Earnings Call: Q4 2012

Feb 5, 2013

Okay. All right. Good morning, everybody. Thank you, thank you very much for coming. I looked at the number of people in the room here said, oh, it's quite depleted. And, Tim's getting with the semiconductor vernacular now. And so he said, oh, it's only partially depleted, But there we are. Good morning, and welcome to our obligatory statements, and we're going to start off. I'm going to give an update on the business a run through of what we've been up to in 2012 and in Q4, in particular, a little bit of a longer term viewed view towards the end. And then Tim will follow-up with numbers in the usual way. So let's start off with the highlight for Q4. Well, Q4 was a fantastic finish to 2012. We saw continued in licensing. And so 36 licenses in the last quarter, that's another year of over 100 licenses in the full year. At the start of fourth quarter, we held our TECON event in in Santa Clara. And at that event and around that event, we launched our B8 products, the 50 series. And indeed, in Q4, we saw some more licensing of those VA products And now they're launched, then we're sort of relaxing a little bit on the lead partner licensing as we closer to silicon on those devices. So that was a good start to the quarter. I'll come back to some of the detail of licensing a bit later. In terms of how shipments performed in in the industry at large. We saw a continuation of, outperforming the semiconductor industry. And we've got a few slide or a few pictures in slides later showing this, this gap of outperformance is increasing as ARM is targeting a wider range of end applications. But it was particularly pleasing to see when we step back and look at the year as a whole growth in core tech A and Moly shipments, and we've got some statistics on that. We normally talk about the outsourcing model and the increasing traction there. And it was another quarter of good licensing for Marley and for processor optimization packages. So all of that came together and enabled us to deliver increases in revenue profits. The normal pie chart that we put up there, you can see the split of, of revenues, and, revenues up 21% profits up 16%. And Tim will talk about the numbers there. Now I'm going to step back a little and look backwards 5 years, one of the key drivers for what's been going on with arms business over recent years has been the PC era. And more importantly, the sort of beginning of the end of the PC era, such that now we're talking in our statement this morning about the post PC era. So we thought it worthwhile having a little look from a sort of longer term per if you go back to 2007, there were about 400,000,000 devices shipped in the year that connected to the internet. And most of those, a good 2 thirds of those, were effectively PCs and the ARM based smartphones, really were only a small portion of that, and there are a number of devices with other architectures as well. And a few years ago, and with 2007 is conveniently 5 years. It's also the year of the launch of phone wave. It's instructive to think about the applications. And at stage, there were thousands, measured perhaps in the tens of 1000, but only just 1000 of third party software. Applications running on the Now fast forward to today and we'll call it the post PC era or the beginning of the post PC era. And you can see the of devices connected to the internet has grown by a factor of 4. There's now 1,000,000,000 devices connected to the internet, and that is, as many of you have heard me say, it's from the palm of your hand, sort of 2 inch screens, 4 inch screens, right up to 84 inch screens in digital TVs, and these are all internet connected screens. And when we look at the architecture is sat behind there, then you can see that the ARM architecture is sat behind about threefour of this massively increased volume, and PCs are still there, of course. And and people still buy PCs and people will want to continue buying PCs going forwards as well. What we mean is not that the PC is finished, but actually the digital products are now much more than just PCs. And but it's instructive to look at the locations and the strength of the ecosystem because, we've moved from a situation of thousands, even low tens of thousands of to now millions of apps that are available. And of course, these millions of apps have been downloaded billions of times, some 1,400,000 apps between iOS and Android available at the moment in 1,000,000,000 downloads. So the huge growth from 1,000,000 to 1,000,000,000 has really been driven by smartphones tablets and an increasing diversity of form factors. So what's going to happen going forwards? Well, it's a very competitive market. And, who knows what is going to happen to those market shares But what we would say is that this is all opportunity for our architecture going forward. As the 1,000,000,000 devices, grows by a further factor of about 1,000,000,000 did screens over the next 5 years. And obviously, comments here about the strength of the ecosystem, clearly people are going to be building on those applications and software developers will be free to choose the platforms that they choose. So that's the sort of context around PCs, and we know that PCs, tablets, smartphones, smart TVs is a very important area. It's very competitive space, but it's a very important area for our business over the next 5 years. So we thought it was worth that slightly longer term perspective. Back to the business, and we'll look first at royalty revenue process of royalty revenue, just under half of our total revenue. For Q4, that was up about just a bit over 20% year on year. The industry for this particular period, down year on year, that outperformance of the industry, 24% shown on the chart on the right And we're breaking that down into approximately 11% market share gains, approximately 7% due to the customers choosing to adopt Mali alongside our Cortex A products and about 6% due to the higher value of the Cortex A products in the first place. So that's effectively what happened in Q4, it's instructed to note that that sort of roughly 20% stood stood for quarters throughout the year. What does that mean in total? What Q4 arms business usually is has a little seasonal component, and we quite often see an uptick in Q4. And we saw that uptick. We said at the half year, it's likely to be a bit more muted than it has been in the past. It was a 7,000,000,000 chips for the year as a whole. When we look at the outperformance on royalty for the whole year, that comes out at 19%, as I say, is about 20%. And the chart on the bottom right, is a chart that you've seen many times before, and we continue to extend that to show the continuity. Is not impervious to the cyclical market here. And when the industry, shipments fall, armed shipments fall as well, but not by as much or rather. When industry growth declines, growth is held back a little. But that outperformance is actually increasing over the years moved from a sort of 10% to 15% outperformance to more like a sort of 15% to 20% outperformance. What are the sorts of products that are driving that? Well, these are the sorts of products that we see. And the reason for this slide is twofold. 1 is to show that this huge range of products and the dotted lines refer to some kind connectivity. It doesn't have to be screens, which are connected to the internet. And indeed, as we look forward and contemplate the internet of things, then the vast volume of devices probably won't have screens. I visited CES a few weeks ago, and have been going to CES for the last several years. If I think about CES in 2010, 2011, then it was very much about the bottom right hand corner of this slide, consumer oriented products and a great place to go collection of nerds and so on. And what we saw in 2010, 2011 was a few Michael processor controlled light switches and security devices and so on. But quite often, you could look at these and you could tell that, hey, there's an eight bit mic processor in here to give somebody a sort of push button interface instead of a rotary interface and that sort of thing. Not really very smart. 