Earnings Call: Q1 2010

Apr 29, 2010

Earnings release

Thank you very much indeed. Good morning. This is Ian Thornton, VP of Investor Relations at R. On today's Q1 results conference call, we have Warren East, Chief Executive Officer and Tim Score, 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 to a Q and A session. As a reminder, the presentation and release can be found on the ARM Investor Relations website at www.arm.com/ir. Before I hand over to them, I just have to read out a few words with respect to this conference call and what we're about to discuss. The contents of this conference call are being directed only to those of you who have professional experience in matters relating to investments, and the information communicated on this call is being made available only to investment professionals. Any persons present on this call who does not have professional experience in matters relating to investments should not act or rely on 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 of 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. Thank you, Ian. Good morning, everybody. Thank you for joining our Q1 2010 conference call. I'll run through some of the business highlights and then hand over to Tim to provide some more detail on the numbers. I expect though that we will cover much the content during the Q And A. I'll just start with a bit of context yesterday at 3 pm actually was the 25th anniversary of the first arm process that coming to life at Acorn. So this morning, twenty five years and very nearly 1,000,000,000 on processes later, we're pleased to be announcing what we think an excellent set of results for Q1 twenty ten. There are lots of healthy indicators of arms growing strength for the medium and longer term as well. We've entered 2010 with a record backlog, several new products ready for launch during the year and a strong competitive position as we're gaining market share in long term structural growth markets right across our application spectrum. During Q1, the market has continued to recover from last year's downturn and ARM has continued to move forward in line with our expectations. We've again outperformed the semiconductor industry as a whole with all of our businesses making an encouraging start to the year. We're continuing to gain share in all our target markets. Shipments of ARM based chips increased by 50% compared with a year ago, which are contributing to earnings expect our full year $20.10 revenues to be in line with current market expectations which have been rising steadily through the 1st 4 months of the year. Now I'll just discuss some of the drivers for revenue in different parts of the business. In a bit more detail, we'll start with the process of division In the Processed Division, we signed 17 licenses in the quarter with non mobile applications continuing to drive the majority of those licenses We saw demand for arming smart meters, intelligence sensors, solid state drives industrial control and automotive applications. Cortex products accounted for 13 of those licenses, including 3 licenses for Cortex A products, driven by smartphone and mobile computing applications and 9 licenses for Cortex M products mainly for use in microcontrollers and sensors. And alongside these new CortEx products, a further 4 licenses were sold for older armed processes, armed sevens, nines and elevens. And whilst there were no Mali licenses signed in Q1, the opportunity pipeline for Mali looks healthy for the remainder of the year. Switching to royalty now. And just as a reminder, Arm's royalty revenues are reported 1 quarter in arrears. So Our royalty for Q1 was generated from semiconductor devices sold in the fourth quarter of 2009. It was a record quarter by some margin for volumes of ARM Processes shipped by our partners who delivered a total of 1,400,000,000 on processes to their customers. There's been a doubling of shipments in Cortex M products that they're starting to ship in volume now. Driven primarily by microcontroller and Bluetooth products. And this combined with the doubling of Cortex A Shipments, which was driven by smartphone growth means that Cortex overall is now contributing 5% of the total volume, up from 2% in the fourth quarter of 'nine. Meanwhile, arm 11 is now representing 6% of overall volume. Again, that was largely driven by smartphones. Royalty revenue increased to record levels. It was up 33% year on year versus growth for the industry when you exclude memory and analog 18% for the corresponding period. And this difference is a measure of arms continued market share gain. Particularly in storage, set top box and digital TV. And as I noted earlier, in microcontrollers, where we've also seen many new product announcements from our partners in recent months indicating more volume to come in the microcontroller space. In mobile, we saw overall growth in the fourth quarter of 'nine, but smartphones grew particularly strongly up about 40% year on year. So on average, this makes now 2.4 on processes per phone versus 1.9 a year ago. Now I'll move to our physical IP division. Physical IP revenue was broadly flat quarter on quarter and up 17% year on year. We secured 2 new platform licenses which will help drive long term royalty revenue. These were for 130 nanometers and 90 nanometer technology, which demonstrates the longevity of semiconductor processes and also the potential for new product development at the older nodes. And that's the leading edge. We now have 32 nanometer products available via the established free library program. Available for download from our web. And we expect first customer tape outs during the first half of this year with 1st 32 nanometer royalty by the end of 2010. So far for advanced processes that those at 65 nanometers and below, we now have 11 platforms generating royalty which is accounting for 10% of the total physical IP royalty. Physical IP royalty for the quarter was up 35 percent year on year, but excluding catch up, the underlying royalty was up 60%, which compares with foundry revenues for the corresponding period up 45%. So once again, we're seeing further growth in ARMOUR's market share. Mentioning our Tools division, the System Design Division there enjoyed a good quarter, driven by a recovery in the underlying run rate of business and we expect that to continue. Q1 also included additional revenue from some milestone payments relating to 2 large software deals that were signed in previous years. Now I'll touch on some operation and marketing matters. Following what has actually been a lengthy period in which we've maintained the group's headcount at a pretty similar level, We're focusing this year on selective rated on the process there and media processing parts of our business together with activities to strengthen the ecosystem, particularly for computing and smartphone application where Linux is a priority for us. We highlighted back in February that we plan to launch 3 new processes this year, The first of these code name Merlin was launched in the first quarter as Cortex M4. That's the latest of our microcontroller processes. And that has additional DSP capability and the product is aimed at motor control, industrial control and automotive applications. And we already have lead license seas in place. 