Earnings Call: Q1 2013

Apr 23, 2013

Slides

Thank you for standing by, and welcome to the Arm Q1 Results Conference Call. At this time all participants are in a listen only mode. I must advise you that this call is being recorded today. On Tuesday, 23rd April, 2013. Let me hand the conference over to your first speaker today, Ian Thornton. Please go ahead, sir. Good morning, everyone. This is Ian Thornton, VP of Investor Relations at R. On today's Q1 results conference call, we have John Buchanan, Chairman Warren East, Chief Executive Officer Tim Skaw, Chief Financial Officer and Simon Seagulls, Fred President and CEO designate. On today's call, John, Warren, Simon, and Tim will take us through the highlights and comments from the quarter's results. And it will 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 w.arm.com/ir. Before I hand over to them, I just have to 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 call is being made available only to investment professionals. Any persons present on this call who does not have professional experience in matters relating to investments should not act or rely on 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 that note, I'll hand over to John. Thank you, Ian. Good morning, and welcome, everybody. I'm John Buchanan, the Chairman of are. Thank you for joining our Q1 twenty thirteen results conference call. As you will be aware, this is the last time that Warren will be reporting arms results as you'll be retiring as CEO at the end of June. Simon Seagulls, who joins us on the call today, will be taking over as CEO owe from July 1st. As you will hear, these are another strong set of quarterly results delivered by Warren and the team. More importantly, for a long term business such as Arm, these results are part of the foundation for Arm's future growth. Opportunity. As Warren's successor, Simon will play an important role in delivering on that opportunity. In a moment, I will hand over to Warren. He will run through the business highlights before handing over to Simon to say a few words. Tim will then provide some more detail the numbers. As usual, I expect Great. Thank you, John. Good morning, everybody. So after an excellent year for Arm in 2012, we're very pleased to be starting 2013 in this way this morning where momentum has continued into the first quarter of 2013. There are some very healthy indicators that underpins a long term growth opportunity for our business in these results. As consumer, electronic and embedded devices are increasingly becoming smarter and more connected. We're seeing our customers choosing arms technology for high performance and low power and the demand is driving both our licensing and our royalty revenues. In the first quarter, we saw particularly strong uptake of our most advanced version 8 process of technology. Our customers are licensing this technology for using smart mobile devices and computers. The continued growth of the smart phone and tablet markets, along with the substantial demand for technology and other end markets like microcontrollers and digital TV. Has helped increase our royalty revenues by 33% year on year this quarter and that was significantly ahead of the overall semiconductor industry. Before we get too carried away, it's worth noting that in that year on year growth, we're pairing with a relatively low base. And that's because royalties in Q1, twenty twelve were you might recall adversely impacted by a semiconductor inventory correction, and that was particularly biased toward the mobile industry. But that said, much of arms outperformance versus the semiconductor industry was based on our partners continuing to grow their market share. The revenue momentum has enabled us to grow earnings by 58% in Q1 at the same time as continuing to invest in our R and D capability, hiring people, enhancing our ability to innovate and develop new products. We look forward, we note that the semiconductor activity in the first quarter, which of course is the relevant shipment period for we expect our revenues for Q2 to be in line with current market expectations. Environment, but nevertheless we expect group dollar revenues for the full 2013 to be at least in line with current market expectations. Now, I'll just delve into a little more detail on the revenue drivers in different parts of the business and we'll start with licensing. We signed 22 processor licenses in the quarter, and they were signed for a broad range of applications going from smartphones and mobile computing through to digital TVs and wearable technology. Half of the licenses signed were for A technology and this included 7 licenses for our latest Cortex A53 and A57 Pro processors. We continue to see traction in enterprise networking signing a further B8 architecture license fees in this area and some of the previous licenses that we've signed the high end networking and servers are starting to bear fruit and we saw significant design win momentum during Q1. That included Marvell announcing the deployment of some of the first commercially available ARM based servers with Baidu as well as LSI Logic announcing its Axia 5500 range of communications processes for high performance, power efficient networks. We also signed 7 licenses for Cortex M and Cortex R Processes. We use in a huge range of different applications, including the internet of things. And this included 2 more licenses for CorteX M0 plus that's our smallest lowest power processor And for example, that has the potential to control an embedded sensor application for up to 10 years on a single watch battery. This quarter free scale announced a range of cortex M0 Plus based microcontrollers designed to help migrate consumer and industrial applications which currently use legacy 816 microcontrollers over to on. Finally, we signed 3 more Marley graphics licenses, 2 more POCs, POC physical IP in is the IP that's been optimized to enhance the performance of both CorteX A and Mali Processes. So now I'll switch to royalty. Our royalty revenues don't forget are reported 1 quarter in arrears. So royalty for Q1 was generated from chips sold in Q3 4. Processor Royalty, the revenue was up 33% year on year compared with relevant industry revenues, increasing