Earnings Call: Q3 2013

Oct 22, 2013

Thank you for standing by, and welcome to the Arm Holdings Plc Q3 Analyst Results Conference Call. At this time, all parties a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Tuesday 22nd October 2013. I'd now like to hand the conference over to your speaker today, Ian For Please go ahead. Thank you, Will. Good morning everyone. This is Ian Thornton, VP of Investor Relations at Arm. On today's Q3 results conference call, we have Simon Seager's Chief Executive Officer and Kim Skorp, 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 release can be found on the ARM Investor Relations website at www.arm.com/ir. Before I hand over to them, I have to just read out a few words with respect to this conference call and what we're about to discuss. The 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 to investment professionals. Any person's presence on this call who does not have professional experience in matters relating investments should not act or 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 as 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. Good morning, everyone, and thank you for joining our Q3 2013 Results Conference Call. I'll do this morning is run through the business highlights and then hand over to Tim to provide some more detail on the numbers. Following Tim, there'll be some time for Q and Let's start with the business overview. 3 months ago, we highlighted how leading companies in multiple markets were licensing ARM Technology and introducing new products into a wide range of end markets. We've seen this activity continue technology, which has resulted in record licensing revenue. A record 48 processor licenses were signed in the quarter with 24 companies. This included 11 companies taking their first ever arm license, many of whom are planning to take our technology into new and emerging markets, such as fingerprint recognition and wearable devices. Established, FALT Leading Technology Companies also continue to make long term investment in Arm. And this quarter, Arm signed 4 large multi IP licensing bills, including a significant licensing deal with MediaTech. This quarter has also seen several important design wins. MediaTek and Samsung both announced chips that support Arm Big Little Technology. AMD for all common Huawei, announced ARM based chips that support 64 bit for mobile infrastructure and enterprise networking applications. In January 2013, we increased our medium term guidance on how arms royalty revenues would outperform the wider semiconductor industry, from a 10% to 15% to 15% to 20%. This was to take account of the increasing opportunity for Alme's Cortex A and Marley graphics technology, which yield a higher royalty. Over the last few quarters, the rate of arms outperformance significantly exceeded our raised guidance, as chips containing out the industry by 16 percentage points. This is in line with our raised guidance. The revenue momentum in both licensing and royalty enabled ARMs to grow earnings by 38% and deliver record quarterly cash generation in Q3. This has been another quarter that underpins the long term growth opportunity of the business and enables us to continue to invest in our R and D capability, enhancing our ability to innovate and develop new products. Looking forward to Q4, the combination of record order backlog and a robust opportunity pipeline points to another strong quarter for licensing revenue. We also expect to see Assuming that the macroeconomic situation does not deteriorate significantly in the remainder of the quarter, we expect group dollar revenues for the 4th quarter be in line with current market expectations of approximately USD 290,000,000. In more detail, starting with technology licensing. As I mentioned, we signed 48 processor licenses this quarter, These licenses were signed with a view to armed technology being deployed in a broad range of end markets. These included 14 licenses for mobile and computing applications, including entry level smartphones, tablets, and 2 in one laptops. 18 licenses for microcontrollers and sensors for the internet of things applications, 7 licenses for wired and wireless enterprise networking, and 9 licenses for other consumer electronic applications, such as digital TVs. Included in these licenses were a further 3 for Cortex A50 series processes, which include support for 64 bit computing. To date, Arm has now signed 24 Cortex A50 Series licenses, and we are in discussions with many of our partners for considering licensing the latest technology. Cortex A-fifty series processes can be used in a multitude of high performance applications from mobile computing to enterprise networking and service. This quarter, Arm also signed an 18 Cortex M Series licenses. With close to 200 Cortex M licenses now signed, arms partners are well positioned to continue to gain share in the general purpose microcontroller market as well as to take advantage of the emerging internet listings opportunity. Finally, Arm signed 5 more Marley graphics licenses and 4 more POPs during Q3. Pop IP is physical IP that's been optimized to enhance the performance of Cortex A and Marley Processes. Now switching to Royalty. Palms Royalty revenues are reported 1 quarter in arrears, so our royalty for Q3 was generated chips sold by our licensees in Q2. Arm continues to outperform the semiconductor industry. And despite the industry being down 2 year on year in the relevant period, process of royalty revenue was up by 14%. Just over 2,500,000,000 ARM processor based chips were reported in the quarter. This 13% year on year increase was driven by growth across and non mobile chip shipments now account for more than half of Arm's total royalty shipments. Arm is also beginning to see traction of shipments in enterprise networking applications as the first of the early adopters start to ramp into high volume. In fact, more than 15,000,000 CorteX A enterprise networking chips were reported in Q3. The growth and functionality of consumer devices such as smartphones, tablets, and digital TVs also continues to benefit ARM. This quarter, ARM saw a doubling of both its Cortex A and Marley processor shipments year on year. Typically, ARM receives a higher royalty percentage for its Cortex A class range of products and an additional royalty percentage for chips that contain Mali. Notwithstanding the strong growth in both CorteX A and Mali Chip shipments, Arm's average royalty revenue per chip was flat year on year. As a strong growth in the higher value lower volume applications, sorry, lower volume application processes was balanced by Now turning to the operational side of the