1st quarter saw 2 large conference conferences and submissions. The Mobile World Congress, which we attended in Barcelona is a very important one for us. We went there and demonstrated several of our customers dual cortex A9 platforms and they're now being designed into the next generation of smartphones and mobile computers. And we expect to see those shipping later this year. And we also had a preview of some of the mobile computers that OEMs are planning to start selling over the next few months. The host of ARM based products were launched by our customers at Mobile World Congress, utilizing our elevens and core tech a based processes in apps processes. So we expect 2010 will see continued strong growth in smartphones. And a few weeks later, we intended embedded world, and that's increasingly becoming a key event for us as well, especially for our microcontroller initiatives. This year, we launched the Cortex M4 and the new tools suite from our tools division, DS5. And there were 70 companies from the armed connected community presence promoting their arm based or arm related offerings. And talking of the connected community, the development of the ecosystem around the ARM architecture becoming even more important as we broaden our market reach and we're continuing to develop that connected community. Which now has 700 companies up from 525 a year ago and 4 50 the year before that at the end of first quarter 'eight. So that continues to develop. With that, I'll hand over to Tim. Thanks Warren. Good morning, everyone. Hopefully, most of you have had a chance to have at least had a quick look at the numbers in the Q1 earnings release Just a reminder, the quarterly slide set, which hopefully helps you with models is available on the website as usual. And you might also find it useful to review notes for 11 and 412 at the back of the earnings release where you'll find the line by line reconciliation of normalized numbers to the IRS numbers. So at headline level, Q1 dollar revenues up just over 143,000,000 slightly above consensus up 19% year on year. With the growth really being driven by both PD and PIPD royalties. Licensing development systems and services all reflect an encouraging start to the year. The effective FX rate for revenue and costs on translation basis was 1 55 for both revenue and costs. And these strong royalty revenues in Q1 have driven margin expansion and excellent net cash generation. Now a little bit more detail on the numbers. And Warren has had a good run through there on Q1 revenues. So I will focus on backlog cost margins and then finish up with the outlook. As you've probably seen in the release, group order backlog at the end of the quarter was about 7% lower than the record level we saw at the end of 2009. But remains about 25% higher than it was a year ago. Looking at the mix potential deals in the opportunity pipeline from here, we would say the prospects for backlog over the next few quarters are promising The usual analysis of backlog maturity and composition is included in the slide set on the web, and that shows that 30% of total backlog expected to be recognized as revenue over the next two quarters and just under 60% of PD license revenues Q1 were generated from backlogs. So at the higher end of the normal range between 40% 60%. Gross margins in the first quarter were 93% compared to 94% last quarter and just over 90 a year ago. Generally reflecting the impact of increase the increasing proportion of royalty revenues. And as I explained last quarter, the gross margin will move around a little bit from quarter to quarter, but it will typically be higher than 92% and is on a long term improving trend as royalty revenues become a higher proportion of total revenues Our normalized OpEx in Q1 was $49,000,000. OpEx in Q2 is expected to be in the range of $50,000,000 to $52,000,000 assuming that FX rates are at the similar level to the $155,000,000 we saw in Q1. And this is Warren says is that the group continues to invest in key R and D programs, particularly in the process division and in the media process division. This trajectory is consistent with the current full year 2010 normalized OpEx consensus of about 202,000,000 which if you adjust for the Q1 exchange rate gives you approximately 204000000 to 1000000 for the full year. Just a quick reminder about the impact of FX movements on the translation of our results. As you're aware, most of our revenues were earned in dollars, more than 95% and more than 40% of our costs are incurred in dollars. We have seen some recent forecast provisions where sterling revenues have been adjusted to account for changes in exchange rates, but sterling costs have been left unchanged And that will clearly be inconsistent. That's just a reminder there on the translation impacts. Record royalties and a pretty meaningful working capital inflow during the first quarter have driven a record level of cash generation. First time we've reported net cash in excess of 1,000,000. And now finishing on the outlook, looking forward we made an encouraging start to 2010 in improving trading conditions, although there does still remain a lack of certainty as to the impact of the broader macroeconomic environment on end consumer demand later in the year. But in this context and as Arm continues to execute its strategy, we expect group dollar revenues for the full year. 2010 to be in line with current market expectations. And as Warren said, those expectations have been increasing. They were around about $555,000,000 when we announced our results at the beginning of February and coming into today, they're around $576,000,000 