Q2 2024 Arm Holdings PLC Earnings Call

Yeah.

Okay.

Speaker 1: and welcome to the ARM second quarter of the financial year ending 2024 earnings conference call. At this time, all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session. To ask a question, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. So withdraw your question, please press star 11.

And welcome to the arms second quarter of the financial year, ending 2024 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you will need to press star one one on your telephone you will then hear an automated message advising you.

And has raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Ann Thornton head of Investor Relations. Please go ahead.

Speaker 1: Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today and Thornton. Head of Investurulations, please go ahead.

Speaker 2: Thank you, Abigail. Good morning, good afternoon, everybody. My name is Ian Fontan, and I'm the head of Investor Relations at ARM. I'd like to welcome you to our earnings conference call for the second quarter of the fiscal year ending March 31, 2024.

Thank you I have again.

Good morning, Good afternoon, everybody my name is influencing and I'm the head of Investor Relations at all.

To welcome you to our earnings conference call for the second quarter of the fiscal year ending March 31 2024 on.

Speaker 2: I'm joined today by Renny Haas, the Chief Executive Officer of Arm and Jason Child Arms Chief of Financial Arts.

I'm joined today by renting Haase, Chief Executive Officer.

And Jason child.

<unk> financial officer.

Speaker 2: Hopefully you will all have downloaded and read the shareholder letter. If not, it is available on the arm-investorrelations website at investors.arm.com.

Hopefully you will all have downloaded and read the shareholder letter if not it is available on the Investor Relations website at investors <unk> com.

Speaker 2: As a shareholder letter provides a rich update on our strategic progress in the quarter, we would expense with the prepared remarks from the CEO and CFO and stead focus on Q&A.

The shareholder letter provides a rich update on our strategic progress in the quarter, we would expense with the prepared remarks, with CEO and CFO and instead focus on Q&A.

Speaker 2: Before we begin, I'd like to remind everyone that during the course of this conference call, I will discuss force castes, targets and other forward-looking information regarding the company and its financial results.

Before we begin I would like to remind everyone that during the course of this conference call I will discuss both cost targets and other forward looking information regarding the company and its financial results.

Speaker 2: While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we are.

These statements represent our best current judgment about future results and performance as of today.

Results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.

Speaker 2: In addition to any risks that we might, that we highlight during this call, important risk factors that may affect our future results and performance are described in our registration statement on Form F1, filed with the SEC on September 14, 2023.

In addition to any risks that we highlight during this call important risk factors that may affect our future results and performance are described in our registration statements on form F. One filed with the SEC on September 14th 2023.

Speaker 2: I'm assumed no obligation to update any forward looking statements which speak only as of the date they are made.

<unk> assumes no obligation to update any forward looking statements, which speak only as of the dates they are made.

Speaker 2: In addition, we refer to non- GAAP financial measures during the discussion. Reconciliation of certain of these non- GAAP financial measures to their most directly comparable GAAP financial measures and a discussion of certain projects. It's non- GAAP financial measures that we are not able to reconcile with that unreasonable efforts and supplemental financial information can be found in the shareholder letter that we released earlier today.

In addition, we refer to non-GAAP financial measures during the discussion reconciliations of certain of these non-GAAP financial measures to their most directly comparable GAAP financial measures and a discussion of certain projected non-GAAP financial measures that were not able to reconcile without unreasonable efforts and supplemental financial information can be.

We found in the shareholder letter that we released earlier today.

Speaker 2: The Shareholder Letter and other earnings related materials will be available on our website at investors.arm.com And I'll now hand you over to Rene. You will make a brief opening statement before we go to your question.

The shareholder letter in other earnings related materials will be available on our website at investors <unk> Com and I'll now hand, you over to Rene who will make a brief opening statement before we go to your questions.

Speaker 3: Thank you, EM. And as Ian mentioned, we have given you the shareholder letter in an attempt to minimize the opening remarks by myself and Jason, but I can't resist. I'll just start with a few comments to kick off. We are very pleased following the IPO process to kick off our very first.

Thank you Ian.

<unk> mentioned, we have given you the shareholder letter.

To minimize the opening remarks by myself and Jason but I can't resist I will just start with a few comments to kick off.

We are very pleased following the IPO process to kick off our very first quarter as a public company.

Speaker 3: quarter as a public company. And the quarter was excellent. We had record revenue really fueled by demand for all our products, which has driven our licensing numbers up over 100% year on year. This is largely driven by...

In the quarter was excellent we.

We had record revenue really fueled by.

Demand for all our products, which has driven our licensing numbers up over 100% year on year.

This is largely driven by.

Speaker 3: When I would consider as an AI R&D super cycle where people are investing more and more in new technologies to take advantage of the huge opportunity going forward. On the royalty side, slightly down year on year, however, the new businesses that we have emphasized in terms of our new growth strategy into the cloud and automotive were up approximately 20%. And the financial results relative to profitability were excellent.

What I would consider as a AI R&D super cycle, where people are investing more and more new technologies too.

Take advantage of the huge opportunity going forward.

On the royalty side slightly down year on year. However, the new businesses that we have emphasized in terms of our new growth strategy into the cloud and automotive were.

Approximately 20%.

And the financial results relative to profitability, where we're at.

Excellent. So in summary, very very pleased about the first quarter.

Speaker 3: So in summary, very, very pleased about the first quarter, and very, very pleased about the results we've shown as the first of our many quarters and we've forwarded to public companies.

And very very pleased about the results we've shown.

<unk>.

The first of our many quarters going forward as a public company. So so with that I will turn it over I suppose to Abigail to queue up for questions.

Speaker 3: So with that, I will turn it over. I suppose to Abigail to queue up the question.

Speaker 1: You at this time we'll conduct the question and answer session. We ask that you limit yourself to two questions today. As a reminder to ask a question you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question please press star 11 again one moment for our first question.

Thank you at this time, we will conduct a question and answer session. We ask that you limit yourself to two questions today.

A reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for our first question.

Speaker 1: Our first question comes from Toshi Ohari with Goldman Sachs. Your line is open.

Our first question comes from Toshi Hari with Goldman Sachs. Your line is open.

Speaker 4: Hi, good afternoon. Thank you so much for taking the question. I had two questions. Maybe one for Renee. I think your royalty business was up mid-single digits or 5% sequentially. And I think units were down about 5% sequentially. So can you speak to what drove?

Hi, good afternoon. Thank you so much for taking the question I had two questions maybe one for Renee I think youre royalty business was up mid single digits or 5%.

Sequentially I think units were down about 5% sequentially. So can you speak to.

What drove.

Speaker 4: your revenue there is it is a chip ASP is it you know royalty rates or a combination of both I think during the IPO you know you guys had talked extensively about the transition from V8 to V9 so I'm guessing that was one of the bigger drivers but if you can provide a little bit of context what drove your royalty business on a sequential basis that would be helpful.

Your revenue there is it chip asps is it.

Royalty rates or is that a combination of both I think during the IPO you guys had talked extensively about the transition from via <unk> nine so I'm guessing that was one of the bigger drivers, but if you can provide a little bit of context, what drove your royalty business on a sequential basis that would be helpful.

Speaker 3: Sure, yeah, thanks for the question. And you're right, it is largely driven by the transition to a to B9 accelerating, particularly across the smartphone segment. Additionally, as we had mentioned.

Sure Yes, thanks for the question and Youre right. It is largely driven by the transition to at a benign accelerating.

Particularly across the smartphone segment.

Additionally, as we have mentioned.

Speaker 3: Earlier in our discussion with the analysts, we're seeing growth now across the automotive and cloud infrastructure business. And those have different world-view rates than our smartphone business does. So as a result, what you're seeing is that even with units down, the overall numbers are actually often in terms of revenue.

Earlier in our discussions with analysts.

We're seeing growth now across the automotive and <unk>.

Cloud infrastructure business and those have a different royalty rates than our smartphone business does so as a result, what youre, saying is that even with units down.

Overall numbers are actually up in terms of revenue.

Speaker 4: Great. And then as my follow-up, during the IPO, you had shared with us that roughly, I think it was 97% of estimated royalties under contract in Fiscal 25 kind of being locked in from a royalty rate perspective, 81% for Fiscal 26. So, I was hoping now that a couple of months has gone by, if you can provide an update on those numbers. Thank you so much.

Great.

As my follow up.

During the IPO you had shared with us that roughly I think it was 97%.

<unk> estimated royalty under contract in fiscal 'twenty, five kind of being locked in from a royalty rate perspective, 81% for fiscal 2006. So I was hoping now that a couple of months has gone by if you can provide an update on those numbers. Thank you so much.

Speaker 3: Yep, yeah, again, thank you for the question. Yeah, and I would say we're about at the same level in terms of where we are in terms of mile markers towards progress. We're still confident in terms of the numbers that we had talked about in the past, but more importantly, everything's tracking as we would expect at this point in time. So those numbers are still unchanged.

Yeah again, thanks for the question.

And I would say we're about at the same level in terms of where we are in terms of mile markers towards progress.

Still confident in terms of the numbers that we had talked about in the past, but more importantly, everything is tracking as we would expect at this point in time so.

Those numbers are still unchanged.

Thank you.

One moment for our next question.

Speaker 1: Our next question comes from Ambrish Shurrasava with BMO capital markets. Your line is...

Our next question comes from Ian Bruce Srivastava, with BMO capital markets. Your line is open.

Speaker 5: Hi, thank you very much. My first question is if I look at the fiscal year guide, given you had to do big upside on the licensing side, please first, is what we remodeling for. What's the mix embedded in the guide between royalties and licensing?

Hi, and thank you very much.

My first question is if I look at the fiscal year guide.

Given you had some debate upside on the licensing side, please versus what we've been modeling for what's the what's the mix embedded in the guide between royalties and licensing.

Speaker 6: Yeah, D, well, for the, so if you kind of unpack our expectations for the back half of this year, the next two quarters, we're expecting royalties will flip to positive, I call it single digit growth in Q3. And then by Q4, we expect to see double digit growth. Final percentage.

Yes, well for the so if you kind of unpack our expectations for the back half of this year. The next two quarters, we are expecting royalties will flip to positive single digit growth in Q3.

And then by Q4, we expect to see double digit growth.

On a percentage basis.

Speaker 6: Licensing, we expect to continue to be strong.

Licensing, we expect to continue to be strong.

Speaker 6: I do expect our assumptions on Q3.

I do expect our assumptions on Q3.

Speaker 6: You know, we do have some lumpiness with our licensing business, especially with ASC 606. So

We do have some lumpiness with our licensing business, especially with ASC 606. So so we do have some as we always have some large deals that are in play as of right now I think versus what we thought a quarter ago. I think there is there is going to be a little more falling into Q4 versus Q3, So I think.

Speaker 6: So we do have some, as we always have, some large deals that are in play. As of right now, I think versus what we thought.

Speaker 6: quarter ago, I think there's going to be a little more fall into Q4 versus Q3.

Speaker 6: So I think, you know, with our guidance for Q3, our expectations are to be somewhere in that kind of call it zero to 10% growth on a year-on-year basis.

