Earnings Call: Q2 2013

Jul 24, 2013

Okay. Good morning, everyone. Thanks for joining us today and, welcome to John's Q2 and H1 2013 results. Before we start, I'd just like to direct you with the customary cautionary statements, which I'm assuming you're all very familiar with, and we're going to take that as read. What I'm going to do today is talk about some of the progress we're making towards our strategic goals. Tim's going to talk through the detail behind the numbers. But let me before we start, just give you some of the highlights. So Q2 was a very strong quarter for Arm, driven by very strong licensing result. We licensed 25 processor licenses, 7 Marley licenses, And this is really driven by, leaders in the semiconductor industry committing to arm into their long range roadmaps. Royalties also grew strongly 24 percent year on year growth. That's significantly outperforming the industry, which only grew by a couple of percent, in the same time period. What that leads to is total revenue due of $264,000,000. And that enables us to continue investing in arms roadmap in hiring people to drive our R and D whilst at the same time, delivering profits and cash, an increase being able to increase our dividend, return to our shareholders. We're very pleased with the way that Q2 has developed. What I'm going to do now is look at some of the key markets and progress that we've made starting by looking at smartphones. At the beginning of the year, we were forecasting a very strong growth for smartphone market, anticipating about 1,000,000,000 units in additional sales through the year. And it would seem from the industry statistics gathered so far that we're pretty much on track to deliver against that. Smartphones themselves, of course, have not just one type of device, we're seeing a tiering of smartphones. We have premium superphones. We have mid range devices, and we have a low cost entry level phones. And you need to look at each of these markets separately when considering the smartphone space. At the high end, we've seen in the quarter, the first big level devices actually on sale and delivering great performance and low power. And recently, we've just seen Samsung announce a second device based on Big Little, the fifty fourtwenty, also incorporating Mali T-six twenty eight and a six core configuration. So another device based around big level technology. The mid range we see is particularly interesting space of this high growth potential for that market. We see that growing to over 500,000,000 units out in 2017. And at Computex in June, we launched a family of products specifically targeted at that market. We launched the Cortex A12, which we have 4 licenses now, the Mali T62, and the Mali V500, which is a video accelerator. Together, those processes form a very power efficient processing subsystem, which we think is ideally suited for midrange phones. At the low end, in entry level phones, we're seeing a greater adoption of Cortex A and Mali, which together providing high processing performance, giving a great user experience, even though the device itself might be less sophisticated than some other products. So smartphones performing very well. Now what we're seeing across the range is an increasing attach rate of Mali. So in in the entry level, in the mid range, in the high high end, all we're seeing devices containing Mali as well. And that's led to very strong unit shipments of our Marley graphics process through the year. So far, in 2013, unit shipments have already outpaced all of 2012. So we're on for very strong growth through this year. Now the smartphone market itself has a said is developing, in quite interesting ways. And it's easy to think that everybody on the planet has a smartphone, but actually when you look at global penetration of smartphones, it's actually quite low. This is industry data that we've taken for 2012. And you've seen developed regions such as North America and Europe, smartphone penetration around 50%. But in other countries, in other regions of the world, much lower. The portfolio of technology that Arm is producing, allows devices to be built, different performance points, different price points, to allow smartphone penetration globally to increase by having the right product for the right economics of a given market. We're particularly excited by growth in the, in the entry level phones, the low cost devices. And although those are many people say these are a bad thing. Actually, we see this as a very good thing because it enables many more people, billions of people to get access to smartphones which they just wouldn't be able to if the industry only produced very high cost premium phones. So Smart Pine penetrations say across the world quite low, if you look at Russia, Russia's got a population of over a 140,000,000 people, and penetration there is only 9% very low. When you look forwards to 2017, just taking Russia as the example, we see a smartphone penetration up to 70%. That's about another 85,000,000 people getting access to smartphones. And when you consider that the average monthly income there is about $800. Clearly, few people are going to spend $600 on a smartphone. Penetration there is only going to increase through the availability of low cost devices, and we are designing products specifically to address those expanding markets. If you look at 2017 as a whole, we see growing, smartphone usage in all areas of the world. And in very large, populous countries, we've seen significant increase in use of the technology. China and Brazil, we're seeing roughly a doubling of smartphone usage. And in India, you're seeing a factor of 10 increase from 4% today to about 40% out in 2017, that even if you factor out increased population in that time period is about another 500,000,000 people, using smartphones. As I said, that wouldn't happen without the availability of low cost devices. So we wouldn't have access to this additional market without progress in that that technology space. And to understand that a bit further about what's going on behind it, we need to look at some of the silicon content and the devices themselves. So here we have that that bar graph showing 2017, breakdown of devices from, premium phones, mid range, and entry level compared to today in 2012, and you see significant growth there. When you look at the devices, at the entry level, we're expecting phones at below $200, probably significantly below $200, containing multicore Processors, Marley GPUs, and build on silicon potentially using our physical IP as well. In the mid range where the price goes up, anything up to about $400 we would start to see big little, processes, adding GPU compute so that, the very there are numerous algorithms which can benefit from GPU compute. If you take, for example, taking a photo of a group of people and you want to change the color or the contrast of it. You can do that today, but when you do that using a GPU compute, those algorithms are very well suited for for running on a GPU. And so you can do it more quickly, and use less of