buyback 2%. That royalty was generated from 2,600,000,000 ARM processor based chips reported during the quarter. And volume terms, that's a 35% year on year increase and that was driven by growth across all of arms end markets. Shipments of ARM based storage chips were particularly pleasing as ARM based flash and storage drives more than eclipse any decline that we've been seeing in PC hard disk drive controllers. The growth functionality in consumer devices like smartphones, tablets, and digital TVs is also continuing to benefit us. During the quarter, we saw a near trebling of Cortex A class product shipments and a near fivefold increase in Moly processor shipments. That's year on year. Typically, of course, we receive a higher royalty percentage for Cortex A class processes. And an incremental royalty for chips containing Mali. Our average royalty per chip in Q1 was flat year on year as the growth these higher value but lower volume application processes was balanced by strong growth in of higher volume, lower cost chips like microcontrollers, smart cards, touch screen controllers, and wireless connectivity chips. So now let's look highlights of the quarter. We've continued our investments in R&D. We're growing our engineering teams, working on advanced processes and graphics. We've added 69 people in the quarter and we expect that investment to continue in Q2. Q1 is a very busy and exciting time for Arm and the companies within the Arm ecosystem. With, with big world events, events like Consumer Electronics Show, Mobile World Congress, embedded world, which give our customers the opportunity to demonstrate their new technologies that will be going into products and services that we will all be enjoying as consumers in the years to come. And from having visited most of these shows, I came away with the following impressions. We are truly in the post PC era, the mobile computer is increasingly being used as the primary device in our digital lives. Sensors that are smart and connected are enabling new products, services, and business models. Some of the most innovative technologies are solving old fundamental problems that are coming out of the and those new innovative solutions for these old problems are coming out of the embedded smart sensor space. And our technology is ready for servers and enterprise network and that's demonstrated by design wins by Marvell at Baidu, the recent HP announcement to use ARM based chips from Carl Zader and TI as well as the traditional view of the quarter. Warren has just covered that, but obviously that will be my role next time. However, when I look at this quarter and indeed the last few reporting periods is the quality of the licensing that I find particularly encouraging. It's that installed base that underpins Alarm's future royalty growth. The higher license revenue run rate that we've seen in recent quarters, together with the growth in the order backlog, bodes very well for the trajectory of future royalty revenues. The world's largest semiconductor companies continue to choose to license armed latest technology using their main product line In mobile computing markets, they're licensing our latest processes, and many are planning to implement big level implementation And they're not just choosing to deploy processes. They're often, also combining our process of technology with both Marley graphic and Physical IP technology from Arm. Talking with Physical IP Technology, during the quarter, we signed our first license for our new graphics Pop IP product, and that optimizes the implementation of the Mali graphics Processor. Also, we reached the milestone of 100th royalty bearing physical IP form. Again, something that bodes well for future growth in physical IT royalties. So for me, of course, this is all very exciting. As more and more chips in incorporate multiple technologies from Arm. It's a great base for us to build on for the future. And with that, I'll hand over to Tim, who'll provide some more details on the numbers. Thanks, Simon. Good morning, everyone. Hopefully many of you have had a chance to have a brief review of our Q1 earnings release and the financial details varian and the quarterly slide set that you're used to seeing is on the website to help you review your model. So I'm not going to go into detail on the numbers, Warren's talked on a lot of them, but I will provide a little bit of color to help we think about the balance of the year. So process and license revenue in Q1 was 81,000,000 lower than Q4 2012 when we reported 85,000,000, but on the positive side of my guidance that I gave with Q4 results for quarterly license revenue of plus or minus 75,000,000. And looking out for the balance of the year, that that remains the guidance plus or minus $75,000,000 for license revenue. Going into Q1, the backlog was at record levels and we exited the quarter with backlog up about 5% sequentially. In this quarter, Q1 over 70% of PD license revenues were generated from the backlog, a higher contribution than the normal range that we typically see as sort of 40% to 60%. Given this relatively high contribution from backlog to the strong license revenue number reported in Q1, it is very encouraging to see increase again sequentially indicative of another very strong bookings quarter in Q1. The usual analysis of backlog maturity and composition is included in the slide set that I mentioned and it shows that approximately 25% of backlog is expected to be recognized as revenue over the next two quarters. Processed royalties once again outperformed the industry in Q1, up thirty 3% year on year against an industry that's broadly up around 2%. So it's a bigger differential than we have typically seen, which is usually more in the sort of to 20% range. But as Warren says, probably flatter to some extent by the Semiconductor infantry correction, at the back end of 2011, which was reported in our royalties in 2012. Looking at operating expenses, the headline normalized OpEx in the first quarter was $74,600,000. And after taking into a foreign exchange mark to market credit of around 4,000,000 offset by 2 or 3 smaller one off items I think the appropriate base for normalized OpEx when thinking about forecast for the balance of