Earnings Call: Q3 2012

Oct 23, 2012

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Arm Q3 Analyst Conference Call. At this the session. I must advise you the conference is being recorded today. Tuesday 23rd October 2012. I would now like to hand the conference over to your first speaker today, Ian Thornton, Please go ahead, sir. Thank you, Jenny. Good morning, everybody. This is Ian Thompson, Head of Investor Relations are. On today's q 3 results conference call, we have Warren East, chief executive officer, and Tim School, chief financial officer. On today's call, Warren and Tim will take us through the highlights and comments from the quarter's results, and then we'll open up the call to a Q and A session. As a reminder, the presentation and earnings release can be found on the ARM Investor Relations website at www.arm.com/ir. Before I hand over to the team, 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 per professional experience in matters relating to investments the information communicated on this call is being made available only to investment professionals. Any persons present on this call does not have a question and experience in matters relating to investments should not act or rely on the contents of this call. The following conference call will contain forward looking statements, which are other than statements of historical fact, the company's actual results for future periods may differ materially from these statements as they are based on current expectations and are subject to a number of risks and uncertainties. And on this note, I'll hand over to Warren. Thanks, Ian. Good morning, everybody, and thank you for joining our call. I'm going to run through the highlights as usual and then hand over to Tim, who will provide some more detail on the numbers. And I hope we'll cover most of the content in Q And A. So it's been a quarter with very strong momentum. Royalty revenues are at record levels, volume shipments at record levels, licensing at record levels, and our already record backlog at the half year up by a further 6% by the end. So, it's been a very good quarter. We highlighted 3 months ago how various market leaders are licensing on technology and introducing new products into a wide range of end markets and that has continued during Q3 with several important design wins being announced in enterprise networking new products launched in mobile, mobile computers, ARM based servers, wireless sensors for the internet of things. Right across the application spectrum. The fourth quarter has also started very well. We've recently seen Google announced its new Chromebook from Samsung and later this week, on based mobile computers running Microsoft's latest PC operating system will start shipping. Generally, the demand for high performance low cost computing is driving our license revenues and as these products are coming to market, our royalty revenues are growing as well. This quarter, our royalty revenue increased by 27 percent year on year and that's significantly outpacing the further in our R and D capability. It's enhancing our ability to create new products in fact, since the beginning of the year, we've added 252 people with 115 of those joining us in Q3. But at the same time, we've been able to grow earnings by more than 20% and it's been a quarter of record cash generation. So we're going into the final quarter of 2012 with a record order backlog. The opportunity pipeline is robust. And that points to another strong quarter for licensing revenue in Q4. And our Q4 royalty revenue is generated from Q3 chip shipments, as you will recall. And the data that we have from our customers so far suggests that there will be a moderate sequential increase in ARM Royalty in Q4. So overall, we'd expect group dollar revenue for the 4th quarter to be in line with current expectations. So now I'll discuss revenue drivers in a little bit more detail starting with the Processor division and Liza Quarter, for a very broad range of end applications from embedded microcontrollers for internet of things right through to image processes in digital cameras and mobile phones. About a third of the licenses, were signed with companies taking their first arm license and many of these new licensees are located in Asia and we continue to see strong demand from this region. These new companies, licensed across the full spectrum of armed products from Cortex M, they use an embedded app locations through to Marley graphics and Cortex A in mobile and mobile computing. At the high end, we signed 2 BA licenses for enterprise and networking applications. This is including 1 VA Architecture license and 1 VH processor license. We've seen increasing demand for the use of our technology and higher networking applications and these licenses are continuing to build on the momentum that we've seen in that application space generally over the last few quarters. In addition to the V8 licenses, we sold 6 Cortex A processor licenses mostly into consumer and to server applications. That included another license for Big little technology for use in mobile computing. So that brings the total number of parts has now enabled with Big Little to 14 and Big Little as a reminder incorporates our most performance intensive process, so the Cortex A15 coupled with our most power efficient process, the Cortex A7. We've seen very exciting feedback from the partners in relation to this and that we expect to see the first big, little implementation shipping next year. In fact, we have our own, silicon back now and early test silicon is confirming our initial expectations on Big Little and delivering on the promises that we talked about a year ago when we launched this technology. The early silicon is suggesting that big little implementations can produce a 2 times improvement in performance at the same time as halving the energy required. And that's compared with a typical smartphone apps processor that's shipping right now. So, enough of big little at the other end of the spectrum, we also signed licenses for our core XM processes, 13 licenses for core XM mainly for microcontrollers and storage applications and 2 of these licenses will for Cortex M0 plus which is our smallest lowest power processor. That's the one with the potential to control something like an embedded center for up to 10 years on a watch battery. And this new technology enables our customers to have armed software compatibility right across their entire product range. Including chips that might previously have been 8 bit. In fact, free scale this quarter announced a range of cortex M0 plus MCUs designed to help migrate their consumer and industrial application that are currently using their legacy 816 bit microcontroller to arm. Finally, 5 of the processor licenses was or our Marley graphics processor for applications