With our guidance for Q3 are.

Expectations are to be.

Somewhere in that kind of call it zero to 10% growth on a year on year basis.

Speaker 6: but we expect pretty significant growth.

<unk>.

But we expect a pretty significant growth.

Speaker 6: Uh, because we do expect, um, um, some pretty big license deals coming in Q4 in terms of the, I guess you're the, the mix of, of, of revenue split. I, you know, I.

Because we do expect.

Some pretty big license deals coming in Q4 in terms of the I guess you are.

The mix.

Revenue split.

Yes.

Speaker 6: Hard to say at this point. It's gonna be, I'd say, yeah, closer to 50-50 then, but that really depends on how strong the royalty recovery is in Q4. There's all sorts of industry reports. And I think if you look at most of the guidance, as well as where I have a pretty easy comp from a year ago, it could get maybe closer to 60% of total, but we'll see.

Hard to say at this point, it's going to be I would say closer to 50 50 then.

But that really depends on how strong the royalty recovery is in Q4.

All sorts of industry reports.

If you look at look at most of the guidance as well as we have a pretty easy comp from a year ago. It could get maybe closer to 60% of total.

But we'll see.

Speaker 5: Got it, got it. No, I think you gave enough details. And my second question is a little bit longer term. On AI, you guys have been pretty detailed about giving us a percent. I think you said, correct me if I'm wrong, 43% of OIPs.

Got it got it and I think Youll gave enough.

And my second question, a little bit longer term on AI.

You guys have been pretty detailed about giving us a percent.

I think you said correct me, if I'm wrong, 42% of the royalties.

Speaker 5: have are driven by AI. I just wanted to understand going forward. What's going to be the driver is that and I'm assuming that majority of the 42% is on the edge. So as we look forward, if you're going to be more.

Are driven by AI.

I just wanted to understand going forward.

What's going to be the driver is it and then assuming that majority of the 42% is on the edge. So.

Look forward is it going to be more as we have seen with Grace Hopper, obviously volumes are very small theres going to be more infrastructure, driven I E something that hopper or the data data center hyperscale.

Speaker 5: as we have seen with Grace Hopper, obviously volumes are very small. Is it gonna be more infrastructure driven, i.e. something like Hopper or the data center hyper scalers, or is it more gonna be more of the same, more on the edge on the mobile side? Thank you.

Or is it more going to be more of the same more on the edge on the mobile side. Thank you.

Speaker 3: Yeah, so this is a very, very fast moving market relative to the models that are being released that are almost on a on a daily basis, combined with just how quickly some of these agents are moving across different devices.

Yes.

So this is a very very fast moving market relative to the models that are being released are almost on a on.

On a daily basis.

Bind with just how quickly some of these agents are moving across different devices.

So when you think about for.

Speaker 3: For example, the endpoints, a PC or a smartphone that could be running a chat GPT agent or Microsoft Copilot just a quarter or two ago, we may not be classifying them as devices that were running AI. So our expectation is that increasingly all of the devices

For example.

The endpoints.

A PC or a smartphone that could be writing a check GPT agent or Microsoft co pilot, just a quarter or two ago, we may not be classifying them as devices that were running AI.

Our expectation is that increasingly all of the devices.

Speaker 3: that exist in the overall value chain from the cloud to the endpoint. And the endpoint can be the smallest sensor with a compute engine. We'll need some level AI capability, which is why our licensing activity has been as strong as it is. People are looking to add as much capability in terms of compute to capture the workloads that are being developed. And in some cases,

That exist in the overall value chain from the cloud to the endpoint and the endpoint can be the smallest.

Sensor with the compute engine will need some level of AI capability, which is why our licensing activity has been as strong as it is people.

People are looking to add as much capability in terms of compute to capture the workloads that are being developed and in some cases.

Speaker 3: It's really a function of making sure you have enough compute capacity to run the model when you don't even know yet what the model is. So I think we are in a very interesting time relative to

It's really a function of making sure you have enough compute capacity to run the model. When you don't even know yet what the model is so I think we are in a very interesting time relative to.

Speaker 3: how this overall market is going to play out. To specifically answer your question, whether it's the endpoint or the cloud, both. And I think it's going to be a rapid acceleration across the next few years, where a few years from now, we won't talk about the percentage of devices that have AI in them. It will be sort of table stakes that they all do. Got it. Thank you, Rene. Good luck. Thanks.

How this overall market is going to play out.

Particularly answer your question, whether it's the end point of the cloud.

Both and I think it's going to be a rapid acceleration across the next few years, where a few years from now.

We won't talk about the percentage of the devices that have AI in them. It will be sort of table stakes that they all do.

Got it thank you and good luck. Thanks.

Thanks.

One moment for our next question.

Speaker 1: Our next question comes from Vivek Arya with Think of America, your line is open.

Our next question comes from Vivek Arya with Bank of America. Your line is open.

Speaker 7: Thanks for taking my question. Rene, for my first one, I'm curious, you know, you had the IPO two months ago and the process started before that.

Thanks for taking my question for.

My first one I am curious.

You had the IPO two months ago in the processed product before that what have been the big changes in your macro and industry assumptions positive or negative since the team went through that process and any color by end market geography and.

Speaker 7: What have been the big changes in your macro and industry assumptions, positive or negative, since the team went through that process and any color by end market geography and specifically what I'm trying to get to is that if you look at the way you were thinking about royalty revenues.

Specifically, what I am trying to get to is that if you look at the way you were thinking about royalty revenues.

Speaker 7: in December and the next few quarters, have they changed in any way positive or negative, given any potential changes in your macro assumption?

December in the next few quarters have they changed in any way positive or negative given any potential changes in your macro assumptions.

Speaker 3: Yeah, so thanks for the question. We haven't changed anything in our models that we're talking about publicly relative to.

Yes, so thanks for the question.

We haven't changed anything in our models that we're talking about publicly relative to.

Speaker 3: the years out forecast in terms of what any assumptions are relative to the numbers. But going back to the commentary that I made on the previous question.

The year's out forecast in terms of what.

Any assumptions are relative to the numbers, but going back to the commentary that I made on the previous question I do think what we're seeing from a macro standpoint is people figuring out across every end device, that's being built and again that end device can be a smartphone it can be a base station that can be.

Speaker 3: I do think what we're seeing from a macro standpoint is people figuring out across every end device it's being built. And again, that end device can be a smartphone, it can be a base station, it can be a laptop. People are figuring out how to make sure they have enough compute capability to take advantage of these.

Our laptop people are figuring out how to make sure. They have enough compute capability to take advantage of these applications and models and agents that are being introduced almost almost daily. So from the perspective of have we changed our models not anything we're talking about publicly but what I can say and feel and again <unk>.

Speaker 3: Applications and models and agents that are being introduced almost almost daily. So from the perspective of have we changed our models, not anything we're talking about publicly. But what I can say and feel. And again, you see it relative to the licensing activity being as strong as it is there is there is absolutely a

See it relative to the licensing activity being as strong as it is there is there is absolutely a rush to ensure that there is enough compute capacity at the end devices.

Speaker 3: to ensure that there is enough compute capacity in the end of the devices. What one of- is that there is enough compute capacity in the end of the devices.

One of the.

Speaker 3: One of the enemies of growth in our business is getting to good enough from a compute standpoint. And we are nowhere close to good enough. And that ends up meaning a drive for R&D to figure out just how to handle all these new capabilities.

What are the enemies.

Growth in our in our businesses.

Getting to good enough from a compute standpoint, and we are we are nowhere close to good enough and that ends up meaning a drive for R&D to figure out just how to handle all of these new capabilities.

Speaker 7: Thank you. And for my follow up, you know, there's recently been excitement about.

Thank you and for my follow up.

Currently being excitement about.

The combination of Windows and arm I know there have been previous attempt.

Right were not as successful I am curious how do you think about the potential for windows to succeed on arm based devices that are tangible factor for 'twenty four is that a factor for 25 and beyond just give us your perspective on.

How successful it can be and what is different this time versus the prior to attempt.

Speaker 7: that Windows has had in dealing, interacting with on technology.

Vendors have had in dealing.

Interacting with <unk> technology.

Speaker 3: Yeah, the windows and arm ecosystem is one that I have a personal history with having been there from the, from the very, very beginning, and we have come a long, long way from that point relative to.

Yes, the windows on the arm ecosystem is one that I have.

A personal history with having been there from the from the very very beginning.

And we have come a long long way from that point relative to.

Speaker 3: readiness of the application ecosystem, readiness of developers, native applications. So I think from a software standpoint, everything is now in place for the next growth cycle.

Readiness of the application ecosystem ready.

Readiness of developers native applications, So I think from a software standpoint.

Everything is now in place for the next growth cycle.

Speaker 3: One major ecosystem, not called Windows, has moved over 100%. And I think what they've proved is that there's amazing battery life, amazing performance, and amazing application compatibility across a number of different dimensions. You can run Windows on that alternate ecosystem and get really, really good performance. So I think we are on the cusp of getting over this hill. I feel very, very good about the glow projections for Windows on ARM.

One one major ecosystem not called Windows has moved over 100%.

What they've proved is that there is a amazing battery life amazing performance and amazing application compatibility across a number of different dimensions.

You can run windows on that ultimate ecosystem and get really good a good performance. So I think we are on the cusp.

Of getting over this hill I feel very very good about the growth projections for windows.

Thank you.

Our next question.

Yes.

Speaker 1: Our next question comes from Charles Shee with Needham and Company. Your line is open.

Our next question comes from Charles <unk> with Needham <unk> Company. Your line is open.

Speaker 8: Good morning, good afternoon. Thanks for letting me ask a couple questions. Maybe the first one I want to ask since Expo Control US government put out there all the rules and that they recently updated that. I wonder if...

Hi, Good morning, Good afternoon, guys. Thanks for letting me ask a couple of questions. Maybe the first of all I wanted to ask since export control U S. Government put out there are the rules and that they recently updated that I'm wondering if you.

Speaker 8: You can provide a comment whether that has any impact on arms, physical, and physical issues.

We can provide a comment whether that has any impact arms business and specifically since you havent really distinct business model, especially on the royalty side.

Speaker 8: You have a really distinct business model, especially on the Royalty side.

Speaker 8: to the extent that when your customer may be put on the end of the list, are you still able to collect the royalties? That's a related part of the question. Thanks.

In doing.

To the extent that when your customer may be put on the end of the list are you still able to collect the royalties.

That's a that's a related part of the question.

Speaker 3: Yeah, so for starters, every time these new export rules come out, we have a team of folks in our trade compliance group that go through the...

Yes, so for starters every time these new export rules come out we have a team of folks in our trade compliance group that goes through the infill.

Speaker 3: information in a very detailed way and trying to understand exactly how it might impact our company. I can say that

Information in a very detailed way and trying to understand exactly how it might impact our company.

I can say that.

Speaker 3: We obviously would comply with any kind of export restrictions that apply to our technology or what we what we build the latest the latest round of.