the year is about $76,000,000 for Q1 broadly in line with consensus coming into these results. And given, as Warren said, that we are still investing in our research and development capability and business infrastructure, normalized operating expenses in the 2nd quarter, assuming effective exchange rates similar to current levels expected to be in the range of 1,000,000 to 1,000,000 and consistent with the current consent for realized rate in the first quarter was just under 17%. You may recall from my comments at the Q4 results that we didn't recognize the benefit of the U. S. Federal R and D tax credits in 2012 because that legislation was enacted at the very beginning of January, rather than at the end of December, which is typical. And therefore, the 2012 benefit of U. S. R and D as credits has fallen into the first quarter this year and that's why the Q1 rate is lower than the rate that we are forecasting for the balance of the now will be receiving in 2013 for the Patent Box legislation in the UK, which is effective from April. And you'll remember from previous presentation that the full benefit gets introduced over 5 years with 60% of the benefit coming in year 1. So we'll be getting effectively 9 months of 60% of the benefit for Patent Box this year. So our full year rate is expected to be just under 20%. Looking forward and reiterating what Warren has already said, we've made an encouraging start 2013. More companies are deploying ARM technology in their products. And we therefore expect group revenues for this year to be shipment period for armed Q2 royalties points to the sequential decrease of 10% in industry wide revenue that Warren referred to And in this context, we expect group revenues for the second quarter to be in line with current expectations, which are just over $250,000,000 or $253,000,000, $254,000,000 is the current expectation for the second quarter, which we are confirming we expect to be in line with With that, I'll hand over to questions. Your first question comes from the line of Thanks. A few, if I could. Firstly, I just noticed the, the licensing of screen here, high end graphics. I'm just wondering whether you're expecting drift in, in graphics ASP over time, similar to what we've seen on the, the mobile side and processor side. Secondly, I wonder if you could just give us a sense, Warren, or or Simon, in terms of attach rates of, of Mali within tablet and low end smartphones, it feels like you're seeing a very real impact of that market taking off. And I just wonder whether you could give us a sense of whether it's DTV driving it or whether it's low end tablets and smartphones that's really driving that Moly volume forwards. And then finally, just on PIPD royalties, know, again, really quite strong in the quarter. I just wonder whether we're now at an inflection in terms of royalty, right, royalty revenues on PIPD. Thank you. Yeah, right. Okay, let me let me start Garrett and I'll chat about Amali and then we'll ask Simon to comment on those physical IP royalties. So I mean, yes, good that you've noticed the licensing of screamer. There's no specific guidance here on on royalties going forward in our graphics products. But the general principle is if there's more value in the product that we're licensing, then we do charge more. The next generation graphics processes do deliver more value than the previous generation graphics processes. And so exactly the same sort of trajectory that we seen in our general purpose processes where when there's more value added, there's a higher rate of royalty associate with it. We our plan is to continue to execute that with our graphics growth So as we license more of the next generation graphics processes, hopefully we're going to sign those licenses with incrementally higher royalty rates. And the second question about Marley was what's really sort of driving the volumes here. And I think the answer is both. As we've commented before, our graphic presence is relatively strong in what digital TVs as we see as a sort of greenfield area for graphics and it's very encouraging that our share in digital TVs very strong for Mali. But you're right in the in the more cost effective smartphones and in the lower priced tablet, we are very strong as well and last year, we saw Marley being in 60% of the world's Android tablet. That trend is continuing and as the low smartphones continue to grow and we're seeing more Marley there. So the trajectory of Marley volume increase is driven by all those things. Simon, would you like to comment on the physical IP royalties? Yes. So, as you've observed, the royalty growth been strong. And a lot of that does come from the work we've been doing over the last many years to develop technology for leading processes and develop technology that the POP IP to allow our customers to get a more optimal implementation of an ARMcore and now the Marley graphics score as well, in their, in their SoC. So the fruits of that work are studying to come through in the royalty, and that's driving the growth. Quite a significant proportion of physical IP roll now comes from advanced technologies, 14 nanometer, 32 nanometer, 28 nanometer and so on. And we would expect to see some continued growth there, as all of the design ins that have been going on over the last few years do come to fruition and the way to start shipping. Your next question comes from Didier Samama. Please ask your question. Good morning, gentlemen. Thanks for taking my question. A couple of quick ones. First, maybe a question for Tim on licensing. I just was wondering why you were not a bit more optimistic on licensing growth given the presumably initial recognition of 64 bit licenses over the course of this year? That would be my first question. And secondly, Just a question on the broader arm ecosystem. It seems as though TSMC is going to start making 20 nanometer wafer already towards the later part of this year and is bringing forward a 16 nanometer FinFETs. Do you have a sense of when the ARM ecosystem will start producing 16 nanometer FinFET Chips and perhaps associated with 64 bits, just so we understand where you are relative to your main competitor? Thank you. And obviously, as you know, licensing is potentially quite