ranging from digital TVs, car entertainment, imaging, and 3 of those licenses were the companies taking their first ever Marley license. So, um's Marley is now the most widely licensed graphics IP. We've sold 69 licenses to over 50 companies. So switching to royalty, our royalty revenues are reported 1 quarter in arrears So, Q3 royalty was generated from Q2 device shipments. And processor royalty revenue was 27% year on year compared with the relevant industry revenues increasing by 4%. So, of that 10% was due to market 8% from Cortex, 5% from Mali. All told there were 2,200,000,000 ARM Processorship chips, reported, during the quarter. And the mobile, non mobile split was fifty-fifty. It's a 16% year on year increase in volume and that was mainly driven by a growth in non mobile markets. It's continuing to gain share in markets like digital TVs and set top boxes as well as microcontrollers and smart digital TVs and set top boxes actually were particularly strong this quarter more than doubling year on year compared with an industry that was down 5% to 10% over that period. The growth in functionality of consumer products like smartphones, tablets and so on is also having a positive impact on our royalty. During the quarter, we saw a doubling of Cortex A class shipments and a nearly fivefold increase in the number of Marley Processors shipments compared with a year ago. And typically as you know, Arm receives a a royalty percentage for quarterex A and an additional royalty percentage for chips containing Marley. So the growth in Cortex A and Mali has helped increase the average royalty per chip from $0.044 a year ago to 4.9 cents now. It's worth noting when we're looking at the quarter's royalties that on a year on year basis, this quarter's compared with a relatively low base because the royalties in Q3 were adversely impacted by a number of effects last year, also including the Japanese tsunami. And when you look to Q4, Q4 2011, royalties were unseasonably high. And that's pointing to a relatively lower year on year growth rate in Q4 this year than that which we've just seen in Q3. So moving on to physical IP now, total physical IP revenue was up 9% at $28,000,000. We saw find 3 new royalty bearing platform licenses including 2 new platforms at 20 nanometers 14 nanometers with global foundries. We'll be working with global foundries to deliver our optimized ARM based system on chip designs including the 14 nanometer binfet process. We continued to see demand for the processor optimization packages, comprising our physical IP optimized for use with CorteX A, We signed 4 more POPs in the quarter bringing the total to 36 and just after the quarter closed, we announced that we're making available a processor optimization pack for the full range of Marley graphics Processors as well. Underlying physical IP royalties in Q3 were $13,900,000 and up 28% year on year. One of the drivers behind that is the royalty revenue from our physical IP as advance nodes 45 nanometers and newer, and that's continuing to increase and now accounts for about a third of the physical IP royalty revenues. In other parts of the business, sales of development systems were $12,100,000. That was a decrease of 3% year on year And as you know, we're transitioning that business to focus on microcontroller tools and premium sockets for multicore systems. At the same time as generally in the market. There is a rise in the availability of open source tools. But the transition for that business remains on track and we expect our development systems business to achieve a stated target of being broadly year on year. Just a few operational points. It was a busy quarter for marketing. We had record numbers of people at ending our partner meeting in Cambridge. We share each year with our partners, our roadmap plans and we had nearly 500 representatives from our partners and key ecosystem companies. And next week in Santa Clara will be holding our annual tech con and we're expecting well over 3000 visitors for 3 days and we'll be presenting new technologies, have exhibit illustrations from our engineering teams and from companies across the ecosystem. Meanwhile, back at arm, we've continued our investment in R&D. We've grown the engineering teams. We've hired over 250 people so far this year and we expect to continue that investment through Q4. And with that, I'll hand over to Tim for some further detail on the numbers. Thanks Warren. Good morning, everyone. You heard, Warren's covered quite a lot of the financial headlines. So I'll keep my comments relatively brief. Just a reminder of the lines in the third quarter, dollar revenues up 18% year on year, normalized PBT up 22% and earnings up 22%. And that revenue growth of 18%, strong in process of licensing, up 17 percent year on year. And as Warren said, process a royalty up 27% year on year. Going into the 3rd quarter, We reported that July that the backlog was at record levels and approximately 60% 60% of PD license revenues in the 3rd quarter were generated from backlog, but we still exited the quarter with backlog up 6% sequentially. The usual analysis of backlog, maturity, and composition is included in the quarterly side set on the website. That shows that approximately 30% of total backlog is expected to be recognizable as revenue over the next two quarters. And as we stated in the earnings release, prospects for order backlog in the fourth quarter look promising. And this combined with a healthy licensing opportunity pipeline points to another strong quarter for license revenues in Q4. Processor royalties again outperformed the industry, up 27% year on year. And as Warren mentioned, the percentage growth year on year has been flat to some extent as royalties in Q3 twenty eleven were impacted by the Japanese tsunami but a very strong performance nevertheless. In previous years, normal seasonality has resulted in about a 10% sorry, a $10,000,000 sequential increase in royalty revenues from Q3 to Q4. However, the macroeconomic environment remains uncertain and industry data for the third quarter indicates that the seasonal uptick typically seen in Q3 was lower than normal. Hence, our guidance on royalties for the fourth quarter. Normalized OpEx in Q3 headline was 1000000 compared to the guidance given in July of range 68 to 70. OpEx in Q3 included a net charge of 1,000,000 due to the impact of a weaker dollar on the accounting for derivative instruments. And this compares to a £2,000,000 credit in the second quarter which you may recall from the half year release. Stripping out these effects from both Q2 and Q3 indicated underlying costs have moved from 1,000,000 in Q2 to 1,000,000 in Q3. And as noted in the earnings release, the increase in OpEx is due to increased investment in our research and development teams. Normalized OpEx for Q4 is