Q3 2024 Arm Holdings PLC Earnings Call

February 7, 2024

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Operator: Thank you for standing by, and welcome to ARMS's third quarter fiscal year-end 2024 earnings conference call. At this time, all participants are in a listen-only mode.

Thank you for standing by and welcome to Arm's third quarter fiscal year end 2024 earnings conference call. At this time, all participants are in a listen only mode.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again.

After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone to remove yourself from the queue. You May press star one again.

Ian Thornton: I would now like to hand the call over to Head of Investor Relations, Ian Thornton. Please, go ahead. Thank you, Latif. Thank you, everybody. My name is Ian Thornton, and I'm the Head of Investor Relations at Arm. I would like to welcome you to our earnings conference call for the third quarter of the fiscal year ending March 31st, 2024. I'm joined today by Renny Haas, the Chief Executive Officer of Arm, and Jason Child, Arm's Chief Financial Officer. Hopefully, you will all have downloaded and read the shareholder letter. If not, it is available on the Arm Investor Relations website at investors.arm.com.

I would now like to hand, the call over to head of Investor Relations in Thornton. Please go ahead.

Thank you Latif.

Thank you everybody my name is in concert and I'm the head of Investor Relations. So Tom I would like to welcome you to our earnings conference call for the third quarter of the fiscal year ending March 31 2024.

I'm joined today by Randy Haugh, the Chief Executive Officer of <unk>, and Jason Child, Armes, Chief Financial Officer.

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

Ian Thornton: The shareholder letter provides a rich update on our strategic progress in the course of this year. Before we begin, I'd like to remind everyone that during the course of this conference call, Arm will discuss forecasts, targets, and other forward-looking information regarding the company and its financial results. 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 expect. 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 statement on Form F1 filed with the SEC on September 14th, 2023. ARM assumes no obligation to update any forward-looking statements.

The shareholder letter provides a rich update on our strategic progress in the quarter.

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

While these statements represent our best current judgment about the future results and performance as of today.

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

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

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

Ian Thornton: We speak only as of the date they are made. In addition, we refer to non-GAAP financial measures during the discussion. Reconciliations of certain of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of certain projected non-GAAP financial measures that we were not able to reconcile with our unreasonable efforts and supplementary financial information can be found in the shareholder letter that we released earlier today. The shareholder letter and other earnings-related materials are available on our website at investors.arm.com. And with that, I'll turn the call over to Rene, who has some prepared remarks. Thank you, Ian, and good afternoon, good evening, everyone.

In addition, we refer to non-GAAP financial measures during the discussion.

Reconciliations of certain of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of certain protected non-GAAP financial measures that were not able to reconcile without unreasonable efforts and supplement.

I answered information can be found in the shareholder letter that we released earlier today.

The shareholder letter and other earnings related materials are available on our website at investors <unk> com and with that I'll turn the call over to Rene who has some prepared remarks.

Thank you Anne and good afternoon, good evening everyone.

So I'd like to speak a few different comments about the quarter and then I'll turn over to Jason for some specifics.

Two it to Q&A.

We had an outstanding third quarter inside the company, we could not be more pleased.

Renny Haas: So I'd like to make a few different comments about the quarter, and then I'll turn it over to Jason for some specifics, and then we'll open it up to Q&A. We had an outstanding third quarter inside the company. We could not be more pleased.

Revenues.

See the high end of the range for the guidance.

Extremely pleased about results overall for Q4, we're expecting another record quarter and to that end. We've also raised guidance of which Jason is going to give more color on.

Renny Haas: Record revenues. We exceeded the high end of the range for the guidance and are extremely pleased about the results overall. For Q4, we're expecting another record quarter. And to that end, we've also raised guidance, which Jason is going to give more color on. But a little bit regarding the why and how we got here.

But a little bit regarding the why and how we got here.

<unk> is the most fundamental foundational pervasive compute platform really in the history of digital design.

Over 280 billion units in the 30 plus years that arm has been a company had been built.

And that has underpinned a software ecosystem and hardware ecosystem like no other.

And given the fact that our CPU design is really driven by the hardware and the software it creates a flywheel for continuous development.

Renny Haas: Arm is the most fundamental, foundational, pervasive compute platform, really, in the history of digital design. Over 280 billion units in the 30 plus years that Arm has been a company have been built. And given the fact that a CPU design is really driven by the hardware and the software, it creates a flywheel for continuous development, that is, the more hardware that exists on ARM, the more software that's written for ARM, the more software that's written for ARM, the more popular the hardware.

That is the more hardware that exist on arm.

The more software that's written for arm the more software Thats written for arm the more popular the hardware.

We're building off a fantastic base that when we look at what happened in the last quarter.

Not only did we see growth driven by a number of factors, but growth that we think is long term and sustainable.

For royalty specifically around some of the products that shipped in the quarter, we've seen a significant transition now continuing from our VA product to our benign product RV.

<unk> nine product.

Garners, roughly two X the royalty rate or the equivalent VA product and.

And whereas in the previous quarter that was about 10% of our revenue for royalties, it's now moved to 15%.

And that has seen growth in not only the smartphone sector, but also in infrastructure and other markets, which drives growth.

We are also seeing.