for information. And now over to questions. Your first question comes from S Deshpanda from JP Morgan. Please ask your question. Yeah, hi. Sandeep Deshpani here. A couple of questions. Firstly, I mean, in terms of your guidance, you're not giving any specific guidance for the full year rather than saying what you're comfortable, what's in the numbers given that you've already beaten quite significantly in the first quarter, why is it that you're not changing full year numbers? I mean, given that, I mean, there does seem to be signs in the semiconductor industry that things are looking pretty good overall rather than what we had last year when things were pretty unclear. Secondly, on PIPD, I mean, in PIPD, I mean, fourth quarter, things look pretty good in the semiconductor space, up 5% to 10 whereas PIPD royalties are essentially flat quarter on quarter. What is happening there on the PIPD royalties is something issue with one customer or 1 or 2 customers or rather there is there is some other issue associated with the Tier 3 royalties? Thanks. Yes, I mean, on guidance, Sandeep, I think we are, I mean, the industry like the form and the form and context of our guidance, I think we're trying to be with how we've guided in the past. I don't think we have ever tried to identify a range for the full year But I mean, I think what we've observed and what we're saying is that we see the estimates of industry as a whole. We don't see any specific reason why those estimates are not going to come through, but we don't have visibility right through to the end of the year, but we do see consensus that's been increasing fairly and iterably. So our guidance is really in that context, very similar to how it's been, I guess, for the last six quarters or so. So do you so are you saying at this point that you expect that consensus to go up on this or are you saying that I mean, you consist you're saying that you're comfortable with what is in the numbers? Well, we're comfortable in the numbers. I mean, I think, obviously, the Q1 numbers have been The consensus has been going up, I would say, inevitably now for the last 18 months. And I think it would be a reasonable assumption to assume that will Tinjoo. Yes, Sandeep, it's Warren. I'll answer the physical IP question. And I'll point you at, one of the slides that should now be on our website, the update to our presentation And if you look there at the physical IP slide, you will see us comparing the underlying royalty in the supply P division with foundry revenues for the corresponding period. And now by our reckoning foundry revenues, were for the $5,950,000,000 4Q last year and 5,990,000,000 for Q4, which is essentially flat. And the underlying royalty revenues in IP division were 10,300,000 10,200,000,001,000,000, sorry, for those who or for the our royalties corresponding to those periods. In other words, flat. So I think there's slight fluctuations, but it's a lower of small numbers essentially. It's flat. So it's would that indicate that you're not taking, I mean, no new products are not taking share within this business like you're seeing, because you're seeing clear signs of momentum within your processes from quarter on quarter, whereas you're not seeing that in PIPD? Well, again, I think we've got issues with more numbers in the quarter on quarter, I'll point out what I just said in the in the opening commentary, if I look at underlying physical IP Royalties on a sort of year on year basis, then we're seeing up 60% versus an industry up 45%. So sort of continue to look at it on a slightly longer term basis than every quarter, particularly when the numbers themselves are small and the movements are very small. Your next question comes from Simon Schafer from Goldman Sachs. Please ask your question. Yes, thanks very much. My first question actually was more surrounding the balance sheet. Tim, you mentioned it yourself. Really for the first time, you've got this level of excess cash perhaps on the books with almost 15p now. Any updated thoughts as to what may be the usage for that PAM's excess balance sheet? No particular change, Simon, to what we've been saying over recent quarters. I mean, we the current plan of record here is that we we have a progressive dividend policy. It's growing consistently at 10% a year for the last 2 choppy years. Progressive dividend policy in our language means that over time, it grows broadly in relation shift to earnings. And so I think it would be reasonable to expect as we move through a phase of more significant earnings growth that the dividend will reflect that But generally speaking, cash just under $200,000,000 in the market cap of $3,300,000,000. It's we don't feel as though it's an uncomfortable level of cash at this time. But we will continue to update the market and when we've got something new to say, but I mean, the current thinking is still progressive dividend policy as we look forward. I guess another way of maybe asking it, do you think there is threshold for yourself in terms of level of M and A you would commit to in terms of size? I'm just thinking back to obviously 2003 when your cash level was sort of similar actually slightly higher. Just thinking as to what size of acquisitions, if you were to commit to something would be would be a maximum threshold? No, we don't look at it like that. I mean, we have no intention of building a cash pile for acquisitions if that's if that's the question is partly coming from that angle. We're happy to run this business at the moment. With a fairly modest cash balance in the context of our overall valuation. But we're certainly not intending to grow that cash pile for M and A. As you know, we have a history of doing acquisitions to develop this business. We've done a whole series of bolt positions. We've done one major acquisition. We haven't done one for a while. We continue to view that as a way of executing on our strategy. But I wouldn't try and draw too close a linkage between the cash balance and the execution of the strategy in that sense, but I've reiterated for the third time. We don't plan to build a cash file for acquisitions. Yes. Okay. And my second question, for Warren, there's all debates about when or whether it's some point, Windows 7 may not be operating system may or may not get portability onto the architecture. Any updates on that? Sorry, Simon. I'm afraid there are no updates on that. I'll say what I said a couple of months ago that the whole