We obviously would comply with any kind of export restrictions that apply to our technology or what we what we build the latest the latest round of.

Speaker 3: documentation that came back from from the US pardon me. I would say not so much. In fact, probably not at all in terms of the impact there.

Documentation that came back from from U S pardon me.

I would say not so much in fact, probably not at all in terms of the impact there, but generally speaking the impact to arm.

Speaker 3: Generally speaking, the impact to arm is not that significant for two reasons. One, the components and pieces that we build are generally under the thresholds that have been listed by the United States government in terms of export control. And secondly, in the areas where there's a de minimis content.

Not that significant for two reasons, one the components and pieces that we build are generally under the thresholds that have been.

Listed by the United States government in terms of export control and secondly in the areas where there is a.

De minimis content in terms of U S people working on the design because much of our technology is actually presented developed outside the United States.

Speaker 3: U.S. people working on the design because much of our technology is actually designed and developed outside the United States.

Speaker 3: in continental Europe and the United Kingdom, we're not impacted quite so much. So generally speaking, the last set of rules did not impact ARM and we have, broadly speaking, not seen.

Europe, and United Kingdom were not were not impacted quite quite so much. So generally speaking the last set of rules did not impact arm and we have broadly speaking that scene.

Speaker 3: large impact there. To your question relative to how it works in terms of do we collect royalties if someone's on the on the entity list etc. It's pretty simple if if an end product that contains our technology can't be shipped and there's no revenue to be derived and then we feel the the ripple effect of that. Again

Large impact there to your question relative to how it works in terms of do we collect royalties if someone's on the on the entity list et cetera.

Pretty simple.

If an end product that contains our technology can't be shift and there is no revenue to be derived in that we feel the ripple effect of that.

Speaker 3: In the in the last quarter, no, no impact from that. And as we forward forecast to the guidance that we gave for the remainder of the year, nothing that we see on the horizon that's impacted there.

Again.

In the last quarter.

No no impact from that and as we forward.

<unk> forecast to the guidance that we gave for the remainder of the year.

Nothing that we see on the horizon that's impacted there.

Speaker 8: Thanks, Renee, maybe a 2nd question I want to ask is on operating margin. Are you provided at the full year operating expense? What do you expect? It kind of implies the fiscal Q4 margin is going to be down. I mean, operating margin is going to be down. I mean, even if I back out that 1 time.

Thanks, Ryan I might be a second question I wanted to ask.

On the operating margin you provided at the full year operating expense. When you expect it kind of implies fiscal Q4 margin is going to be down I mean operating margins going to be down I mean, even if I back out that one time.

Speaker 6: increasing social security taxes roughly 45 million. It's still down a little bit. So how should we think about what's driving that kind of year and margin of weakness and how should we think about going into next fiscal year? I know you have a long-term 60% operating margin target but how do we get from here to about 60% timing on annual basis next? Yeah, I'll let Jason take that one. So the way I'd answered is the margin, I think at the midpoint, yeah, it's in kind of the...

Increasing social security taxes, roughly quantify Milan.

Still down a little bit better so how should we think about what's driving that kind of a year end margin weakness and how should we think about going into next fiscal year. I know you have a long term, 60% operating margin target, but how do we get from here to about 60% on.

Annual basis.

Yes, I'll, let I'll, let Jason take that one so yes.

The way I would answer it is the margin I think at the midpoint, yes, it's in kind of the high 20% range, obviously, the expenses I'm, giving our independent of whether we come in at.

Speaker 6: The high 20% range, obviously, the expenses I'm giving are independent of whether we come in at the, you know, middle or high end, or even.

Middle or high end or even low end of the range.

Speaker 6: If you assume that off X and you also account for the one time impact on social security, which relates to the stock investing that was tied to the IPO, that's about 600 basis points of impact.

If you if you assume those net opex in use and you also account for the one time impact on social security, which relates to the <unk>.

Stock vesting.

<unk> was tied to the IPO.

That's about 600 basis points of impact.

Speaker 6: So I think if you, you know, the midpoint applies somewhere around 20-ish, 80-ish percent, if you take out that adjustment, that would put you in the kind of the mid-30s.

So I think if you know the midpoint implies somewhere around 28%. If you take out that adjustment that would put you in.

Kind of the mid thirties.

Speaker 6: And, you know, low 30s if you're at the bottom end of the estimate, and you'd be closer to, you know, low 40s if you're at the high end of guidance, or maybe high 30s. And so that's the mechanics in QPP.

Low thirties, if youre at the bottom end of the estimate and you'd be closer to low <unk>, if you're at the high end of guidance or maybe high <unk>.

And so that's that's the mechanics in Q4.

Speaker 6: Going forward, I would say, you know, we do expect to deliver incremental margin in the, in the, I would say in the medium term, ie over the next few years that will approach start to approach that 60% target that we're aiming to

Going forward I would say.

We do expect to deliver incremental margin.

In the in the I would say in the medium term over the next few years that will approach start to approach that 60% target that we're aiming towards.

Speaker 6: However, you just saw we've we've actually added about 1000 people in the last year, and and most of that is because of the head count, mostly engineers about 85% of those heads that we added last year engineers.

However, you just saw we've actually added about 1000 people in the last year and most of that is because of the head count mostly engineers about 85% of those heads that we added last year, our engineers and those folks are specifically working on the compute subsystem and the increased complexity.

Speaker 6: And those folks are specifically working on the compute subsystem and the increased kind of complexity needed with all the designs that folks bought this quarter and are going to, you know, forecasted to buy in the coming quarters.

Needed with.

With all the designs that folks spot this quarter and are going to <unk>.

Forecasted to buy in the coming quarters.

Speaker 9: So that will put maybe a little bit of pressure in Q4, but I still expect you to see us deliver, you know, a solid 40-plus percent overall margin for this year, and then certainly for next year. And I do expect us, no change in our trajectory to get to that 60 percent margin over, you know, the coming years. Next.

So.

So that will put maybe a little bit of pressure in Q4, but I still expect.

I expect you to see us deliver solid 40 plus percent overall margin for this year and then certainly for next year and I do expect US no change in our trajectory to get to that 60% margin over the coming years.

Thanks, Jason I appreciate the color. Thank you.

Next question.

Speaker 1: Our next question comes from Chris Caso with Wolf Research. Your line is open.

Our next question comes from Chris Caso with Wolfe Research Your line is open.

Speaker 10: Yes, thank you. Good afternoon. The question is another one on AI and obviously a lot of discussion about AI capabilities and client devices. Can you go into a little more detail about how ARM monetizes that? Is it from a higher per chip royalty? Is it from a better mix at your customers, maybe some higher device ASPs? How do you see that playing out over time as AI gets embedded in clients?

Yes. Thank you good afternoon.

Question is another one on AI.

And obviously a lot of discussion about AI capabilities and client devices can you go into a little more detail about how arm monetize that.

Is it from a higher per chip royalty is it from a better mix at your customers, maybe some higher device Asp's, how do you see that playing out over time.

AI gets embedded in client devices.

Speaker 3: Broadly speaking, the way I would think about it is whenever you're running one of these AI clients or assistants or agents,

Broadly speaking the way I would think about it is whenever you're running one of these AI clients or assistance or agents.

Speaker 3: It's going to require a significant uptake in terms of compute capability, both in terms of if there's an in situ accelerator and or through the CPU complex, keeping in mind that in a client device when you run these AI agents or whenever you're running something that's going to be a...

It's going to require a significant uptick in terms of compute capability both in terms of.

If there is an in situ.

<unk> <unk> through the CPU complex keeping.

Keeping in mind that in our client device. When you run these AI agents, so whenever youre running something thats going to be.

Speaker 3: co-pilot of some sort, nobody wants to see their battery life suddenly go down 40% in terms of everything that was involved in running the algorithms. So what that means for us in the broad sense is I expect it's going to be a higher need for more compute capacity. We'll see more advanced cores. We'll see larger cores, more B9, which in the end game should mean higher royalty rates for us. That would be our belief going forward in terms of just the mega trend.

Our copilot of some sort nobody wants to see their battery life suddenly go down 40% in terms of.

Everything that was involved in running the algorithms so what that means for us in the broad sense as I expect it's going to be a a higher need for more compute capacity.

See more advanced course, we will see larger quarters more benign, which in the end and game should mean higher royalty rates for us that would be our belief going forward in terms of just the mega trends.

Got it.

Speaker 10: If I could just go back and Jason go back to some of the comments on OPEX, you spoke about them in terms of operating margin.

If I could just go back and Jason go back to some of the comments on Opex.

Spoke about them in terms of operating margin.

Speaker 10: But just as we look at modeling operating expenses as we go into next year, obviously, it sounds like we should take out.

But just as we look at modeling operating expenses as we go into next year, obviously, it sounds like we should take out that onetime social security tax in the fourth quarter, but what well I guess what would be the path of Opex as we go into next year and to what extent is that dependent on.

Speaker 10: that one-time Social Security tax in the fourth quarter. But what do you, well, I guess what would be the path of OPEX as you go into next year?

Speaker 10: And to what extent is that dependent on the revenue stream or, you know, is there a, are you modulating op ex according to revenue where you're just spending where you need.

Revenue stream.

Sarah.

Are you modulating opex according to revenue, where you're just spending when you need it.

Speaker 6: Yeah, I don't in terms of providing guidance for next year, I'm not not ready to do that. I would say kind of our our long term model approach, you know, is it really any different. So I'm not ready to, you know, kind of go provide any updates to that. But, but I would expect.

Yes.

In terms of.

Abiding guidance for next year I'm, not ready to do that I would say kind of our our long term model approach.

Isn't really any different so im not ready to kind of go provide any updates to that but.

But I would expect.

Speaker 9: We definitely will be growing op-ex less than revenue. And so I do expect to get income on margin. I just, I can't say exactly kind of what the quantity is for next year until we get a little later into the share. All right, Colonel, thank you.

We definitely will be growing opex less.

Less than revenue and so I do expect to get incremental margin.

Can't say exactly.

Kind of what the quantum is for next year until we get a little later into this year.

Alright fair enough. Thank you.

One moment for our next question.

Okay.

Okay.

Speaker 1: Our next question comes from Andrew Gardner with Citi. Your line is open.

Our next question comes from Andrew Gardiner with Citi. Your line is open.

Speaker 11: Thank you very much for taking the question. I have one on licensing to start with. Clearly, you beat expectations quite handily in the quarter on that front, and I suppose this was a part of the business that during the IPO process you explained was an area where you guys had pretty good visibility, it was fairly predictable given the timing of contract renewals.

Thank you very much for taking the question.

One on licensing to start with.

Will you be expectations quite handily in the quarter on that front.

This was a part of the business. It during the IPO process. You explained was an area, where you guys had pretty good visibility Craig predictable given the timing of contract renewals.

Speaker 11: So, you know, what's the beat a pull forward of demand or, you know, are you seeing the, uh, as you put it, Renee, the AI super cycle, is that driving upside to the pipeline that you had had there earlier in the year?

