Earnings Call: Q2 2012

Jul 25, 2012

Good morning, everybody. Olympic week. So it's a fairly select bunch. So thank you all very much for, coming along. Braving, braving the London transport conditions. They were they were fine at 6 o'clock this morning, by the way. So As usual, I will step through, I will step through business update, and, and Tim will follow-up with some detail on the numbers. It's, it's been a really good quarter. Not one that I would say, you know, here's the standout one thing that we talk about. But actually if you look right across our business, whether you cut it up by application sector, whether you cut it up by product sector, then, then it's been an excellent quarter with some good news. But if we're to highlight some things at all, then on our highlights slides, it has been a continuation of big semiconductor companies continuing to invest in our technology, not just sort of tier 2 type semiconductors. We've had some very serious semiconductor companies who you'd call market leaders who have incumbent architectures that they've with for many years, adopting arm in, in their next generation, to next generation of their products, which is very good. We've signed another V Eight architecture license, and that is that particular one, will be announced in due course as and when they want to announce it, but what we can say is that it's in networking applications. And if there is a little bit of a theme, particularly behind my excitement in these results, then It is the fact that we're starting to see quite a lot more arm activity, in the networking space. And more on that as we go. If you look at it from a volume shipments and a royalty point of view. Again, we'll come on some detail on that. But across all our target markets, we're continuing to outperform the industry at large, and I'll come back to the numbers on that. Just earlier this week, We had an announcement with TSMC about pushing forward on semiconductor process technology and involvement there in terms of optimizing our physical IP, optimizing their semiconductor process and working with our leading edge 64 new 64 bit product. So, a bit more on that later as well. But net net, very good quarter which helped us generate increases is significant increases in levels of profitability. We're maintaining we're maintaining our dividend going forward. So that's the sort of, summary picture. Now if we sort of cut up and start looking at the business, And we'll look at the business to start with from the outside in. So look at it by market sector to start with Obviously, mobile and computing remains very, very important for Arm, and it's nice to see a flagship, mobile product like the Galaxy S3, which was launched during the quarter, containing so much arm technology. In the apps processor, we've got arm microprocessors, we've got arm graphics, we've got arm physical IP. And, I've played with one of these products for the first time only yesterday, actually, And, it really does perform in, it's an outstanding performer. So I can see why everybody is very excited about the Gal CS3. And for us, of course, having all that arm technology in it is good. And by the way, there's also arm in the touch screen. So, that's encouraging to see our processes getting into those more sophisticated touch screens. One thing we are seeing is the value coming through in mobile generally, the increasing number of, smartphones and within the smartphones themselves, an increasing number of Cortex A product And you can see from the little histogram halfway down the slide, the top bar there is the ARM 11. So ARM 11 is still accounting for 40% roughly of the, the apps processes, and the Cortex A is accounting for roughly percent of the apps processes. But within that cortex A, you can see dual core, Cortex A increasing significantly if you compare the situation with a year ago. And that's good news from a value point of view for Arms Royalty because typically these chips are more expensive. So single core moving to dual core and, and cord core is a good trend for us. And note also the underlying growth in sheer volume of apps processes in smartphones, don't forget with all this gloom and doom around, smartphones continues to be an area of significant growth for the business, and we're looking forward to 30% there or thereabouts growth in smartphones, year on year. So, for for the year as a whole. A computer is really like a smartphone in a different form factor. And obviously, the big news of 2012, in the computing front for Arm will be the arrival of the Windows operating system on Arm, and this quarter saw the Computex show. We had an excellent Computex show, the armed partners who, who are engaged in the Windows launch, were showing off their products. They went down very well. And we're looking forward to that launch, which is, it's going to happen in the 3rd, fourth quarter rather of this year. So that's yet to come, but we've seen the products and they're looking good. Just while we're on PCs, of course, it was a quarter in which AMD made an interesting announcement. About adopting ARM technology for use in their computer chips. And this is an example of how arm is actually sitting alongside an X86. So it isn't always a question of either or, This is arm adding significant value to AMD's X86 product line, as security becomes more of more of an issue in these products. Moving on to, sort of down the chain now, these smartphones, computers, and everything, they communicate, and that communication means that they're getting data from somewhere, or they're sending data somewhere, and they're sending over some data handling infrastructure. And the explosion in smartphones and more mobile computing and prevalence of the internet is generating much more data. Some studies suggest as much as 20 times as much data, over the sort of 10 year period from 2010 to 2020. And, clearly, if that data is handled with the existing architecture, it's going to consume 20 times as much power. Which is not a very sustainable situation. If you look at all the electricity generated in the world, then, you know, IT equipment accounts for about 10% of it. And if, if that is going to increase by a factor of 20, then we're going to have to build a lot more power stations. So That isn't going to happen. People are going to look for more power efficient ways of designing this stuff. And here is the opportunity for ARM in networking. And so you see, as I mentioned a moment ago, a new V Eight architecture licensee, engaged in army networking, Freescale. I was at their Freescale Technology Forum a few weeks ago, Freescale busy announcing their extensive networking product range switching to adopt the ARM architecture. We've seen similar, indications from high silicon LSI, TI, Xilinx, and so on. Everybody is realizing that in order to get more power efficient products here, no harm is a great solution. And it's the same power efficiency story, which is behind Arm's activity in servers. We've talked about servers before, great stunning news this quarter from, in service, but just continuation of the 6 year journey that we're on that we're now getting towards the end of this 6 year journey from 2008 to when you can actually go out and buy commercially sensible, arm based servers. And it's actually been a good quarter in terms of, data points on the way. So Calzeda and we had a demonstration