development of ARM in mobile computers seems to be happening. And it's happening right now with or without Microsoft. Obviously, we do understand that if the Microsoft operating system was running on our computers. Your next question comes from Lee Simpson from Jefferies. Please ask your question. Hi, good morning, everyone. Just given that smartphone ramp that you talked about, what is the incidence now of multicore shipments within that 1,400,000,000 chip shipments. I mean, that's not cores. That's chip shipments, from what I understand your press release. And I wonder if you can tell me, is are these still shipping these multi cores for sort of 1.2to1.5percent royalty rate? Yes. I think if I'm interpreting the multicore correctly there, what you mean is multiple on microprocesses is almost single chip. Yeah. And typically, for most of our license deals, then, 2nd and subsequent cause increment the royalty, but there's a substantial discount of the order of 50% and then further, which would give you a sort of net royalty per chip of 1.5 percent. They're about probably more, actually. Compared with a chip that just has a single microprocessor in it. Right. And that's in all cases when there's multiple processes, as you call it, inside a single chip. It's not in all cases, in most of our license deals, they've done like that. Some partners who had the foresight to think that they were going to do multiple, cause from the word go. Have negotiated different discount structures, but that's normally compensated by the fact that they pay a higher level of royalty in the first place. Right. So I mean, given that we had a lot of talk about Joe Corning Nine's coming to market design wins currently here, Yeah. You got UH500, etcetera. There's a lot going around at 2% plus royalty rates are possible. I wonder Is this a potential here for you that that's 2011 or is it 2012? And secondly, how do these royalty rates compare with for instance, a snapdragon where you've got an architecture deal. So do you give it away in the license, or architecture deals? And do they have different royalty rate structures. Okay. Typically, there are a lot of questions there. Starting with the last one, architecture licenses tend to have exactly the same types of royalty structure as implementation licenses. So from a royalty point of view, they are the same thing. And core X A9 dual core designs There are a few of those there now. Yes, Cortex A9 is a high value product. So it's within this range, then our royalty rates for the CorteX A9 are at the top end of the range. And clearly, it's a multi core design and it's therefore we expect to see implementations with more than 1 core XA9 and that should drive increased levels of royalty. However, I draw your attention to the fact that Haiti's products haven't really started shipping yet. And even when they do start shipping, it's going to be relatively very, very small volumes compared with the sort of $1,400,000,000 cost shift in the quarter. So you're not actually going to see a big impact in the short term Your next question comes from Aaron George from execution Noble. Please ask your question. Good morning guys. I have two questions. Warren, firstly on in your prepared remarks, you mentioned that the Mali pipeline looks healthy. Can you just comment on the mix of the potential deals out there? Is that largely new names or is it existing Moly customers taking additional licenses? And my second question is for Tim on the gross margin side of things. So Tim, in the Q4 results, you said a gross margin base for the full year should be around 92%, which was what consensus was factoring in at that time. But based on the comments today, it looks like you're suggesting maybe the Q1 gross margins of 93% is what you should be factoring in for the full year. Is that the right way to understand it? Thanks. Okay. I'll do the Marley question first. The comments really refers to the quantity of Mali license opportunities that we have in our pipeline. I think last quarter, we said we would expect to sign a few licenses every quarter. Last year, we signed 13 Marley licenses, the year before we signed 8 Marley licenses. I felt it important comment this morning because our Q1 was a quarter of no Marley licenses. Looking at the pipeline, we would expect the annual run rates to be in line with what we've seen over the last couple of years. And for the types of customers involved, then it's a mixture of it's a mixture of new people and and people who have been with Arm for a long time. And on the gross margin, Aaron, the reason I can't be too definitive. It does, as I say, it does move around a little bit because, I mean, for example, as I think you know, engineering time, particularly in physical IP, sometimes gets charged to cost of sales and sometimes to OpEx. But I did say today that in most quarters, the gross margin would be higher than 92%. And therefore, it would not be surprising. I think if the consensus gross margin these up towards the 93% for this year. Your next question comes from Jerome Rommel from Exane BNP Paribas. Please ask your question. Two questions. You concerning your backlog, it was down 7% quarter on quarter, but you said that looking at the pipeline you have, it providing for the rest of the year. Could you quantify a little bit what you mean by providing? And second question concerning the royalties on enterprise seen that you have a quite a nice jump. Could you explain a little bit what happened there? I mean, as you know, given the different shapes and sizes and the range of licensing models that we deploy, It is very hard to in a sense quantify promising, but I think you can interpret that as an indication for us that we expect the backlog to go up over the next few quarters. And again, we don't really talk about sequential trend as such. But the mix of deals in the pipeline and the balance of them and the likelihood of closure suggests to us that the backlog is going up. Okay. And comments on the enterprise number that you highlighted This is actually due to hard disk drives where the volumes were up over 100%. And that's not particularly extraordinary. It's a manifestation of a trend which has been happening for some time We've talked about for some time where Arm has been designed into designs from all the hard drive manufacturers, but not necessarily in all of their designs. And in particular, we've been designed into the higher end products. And what happens