Whats the beat a pull forward of demand or are you seeing the as you put it Renee the AI Super cycle is that driving upside to the pipeline that you had had earlier in the year.

Speaker 3: Yeah, thank you for the question. It's a good question. I would say it was expansion of deals that we had visibility on what we have generally pretty good visibility is when when our renewals do and or when our customer is going to be looking at uptakes of new technology. I think what we saw more broadly speaking was the partners that we knew about that we were expecting deal closure, their appetites got bigger over the quarter, and they took more technology so the size of the deals were larger.

Yes. Thanks for the question. It's a good question I would say it was expansion of deals that we have visibility on.

What we have generally pretty good visibility is when our renewals do <unk> when our customer is going to be looking at uptake of new technology I think what we saw broadly speaking was the partners that we knew about that we were expecting deal closure.

Their appetites got bigger over the quarter and they took more technology. So the size of the deals were larger.

Speaker 6: I think the one thing I would add versus expectations in the quarter if you look at, you know, revenue certainly growing 28% is strong, but also RPO or total backlog actually grew 700 million, both year on year and even sequentially quarter over quarter. And, you know, if you actually do the math on on total booking.

I'd say, the one thing I would add versus expectations in the quarter. If you look at revenue certainly growing 28% as strong but also our appeal or total backlog actually grew $700 million.

Both year on year, and even sequentially quarter over quarter.

And if you actually do the math on on total bookings.

Speaker 6: or RPO Votings, Revenue Plus Change in RPO. You can actually see that we did over 1.1 billion in Votings in the quarter, which is the best quarter in our history.

<unk> revenue plus change in <unk>, you can actually see that we did over $1 1 billion in bookings in the quarter, which is the best quarter in our history. So so that definitely to <unk> point, while we had.

Speaker 6: So that definitely, to a redance point, while we had insight into the pipeline, the size of the deal did expand and get bigger. And certainly a lot of that, we think is tied to this kind of deeper investment, R&D, given everything it's happening.

Insight into the pipeline the size of the deal did expand and get bigger and certainly a lot of that we think is tied to this kind of deeper investment in R&D given everything that's happening in AI currently.

Currently.

Yeah.

Speaker 11: Well, and then you lean into my next question, because in the letter, you say that of that RPO, you're expecting to recognize 28% of it over the next 12 months, which, given roughly where expectations were following what you guys had given us through the IPO process, it looks like you've already got two-thirds of that licensing revenue.

Well understood.

You lead into my next question because.

In the letter.

Say that of that RPM.

You were expecting.

To recognize 28% of it over the next 12 months, which given roughly where expectations were following what you guys had.

Given us through the IPO process. It looks like you've got you've already got two heads of your.

That licensing revenue.

Speaker 11: in hand. So even if you don't sign that many more deals, it looks like you're pretty well set for the rest of the year in terms of licensing. So the expectation is not too conservative on that front at this point.

And so even if he.

If you don't sign that many more deals it looks like you're pretty well set for the rest of the year in terms of licensing.

The expectation is not too conservative on that front at this point.

Speaker 11: You're talking about expectations for next year or the back half of this year. Well, just there's sort of 12 months forward, right? So what you're saying about 28% of the IPO to be recognized over the next 12 months.

Youre talking about expectations for next year or the back half of this year.

Yes.

Forward right, so what you're saying about 28% of the IPO.

Over the next 12 months.

Speaker 6: Well, we feel good about the guidance, and we did increase the targets for the back half of this year versus, you know, versus what we thought at IPO, and we haven't talked about next year, but but certainly, given the tailwinds that I think exist on the licensing side. And then now that we are seeing signs of progress on the royalty side. We're still not ready to finalize the numbers but but they're definitely our tailwinds.

Well, we feel good about the guidance I mean, we did increase the targets for the back half of this year versus.

Yes.

Versus what we thought at IPO.

<unk>.

We haven't talked about next year, but certainly given the tailwind that I think exists on the licensing side and then now that we are seeing signs of progress on the royalty side.

Yes.

Not ready to finalize the numbers, but they are definitely <unk>.

Speaker 3: Yeah, I think you're reading it correctly. To Jason's point, a billion dollars and booking in a quarter. There were years where we didn't do that in a year, minus a few hundred million. So we are very, very confident about the level of

You are reading it correctly to Jason's point.

A $1 billion in bookings in a quarter there were years, where we didn't do that in a year minus a few hundred million dollars. So we are very very confident about the level of.

Speaker 3: backlog we've built up and how that gets recognized over time, so we feel very confident about that. But more importantly, from the financials, not to minimize that, it does underscore very, very strong demand for armed technology relative to the R&D investment that people are making. We see no, in the midst of

Backlog, we built up and how that gets recognized over time. So we feel very confident about about that but more importantly from the financials not to minimize that.

It does underscore very very strong demand for arm technology relative to the R&D investment that people are making we see no.

In the midst of inflationary.

Speaker 3: Inflationary pressures, geopolitics, lots of unknowns about end markets.

Any pressures geopolitics lots of unknowns about end markets.

Speaker 3: What we're not seeing is people pushing out deals, not making investments.

What we're not seeing is people pushing out deals not making investments.

Speaker 3: staying with the current generation of technology for a cycle, none of that whatsoever. What we're seeing is sort of as much as possible in the acceleration to make sure that there's much compute capacity in the end devices that are being built. What largely back on the AI piece, because these models are changing so fast and being evolved so quickly.

With the current generation of technology for a cycle none of that whatsoever, what we're seeing is sort of a.

As much as possible and acceleration to make sure that there's as much compute capacity in the end devices are being being built largely back on the AIP because people people. Because these models are changing so fast and being evolve so quickly.

Speaker 3: The understanding of what amount of compute capacity you need to take advantage of the capabilities they're being introduced is a bit of an unknown. What you do know is that you probably don't have enough compute in the devices that you've designed today. So adding to it is critical, which is why we saw such the expansion in this last quarter.

The understanding of what amount of compute capacity you would need to take advantage of the capabilities that are being introduced as a bit of an unknown. What you do know is that you probably don't have enough compute into devices that you've designed today, so adding to it is critical which is why we saw such an expansion in this last quarter.

Thank you very much.

One moment for our next question.

Speaker 1: Our next question comes from Harlan Serif with CP Morgan. Your line is open.

Our next question comes from Harlan sur with Jpmorgan. Your line is open.

Speaker 8: Good afternoon, thanks for taking my question. Another one on licensing. You know, as you mentioned, there's some timing related dynamics and revenue rec dynamics regarding licensing in the December and the March quarter. Some of the uncertainty is to be expected, especially on large deals, as you mentioned. So, on the fiscal second half is more of the uncertainty on timing of licensing deal closure or or more around the revenue recognition profile of those signed deals.

Good afternoon. Thanks for taking my question. Another one on licensing as you mentioned there is some timing related dynamics and revenue Rec dynamics regarding licensing in the December and the March quarter. Some of the uncertainty is to be expected, especially on large deals as you mentioned so on the fiscal second half is more of the uncertainty.

On the timing of licensing deal closure or are more around the revenue recognition profile of those sign deals.

Timing.

Speaker 6: Yeah, we were. I mean, deal deal. And as Rene just mentioned a moment ago, deals certainly have the capacity to change in overall size or quantum, but but

Yes, we.

I mean deals.

And then I just mentioned a moment ago deal certainly have the capacity to change in overall size or quantum but but that's.

Speaker 6: That that for the most part usually provides more upside. So in this case, it's really just about timing and you know as these deals.

That for the most part usually provides more upside so in this case, it's really just about timing.

And as these deals.

Speaker 9: given we did 1.1 billion in bookings last quarter. These are very, very large deals that require lots of complicated approval that go to the highest levels of these organizations that...

Given we did 1.1 billion in bookings last quarter. These are very very large deals that require lots of complicated approvals that go to the highest levels of these organizations that can take a while and thats hard for us to predict.

Speaker 9: can take a while. And that's hard for us to predict. And so it's it's certainly

And so it's certainly.

Speaker 3: our view on, I would not evaluate just Q3, I would evaluate Q3 plus Q4. And Q3 plus Q4 is what we took up in our guidance and feel very good about the trajectory. Yeah, so having been with the company 10 years and watched how this process works.

Our view on I would I would not evaluate just Q3 I would evaluate Q3 plus Q4.

And plus Q4 is what we took up in our guidance and feel very good about the trajectory, yes, so having been with the company 10 years.

Watched how this process works.

Speaker 3: We generally have pretty good visibility on the six month basis, but to tell you whether something is gonna close in December or January , given the fact that there may be a lot of legal language to review, it takes approvals, December is a holiday period, could be a bit of out of our control. So to the level of being potentially conservative on a quarter timing, I think that's potentially the...

We generally have pretty good visibility on a six month basis, but to tell you whether something is going to close in December January and given the fact that there may be a lot of legal language to review. It takes approvals December is a holiday period could.

Could be a bit about our control so.

So to the level of being potentially conservative on a quarter timing I think thats potentially.

Speaker 3: the detail you're extracting here, but our confidence that the deal will actually close is quite high given that we know what the needs are, which is why at Jason's point, the guidance went out. But more importantly, and I give that example of December , January as both a figurative one and a real one, because that's exactly what we might be looking at here and it makes a big difference on which side of the boundary it hits. But our degree of confidence that the technology will be needed by the end customers is quite high.

The detail Youre extracting here, but our confidence that a deal will actually close.

Is quite high given that we know what the needs are which is why its adjacent point the guidance went up but more importantly.

Give that example of December January is.

Both the figure of one and a real one because that's exactly what we might be looking at here and it makes a big difference on which side of the boundary it hits our.

Our degree of confidence that the technology will be needed by the end customers is quite high.

Speaker 8: And then maybe mid to longer term, you know, the step up in royalty rates over the next few years is in large part driven by the adoption of your.

Perfect and then maybe mid to longer term.

The step up in royalty rates over the next few years is in large part driven by the adoption of your.

Speaker 8: total compute or compute subsystem solutions where you're not only delivering more CPU or MCU cores to your customers, but also integrating some of the key subsystem blocks like bus architecture.

Total compute compute subsystem solutions, where they're not only delivering more CPU or MCU cores to your customers, but also integrating some of the key subsystem blocks like bus architecture cash memory management memory controller security et cetera, David your customers significant engineering design and validation.

Speaker 8: cache memory management, memory controllers, security, et cetera. Saves your customers significant engineering, design, and validation costs. In return, you guys get a higher royalty rate.

Cost and return you guys get a higher royalty rate Tcs has been very successfully adopted by several of their large mobile customers can you guys just give us a sense on the traction of driving more subsystem solutions into your automotive industrial PC data center compute customers than any sort of.

Speaker 8: TCS has been very successfully adopted by several of your large mobile customers.

Speaker 8: Can you guys just give us a sense on the traction of driving more subsystem solutions into your automotive, industrial, PC, data center, compute customers, and any sort of way to quantify the momentum there?

Way to quantify the momentum there.