the phone's battery, along the way. So GPU compute important technology, and we'd expect to see that in the mid range phones. In the high end, we would expect to see processes based on, version 8 of the ARM architecture that adds support to 64 bit. That's going to enable more memory in devices, more sophisticated algorithms to run. Again, GPU compute probably in a, in a greater core configuration. And across the range, the silicon can be built using Arm's physical IP. So a lot of Arm content and obviously different Arm content in different devices across the tiers here. So when you look at that silicon content, you'll see different application processes designed specifically for these different market tiers, and different numbers of companionships based on the amount of connectivity, the number of sensors, and so on that will be found in the end device. And what that leads to is a different royalty opportunity for Arm in each of these different tiers, but a significant one. What we've done here is compare against the royalty opportunity of a basic voice only phone. And you can see, we have four times the royalty opportunity there in the entry level all the way up to twenty times, in your super phones. But again, the market wouldn't grow in this way. Without the availability of these lower cost devices. So when you run those numbers through, we've to see compound annual growth rates of about 20% for handsets themselves. That leads to a Silicon Value CAGR of about more than 10%. Leading to a royalty CAGR for Am in this period, 4 handsets for smartphones in the 15% to 25% range. So what we're doing is designing products specifically to target these markets. We mentioned, I mentioned Cortex A12 and the T-sixty two specifically targeted at mid range, Cortex A 7. We designed that for entry level phones, and that's, the option there has been quite strong. Of course, it takes a 50 series, we designed for the higher end phones. So we're developing a portfolio to address these growing markets as they grow in different ways. Now smartphones aren't the only device that's, that's evolved quite a lot over time. When we look at mobile computing, we see a lot of interesting changes in the dynamics of the market. Computing used to be something that you did sat at your desk in front of the keyboard and plugged into the wall. And of course, computing now is something you do or can do, whilst on the move, driven significantly by, by tablets, which really have revolutionized the way that people access the internet and access technology as a whole. So tablets really are dominant in this mobile computing space. We've seen lots and lots of designs, around our own processes in tablets. And again, price points are changing. Prices are coming down, and low cost devices are being produced in this sub $100 category. I bought 1 myself recently in Fry's in California, $100 tablet. It's very good, great for reading on, for example. And these different tiers, these different prices are again going to enable access to billions of people across the world. Again, we're seeing good opportunity for our Mali graphics processor in tablets today, we see about a 25 percent tax rate of Marley graphics in tablets, and we expect that to grow. Overall, we're expecting our market share in mobile computing, which we categorize as the sum of tablets and, netbooks and laptops to grow to over 50% through this year. And it isn't just about tablets for us. We are starting to see clamshell form factor devices based on ARM. And then whilst we've talked about it a lot, it's interesting to note that the Samsung Chromebook is still the number one selling laptop on Amazon in the U. S. And that's been there for over 2 60 days. It's proving to be a very popular device based on arm, great performance, very low power, long battery life. Now Arm is more than just about mobile. We spend a lot of our time developing products for mobile devices, And that's given us a lot of expertise in low power design and low power is useful across the entire spectrum of embedded processes. And if we look at embedded, we see great progress in the use of ARM Technology in this market. And the Cortex N Series has proven very, very popular amongst companies wanting to produce very low cost, very low power microcontrollers. We added 9 new licenses of Cortex N in Q2, taking the total up to around 180. And 5 of those 9 new licenses will with company who've never used never licensed ARM technology before. The microcontroller space is very active right now and new companies are coming into the space. Because there's a vast range of end applications that can benefit from embedded intelligence. Anything from washing machines, obviously cars, dish washes, energy control, embedded in light bulbs. It's just a gazillion, it seems different end applications for embedded technology. And the chips are so low power, so small, so low cost that they can be used in many different applications with very little impact to the end price of whatever is getting designed into. Obviously, their interesting area right now is, is in wearable electronics, and even ingestible electronics, free scale have produced microcontroller. It's about 2 millimeters on the side. I mean it's tiny. And that's been driven by for the U. S. Medical industry, looking at embedded chips into something that you swallow for monitoring and data collection, whatever, interesting application, again, driven by very low power, very small die size So this space is really right for explosive growth. And if we look at our 180 licenses that we have, what we see today is only about 50 are shipping and contributing to royalty, but cumulatively, that's added up to 4,700,000,000 Cortex M based chips so far. So the other 130 licenses that we've signed Most of those are being designed into Nbar products right now, and we would expect to contribute more to royalty over time. So we see, huge potential for growth in the microcontroller space based off a continued success for the Cortext M family, which again, we're continuing to invest in. Now at the other end of the spectrum, our servers, and Q2 was a very busy quarter for our ARM and our partners progress towards delivering on this promise of in lowering the power and disrupting the data center. Particularly, Calzada and Applied My Pro have been very active in Q2 talking about the design wins they've had, and, that's great to see the progress there. We also saw, AMD announced two products, their Seattle road map, which is a an 8 core and a 16 core, a core XA 57 based devices, 2 chips there. And they're very bullish about the prospect for ARM in the data center. This is a quote from Andrew Feldman, who's general manager over AMD, a long history in developing servers knows what he's talking about, and he's seeing great prospects there. For the products that they've developed. Now we get asked a lot about, progress on software for servers, lot of the infrastructure, a lot of the software that's running on the data centers right now is based on open source. And that's obviously contributed