of some of the Cal Zader equipment at our Analyst Day here earlier in the quarter. And, you can see an example there in the histogram on the right of the slide showing the energy saving for similar performance. Produced by an arm based calceda product, is not calceda alone. You saw, Dell announcing products based on Marvell. And the hardware alone is, of course, not sufficient with one of the reasons why it's an 8 year journey is software ecosystem existing in the server world needs to become unflavored. And so We've also had some announcements this quarter about that software ecosystem, inching its way towards the Arm world as well. So with canonical announcement that was very encouraging. Continued proof points then of, arm in service. And, next sort of high volume wave that comes along after the wave of networking is going to be the internet of things. And we've talked about the internet of things, obviously, it's not our catchphrase, but certainly, armed technology is sitting behind a lot of the products that comprise the internet of things. And We've seen continuation of, our Cortex M Series, licensing. We've now over 100 companies using that product. Collectively, if you look at the line cards from the ARM partners, there are over 1400 different ARM microcontroller products, that you can go out and buy from our partners today. And, that's, that's going to be a much bigger number by the time all about licensing that we've been doing gets into silicon production. Earlier this year, we launched the Cortex M 0 product. I think probably stood here, I've stood here in February and said we've got a new product coming down. It's going to, on one of them be a small one, and we're gonna launch it later in the quarter. We did that became the Cortex M0, which is the most energy efficient processor for microcontrollers that is out there. And again, at the Frayscale Technology Forum, we saw an an armpowered charger, crank it up with a crank handle, charge a few capacitors up in a range of different microcontrollers. And of course, the cortex M0 based 1 went on or M0 plus went on and on and on. So, that's a great product. As far as the range of opportunities is concerned, it's huge, and we're starting to get design ins. And as we start to get design in. So more and more semiconductor companies are jumping onto the ARM based microcontroller. Party, and, they're making these decisions in order to position themselves for the internet of things wave. In terms of volume shipments at the moment, then we saw another great quarter where if we look year on year on microcontroller shipments up about 20% compared with industry shipments up about 8%. Now looking ahead to, more leading edge technologies, I said we had an announcement earlier this week, with TSMC, and this is Arm and the biggest independent semiconductor wafer fab, a foundry company in the world getting together to actually continue work that's been ongoing together for quite a long time in terms of optimizing their process technology working with our physical IP division to optimize our physical IP on their new FinFET process and using our new 64 bit processor as a vehicle for that development. So it's world leading companies getting together to work from transistors right through to microprocessors to enable our joint partners to produce world leading products. Now I'll look at the business and sort of cut it the other way rather than by end products outside in, let's look inside out. And let's look at processor licensing to start with, solid quarter, up 15% And importantly, coming out of the quarter, our backlog up again and now back at record levels. And I think we've got some data on that a bit later on. We now have nearly 900 licenses, And so that continues to grow the pool of licenses that are out there to generate royalties for the future. If I look at just the quarter on its own, 23 licenses in total, collection of, Cortex A licenses, including our 12 big little licensees who've now got 12 partners signed up for Big Little. At the other end of the scale, the microcontroller end, I was just talking about net of things, yes, more licensing of our CORTEX M products. And new architecture, the V Eight architecture, the 64 bit stuff. We've now got 9 V Eight licensees, including the latest architecture licensee. And we've got this rather sort of, rather ill defined horizontal axis of time, going along the, going along the slide here, we are at the stage where we've done a lot of lead licensing now. We are approaching the 1st silicon, the product launch type phase. And so the 64 bit program is on track. And the interesting thing about 64 bit architecture It is not just about high end computing and servers. It's actually people talking about using it in mobile as well, talking about using it in infrastructure applications, some of the networking applications, that I talked about a moment or 2 ago. Licensing is, of course, essential to drive royalties going forward, and here's an update of the chart that we've shown several times. You can see the licensing on the bottom left of the slide, a continuation of growing our base of licenses nearly 900 licenses out there. Interesting thing to note is that we look at the chart on the right hand side, and the bullet halfway down the slide, only 5% of arms royalty in the last quarter came from the 350 licenses sold in the last few years. So now 95% of ARM's current royalty is coming from legacy licensing. All that new licensing is royalty yet to be delivered. So, that's a good picture for the future. And look at royalties actually and have a sort of panned out during the year. Well, story here is, consistent gain in market share, from a volume point of view up nearly 10% against an industry, which is down, actually. So that's a continuation of the gaining market share story. If I translate that into value, however, value up 14% versus industry value, down 7%. It's a wider gap. And one of the things that's driving that increase in value is the increasing activity in the cortex A land, where increased adoption of cortex A in smartphones, is helping us. But if you look at the waterfall chart, then, you can see, yes, penetration in microcontrollers, we've always said, these are lower price to devices, significant growth in microcontrollers, you can see is putting some downward pressure on the average amount that we earn per chip. And similarly in the mobile world, some of the Bluetooth, some of the Wi Fi baseband modems, these sorts of things, having a similar sort of effect there, they're similar low priced chips. But if we look at the higher priced chips, the networking, it's a small contributor at the moment, hopefully, with all that licensing, it's going to be a more significant contributor going forward. Look at the cortex A's in consumer products, and if we look at the cortex A in mobile apps, you can see a significant upward pressure there on the royalty that is earning per chip. So put all that together, and that's why you get a 14% increase in value versus a 7% decline for the market when we look at arms royalty revenues. Let's, I should just highlight we've put on the slide, of course, 1,000,000 now of Mali devices as well going into those, Cortex A based chips. And as far as Mali is concerned, then we're very much on track for the 100,000,000 plus units that we expect to deliver this year. If I look at our physical