over time is that they those higher end designs migrate towards lower end products coming out of those companies. And as they do, then overall volumes go up and that's what we've seen. Thanks a lot. Your next question comes from Brett Simpson from R. Yes, thanks very much. I had a couple of questions on the wireless PD royalty side. Can you maybe clarify what happened in the March quarter, because it looks like the unit number was only marginally up in the March quarter, which I guess is shipments in the December quarter. And can you confirm whether you actually grew your revenues sequentially in wireless PD royalties? And maybe just a follow-up for Warren. There's been a lot of talk about pricing in both handsets and chips in the wireless side, some sizable smartphone price lines at Nokia last week. And there's also some talk from Qualcomm and Media Tech about price pressure intensifying Can you maybe just talk about how this impacts your business and whether Arm can continue to grow its absolute royalty ASP per phone in this environment? Yes. So I'll start off and look at some numbers for wireless. And essentially, the volumes are flat. There's a slight increase but the volumes in, was off land. And the second question was about ASPs in smartphones. And I guess this has really been stimulated by Nokia last week and Qualcomm a quarter ago. And what we are trying to say is, yes, there is certainly pressure on handset pricing, we can see that amongst our customers. And we can see a mix shift going on. And there are certainly lower prices on average in in highly featured phones, but that has to be viewed in the context of greater numbers of higher featured phones. And so frankly from a sort of price of the application processes point of view, we're not at all concerned and expect to see upward pressure continuing. Looking sequentially at unit shipments. I think that sounds particularly helpful, which is because of all the disapproving costs there are when you go one quarter to another quarter. Terms of the industry movements and things of that. It means really sort of year on year to find out what the overall trends are rather than sequential. Okay, thanks. Your next question comes from Gareth Jenkins from UBS. Thanks. A few, if I could. You mentioned the Eagle lead licensing, and I just wondered if you could talk about the pipeline for Eagle what you're seeing in terms of products for that particular product? Secondly, I think you mentioned just in terms of hiring around Linux, and I just wonder whether the based, net book and tablet market is proceeding as you now plan? And then, I guess, finally, in terms of the kind of Tier 3 and 4 customers? Are they coming back in droves in terms of licensing? Okay. So on the Eagle, Eagle is at the stage where we have lead partners signed up and we're not really looking for signing up additional lead partners at the moment until we deliver the deliverables from Eagle, which will happen later this year. However, there is a lot of interest in the Eagle and people wanting to get hold of this product. So we're at the stage where we're sort of if you like, keeping those people interested, but we have to trade off between actually finishing the development of the product and supporting those lead partners, which is why we're not seeking additional licensees for Eagle at the moment. And sorry, your second question. It was just on Linux based. I think you mentioned when you talked about hiring that some of it will be repointed to kind of helping out Linux or Linux based development. I just wondered whether the Linux market is developing for netbooks and tablets as you expected. Yes. Well, I think it is. And I mean, my comment was more about how we see Linux becoming used and not just in things like net netbooks, but becoming more widely used across the embedded space. And we're seeing this as an area where it's necessary for us to make some investment to keep our ecosystem at the leading edge? I think your last question was about sort of Tier 3 and Tier 4. I think you called them license fees. And I think coming back in droves is probably a little bit heavy, but certainly the trading environment does feel more benign and I think people's people have a slightly more flexible budgetary environment in which they're operating. So I think we would expect to see a little bit of a healthy underlying run rate from the smaller from the smaller companies. Your next question comes from Jonathan Menon from Liberum Capital. Please ask your question. Hi, thanks for taking the question. One question on share based compensation, which sort of doubled year on year compared to the last year. And I was just wondering what are the trends there which changed that number around as we go through years. And what are your policies going forward on share based payments? Also, the second question is, is the additional R and D spend that you are you're seeing going up to about 1,000,000 dollars, $52,000,000. How does that change? Does that was that result in any tangible change in either the the speed of introduction of new processes or the width of new processes are you widening out into any new area? Or is it just more customization work and things like that, which is leading to this increase? Jonathan, on share based. I mean, our sort of underlying approach share based remuneration hasn't changed. It's really based on all of our employees essentially getting shares each year to as a percentage of their salary if you like. What happened, the difference you refer to is really largely a function of share price. And the fair value of what is essentially the same amount of shares has, of course, increased significantly. Now, as we look forward assuming that share prices stay where they are alright, then the number of shares that will be issued will go down. Because we're talking about a value of salary here, not an absolute number of shares. So in that sense, it's quite self regulating. But on average, we tend to issue something close to about 1% of our issued share capital per annum and that policy hasn't changed. Okay. On the R and D question, I think you'll note that we've we've gone through a period where we've maintained our headcount very flat. And that was due to the economic conditions last year where we had to take a very hard line on cost. What happens is that during that period, there is a little bit of pent up demand that you like for development the industry is in a much better