to by many, many different companies. And it's been great to see, Oracle just recently announced their support of the Java SE for both 32 and 64 bit. Arm architectures, specifically targeting enterprise and, in fact, embedded as well. So great progress on both the hardware side and the software side in servers. And then connecting servers to sensors, the smartphone, the tablets, is 1,000,000,000 of dollars worth of networking equipment. And we've seen strong design wins over the last little period. So we anticipate it will be a lot of the next generation of network infrastructure to be based on low power on technology. We've had our first royalties in Q2 from base stations, And we've seen LSI who've been very active in this space with wind sockets at 2 of the 3 largest base station vendors in the world based on their cortex A15 devices. Again, software is key and Lanaro, which is activity we set up, to, create a community around developing Linux infrastructure, Linux software, for Arm, Lanaro has formed a a special interest group for networking called LNG, Lanaro networking group, And in the quarter, we saw both Cisco and Nokia Siemens Network, join Lanaro Networking Group And what that's going to do is provide the key software building blocks, but done in a very industry efficient way. Now one company has got to fill the bill for all of this, it's shared amongst everyone, and the Reseda adults are shared amongst everyone. So a great partnership way, of solving the problem of software migration. Networking, we see as a big opportunity. Looking out at 2017, again, we see a CHIP TAM of 700,000,000 devices, that the revenue implications of that are $17,000,000,000 silicon tam, and we would expect, to win about a 20% to 30% market share out in that time frame. So this is a big silicate market, and we do expect growth there as these design wins start to come to fruition and a royalty start to flow from that. Now all of the markets I've been talking about benefit from high performance, and low power and all the emphasis that Armas had in the last 22, nearly 20 3 years now, on on mobile and low power is paying off, and enabling us to to target all of these different markets. Everything can benefit from lower power, everything's smaller die size and lower cost. So that, that heritage in mobile has given us a lot of expertise And when we look at how we compare, we believe that we compare very well. Obviously, with the size of these markets, there is competition, So when you look at how we set up against some of our competitors, making different markets in turn, I think we're in a very strong position. If you look at entry level phones, which today have been based designed around Cortex A57, I mean, really, until don't have a product to the suitable for that market. CloverTrail Plus is the smallest thing they have, but is enormous in comparison to CORTEX A57. Cortex A7. Cortex A7 delivered roughly the same performance, but considerably less power and crucially in a really small die size. And the benefit of that die size is that everything else that you need to put into effectively a single chip application process with modem can be integrated onto one device, at low cost. So the modem, the connectivity, the GPU, the memory can all be integrated onto 1 SOC. That built on foundry process, can sell for as low as $5 and our customers are doing that today. These devices are shipping today. We look in the mid range, which again, devices are shipping today based on Arm based on Cortex A9, Cortex A9 outperformers Global Trial Plus, Again, it's lower power. It's considerably smaller. So again, it can be built into an SoC with everything else you need and build on a foundry process. And sell for around about $10, very low cost, very low power, great performance, shipping now. In the premium end, as I mentioned, right at the beginning, we're seeing big little devices shipping now that adds significant performance in comparison overvolt plus, but at the same time, allows power to be lower because of the big little architecture. And again, relative size wise, that the cluster configuration is still very small. So when you build out on a foundry process, you can build this whole SSP and sell it for $15. We can deliver the performance. We have very low power, and we can hit these very low price points that are required for these large volume markets. And the same is up to service when service side is about total diplomacy and how much it cost you to acquire the equipment in the first place and how much it cost you to run it based on the electricity, the servers themselves are going to use and all the air conditioning that you need to power your data center. Today, we have, 32 bit ARM Processors based on version 7 of our architecture, shipping today in scale out server applications, that are lowering power, lowering that total cost of ownership. Again, build on a foundry process, our licensees can sell chips at these sub-one hundred point, which you're building servers, is a very low cost. So all of those examples are based on all of processors, which have been designed and are shipping today. We, of course, have a next generation of technology coming through. Talked about Cortex A12. Last year, we the Cortex A50 series, which has Cortex A 57, Cortex A53, as a big level 64 bit configuration, as that technology delivers into these markets, again, we'll see more performance taking that to the next level whilst at the same time maintaining the focus on low power, low cost, our partners can produce these very aggressively priced SoCs to address these very large markets. So before I hand over to Tim then, I'll just, let me just summarize the quarter. It's been a very successful quarter for us. Characterized by major semiconductor companies making long term commitments to ARM Technology. And that licensing has delivered great financial results, allowing us to continue to invest in our R and D whilst returning cash to our shareholders and increasing our dividend. With that, I'm going to hand over to Tim. Thanks, Simon. Good morning, everyone. Quick run through the numbers, a little bit of color, talk a little bit about guidance. Simon has already, gone through headline. So I won't dwell on them in too much detail, but, in 24% overall revenue growth in the quarter, the very strong licensing that we've seen in the last 3 plus years continues, up, up 32%, lots of new licensees, lots of existing these either upgrading in their vertical or broadening their use of arm into other end markets. Royalties, up 24% We were up 33% in Q1, but you probably recall that we, we called that probably a slightly inflated level based on the inventory correction a year ago. So, you know, 24% 22% outperformance versus the industry at the top end of, our our normal experience. And that's driven, normalized PBT growth and earnings growth that you can see there 30% and 37%, respectively. And encouragingly, perhaps what you'd expect with the margin expansion that we've seen, GBP 96,000,000 in Q2, that's highest net cash generation we've seen in an individual quarter and now just over 1,000,000 of net cash at the end of June, and, you know, we've announced an increase in the interim dividend this morning of 26%. Looking a bit more at, licensing and royalty, you will remember no doubt that my guidance for Licensing in April was 75 plus or minus. So 88,000,000. We're at the top end of that. Probably an understatement, very positive. 