lumpy and the guidance I give is to try and take into account how we see the backlog maturing into revenue and how we see our opportunity pipeline unfolding in future quarters. You can see from last quarter in Q4, we did 85,000,000 in the 2 quarters before that. We did sort of 6769 and now we've done an 81. I mean, so it's quite hard and it's going to move around a bit. I mean, observing the consensus coming into these results I note that effectively licensing consensus averages out at about 79 to 80 per quarter sir. And you know, relative to the guidance of 75 plus or minus, you know, that that's already on the upside So I don't think it's sensible this early in the year to fan the flames any further than that. There's already an expectation in the that licensing is going to unfold at the top end of my guidance. And I think that's broadly the appropriate level. There will be quarters where it license starts with an 8 like we just seen. There will be quarters where it starts with a 7 and we shouldn't be concerned about that So that's why I'm reiterating 75 plus or minus. That makes sense. Thank you. So I'll take the question on FinFETs and availability for the ARM ecosystem. So yeah, the foundries are continuing to invest, aggressively their development of FinFET technology. I think it was 2 weeks ago, TSMC had their annual forum here in San Jose and reiterated their expectation that their 16th impact technology would go into risk production at the end of this year. Now what risk reduction in TSMC speak typically means is that the very early adopter customers we'll be in a position to tape out some devices. Now we've been working with them. We've been working with others on making sure that The ARM ecosystem is going to get the best out of FinTech Technology. We announced a couple of weeks ago that we had collaborated with TSMC on an early tape out of a CORTEX A57 on their 16th in vet process. So that's running the fab right now, and we'll see the results that a bit later this year. So I think the ARM ecosystem is set to take advantage of FinFAC technology. And I think the development schedules from the foundries are progressing well. And so, I think the timing of that right for the kind of SoCs that our partners want to build. Yes, brilliant. And then maybe just one quick follow-up. Is it fair to assume that you have yet to see the benefit of the licensing you've done recently in the base station and router market and networking division? Because you had very strong volume growth year over year, but I would thought you have not yet seen those share gains coming in your P and L yet? That's correct. I say today, you've seen the order book increasing. Part of that is due to VA licensing. Some of these networking design where companies have taken VA licenses. We've seen the first of those products really sort of launched this year. I mentioned LSI's product launch. They were at Mobile World Congress with their product. Brilliant. Many thanks. So it's to come. Your next question comes from Sandeep Deshpandeepan Please ask your question. Yes, hi. I have a question for Tim. A couple of questions, Tim, I mean, when we look at your revenues on a year on year basis, your revenue is up very strongly. But your gross margin is down. Can you talk a little talk talk us through this gross margin dynamics? And secondly, on your operating expenses as well, how should we be looking at operating expenses in the Q2? You have guided, but there is some dynamics in Q1, which I would like to understand what happened on across in Q1 and how you see this OpEx going through 2013? Well, on the gross margins, I mean, if you look at it back over the last end quarters, you'll see that the gross margin that sort of vacillates between sort of 94 96. And there are a number of variables in there, revenue where engineering cost time is applied to service revenues that are supporting parts on the software tools business and then the physical division, some engineering time is split between cost of sales and OpEx depending on the precise nature of the projects being undertaken. And it's really those those factors combined, contribute as to whether the answer is sort of 94 plus or 96 minus. But it's a fairly narrow range in which we operate. So you're saying that the higher percentage of royalties as a percentage of revenue is not helping the gross margin? I don't think I referred to that at all actually, but I mean obviously in the long term, as royalties increases proportion of total revenue, that is an underlying positive driver. But, you know, precisely the question around, you know, why 94, why not 95? Those are the short term reasons. Okay. On OpEx, as I say, I mean, Q1 headline was 74.6 Q1 base for forecasting forward is 76 and we had an FX mark to market credit of about 4 the first quarter. We also had about an aggregation of about £2,500,000 worth of things offsetting that. A couple of doubtful debt provisions and a minor settlement cost of a legal case, which don't normally recur, which is why I'm sort of drawing out £76,000,000 as the appropriate base and with the ongoing increase in our headcount guiding 78 for the second quarter consistent with I think what's already in the market. And then one final follow-up. I mean, would you comment on the, I mean, you grew very strongly in terms of your royalty units, with my controller, etcetera, which is why the royalty per device was flat year on year. But would you comment on how you because you probably see it, how the royalty per device did in the mobile space? Yes, Sandeep, we won't comment specifically on the mobile space, but we have in the presentation, which is on the website, giving you a sort of waterfall chart showing the positive contributions and the sort of downward contributions from the different sectors. So you know, we have building off where we were 12 months ago, you know, and an uplift of getting on for a scent a cent and a half based on higher value chips going into home and mobile and mobile computing and about another 0.5% from, from the positive contribution in Mali. And then we've got negative from microcontroller growth and from the lower cost connectivity and touch screen chips. In mobile, which brings it back to flat over the