2013 was a different CES. For me, CS 2013 was all about this Now clearly it's sort of been a gradual process from one place to the other. It hasn't been a sudden switch in 2013, but we really are seeing a plethora of health care products, metering products aimed at energy efficiency, home security products and so on. Or indirectly via some form of mobile phone type hub. And that connectivity is enabling people to talk about service which apply on top. And obviously, the commercial potential in those services is what drives the volume adoption of N products. And that is clearly going to be a driver for, royalty going forward. This has clearly been sort of part of the story in 2012, 2013. So in 2012, we said it's 8,700,000,000 chips I'm not going to go through this slide. This slide has a few pictures, examples of some of the new products in 2012, but really this slide is an advert for the tabular slides, which we've included in the appendices at the back of the book, will appear on our road show slides and will appear in the Investor Relations section of our website, as is has become the habit over recent years. Jonathan and Ian and the team have updated the numbers which includes looking at revised numbers from Gartner and other analysts. And so we have put 3 slides in. We've re stated 2011 slightly, and in particular, there's some updates in the networking section and the embedded section so that the total volume available, for us in 2011, we think was a little bit more than we thought a year ago, and that means that our market share is a little bit less than we thought it was a year ago. So we're restating that down to 29% for 2011. And on the same basis, then in 2012, our market shares increased from 29% to 32%. When you actually do look at the slides in the appendix, you'll see that, that's a continuation of the theme for the last several years where market share increases by between 2% 4% per annum. And so twenty 12 was no different in that respect from any of the others. And we would expect that our market share should continue to increase based on the design wins are seeing, but recognizing that it's a competitive world. And just because things have increased by 2% to 4% over recent years, have to make our own judgements about the rate of that increase in market share going forwards. But the slides are there. They're updated, and we're also showing a slight increase in the volume for when we look out 5 years and we're now expecting 2017 total volumes to stretch to about 41,000,000,000 units. The other interesting observation about that slide phones will turn into low end phones and low end smartphones. And so there's a 0 in that line now. So that's royalties. Let's switch to licensing and licensing is really what creates the opportunity for future royalties. The quarter saw 9 new license these, which, which is something which has been happening as we've been targeting a wider range of applications we're bringing more companies into the ARM Partnership. We now have over 320 ARM partners And just then the half of them are shipping products these days. But it was a good quarter. We saw, as I mentioned at the start, increased licensing of our V Eight technology, very much at the start of the wave of licensing of V8. Embedded in the 36 license agreements, there were 15 in the court A licenses, which is good to note. And along with those core XA licenses, another 2 companies adopted Big Little. So we now have sixteen people on Big Little. And we saw a licensing of Mali Graphic processes, for phones, tablets and TVs. So, so that's the story on continuation of the sort of increasing the number of licenses out there, creating opportunity for future royalty another year of over 100 licenses in the chart at the bottom. And the chart on the right hand side is, again, a chart with which you're familiar And you can see that the latest licenses from the last several years, nearly nearly, well, just over 400 actually, but I was going to say nearly half of the installed license base. It is is a little bit less than half, really not contributing a huge amount in terms of royalty revenue so far. So that's clearly a great potential. And of course, many of those licenses, the more recent licenses have been for the higher value product the Cortex A type products and 15 of them in the last quarter. So some of the drivers behind licensing are a course, the new markets. And it's worth just sort of commenting here, as you know, our process the road map has several different sections. There's the applications processor, the Cortex Aid products and the Mali products. These really are about screens. Screens of all different sizes, but they're starting to be about servers some networking equipment as well. We anticipate at this process market opportunity in 2017 about 4,000,000,000 units. At the bottom of the slide, we talk about the Cortex M family. These are the microcontrollers, and these are are embedded industrial, medical, security, and so on. This is the in net of things. And screens are not obligatory in this space, the value of some of the chips is obviously much lower than for application processes, but the volume is significantly higher, and we're anticipating a market opportunity there of over 20,000,000,000 units in a few years' time. The devices which either have screens or the internet of things devices are connected to the internet and increasingly that the volumes of data, which are used and generated by these devices, is putting demand on the infrastructure and the servers and the network equipment that connects things, taking too much energy. And that is stimulating demand for people to use energy efficient technology. I'm not saying Arm is the one and only answer to this. But Arm is one of the tools in the kit bag, for these equipment providers to drive down the energy assumption of the infrastructure and server product. And that amongst other things is driving demand for our core tech our series of products. And we anticipate between 10,000,151,000,000,000 units of market opportunity in that base in a few years' time. So it's those significant opportunities, which are attractive to our semiconductor partners, which is what's driving our license business at the moment and driving interest, and we talk about a healthy pipeline going forward. Let's switch to physical IP. Was a year of great execution for our physical IP business. Physical IP is definitely now, you can see in our processor optimization package chart on the top right hand side, now it's inextricably linked to our processes, many of our partners are choosing to use on physical IP to create deterministic solutions so that they know what they're going to get out of an arm microprocessor implementation. The arrows on in the graphic on their bottom right hand side of the slide, when you look at that in detail, show that using appropriate optimization packages people can achieve implementations, which achieve higher performance in a smaller area and therefore, cheaper devices and, devices as well. And that applies to our microprocesses, the red and the blue part, but also to our graphics processes as well. And we introduced graphics process or optimization package, in 2012 as well. If I look at the underlying physical IP technology that we licensed to the foundries on the left hand side slide. It was another quarter where we did some more platform licensing. The encouraging thing here is that ARM Physical IP is now absolutely at the leading edge of Semiconductor Process Technology. So the new platform licenses sold during the quarter. We're engaged on 14 nanometer work with the