25 licenses, as you've heard us say before, we typically build this installed space leaves at about 100 licenses a year, completely consistent. For the 2nd quarter running, the take or the contribution order backlog into the license revenue at the top end of the normal range, which is typically 40% to 60%. At 60%. So quite a high drawdown, from backlog given the percent, you know, recognition of engineering milestones. But as you can see at the bottom there, the backlog in itself still up more than 10% sequentially. So obviously, a very strong bookings quarter which has more than replenished the backlog, notwithstanding a 60% contribution into revenue this quarter. Physical IP licensing, also strong, up 23% year on year, and 5, POPIP licenses signed, which again is encouraging for future contribution from physical IP royalties. And of course, the importance of all this, licensing activity and the accelerating accelerated bit yield of the installed base is what it means for our royalties going forward. And you can see it from the chart on the bottom right, which you've seen before, that this licensing activity, 450 licenses, in the last 3.5 years, fairly moving the dial really. On on on royalties. So there's there's a lot of royalties in the can, yet to be recognized. In this particular quarter, 119,000,000, as I say, up 24% year on year, 22% outperformance in the quarter mostly market share gains. Cortex A is now 17% of total shipments versus 8% a year ago. And Simon talked about the accelerating trajectory of Marley shipments also contributing. On the bottom right, you can see the historical outperformance, we've often talked in these, in these meetings about a sort of 10% to 15% outperformance. And nothing, as was noted, in the last analyst presentation, by one of the analysts that that has actually expanded in recent times. To be really at the 15 to 20 percent end and slightly north as we can see this quarter. So encouraging trajectory, Similarly in physical IP, smaller numbers, but a good trend, up 17% and headline level and up 20% in the quarter, excluding audit catch up royalties from this year and last. So good trends. Looking at costs, and tax just to sort of help with the models. Normalized OpEx in Q2, seventy eight million, that's pretty much in line. With guidance last time and consensus, as you'd expect, expected to grow a little bit in Q3. We continue in investment mode. We're investing in R&D. We're investing in the back office infrastructure of the company, to make sure that there's growth opportunity is supported by a resilient infrastructure. So in 7981 broadly in line with current consensus for Q3, I think it was about 80. And you can see that in the first half of the year, operating margin is up about four points year on year over the over the 6 months. Most of you would have noticed, I'm sure, from the release that this morning, there is a fairly significant, cost litigation related cost, sitting in the IFRS numbers. Just a little bit of color on that. Most of you will be aware of patent trolls, non practicing entities, building portfolios of patents, asserting them around the industry. This is actually in the normal course of business. This is going on kind of all the time. And, you know, is rarely and not in this case party to litigation, but does provide, indemnities under certain conditions to our licensees. Usually, these things close by settlement or cross licensing. And typically, the contribution from Arm and the impact on Arm is really under the hood and goes through our our numbers, and you wouldn't really notice it because it's from time to time, small to single digit. Millions, ongoing cost of running an IP business and protecting your technology and protecting your ecosystem. In this particular, In this particular situation where patents were asserted against the number of our licensees, towards the end of the second quarter, put all of those licensees, some together, some individually settled, and had a contribution in total of £42,000,000, which was a combination of some indemnity payments to certain licensees. And us buying a license to the whole patent portfolio of this, non practicing entity which protects the ARM ecosystem. And this that this matter is now closed, so that's a full and final settlement. As I say, these things come up from time to time. I think about 5 years ago, we had a case related to Nozomi that stuck its head above the reporting parapet about 10 years or 5 years before that, we had one with an outfit called Eco Turvo. So yeah, these will happen from time to time. We don't see anything in view of this magnitude But we, we should, we'll be aware that the Patent Control exists. And it is something that we have to manage on an ongoing basis, with our partners and with our ecosystem. No no change to tax, really. You remember that Q1 rate under 17% was kind of artificially low because we recognized the benefit of the US R and D tax credit in Q1, the 2012 tax credit because the legislation was enacted in January and not as normal in December. This quarter, more normal, just over 20% But still guiding the full year tax to be just under 20%, which is pretty much where the analyst community are. On tax rate. So in summary, looking into the second half, The backlog is obviously in good shape, record level, the opportunity pipeline for licensing, which obviously we have fairly good visibility into on a 3 to 6 months basis is looking, is looking healthy based on our product portfolio, and the new markets that as Simon explained, our licensees are taking us into. So that looks good. License revenue expectations, you know, 25 license a quarter, lumpy business, But I mean, the sort of baseline goes up based on this backlog. So you're probably not that surprised to hear me say the 75 plus or minus moves to 80 plus or minus as I think a realistic base. Could it start with a 7? Yes. Could it be north of 80? Yes. But this looks like a sensible way because this is trying to look forward in a way multiple quarters. I'm not trying to forecast 1 quarter, but that looks to be the right base, I think, to be thinking of this stage. Looking into royalties, obviously some mixed messages going on around the industry for the second half. Our data suggests that in Q2, which is our the relevant period for our Q3 royalties there was a small sequential increase in overall industry revenues, which is obviously the context, for our Q3 royalties. And as I said before, OpEx in the range 79, 81, just growing up, continuing to increase slightly as we keep investing in our people. So full year, we've had a strong first half, and we expect the full year revenues to be at least in