Speaker 3: So, we just announced for our infrastructure business, our CSS partner program, where we are engaged with people like TSMC, Cadence, Synopsys, Intel, etc. to more rapidly accelerate partners who want to move into this.

So we just announced for our infrastructure business, our CSS partner program, where we are engaged with people like <unk>.

TSMC.

Cadence Synopsys, Intel et cetera to more rapidly accelerate partners, who want to move into this.

<unk> solution space.

Speaker 3: That's really been driven by the fact that the demand for this has been higher than we expected. And if you just step back and think about, well, why would this be of such high interest to end customers?

That's really been driven by the fact that the demand for this has been higher than we expected.

<unk>.

If we just step back and think about why would this be of such high interest to end customers.

Speaker 3: From if a customer is designing a, an S.O.C. that has one microcontroller core into it or two, handing IP to that customer, they then develop their chip, they put their IP around it, and then ultimately develop the end product, that model works very well for certain segments.

From if a customer is designing a an SFC that had one microcontroller.

Or intuit or to handing IP to that customer.

And then develop their chip they put their IP around it and then ultimately.

Developing and product.

That model works very well for certain segments, but we're trying to build something that is for.

Speaker 3: But if you're trying to build something that is for a laptop, or a cloud infrastructure, or a 5G switch, and you're putting down 16 CPUs, 30 CPUs, 100 CPUs, and you're trying to incorporate the fabric, and you're trying to incorporate the cache memory interfaces,

A laptop or a cloud infrastructure or <unk>, rich and Youre, putting down 16, Cpus 30, Cpus 100, Cpus and Youre trying to incorporate the fabric and youre trying to incorporate the cache memory interfaces.

Speaker 3: And they are also trying to build a chip that used to take you 16 weeks from TSMC to now 26 weeks.

And they are also trying to build a chip that used to take 16 weeks from TSMC to now 26 weeks, you've got 10 weeks added to your cycle time.

Speaker 3: You've got 10 weeks added to your cycle time, and now the subsystem part that you have to integrate is really hard. So.

And now the subsystem part that you have to integrate its really hard so, particularly.

Speaker 3: Particularly in the cases where many of these subsystems are exactly what we just described. They are the compute, they are the block that arms delivers. It actually makes a ton of sense for partners to look for us to provide that.

Particularly in the cases, where many of these subsystems are exactly what we just described they are the compute the block that arms delivers it actually makes a ton of sense for partners to look for us to provide that.

Speaker 3: That applies extremely well as I said to the markets I mentioned, including automotive ADAS.

That applies extremely well as I said to the market as I mentioned, including automotive Adas.

Speaker 3: including mobile. So we are over-cribed on this and again on the guidance standpoint, not going to change any words that we've provided in terms of what the overall future looks like, but it is a I think a huge value driver for our end customers. So we see this direction is travel only increasing. Absolutely. Thank you.

Including.

Mobile. So we are we are oversubscribed on this and again on the guidance standpoint, not going to change any words that we provided in terms of what the overall future looks like but it is a it is I think a huge value driver.

For our end customers. So we see this direction of travel only increasing.

Absolutely. Thank you.

Yes.

One moment for our next question.

Speaker 1: Our next question comes from Rossi Moore with Dujabank, Your Line Isle.

Our next question comes from Ross Seymore with Deutsche Bank. Your line is open.

Speaker 12: Hi guys, thanks for my asking question. For my first question, I just wanted to get into the implied December and well actual December guide and implied march. Guys, it looks like you're missing the street a little bit in December , but then beating it in March.

Hi, guys. Thanks for let me ask a question for my first question I just wanted to get into the implied December while actual December guidance implied March guys. It looks like Youre missing the street, a little bit in December, but then beating it in March is that just the lumpiness of the licensing you've mentioned a bunch of times.

Speaker 12: Is that just the lumpiness of the lightening you've mentioned a bunch of times? And I guess more precisely...

More precisely what's the general expectation on the royalty side of things, especially in the March considering that there's lots of moving parts cyclically right now, but seasonally that doesn't tend to be the best of quarters for your mobile business the smart.

Speaker 12: What's the general expectation on the royalty side of things, especially into March, considering that there's lots of moving parts cyclically right now, but seasonally, that doesn't tend to be the best of quarters for your mobile business.

Speaker 12: Smart phones, et cetera. So just the push and take on those would be helpful. Sure. So.

Smartphones et cetera, so just the puts and takes on those would be helpful.

Sure so yeah on the licensing side.

Speaker 3: Exactly as we described our six month visibility is very, very good. Our month to week visibility is a little fuzzier. And as a result, we're going to err on the side of caution and not overstep, but make sure we...

Exactly as we described our six month visibility is very very good our month to week visibility is a little fuzzier and as a result, we're going to err on the side of caution and not overstep. It make sure we do.

Speaker 3: deliver on what we say we're going to do. And as I said, we're extremely confident in the deals that we've identified and the need for the technology.

To deliver on what we say, we're going to do and as I said, we're extremely confident in the deals that we've identified the need for the technology.

Speaker 3: I'll let Jason come in a bit more in terms of the direction of travel on royalties, but broadly, we've seen three quarters of sequential growth. We have a lot of strong indicators from partners.

I'll, let Jason comment a bit more in terms of the direction of travel on royalties, but broadly we've.

We've seen three quarters of sequential growth.

We have a lot of strong indicators from partners.

Speaker 3: that we are out of the of the of the trough and and claiming out of the trough.

We are out of the trough and climbing out of the trough.

Speaker 3: relative to the direction travel, the slope of the curve. I'll let Jason sort of speak to that. But generally speaking, our indicators are pretty strong as far as that market goes. And as I said, in the other markets where we continue to grow and gain share in cloud and automotive, our confidence level is quite good.

Relative to the direction of travel of the slope of the curve I'll, let just Jason sort of speak to that but generally speaking our indicators are pretty strong as far as that market goes and as I said in the other markets, where we continue to grow and gain share in cloud and automotive our confidence level is is quite good.

Speaker 9: Hey Ross, I'm on the royalty side. What I would say is, you know, in this most recent quarter, we did see positive sequential growth return. You know, and if you look at some of our largest partners, they've seen the same.

Hey, Ross on the on the royalty side, what I would say is.

This most recent quarter, we did see positive sequential growth return.

And if you look at some of our largest partners they've seen the same if you our guidance, which is in part we are looking at some of the industry reports as well as also.

Speaker 9: If you are guidance, which is in part, we are looking at some of the industry reports as well as also looking at some of the forecasts from our partners.

Looking at some of the forecast from our partners and I think we're forecasting something pretty similar to what others are saying and that is we're expecting to see.

Speaker 9: And I think we're forecasting something pretty similar to what others are saying is, and that is we're expecting to see, you know, somewhere in the probably high kind of mid to high single digits sequential growth in, in the next, I would say next two quarters, each of the next two quarters.

Somewhere in the probably high kind of mid to high single digit sequential growth.

In.

And the next I would say next two quarters each of the next two quarters.

Speaker 9: And so when you factor that into the downturn that really kind of took hold last year, that means you're going to see year on your growth in royalties get back to, you know, I'd say positive single digits in Q3. And then I'd say get, you know, definitely, you know, kind of well into the double digit growth by Q4.

So when you when you factor that into the downturn that really kind of took hold last year that means you're going to see year on year growth.

In royalties get back.

I would say positive single digits in Q3, and then I'd say get definitely.

Well into the double digit growth by Q4.

Speaker 9: And then, you know, we'll see from there, but obviously the comps certainly are easier as well in the first half of next year. So I think we have a good setup, and as long as this kind of recovery that us and our partners are seeing continues to come to fruition, it should be great setup.

And then we'll see from there, but obviously the comps.

Certainly our easier as well in the first half of next year. So I think we have a good setup and as long as this this kind of recovery that us and our partners are seeing continues to come to fruition.

It should be great setup.

Speaker 12: Thanks for that, Jason and Renee. I guess for my second question, this has been a bit of a rolling correction. You just talked about some of the dynamics coming out the other side, thankfully. But some of the other markets, automotive, industrial, broad-based ones, seemingly are just rolling over now to the downside.

Thanks for that Jason and Renee I guess for my second question. This has been a bit of a rolling correction you just talked about some of the dynamics coming out the other side thankfully, but some of the other markets automotive industrial.

Broad based ones and seemingly are just rolling over now to the downside what's the impact arm. If some of your more client businesses improve I realize you have a bigger exposure to those but as far as implied royalty revenue rates those sorts of things that the automotive and the industrial Iot side of things weekend can you make up for that with the.

Speaker 12: What's the impact to ARM if some of your more client businesses improve? I realize you have a bigger exposure to those, but as far as implied royalty, revenue rates, those sorts of things, if the automotive and the industrial IoT side of things weaken, can you make up for that with the mobile side of things, the client side, or are there trade-offs that we all need to appreciate?

The mobile side of things the client side or other trade offs that we all need to appreciate.

Speaker 9: Our expectations are the combination of increasing B9 products that actually are starting to shift because we're still on the royalty side. We're still in the real till the early days of B9 shift.

Our expectations are the combination of.

Increasing benign.

Products that actually are starting to ship because we're still on the royalty side, we're still in the relatively early days of DNI and shipments.

Speaker 9: Think of it as being probably somewhere in the 10% or so of our royalties are shipping with V&I.

Think of it as being probably somewhere in the 10% or so of our of our royalties are shipyard benign.

Speaker 9: So as you know, since we started, since really a lot of these designs were sold over the past couple of years, those products are really just starting to make that come to market now. So so that's certainly going to be a tailwind to growth, both as we see recovery in units, but then also as we see these higher rates flow through.

Since we started it's really a lot of these designs were sold over the past couple of years. Those products are really just starting to make that come to market now. So so that's certainly going to be.

A tailwind to growth both as we see recovery in units, but then also as we see these higher rates flow through.

Speaker 9: There's also a lot of, there's some strong growth drivers certainly happening in the infrastructure business where,

There's also a lot of there's some strong growth drivers certainly happening in the infrastructure business where.

Speaker 6: Certainly, while the industry had been a bit slow in this last year, things seem to be picking up and obviously with all of the different hyper-scaler AI efforts, there's a lot going on there. And so we're gonna continue to gain share on the infrastructure side, specifically on the cloud compute side. Auto is an area where we've also seen pretty strong gains. You know.

Certainly while the industry had been a bit slow in this last year things seem to be picking up and obviously with all of the different hyperscale or AI efforts. There is a lot going on there.

And so we're going to continue to gain share on the on the infrastructure side specifically on that.

Compute side.

<unk> is an area where we.

We are also seeing pretty strong gains.

Speaker 9: Certainly the market, I think our expectations won't be as strong as it's been over the last year or so. I think their inventory levels have probably caught up a bit more. And so at least from a, I'd say from an auto inventory, not a chip inventory perspective.

Certainly the market I think our expectations won't be as strong as it's been over the last year or so I think their inventory levels are probably caught up a bit more.

And so at least from a I would say from an auto inventory not a chip inventory perspective.