business, we've continued to invest in our R and D and commercial teams and in our business infrastructure. So far, this year, Almas added has added an extra 364 people, including 142 graduates. We expect to continue to invest across It was a busy quarter for marketing with record numbers attending our annual partner meeting in Cambridge where we shared our roadmap plans over 500 representatives from our customers and key ecosystem partners. Next week, we will be holding our annual technology conference in Silicon Valley in California, where we expect to host around 5000 developers over 3 days. And where we will present new technologies and have exhibits and demonstrations from our engineering teams and across the ecosystem. There is an investor event on the Wednesday afternoon if you can join us, and more information on that is on the IR website. Now, I'm going to hand over to Tim who'll provide some further detail on the numbers. Thanks, Simon. Good morning, everyone. Hopefully, many of you have had a chance to have a quick look at the Q3 earnings release. And just to remind you that the quarterly slide set is available on our website as usual. Simon touched on a lot of the financial headlines. So I won't repeat, all of those, but I will add a little bit of color as we think about the sell side models going forward. So overall, Q3 dollar revenues at $286,700,000, up 26% year on year. And you will obviously have noted that particularly strong growth coming from Processor Licensing, up 52% year on year to $6,000,000, clearly well ahead of the $80,000,000 that I pointed to at our Q2 results presentation. You know, Simon noted, we signed 48 licenses in the quarter, yeah, much higher than the normal quarterly run rate where, you know, over multiple years, the average is more in the sort of 25 to 30. And further, these 48 licenses included some licenses which yielded significant revenue in the quarter. Approximately 50% of PD license revenue in Q3 was generated from backlog. So in the normal range of 40 to 60, but actually a lower evolution from backlog than we've seen in the last couple of quarters. And the 3rd quarter was also a strong bookings quarter, and notwithstanding the strong license we have new result, we exited the quarter with backlog up about 3% sequentially. Given this healthy backlog position, and the quality of the licensing opportunity pipeline, $90,000,000 plus or minus looks to be a realistic base for Q4. The usual analysis of backlog maturity and composition is included in the Q3 slide set on our website, and that shows that approximately 25% total backlog is expected to be Simon has gone into some detail on royalties, but again, the headlines up 14% year on year in third quarter, about 16% ahead of the industry, which was down 2 over the same period, consistent with our long term guidance of outperformance of 15% to 20% albeit at the lower end and lower than in recent quarters. Normalized OpEx in the 3rd quarter headline was 85 £600,000. This included a mark to market charge of 5,500,000 in the quarter, which actually gives to market mark to market charge of Nil in the 9 months to date, but 5.5 in third quarter. Reflecting the weaker dollar at the end of Q3 compared to the end of Q2. So underlying costs therefore were around £80,000,000, you know, broadly in line with consensus and normalized OpEx in the 4th quarter assuming effective exchange rates are similar to current levels are expected to be in the range of $82,000,000 to $84,000,000. Again, and consistent with current market expectations. The group's normalized tax rate in the third quarter was 22%. Our guidance for the full year normalized effective tax rate remains unchanged at just under20%. And as the Patent Box regime in the UK, transitional implementation continues over the next few years, And that tax rate is expected to gradually reduce all other things being equal, from the 2013 base of just under 20%. Reiterating Simon's comments on the outlook. We entered the final quarter of the year with a record order backlog healthy opportunity pipeline for licensing. And as I say, that points to a strong quarter, of, you know, $90,000,000 or so for licensing. And on the royalty side, you know, the relevant industry data that we've seen and some, you know, some of the customer guidance data, For the third quarter, which is our shipment period, for our Q4 royalties, suggests a sequential increase, similar dollar value to prior years, Last couple of years, it's been up $15,000,000 or so, looking back over sort of 3 to 5 year average. It's somewhere in the region of $10,000,000 to $15,000,000. So in this context, you know, taking licensing and royalty together, we expect group revenues for the fourth quarter to be in line with current expectations of approximately $290,000,000. And with that, we'll throw it open to questions. So, we'll, we have some time for questions now. If I could request please that, when you come on the line to ask a question, you asked just one question so that we do have a chance to get through, everyone on the call. So with that, operator could be on the first question, please. Thank you. Your first question comes from the line of Gariff Jenkins. Please ask your question. Yeah. Thanks, gentlemen. Just wanted to, we'll probably hear more on this next week, but I just wanted to give us an update on the server market and the developments there. Obviously, seen the recent developments at Broadcom and also Calceda taking Facebook, exactly on the board. And I just wondered whether you could give us an update on how things like Project outcoming and really the expectations around 64 bit in the market? Thank you. So I think generally progress has been very good. In the server market over the last, little while. We're seeing hardware platforms come to maturity. We're seeing some of the software components that are be required to run on the server hardware, become developed, across the ecosystem. And I think, through over the next 12 months, we should start to see some shipments of, of real server products to real customers. Being deployed in real applications. So I think progress has been good. And as you say, I think you'll see some more on that at next week's TechCon. Your next question comes from the line of Simon Sheffer. Please ask your question. Yes, thanks so much. Just want to get your sense on market share and non mobile going forward. Obviously a very strong beach once again on the core licensing side. So if anything, I guess, that should be precursor future market share. I think last year you had roughly 20% market share in non mobile. Any sense as to how that might look in sort of more like 2014, 20 theme