leading foundries. And if you look where this stuff is starting to generate royalty, then, we saw our 1st 28 nanometer royalties as well during this quarter. Clearly, on physical IP is being adopted more because, you can see underlying physical IP royalty as growing the foundry growth, as well. So 17 plays, has placed 7%. So that's it for physical IP, and that's it for a brief run around the business as in 2012. I think it's worth because some of the costs that we're, we're bearing into and some of the investments that we're making in 2013 is actually about a longer term story. And this is about addressing the sort of challenges that face our business in the medium term. Clearly, we are investing in R&D. You can see us building the headcount. This is because the technology that we're working with is more complex. It's getting much harder to implement. We're facing more uncertainty in those technology developments. And rather than simply face that uncertainty, we're investing in people and we're investing in tools to get around some of those challenges. And when we deliver on those challenges, then consumers and businesses are able to benefit because they have even more capable device that are even more power efficient. One of the other reasons we need to invest in technology development is because it's a competitive environment out there. I've just painted a picture showing fantastic market opportunity. Obviously, that's attractive to everybody, not just arm, And we absolutely need to make these investments to ensure that our technology is thoroughly competitive. We've always invested in partnership and Arm tends to work with a few leading edge companies whom we describe as the thought leaders. And what you do is, is work closely with these thought leaders, they've got their eyes on the future, the pulse on what's actually happening, and then we can apply that learning to the fast follower The interesting thing is, of course, that thought leaders aren't thought leaders forever. Industries change and evolve, and we do need to invest time, we will spend money. And one of the reasons we are increasing the headcount is not just in R&D. It's also investing in partnership with some of the fast followers, some of the players who are in enabling technology that sit alongside these companies to enrich our ecosystem. So there is some investment there. You also saw us in 2012 mitigation. The MIPS Patent Portfolio is an example of this where we acquired some rights to the MIPS Patent Portfolio. Obviously, MIPS are in the business of MicroPro to licensing, that patent portfolio was potentially, particularly a risk to arms business. And we needed to invest in that, in acquiring those rights. And as our technology becomes more prevalent, clearly, we are exposed to a wider range of technologies, therefore a wider range of other people's patent And that's why we need to continue to invest in patent risk mitigation. And of course, with an eye on the future, people often ask us in one on ones, how do you guard against disruptive technology? How do you know when somebody is designing something which is going to undermine your future microprocessor business. Well, of course, the real answer is we do. But the right answer is that even though you don't, you spend a heck of a lot of time and effort worrying about who those people might be keeping tabs on universities, investing in appropriate startups, interesting enabling technologies that probably half of in the room and haven't heard of, that we need to do because they might be technologies that help us at some stage in future. And so you see us with, with seed funding, different technology companies. As we're exploring new businesses, you see us apply the classic ARM Partnership approach working with consortia, things like the Lanaro Consortium moving out from just mobile into the enterprise space and you see us do some acquisitions. You also saw us launch a joint venture in the security space. So there are some future challenges, and that's what really lies behind some of the investments that we make today and why today's cost doesn't necessarily match up with today's business. I've gone on for long enough. The summary at this point is the business is in very good shape our license revenues now are continuing to be strong and it's really new product development, a competitive environment out there that is stimulating our partners to invest in new arm technology. That trend continued during 2012. It's set to continue in 2013. Shipments of ARM based chips, the results of the labors of those semiconductor partners and ARM, that's continuing to outperform the industry. So we're continuing to invest in the ecosystem to enable that. It's very encouraging to see the extension of the outsourcing model in our graphics business and our physical IP business, starting to generate additional royalty revenue. So the value that we get when somebody ships 1 of these chips actually is starting to increase and we saw that as a trend in 2012. And as I just said, we're continuing to invest in new technology. And the good news is we're able to do that at the same time as increasing revenues and profits. And Tim is going to talk about that now in some more detail. Thanks Warren. Good morning, everyone. So I think Warren's given a fairly comprehensive overview of the quarter. So you'd probably be relieved to know I've got 4 four slides which are not going to repeat everything you said, but it's probably just going to give you a little bit of guidance on the models and a little bit more insight into the Q4 P and L. We talked about the revenue overall up 20% 21% in the quarter year on year, very strong in license seeing 26% strong in royalty 'seventeen. And Warren's talked about the relativity to the market. And we know that its core taxation and Mali helping to drive that. I'm, however, going to focus more on the, if you like, the trajectory of a 21% revenue increase becoming a 16% PBT increase, becoming a 10% earnings increase because important to understand that in terms of when we look forward into Q1 and the rest of 2013. The underlying cost in Q4, as we said in the release, were about 1,000,000. There were 2 issues in there that increased it up to 79.7 as reported. One of those is the mark to market charge, which arm followers will be aware tends to move around in the plus or minus $2,000,000 depending on what the quarter end exchange rates are. For those eagle eyed on the 31 December, the dollar blew out to 16250 for sort of a one day only offer. And then came back sort of 160 and below when people came back to work. So very transient, but actually had an impact on our mark to market. So there was the small charge there. The more important one was related really to our Q4 performance, both in terms of the overall corporate bonus that is paid to all of our employees on 1 year revenue and profit targets because the Q4 performance was much stronger than we had expected, by the end of Q3, we were obviously accruing a bonus expecting a slightly lower result. When we got the Q4 result, we needed to true up the bonus accruals that we'll be making through the year to cater for that result. That was part of the uplift. So obviously that goes away. And the other one was, sales commission payments to our sales force. You've seen in the release that the order backlog is up 25 percent sequentially in a quarter where license revenue was as high as it's been, that tells you that the bookings in the quarter was very high. And therefore, sales commissions again were higher than the normal ongoing level So a combination of those 2 factors, meant that we did £80,000,000 of pretax profit. But sort of in a sense, those won't recur. I mean, the corporate bonus would only be at that elevated level in 2013 if we shop through the budget again. So you know, you can expect if we did our budget, the bonus