IP, the story here is our physical IP is being used right across the different sectors that arms processes are used in. We're continuing with the process or optimization package activity. It was a record quarter for pop the best quarter we've had. So total of over 30 two POPs sold now, still about a 50% attach rate with, Cortex A licensees. So that's good in terms of generating royalty for the future and also good in terms of joint of generating royalty of the future is that this quarter, we had 4 new fabless semiconductor companies adopting on physical IP for their 28 nanometer designs and beyond. So that is good for, for royalty growth going forwards. If we look at, to sort of summarize really, Arm is getting designed into a range of new products. And the sighting thing about this is that when we look at the pictures, they're not all phones and tablets. We are seeing design ins in automotive space, in the networking space, the infrastructures, the base stations, and so on. We are seeing new designs in the embedded world, the driving the internet of things. But of course, on top of that, if you look at the top of the slide, we're seeing Arm getting designed into a great range of new exciting products in the mobile and computing space in that world of internet connected screens. So right across the different market sectors, we're getting more design ins, growing market share, We have strong licensing activity sat behind that, which is building a continuation of this picture for the future. That's all generating enough revenue and profit for us to continue to invest in our roadmap back in arm. So we've grown our headcount by 6% since the start of the year, and we are going to continue to grow our headcount into the back part of the year, so that we can actually put the resource behind the arm activity, where we're forming ever richer partnerships with leading edge technology players to develop more leading edge technology for the future. And with that, I will hand over to Tim, who will put some color on the numbers Thank you. Thanks, Warren. Good news is we've only got 4 slides Waron, I think, has given a pretty good overview coverage of the numbers, in high level and you've seen them in the detail. So what I'll do is as he says, a little bit of color and a couple of comments about the sort of forward looking as we think about our models in the second half of the year for the full year. So licensing, $67,000,000, you will recall, I mean, when we stood up Q3 'eleven last year, and, we've just done a sort of 58 and a 59. And we were sort of well up on the run rate before that. I gave guidance that said, looking out now, it looks like a sort of $60,000,000 plus or minus a higher level, but still potentially lumpy, you know, around the base. And since then, we've done a 67, a 65, and 67. So I think if I stand up here and say 60 plus or minus, you're probably going to yawn ever so slightly. So what I'm going to say today is that I think looking at the level of the backlog and looking at the pipeline, I think to move that base up a little bit sort of $65,000,000 plus or minus as we look forward, I think, is the right way to think about it. And the reason I'm saying that is not just because the opportunity pipeline for the second half specifically is, as we say, they're healthy. And the order backlog at the end of June is as Warren says, at a record level, having gone up sort of small single digits in Q2 after a very slight fall in Q1. It's also about the picture on the bottom right, which shows the relationship between how license revenue has developed since the first half of twenty seventeen and how the backlog has developed since the first half of twenty seventeen. And that's PD licensing and PIPD licensing combined. And in the nutshell, what that's telling you is in H1 2012, licensing is just under 1.5 times higher index than it was H107 whereas the backlog is broadly 3.5 times higher. And obviously, what happens over time, an ARM backlog, remember, is a contractual value of licenses signed. It's not some discretionary list of things that people may or may not choose to do in time. This is contract value. So this gets into license revenue in due course. And so what's happening? That gap there is obviously going to feed its way into license revenue over time. So looking out now, quite a long way. The underpin of future license revenue is very encouraging. And specifically, we do say in the release that prospects for backlog in the second half are promising, which is language we've used before suggesting that we think probably we exit the year with the backlog higher than it currently is. I mean, clearly, that's not guaranteed because licensing is lumpy, but that will be our expectation. So bottom line is outlook for licensing, is pretty healthy from here. Looking at the royalty, I mean, Warren sort of touched on most of the numbers. I mean, clearly, it's another period of outperformance, plus 14 versus minus 7 in value terms, I think, plus 9 versus minus 4. In unit terms, against the comparable periods and gains in all markets and increasing average royalty per chip. I mean, quite encouraging, really, that the 4.8 average royalty per chip this quarter is at the same level as last quarter because last quarter microcontroller growth was relatively muted compared to previous quarters, whereas this quarter microcontroller growth is back strong again And yet, the overall average has stayed up, notwithstanding that suppressing influence. Think that's pretty encouraging. As Warren says, we continue to invest. We're hiring people, both in the R and D capability, notably in our processor division and in our graphics division. We're also obviously scaling the sort of commercial and infra structure part of the organization to support the growth. So there's investment going on there. I mean, OpEx overall, you've seen this morning 1,000,000 against consensus 68. And there's a reference in there to the mark to market FX impact which in every quarter or in most quarters, unless you have significant volatility, is in the sort of plus or minus 1,000,000,000 this quarter because the dollar strengthened when we were marking to market sort of contracts in the balance sheet sort of small credit So basically underlying, in line with consensus, and our guidance for next quarter, broadly similar exchange rates 68 to 70, again, in line with current consensus of 69 for Q3 and full year consensus for OpEx around the $272,000,000 mark looks to that, that would still be a good best estimate, I think. So not, notwithstanding this investment in our R and D capability and the growth of the company margins, about 4 percentage points ahead of consensus and a couple of percentage points ahead of where we were this time last year. Earnings up 20% in the quarter, 22% in the half, and interim dividend increased by 20, consistent with where it's been for the last couple of years since we came out the downturn when we were reminder, we increased it by 10% through the downturn when the world was falling off a cliff. So outlook summary, putting our sort of bit of color behind our guidance, we're in good shape. We're entering the second half as we say, with a record backlog, healthy pipeline licensing looks robust. Underpinning this, of course, is the dynamics that Warren was talking about in terms of more companies using more armed technology in more