year. But as you know, the answer just simply depends on the relative volumes of those buckets, but the little chart is shown in the slide on the website. Thank you. Your next question comes from the line of Andrew Gardiner. Please ask your question. Good morning. Thank you. I had a question regarding the where we are in terms of the V Eight licensing process. I mean, you're clearly highlighting, I think, in the, in the release here that mobile and tablets continue to be sort of the key end market, but are you seeing, your partners sign up for a a broader range of end markets at the moment, and also what's the latest in terms when you expect actual commercial silicon on the market for some of the initial chips? Thank you. Okay. It's Warren. I'll answer that. We are seeing VA taken up for some of the other markets as well. So for servers and for higher networking, we're seeing a 57 being licensed there. And we've had another V Eight architecture a licensee for this enterprise space as well. So we are seeing it obviously that licensing activity it will be at least a couple of years before we see any silicon from those licenses. Some of the very early licenses, however, we are getting close to silicon. We're starting to see, trial silicon from V8 architecture, licensees and we would expect some of the initial implementations, to be in silicon before the back end of this year. It's really a 2014 phenomenon, as far as royalty concerned though this anything you see in 2013 is going to be very, very first silicon. Thank you. Your next question comes from Francois Munier. Please ask your question. Yes, thank you guys for taking my question. First, a partial question, maybe for a change, the headcount, when, like, something like certain percent in Q1 mostly with engineers. Could you please explain what type of engineers you hired? Is it like newbies or more experimented people, maybe where they come from? And how easy or how difficult is it to integrate those new guys probably from other organization into something which is still a bit of a startup, I would say. In Arm, that's my first question. Okay. Answer that in Francois. I think probably the 13% you referred to is, year on year. We hired 69 people during the quarter So if we look year on year at, at the people that we have hired, then, just over a third are graduates And it's important that we hire graduates and get these people and train them the remainder are more experienced people. The areas of the business that they're going into primarily, our microprocessor, general purpose microprocessor design teams, specifically over the last 12 months, we have been growing our graphics business as well and the graphics resource last year, we also hired a small number of people. For the first time in several years, we hired a small number of people some tens of people into our physical IP division. And that's because, you'll see we've been been growing the activity there. And as Simon described, the emphasis there is very much on the leading edge technology. We needed some more resource to do that as well. The ratios are about constant with roughly 40% of that hiring being in the UK. So that's where most of the hiring goes. As Tim mentioned, as we scale up the business, we do need to hire some people into more of the sort of the infrastructure of the business to enhance our IT capability. So that our engineers can be more productive. We don't experience any specific difficulties the absolute number of people that arm needs to hire is relatively small compared with some of the big semi up the companies, and we are able to access the talent that we need. Okay, very good. And Warren, as well, I think in your opening remarks, you talk about, both the internet of things and wearable technologies. Big do you think this market could be coming in terms of a mix? Is it more a context market or a context market? Yes. Well, I'll start and then maybe Simon can make a comment on that as well. I mean, I think the answer is both we are seeing microcontrollers typically when we talk about low cost sensors and so on, then we are saying it's very much microcontrollers. Now, however, this quarter, we have seen, a Cortex A5 based microcontroller family launched from 1 of our us when we get into wearable technology, then obviously that demands a little bit more of a user interface. And so we probably see some A class processes going into those as well. But I don't know if Simon you want to add anything to that. Yes, I mean, I think a lot of the initial applications for wearable technology are going to be N class. With a lot of connectivity to a mobile phone. So if you take some of the applications like the Nike fuel band, for example, that has a small display built in. But really the idea is that you track your data on your mobile device. And I think you're gonna a lot of that. I mean, in our partner's microcontroller products, there are cortex A based microcontrollers, are and lots and of N class. And so there is a whole wide range performance spectrum. I mean, many hundreds of megahertz, CORTEX A8 based devices are being shipped by for example, as well as all the M class that Warren mentioned in his talk there. So, but I think for wearable, I think a lot of that will be M. And it's the device is basically going to contain some form of sensor to determine what you're doing, some form of connectivity to your phone. And a very small battery and the whole thing will be built for very low power. And the market for that can be very big. I have to be sat next to a guy from a textiles company on a flight the other day. And we got chat and he said he was in kind of high end textiles for sporting equipment. And he said all his customers wanted to integrate our technology, I. E. Arms technology with his technology. I think it's going to be a big market. Your next question comes from Simon Sheffer. Please ask your question. Yes. Thanks so much. Want to ask a follow-up question on PIPD royalties. I know you sort of alluded already that TSMC and other people's strength, roadmaps are benefiting you in terms of units and that momentum. But I think in Q1, you saw something like a 30 point spread compared to industry growth, I. E. 50% growth that you guys, I think foundry