expected to be in the range of £71,000,000 to £73,000,000, assuming current exchange rates. Now before moving to outlook, a couple of comments on cash flow and balance sheet. At £88,000,000 net cash generation in Q3 was at a record level, reflecting the increasing profitability of the business notwithstanding the ongoing investment, which Warren referred to in our research and development teams and in the organization infrastructure that supports the company's growth. You will note that there is an other debtor on the balance sheet just over £100,000,000 at the end of September. We regularly evaluate strategic opportunities and in relation to one of these opportunities, we had conditionally committed this amount at the end of the third quarter. This represents the entire investment being contemplated and in the event the transaction is not completed, the amount will be returned to ARM. This investment has no impact on our stated progressive dividend policy, which means that over time. As we have said before, we expect to grow dividends faster than earnings. Now, closing on outlook, Arm entered the final quarter of 2012 with record order backlog and a robust opportunity pipeline for licensing. Pointing to another strong quarter for licensing in Q4. Q4 royalty revenue generated from third quarter chip shipments you know, and data from our customers and from the industry at large suggests a moderate sequential increase in arms royalty revenue in the fourth quarter. We therefore expect group dollar revenues for the fourth quarter to be in line with current market expectations. And with that, throw it open to questions Thank you Your first question from Francois Munier from Norman Stanley. Please ask your question. Yes. Actually, on the cost team, I understand that the budget is going a bit higher. And I think it would be good to reassure us that this will remain under control into next year. And also in Q4, the 1,000,000 pounds you're guiding to? Is there any like bonus payment or anything? I'm just trying to see what's going to be the new run rate for next year. That's going to be my first question. The second question, obviously, is the ASP, which is a very strong, this quarter, a very, very big increase. And thank you for providing bridge on page 13 of the presentation, but what's going to be the blended royalty rate for this year. I mean, last year, it was 1.2. Is it going to be around 1.3,1.4 already this year? I mean, on OpEx Francois, as I said, the underlying cost in the Q3 were at $70,000,000 just at the top end of the range we guided. And $72,000,000 for Q4 it would be broadly in line with, you know, consensus estimates for this year. So, you know, there is no change to our medium term view of the expenses that we need to incur to get the revenue growth. So no change in the shape and costs absolutely under control. And as Warren said, we are investing. We have a lot of opportunity to take arm technology into a very broad range of new markets and we're obviously invested in the R and D capability to execute on that opportunity, but there's no change to medium term guidance in terms of operating leverage that we expect to generate through this business. And Francois with regard to your second question about ASPs, where we haven't got a number for you today on what that's going to look like for full year, we'll wait until we see the full year on that. But I think if you look at the trend in Cortex to Asia So you can see that that's now up to 9% of the total. You'll see Marley volumes increasing significantly And as you know, both of those have a positive impact on both the royalty rate and they're tending to go into chip of higher value and therefore you have a higher percentage multiplied by a higher value and that is driving this average take per chip up and at the level that it's at today, we expect that trend to continue At the same time as we expect the trend in growth of microcontrollers to continue as well. And we'll wait and see what the answer is when we the end of year. Thank you, sir. Now from Merrill Lynch, you have a question from Didier Skamama. Please ask your question. Yes, good morning, gentlemen. And, yeah, congratulations also on my end on the ASP licensing, very, very well done great execution there. Two quick questions, if I may. First on licensing, I think there was a lot of confusion in the last 3 or 6 months on that particular business where people, I think, expected that to slow down dramatically. So can you explain a bit the underlying dynamics in licensing and in particular, whether you've seen any changes in the underlying ASPs you charge or perhaps also the contribution from subscription licenses? And I've got a quick follow-up. Thank you. I mean, yes, I'm not exactly sure Didier where that Fusion would have come from. But, you know, we obviously might, my sort of guidance on, you know, quarterly license revenue has been gradually increasing over the last few quarters and the backlog has continued to go up. And what is driving that really is the broadening applicability of ARM technology to the full computing spectrum. And that bringing existing encouraging existing licensees to license on more widely and it's bringing a lot of new licensees to arm for the first time. So, you know, I think the trend that we've seen in licensing has been fairly clear. So, as I say, I'm not quite sure where the confusion it would come from. No. I think what I mean is skepticism. Oh, yeah. I see them. Well, that's a different word. Sorry. My English is Paul. You're very harsh on yourself. All right. 2nd, a follow-up is basically on the, on the ASPs. If I've done the math correctly, so you've disclosed for the first time that the core tax A class of processor with 35 percent of royalty revenues. So if I've done the math it looks like the underlying ASPs on Cortex A Chips are $5 on non cortex A types chips. So would you assume that the non cortex A type chip sort of effectively ASP would go up in the longer run as you start to see more MALI contribution as well as maybe your higher royalty rates in the non core XA type of chips in the medium to long term? Well, I mean, it's possible, but I mean, these things really do depend on where you see the proportion of straight Cortex M microcontrollers compared with the Cortex A. You know, if you're right with the arithmetic on Cortex A, and that's going to continue. Molly tends to go into the same sort of chip that you would find the Court XA So we're not really seeing Mali sitting alongside something like a Cortex M processor. So I would expect the dynamic that's been established where you have a higher priced chips with higher value on microprocessor cores. That's going to continue as more phones get to be smarter phones as mobile computing turns into reality as we get into servers. And we're also seeing