markets as a long term trend. From the macro standpoint, we were living in the real world. We were all reading about, the uncertainties that surround us The industry in Q2 was up midsingledigit5or6percent that's obviously the context of our Q3 royalty. So you would expect to see a sequential increase in arms Q3 royalty. If you look back over the last 5 years at arms Q4 Royalty, you will have seen numbers a $10,000,000 $16,000,000 uptick on a quarterly basis, reflecting normal seasonality and arms growing faster than the market. It looks from here, as though we're going to see something overall less than normal seasonality. I mean, a number of the semiconductor companies who have guided their Q3 to date, are guiding sub seasonally in Qualcomm's, TIs, STs, these sorts of people. Others are in a slightly different place. So as ever, it's a mixed picture, But I think as we look out over the second half, and we look at the $875,000,000 full year revenue consensus coming into these results, We think with that uncertainty about the seasonality effect of Q4, we think that's a reasonable place to be thinking about ARM's revenue in the full year. I think if there is a risk in Q4 royalty, we think it would be offset by licensing. So 875 seems about the right full year number, which is why our conclusion is, we expect to be in line with market expectations. So summary, strong licensing, lots of design activity, arm in an early stage of penetrating a lot of new mark which is very encouraging. Expect to continue to outperform the industry. We're still investing but we're increasing profitability and generating strong cash as we do that. So it's a good picture, a quick advert at the bottom. Many of you would have gone to our tech con in the valley last year. We're running a similar program this year. It's an industry event, but there's an investor activity in there on the 31st October, our partners were involved. So it's quite interesting to get their perspective how Arm is helping them and how they work with Arm, focus on advanced manufacturing, mobile computing, networking, which Warren was talking about and security. So anyone interested in going down to that contact Ian or Jonathan. And with that, we'll throw it open to questions. Thank you. Didier firsthand first up? But a long way from the mic. Thanks. It's Denise Emma from Merrill Lynch. First question, just wanted to have your views on the ASML, Intel transaction, you know, what are your thoughts as to what arm needs to do, can do in response to that? And in particular, I'm just wondering whether the arm partners I've talked to you about it and whether they would consider a similar transaction with them. I've got a follow-up. Yeah. Well, I'll sort of kick off. I mean, it's not something we've spent a huge amount of time discussing and cogitating on in, in armed, to be honest, we know that the world of equipment supply is small. The number of customers is small. And, in order to move to 450 millimeter wafers, then no significant investment is required, SML have a business model where they get money from their customers for the products that they sell. And, running that business model, they reckoned that they were unprepared to invest in, 450 nanometer development and Intel wanted them to invest in 450 nanometer development and SML presumably said, well, if you want us to do it, you have to fund it. And, that's, you know, how I would imagine it. Well, we have a similar business model where we get money from our partners for selling licenses, and they'd love us to do, many more products. But, you know, we, we have to balance the books. And so we say no. If you want us to, invest some more, then you have to pay some more. And we generally manage to get them to pay for the extra value of, which involve more investment from Arm. So all the 64 bit products, for instance, we are selling these licenses, at a higher level, and we've not had reason to turn to our partners and say you need a different kind of commercial, arrangement, I. E, an investment in armed to fund that sort of development. They invest in arm through writing as purchase orders and they agreed to pay us higher levels of money for a higher value license. So I think the reason you're saying is that licensing could be sort of brought forward as a result of this transaction as a retaliation from the unpartners, something? Well, I don't anticipate a big sort of retaliation. I don't think it is about retaliation. It's about, you know, people wanting to build 450 millimeter wafers instead of 300 millimeter wafers. And, whether Intel and ASML decide they need some different kind of commercial structure to to make that happen is up to Intel and ASML, as I say, you asked, did we have discussions with our partners about something similar? And no, we do it through the standard business model, and the standard business model in our case seems to work because people are prepared to pay more money for products that cost us more to develop because we're able to show that those products deliver more value. ASML are in the business of supplying to the whole industry, and that's not going to change. The fact that their customers entail or others in the future might be funding certain pieces of it. It doesn't mean that that technology is not going to be available at all, which in a way is the key thing from our perspective and from the ARM Partnership perspective And then, I mean, the counterargument to, aggressive CapEx And Process Technology is CPU innovation as you mentioned in the past. So I was just wondering, you know, what you can say about the progress of, big, little, you've announced a new customer also for the NV8, what sort of feedback you get from, not just the semiconductor companies, but also the OEMs and the broader EcoC them about big little, whether they think that's enough to sort of keep, intel at bay, when it comes to power consumption. Well, a couple of things. I don't think it's all about keeping intel at bay when it comes to power consumption. There is an underlying demand for making microprocesses more efficient. If we look over the next decade, then there's about a thirty fold increase in, the amount of processing power that people expect to find in things like phones and tablets and those sorts of things. And there's about a 2 times improvement in battery capacity. So there's a massive gap to close by intelligent design of the products. You can't just rely on the batteries to get better. And that applies whether it's Arm, whether it's Intel, whatever. And that, I think, is driving our, that's what's motivating us to create microprocesses, which are ever more efficient. Big little, achieves, you know, we have yet to see the silicon, but, you know, we, we anticipate that we can achieve multiples in terms of efficiency rather than, 10% improvement here, 20% improvement there. Big little we expect to see about a fivefold improvement in efficiency when you look at the whole system. And So our partners are buying into that, their customers are buying into that because they want to close this massive gap, but needs to be closed in terms of performance of the thing and amount of energy you can get out of the battery. Final one, just maybe a quick one, housekeeping question for Tim. If I remember correctly reading the press release, you're talking about, I think, 1,000,000 for data center. In Cambridge, why