Speaker 9: And then, you know, our expectations are, I think, similar to yours. We don't expect IoT to be a big door driver in the near term. I think, you know, certainly could be further down the road as we see what AI does for edge computing, why not, but for right now, probably not a strong growth driver for next year. So that's, I'd say kind of a, how we're looking at it on a law by law basis. And we'll certainly let you guys know as we learn more and progress throughout the year.

And then our expectations are I think similar to yours, we don't expect Iot to be a big driver in the near term.

I think.

Certainly could be further down the road as we see what AI.

Does for edge computing, and whatnot, but right now probably not a strong growth driver for next year. So that's I'd say kind of how we're looking at it on a loan by loan basis, and we will certainly let you guys know as we as we learn more and progress throughout the year.

Thank you.

One moment for our next question.

Yes.

Yeah.

Speaker 1: Our next question comes from Pierre Ferrague with New Street Researcher Line is open.

Our next question comes from Pierre <unk> with New Street Research. Your line is open.

Speaker 13: Hey, thanks for that for taking my question. I'd like to come back to OPEX. I mean, you've given a lot of clarity on numbers. Thanks for that for that. But my question is probably a bit more.

Hey, Thanks for taking my question.

I'd like to come back through.

Opex.

Given the lack of clarity on number of things that I talked about.

My question is probably a bit more generic.

Speaker 13: So if we say like Q4 to Q4, your OPEX has increased by, we'll have increased by about like 20%, 20% or so. I'd like to better understand like the operational drivers of that increase and in general how your OPEX is increasing. Maybe I have like too much of a simplified view of your model, but to me you spend a lot of OPEX on developing products.

So if we hit a Q4 to Q4 your Opex hasn't increased buy we would have increased by about <unk>, 10% to 20% or so.

I'd like to better understand like the operational drivers of that increase and in general how your opex are increasing.

Maybe I have like too much of a simplified view of your model.

To me you spend growth of Opex on developing products.

Speaker 13: And then after that, you license these products. And then after some time, these licensed products end up into the products of your client. And so I would have expected OPEX, you know.

And then after that to license these products and then after some time his license products and back into the products.

And so I would have expected opex.

Speaker 13: to grow very early in the process, and not really at that point in time when actually your licensing activity is very, very rapid. And the next stage is for your clients to actually integrate your IP in their product. So there is probably an element of the model that I'm missing. And I'd love if you could help me better understand that.

To grow very early in the process and not really at that point in time.

We're not giving you a licensing activities.

<unk> and <unk>.

The next stages for your clients to we can integrate.

Your IP in that.

Product so there is probably.

And then in terms of motor that I'm missing.

Notice you crude to help me better understand that.

Speaker 13: And so, and also one thing that could help is to give us a sense of that increasing up eggs is that almost exclusively product development like R&D or actually is there a lot of like business development and managing client relationships within the start of this new licensing column that maybe we are missing the way we understand it.

And so and also one thing that could help us to give us a sense of.

Does that increase in Opex is that almost exclusively.

Product development R&D are actually we are not.

Best of luck Mike.

Managing client relationships within the startup of these new licensing program, but maybe we are missing the way we understand it.

Speaker 9: Thanks for the question. So first, yeah, so if you look back over the last year, we've added about 17% increase in headcount, about 1000 people, 85% of those heads are in R&D.

Great.

Thanks for the question. So first yes. So if you look back over the last year, we've added about 17% increase in head count.

About 1000 people.

85% of those heads are in R&D.

And so so while there may be some G&A and some sales whatever we're talking about 15% is everything thats non R&D and in our total R&D as a head count and a percentage of total opex runs about 80%. So so we're I'd say pretty consistent in terms of.

Of our over weighting towards building capabilities future capabilities.

Speaker 9: And most of this R&D, to your point, when we're, the R&D teams are creating designs and, you know, that we're then, of course, selling, but we're constantly working on, you know, the next evolution.

And most of this R&D to your point when we're.

The R&D teams are creating designs and.

That will then of course, selling but we are constantly working on the next evolution right now what's been happening over this last year and the reason why there's been such a.

Speaker 9: Right now what's been happening over this last year and the reason why there's been such a significant amount of hiring is because we, you know, as we started selling the compute subsystem capabilities because that's certainly what customers have clearly been, and partners have been looking for from us.

Significant amount of hiring is because we as we started selling the compute subsystem capabilities because thats certainly what customers have clearly been and partners have been looking for from US that's required us to build a solutions engineering team, which is a bit of a new muscle for us and so that team.

Speaker 9: That's required us to build a solutions engineering team, which is a bit of a new muscle for us.

Speaker 9: And so that team went from, I'd say, very, very small a year ago to now.

Went from I would say very very small year ago to now.

Speaker 9: about a thousand people. And so that's been a big area of hiring and a lot of the contracts and a lot of the royalties that we're going to get.

About 1000 people and so.

So that's been a big area of hiring and a lot of the contracts and a lot of the royalties that were going to get from those hires were going to start seeing really not until we get into our fiscal year end 2006 as.

Speaker 9: from those hires, we're going to start seeing really not until we get into our fiscal year in 26 as we talked a bit about during the road show. So...

As we've talked a bit about turning the roadshow. So so so it is to some extent some foreign investment.

Speaker 9: So it is to some extent some forward investment. And, but there is, you know, contracts. I think someone earlier asked the question that, you know, we had something like 81% of our, of our royalty contracts were already signed for FYH26. So the vast majority of the benefit we're gonna get from them has been signed, but will not ship until we get into late 25 and early 20.

And.

But there is.

Contracts I think someone earlier asked the question that we had something like 81% of our of our royalty contracts are already signed for FY 'twenty six so the vast majority of the benefit we're going to get from them has been.

<unk> signed but will not ship until we get into late 'twenty five in early 'twenty six yes.

Speaker 3: Yeah, as far as the product development cycle goes, your question is a very good one relative to how to think about product development and cycle time.

And as far as the product development cycle goes.

Your question is a very good one relative to how to think about product development and cycle times.

Speaker 3: We put out products very, very frequently. The mobile and PC world, they need to see new CPUs every single year. They need to see new GPUs every single year. So we are developing the next generation product and releasing something literally on an annual beat.

We put out products very very frequently.

The mobile and PC world they need to see new Cpus every single year, they need to see new Gpus every single year. So we are developing the next generation product.

And releasing something literally on a on an annual beat.

Speaker 3: The hyperscaler market is probably every two years, but we also do performance scores and efficiency scores on a bit of a tick-tock basis. And then automotive cores are probably anywhere between two to three years. So our people are always working. And I would also say that, well, one of the things we did during the SoftBank years to invest is we actually got out of a number of commodity businesses that we were in, such as video IP.

The Hyperscale market is probably every two years, but we also do performance cores and efficiencies cores on a bit of a tick tock basis.

Automotive cores are probably anywhere between two to three years. So our people are always working.

And I would also say that one of the things we did during the Softbank years to invest is we actually got out of a number of commodity businesses that we're in such as video IP display IP, where we were highly.

Speaker 3: display IP where we were highly undifferentiated and use those resources to develop a Nealverse CPU roadmap and to develop a automotive AE roadmap. AE is a automotive enhanced, including functional space.

Differentiated and use those resources to develop a new reverse CPU roadmap and to develop a automotive AE roadmap AE is automotive enhanced including functional safety.

Speaker 3: So there is a constant treadmill of products and CPUs and GPUs and NPUs that are being developed. And then to Jason's point, when we start to put those into subsystems.

There is a constant treadmill of products and Cpus and Gpus and Cpus that are being developed and then to Jason's point when we start to put those into sub systems.

Speaker 3: That's a new output and a deliverable. So the IP group.

That's a new.

Output in a deliverable so the IP group.

Speaker 3: provides those IP cores to the solutions engineering group, which is then essentially the group responsible for stitching them together as a subset.

Provides those IP cores to the solutions Engineering group, which is then essentially the group responsible for stitching them together as a sub system. So it is an ongoing.

Speaker 3: So it is an ongoing engineering flywheel that does not abate. And as I said, relative to the broader market demand, we're nowhere close to good enough. People want smaller, smaller, faster, better, all the time. It was just what we're working on.

Engineering flywheel that does not abate.

And as I said relative to the broader market demand, we're nowhere close to good enough people want smaller smaller faster better all the time, which is what we're working on.

Speaker 13: Thanks, that's very, very clear. Like this like subsystem engineering really answers the question I had. Maybe one quick follow up if I may. If I look at where you're guiding and how it compares to like the set side conferences, you're kind of quite significantly higher on the back four Q4. And so my question here is maybe a bit provocative, but

Okay, that's very very clear in like this like sub system engineering.

<unk> says.

The question I had.

Maybe one quick follow up if I may.

If I look at where you're guiding and how it compares to like.

Set aside consensus.

Youre kind of quite significantly higher on the Opex for Q4, and so my question here is.

Maybe it would be probably continues but.

Speaker 14: Does that mean that the cell file analyst didn't listen to you carefully enough during the IPO process and mismodeled a bit OPEX in the near term or does that mean that today compared to three months ago you've actually built a public faster than what you were thinking three months ago I can answer that

Does that mean that to satisfy the analysis didn't Houston you carefully enough during the IPO process in <unk>.

Opex in the near term does that means that today compared to three months ago, you've actually built up opex faster than what you were thinking.

Turning to grow.

I can answer that the short version is.

Speaker 9: The assumptions back when we had Analyst Day in early August was for a lower stock price than we actually ended up issuing most of the equity at, and also I would say higher social security taxes, especially in the UK, where they're about two X higher than they are in the US.

The assumptions back.

Back when we had analyst day in early August was for a lower stock price than we actually ended up issue in most of the equity at.

And.

Also I would say higher social security taxes, especially in the U K, where they are about <unk> higher than they are in the U S.

Speaker 6: And when we flow through the increased stock price and then we flow through the increased taxes

And when we flow through the increased stock price and then we flowed through the increased taxes.

Speaker 9: That's the driver. So it's not an ongoing cost driver. That's why our expectations are still to deliver somewhere on the 40% range of non-gap operating margin in the near term in this year, and we still have a long-term target that will be getting to the 60% range. There's no change to those targets. It's the short-term aspects of...

That's the driver so it's not a it's not a an ongoing.

Cost.

Cost driver that's why there are expectations are still to deliver.

Somewhere in the 40% range of non-GAAP operating margin in.

In the near term in this year and we still have a long term targets that we'll be getting to the 60% range. There is no change to those targets in the short term aspects of dealing with some of the IPO related costs switch.

Speaker 6: dealing with some of the IP-related costs, which just ended up being a little higher than we'd previously forecasted. Thank you, very clear.

Just ended up being a little higher than we had previously forecasted.

Thank you very clear thank you Glen.

One moment for our next question.

Yeah.

Speaker 1: Our next question comes from John Diffushe with Guggenheim Securities. Your line is open.

Our next question comes from John <unk> with Guggenheim Securities. Your line is open.

Speaker 4: Thank you and thanks for taking my question. My first question has to do with the related party revenue, which was flattish year over year versus the rest of the revenue was up almost 40%. Can you provide more color around the license versus royalty mix for the related party business and how we should think about that going forward?