line with current expectations, which are just under 1000000000 And I think with that, we'll open it to the floor. Questions. First on the outlook for the second half, clearly, Tim, you are guiding about 1,000,000 plus or minus, I guess, although you are 88 in Q2 on licensing, also for the full year for PD royalties. I think the the street is at 5:20. So do you think that it's appropriate to to have, you know, still 80,000,000 for the full year, 80,000,000 per quarter in the second half. Or can that be a bit slightly better than that? And on the royalty front, obviously, we see some mixed messages from the premium smartphone market, etcetera, sometimes very strong growth in the low priced smartphone market. So how do you feel about, you know, sort of those numbers effectively ex would you expect the 1080 number to move up I guess that's my question. And the second question is on the the benchmarks. I mean, you've you've sort of given us some some interesting data there of A7, A9, digital versus clover trail plus. I guess what people are wondering is where you think you will be versus silver months. And then my final question is on the, announcement made by Samsung yesterday, of the EXinos for 'twenty using your geographic solution, which I think is a big surprise to everybody since they launched the first big little chip with imagination only less than 6 months ago. So I just want to understand why you think Samsung has done that with what are the benefits of switching so quickly. Thank you. Take in order for me to do the first one. Yep. You do the appropriate split of responsibility. Yeah. I, as I said, I mean, current consensus coming to result is just under 10 80. You know, as well as I do, that if I say that licensing is going to be 80 plus or minus, consensus is going to be a little bit north of 80 in both quarters. So, you know, I and clearly, I you know, we feel comfortable with that. I think the royalty outlook is is is much harder to call. I mean, the the consensus is Lee, plus 12,000,000 to us 13,000,000 in Q3 and plus 17,000,000 in Q4, yeah, reasonably chunky up uplifts. In the last two years, our Q4 royalties have been up $17,000,000 in each quarter. So not unprecedented, but clearly, we'll have to see whether some of this noise around, actually manifests itself, in, in, in, in lower sales. So what I would expect to happen is the overall consensus to increase broadly by our outperformance on q 2. Maybe with some rebalancing between licensing and royalty for Q3 and Q4. I mean, that's kind of what I would expect. Okay. So on your question about Silvermont, you got to remember there's actually very little data actually there to say what silver money is gonna do, from what we've heard from what we've seen from the analysis we've done, you know, we're pretty confident that, today's solutions around Big Little are gonna continue to give our armor performance on a power efficiency lead. We'll have to see what it comes, what happens when it comes out. And of course, I think the last few weeks has shown that it has to be very cautious about how much benchmark data you use and where it's come from and how it's been created. So big health warning around benchmarks. What ultimately matters at the end of the day is the user experience. You know, how good is the fungal to sell is a combination of lots of parts in there. We think our technologies good shape, which kind of leads quite nicely under the question about Samsung's choice of Mali in the 5420. You said that comes as a surprise. I mean, that hasn't really come as much of a surprise to us, and I actually thought we've been kind of signaling that for a while. Obviously, you need to ask them about specific reasons for why they choose different devices. They produce a lot of silicon in the year. They're constantly updating their devices. The graphics processes don't have as much stickiness as the CPUs because of the way the codes written and all about that. So it is a relatively easy thing to switch from one architecture to another, and back again, of course. And so the onus is on us to make sure we've got the best technology available to our customers at the time at which they're going to make that decision. It appears for this generation device from Samsung. We did. Hi, it's Sumant from Redman. Thanks very much for taking the question. It's essentially, I have 3 questions. One is to do with the license beat essentially in the Q2. I was just wondering whether that was driven by licensing the Greater China, customer base. And if that is so, is that a growing trend, or do we expect that to happen going further as well? The second one to do with the PIPD division. I think, congratulations, and for the first time you've hit profitability on that one. I'm just wondering if there is a, sort of, operating profit margin guidance or something of that. So looking forward, what should we consider should be the sustainable margins coming out of this division? And finally, the 3rd part is on the smartphone chip growth. Maybe I'm completely mistaken on this, but I was wondering Is there, sort of, slowdown you're expecting in some sort of overall chip growth? I remember 30% CAGR being talked about if I look through the slide, it's now 20% on arms addressable market chip growth. Maybe I'm mistaken on this, but just a bit of color on that would be really. Yeah. Okay. Now the lie the licensing beat wasn't really China. And we we did we did we drew out China in the lease because we in the release because we had our 1st kind of subscription license there. But as you know, subscription license is recognized rate to be over time. So that have much impact in short term revenue. But having said that, I mean, China has become over the last few years an increasingly important part of our overall life activity. No, you know, the, the general beat was, you know, it was it was a combination of the turns, licenses, yielding revenue in the quarter, and obviously reasonably material draw downs based on engineering milestone hit on the newer technology releasing revenue into the, into the P and L. So kind of business as usual, but 60% contribution from backlog is at the upper end. And 25 licenses is probably on average, slightly at the upper end as well. I'm sorry. So there's two reasons why we have a physical IT business. 