do we need to build that? That doesn't tell you that was behind it? The data, I mean, if you think about what the arm R and D people actually do, is they're designing products using machines. And they need compute capacity. And the more engineers we have and the more complex the things they're designing the more capacity, the more capacity you need. So yeah, what this is, is a every so often, you're going to get a step change in your sort of production requirements. And that's what we're doing in due course over the next 3 or 4 years. There may be another data center built somewhere else in the world. So it looks like a fairly significant step up, but it's kind of an investment for the next 10 years. So this is not something you're going to see keep repeating. Let's move along, right around here, and then we'll re open this site. Yeah. We try to be shorter. So on the, on the FinFETs with TSMC, Can you give us maybe a bit more comments about this? How do you think it compares with Intel 3d or whatever they call it? And how involved your PAPD team is involved to extract the transistors characteristics of those transistors And also, I think the timing has been brought forward by 1 year, I think. So that's the first question. The second question is you've been talking about 64 bits. So the VA architecture, taping out relatively soon. Maybe could if you could give us a bit more details on what type of products would come on the market the next 12 months for this 64 bit, if it's only servers and other things. Thank you. Okay. I'm dealing with the FinFETs. First, a year or so ago when Intel Technology, we said, yes, all right. This is something which has been around in the semiconductor industry for the last decade or more. It's one of the ways of making transistors more efficient, but it comes with a load of associated challenges about actually making the stuff and making them the yield, and that sort of holds back the semiconductor industry from, from, you know, taking that step. Intel took the step and announced that they've taken the step. They were the first ones out of the gate, announcing that they were doing this. Course, everybody else has been the same researching it and playing with it for the best part of the last decade. And, TSMC, had their plans in place. They just, you know, were not choosing to go public on, on FinFET, until they were choosing to go public. And we've been working with CSMC on, you know, next generation processes, for some time. We always stood here and done presentations and talked about, you know, tape outs on 20 nanometers, the first arm save out on 20 nanometers was well over a year ago. We've take that 1st 14 nanometer, designs already. With some of these players. And, you know, it's it's R and D activity. As and when the foundry wants to make some of these things public, then they will, and that's what TSMC had chosen to do, this week. And they chose to I guess, communicate particularly with their customers who are armed partners by saying not only are we doing some process development in the backroom, but we're also thinking about how you're going to take this technology to market the sort of products you're going to build with it you're probably going to build ARM based products with it. And so we've been working with ARM and ARM's physical IP division to make sure that their physical IP, their microprocessors, and that our semiconductor process technology, works well together. And that's all there is to it. On the second question about 64 bit, then as I said in the presentation, it's being used across a range of different applications, including mobile and computing. Servers is a very visible application area where as we've said before, our penetration in the server market is limited until such time as we deploy 64 bit solutions, and I think it's well known that, you know, one of our early 64 bit architecture licensees is targeting server applications, and so probably you'll see that silicon fairly early on. Thank you. If we move along and move move back. Thanks. I guess, firstly, just a related question. I think Calceda provided some interesting milestones this quarter in terms of the server progress. I just wonder whether you can talk to how you feel the progress is going there in terms of actual sort of processing. Secondly, I just wondered whether You provided the interesting slide just on the multi core effect in quarter. I just wondered whether you have a sense of how much of your units shipped in mobile today is actually on, quadcore based devices versus dual core. So the impact of quad core presumably is still to come. And then just secondly, some housekeeping, maybe a couple for Tim, sorry for, Tim, yeah, just in terms of the cash is creeping up, it's been creeping up for several years. And I know the historic argument that as a percentage of your market cap, maybe it's not quite as high as some of the technology peers, but your business model is quite different. What's the intention for the cash bar going forward? On Calceda and the server activity, I haven't really got anything else to say. We're very pleased with the progress the data that's coming out suggests that all the experiments that we did before and all the simulation that we did before is, being proven in, in silicon. And bear in mind, this first calzeta silicone, is essentially Cortex A9 based, and so I think I've said Cortex A9 was a call we developed very much with mobile in mind. Cal Zaida have added system on chip infrastructure to turn it into a server chip, but it's still a microprocessor call that was designed for mobile. When you put that server infrastructure around the microprocessor core that's been a bit more designed with server applications in my like for instance, Cortex A15 or moving on to V8, then you're going to see even better, performance at these levels of power consumption, but we're very pleased with the data that's come out so far. We're also pleased to see other arm silicon partners starting to get a bit more public with their activity on servers. The dual core quad core, I don't know, that I can talk specifically about numbers, but I'll just point you to shows like Mobile World Congress and CES where what tends to happen is that you sort of have an announcement about product 1 year and they turn into reality the next year. And we saw in the 2011 season, a load of dual core devices being announced and they've now sort of materialized into phones. And it was about a year later, Adney shows that we saw the Codcore products announced, and so we'd expect that sort of trajectory to continue. Over and above that, some people have gone a little bit further ahead with the quad core, and they're using it as a sort of marketing tool and saying the record is better than dual, it's a bit of a marketing thing, and, you know, it's up to our semiconductor partners to see what performance they can actually what performance for a given level of power consumption they can actually achieve. We push it up on the slide as multicore and put the 2 together because that's really how we view it. I mean, no, nothing particularly new, to say about that today. I mean, you're right. We managed cash down before the downturn, to around 50,000,000 quid by the end of 'seven. We bought back 16% of the stock the period leading up to that and into a little bit into 'eight at about 1.20. We have let the cash write