Thank you and thanks for taking my question. My first question has to do with the related party revenue, which was flattish year over year versus the revenue the rest of the revenue was up almost.

Almost 40%.

You provide more color around the license versus royalty mix for the related party business and how we should think about that going forward.

Speaker 9: Sure. Thanks for the question, John . So related party revenue is armed China.

Sure.

Thanks for the question, Jon So related to related party revenue as arm China.

Speaker 9: where we have a couple hundred customers in China that are all aggregated and treated as one based on how the joint venture was set up. You should think of, so China did, it still grew, I call it in the low single digits, but as a percentage of total, it fell from about 25% in the more recent period down to about 20%. And that's just because the rest of the world has grown.

Where we have a couple of hundred customers in China that are all aggregated and treated as one.

Based on how the joint venture was set up.

You should think of.

So China did.

It still grew.

In the low single digits, but as a percentage of total it fell from about 25%.

In the most recent period down to about 20% and that's just because the rest of the world just grew so much faster.

Speaker 9: In terms of the mix of, of loyal of license versus royalty. Think of it as being pretty close to, you know, 5050 a little over 50% of license a little less than 50% is is royalty, but all of that revenue for arm China is treated as, as, as other, because of the fact that the way that the arm China joint venture structure.

In terms of the mix of.

Loyal.

Since versus royalty.

Or it has been.

Pretty close to 50, 50 or little over 50% of license a little less than 50% is.

As royalty, but all of that revenue for arm China is treated.

As as as other.

Because of the fact that the way the arm China joint venture is structured.

Speaker 15: got it. Okay, great. Thanks Jason. That's that's really helpful. And actually, how about going forward? How should we be thinking about that mix going forward for for our China?

Got it okay, great. Thanks, Jason.

That's really helpful.

And.

How about going forward, how should we be thinking about that mix going forward for four arm China.

Speaker 6: I think the mix is pretty similar. It's, they, they, at least that's the color we have right now. They've historically been, I'd say closer to 50-50 than the rest of the world, which is closer to 40-60, 40-40% license, 60% royalty. In terms of, you know, we'll certainly update you if we see a change, but that's our expectation, I'd say, for at least the back out of the shape.

I think the mix is pretty similar.

At least thats the color we have right now they've historically been.

I would say closer to 50 50 than the rest of the world, which is closer to $40 to $6, 40% to 60%, 40% license 60%.

Royalty.

In terms of.

We'll certainly update you if we see a change, but that's our expectation I would say for at least the back half of this year.

Speaker 15: Okay, great. And for a second question, when we think about the guidance for next quarter in the year, obviously the macro backdraft has an effect, and you guys have your own crystal ball. I guess we all do. And it has an effect on both license and royalties. But the royalty part is really something you probably have less control over and visibility into that timing, even though there were a lot of questions here on license, which is...

Okay great.

Second question, when we think about the guidance for next quarter and the year. Obviously, the macro backdrop has an effect and you guys have your own Crystal ball I guess, we all do.

And it has an effect on both license and royalties, but the royalty part is really something you probably have less control over and visibility into that timing, even though there were a lot of questions here on license, which this probably you have more visibility there.

Speaker 15: probably you have more visibility there. Jason, you did hit on the Royalty visibility in one of the questions, but I just want to make sure I understand what's implied in guidance in regard to units. And I know there's a lot of other things that affect Royalty revenue that are most of which are going in the right direction.

Jason you did hit on the royalty visibility and one of the questions, but I just want to make sure I understand what's implied in guidance in regards to units and I know theres a lot of other things that affect royalty revenue that are.

Most of which are going in the right direction.

Speaker 15: We can all see industry analysts forecast for units and that's, you know, we don't, you guys have intimate relationships with your customers so you can have even better visibility into that. But I'm just curious, are you assuming, when you look at industry analysts, and that's on units, are you assuming about the same?

We can all see an industry analysts forecast for units and Thats. We don't you guys have intimate relationships with your customers. So you can have even better visibility into that.

Just curious are you assuming when you look at industry analysts estimates of units are you assuming about the same a little below or even perhaps a little even better or do you still see things a little bit better than industry analysts estimates.

Speaker 15: a little below or even perhaps a little even better. You just see things a little bit better than industry analysts' estimates.

Speaker 6: Sure. Okay, so here's what I would say. So in this quarter, we just reported we were minus 5% on royalty. If I compare that to our three best comps, at least closest in terms of mix, you can look at media tech, you can look at Qualcomm and you can look at TSMC. Those guys were all between minus 11 to minus 24%, you know, as they just reported the last few weeks.

Sure. Okay. So here's what I would say so in this quarter. We just reported we were minus 5% on royalty if I compare that to our three best comps at least closest in terms of mix.

You have to look at Mediatek.

You can look at Qualcomm and you can look at TSMC. Those guys are all between minus 11% minus 24% as they just reported the last few weeks. So we were.

Speaker 6: So we were, you know, so we had stronger growth than those guys, primarily because of our share gains that we're seeing in Infra and Auto. And then also in some part because, or in part because of the R&B 9 adopt.

We had stronger growth in those guys, primarily because of our our share gains that we're seeing in infra and auto and then also in some part because.

In part because of the RMB nine adoption so <unk>.

Speaker 9: So we are expecting that, and I think those guys, as well as counterpoint from the other industry analysts, all seem to be kind of triangulating around, flipping to positive sequential growth in this current quarter, or I'm sorry, last quarter, and then in the current quarter, expecting to see that get kind of in the high single digits approaching double digit range. And that's pretty consistent with what we're expecting, and then same for Q4.

Expecting that.

And I think those guys as well as a counterpoint from the other industry analysts.

All seem to be kind of triangulating around flipping to positive sequential growth in this current quarter.

Or I'm, sorry last quarter, and then in the current quarter expect expecting to see that get kind of in the high single digits approaching double digit range and thats pretty consistent with what we're expecting and then same for Q4.

Speaker 6: So I, you know, from everything I can see, and you know, we do get paid rollities on, you know,

So from everything I can see and we do get paid royalties on.

Speaker 6: seven plus billion chips per quarter. So we do see quite a bit from a bunch of folks. As far as I can tell, we're kind of all triangulating relatively similar impacts. I think the difference probably are our B9 rates is maybe the piece that is why we typically grow a little bit faster than maybe some of the others.

Seven plus billion chips per quarter. So we do see quite a bit from a bunch of folks.

Far as I can tell we are kind of all triangulated in relatively similar.

Similar impacts I think the difference probably are are benign rates.

It may be the piece that is why we typically grow a little bit faster than maybe some of the others that does that.

Speaker 15: Yeah, that's really helpful. Thank you very much, Jason.

Yes, that's really helpful. Thank you very much Jason.

One moment for our next question.

Speaker 1: Our next question comes from Matt Ramsey with Cowan. Your line is open. Yes.

Our next question comes from Matt Ramsay with Cowen Your line is open.

Yes. Thank you very much guys I guess Mike.

Speaker 16: Rene, my first question is just the phenomenon we've seen with with Gen AI computing in the last 12 months or so. I just wanted to get your take on what it may mean for ARM. Is it, do you view it, I mean, maybe the balance of it as a positive catalyst in that

My first question is just.

Phenomenon, we've seen with Gen AI computing in the last 12 months or so.

Wanted to get your take on what it May mean for arm is that do you view it I mean, maybe the balance of.

It is a positive catalyst in that.

Speaker 16: a bunch of sort of arm server designs that might be hosts for accelerators in a data center and things like that, or do you have concern that maybe it's...

You can pull forward a bunch of sort of arm server designs that might be hosts for accelerators in the data center.

And things like that or or do you have concern that maybe.

Speaker 16: limits or shrinks the CPU TAM that you can grow into organically? How do you think the puts and takes of that are?

Limits of shrinks the CPU Tam that you can grow into organically how do you think the puts and takes to that arc. Thanks.

Speaker 3: Yeah, no, Matt, thank you. Thanks for the question. I think it's broadly a positive. And the reasons for that are, as more and more of these LLMs are being used in cloud data centers for training, the, obviously, any accelerator or GPU needs a CPU, that sort of table stakes.

Yes. Thank you. Thanks for the question I think it's broadly a positive and the reasons for that are as more and more of these <unk> are being used in cloud data centers for training.

Obviously, any accelerator or GPU need the CPU that sort of table Stakes.

Speaker 3: Then when you drill down one level deeper in terms of what is the type of CPU that you need, you need something that's energy efficient, you need something that's very, very low power, something that you can customize in terms of an overall system.

Then when you drill down one level deeper in terms of what is the type of CPU that you need you.

Do you need something Thats energy efficient, we need something that's very very low power or something that you can customize in terms of an overall system.

Speaker 3: Then it gets very interesting because when you look at TCO, but more importantly, total system power, by actually developing a custom ARM-based SoC that can interface with one of these accelerators, you're actually able to get a very, very high degree of customization relative to power efficiency and throughput. The one of the biggest.

Then it gets very interesting because when you look at <unk>, but more importantly, total system power bi actually developing custom arm based SFC that can interface with one of these accelerators you are actually able to get a very very high degree of customization relative to power efficiency and throughput.

The one of the biggest.

Power.

Speaker 3: requirements or beefs from these applications.

Requirements or beef from these applications is actually in terms of feeding the engine. It's memory bandwidth. So if you can design something thats actually custom that can interface into the accelerators that can be hugely beneficial.

Speaker 3: is actually in terms of feeding the engine, it's memory bandwidth. So if you can design something that's actually custom that can interface into the accelerators, it can be hugely beneficial. I think as you know, there's a lot of work going on inside the community today developing custom shifts that are arm-based, so I think that's only a net positive.

I think as you know theres a lot of work going on inside the Q&A today developing custom shifts their arm based so I think thats only a net positive.

Speaker 3: Then when you layer on top of it, the leading player, leading actor in that field on accelerators is obviously NVIDIA. NVIDIA has been doing a big benefit in terms of making the CUDA drivers for the A100 and H100 available on ARM. So whether using a standard product from an Ampere or building a custom chip based upon ARM-based cores, I think this generative AI

And then when you layer on top of it the leading player leading actor in that field on accelerators is obviously nvidia.

And then he has been doing.

A big benefit in terms of making the cuda drivers for the <unk> hundred <unk> hundred's available on arm, so whether you're using a standard product from from an empire or building accustomed ship based upon arm based cores.

Think of this generative AI.

Speaker 3: workloads being pushed onto AI clouds is a tailwind for ARM. We're pretty excited by it.

Workloads being pushed onto AI clouds is a is a tailwind for arm, we're pretty excited by it.

Got it thanks for that my follow up I think and then other question.

Speaker 16: Thanks for that. As my follow up, I think in another question.

Speaker 16: Jason, you spoke a little bit about on China in.

Jason you spoke a little bit about China.