these types of technologies deployed in the networking infrastructure product as well. But at the other end of the spectrum, we do see a huge volume opportunity for microcontrollers and typically these chips will contain a single microprocessor core, it will be a lower priced chip and it will be core that is commanding a royalty break at the lower end of the spectrum. Got it. And then the final one on the Renaissance announced I think this morning on their microprocessor product line based on ARM. I mean, that has been historically a sort of proprietary CPU calls for that sort of products from So how significant are you going to use it for the company? Well, I mean, obviously we've been working with the companies that have that currently comprise Renatus, you know, Hitachi NEC in Mitsubishi for many years and they've all had an arm in the stable. I mean, we do think this morning's announcement is quite a milestone because for microcontrollers per se it has been a bit of a no go area for Arm. It's a great milestone and I would like in it to a couple of years ago when freescale came out with their first microcontroller announcements and we've seen that sort of become more pervasive across the previous scale microcontroller line and this quarter as I mentioned a few moments ago in in the narrative on the call here, even more announcements from free scale. So it's the start of the journey. Thanks so much. Congrats. Thanks. Thank you. Now from Citigroup, you have a question from Amit Hal Chandani Please ask your questions. The first one is, is following up on the previous question on processor royalties? So you've talked about outperformance 10% to 15% relative to the industry. At the same time, you have this dynamic of increasing proportion of Cortex royalties, which in turn have a higher royalty rate. So basically a multiplier effect, so would it be fair to say that over the next, say, 3 to 4 quarters, still display out, that outperformance in terms of processor royalties would be closer to the higher end of the 10 to 15 range or maybe even higher? And then I have a follow-up. I mean, it what you've just laid out there is, it's totally logical there is a double effect with the cortex A and the Mali processes. The only modification I'd make to what you've said is that this is an effect is going to play out over several years rather than several quarters. So in that case would it be fair to say then we are looking at a range of 60 seen or even higher going forward in terms of outperformance? Well, obviously, what happens on a quarter by quarter basis depends on the sort of particular dynamics in that quarter. But as a trend for several years, I think would be comfortable that that positive effect from the high end chips with the high end course is going to continue to be a major driver of arms overall outperformance. Okay. And as a follow-up, if I may, could you provide us with some insight into the licensing of V Eight by various end market it's other than networking. In particular, approximately what proportion of these would be customers that one would normally associate with the mobile computing or smartphone space? And also maybe what proportion of your backlog currently consists of architecture, architecture license revenue? Well, let me start with the VA first while Tim is having to think about the backlog 1. I mean, it's very, very early days for VA at the moment. We would expect we've seen as we mentioned VA providing a hook for things like networking and things like servers. The key differentiator about V8 is 64 bit and a lot of networking applications find 64 bit very useful. A lot of server software assumes that there is a 64 bit processor there. And so these applications really hit the 2. There have been significant barriers to the art architecture and V Eight overcomes those barriers with 64 bps. So that's why you're seeing some presence of V Eight license thing there. In due course and already, we are seeing interest and that interest will turn into reality will see the V Eight products finding their way into computing and high end mobile applications as well. I think that's an inevitability. But it's something which is going to happen over the next several years rather than any time very soon. I mean, on the, we don't break out by type of license, the composition of the backlog. I mean, just a reminder, you know, the backlog is a combination of, you know, longer term licensing arrangements, like subscription deals, which would include architecture similarly. But but but the majority relates to new technology or technology to be finalized that has been licensed where we're not yet recognizing the revenue because there are still engineering milestones. So Architecture is a component, but it's a relatively small component of the overall backlog. Alright. Thank you and congrats for a good quarter. Now from Goldman Sachs, you have a question from Simon Schafer. Please ask your question, sir. Yes. Thanks very much. Actually wanted to ask a question on royalty units in the wireless segment, just because of this disaggregation specifically on the connectivity side, looks like your units actually year to date and wireless haven't really grown, obviously significantly less than your company average and also much less than smartphone growth. So when are we completing this sort of disaggregation of components that has been depressing that unit growth number in wireless. I'm just trying to get a sense as to when you would expect some sort of reacceleration for for you had potential longer on the mobile phone side? Well, it's true, Simon. We've seen, I mean, 6% growth in volume 22 percent in value. The thing about mobile is we've got 2 trends. We've got increasing proportion of phones being smarter phones and containing more functionality typically more chips. And against that, you know, we have the integration trend of, you know, in particular on the connectivity chips, things like wifi and Bluetooth coming together. And that's why there isn't a simple relationship between the volumes of phones actually shipping and the volumes of armed ships within phones because the 2 just are a bit disconnected because you've got these 2 trends happening and they're happening at different rates different drivers and it depends on different suppliers and market share changes and and it's very difficult for us to help you model that other than highlight the underlying trends. And then when you talk to individual suppliers, maybe you can can refine the modeling, but I don't think we're really able to help much more than that. Got it. Okay. Thanks, Warren. Thanks for that. And my second question on the cost side, as you said, another 250 also employees since the beginning of the year added. As you look into next year, what's the sort of preliminary budget plan and typically, I