timeframe based on the licensing that you've exceeded this year? Well, I'd like to think that overall there's a healthy adoption of ARM technology in many markets. I mean, one of the particular standout features of our licensing in Q3 was the number of Cortex M devices. In the microcontroller space, our market share is, today relatively small. And I'd like to think that's going to grow quite strongly over next couple of years off the back of this licensing and the opportunity that IoT represents. The other side would say where we're poised for some good growth that is in enterprise networking. We've already had early adopters such as LSI Partnership products, But you saw in the quarter, that we signed licenses, with, well, sorry, the products were announced by, Huawei, for all com, freescale, talking about new enterprise networking applications that they're using, that they're using on technology to develop with. So I think we should see some good market share gains there. Great. Thanks, Ivan. Your next question comes from the line of P. F. Barragu Please ask your question. Hi, good morning. Thank you for taking my question. I'd like to come back to the royalty growth this quarter. So yours 15% sequentially ahead of the overall semiconductor market. But if you think that's about how it should revenues come from smartphone, the smart have been growing like in the high 30s this quarter. It's kind of puzzling because it doesn't seem that your actual royalty revenues have been growing faster than your addressed markets, even if it's growing much faster than your addressable market. And so the reason why I'm pointing to that is that next year, we'll probably have like a slowdown in smartphone growth. And so for you to stay, 15% to 20% above the overall semiconductor market in terms of growth, I need to see like something coming into play and reeling the growth that is coming from smartphones today. And I'm not sure where we should see that coming like I would assume that the increased penetration in non smartphone segment is already quite strong this year. So do you expect like a steep acceleration And if that's the case, what would be like some as a segments where most of this acceleration would come from? Well, I think in smartphones, generally, we're expecting quite about 20% to 25% growth in smartphones. There's going to be a range of end devices there. It's going to be growth in the high end, but most growth will be in entry level and mid range phones where there's an opportunity for a lot of our technology opportunity foretext processes, opportunity for Mali, opportunity for our physical IP. So the growth and, whilst they may be lower cost devices, there's an opportunity for a lot of Silicon Content there for Arm. So, you know, we're expecting mobile to represent a strong growth in our royalties, through next year. And then in non mobile, we've seen, in this last quarter, the overall split of unit shipments now, it's 52% in non mobile devices, a lot of growth there in embedded, where we see you know, strong growth of our CORTEX and based parts from many of our licensees and we would expect that to continue as well through next year. I suppose as a sort of a more general point looking sort of longer term, you know, license revenue has obviously been well above trend growth now for 3.5 years, and continues into 2013. And really, given the normal lag of 3 to 4 years between licensing and royalty, looking further out into royalty, we haven't yet you've seen the benefits of, you know, much higher than trend licensing growth. So I think, you know, the sort of long term picture for royalty that is being painted by license revenue growth in the last three and a half years is very encouraging. The other end market I'd point you would be, Enterprise Networking. I mean, just touched on that. But with the licensing that's gone on, and with the first products that are now being shipped, that is an area where we do expect see some good market share gains. And of course, that translates to volume. And given that those devices tend to be, the more expensive end spectrum, then that should be a good dollar contributor to our overall royalties. Your next question comes from the line of Didier Skamala. Please ask your question. Yes, good morning gentlemen. Thanks for taking my question. Very simple question. You mentioned in your press release that you've got a major networking OEM signing a license. So my question would be what sort of applications are we looking at? And number 2, do you think that the trend of these intermediating the semiconductor vendors and going straight to OEMs is going to accelerate whether a network or in other applications going forward. Thank you. So, well, I think that the licensing we've done is with the silicon partners who are going to provide devices into OEMs I mean, to your question about OEMs taking licensing, that license is, there are certainly some who want to, be able to guide what they're system products look like. But I think generally, whilst that was a trend that people were anticipating a few years ago, I don't actually think we've seen much of that. And I think the semiconductor partners are working closely with the OEMs on defining what the products need to look like. And then going off and doing what semiconductor companies do well, that is designing semiconductors and providing them to their end customers. Your next question comes from Amit Hartchandhan Please ask your question. Good morning, gentlemen. Amitur Giannani from Citigroup and thanks for taking my question. My question is around looking at licensing going forward, as Tim pointed out, we have been above the usual trend for close to 3, three and a half years now. And particularly when I look at 64 bit, And a scenario wherein given that one silicon maker out there has already got a 64 bit product in mobile, and others looking to accelerate their attempt in 64 bit. Does that potentially lead to an accelerated revenue recognition coming out of backlog well as milestones are achieved. And potentially, how should we then think about the licensing revenue that you declare going forward over the next 12 to 18 months? I mean, it's Tim. Yeah, I think generally, when we discuss the trend that we've seen in licensing, you know, you know, with investors. I mean, the the our message remains the same that if you if you look out medium and long term, we do expect license revenue to grow in the sort of mid to high single digit. I think the thing that's interesting is how we transition from the growth we've been seeing in the last three and a half years to that steady state. And I think, you know, that is quite a difficult transition to call. And obviously in recent quarters, you know, we've been performing ahead of, I have our guideline guidance. I mean, I don't think the, I think the 64 bit and, you know, licensing in version 8, I mean, is all is all a very strong driver for arms licensing going forward. I don't think it really materially changes the overall profile of how backlog gets converted into revenue. You know, new technology, when it's adopted by lead licensees, takes a good few quarters to get into revenue. And then when it becomes available, for general licensing, it's a much shorter period into revenue. And I don't think that, you know, overall dynamic changes mean, as I said earlier, there is the backlog, you know, pie chart in the slides shows the recognition profile, next couple of quarters. 