1 is to drive revenues and profitability in its own right and the other is to enable us strategically to, create better implementations of ARM CPUs. The 2 are both important. Although, you know, we're more focused on the strategic benefits of having the business bank driving it for profit in its own right, you know, because obviously would lead you to drive the business in very different directions. So what we've seen is continued uptake of our POP IP. That's the product line we created specifically to enable our licensees to get better, higher performance, lower power implementations of their ARM CPUs. The licensing from that has been a great success. We've got nearly 50 licenses now, or sorry, licenses of the POPS. And we're starting to see the impacts of that and design wins generally for advanced technology flowing through to the royalties. So, you know, we do want to drive this as a profitable business, but at the same time, the real focus is on the, on the strategic benefit there. So we we don't have any formal guidance for for how we see that growing. But as the design wins continue, I I would hope that that would go in a positive direction. And your last question was about smartphone growth. I don't think we've changed the numbers there. Thanks. One follow-up the drivers of license. I just wondered if you could talk about the products driving. Is it 64 bit? Is it V500? What's what's the kind of key driver of that? Secondly, I just wanted if you could talk to the royalty rates that you expect for V Five Hundred into, you know, as you ramp into next year with four k coming on tablets potentially. And then finally, just on, the attach rates you've hopefully gave the attach rates to Mali on tablets. I just wondered if you could sense in the lower end smartphone market, what your attach rates from Ali are, they hire, they are lower than kind of the broad broad range of smartphones. Thank you. I mean, in in terms of the technologies driving the licensing, yeah, I think it was it was pretty broad, really. You know, we're seeing Cortex AR and M licensing, and a bit of subscription as well and and Mali. So it's been fairly, across the board there. You know, and there's not one area that particularly stands out. Your second question, I've got, so I forgot because there were 3 in there. The royalties there, we expect to see some incremental royalty on top of the, the royalty that we get for Mali, you know, you might think of that as another percent ish on the overall royalty. And your third question was was on attach rates, Marlene, not. And so, okay, so, yeah, easy attach rate higher in the in the lower end than than others. I think a bit early to say on that, I think right now, consistent across the entire tiers of the smartphone market. Just one question. Again, on rest of the month, The supply chain seems to be indicating at this point that Intel is being very aggressive on the pricing of their in the fourth quarter whenever they are going to come, I guess, some point in the fourth quarter. Could you comment on, you've talked about these 3 tiers I mean, I guess Intel is initially going to play in the tablet market rather than the smartphone market given the lack of an integrated product. That where your ASP is at this point, will you be impacted by a very, very aggressive ASP from Intel associated with their initials. Well, hard to predict that. You know, obviously, I don't know intel is going to do in terms of pricing and that, that, price competition is more of an issue for our licensees than it is for us directly. I think in terms of uptake of those products or not, it's going to come down to, the, the handset makers or the tablet makers looking at what they can get from Intel, looking at what they can get from the Arm Partnership, and weighing up multiple factors, you know, software compatibility, performance, power, cost, all of this is going to, come into play. But particularly that, that software ecosystem and the amount of applications written for and optimized around arm. I think it's going to be a big factor in our favor for a long time to come, but we'll we'll see how that pans out. What is your age? I mean, a couple of quarters ago, I remember it being, but rather than a half hours. Where is it? For a tablet. I had in the chart there some some different price points for, you know, $5, $10, $15 for the different tiers. Beyond that, you know, it's really that pricing. That's a kind of broad generalization of the pricing that we see in those tiers and exactly the spot price is what our customers do. It's Francois from Morgan Stanley. I've got a few questions. So maybe the first one is, I'm trying to understand the guidance I'm trying to read between the lines. So, but as Didier was saying, you feel more confident about licensing, And maybe you think that royalties should be a bit a bit lower. Is that because you see some inventory correction in the high end of the smartphone market or is it because you think that some people in the sell side got ahead of themselves in terms of, of them in terms of numbers and maybe the 2014 royalties, are bit too high as well. That's my first question. Yeah. I think that's That's an extrapolation of, I mean, all we're saying right now is that, you know, if you look at the consensus consensus royalties in the second half, It's plus 13,000,000 in Q3 and plus 17,000,000 in Q4. Those are seasonal shapes that we've seen before. There is a mix. There are some mixed messages around the industry. You know, it's hard to put your hand up and say that's in the bag right now. It isn't. But we're not we're not making any comment on the longer term royalty trajectories. We're not making any comment on 24 or 24 2014 royalties, I mean, as you can see from the the the charts, our performance in royalties versus the industry as a whole, has been on improving trend and the gap has been expanding. We see nothing fundamental that changes that dynamic. We're just pointing to the fact that, the sequential increases that are in the market for the second half, which are, as I say, pretty close to normal seasonality, are not in the bag as of July 24. The second question is about the licensing, which is, as you explained at the beginning, moving more and more to to Asia maybe a tiny bit to to mainland, China. So I think for us to be difficult because, you know, I grew up with, you know, TI Qualcomm and this type of companies, and now it's maybe names that I'm not as familiar with, today. So, of course, we know that media tech spectrum, maybe, a new building to 1 is, is RDA. So, what I'd like to understand is, you know, as as we are moving from, you know, with with down chip players to agent type players, how do you see this having an impact on on the pricing? Because I think we all believe that, if you have more customers in Asia, then it could have more pricing pressure down the road for all the industry. I think there's been a gradual shift in our business towards Asia generally over about the last decade. You know, this is not a new phenomena It's been going on for a while. You know, you'll note that in that time, our license revenue on a quarterly basis has has gone up. So These two things, if you correlate them, would not suggest that we're under increasing price pressure because of that shift to Asian markets. Another question would be, I'm sorry about Intel and I'm I hope I'm not, you know, begging you too much on this, but, I've I've been very surprised myself. To see, the new MacBook Air from Palmette, which is not even silver or more, but it's a big chip. It's as well. Of course, much more expensive than yours, but still getting a very good battery life, for the MacBook Air. So it's 13 hours if you basically compare on the same battery, site basis as the iPad, basically, it got 11 hours browsing, time