year will be lower than we've seen in 2012. If we shoot through our budget, which probably be a good outcome for us all, then the bonuses we hire certainly bonus payments in Q1, Q2, you can expect to be lower than we've seen in Q4. The other issue we had in Q4 was the tax rate. I've been messaging a sort of 25% normalized tax rate for 2012, and that's what it was in the 9 months to the end of September. There are a couple of issues in the US that are actually, well, one is a short term timing difference, which was the timing of the legislation of the R and D tax credits in the US you only you can only you can only realize the benefits of the US R and D tax credit when the legislation is passed. In all previous years, the legislation has been passed in Q4. This time it was passed on the 2nd January. So slightly annoying, because I'm having to stand here explaining to you why that benefit gets taken in our Q1 numbers not in our Q4 numbers as normal. That was one issue. There's another, piece of law in California that was passed in November, which change the way that companies who operate in California, how their income gets taxed in California. And the good news is the change in methodology means that less of our income going forward is going to be taxed in California the short term impact of that is we have some deferred tax assets that we need to, as it says in the release, derecognize because we had been assuming higher than California going forward, but because we're going to be paying less, then not all of those deferred tax assets will be recovered the fullness of time, we needed to write them down. Again, a one off issue. Good news, we're going to be paying less tax in California going forward. Putting all that aside, Q4 noise on tax, as we know, the Patent Box regime that we've talked about before, we talked about it at the Analyst Day, comes into effect in April. We get 60% of the benefit of that in year 1 and 10% per year in the subsequent 4 years And for Arm, a lot of our profits are earned from qualifying patents as defined by that regime. And therefore, as of now, my guidance is that the full year effective normalized rate will be about 20%. In 2013. Okay. So that's the kind of Q4 the P and L is the way it is. I suppose the other thing to say is you also see in the release that the guidance for the underlying OpEx in Q1 is 75, 77. I said a few minutes ago that with underlying, it was 73 in Q4 removing the incremental bonus and the FX charge. So 73 going to 76 reflecting some overall employee cost inflation that tends to kick in at the beginning of the year. And, obviously, we've been hiring people. So there's a sort of full quarter effect of hires that we've been making. So changes into that sort 75% to 77% range for Q1, we think. And that's assuming a sort of neutral mark to market. Clearly, if the end it tomorrow with the dollar sterling where it is, we'd have a next, we'd have a mark to market credit in Q1. But obviously, there's a lot of water going to the bridge before 31 March. So standing back and looking at the full year, again, I don't want Pete, you know, what Warren has said. But you've seen us, it's been another year of, investment in people and in business infrastructure. Net headcount up to 176 in the year, about 80% of those people being in research and development. But also commercial feet on the street back office support functions, and accommodating the growth that we're seeing and that we're going to go we're going to see in the future. Yeah, that investment will continue in 2013. Maybe broadly at the similar level, but we'll have to see how the overall environment plays out, it's very early on in the year to make specific judgments about our level of recruitment. But we would envisage something broadly similar to seen in the last couple of years. And notwithstanding that investment, of course, we've seen a very strong net cash generation, especially in the second half of the year. And we're recommending a full year 2012, up 35% on last year's final, which overall would be a 29% increase in the full year dividend. Taking it to 4.5p. Licensing and backlog, You have heard me talk about $35,000,000 of licensing being the base plus or minus. You've heard me talk about $6065 and 70. And this morning, you've seen us report 85. So I'm sure you're all interested in my guidance as to what the base is for 2013. And I think the answer to that question is about 75. Again, plus or minus, are there going to be quarters in 2013 where our licensing starts with an age probably? Could there be one where it starts with a 6 maybe should we panic if there is? No. You know, licensing is inherently lumpy. But the backlog is high. The underpin of licensing is higher, obviously, with that record backlog. So 75 plus or minus is how we see it based on backlog and based on opportunity pipeline of license seeing opportunities that are either in flight now or we would expect them to be in flight later in the year. And of course, other things will come onto the radar later that we haven't we're not yet seeing. And what that chart, which we introduced a couple of quarters ago, was really there to show because I think the question we've always said licensing is a mid to high single digit revenue growth stream over periods. And before the downturn, it was 9%. It then went down. It then bounced up. And then it's been growing strongly in the last couple of years. And the question was, you know, have all your christmases come at once? Is this just a bounce back out of the downturn? Is it sustainable? And what we're saying is, yes, from this elevated base, we're still guiding if you look out multiple years mid to high single digit. On top of this base that's been growing at more than 20% per annum the last couple of years. And one of the main reasons we say that of course is that chart on the right which shows how the backlog has grown over the last 5 years and how license revenue has grown over the last 5 years. There's quite a big gap to close, which of course is closed by the recognition of license revenue over time. So $75,000,000 plus or minus mid to high single digits growth rate sustainable over multiple years, we believe. And so the outlook, okay, we came into the years we've said licensing pipeline looks good. Order backlog is high up 25% in Q4 based on the sort of new products and new market that we're going into, but it does remain lumpy. So 75 plus or minus. In terms of royalties, We grew royalties 21% as you saw in Q4. Is a process of royalties. We grew process of royalties 17% in the full year 2012. The mark in Q4 'twelve versus Q4 a year ago, which is obviously a relevant relationship. We're looking at our Q1 royalty was slightly up, flat to slightly up. So based on all that, it's reasonable to expect that arms royalties in Q1 could be 20 percentage, up year on year. Q1 royalties last year were 93. That will take you somewhere into the 110, 112, 115 area. If we were continuing to grow at around that sort of 20% plus. So looking at our taking that license revenue guidance, looking at recent royalty growth, looking at the development of PIPD, development systems, in the round, we think that's around $250,000,000 plus or minus likely for Q1. Normalized OpEx, as I said earlier, 75 to 77. And then the reminder at the bottom that, you know, it is very early on in the year. We are living in low growth times to be kind And whilst we may think that sort of catastrophic risk has reduced, we're still living in low grow times and there can be negative influence on consumers and on Semiconductor Industry. So we need to be careful But assuming it doesn't deteriorate significantly from where we are now, we would be confident in saying, that our year revenues will be at least in line with what they currently are, which is about 10.30 dollars, $1,030,000. I think with that, we'll open it up for Q And