3 4 quarters out and more than 12 months. And I know that I don't think the shape of that is particularly different from what has been in the past. Your next question comes from Andrew Gardiner. Please ask your question. Good morning. Thank you. Tim, I was just looking at some of the comments that have come across the wires where you're acknowledging inventory in the mobile space. I'm just wondering if you can give us any more color on what you're seeing sort of the early stages of the 3Q royalty reports coming through and just signs of sort of confidence return your confidence in that business coming back in the fourth quarter. Any further detail there would be helpful. Well, I think, Andrew, the, you know, the guidance we've given, is that we expect, you know, a broad, a broadly similar seasonal picture than we've seen in recent years, you know, of an uptick in the sort of mid teens area mean, actually, you know, 22nd October, it's even earlier than usual for us, to be reporting. And therefore, we've actually seen less royalty reports than we may normally have done by the time we report. But, you know, what, obviously, what we're looking looking at as you do is guidance from, you know, some of our big shipping partners. And inevitably, you know, it's a somewhat mixed picture, you know, some strongly up you know, some less so. But, yeah, taking that all in the round, we we see a picture probably emerging that's a similar shape to previous Q3 to Q4 transitions. Your next question comes from Sandeep Deshpanti. Please ask your question. Yeah, hi. Thanks. Can I ask a question about the IPD royalties? I mean, the FPD royalties were showing quite nice signs of growth in the first half of the year. That growth seems to doesn't seem to be shown in this report as such. So what is exactly happening? Because you did seem to be showing some signs on traction associated with pops. But at this point, it does seem very lumpy because normally historically, your royalties have never been, I mean, licensing has been lumpy in ways, but royalties, once the royalties started coming in, they they keep coming in. So is there anything happening on the PIP royalty side? I think, Pop licensing continues to perform well. There were another 4 deals that we did in Q3 and plenty of opportunities we see ahead of us. The royalties that those license deals will generate and follow a similar trend to process licensing as well. So there's, with all the pop deals that we've done, over 15 now, I believe, you know, they will take time to come through on the royalty line. The Q3 royalties in VIP last year were very strong. So the comparison year on year, is unhelpful in terms of percentage wise. But year to date, PIPD royalties are up 16%, which I think reflects the overall success we've had in design wins and delivering leading edge technology over the last 5 years or so. So you're saying that there is no reason advocacy or almost at 51% year on year growth in Q1 and now it's 5.6% year on year growth. So something it's not just is it just the base effect or is it some nothing else tightening there, is that really? No, there's nothing else affecting that. It's purely looking at a mathematical artifact of the comparison. Thank you. Your next question comes from Francois Munier. Please ask your question. Yes, thank you. Actually, I'd like to ask a question about the Monster license number you printed this quarter, if I understand well, there's been a few big deals in this number, maybe 3 or 4 versus normal 1 or 2. I was wondering, is it basically big deals, which have been pulled in into Q3? Is there a limited number of big deals you can sign every year? And did you give the normal rate of or the normal level of discount for pig deals this quarter or maybe more than usual I'm trying to understand basically because I think everyone here has been surprised with licensing numbers for the past 3 years. And I think team has been quite good at managing expectations, but every quarter, basically, there's an umbrella way ahead of what we've been thinking. I mean, Francois, you're right. I mean, there I mean, I think the there are a number of things to note. I mean, the most significant ones are there were 48 licenses, you know, and we haven't we haven't really been sort of north of the mid-30s before. So, you know, a lot of licensing across a very broad range, of customers and end markets. Yeah. There were some, you know, significant revenue contributors, you know, that there are in every quarter. There were 2 or 3 here. But, you know, I can sort of categorically state that none of these were brought into Q3 from future periods, in terms of commercial arrangements to to pull that in. I mean, this sort of underlying is a sense of, you know, where you're trying very, very hard to offset the royalty shortfall with licensing. I mean, if we've been trying to do that, we probably would have stopped well before we went 20 over. So that's just not a fact at all. I mean, the reality is there's a very big demand for our technology at the moment. And whilst I think 106 is clearly a high base, we are pointing now to a base of 90 rather than 80 coming into this quarter. So, you know, this is, this is not a 1 quarter wonder. You know, the licensing continues to be strong and the backlog's up and the pipeline's still healthy. But are we going to be beginning to a period of the way? Because as you've said many times before, you say maybe it's going to be 90, ninety five next quarter and then try to view 105 again. So it's just like, you know, what's your fitting now? Well, I think the reality is when you've got a period where there, you know, there is a really, really strong demand for our technology. It is actually quite tough to call precisely, you know, which deals are going to close in in which period, you know, deals can close very quickly. They can take longer to negotiate. And, yeah, as