versus 9 hours for for the APAD. I'm I'm really surprised because, you know, maybe it was like, well, I'm I'm so much better in Telkom catch up. So where do you think the progress have been made? And where do you think you can, you know, basically leapfrog them again going forward? Well, obviously, the chip that's in the MacBook Air is a very different chip to the kind that you put in a, in a phone or in tablet, and it's built on a different kind of manufacturing process for that that you'd use for a, for a phone or a tablet. You know, MacBook Air, great products, I've got to say my own experience of using 1 isn't quite what the claim battery life statistics are, but it but it is still very good at the end of the day. You know, I think the technologies that we've been delivering on, big, little, very energy efficient graphics and now with video accelerators as well. And the approach we're taking to system design the approach our partners take to, SOC level power control, is going to enable ARM based AI evolutions, that ideally target tablets and finance. Hey, Jean Marc, Eric, and PNP Paribas. When do you, can you update us on B. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. L. T. L. L. L. L. L. L. L. L. L. L. L. L. The end of this year, when do you expect meaningful unit shipments of, not expecting big detail? Well, there are a number of customers who have licensed the Cortex A15 and Cortex A7 big little combination exactly when they're going to ship is hard to say, but I expect to see that volumes would grow through next year. It's Nick James from Numis. A couple of questions. One was on the benchmarks. You've given us a health warning on benchmarks and then you've drawn attention to your own benchmarks and guess I'm a little bit surprised you've kind of used big little there. There's one implementation of big little on the market, which there have been reported overheating issues. There've been criticisms of the size of the chip. So if you could kind of just address those in the context of the benchmarks that you took out there. And then the second question was on the exception from a patent litigation and, we had a big kind of investment last year, which is basically stopping there being a patent troll for the MIP's patents to protect Arm. We've got this unexpected thing come through in q 2. I know you don't foresee more of these, but I don't know that you've also ordered this one. So what is the assurance that we're not going to see more and more of this type of big patent mitigation per cash outflows. Okay. So I'll do a big little detail. So in terms of, big little reduction, as I as a number of customers who are designing products there. So, yeah, you do have to take a health warning with benchmarks. You do have to look at what is being in paired, and and, obviously, what we're showing on the chart there is a synthesis of what we think is important, when looking at, you know, comparing one chip against another. And there's a lot of data behind that that we're presentations, what we provide to our customers is a very flexible set of components that can be built in big clusters, smaller clusters, mix and match. And depending on the level of performance, but, one of our licensees want to produce, they can use, you know, that technology, in however they see fit So you're gonna get some larger implementations. You're gonna get some smaller implementations, but it's all about, what we provide is flexibility and choice in in how our customers put the their chip together, and how they best think they're gonna target the market. And that's what Samsung had done. That that those benchmarks reflect shipping arm chips because that's kind of what what you said. Right. Yes. So which Thank you. Yes, and on patents, as I said in the remarks there, the existence of non practicing entities and patent trolls and the reality that sometimes in this space, operating company fail, and investors want to monetize what's left in the form of patents. This is the reality of the business. It's been going on for a long time. And clearly, our long term interest is to protect Arm and the Arm ecosystem from the disruption, irrespective of the merit of these claims, you know, regarding infringement or not, they require time and money to deal with. They usually end up, as I say, in settlements that you don't notice because the numbers are so small. You know, by from time to time, but you will get a patent portfolio, that requires more to to close down. As I say, this is the first one that we've seen in it that's kind of material to arm to draw out in this way for many years. And typically, when these things do emerge, you get, you get quite a long sight on them. Because, you know, actually being a patent troll is not all easy money. It takes a long time to get the money. And so usually we have good visibility or if there's anything in the pipeline. Right? So so when we say we can't see anything material in view, That's based on what we can we can see now. Something can emerge and it could end up in a quick settlement that, you know, the ARM ecosystem, the ARM partner, and aren't considered to be in the best interest of our business and for those of us that are public our shareholders. So, you know, I can't guarantee that the landscape is clean, but I'm not expecting to be talking about this type of thing, in the foreseeable future. And can I just follow-up on one of the other exceptional charges for Linaro, which I think is 7,000,000 in this quarter? It was 7,000,000 at organization, but it's not profit I funded by Arm. So so why isn't this an expense of the Arm business given it seems to be ongoing? But it isn't expensive the ARM business, but the reason we draw it out separately is because it only occurs every 2 years. So last time it was it was 2 years ago, in fact, not 1 year ago. So every 2 years, based on the current membership and the current, if you like, price list, you know, Arm will be spending 7,000,000 over 2 years. Now given that that gets paid in one lump and recognized in one lump, it is obviously a cost of ours. It's charged to the p and l, but we draw it out separately because doesn't appear in all the other quarters. So we'd sit here explaining why next quarter wasn't there. So it kind of just easier to have it transparent. That's fine. Thanks so much. Simon Shepherd. Just wanted to ask about Slides 10, which is about your growth in embedded computing. Construction, how big is this opportunity for you in terms of machine to machine? Most of us have had Erics and and a lot of telco infrastructure guys talking about this opportunity more broadly, whether it's 30,000,000,501,000,000,000, I guess no one really knows, but it's certainly a big opportunity. Structurally, given that there's still 130 licenses, I think you pulled out that will start to ship. What's the structural run rate of growth in this in this market. And then more importantly, going forward, is that still going to be a very low price point or eventually is there a chance that these guys require higher value technology