industry only growing 20. Is that a sustainable run rate in terms of being able to outgrow the industry, or does that change, or you can see a step function as as 22 nanometer gets introduced and and even lower down? Yes, thanks, Simon. Simon, I think probably best if you comment on that. Yes, I mean, I think that when you look at the fan market. There are lots of mature technologies. There's still an awful lot of wafers shipped every every day on 0.18 micron, 0.25 micron, even 0.35 micron. And our physical IP business has quite a large installed base there. So I'd expect that to be that portion of the royalties to be fairly, fairly constant. Slightly growing up and down as the industry kind of ebbs and flows. But again, in that area, there is big opportunity around these microcontrollers for a lot more growth. But there's obviously a lot of action, though, at the more advanced technology nodes. And as the process nodes themselves get more complex and it gets harder harder to build any form of chip utilizing that technology, then more of our partners are looking for anything, any help they can get. And that's where the pop IP is becoming so popular. So I think with the design ins that we have, the momentum we have to find that technology, the licensing that we've done on the advanced nodes at the foundries, then I do think there is potential for us to grow at a faster rate than the foundry industry as a whole. Got it. And my second question, would just be on the sort of quality and anatomy, if you will, of the PD licenses number. I think you said 70% of the license number in the quarter was recognized from backlog. I mean, more broadly, is there a risk that your backlog starts to go down. I know it's up plenty in the second half of last year specifically. But it just seems like an unusually high centers to be recognizing from backlog and their risk in that? No, I don't think so, Simon. I mean, I think in any quarter, the license revenue number is going to be comprised partly of contribution from backlog and partly from turns business where revenue is recognizable immediately. And I think you know in different quarters depending on the nature of the deals and the number of the deals that the balance will shift As I say, if you look back over the last few quarters, 50% to 60% is more typical. This one was 70 because we had some engineering milestones that were met that yielded revenue. But as I said in my comments, the fact that the backlog was more than topped up by bookings, which didn't yield revenue in the quarter. You know, I think is very encouraging as we look forward and I would expect typically the contribution from backlog to be beyond the norm outside of the normal range for to 60. I think this is probably quite an unusual quarter. But as I say, very reassuring that the backlog still went up sequentially. Your next question comes from Sumant Bahi. Please ask your question. I guess, I had 2. 1 actually was on the market share gains you reported in this quarter. And I'm just trying to understand, really, I mean, you stated was primarily driven by embedded businesses. And then you made the comment on the fact that the base station hasn't really started showing up in your royalty. So I was wondering if you could give a little bit of a color on which aspects of the non mobile market essentially are the drivers for this market share gains? Are we talking microcontrollers TVs, networking equipment. So that's really my first question. And then I have a follow-up on Patent Box, but I'll let you answer this one first. Let me answer that one first. If you look at the 2,600,000,000 chips reported as shipped by our partners in the reporting quarter, then the market share gains that we're seeing are primarily in microcontrollers, digital TVs. I mean, just to put some color on that, and we've got this data on the website as well. You know, overall chip shipments are arm up 35% industry up 7. Mobile 20 for arm industry flattish -1 percent microcontrollers are up 40% industry up 20%, digital TVs, up 100% industry up 10%. And the storage, up 20% industry up 10%. Numbers. The networking share gains that we're seeing at the moment are Arm's traditional networking areas, which is very much sort of consumer home networking I guess, our modems and those sorts of things. The gains in enterprise networking are all at the in stage and licensing at the moment. And the benefit that we'll see from that in royalties is yet to come. Okay. Thank you. And I mean, just a quick one on that. Simon mentioned that the wearable market could be a significant market where, I mean, is there any possibility of giving a rough idea of how we can quantify that? I mean, is it big enough to actually be in another line on your Analyst Day the way that you put split up the whole market. Do you think this wearable technology could actually be another line over there? Is it that big? I can tell you the Analyst Day material is in preparation and we haven't got anything on that in the Analyst Day material specifically. In years to come, maybe we'll see, but it's far too early to talk about scaling that right now. I'm including those sorts of things in the microcontroller market. Okay. Okay. Cool. And then I think I had a quick follow-up on the Patent Box side. If I understand that law correctly, It probably allows for a much lower tax rate on royalties, which are achieved from patents signed or made, registered in the UK. So I was wondering, from a long term strategic point of view, does that really change your sort of hiring or investment strategy in the coming years? I know that you mentioned only a 40% of your new hires were in UK, but I was just wondering the way it would affect your tax rate blended, would this change the way you invest in UK? No, I don't think so. Samantha, I mean, the way we structure our affairs and our patent ownership is actually the most of our tech technology is already owned actually out of the UK. We've structured it in that fashion in years gone by pre patent box. So I think it's unlikely that this type of tax legislation would influence our overall sort of strategic approach to to resourcing. But in a sense, we're almost fortuitously, if you like, a lot of our qualifying profits from