you, I think said earlier, I mean, I view our role to, you know, to er on the cautious side in guiding. You know, quarter is a short period for licensing in this type of business model. So I think we need to earn on the side of caution when we're trying to predict precisely which deals are closed. Okay. Thank you, Tim. Your next question comes from Matt Ramsay. Please ask your question. Yes, thank you very much. Just wanted to dig in a little bit further on the licensing. You guys mentioned that about half of the licenses signed in the period were from new licensees. Maybe you could give a bit more color of where these new licensees are coming from? Are these processor makers that formerly used a different instruction set architecture, maybe power PC or MIPS in the embedded space. Or are these sort of new upstart process or companies from Asian markets or whatever emerging market might be? A little color on that would be great. Thank you. So there's a very, broad range of customers that we've licensed to of these, 11 customers who have never taken licensed arm technology before, broad range of end markets that people are looking at, although many are looking at, microcontroller and IoT applications, but there are companies in the UK, companies across Europe, companies in China companies in other parts of Asia, companies in the U. S. So, a very wide range of end customers that we've licensed to. Addressing a broad range of markets. Yes. And many of these companies are established semiconductor companies who just because they've been developing, say, analog sensors or or something that didn't necessarily require any, you know, a a smart processor before, quite often, I I I look I I into these companies and find that they've been around for years, but they just never needed to have any smart, you know, technology in their chips before. So they, they're coming to a while and just getting their first ever process. Your next question comes from Johan Shala. Please ask a question. Yes, thank you. Thanks for taking my question. Just really one on 64 bit, driving royalties. I mean, we obviously have one major smart device. So we, that is shipping volumes here now and probably see a few more 64 bit products on the networking service space in 2014. Just if you could give us a bit of a feeling on how your conversations with your licensees are currently going on 64 bids, both smart devices and other areas and how we should think about volume shipments here. I guess that smart devices next year will still predominantly be apple, but then how should we think about the other markets and also into 2015 on the volume side? Thank you. So we're seeing demand from 64 bit compatible technology across a wide range of markets. I mean, in mobile, in smartphones and tablets, we've said for quite some time that we see it as an inevitable shift to 64 bit at some point in the future. In this last quarter, we've seen Apple come out with a 64 bit, the first 64 bit device. I think we're going to see the start of a transition there. How quickly that migrates in the high end, the mid range, the entry level, you know, time will tell. But on the other side, we see strong interest for 64 bit ARM Processors in the service space. And in enterprise networking. So the technology we've designed, we've designed in a way that it can target a very wide range of end applications. We have different products for different markets, and we're seeing strong uptake in the licensing. In terms of volumes next year, I think realistically, that's going to be quite modest for 64 bit. These products do take time to design, to deploy into the field, and for for volumes to grow. So I think 64 bit volumes will be quite modest in 2014. But we should like to get more more clarity on the 2015 outlook then and maybe a few of your licensees giving us an update on new products over the course of next year. Is that fair to assume? Yes, I would expect that you would be seeing products announcements from our licensees talking about, new devices featuring, 64 bit ARM technology through next year. And that should be both in mobile and outside. I'd expect that across a wide range of markets, yes. Understood. Thank you very much. Your next question comes from Sumant Waihi. Please ask your question. Good morning guys and thanks for taking my question. I had a bit of a broader longer term strategy question around Intel and instead of that. In September Intel announced that it's entering the intern of things with its quark family, yet another market I suppose where UN Intel will, compete head to head. And what I was quite interested in that was their comment about the fact that they will offer Quark Family or Quark solution as a synthesizable product. So if I kind of compare that with the smartphone market, you, you clearly won because probably three reasons the right technology, the right business model. And of course, that your cores were standard by the time Intel really decided to come in. But in the interim things, when I look at it, from where we are today, the standards are not set. And, and they suggest that they're probably am relating your model in a, to a certain extent, by selling IP, lead. So how do you think you'll be able to defend yourself in that? I know that your technology is much further ahead, but is that the the only focus which should help you stay ahead of them? Or is there anything else I should be looking at? And while you're at it, could you also us what you think is your latest view on how big in dollar terms is the internet of things today? So I think you have to be careful not to fuse a process of being synthesizable with a process of being licensable. I may be wrong about this, but I don't think I've heard Intel say that they're going to be licensing their processes to other people to design chips with. And so I think our business models remain very, very different. I think the internet of things space is very broad. There will be a wide range of processes required to address it in its entirety. Internet of Things can mean processes connected to, large pieces of equipment sitting in factories, which are being monitored to see when they need repairing. It can mean, wearable devices, which can require high performance processes or very small processes. It can mean sensors embedded in light bulbs to work out when they're going to need replacing and what color temperature the light is going to be coming out of So there's a very wide range of end markets, which comprise the internet of things. All of them pretty much have characteristics of there being a processor, a sensor of some sort and some wireless technology, all of which arm has a