think you almost have what still have almost twice as many employees in the UK as compared to what you have in the U. S. And over time, are you going to continue to just continue to leverage your U. S. Headcount and therefore sort of having more of a natural hedge. I guess I'm trying to understand this is the avenue of cost growth as we go into next year. Thank you. Yes. Well, I mean, we are depending obviously on the business climate and our views of revenue prospects for the for the year next year and the years going forward. You know, we will continue to increase the resource particularly as we get into the new market areas that I talked about and in particular, the enterprise space does require us to do different things. The functionality in mobile consumer and mobile computer We also need to do different things today than we did 5 years ago and that does need more resource. So we are continuing to hire as we said through to the end of this year and we have plans that are sort of fairly fairly similar in absolute terms, but less in proportionate terms probably for next year against subject to how the revenue plays out. I think as Tim mentioned, in addition to that, from a cost point of view, when you're growing people, which in our case is is mainly engineers, then they need tools and infrastructure to work with. And so, no, it isn't just about headcount. In terms of where we put the people, you know, we are hiring and and growing our resources in the US but we're going to continue growing them in the UK as well. Although you talk about natural hedges, with the currency, there is an element of that. It's really about putting engineers where the talent is, where the customers are, and, bearing in mind overall costs as well. And, you know, it costs us a lot less to employ somebody in the UK than it does to employ them in Austin, Texas. Us. But at the same time, Austin, Texas is one of the global centers of expertise for microprocessor design arm has a strong presence there. And so several of our, very major customers. So I think you're going to see the pattern that we've established continue and we don't really see a rationale significant changes. Your next question comes from Justice Mackay from Credit Suisse. Please go ahead. Hi, good morning. My question is around Molly. I see you've had several chipmakers taking both Molly and imagination power VR licenses. And I'm just wondering if you can provide some color on maybe the 2 key factors that impact their selection process, especially in terms of smartphones and tablets. Well, I mean, obviously you need to talk to imagination to get the full color on this as well. I mean, we believe that our technology offers the best combination of power and power efficiency together with performance. And this is a sort of selling feature, if you like, of the Arm Molly graphics Pro against that of course when one is considering the design of a new chip, you look at what you had before in the chip, And so the cost involved in switching between different flavors of graphics process, you know, is an input to that decision and different customers will trade off the a power consumption, smaller area and those sorts of things. Because in the world of graphics processes, the software a lot of the software is written for open standards, open GLES2 type is one example of the standard API that programmers use then it is relatively compared with say a microprocessor, it is relatively easy to to deploy both types of graphics processor. And so I think what we're seeing is something fairly normal. It's rather like several years ago. If you go back 5 to 10 years then some of our semiconductor partners had our microprocesses in some products and mix microprocesses in other products. And gradually over the 5 to 10 years, we've seen our market share increase versus MIPs and now it's shifted altogether in many of the application spaces and maybe we'll see something similar happen in graphics. Don't know. Okay, great. Thank you. Your next question comes from Nick James from Numis. Please go ahead. Morning. Just a couple of questions. One was on the Q4 guidance on royalties. I think last year, the sequential growth in Q4 was about 19%. And I think at the time, it didn't really feel that was necessarily a snapback from the Japan tsunami, but it was more about kind of build for Stone 4S. So I'm just trying to understand kind of how the dynamic is different this year from last year given the macro wise are both quite similar. And then the second question, I think you said on the big lift a little bit you're expecting chip shipments next year which I guess kind of suggests that the time span from license to chip shipments is narrowing somewhat. Is that a trend that we're seeing across the business? Nick, Tim, on the royalty issue. Let me try not to over complicate this, but I mean, if you look at arms royalties in Q3, Q4 and Q1 last year. I think I'm right in saying they went from sort of 84 to 100 to 93. And I think we commented when we reported 100 in Q4 last year that there was probably some element of the weighting of shipments between Q3 and Q4, I. E. Our Q4 and Q1 being more weighted to to Q3 because if you look back at Arm over the last 5, 6 years, it's actually very unusual for Q1 royalties to be lower than Q4. Okay. So I so I think in in two senses, Q4's result last year was, you know, quite unusual one because of the snapback, as you say, from the tsunami. And the second thing is there was probably a little bit of draw forward, from what turned out to be our Q1 royalties. I think that's one fact I mean, the other fact is purely if you look at, you know, the messaging coming out of, you know, the big semiconductor companies for their third quarter, You know, it is, in many cases, lower than normal seasonality. You know, I think we had Marvell overnight, minus 6, you know, I think Qualcomm Mar, down sequentially and you've got TI obviously there in, you know, down in their wireless business. So I think, you know, there are a number of companies who their third quarter, you know, was flat to down and not up. Similarly, I'm well aware of the fact there are a number of companies who are strongly up. And so, you know, it's a mixed picture, but that is the context in which we are guiding our Q4 royalties. Okay. And with regards to your second question about a big little and product launches and and so on. Yes, we expect to see our our first big little, shipments next year. So bear in mind this is very much the vanguard of, of big little. As is normal, we work with lead partners ahead of completing the designs and we've done that with the big little processes as well. And it's always been the case that one of the benefits of being a lead partner with Arm is that you get a time to market advantage. And so you know, arguably some of the semiconductor