up through the downturn. And since we've come out of the downturn, we're now just under 1,000,000, which, as you say, is sort of 7 or 8% of our market cap, although that is in a sense, quite an academic point. But it doesn't, it means, I mean, certainly, if you benchmark the sector, it doesn't look an unsightly amount, but I mean, the bigger point is what are you doing with your cash and where do you need it? Where is it going? I mean, the plan of record remains, as the base case, a progressive dividend with a gradually growing payout ratio. Now at the moment, I mean, you look at half 1, our interim dividend is up 20% broadly the same as our earnings. And I think in a period of fairly considerable macro uncertainty, I think growing a dividend 20% in line with your earnings is not an unreasonable place to be, especially at the interim. This is something that's being the trajectory of this payout ratio increases is sort of constantly reviewed by the board. But at the moment, we're comfortable with the level. It may well be when we look out that an increasing payout ratio, depending on the trajectory, is insufficient to stop the cash power from growing. Beyond the level that we feel comfortable with or need. And in which case, we could do other things. We could step up dividend. We could we could return via special. There are other things that we consider. But the plan of record at the moment remains a gradually increasing payout ratio from here. I. E. Dividend growing faster than earnings over time. I think if you just sort of move it back and along. We'll go feed Zag. Thank you. It's, Kai Korsler, Deutsche. A couple of questions I had. The first one was just on the on the attach rates for GPU or for Mali for that matter in set top box and digital TV market, where do you think, say it around this time, where we are in terms of percent terms of overall volumes and where do you think that goes maybe on a 5 year view? That would be my first question. The second one is, looks like, particularly in the lower end of the smartphone market, they are sort of increasingly platform solutions, which rather than using an apps process and a GPU use a beefed up GPU as basically the only to drive the only processing function. I think Broadcom has one of these, platforms out there. So I'm just wondering how or whether you see a risk that may be particularly low end of the market, call them beefed up GPUs take over more of the historical, operational, application process of functions. And the third one was just on a like for like perspective, if you could remind us maybe of the, potential royalty premium for 64 bps versus 32 bps, please. Okay. On the Moly attaching digital TVs, we expect to be in 70% ish of for digital TVs that we have processes in to have, to have Molly. We expect to retain our number one slot in TVs this year. Exactly where we are at the moment. I'm afraid I can't tell you. He looked at the interview. Yes. So we don't really have an update on the full year view at the midyear, I'm afraid. As I said in the presentation, we're very happy with the Mali shipments, that our partners are reporting in the latest, sort of quarter just gone, we think we're on track for the 100,000,000 units plus and obviously digital TVs are part of that. One of the low end smartphones and the GPUs, that's an interesting question. I think people will, you will see people experiment with this concept of GPUs being used for computing functions. I personally am not seeing it as a serious threat to our applications business at the moment. Our applications process of business in mobile phones, probably even less so in the low end phones where you want to produce something, really cost effectively And we have, CORTEX A products like CORTEX A5, like CORTEX A7, which are really designed I mean, coordinate the K7 is a big little, it's a little half of a big little combo, but it can also be used on its own. And only its own, it's our most efficient apps processor yet. And in terms of delivering into that low end smartphones space. I'd say it's a lot less effort to, to use a Cortex A7, efficient processor on its own, and coming with all the soft ecosystem that already exists around the Cortex A Series product. That said, if the world does at some stage, turn to, GPU, then, you know, if we look at our Marley graphics family, we do have two parts to our family. We have the pure graphics and we have the GP GPU, series as well. And so to an extent we're sort of hedging our bets, but I don't see it as a serious threat. On a 64 bit premium, for, or sort of royalty premium for 64 bit. I mean, this is a continuation of the trend we've been on for a while where basically if there's more value in the microprocessor, the royalty comes through at a higher rate. And we've talked about Cortex A being sort of typically in the, sort of one point 5% to 2% range compared with pre Court XA being more in the sort of 1% to 1.5% range. And that trend will continue with our VA's architecture. So it's going to be at the higher end of of that range. Yep. I think we're we've got one here, but, yes, we've got one here first. And then are we coming over next one, Simon? Just a very quick one, if I may, Andrew, Dunn from RBC, just following up on royalties. Your slide number 5 on smartphone application process at times with Singapore, multicore, etcetera. Could you just remind us on either the absolute or relative royalty rates you might get for each of those segments? Sorry. So multicore single core and, an arm 11, just a relative royalty rights for you? Yeah. Well, typically, arm 11 is that the in the sort of 1% to 1.5%. And typically, Cortex A, as I say, is in the sort of 1.5 to 2%. Cortex A-nine processes are less than Cortex A-fifteen, so there'll be more at the sort of 1a half of that top range, and that's the percentage. You then multiply that by the chip price. And if it's a dual core chip or a cord core chip, typically it's more expensive than, a single core chip, but it really is a matter for the semiconductor partners and where they are sort of positioning their their chip. So if you've got a single core A9 with, you know, very fancy video accelerators and graphics accelerators and some integrated Wi Fi or something like that. It could be just as expensive as a dual courtship with with fewer, fancy bits on the side. So, I don't think we can clinically say single core is this price, dual core is this price, and the quad core is a higher price. Clearly, there must be a sort of trend there that Otherwise, people wouldn't do it. But, but I can't tell you the data points. Simon, I think we're over here. Hi. Thanks, Simon Schafer, Goldman Sachs. I want to actually stick on this royalty debate. I guess in just in basic terms, if I look at Slide 10, think you talk about 95% of your royalties still being from licenses signed 4 years ago. So in rough terms, I mean, is it fair to say that 95% are collecting a 1% rate and then the 5% are collecting a 2% rate, or how should we How should we think about that? Yes and no, what I would do to refine that model slightly, I would make one refinement. That is in your sort of 5%, I would split it into the microcontrollers and the non microcontrollers. And it might be fair to look at, or you could split it as Cortex A and others. And the others, you'd still count at the sort of 1% end the cortex there, you could allow it to go a