A. Okay. I think we got the first one. First one there is in towards the front on this side. Couple in the front. Morning. It's Nick James from Numis here. A couple of questions. First was on the OpEx and you've highlighted the need for investment in the business. I guess just to understand your thoughts on the longer term potential for operating margin expansion is the fact that now we're kind of looking at other markets beyond the very high volume mobile 1. I mean there's less of an opportunity for operating margin expansion as we've seen previously. And then the second one would just be in terms of looking at the level of outperformance, we can expect this year. Obviously, last year was a strong growth year for high end smartphones. It now feels like the growth in smartphones moving much more to the lower end. Does that change the degree of outperformance you see relative to the semiconductor market? Okay. Yeah. I mean, I'll do the first one. I mean, there's no there's no real change to how we see the investment proposition here. And I think we're on a quarterly set of results, we're sort of focusing on the cost and why we're investing. But it doesn't really change the view that there's operating leverage inherent in this model. You've got generic technology that's becoming more and more applicable to more end markets. And we don't see step changes in our cost structure that mean that everything we've told you about margins before has to be rewritten. I think there's a very valid question about you've got 45%, 46% margin today. What's it going to be in 5 years' time? Is it going to be 50? Is it going to be 55? Is it going to be 60. You know, Warren's point is in 5 years' time, the relationship between our revenue and our cost they're not going to relate directly to each other. One's going to be based on costs incurred in the past and one's going to be about revenues to be earned in the future. And it could well be that this business is much more valuable in terms of its potential to generate profits and cash with a 50%, 55% margin than with a 60% margin, which may mean that royalties are a higher percentage of revenue. The business is more mature, etcetera, So we don't think of it specifically in terms of margin. We think it in terms of our investment opportunity and our ability to generate profit. But you should certainly expect margin to be higher and continue on this gradually increasing trend. And the second part of the question was about, royalties, shipments and outperformance of the industry, and did we feel that with slowing growth in smartphones, the outperformance was slightly to change. I think the slowing growth in smartphones is is arithmetic. There are estimates out there, by the way, for still significant growth in smartphones in 2013. So I don't think we're going to see a massive change there. And I would also point out that as some of this smartphone growth is fueled by effectively low end smartphones, and, and sometimes that's perceived as a bad thing, strangely for Arms business, which is, of course, a complete fallacy because a low end smartphone is typically replacing, a, a simpler phone, and Arm is still earning, perhaps five times as much royalty on a low smartphone as on a simple phone. So, those changing dynamics in smartphones, I don't think really make a massive difference. And whereas historically, as we saw on the chart, we've sort of outperformance has been in the 10% to 15% range, I said, you know, it's in the 15 to 20% range. Whether it's 21, 19, 22, or 17, we can't really tell you what going to be at the moment, but it's going to be in that range rather than the rather than 10% range. I think Sandeep was next, actually. Hi. Sandeep Deshpande, JP Morgan Gasnu. Thanks for it. A couple of questions. Firstly, on licensing, I mean, you've been growing licensing we strongly over the last few years, can we have a comment on, I mean, is this going to be the, what is the long term growth rate licensing that you are looking at in your own model at this point. Secondly, on the royalty per device, I mean, you are seeing this uplift in per, in as you move towards these latest generation cortex A processes and the latest generation, but at the time, you saw a small dip from the last quarter to this quarter. Can you make a comment? Was it that some other businesses are growing, which is causing a dilution in the royalty device. And then finally, this this guidance on the first quarter in terms of revenue, Tim, maybe you can make a comment in the last 12 years. You've never given a quarterly revenue guidance. What's changed? Did you say 12 years? Yeah. Wow. I thought I thought it was 11 in 3 weeks time. No, I mean, on that latter point, Sandy, it it we do often specifically mentioned that you're right. Following up, we did this time last year, actually. If you look at your, eleven release, you'll see we pointed to 200. So it's not unprecedented. I mean, our job is to guide the market the best way we can. And if we think it's it's appropriate to put in a specific number, then that's what we'll do. Sometimes we do, sometimes we don't. I say, it's all about guiding the market the best way we can. I mean, on the licensing, it's really what I set up there, Sandy. I mean, I think from having had these periods of much higher than historic growth in licensing. When we look forward, you know, look at the backlog look at the customers, look at the markets we're entering, look at our technology roadmaps, we see a mid to high single digit percentage growth rate from here out into the medium term. And the middle question was about royalty rates. I don't think we see a change to the long term upward pressure with higher value, higher value microprocessor cores in applications processes pushing the, the royalty rate up. In any given quarter, then, you know, the, the actual answer is going to depend on relative growth rates of those types of products versus things like microcontrollers versus low cost connectivity devices that are also going into things like smartphones and tablets. And so now on a given quarter by quarter basis, then don't read too much into the numbers. Cortex A plus MALI plus physical IP, multi Processes. You know, we've got to the stage in in 2012 where we're starting to see the cortex a's with, you know, about 1 in 4 cortex a's had a mali attached to them in, in the last quarter, we're seeing physical IP, being attached as well and, and contributing. And as we look forward, we'll see big little drive things like, multi processes as well. So the long term trend is, is there to stay. Goodness. Where do we start Let's have some over this side because I think they were quite keen as well. Sorry. It's Francois from Morgan Stanley. Thanks for taking my question. The first question would be about the royalty rate on average for the company. I think last year it was 1.2%. If you could give us an update of where it is today or for 2012. 