the already come out of the U. K. That's because of the historic patents you signed, the way your business works, essentially, is that the way we've structured the ownership of our patents, yes. Okay. Thank you very much. Your next question comes from the line of Kai Koshalke. Please ask your question. Yes. Hi. Thanks for taking my question. I had a couple. The first one was just going back to this slide 14 where the ASP bridge for the process effectively, it does seem to suggest that enterprise is currently dragged on ship ASP. I'm just curious, I would have thought that the ASPs in that market are fairly high. So I'm just wondering why they seem to be a drag on the $4..8 My second question was just on the tax rate. Not entirely sure, but it sounds like this U. S. Legislation is maybe new and it seems to be in addition to the UK regulation. So I'm just wondering what do you think your blended tax rates could be next year and maybe in 3 years as a consequence of both the U. K. And the U. S. Patent Box? Let's do last in first out shall we on that one. On the tax, I mean the US R and D tax credit which I referred to is not new Kai. I mean, the issue is, typically, we've been receiving R and D tax credits based on our US R and D effort for a number of years. It just so happens that in 2012, the legislation was not enacted was enacted on the 2nd January. And therefore, we couldn't recognize the benefit of those R and D tax credits coming out of the U. S. Until Q1 20 13, which is why we had a slightly higher rate in Q4 'twelve and a slightly lower rate in Q1 'thirteen. I mean looking forward, So accepting if you like that that issue doesn't impact. The thing that does impact is obviously the full realization of the Patent Box benefits. And again, I said earlier that about 60% of the benefits accrue in the 1st year, and it was introduced in April, so we're getting 812 of them, 9 wells of them in 2013. And I think I showed at the Analyst Day last year or the year before that the tax rate would continue to gradually go down from current levels. And I think in due course in the out years, you can expect it to be in the sort of mid mid just over mid teens area, all other things being equal. Okay. And let me just explain the chart that you referred to there Kai. Yes, enterprise, what we mean by enterprise in this particular context, it's about the storage chips. As I said, the network infrastructure and the service piece is not really contributing to royalties yet. So that particular enterprise thing, you'll note, storage overall industry up 10% arm up 20% as we gain share in the solid state disk drive market as PCs switching more to solid state disks and that's those are low cost devices for us and that's what's responsible for that part of Your next question comes from Janardan Menon. Please ask your question. I just want to go back to the outlook for licensing. Tim, over the last 2 years, you've given guidance of a range And the reality is that Arm has sort of blown past that guidance, taking the licensing number higher and higher into the next range of $10,000,000 and so forth. When you look at your current outlook and you've given a range, which is if going to likely start from the 7 or an 8. Has, have you sort of gone through the, the sort of diverse of applications into new areas and signing up of a number of architectural licenses in the last couple of years. Which makes it less likely that you are going to beat these numbers very significantly, which is moving to the 9s or something like that. And are you going to be more in line with your long term guidance of sort of mid to high single digit growth rates? As second question I had was just on your Q1 results. You had guided revenues down to 250 and with an implication of royalties being down in the quarter. I was just wondering where what surprised you in the quarter, what came in, much higher than your initial expectations at the beginning of the quarter? Was it more on the smartphone side or was it more on the embedded processing side of things? Yes. John, yes. No, I think, I think, again, you me say before that I think we obviously we're going through we have been going through in the last couple of years a very, a very strong period of license growth and there are a lot of questions, you know, over the last few quarters about whether this was sustainable, whether it was a short peak or all our Christmases were coming at once or post downturn bounce or whatever. And what we've said is looking forward from this higher base, the medium term outlook for licensing is as you said mid to high single digit. I mean, that's what we see as the longer run sustainable growth rate for our processor licensing. I mean, what a little bit harder to call is the exact transition period from the much higher licensing that we've enjoyed over the last couple of years to that long term rate. But taking all that into account, as I say, I still think 75 plus or minus when we're looking out the next few quarters is the right way to think about it. So I think that's the answer on licensing. On your other question, I'm not sure that I'm interpreting the question correctly. Are you referring to the quarter that we're just reporting or what lies behind our guidance for Q2? No, the quarter that you just reported. Yes. So Actually, as we've said in the numbers, the upside is across the piece. The royalty numbers reported absolutely a little bit higher, but I think you're seeing seasonality in the smartphone piece and strong market share gains in the microcontrollers and embedded is done. Okay. Is your visibility any different for different parts of the business? I mean, you have some visibility as you go into the quarter. As you sort of get initial receipts from your customers, which gives you an idea of what the quarter is likely to look like as you, as you're sort of diversifying your revenue base, did you have similar levels of visibility, to give that guidance, or is it very much different for different segments Well, I mean, in terms of the direct reporting from our partners, they report, they 90 days after quarter. As we sit here on the 23rd the month, we have relatively few royalty reports in from our 120 odd royalty payers. By the time we get