place than it was 12 months ago. We are gaining share across multiple applications and we need to accelerate the development of our roadmap. And so right now on conference call, we're not going to talk about any specific product other than what I said, which is that the investments are concentrated in our Processor division and our Media Processing division. But those are the areas of the business where it's happening as for specific products. I can't comment at this stage. Your next question comes from Gunnar Flag from Nomura. Please ask your question. Yes, hello. I just wanted to come back on the hiring. I was wondering, Tim, a PIPD headcount will that actually be reduced in the current year or maybe you could comment? Well, I think we've said before that our sort of medium term view of the IPD is that headcount in that division does not grow in the same way as it might do around BD and MPD. And that's really about the fact that as you know, in recent years, we've been doing accelerated R and D. And we also have opportunities in the division for process improvement and productivity gains. So without wanting to talk about sort of short term periods, our sort of longer term view is that the cost base in that division does not grow at the same rate as process division or media process division. Okay. Thanks. And if you could just comment on the PD license purchasing behavior, in terms of single licenses, where there's a due to license, has that fully come back? Is that normalized? I think normalizes a bit. I mean, apart from else, it's hard to establish what's completely normal, but I think as we come out, if operating in an improved trading environment, a more typical mix of deals. You are likely to see whereas in the back end of last year, we saw an unusually high number of unit deals signed in each quarter, but of course a lot of them were sort of single use and term. So yeah, we would expect a more normal spread ranging from subscription licenses at one end to single of the other, but probably a more normal spread now. Okay, thanks. Your next question comes from Cedar Shimama from RBS. Please ask your question. Hi, good morning, gentlemen. Manas, 2, squeeze in at the end. One question, I was a couple of questions if I may. First of all, team, could you just help us with the free cash flow? It sounds like you had some adjustments on the share option. So I would just like us to explain what happened there? And second of your questions to Warren, in terms of, the market shares that you're showing are pretty obvious on the HDV side, set top box and DTV. At which point do you think that the end market shipment will track more in line with your own shipments or maybe the other way around? Thanks. Each quarter where we disclose net cash generation. And in the notes, we describe exactly what we've been by that and that is unchanged. But net cash generation as defined excludes things like payment of dividend. It excludes monies coming in for example from the exercise of options. And so when you look at the table, you might be referring to taking out from cash flow in arriving at net cash flow, the amount coming in from options. So there aren't any adjustments. It's just that we did actually receive was quite a lot of option exercise in the first quarter. So the number that adjusts is bigger than normal, but the 44,000,000 headline net cash generation excludes all of that type of cash flow. It's pure underlying cash flow in the business. Okay. Okay. And on the market shares, I think you're right, obviously, when we achieve a very very high market share, then our shipments will track the products that actually shipped. However, for hard disk drives at the moment, with estimate that we're around about 65% and for DTB in set top box, then it's still only about 30% And so there's a lot of room for arm shipments to outstrip end product shipments for some time to come. Okay. And just a quick follow-up, if I may. Just on the sort of portable computing and maybe computer at large sort of market segments, Can you comment perhaps on the sort of momentum you're seeing on netbooks? Because it seems like this category as a whole is sort of losing momentum while the tablet is gaining momentum. I guess for your own sake, it doesn't make much difference. So I was just wondering if you've seen any sort of change in the design momentum of your processes into these markets? And also, there's been some comments of potential armed processes being designed in servers. So we just like you have your thoughts on that. Thank you. Okay. So on netbooks and tablets, you're right. We tend to regard these as being the same sort of product category. And the sockets that we're very interested in are the application growth of the socket. We tend to already have significant share of the Bluetooth and the Wi Fi and the power management and those sorts of functions within these products. Probably, yes, compared with 12 months ago, there's certainly more tablet activity, whereas this time last year, it was more netbooks. However, there are still some interesting net book designs we saw. New designs across both CES and Mobile World Congress in Q1 and we would expect to see a number more ARM based designs both the net book form factor and the tablet form factor at Computex at the beginning of June momentum hasn't appreciably changed. Obviously, there's been a lot of publicity around the Apple announcements in January and the Apple launch later in the quarter. And apart from that, there's been no sort of real underlying momentum change. And I sort of service your question on service. Well, we've talked about service for some time We are seeing some take up of that both in the press and also out in the industry where people are researching into their and we believe it's undoubtedly an area in future where people will experiment with processes and we're encouraging those experiments. But how far is that? And I mean, those markets are very high ASPs for Intel, a bit on the low volume market clearly, but a very profitable business for Intel. I was just wondering how far do you think our penetration in services? Yeah. Well, I mean, we can see the application developing as far as arms concerned and the use of arm in there as a possibility exactly what sort of levels the penetration are achieved depends on what sort of products our partners are are able to produce in it far too early to call that at the moment. Right now, we're encouraging and