the last couple of years designs, as we always say, take, you know, 3, maybe 5 years to come into into mass production. Been on a licensing program with Forte Benz longer than that, so you would expect to see, increased share gains there in the mobile sorry, in the in the embedded segment. So I think hopefully that answers your question in terms of of where we see that go. We do expect, yeah, an expansion of our of our market share in those two areas, and I think I think we will find it for it. I guess, given that it does not get given that internet of things and and since you don't have much of a competition, so to speak versus just the internal customers, within Would it be fair to say that you could double your market share within the next 3 years? I'd be very happy if we did, but, you know, it's tough to say that there isn't competition there. It is a large market. The new market. There are internal architectures competing for it. There are other third party IP vendors out there trying to take a share as well. I think we've got a strong story that sets us up well to take a significant share. Karen? Thanks. It's Darren Changins again from UBS. Last year, you gave some very useful metrics around graphics and your your units, in terms of graphics development. I just wonder whether you could give us a sense of your graphics market share this year, the growth that's expected in that market. I guess you've got very high tax rates with Chinese mobile players, so you're benefiting the low end. You've got high tax rates and DTV. I just wondered if you could give us a sense of what you think your graphics market share will be through the course of this year. Thank you. I mean, the the growth has been strong. I'm not sure we put a number in me. Right. There you go. It was in there after all. So, 150,000,000 units in 2013 going through it's about 400. So 2012, 2015. I'm sorry. You're gonna have to point me to the 5 g. Right. So total for the year was about 400,000,000 in 2013, up from about 150,000,000 in 2000 Strong trajectory, gas. I mean, if you think of where the, you know, where it's come from, if you look at the Marley licensing in the last few years and you look at where the unit shipments is, you know, go back to 12 and 11 and 10 and there's virtually nothing. So I think it it it is a pretty strong trajectory. Yeah. Just say that again. So total of 2013 about 400,000,000, up from 150 in 2012. We haven't got any number, but I'll just wait. It's totally broke. Alright. Well, thank you everyone.