bit higher. And when do you think that 5% will be 25%? How long that's why we publish the, little bit, the chart on the bottom. We would expect a similar sort of trajectory to what we've seen in the past. And then just on the licensing side, Tim, you sort of alluded to it, but the $5,000,000 number yet another step up. In essence, is this just because people are paying a higher value per license or there's not necessarily more people. I mean, I appreciate there's a few more different verticals that are being added. To the licensee base. But what's really the delta? Is it just a higher price per license? How should we think about it? Well, it's actually, I mean, it's multiple factors. I mean, clearly, there are more companies buying armed licenses today than they were before. I mean, if you look back over the last couple of years, about a quarter of the licenses we've signed are with new companies. Okay. So that's not insignificant. Albeit quite a lot of them at the cortex end. I mean, I think in a way, the most interesting thing is, is that log line that we were looking at because a lot of the, a lot of the bigger deals that we've signed in the last couple of years have really found their way mostly into backlog. Not yet into license revenue. And it's quite interesting looking at the, if you look at the license growth in that bar chart, you can see that the growth is coming from backlog. But the turns business is staying reasonably consistent. Now you could argue with lots of big companies entering into things like more subscriptions, it's actually very encouraging that the turns business is staying at the same level on top of an increasing backlog. So I think it's multiple dynamics, but I mean underpinning it is arms addressable market is much broader across the computing spectrum than it was viewed to be 2, 3, 4 years ago. And so now companies are licensing arm. The traditional companies are using more and more more and more end product divisions because of the, in a sense, the typical outsourcing dynamics and the technology pressures, but then there are also new companies coming into the frame first time, both at the top end towards the servers and at the lower end towards the internet of things. And all those factors are driving it. I think we'll continue to move back to the end if we get time for a second one if and I haven't forgotten, we've got one at the front here after this one. Hi. It's Jonathan from Liberum Capital. Two questions. One is on the FinFET agreement with the SMC. It's on 64 bit. So I was just wondering what plans you have on moving the 32 bit vortex A15 kind of products to FinFET. Do you have another agreement with them don't know about and will the timing of instruction of that be roughly the same as the 64 bit site? Second question is on windows on ARM, there have been not that many companies and devices being announced so far for Q4. And presumably some of that is because of software ability issues and things like that. What is your estimate of how much time it'll take for that software ecosystem to to come up to comparable levels with X86 architecture. Are we talking about a couple of quarters or is it going to be a year or is it more than that? What's your view on that? Okay. Well, let's answer the first one. The FinFETs, yes, the announcement is, is with our 64 bit, processor because just as we want to work with TSMC's most advanced process technology, they want to work with our most advanced microprocessor, making a, a 20 nanometer FinFET and later 16 nanometer FinFET implementations of our 32 bit processes will fall naturally out of, out of that development activity. We're optimizing, our physical IP to build microprocessors, we just happen to be using our, our new 64 bit processor as the vehicle for it. The same physical IP will be, very easily used to implement, our 32 bit processes. And what's your estimate of the timescale introduction? Is that a 2014? Or is it 15? Well, we have to, stick with the announcements for now. And I think as in well, as in when DSMC want to make more comments on when these things are available, then they'll they'll make more comments. As I say, you know, from a development point of view, where we're taping out stuff all the time. Windows on arm are not that many announced and our estimations for when things become, come widespread. As I said, we're very excited to see the windows on arm products that are going to be launched in the fourth quarter of this year. My expectation for volumes of those things, in fourth quarter of this year, incredibly modest. And And frankly, I'd rather see fewer good quality products than many products that don't go down very well. So the fact that Microsoft are controlling the launch very tightly and working with a limited number of partners, we see as a good thing. We're not changing our estimates for, an expectation that via about 2015 weeks effect that we'll have a share of the laptop market of maybe 15% to 20%, that hasn't changed. And, and I think that's a sort of measure of how we see the rollout of that going. Does 2015 still a few years away? Let's, keep, forgotten, but let's keep going going back because you've got the microphone there. Thanks. It's Julian Yates from Investec. Just a quick question on the, on the licenses and backlog, Tim. If we look at the backlog, it seems as though you maybe take you more from the backlog into the revenue line over a period of time. So I'm trying to understand, should we assume the backlog at some stage level soften starts declining as more of that backlog gets recognized into the P and L, or do you think over the medium term that backlog should continue to increase? Well, I mean, backlog contribution to license revenues typically in the 40% to 60% range per quarter. As it happens, this quarter is up at the 60% range. Therefore, in a sense, even more encouraging that the backlog is up quarter on quarter, even with a reasonable, yeah, a reasonable drawdown into license revenue. And, you know, so therefore, essence, whatever the recent dynamic has been, the fact is the backlog is 3.5 times higher than it was in the first half of 2007. And frankly, that gap that I showed between license revenue growth and backlog growth takes a very long time to unwind because of license revenue recognition through periods. So no, I mean, obviously, no backlog is inevitably lumpy quarter on quarter, depending on which deals, which profile of deals assigned in a given quarter. But we're not just about to stare at a reduction in that backlog. So we should worry about the increase in license revenues of 1,000,000 being a reflection of yourselves taking more from the on the of a bigger backlog. And we've moved from a world of 30,000,000 a quarter to 45,000,000 a quarter to 60,000,000 plus, and the backlog's still going up. Tree pollution? Thank you. Let's come over here to the front line. Thanks. It's Sumant from Raven Partners. Just three quick questions, if I may. First is, on your sort of market share. I mean, given that about a third of your licenses are still sort of not generating much royalties yet. And majority of them are in the non mobile sector. What do you see in the next 5 years if you don't attain any further assuming if you don't attain any more licensing license in this space, what do you see your market share growing to just from these licenses which you've already sold out? In