very deep penetration of into already. And if you look at the microcontroller shipment, by arms licensees, there's cumulatively over 5,000,000,000 of them that already been shipped. So while the internet of things is a new space and there's scope for many people to go and play in it, and there is scope for new standards to be set. I think Arm has already been successful with our range of micro controller, processes, and achieved very large penetration into companies that produce chips for the internet of things or or will produce chips for you instead of things. Okay. And any view over the next 5 years? How big this market could be in dollar terms? Any new view essentially given the fact how quickly it's growing? I don't think we've sort of changed our view on that. I mean, we exactly how it's how big it's going to be. Again, kind of remains to be seen, you know, how quickly, standards for, security get deployed, for example, how quickly services can be built up around these interconnected devices remains to be seen. But this is a tens of billions of units opportunity. The really small sensors in the light bulbs will be, you know, 50¢ and below, products larger processes going into smart watches are probably going to be in the $5 range. And industrial applications might be that and maybe more exactly the blend of that hard to call right now. Your next question comes from atlasultania. Please ask your question. Hi, guys. Yes, on mobile royalties, you mentioned in the press release that mobile royalties were up 20% year on year. Volumes were up 8%. That would imply that your royalty rate per unit within mobiles was up about 12%. Can you give us some sense of obviously it's being helped by rising royalty rates? But that's been offset also by declining chipset ASPs. Can you give some sense of how much of that is actually being driven by the increase in royalty rates And is that trend that we should actually expect going forward? And then I have a link linked to that. How do you actually see the adoption of both 64 bit and also big little technology. We've seen some traction, initial traction in the high end, but do you actually believe that these technologies will be needed in the mid end smartphone market 3 or 4 years down the line? Okay. Well, I'll take the first part of that one. Yes, so clearly as we say in the release, the look at Yeah. CorteX, a, processes and Marley graphics processes, both bodes up about twofold, year on year. You know, Cortex A, you pass processes when compared to sort of the army elevens and our mines have a slightly higher royalty rate. And my graphics ads and another sort of about 1% as well. So the combination of those together does mean then that we are going to be seeing slightly higher royalty, you know, percentages from, you know, from, from mobile, from application processes going into mobile phones. And, yeah, that's obviously going to pass to be put into the overall mix with what's going into, you know, microcontrollers and invented things where, you know, we we clearly will have a separate SIM class processor. So the end, what happens to the average going forward will very much depend be dependent upon the mix. But I certainly think you can, you can sort of separate your, your cortex a car your application processes going into smartphones, into tablet, into computers, into TVs, and also into things like enterprise networking and servers and I think that those will probably have a growing royalty percentage over time, whereas, you know, the other markets, maybe you have, yeah, we hope we get a slightly higher percentage, but probably a slower growth trend going forward. So your follow on question was about big level. So we've seen a couple of announcements in the last quarter, one from MediaTech, one from Samsung about new devices using Big Little. As you said initially, that's been successfully in the high end. I think over time, we should expect to see that migrate into the mid range. I think Big Little is most suitable where you have a broad range of processing performance requirements. Sometimes in an application where sometimes you need a lot of performance, sometimes you don't need much performance, Big Little is a great technology for helping lower power and smartphones exhibit those characteristics. So no reason why it's not a suitable technology across the entire spectrum, but in a low cost entry level device, people are probably initially at first anyway. Likely to go for the lowest cost implementation point, which is probably a single or dual core processor. But over time, as devices continue to shrink, as silicon continues to get less expensive to manufacture, then there's no reason why big level can't span the entire range of smart computers. Your next question comes from Jerome Rommel. Please ask your question. Yes, good morning. Just coming back to the royalty per cheap, flat year on year. If I look at the mix between CORTEX and the rest, CORTEX was a little bit ahead of 50%, 53%. Significantly higher than last year. And if I look between the in the cortex A, was up 127% Cottex and only 74%. So I'm just wondering why I understand the mix effect if I look at the Cortex ag grew significantly higher and quicker than the Cortex. And so I'm just wondering why we had only flat royalty per chip. So I'd just like to understand what was the underlying price decline you saw per chip? I don't know about price decline, but there's a potentially a large price difference in the cost of a application processor with, multi core cortex A in it. And the price of a microcontroller with a single cortex imminent. I mean, one could be 5, 10, maybe $20, the other could be $0.50 and below. So in terms of the volumes, We've seen large volume growth in Cortex M. That has pretty rapid effect on pulling down the average when you just divide the royalty dollars by the royalty volume. Understood. And I know there are many inputs, but what could be your best guess for the rate you purchased going forward Well, it depends on the mix. I mean, Jerome, this has obviously been a, you know, longstanding discussion and our Our guidance, as you've heard before, tends to be, we sort of think broadly flat. I mean, what we've seen over the last 2 or 3 years well, in in the many years before that, we saw a sort of a gradual decline as the weighted average of chip prices aren't got designed into went down And then we've seen in the last 2 or 3 years sort of flat to slightly up. And when we look out forward, we obviously see, you know, some trends that are taking in different directions, you know, very strong growth, Portex A version 8, you know, higher percentages, higher chip prices, mean, but