Speaker 16: given all the things that are going on regulatory-wide, I wanted to step back a bit. And you guys control the IP that gets given to ArmChina for them to then do things with a license into China and the royalties come back out the other end. I guess what I want to get a little bit more granular on, given the dynamic environment we're in, is just what kind of visibility do you actually have?

Given all of the things that are going on regulatory wise I wanted to step back a bit and you guys control.

The IP that gets given to arm China for them to then do things within license into China, and the royalties come back out the other end.

I guess, what I wanted to get a little bit more granular on given the dynamic environment. We're in is just what kind of visibility do you actually have.

Speaker 16: through the structure of ArmChina into the forward licensing trends. And then from an audit perspective, the royalties that are coming out on a sort of quarterly basis, just like the level of visibility you have to sort of the operations that go on within that organization as IP goes in and royalties come back out.

Through this structure of arm China into the <unk>.

Forward licensing trends and then.

From an audit perspective, the royalties that are coming out.

On a quarterly basis, just like the level of visibility you have to sort of the operations that go on within that organization.

He goes and then probably come back out.

Speaker 3: Yeah, so I'll let Matt, I'll let Jason kind of comment on the audit audit component and also sort of the integrity of the information that comes back but just a couple of things I wanted to note on on arm China, so that that you and the rest of the group and understand.

Yes, Matt.

And I'll, let Jason kind of comment on the audits audited component and also the integrity of the information that comes back, but just a couple of things I wanted to note on arm, China. So that you addressed the group and understand.

Speaker 3: First off, from a delivery standpoint, when Arm China signs a contract with a PRC customer, the IP actually goes from Arm Limited directly to the customer. It doesn't go into Arm China, so they are not a holder, if you will, of the product. The product is essentially downloaded directly from our servers to the end customer. Secondly, for many of the high-value designs, particularly whether we're working in the networking space or the...

First off from a delivery standpoint.

When arm, China signs a contract with the PRC customer the IP actually goes from arm limited directly to the customer it doesn't go into arm China. So they are not a holder. If you will of the product the product is essentially downloaded directly from our service to the end customer secondly for it.

Many of the high value designs, particularly whether we're working in the networking space or the.

Speaker 3: cloud space or automotive, they're generally working with our latest edge technology. And because of that, there is a lot of interaction between the customers in China, the arm China salespeople and arm limited marketing and engineering. So we have really, really good visibility in terms of when these large strategic deals are being consummated.

Cloud space or automotive they are generally working with our latest edge technology and because of that there is a lot of interaction between.

Customers in China, the arm, China, salespeople and arm limited marketing and engineering. So we have really really good visibility in terms of when these large strategic deals are being consummated.

Speaker 3: Because generally speaking, everything around demand creation and

Generally speaking everything around demand creation and the technical interactions between the engineers at the customer and the engineers that arm.

Speaker 3: technical interactions between the engineers at the customer and the engineers at arm. Uh, it's something where you have complete visibility into. So we have a very, very good idea of when, uh, large deals will close in China just by the nature of the relationship between our engineers, the partners, engineers and the sales folks for

It's something we have complete visibility into so we have a very very good idea of when large deals will close in China, just by the nature of the relationship between our engineers the partners engineers and our sales folks for.

Speaker 9: I'll let Jason talk about audit and things of that nature. Yeah. So we, the ArmChina customers run through the same process that all the rest of our customers run through. And that is, there's royalty audits that are conducted after the fact. And again, that's no different than any other of our customers globally. And, you know, occasionally there's findings and we work through those findings.

Arm, China, I'll, let Jason talk about audit and things of that nature. So we.

Arm China customers.

Through the same process that all the rest of our customers run through and that is there's royalty audits that are conducted after the fact.

And again, that's no different than any other of our customers globally.

Occasionally there's findings and we worked through those findings.

Speaker 6: and then get recoveries or adjustments and that process works well. Second, we also have audits from independent auditors, so Deloitte & Touche does independent audits of Armed China.

And then get recoveries or adjustments.

That process works well.

We also have audits from from independent auditors so.

Lytton Touche does independent audits on China.

Speaker 9: And they go through the, you know, the same set of audit requirements that the rest of ARM and SoftBank goes through for that matter. So all of that work is done, you know, in parallel and, and I would say the integrity information and

They go through the same.

Set of audit requirements that the rest of arm and Softbank goes through for that matter. So all of that work is done.

In parallel and and I would say the integrity information in and.

Speaker 16: and the responsiveness and all that is really the same for ArmChina as it is for all the other regions and parts of the organization that we work with. Thank you guys. Really helpful.

And.

<unk> of this and all of that is really the same for arm China as it is for all the other regions and parts of the organization that we work with.

Yeah.

Thank you guys really helpful.

Thank you.

Our next question.

Okay.

<unk>.

Speaker 1: last question comes from Sarah Rousseau with Bernstein, your line is open.

The last question comes from Sarah <unk> with Bernstein. Your line is open.

Speaker 1: Great, thanks for taking my question. Hello, Renee Jason. So it's been about 3 years since you, you launched flexible access more than 3 years and about 3 years and total access is launched and the letter gave some some helpful details around, you know, slight increase in just wondering.

Great. Thanks for taking my question Hello, Renee, Jason Theres been about three years since you launched flexible access more than three years in about three years in total access is launched.

Later gave some helpful details around you have a slight increase in ACD.

Speaker 17: For renewing customers, are you seeing any trend on increasing IP adoption because they're sort of into an all-you-can-eat to subscribed mode? And for those renewing customers then, after they've been in total access for a while, are you seeing any increasing spend from those customers?

Just wondering.

Renewing customers are you seeing any trend on increasing IP adoption, because theyre sort of into an all you can eat to subscribe mode.

And for those renewing customers then after they've been in in total access for a while are you seeing any increasing spend.

From from those total access customers.

Speaker 3: Yeah, so total access. As you recall, about three years ago that we that we rolled that out. And we've seen a few, few things happen at the program is launched. One is

Yes, so total access as you recall about three years ago that we that we rolled that out and we've seen a few things happen as the program is.

Launched one is <unk>.

Speaker 3: Customers that were initial adopters of it, when they've gone up to the next cycle, they've actually taken a larger consumption, either more tape outs and or more IP. Secondly, the program has worked extremely well from the standpoint of it reinforced what we kind of believed going in. And that is the churn rate for our large partners is pretty small, if not zero.

Customers that.

Were initial adopters of it when they have gone up for the next cycle, they've actually taken a larger consumption either more tape outs and or more IP.

Secondly.

The program has worked extremely well from the standpoint of it reinforced what we kind of believe going in and that is the churn rate for our large partners is pretty small it's not zero.

Speaker 3: The mean is around 16 years, the median is 19 years of just the longevity of the relationships that these partners have with ARM. It's allowed our FAEs to be much more involved and engaged in terms of...

The mean.

Is around 16 years. The median has 19 years of just the longevity of the relationships that these partners have with arm.

Allowed our ftes to be much more involved and engaged in terms of pull.

Speaker 3: pull through of other IP, and then as mentioned earlier, particularly with everything going on with AI and such, it's sort of really, really moved the dial. So, ATA has been everything we hoped it would be and probably a bit more. It's removed a lot of churn in terms of sales cycle. And for the partners, it's very, very easy for them because

Pull through of other IP and then as mentioned earlier, particularly with everything going on with the AI and such its sort of really really move the dial so.

He has been everything we hoped it would be in probably a bit more.

Removed a lot of churn in terms of the sales cycle and for the partners, it's very very easy for them because.

Speaker 3: They do subscriptions around EDA tools. They'd rather they know they know they're going to spend money with Arm. As mentioned, many of these customers have been with Arm 10 years, 15 years, 20 years.

They do subscriptions around EDA tools.

Rather they know that they know they're going to spend money with arm as mentioned many of these customers have been with arm 10 years 15 years 20 years. So it's been a it's been a pretty natural evolution on that so the program. The program I would say has exceeded expectations.

Speaker 3: So it's been a pretty natural evolution on that for the program.

Speaker 3: The program I would say has exceeded expectations. I would hope over time that we would get the vast majority of all our partners on this. I think we will because A, there is very little churn to our business.

I would hope over time that we would get the vast majority of all our partners on this I think we will.

Because there is very little churn to our business and be it puts all the resources in the right place in terms of having people accelerated tape out of chips.

Speaker 3: And B, it puts all the resources in the right place in terms of having people accelerate the tape out of chips.

Speaker 17: That's great and maybe just a quick follow up. As part of that program, are you, because you're working with customers slightly differently, are you getting more visibility into customer design programs such that it gives you more confidence on sort of forecasting royalties and what you expect to see from a royalties perspective than maybe what you got in the more traditional licensing model?

That's great and maybe just a quick follow up I was part of that program are you because you're working with customers slightly differently are you getting more visibility into customer design programs such that it gives you even more confidence on sort of forecasting royalties and what you expect to see from from our royalties perspective.

And then maybe what you've got in the more traditional licensing models.

Speaker 3: Yeah, I think one of the one of the things that was a byproduct of that, and I would say.

I think one of the one of the things that was a.

A byproduct of that and I would say.

Speaker 3: combination of industry trends slash total access is compute subsystems.

Combination of industry trends Slash total access is compute subsystems because once we started to get involved with partners more deeply we started to understand exactly what their tape out schedules were.

Speaker 3: Because once we started to get involved with partners more deeply, we started to understand exactly what their tape out schedules were, exactly what they were trying to use from a process standpoint, what libraries they were using. We were suddenly in a completely different domain relative to how we were interacting with partners in terms of schedules.

Exactly what they were trying to use from a process standpoint, what libraries. They were using we were suddenly in a completely different domain relative to how we were interacting with partners in terms of schedules. So what it's done for US is I think it's accelerated sub system.

Speaker 3: So what it's done for us is, I think it's accelerated of subsystem engagements. And at the same time, our understanding and visibility of customer programs is at a level that we've never had before.

Engagements and at the same time, our understanding and visibility of customer program.

Is that a level that we've never had before.

That's great. Thank you very much sir.

Speaker 3: Thank you. That concludes the question and answer session at this time. I would like to turn the call back to Rene Haas, CEO , for closing remarks. Okay. Thank you, Abigail. And on behalf of myself, Jason and Ian, I'd like to thank everyone for their

Thank you that concludes the question and answer session. At this time I would like to turn the call back to Renee Haas CEO for closing remarks, okay. Thank.

Thank you Abigail and on behalf of myself, Jason and I'd like to thank everyone for their.

Speaker 3: Excellent thoughtful questions. This was the first time around for us in terms of as a trio doing this. We'll get better each time, but thankfully we had a very good quarter to come off on and talk about which made the job a bit easier. As mentioned before, we're very, very excited about the prospects going forward, very, very excited about the opportunity and look forward to continuing to get you all.

Excellent thoughtful questions.

This was the first time around for us in terms of trio during this we.

We will get better each time, but thankfully, we had a very good quarter to come on and talk about which made the job a bit easier as mentioned before.

Sure.

Very very excited about the prospects going forward are very very excited about the opportunity and look forward to continuing to engage with you all thank you so much.

Speaker 1: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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