supporting our partners moving in that direction. It's far too early to talk about how successful they're going to be. Wonderful. Thank you. Thanks. Your next question comes from Nick Hyslop from RBC Capital Markets. Please ask your question. Morning and thanks for taking the question. I had a sort of different question on M and A. There's clearly been speculation and if we go back a few years, there was speculation that perhaps one of your major customers might consider wanting to buy you. I think you've warren issued some very eloquent defenses so they don't need to buy you. They can buy your technology. But if someone wants to bids, do you have a view on how the regulators might view that from a competitive standpoint? Well, obviously, that depends very much on who the bidder is. And we just have common sense views in that direction. So no, no, I don't think we've got anything to add really on over and above what I said last week, in that newspaper interview last week, there's a lot of value in the ARM business in ARM's independent. And as we've talked about our growing market shares across many different applications, the current position of our market share overall across the embedded space, sasset around just north of 25 percent, a huge amount of room to grow and a huge amount of value in future in arms independence with the current business model. And we think that's the best group forward for the business. Is it fair to say that given some of the people who were speculated? If they were to do something, is it fair to assume the regulator would view that as anti competitive, which presumably would be one of the kind of prime reasons for a move of that nature. Well, as I say, it depends entirely on who the potential acquirer would be. I mean, clearly, if that acquirer was a purveyor of microprocessors, then we're a microprocessor company, and there'd probably be some discussion along those lines. But there are all sorts of people out there who might think about buying on. But as I said last week, when you feel back a layer of detail and think about it in a little more depth, then, there are much more cost effective ways of acquiring the Arm Technologies and acquiring the company, from a sort of customer and technology company point of view. And from a shareholder point of view, there's a huge amount of value in the business in future. So it really doesn't make lot of sense either way. Okay. Thank you. Enough on that one. But just as a change tag, when you started your script, you talked about 33% royalty revenue growth versus the market, at 18% of the markets you serve. I'm just wondering when you look at the full year, which are the forecasters of semi revenue growth are the ones that you respect and roughly what do you think they're at at the moment? Ian, why don't you have a go answering this one then? So I mean, the ones I collect, I mean, the we're looking like with the consensus for harm in excluding memories, excluding, analog for the industry for 2010 is be about 10% to 15% ahead of 2009. Okay. We read them all. Yes, we read them all and same as you do, really. We're not really in the respect game particular. And actually, they all have slightly different reputations. I mean, some of these companies will always stick their necks out. In a slightly contrarian position. But they generally have a reasoned argument for that and we take those arguments on board and think about them. But we make our estimates based on this basket that Ian monitors and also on our own intelligence from a semiconductor partner. Okay. Thanks very much. Your next question comes from Kai Koshel from Deutsche Bank. Please ask your question. Yes, good morning. A couple of questions, please. The first one is on OpEx, and I think you said the current consensus 202,000,000, but I think you all suggested that we may see upgrades to consensus revenue expectations throughout the year. So I'm just wondering if we see those revenue upgrades, whether you would invest some of the extra revenues in OpEx? And my second question is on the graphic side. It looks like some of your smaller competitors are starting to sort of do joint alliances on the graphic side. Again, is that something that worries or concerns you? Or do you think you're pretty well positioned here? Thank you. Yes. Hi, Kai. I mean, what I was saying was the current OpEx consensus is about 202,000,000 for the full year at the current consensus exchange rate for the full year, which is about 1.58. And I was saying that if you take that as a Q1 rate, then it would edge up to sort of 204, 205. I also said in answer to Sandy's question that we had seen the revenue consensus grow gradually and I felt it was a reasonable assumption that that might continue. Our plans for investment through this year are more about plan than what we feel we need to do. And whilst they may be influenced to some extent on the upside or the downside by the market, their plans are really set for the business. So we won't be seeking to try to find ways of spending any overage on revenue specifically. So I think that's probably the right context for you. And on the graphics and smaller competitors, I think you're probably referring to the announcement about imagination and most technologies. So I think we think that we're positioned very well. We think that Mali Technology is the right sort of technology for our target market. And obviously, we'd love it if people were to buy our graphics processes to sit alongside our own microprocesses. But having said that, most of the volume which is shipping today is our microprocessors set alongside imagination processes that we licensed as part of our partnership with Imagination Technology some years ago. And so we have sold some Mali licenses for use alongside MIPS microprocesses. And we're very happy to do that because I'd much rather sell a Molly graphics core to a mixed customer than not sell a Molly graphics core to a mixed customer. And in due course then obviously we hope convert those customers from the missed quarter on. Your next question comes from Adnan Ahmed from Berenberg. Please ask your question. Hi, thanks for taking my question. Just two questions, one for him and one for Warren. And first of all, for Warren, if I look at your army 11 and the cortex mix, That went up to 11% this quarter from 7% last quarter. And your average royalty went down slightly to $4..8. Can you explain what went on here given that your embedded market