Simon's just sort of painted a picture of what the internet of things opportunity looks like massively high volumes. But characterized by lower chip prices on average. So, you know, it really does depend on one's assumptions about the growth rates of these markets and arms penetration of these markets. As to where you get to on the average. The good news is it's all 100% margin revenue. Thank you very much. Your next question comes from Janardan Menon. Please ask your question. Just to go on your guidance on royalties into the 4th quarter, you said it's it's a similar level in dollar value, but obviously that would imply a declining quarter on quarter growth rate, which taking sort of the midpoint of your guidance about $13,000,000, $14,000,000 would imply about 10% versus 12%, 14% that you've seen in previous years. So I'm just wondering what one should read into that. Is that would you say that that's a sort of a temporary kind of a deceleration that you're seeing because of inventory, etcetera? Order that signal a more structural slowdown in key markets like smartphone and tablets and until some of the other applications, so I'm becoming bigger. We could be in a slower growth phase for some time. Well, I think when you look at the end markets, I mean, consumer products go through cycles. What we've seen in Q3 is many devices kind of coming to the end of their life and consumers waiting for the next version to come out before upgrading. We've seen that in, some smartphones. We've seen that in tablets. We've seen that in game platforms. Kind of a lot of that has happened at once. We're expecting, something of an uptick in Q4. We're making a judgment on that based on the information that we have in front of us, which is obviously imperfect and we'll see how the quarter plays out. In terms of long term structurally though, I think when you look at the number of licenses that we've just done, when you look at the strength of licensing over the last couple of years, that points very strongly to an uptick in design wins for our technology, which drives royalty, which drives royalty dollars. So I think for the long term, and we are in this for the long term, should continue to see gains in market share, royalty volumes and royalty dollars. Got it. Thanks a lot. Your next question comes from Vijay Anand. Please ask your question. Thanks guys. I had a question on the server market. Simon, could you maybe talk about the 6 C4 bit ecosystem in terms of how far or how close we are for the ecosystem to be mature in to support commercial deployments? And in that context, maybe could you also talk about the licensing traction you're seeing in the server market maybe in the third quarter, both, some quantitative as well as qualitative color will be helpful. Thanks. Of the ecosystem, I mean, a lot of work's been going on for a long time, to be ready for 64 bit commercial deployments of servers. And we're starting to get to the point where that can happen. I mean, we are expecting this quarter for HP's moonshot products to ship, based on 64 bit arm silicon from, partners like AMCC. So at that time, the required software and hardware will come together And we've seen much of that being developed by, numerous partners in the Arm ecosystem. So it's, it's been a working progress. And I'd say at the moment, it is coming to fruition. We continue to see very strong interest in putting ARM and the data center. Many people who build out data centers for specific applications are very interested in doing trial deployments right now. And I would expect, most on the number of trials that are going on, to start seeing some, you know, meaningful commercial deployments, probably starting in about, well, sometime through next year. So I think we're in pretty good shape. And it's one of the things that's helping drive licensing. Your next question comes from Lee Simpson. Please ask your question. Just want to ask a quick question about networking, if I could. I mean, as far as looking at trends in that space, it looks as though there's an ongoing shift towards low cost wireless base stations. And I just want to understand beyond the help that it has for FPGA's near term and some of that obviously next phase rollout infrastructure in China. Just trying to understand where ARM licensees are coming into the mix here. And maybe associated with that, are you encouraged by the moves that some have towards a unified stack across macro and lower cost base stations as a positive for the arm architecture? I mean, I think in order to, help lower costs, some form of standardizations required. And there are many arm licensees now taking arms technology and targeting this market. I think as you say that there is a shift towards the combination of macro base stations and small cell base stations in order to achieve a number of things delivering the bandwidth that 4g Technologies, offer the capability of is going to require an upgrade in the infrastructure, and a greater shift to the combination of, large and small cells, also enabling people to do more and more communication, from mobile devices indoors is something else that's driving that. I mean, when original mobile networks were deployed, they were deployed for enable people to make phone calls whilst they were out of the office and away from home. And now increasingly, most calls are initiated inside buildings, which the conventional infrastructure doesn't well suit. So that is one of the things that's driving the adoption there. To make all of that reality, these devices need to be low cost if we're going to have high volume, and the ARM business model the technology delivered through Arm's licensees helps enable lower cost end devices and helps drive volume, which is good for plays in the space and it's certainly good for arms, volumes and arms royalties. Perfect. Thank you very much. Your next question comes from Andrew Dunn. Please ask your question. Good morning. Most of my questions have been answered, but I had one on actually on on headcount. You've increased your headcount sequentially this quarter by around 8%. I think that's the highest you've done for a number of years, particularly in Asia Pacific, I noticed. There any specific areas that you're investing in? I know you've spent a lot on Marley and getting that up to a competitive product, but any particular areas that you are investing in now going forward Thanks. Well, as a number of areas, I mean, a lot of the engineers that we're hiring are going on to developing net generation of processor technology. We're also increasing, the number of people that we have kind of in the field working closely with our customers. To help