partners have been getting very competitive and really pushing hard to narrow that time difference or the time gap between when when we sort of first have a design and ship it to them and when they're able to get chips out of the door, It might be a sort of minor effect of that, but I think it's a combination of that and the fact that we're talking about a first silicon that's a lead partner thing. I don't think that it's it's the start of a serious trend to to narrow the typical time delay between license and appreciable volumes of products. Thank you. Now from Deutsche Bank, your next question comes from question. Yes. Thanks for taking my question. I had a couple. The first one was just an operating margins. Looks like they were flat year on year. Despite meaningful revenue growth. So I'm just wondering, if your assumption is right, then there will be a relative slowdown in revenue growth. And could we see in a contraction in margins on a basis on earnings, in fact. My first question and the other one is, sorry to follow-up on OpEx, but maybe to make it a bit easier for you in terms of the context. So I think you were previously indicating that OpEx growth typically tracks around half of the overall revenue growth. I mean, is that the rule of thumb still applicable maybe as a little bit more tangible sign for next year? And then maybe just one brief question. It looks like the dye sizes from an average perspective at Apple looks like they're getting smaller with the shrink to 32 nanometer on a like for like basis. I'm just wondering, does that impact you in any regard? Thanks Kai. I mean, you're right on a headline level, operating margin in Q3, 2012, 44.6 percent. Which compares to 44.6% in Q3, twenty eleven. I think the key thing to take to account there is that as I mentioned earlier, there's a £2,000,000 mark to market charge in the third quarter this year. And actually if you look back you'll find that there is a 2,000,000 credit in the mark to market in Q3 'eleven as well as by the way a 2,000,000 credit in Q2 this year I was just referring to in the sequential movement. So basically again to get your underlying costs, you you need to make this effectively a 4,000,000 swing on FX So actually the underlying OpEx operating margin is quite well up this year versus last. I mean in terms of the 3. As I said earlier, operating leverage is still expected to come through in this business. I mean our operating margin has increased broadly from 30% to 45% over the last 2 or 3 years. And you know, we have multiple conversations with investors about what the trajectory is going to be out into the future. And I think when you look out 5 years and I think we covered this again at the Analyst Day, this margin is going to be higher how much higher is it going to be 50? Is it going to be 55? Is it going to be 60? Will depend on as much as what we're investing in in the out years for opportunity to develop further technology for licensing and royalty as well as the penetration into markets that we currently see. So, you know, very difficult to to sort of give a specific trajectory, but certainly expect ongoing operating leverage over multiple years. And with regard to your second question, Kai, about the, the smaller disizes, I think that's quite a good trend because, what it really reflects is use of more leading edge manufacturing technology. Typically, wafer prices are higher they're significantly higher there. And so that's quite a positive for our physical IP royalty, as I mentioned in the commentary. We've seen good growth in physical royalty. And one of the drivers there is the use of newer leading edge technologies. And secondly, these leading edge technologies are indicative of people pushing the technology further right across the board. And that means using more sophisticated, on processes and as we've mentioned those the more sophisticated ARM Processes, the higher the functionality, the the higher the royalty rate. So I think it's underlying it. It's a symptom of a very positive trend. Thank you very much now from JPM. Yeah. Hi. Thank you. I have a couple of questions. Firstly, could I talk about PRPD? I mean, you look at PIPD, you've seen some recent growth. You've talked about processor pops driving growth, but when you look at the PIPD revenue, it has essentially grown just about percent since you acquired the business. So when do we see this acceleration in PIPD growth associated with the process of POPs? Which will actually make this growth business that we can value as part of the ARM story. Secondly, can we talk about the the processor royalties that you're getting for the non CORTEX A Series Processes. I mean, in Cortex A, you have talked about raising the royalty rate from the historic 1% towards the 2% level. How is that move happening in the cortex? M, for instance, or the cortex R series? And then on and then finally, when we look at the percentage of royalties that you have got from CORTEX A, clearly very strong growth over the last year. But at the same time, when you look at the non XA royalties. They have actually declined from fourth quarter of last year to this quarter, for instance, more than 10%. So trying to understand how we should be modeling the non CORTx A royalties versus the CORTx A royalties because CORTx a clearly growing very fast, but then why is the other business not growing at this point? Okay. Let's start off with this implied T1. I mean, I don't think, Sandy, you're going to see a massive sort of switch but what we are seeing is a continuous trend. As I mentioned in the commentary, the leading edge technology is now accounting for just over 30% of the physical IP royalty. I think the pops are exclusively at those leading edge technologies. And so as you get the leading edge technologies, occupying a greater and greater proportion as more of that 70% that is still trailing technology turns into leading edge technology, then that will be more of the COPS shipping and driving our physical IP royalty growth. As for the cortex M and the versus the cortex A. Well, cortex M and cortex R don't command higher royalty rates you know typically these royalty rates are going to be in the 1% to 1.5% range rather than push push up towards towards 2%. And so, you know, we're not going to see a big change in in royalty rates from those sorts of products. Now what we're seeing overall, and you know as a contributor to arms arms royalty rates. We're seeing the royalties driven by products incorporating things like Cortex M having a negative impact on the average royalty per chip because typically these chip prices are lower than the basket of arm chip prices. And this is what we said in answer to one of the earlier questions. You know, you have a positive effect from the quartet today, the higher value chips with the higher royalty