percentage also went down to 18% versus 18% in the last quarter? And the second question for Tim, if you look at your gross margin The royalty mix was higher this quarter relative to the last quarter at about 54% relative to 50 3 percent. Could you just take me through what led to the gross margins coming down on a sequential basis? Down to it. So on the royalty and the Cortex product and so on, it's all about the detail of the product mix. I'm in reality, the, the average that's, that's worked out $0.048 this quarter0 $0.49 last quarter. It's a very similar number and it's very, very close, but we round to 1 one decimal place. So it's essentially flat. However, it does look strange in the light of Cortex products going increasing, but I'd highlight that in that increase in Cortex products, we've got an increase in absolute numbers and of Cortax Emma products, both in microcontrollers, but in particular in Bluetooth, And that is really the answer to the conundrum. There's been an increase in Bluetooth type products. And of course, we count those as mobile not embedded. So even though you saw the proportion of embedded, reduce, along with huge growth in microcontrollers in absolute terms, we also saw a growth in our Bluetooth market share. And that's what's changed things. Okay. Thanks. Yes. And on gross margin, I mean, there are a number of moving parts. They don't change the outcome materially, but they do change it by small numbers and there's certainly a percent change between quarters is not significant. I mean, it depends on, as I said earlier, there's an allocation of engineering time each quarter with the physical IP division between OpEx and cost of sales. There's also cost of sales attached to our deferred just development system revenue and as a cost of sale attached to our service revenues. And it's really the blend of those in each quarter, which can move the gross margin around a little. But as again said, it's on a long term improving trend and in most quarters, it's going to be north of 92. Great. Thanks a lot. Your next question comes from Andrew Gardiner from Barclays. Thank you. Good morning. My question is regarding R and D, in particular, sort of how that's relating to your licensing activity. Tim, you've highlighted the consensus level of OpEx and also where you expect 2Q to go. Can we expect that that 2Q level therefore is pretty stable level for the remainder of the year. And in particular, just on the licensing side, you're clearly showing a shift away from your former core mobile markets and steadily towards other non mobile areas. Is that are you still able to leverage the existing R and D overall of these new areas or are we likely to see a bit more R and D creep as we go through the year or even into next year as the licensing broadens further? Thank you. On the first question, Andrew, sort of getting from where we are to something in the sort of 204, 205 area. What we would actually expect to see is a sort of a very gradual increase through the year as the headcount increases. It's the Q2 level is quite likely to be. And when I look at the sort of consensus shape, which sort of has it sort of 51, 52, 53, that's not a bad way to think about it frankly. And on the sort of slightly more medium term question of direction of R&D expense and licensing activity. As we move into a broader range of applications, most of the technology that's developed for mobile in the first place, it does apply to the other application areas. But we do do some specific developments for different product categories in particular. We've been highlighting the microcontroller specific cause There's not a hugely significant amount of different R and D to do. They are derived from the architectures that are developed in the 1st place for mobile. But as we broaden, then we will do some special flavors, but also we need to remember that we're still servicing to wireless sector. And that's where we're developing our leading edge product and growth in R&D is necessary to keep developing in that leading edge. And that latter point is the primary driver behind the increase you're talking about for this year then? Okay. I think we've got time for one more question. Okay. Your next question comes from Didier Shimama from RBS. Please ask your question. Yes, thanks for taking my follow-up. Warren and team, congratulations, 40% of margin in Q1, we expected that for the full year or maybe even for next year. In fact, what's the next target? Thank you, Didier, for looking for the grand finale. No, I mean, I think, in a sense, our guidance on margins unchanged. I mean, we've said now for some time that we expect 40% to be a sustainable medium term target. We probably hit it in a sense for the first time a little bit earlier than we might have expected. I mean clearly as I've said many times, the route to 40% is accelerated by a stronger dollar and is decelerated by a weaker dollar. We have a relatively strong dollar at the moment, which helps. And we are early on in the year where we're reducing heads. I think the current consensus is out there of margins in the sort of 36, 37 area. Still feels about right. But our target is to keep growing the profitability and cash of this business. And part of that is going to be margin expansion with the operating leverage in the model as the royalties grow. When do you think you could set new targets? Because presumably no one's going to believe you, that you're going to make 47% margin this year. And the share price obviously wants more than 40% margin. So when do you think you could give us a new target? Well, I think we this is a quarterly reporting. It's a typical game giving specific targets for margins. One target we do have is that, that margins continue to increase. And they've just gone from 34 to 37 to 40. So it's quite encouraging. I don't think it really helps giving hard and fast numbers in limited time scales for this type of business. Okay. Many thanks and congratulations. Thanks to the A. And so, we'll, we'll summarize, I say, good, good set of results, encouraging start to 2010 record volumes, record levels of profitability and cash generation. We're comfortable with the start to 2010 and as the consensus expectations have been rising during the 1st few months we continue to remain comfortable with those expectations as they fit for the remainder of the year. We look forward to coming back at the end of July with our half year results. Thank you very much.