2nd question is about servers. If you could give us a bit of, of update in this market, I'm pretty sure that the sort of chips are being tested at the moment by most of the end customers being, you know, Facebook or whatever. What's the feedback so far from the end customers? And how long do you think it will take for an IT department in the bank or whatever to try and, basically, give up intel. Okay. So on the royalty rate question, I don't have a specific number for you. It's a little bit higher. My head. It's a little bit higher. Yeah. It's there is and it's little bit higher last year than it was the year before, and it'll be a little bit higher this year than it was last year because of the answer that I gave to, to Sandy's question, and that trend is absolutely in place. So one point. So think of those sorts of numbers. I mean, and actually, doesn't necessarily need to be high. I mean, obviously, if the microcontroller bow wave was totally overwhelming, it could actually be a little lower and royalty revenues could be even bigger, right? So it is, it's not sort of totally in a sense, a reasonable comment that it is a bit higher, but it is. So the incremental percentages that Warren talks about are outweighing more volumes at the 1%. So gradually going up. That's, as I said, an answer to the last question, it is going to fluctuate a bit on a quarter by quarter basis. On servers, yes, we're seeing increased momentum. We are a stage closer we're 12 months closer to 2014, and therefore, you know, the appearance of the and sensible, commercially available, aren't based servers. We are more certain that time scales aren't actually changing. So, you know, we are transitioning from there being no servers to some servers in 2014 when it's going to be something that you can actually notice. In terms of the feedback that's coming back, so far, the experimental work is actually exceeding expectations. The original sort of theoretical stuff, has been proved and more, and that is fueling some enthusiasm and you saw some transments in, in 2012, and I think we'll see some more in 2030. Let's move down that map. Oh, sorry. Here we go. Okay. This is a man from the Anglo American Village. Just wanted to ask two questions. I've seen you've signed or you announced 16 big little partners, which is quite a big I think. So I was just wanting to get a sense from you, as to, you know, so what sort of applications we should to see big little and also more importantly, if we're going to expect to see big little in the lower tier of the smartphone market over the coming years. Would be my first question. I've got a follow-up. Thanks. Okay. Big little, we're seeing in smartphones and tablets that that's where it's happening first. You've got to have the sort of workload which is quite variable so that you can have some workloads which are compute intensive and some workloads which are compute light. And then you can get the real benefit of Big Little by using the appropriate size engine for the appropriate workload. That applies in phones and smartphone it applies in tablet. At the moment, it's clearly a sort of leading edge technology thing, but I don't see why over the coming years, the sort of normal trends we see in the technology space, which is something that gets introduced at the high end and it trickles down. I think you will see that in in, lower end smartphones. It's gonna be some years away before it gets to the sort of price points that are sensible, but it will definitely happen. Great. And then the other question is obviously over the last 12 months, there's been a lot of debate about, you know, your key competitor driving more slow and process technology ahead of your foundry partners. However, I think over the last few weeks, we found out that CSMC is going to ramp 29 nanometer quite a bit ahead in terms of volumes that perhaps the market expected. And Samsung is alluding to a 14 nanometer FinFETs perhaps as early as later this year or second half of this year. So I was just wondering if you combine process technology from your partners on a manufacturing front with big little, is it possible that your performance per versus your key competitor, in fact, increase in the coming quarters or years? Well, obviously, we hope so. The, you know, we have not really subscribed to this notion that, that Intel should have a long term significant technology lead. Clearly, the business model is much easier for Intel to get to a new node ahead of the foundries. The foundries, as I've said before, have to support many customers, and it's a more challenging task for them, but 2012 has seen the foundries, you know, the TSMC Samsung Global Foundries have all talked about their leading edge roadmap and UMC starting to talk about it as well now. And so, you know, the same equipment's available for everybody. And there's no reason why Intel should have a long term sustainable lead. They just have a sort of little lead because it's easier for them to service effectively one customer instead of several. And as you saw, let me talk about it out there, no processor optimization packages for 14 nanometers. Our physical IP team are engaged with these foundries. You see in the release, we talk about Samsung, taping out, 14 nanometer, Courtxa 7, based test chips, with arm and cadence, and so it's real. Thanks. And maybe just one final question. Final question. Yeah. I think we need to pass on them. Just very quickly. On the the embedded front. It's a live stream from. Last quarter. Last quarter, Renesh has announced to cortex A8 microcontroller, and yesterday, Admed announced to Cortex A 5 macro controller. So of course, it's probably too premature to talk about an increase in royalty rate for macro controllers, but is it unthinkable that medium to long term that royalty rate also creeps up, in addition to what we know as a sort of 1% base business? Yes. It it's not unthinkable. However, the reason we talk about microcontrollers and and the low air ASPs is because there is a relationship between ASPs and volume. And in the microcontroller space, when we talk about 23,000,000,000 units, then what really drives the high volume is the low end products. It's true today that, you know, you can buy ARM based microcontrollers for 10%. You also have to pay more than $10 for some ARM based microcontrollers. You know, there is microcontroller covers a multitude of different applications and some of these devices are quite sophisticated, but the more expensive ones are going to be much lower volume relatively Alright. I think we need to start moving towards the back of the room. Thanks. Garett James? I'll get around everybody. Thanks. It's Garett James UBS. Just a few, if I could. Maureen, you talked about challenges of implementation. And I just wondered, what precise apart from security that you mentioned, what precisely you were talking to, if you had any challenges for example, with the foundries implementing big little, or are there any kind of, challenges that you're finding shorter term? And secondly, I just I guess unit volumes in handsets down 3% for the industry, you're up 5%. Can you talk about your mobile royalty revenue growth year over year, please. And then, I guess, lastly, it looks like your graphic share, maybe pushing close to 30%. I think this time last year, you talked about a target for Mali of over 100,000,000 units. Just wondered if you could talk to a 2013 target. Right. Three questions. First one on the challenges. We have the slide in about challenges, not to talk about a specific challenge, but simply to explain that, you know, execution and execution I hope in the business has been pretty good and will hopefully continue to be pretty I'm simply pointing out that we need to spend some money to make it good. And as these devices get more complex, then there are many, many more variables involved in creating, a process. A big little is just one example. Now if you're trying to simulate 300,000 transistors is easier than trying to simulate a 1,000,000,000 transistors, much easier, and you need a lot more machine cycles and a lot more brain cycles to work out how to and then to effectively simulate the more complex device. That's that's it. It's a it's a generic comment rather than anything, anything specific. The next question was about, mobile. And I think I think the best thing we can say there is when we gave some very specific guidance or specific information a quarter or so ago, we probably made a bit of an error giving too much information to the financial community because some of our customers also, can get access to this information, reverse engineer it and use it in commercial negotiations. So we're not going to make that mistake again. I said that once before, But if we look at Q4, then mobile units were up about 5% and mobile value was