with the integration of what we licensed to them and help accelerate time to market for our customers and help support them. But then we're also investing in our internal infrastructure, so that the company can scale and grow to deliver on the opportunity that we have. Your next question comes from Brett Simpson. Please ask your question. Just go back to the second quarter, looking at the smartphone market, some of the trends, quite a lot of changes. With your Qualcomm and MediaTek Spreadtrum had very strong sell in, in the June quarter and Apple, clearly working down inventory, on the iPhone side ahead of the new product launches. And I think also had weak iPad numbers. So quite a big mix shift in the second quarter to the low end. And I just wanted to ask, you know, how can you just talk a little bit about CorteX A royalty ASPs, you know, with this mix shift we saw in the June quarter, Have you seen any major changes in your cortex A royalty ASPs? Hi, Brett. It's Dan here. I mean, when we look back at the ASPs of the, the chips, then they've been flattish, I'd say, obviously, they've been down a bit, but they're flattish for the last few quarters. Obviously, the, the royalty percentages that we get from from those. As we're starting to see, some of the core techs, here, 815, some of the big bigger ones, you know, started to come through the way first of those. They obviously had a little bit of an increment, slightly high increments. And obviously with Marley graphics, doubling, units year on year, that all adds an extra an extra percent. So, yeah, there's there's a number of sort of, like, outward drivers within within that, hopefully get getting us a a higher raw percentage over time. That's helpful. And just maybe a follow-up here. Looking at the backlog on PD licensing, what portion will be 64 bit V Eight. And can you give us a sense, what typical licensed ASPs the bump in the ASP you're getting for V Eight versus V7 on a like for like basis? Well, we haven't really provided guidance on, ASPs of our licenses. That's not something that help us, I don't think, in, liaison with our customers. So we haven't really broken that out. More sophisticated the processor and the more complex it is to develop, the more, the more, the higher the license we bring. I mean, that normal trend continues. And we don't, again, we don't go down to the next level of detail around the backlog. As you know, at any one time, the latest generation of technology that we are licensing forms a, you know, a portion of the backlog and V Eight is no different and you've seen how many licenses we've done. And the revenue recognition on those, you know, is, you know, ahead of us, not just behind us. So, yeah, it's And maybe just another way of asking that question, Tim, I mean, when you look at V Eight and the deals you've signed so far and compared to the same time, with Cortex A V7, is the take rates from the industry for your latest architecture much faster than we saw in in V7 cortex A? I think there's distinct enthusiasm for the version 8 of the architecture. But, you know, there are other products that have licensed very rapidly like Cortec M. So, you know, it's either you can tell generally, if you look at what's happening licensing in the last year or so, since the VA has been introduced, it is benefit same level in enthusiasm of our technology, some of our existing portfolio. And I would say probably numerically, it's the case that the uptake is been faster, but compared to when we introduced B7, the business is bigger. The number of customers we have is bigger as well, commensurately. So, yeah. Thanks very much. Okay. We're going to make this the last question. Your last question comes from Kai Kohl Schultz. Please ask your question. Hello. Go ahead. Yes. Hello. Can you hear me? Sorry, Thanks for squeezing me. And I just had a couple on some of the incremental markets. So the first one was on networking. I know there are a couple of questions on this, but any color you can give on maybe the value and essentially unit opportunity, short and mid term here? And then the second was really on the Iphone 5S we saw further arm content growth. We have the M7 that's obviously a low ASP chip. But I mean, should we expect this just sort of processor growth or content growth to continue in other high end devices going forward? Thank you. So I'll take the last bit first. I mean, in terms of content in high end smartphones, I think what you are seeing is an increase in the number of sensors that are embedded in the phone as well as just the raw application process of performance. You've seen that in a number of the high end devices that have shipped over the last year. And I think that's going to be a growing trend. So that does represent a further opportunity for more on technology. Could you repeat the first part of your question? Sorry, the first question was on networking. Just you can maybe give any color on maybe the value of our unit opportunity, maybe next year and then on a 3 of you potentially? As you probably have seen before here in our road show slides, we do tend to to lay out quite a bit of detail and on the roadshow slides from our website and on slide 22, we do have a slide just on enterprise networking, including, value and size And, we, there's a table there, which gives you the detail, but the headline basically is for, for 2017, Charlie Mirene, who runs that, that team there is debating that, 700,000,000 chips is the size of the TAM and the value of that is about 17,000,000 dollars, which when I get my calculator out, that's very similar to sort of the application processes going into smartphones, and we have $1,000,000,000, think the team at Simon's mouth in 1,000,000,000. So, and I get my calculator. That's about the same size of application processes going into smartphones. And yet it's a market where we have practically today, you know, well, I wouldn't say 0. We now actually do have one company that shipping 1,000,000 of units, but I mean, so it's a very, very small market share. But hopefully, as we've been discussing already about the licensing, you know, this is a market where we hope to to gain share share rapidly with some of our most advanced processes, which have the higher royalty percentages. And based on the licenses you've been signing recently, what would be your sort of market share target maybe by 2017? Well, that is also on page 22 of the ratio slides, but, I mean, I guess you're looking at sort of 20% to 30% to get 2017 on average. Okay. Thank you very much. Okay. Thank you very much for your questions and for your time this morning. And, That concludes our conference for today. Thank you for