from you and your partners? So in terms of how in terms of that market size, you say it's it's 1,000,000,000, tens of billions exactly how big a bit hard to say. I mean, you know, we we can think up new applications for the internet of things all day long. And hopefully they're going to come to fruition. I think, initially, you're going to see quite closed systems where some data has collected its process. Eventually, would expect you're gonna see much more open systems where data collected from different places can be made accessible to different people to process in different ways. And I think that's where this starts to become very interesting. I think those devices that the kind of end node where the sensor is is going to be a very low cost device forever. In fact, I think the 10,000,000,000 of units relies on it being a very, very low cost device. What that's going to do though is create an awful lot of data that's going to need aggregating, maybe processing locally kind of along the way and then up into the cloud. So I think it's going to drive, local aggregation points. I think it's going to drive, network infrastructure is going to drive the expansion of the cloud, which will, of course, higher cost, ASP devices. So that's how I think this is gonna pan out. Of course, you know, we are sort of crystal ballgazing here slightly. But when you look at the of applications people are already starting to build, it's not a huge leap of faith to see some of this coming together. Hi, gentlemen, Nextiva. Next is on. Achal Sathania from Credit Suisse. Just follow-up on the Marie business, obviously, we've seen very strong volume growth. I'm just trying to understand what part of that growth has come from, the smartphone market and part is coming from the tablet market. And also just trying to get an understanding of, obviously, we're seeing higher core GPUs being implemented in some of the, for example, the exynos chip, is that what does that mean for your, royalty attach rates for commodities specifically going forward? So in terms of growth, Molly has has pretty good market share in in smartphones in tablets. We're in about half of all Android tablets. We're in, I believe, about 20% of Android smartphones, and about 70% of digital TVs. These markets will have different growth trajectories, but a pretty good established market share there. I'm sorry. The second half of your question was. It's about the implementation of higher school graphics in your in your Okay. So the in terms of the royalty rate, when in terms of the royalty from those chips, graphics scores tend to be fairly large in comparison with CPUs. And we design ours to be as small as possible, but it's still graphics processing. It does take a lot of silicon So if you put a a large number of cores down, the silicon device tends to get larger, and therefore the silicon die costs more And so that would drive higher royalties, into There is a potential royalty rate to increase with more use of course, yes, in percentage terms. So we're gonna have to, wrap up fairly shortly, so maybe we can make that happen. I think we've got one more question and happy to pick up. It's Jonathan Menin from Liberum Capital. Few short questions. One is going to your licensing trajectory, you've always said that, licensing is a precursor of royalties to come, and, historically, it has been true. But today, given that you're getting so many is being signed in markets like China, by a large number of new entrants or trying to get into the same market, a similar market, which is tablets and smartphones to large extent and also some of the affiliate market. Is that really true? Because, you know, they're all gonna chase the same market, and it's just a more and more frank market at the end of the day, so would not necessarily change the overall, royalty number In fact, it may add to price pressure on the end device and bring it down a little bit. Second question is on the benchmarking once again, which is You benchmark, big little with the Clover Trail Plus. I was just wondering, how does Cortex A15 stack up with the Clover Trail Plus on its own. And would you would you foresee that pretty much all your implementations in due course of time on the Cortex A15 and the Cortex 857 would be big little implementation because that is what is competitive with the Intelships. At the end of the day from a power consumption point of view. And the last question is, the industry is quite dependent on Qualcomm for LTE modems. And increasingly so they are, you know, the defector supplier. To what extent do you see the fact that they want an alternative and Intel provides their alternative because they are one of the leading suppliers of 3 gs modems today, especially to Samsung and other players. With that edge market share towards them just because, you know, someone like Samsung wants to be a team modem. Someone is far from Qualcomm, then Intel is the best solution. Okay. I don't expect actually to have a material difference in the conversion of China licensees to royalty from the rest of the field, really. I mean, as Simon said, we have been seeing companies in China now for a long time and actually a number of the leading players are now reasonably significant contributors to royalty. By the same token, there are, you know, 1 or 2 who don't make it or get bought or disappear in the same way as, you know, and when we show our chart of, number of licensees in that. Remember, those are licensees who are still in the game. They're not licensees that we've ever licensed. These are license who are expected to generate royalties. Okay. And our experience so far in China is that the conversion rate has been pretty good. And as I say, we've now got a a significant contributor to royalty from Giant. So your question on Big Little and Cortex A15, I mean, when we're in the when we're looking at the performance graph, those benchmarks, yeah, that is a 15 powered up. I would expect to see devices which just use A15 and don't use the big little combination. There are going to be some applications that that don't need to, either switch like that or don't have the benefits of varying work rates. The thing about phones and tablets is sometimes you need a lot of performance Sometimes you don't. There are other applications like networking, for example, where it's about constant throughput. You don't have variability. So Big Little doesn't help you there, which is why we've designed our processes and all our processes with power efficiency in mind is just there are degrees. So I think A15 stacks up well on its own, and I think it would be used on its own independent of Greek Little. Your last question was about LTE. I think generally, people building things or anyone wants a choice of suppliers. So more people providing LTE is not a bad thing. Infill solution is actually does actually have ARM technology in it. So that's certainly not the end of the world for us, if they do start to ship some volume. Okay. Well, I think we better wrap it up there. And thank you all for joining us today.