up just over percent, 21%. On graphics and our share, then we expect the increase in share to continue. You've seen the graphics licensing. Licensing doesn't guarantee royalty, because we have to get design wins as well as get the licensing but the, to continue, and its fourfold increase in 2012. I'm not sure that we're expecting a fourfold increase in 2013, obviously easy to increase off, small numbers. But it's, it's going to be significant. It's going to follow tablets and smartphones. I think we need to move on swiftly. Hi, it's Jonathan from Liberum Capital. A couple of questions. One is just on your Q1, on your Q4 royalty seasonality. Last year, you pulled out the Q1 trend because you said that you'd pulled forward, some revenue into Q3 on the royalty side on the PD royalty side. Normal seasonality previously was for a rise in your Q4 shipments on a gallon on the actual quarter basis So, I was just wondering, is that seasonality changing now that you're getting a drop in your, quarter on quarter royalties? And is this the way of the future, which is that your Q1 recognized royalty revenues will always be down from Q4 levels. The second is, just on the Windows 8 windows are T front, you know, RT has got off to a bit of a disappointing start. How do you see that evolving going forward, and how do you see the ARM ecosystem gaining traction, in the, in the Windows 8 operating system, and how long do you think that process could take? And lastly, your licensing is rising very fast and your number of architectural licenses seem to be increasing. Is that a trend that we're going to see more and more, a bigger and bigger share of architectural license amongst your overall licensee base, which will keep nudging up your licensing levels in future? Yes. Thanks, Nardan. I mean, on the first one, you know, I think it's difficult to talk about seasonality and the fact that seasonality will stay the same, etcetera, etcetera. I think, you know, what we're what I was pointing to there was, you know, the relationship that we saw between Q4 royalties last, you know, 11 in Q1, twelve you know, is probably the most recent information we have of how the current market, the seasonal impact of the current environment, how it plays out. And, you know, the sort of 20% plus growth that I was talking about year on year are all consistent with what we did in Q4 and what we did in the full year 2012 for a growth rate. So sitting here today with very few royalty reports and seeing guidance from our partners, which as usual, you know, some is really quite positive. Sequentially, some is is negative. That seems like the best information we have to guide at the moment, but I'm not making any prediction about what seasonality might mean going forward relative to how it's been in the past. But I think last year was probably a good indicator. Okay. Next question was, Windows RT. What did we think about Windows RT? Well, 2012 was the launch of RT and our expectation was, was really satisfied that Microsoft proved they could bring a Windows operating system on, on arm technology, and it works, and it's fine. It is a very controlled release that Microsoft have done. They are very tightly controlled the number of chips, chip companies they're working with, and the number of chips that they're working with, and the number of OEM customers whom they're working with as well. And that is a matter for Microsoft. I believe that their 2013 plans are similarly very tightly controlled. But, you know, if you want to probe on you'll have to to push a bit harder with Microsoft. As far as we're concerned, we're we're pleased to see the platform running on Arm, you know, we think that the world needs multiple operating systems. And, you know, we stick with our usual principle of being pretty agnostic and, you know, the rate at which Microsoft take share or not from, from other operating systems is a matter for Microsoft. But we're going to target the full range of operating systems that are out there. On the licensing forecast and architecture licenses, I think you have seen, a bit of incremental architecture licensing, over the last year and, likely over the next year or so as well. For two reasons, as we target a newer, broader range of applications, you know, as we get into things like networking infrastructure and servers, So we're exposing ourselves to, different semiconductor players. And so for example, Cavium's license back in, in, in the summer of 2012 is an example of, of, of, of that where they sort of previously been a mixed house and adopted arm for, for some of their networking applications. The other thing that we're doing at the moment is going through a transition from ARM architecture version 7 to architecture version 8. So the existing architecture licensees are thinking about upgrading. And for those two reasons, we are going through a period of seeing sort of some increased architecture licensing. But those are the reasons, and there's not a fundamental shift in, in the business model. Simon, and then I think, we'll we'll keep on with the pace. It's, slidership of Golden tanks. I'm just wondering actually on this, incremental outside surprise for licensing. So new architecture, is this yet to get another big step up in the amount of Royal keys that you can charge. You know, if I think back about the schedules that you have specifically since, so the initial cortex generation, there was obviously a up as is the case of AT and T, but how should we think about the type of value that you can extract in your royalty within a few years down the line based on some of this incremental licensing activity that that you called out today. Okay. So, it's a continuation of the trend, as we've moved into the wave of Cortex A through more sophisticated versions of Cortex A. So the royalty rate has increased as we're delivering more value to the Semiconductor partner, then we're expecting to be paid for that incremental value. Version 8 is another increment again, and we're expecting to be paid for that. And whereas in the past, we've done sort of 11.25 up to sort of 1.75%. Generally, version 8 architectural licenses, the number starts with a 2. Full of Do you want to do Sue Ment here at the front? Yeah. Thanks. It's Sumant from Brickland Partners. Congratulations on the excellent result. I guess, when you have good results, you tend to notice some of the negative negatives as well. So if you don't mind, I have 2 on that. First is on options expense. It's up 45% Q on Q and up 14% year on year. So could we do or could you do something about on how to sort this sort of volatility we may see in terms of reported earnings? And then the second question is to do with the PIPD segment results. When I look at it, I mean, I think I asked you this question, in Q4 2011 as well in terms of what could we see in the next 5 years in terms of operational profitability of that particular business? It's still negative 20%. So I'm just wondering if there's strategic view over the next 5 years, how you could bring it up to the processor division sort of profitability or even to breakeven, that would be really great. Yeah. I mean, on option expense, unfortunately with the option accounting, you know, there is volatility. There is volatility specifically when you get big moves in share prices. And the fact that our share price moves significantly in Q4 meant that there was, in a sense, the option charge or elements of the share based remuneration charge went up as well. If you look back over the last sort of eight quarters, it's sort of uniformly below that level. And we'll go lower again in the future. Now there are various debates about how this should be disclosed and accounted. What we try and do is set it out very clearly in the same way that we always have done. Which is, you know, here's our normalized numbers, here's our option charge, here's the