through to sort of 2 thirds of the way through the quarter. We've had most of the royalty reports in and so we've got direct information. If you think about what's feeding our guidance today, we're drawing people's attention to the fact that, companies who have already reported their Q one combined with companies who haven't reported yet, but already guided their Q1. That where we're coming up with this sort of minus 10% for the industry at large. If you'd think about color on that, there's rather more common tree around some of the higher profile companies supplying chips into the mobile space into tablets and those sorts of things. Many of our customers who are starting to ship arm in microcontrollers, these are many them are small companies who are not such high profile until we don't get such a lot of commentary and analysis on those companies So if you wanted to look for a longer term trend as we diversify our customer base more and get more exposed to these companies that frankly the analyst community doesn't cover in such detail, then there's less, less sort of ancillary color. Hopefully that's painted a view as to where we get our data from and how it builds up Got it. Thank you very much. Thank you. Your next question comes from Jerome Graemell. Please ask your question. Yes, good morning. Can you give us a little bit more color on the dynamic with Big term, when you expect to see some, a variety of revenues coming from, from big return and the, end. Yeah. I'll kick off, Simon, you may want to add some color on, onto this. I mean, the first big little will be a15a7 combinations. We saw the leading companies with those showing off their wiz at initially at that mobile world congress back in February. And as I said, these are are very sort of early things which are showing off in Mobile World Congress will not really be in production until the back end of this year at the very earliest. And so in terms of you noticing any impact in royalty, it's, it is probably going to be a next year thing rather than a 2013 perhaps very much at the back end of this year. Simon, do you want to add some color on on that and maybe on the VA big little combinations? Sure. Yeah. I mean, I would agree with Warren there about products being shipped late this year. So royalties starting to flow right at the end of the year or into Q1 next year. But when you look at the licensing momentum behind Big Little, we've got, something like 17 Big Little customers right now, as Warren said, be, that's CorteX A15 plus CorteX A7 combinations. But Big Little is technology that spans multiple architectures. So we have V8 version 8 architecture, big little customers as And in fact, 3 of the licenses that we did fit in Q1 were for big little combinations cortex A57 plus cortex A53 form that same big little pairing. So as a technology, we're expecting to see this in many devices, being able to switch between very high performance processes and then very small processes optimized for power. I think it's going to be a vital tool for providing increased performance, whilst managing, power consumption in a end device. Okay, thanks Simon. I think we've got time for just one more question, please. Your next question comes from Matt Ramsay. Good morning. Thanks very much. I just wanted to follow-up on the graphics questions that were asked earlier with Molly up 5x year over year. You talked a bit about the digital TV market, but in the smartphone market in particular, maybe you could comment on your potential for future share gains given that some of your some of your processor partners in the space seem pretty set with their plans going forward with maybe Qualcomm and Cupertino dominating most of the high end share that's not Samsung and MediaTek and comes QRD, you seem to take a lot of share at the low end of the market. So maybe you could talk about some share gain opportunities going forward for Molly and mobile. Thanks. Yeah. Raito, I'll deal with that. Well, I mean, you're absolutely right in your observation. Qualcomm have their own solution and are very wedded to their own solution. And Qualcomm are enjoying a lot of at the moment with their integrated devices and the fact that they are ahead of the curve in LTE modems. So, no, clearly that from a Molly graphics point of view in mobile, that is a headwind for us. That set other chip suppliers are benefiting from the phones in developing regions. People are expecting smartphones across the piece to continue to grow very strongly this year. That growth overall is tapering, but nobody could possibly describe a 40% growth in the number of smartphones in the year as being in any way modest. That is very significant growth. And the high end solutions course being sold into the developed regions of the world. Clearly growth is much lower there. So the activity is happening in the emerging regions that faster growing economies of the world and they are lower price phones and they are chipsets from a broader range of semiconductor companies. And many of these companies do use Marley and that is a driver for our expected growth in Mali as we look forward to this year and next year. Meanwhile, digital TVs as you observe in these numbers, our growth compared with that of the market is very, very strong. Our share in digital TVs for Mali is very, very strong as well. And so putting those two things together, we are seeing some growth from that. And you've got all the low cost tablets as well. That's what's fueling it. We said with the results last time, this year, we expect Marley volume to increase from around 150,000,000 units in 2012 to at 250,000,000 units this year. Hopefully, some of these markets are just described will make that grow even more. We'll wait and see. All right. Thank you very much. Okay. So with that thank you very much for all your questions and for dialing in. As noted at the start of the call, this is actually the last you're going to hear from me reporting these results. So thank you to everybody for your support over the last multiple quarters. And the business is in great, great shape going forward. And meanwhile, the rest of the team will be back to tell you all about it in July. Thanks very much. That does conclude the conference for today.