bearing components within them. But at the same time, we have growth in internet things type applications, microcontrollers and so on which the the royalty percentage per chip is constant. You know, in the at the lower end of the of the percentage spectrum 1 to 1 a half percent, and that's multiplied by a lower chip price. There's no news in that that's been trend for a long time and that is going to continue, but that's a incremental profit for us to have a greater of those microcontroller spaces and is overall good news for our absolute dollar royalties. Just a follow-up to that. I mean, I understand that point that, I mean, any royalties is great because it's it's money which comes to your bottom line. But what I'm trying to understand in terms of modeling it as such is that clearly CORTEX A grows exponentially over the next 5 years. But then, we need the rest of the royalties to also grow over the next 5 years, which we haven't seen, say, over the last three, four quarters. So is this because of where we are in the semiconductor cycle or is it because some mix has shifted in this non cortex A, which is causing this to happen? So how should we be looking at that rest of the ARM business to trend over a 3, 4 year period as such? Sandy, this is Tim. I think the best advice we can give really is to focus on the segment penetration slides that we publish on a regular basis. We give our estimates of the total opportunity. We give details of where our penetration is, how it's tracked in recent years and provide commentary on where we think it's going to go. So I think from a modeling standpoint. It's a volume opportunity. As Warren said, the ASPs of the chips tend to be tend to be broadly flat the percentage we take is in the range that Warren said. And the modeling of it is really a question of how fast, you know, we think that ARM is going to penetrate those markets over time. No change there, really. I mean, in terms of very short term, these things are much harder to map out and relate to each other, but longer term, I think the trend is clear. Arm is growing in in each markets, but in all markets, that we're targeting. But those markets are characterized by different chip prices and different penetration levels at this point, but they're all growing. Okay. Thank you. Now from UBS, Your next question comes from Gareth Jenkins. Please ask your question, sir. Thanks. I have one follow-up question from an earlier question I just wondered if you could, highlight within mobile what your average royalty revenue per chip has done in the quarter. I think last quarter you cited it was, growing around 12%. Year over year. Just wondered whether you could give us a sense of what it's done in the current quarter. Secondly, away from mobile, just in terms of networking. I wonder whether your biggest areas of opportunity here are penetrating companies like Broadcom in in home wifi, etcetera, or whether it's actually into totally new areas. And if so, can you maybe detail a few of those? And then, finally, just in terms of strategic investment of I know you don't want to provide much detail around that, but, I just wondered, you know, flipping some of the early questions on the head, why you need to externally invest when your ROIC is so high that it would make sense to actually invest internally more than the next journal. Is it to seed new companies like Calceda, or is it, in Turkey, other areas? Thank you. Okay. Raito, let's start off with the quick one on mobile. Yes, last quarter we indicated that mobile ASPs are growing by about 12% This quarter, we'd say the corresponding number is about 17%. And that, as I mentioned in the earlier commentary, the sort of A and Mali Driven. And in the in the current quarter on a year to year basis, we've we've seen significant increase in in the Moly. Networking, well, the answer is both. Yes, in the home networking product, where, where arm has been present for many years. We are seeing gradually an increase in our penetration there and undoubtedly, you know, moves by companies like Broadcom Health. But I think the structure in the big infrastructure in switches and routers, particularly in mobile in structure as companies roll out LTE implementations and beyond. We're seeing a tremendous amount of change in that marketplace evolution in form factors, people basically trying to address the serious issue of how on earth are they going to power all this equipment and ARM has a very power efficient solution to that. As I mentioned, the lack of a 6 4 bit processor has held us back from some of those sockets. But now people can see that 64 bit processor coming on the horizon. So we are seeing design ins for the earlier 32 bit implementations in many of these applications We're at the design in stage at the moment, very little of this is actually product shipping, but it's going to be a significant driver over the sort of medium 3 to 5 year time period. Yes, guys. I mean, your third question, related to the other debt that I referred to in my introductory remarks, just under just over £100,000,000 at the end of September, And you're also right. I mean, we're not in a position to provide any further details on that. So I don't think there's any point in discussing our rationale when we're not in a position to discuss what we're actually contemplating. So, I think we'll have to, you know, should the transaction close, it will be on we'll obviously be in a position to discuss that in detail in due course. And if it doesn't, that, that, that other debt will revert to cash. Your next question from the line of Umath Wafi from Redburn Partners. Please ask your question. So much for taking my question and congratulations on a good quarter results. I think a little bit of it is a bit of a follow-up from the previous question. On the strategic investment. I understand that you can't talk a lot about the detail of where that investment is going. But could you possibly just tell us that if it actually does go through whether the investment would be, sort of, paid by your cash on the balance sheet or would you actually be looking at any, other sources of, sort of financing this particular project. And then my follow-up is essentially, I think this is for the first time ever that your non mobile units now represent about 50% of your royalty bearing units essentially. So, although from a unit perspective, we understand that, but is it possible. Could you just give us a rough idea of what the value composition of these two areas is, essentially? Yes, I mean, Samantha, in Note 4 to the well, in the Powering up in the leasing, in Note 4 to the statements, you'll see the reference that the these funds which are being conditionally committed were actually financed in the short term by a facility. Because we didn't want to break you know existing deposits that