subtotal without the option, you know, with the option charge included, and here are some of the other non cash accounting items. And so in a sense, we extract the volatility, but we appreciate it. It's there. And the reason it's there this time is because of spike in the share price in the fourth quarter. And I think the most, when we talk about this to investors, I think the most important issue is dilution. And how much, yeah, how many shares are you wishing to your workforce every year. And that has remained consistent typically under 1%, and is unchanged. Now that gets translated into accounting rules that are volatile mainly because of share price movements. PIPD segments, you know, I think Warren explained, that a lot of the value of PIPD is to the wider arm. And a lot of the value that the PIPD brings to arm doesn't actually go through the PIPD segment. It goes through in the Processor division. Not, and I think the other thing to note is, you know, as you say, there's a margin improvement from last year, but we've been investing in that division quite heavily because as Warren said, it's now acknowledged as the leading, the, you know, the leading third party provider of physical IP, multiple foundries are wanting us to work on multiple projects at the leading edge, and that's requiring more people, which is why you see that result. But I mean strategically, I think PIPD is more important and more valuable to Arm now than it's been at any time since the acquisition. Costview. Thank you. Andrew Gardiner from Barclays. Just again, on the licensing, you highlighted in one of the slides, Warren, the increasing gap between your backlog relative to the licensing revenue in the quarter. But with your comments also around sort of ship from V7 to V8 and more customers at this point having to consider that those upgrades and around architecture licensing. Do you think that gap is going to widen for the time being before we start see it narrow. And what does that mean for is that inherent in your mid to high single digit long term guidance or could it could perhaps outperform that? I think the, mid to high single digit long term guidance stays. I don't think we should look at that graph too closely on a quarter by quarter basis. The reason it's over multiple years is because it's meant to show that, you know, hey, there's a trend over over a handful of years, and, we have the backlog to support the increased level of licensing. When you get into quarter quarter. I mean, look at the last quarter, it's just shifted quite a lot. That is exactly the cause of the new technology. And we are having this little wave of, people licensing, new technologies. When we sell somebody a VA license at the moment or license to a VA product, we don't recognize revenue. So a 100% of that is going to go into backlog, and that is going to cause the gap to widen because you've got backlog growing and license revenue not happening as a result of that order. That's going to happen for a few quarters. And as Tim said, in the presentation, you know, the license revenue is lumpy. Sometimes that's because, you know, orders happen on a Friday, or then there's the end of the quarter, and there's the following Monday. And, you know, that, that sort of thing can make a big difference to, to the actual numbers. So don't look at it on a quarter by quarter basis. My advice Just quickly for Tim, on the sort of the updated tax guidance, I think previously you'd said medium term you were looking for the your tax rate to step down to something around 17% largely driven by the patent box. But with these other changes, you're seeing the California change and other where is that, are we now even lower than that, or is 17% still a good spot to be? I think once we have the full benefit of Patent Box out in effectively 5 years' time, then all other things being equal. And of course, they won't be. You know, sort of mid, mid teens herring still to the 'seventeen. But we are helped by the California issue. But, yeah, on a sort of 5 year view of our tax charge, that's getting a little bit in the noise. Okay. We have room for 2 more. I've said these 2, and we'll come to you afterwards. Okay. Yes. Jean Maile, Alexander BNP Paribas. Just to come back to the manufacturing part of the story from your, from the fundraise. It seems that the 1416 nanometer node machine fed from the fundraise is not a 14 or 16 at the gate length till the 20 nanometer node. So it's really seemed to me that Intel has the lead. And more importantly, from a cost perspective, I mean, what I know the company said that for the first time at 20 nanometer node, they don't see a price improvement. I'm just wondering if that negative trend might actually be a positive trend for ARM as customers might be forced to accelerate the roadmap and for more leading edge core from home? It's certainly a feasible line of thought. I mean, I maintain that what matters is not the geometry, whether it's 14, 16, 20, but what matters is what performance do you get out of the process to, how much area does it take up on the silicon and, how much does it cost to produce the chip? That's what really matters and, you know, companies like Broadcom, traditionally operate a little bit behind the leading edge of process technology, and they find that a very successful formula. It enables them to get products out to market quicker because there's much less uncertainty in the implementation. And that's what works for their business. The good thing about the ARM business is that we supply our processes to a range of different companies, some of whom swear by operating just below behind the leading edge like that, others choose to operate at the leading edge, swallow the uncertainty and the iteration, and and go for the leading edge, and what matters to us. Is semiconductor companies getting arm chips out at the right levels of performance for the market, at the right price for the market. And we recognize that different people have different approaches, and so we have to support all those approaches. That's the last question. Ahmed Harchandani, Citigroup. Thanks for taking my question. My question would beyond networking, what do you see in the networking space today in terms of competitive dynamics and on a 3 to 5 year view? How do you see enterprise networking as a do you see it an opportunity to make money out of this rather than just purely being a mitigation or an insurance kind of a act? Thank you. Okay. On networking, we do expect to see arms, presence in networking increase over a 5 year period. I don't think you're going to see it be massive out to to 2017, you know, we need, 2012 was a year of design wins. It was a year of license enabling with companies like like Cavienne, like FreeScale, like LSI Logic, and so on. And some of those have the design wins with with their customers. But there is a period now, of implementation, and then those products will get introduced and they'll get phased out and are introduced in, in, in phases. Things like the rollout of 4g Networks which is happening now around the world is a great stimulus for people to think about, okay. So when we're coming to upgrade this network, we're gonna make it more power efficient use leading edge technology. That's where plays a role. Right now, the things that getting installed and not based on ARM technology. They're based historically on a lot of power PC architecture, is out there. As for monetizing the MIP's patent portfolio, we did that primarily for what it said on the slide, which is patent risk mitigation. We're not interested in monetizing, the MIPS patent portfolio, we're interested in monetizing the ARM architecture, and that's what we're doing. I think with that, in the interest of time, I do apologize if people have got some additional questions, we're gonna have to bring it, bring it to a halt. Thank you very much.