terms of royalty market share. The second question, is to do with the FinFET again. Is, am I doing most of the foundries are sort of offering different node transitions and in between, I assume, FinFET would be an option in between 20 nanometer and probably 16 nanometer. So my question really was that would you be licensing FinFET technology separately as well, or is this an exclusive collaboration with, with TSMC? And then is there a royalty increase coming from, products based on FinFET, PIPD, so to speak? And my final thing is on, network opportunity in networking equipment opportunity over there. I mean, just trying to understand in the networking equipment, what, how big as a percentage of your royalty revenue in about 5 years' time do you see networking, so to speak? I mean, I'm talking separate from servers. You're talking about, there being networking opportunity in terms of power saving. I'm just trying to understand what kind of chips are we talking about and what kind of cores are we talking about within them? Okay. Yeah. I mean, I think if I understand your question correctly, I mean, talking about the overall market share, which currently in 2011, our estimation is we're about 30% overall market share in better process market. And you can see from our market segment slides, which I think in this pack are in 20212022. If you look back over 5 years, that's grown from 17% to 30% some years, it's growing 3%, sometimes 4% last year, 5%. We don't see any reason to suggest that the growth rate of our market share doesn't grow at least that rate as we look out over the next kind of 5 years. So a good number to have in your head might be about 50% in a 5 year view, which would obviously be, you know, around 4% per annum. But I mean, there are probably more reasons to think it's going to be at the high end of that than the low end given microcontrollers and the volumes associated with it. And in a sense, if we were talking about this 9 months a year ago, we wouldn't have been talking about networking in the same way. So there's a little bit of, flicking of a switch going on. Actually that's a bit of a pun, isn't it? But there's a bit of a flicking of a switch going on, I think, in networking, which might drive it. So I say, on balance, I mean, Ian and Jonathan update this every year. Most years we update it, the actual market size grows a bit because the addressable market for Armstrong grows. So, but bottom line around about 50% seems to us pretty reasonably win a 5 year view. Okay. The next question was about FinFET and whether it's essentially a different physical IP product from Arm. And the answer is, well, it's a different flavor. We have different flavors of our physical IP for each semiconductor process. And so, you know, a, a low power version of a given node is a different physical IP bundle than, than a high performance version. And a FinFET is another flavor again. So it would be an incremental licensing opportunity. But the fact that our physical IP is used would generate the royalty opportunity. But, it's not an incremental royalty opportunity. The fact that it's FinFET, it's just another flavor. So now if we're going to have a 20 nanometer low power planer, flavor, and the FinFET flavor. The chip's only going to be made out of 1 process technology, and so the royalty opportunity is the same. Networking equipment and what sort of share can we expect in that? I think to Tim's point, we update the numbers every year. We will be updating the chart in the sort of the end of this year, probably when we look at the networking line, and you'll see on this slide, which was produced at the beginning of this year, we do have one of the green arrows as in key growth area for Arm, beside networking on the slide. So we are excited and we have been about this area. Maybe the, the absolute numbers there might be one of the areas, whereas he says when we update, we quite often revise the size of the market as we see bigger opportunity. I'm very encouraged by the reception that our customers' customers are providing to arm technology in this space. And I don't see why we can't have a very large share of this space as current incumbents have a large share today. I think the power efficiency benefits of ARM and the ecosystem benefits of ARM and the business model benefits of ARM applied just as well to this networking space is the due to mobile computing. I think we're on 1 more. Was there anybody at the back who didn't ago yet. He wanted, you know, so did he a bonus bonus ball in the mail? Yeah. Thanks. We just wanted to do on this. I mean, we all talk about application processes and so on. I was just trying to have your views as to whether we need higher performance CPUs in modem, IG, does LTE require a higher performance modem? Does Wi Fi AC require a higher performance modem And in that, if that if the answer is yes, what sort of upside in royalty rate broadly are we talking about? And the second bit is regarding, basically the ARMV8 the bears or, let's say, those who are skeptical about Arm penetrating the server market, and the notebook market talk about lack of ecosystem support. They talk about the lack of DEC software. These sort of things, what's your response? And more importantly, what's the feedback you get from the likes of HP and Dell that are dabbling with the technology? Okay. Perceptive question on, on the modems. I mean, in fact, what you're trying to do with these modems is squeeze an awful lot more data down the same size pipe, and that means a much more complex coding system is required. And just to put it in perspective, some of the sort of LTE plus type modems, if we look at the complexity of that and compare it with, say, a 2G modem, you're talking about a factor of 500 or so in the complexity. And so, actually, they do need higher performance microprocessors, If we look at the modems which are shipping today, sort of the 3G type, modems, then, it's not a linear relations, it's not a sort of linear journey from 2G to LTE plus. So actually, the 3G ones are just a little bit more complex. Than the 2G ones. And so today, most of those sorts of products would be ARM11 type products versus arm 7 or arm 9 type products. So a little bit more performance. But from a royalty point of view, no real sort of significant a, royalty opportunity. We've had a lot of design ins for a cortex, our Forte. Products and even some Cortex A products in modems, but these aren't really shipping in volume today. And these are for sort of LTE initial LTE type modems. But as we look to the more sophisticated LTE type modems, then yes, they will use more sophisticated processes because they say they are much, much more complex. And there will be a corresponding royalty upside opportunity there, it's just not really in the numbers yet because I've got the numbers off the top of my head, but the vast majority arm 11 based, today. And the last question was about I mean, pretty, pretty positive so far, but I mean, they have to see the silicon. And, the other thing, as you pointed out, 64 bit. It's a new, new instruction set. The software has to be, has to be written and so on. So it's early days. But they wouldn't be engaged in these programs with us if they weren't actually quite positive about it. Thank you. That is the last question. And we've actually finished roughly on time. So, thank you all very much. We'll look