were in place in the normal course of business. So there is a short term facility which you know transaction or not, we would expect to be repaid in short order. And your second question about the non mobile mobile split in value terms. We don't intend to do a lot of detail on this because we don't want our customers reverse engineering these sorts of statements and playing it into the commercial discussions we have with them. But fifty-fifty in volume terms today translate into about sixty-forty mobile, non mobile. Okay. Thanks very much. And I think, sorry, if I can just ask one very quick follow-up. And on OpEx guidance for Q4, you've given that, I think a couple of people have asked this, for 2013, if we're going to, we are going to start modeling it already. Do you think using the base case of what the OpEx would look like for this year would be a fair view into budgeting for next year essentially at this point? Well, I think the things to take into account some are obviously as Warren said, we would in a, you know, in a sort of normal business environment continue to make investments in our resources. I think the other thing you need to do when you think about next year is factor in full year effect of activities in this year as well as things like inflation. So those are the factors that need to be taken into account. I mean, obviously, we are in the fairly early stages of our budgeting for next year and we'll give a lot more guidance on our 2013 cost base at the end of the year. Okay. Thanks very much and congratulations. Your next question from the line of Andrew Gardiner of Barclays. Please ask your question. Good morning guys. Thank you. I had a question around tax and in particular now that we're starting to get a bit more information from the government regarding the Patent Box I was wondering if you had determined with any more accuracy how your tax rate is going to look going forward as the Patent Box is phased in over the next few years. Yeah. Hi, Andrew. I mean, similar message really to the one I gave at the Analyst Day. As you say, the Patent Box has now been slated and it becomes effective April 13 and is phased in over 5 years with 60% of the benefit in year 1, I. E. Tax year April to April 13 to 14. You know, my expectation would be that all other things being equal, arms tax rate will be below 20% at the back end of that period. And obviously if you look at the line between where we are today and that lower rate a reasonable kicker to that is in year 1, which straddles the financial years 201314. Okay. Thanks very much. Next question from the line of Pierre Ferragu from Bernstein. Good morning. Thank you for taking my question. I have a question on architecture licensing again. It seems that that type of licensing is gaining share amongst your mobile clients. You have now 2 very big clients using them. And I was just wondering how is this, how you see that impacting your average royalty rate, as of today? And going forward, if think it can change the trajectory of your royalty rate in percentage terms, do you think that it opens the door for some of your clients, for instance, taking longer to one architecture before moving to the next one because they have more flexibility on how far they can exploit with the architecture they're working on at the moment? Well, the answer is there's no fundamental change there. I mean, obviously, the royalty arrangements that incorporate into our licenses are individual and confidential to the arrangement, but as a rule of thumb in modeling arm, you shouldn't you shouldn't consider royalty arrangements related to architecture licenses to be any from our sort of perpetual implementation licenses. And what about how this could affect the behavior of your clients? So it could encourage maybe, some of them to stick longer to an architecture for moving to the next generation? I mean, not really. I think, we've always had architecture licensing as an option for for some of our semiconductor partners who want to take advantage of it. And historically, we haven't seen people with architecture licenses take any longer over a particular generation than than some people who use use arm implementation. So I don't see any reason for a change in behavior now. And don't forget that many of our customers use combination of both of architecture licenses and implementation licenses. So I don't think that and in doing that, you know, they're obviously making the decisions, but there isn't particularly different timeline to market in either case. Okay. Thanks a lot. I think we've got to make this next one the last question and I'm afraid we're running over time. And please ask your question. Yes, good morning. Just two quick questions. What is the current attach rate of the graphic mali with Cortex A? And second question concerning the royalties coming from the smart car business, you still have a major design win, which are not shipping yet and which could easily boost your market share from 10% to roughly 30%. When do you expect the 3rd major shipment to happen? Well, in answer to the first question, Jerome, I'm afraid we're not disclosing that. I mean, as far as information provided is concerned, we've said that Cortex A shipments account for 9% of the total volume. We've also said that our target for this year is to exceed 100,000,000 units for Mali shipments. And when we were at the half year, we said We're on track for that. At this point in the year, I'd say we're on track for that. If anything, we probably could say we are running ahead of that run rate right now. But we're not running ahead of it to such extent that we want to come up with a sort of revised target. But I think you can say that we're very confident we're going to exceed 100,000,000 units by some margin. I think that's about all we can really say on a tax rate for Marley and CorteX A. As for the smart card design ins, when these are going to take off, I'm afraid we can't really comment on it's such a such a small space that we can't really comment on particular designs because there's only a few players and we're not able to talk about specific customer design wins like that. Okay. Thank you. So, congratulations to Jerome for getting the last question in. With that, I'm afraid we're going to have to draw it to a close. As we said at the start, it's been a great quarter, a very strong set of results lots of momentum in the design wins, lots of excitement in the new applications and spaces we're getting into record licensing record order backlog. We're saying that the opportunity pipeline is looking pretty robust at the moment and prospects for the backlog. For Q4 look very promising and we'll be back at the beginning of February to tell you how we got on in Q4. So thank you very much. That concludes conference call today. Thank you for participating.