Renny Haas: So we're building off a fantastic base where, when we look at what happened in the last quarter, not only did we see growth driven by a number of factors, but growth that we think is long-term and sustainable. For royalties specifically around some of the products that shipped in the quarter, we've seen a significant transition now continuing from our V8 product to our V9 product; our V9 product garners roughly 2x the royalty rate of the equivalent VA product. And whereas in the previous quarter, that was about 10% of our revenue for royalties, it's now moved to 15%.

Strong momentum in tailwind from all things AI.

From the most complex devices on the planet for training and inference, the Nvidia Grace Hopper 202 edge devices, such as the Gemini nano pixel six from Google Samsung Galaxy S 24, more and more AI is running on more edge devices and.

And devices and Thats all running on arm.

And what that has done is driven very strong set of tail wins for our licensing growth when.

When we look at demand for new products from a licensing standpoint, what we're finding from the end market is that we've reached nowhere near good enough relative to the capability of the technology.

And customers for new designs.

More and more arm technology to keep up particularly with your AI demands so with that our licensing growth has been very strong.

We've also seen proof points around one of our strategies that we call compute subsystems.

Renny Haas: And that has seen growth in not only the smartphone sector but also in infrastructure and other markets, which drive growth. We are also seeing strong momentum and tailwinds from all things AI. From the most complex devices on the planet for training and inference, the NVIDIA Grace Hopper 200, to edge devices such as the Gemini Nano Pixel 6 from Google or the Samsung Galaxy S24, more and more AI is running on more edge devices and devices.

These are complete finished blocks of designs that we put together for our end customers that we'll save them significant time around validation of their engineering work.

And also around time to market relative to cycling products through the fab one of the very first designs that was made public that uses this is the Microsoft cobalt, which uses our <unk> scores of 128 Cpus to be specific.

Were very closely with Microsoft around these designs using compute subsystems.

And we see this trend only going to continue.

So between strong growth in royalties that are driven between VA to benign all things AI meeting energy efficient compute and compete subsystems, we feel very very strongly positioned for growth and again. This is completely underpinned by our ecosystem.

Renny Haas: And that's all running on ARM, and what that has done is created a very strong set of tailwinds for our licensing growth. When we look at demand for new products from a licensing standpoint, what we are finding from the end market is that we've reached nowhere near good enough relative to the capability of the technology. And end customers for new designs are needing more and more advanced technology to keep up, particularly with the AI demands. So with that, our licensing growth has been very strong. We've also seen proof points around one of our strategies that we call compute subsystems. These are complete finished blocks of designs that we put together for our end customers that will save them significant time around validation of their engineering work and also around time to market relative to cycling products through the fab. One of the very first designs that was made public that uses these is the Microsoft Cobalt, which uses our Neoverse cores, 128 CPUs to be specific.

Devices that are in the installed base and.

And a very very large software community that develops on arm.

So with that I will turn it over to Jason and then we will open it up for Q&A.

Thank you Renee I am going to briefly touch on guidance for the fourth quarter and full year.

Starting with revenues for fiscal Q4, we are guiding to a range of $850 to $900 million.

The midpoint of $875 million.

This represents a raise of over $95 million compared to our prior implied guidance for the fourth quarter.

When combined with our strong Q3 performance the full year revenue guidance rises to three 155 to $3 205 billion in.

An increase of $160 million at the midpoint versus prior.

Within Q4 total revenue, we expect royalty revenues to grow mid single digits sequentially and to be up over 30% year over year as we compare against the bottom of the industry wide inventory correction that occurred in prior year Q4.

Royalty revenue sequential growth is mainly coming from increasing penetration of RMB nine where royalty rates are on average at least double the rates on equivalent RMB eight products.

Additionally, we are seeing an increasing amount of our technology and chips being deployed and is the amount of arm technology and chips increases so does the royalty rate.

Renny Haas: We work very closely with Microsoft around these designs using compute subsystems, and we see this trend only going to continue. So between strong growth and royalties that are driven between V8 and V9, all things AI, meaning energy efficient compute and compute subsystems, we feel very, very strongly positioned for growth. And again, this is completely underpinned by an ecosystem of devices that are in the installed base and a very, very large software community that develops on ARM. So with that, I will turn it over to Jason, and then we'll open it up for Q&A. Thank you, Renee.

With around 35% of arms total.

Alright arms royalty revenues coming from smartphones, we have benefited from a recovery in the smartphone market.

But with 65% coming from markets beyond mobile we are seeing more revenue growth from share gains and market share growth outside of mobile.

Additionally, we are expecting another strong quarter for licensing with revenue up sequentially to near record levels.

As with recent quarters, we expect to sign multiple new <unk> deals in Q4 and demand for our latest technology remains high as customers need access to AI capable Cpus and related technology, such as our compete subsystems.

Turning to expenses, we expect non-GAAP opex of approximately $490 million in Q4, and $1 7 billion for the full year.

On a like for like basis, our full year guidance has increased by $10 million driven by slightly higher spend in R&D.

Jason E. Child: I'm going to briefly touch on guidance for the fourth quarter and full year. Starting with revenues, for fiscal Q4, we are guiding to a range of $850 to $900 million, with a midpoint of $875 million. This represents a raise of over $95 million compared to our prior implied guidance for the fourth quarter. When combined with our strong Q3 performance, the four-year revenue guidance rises to $3.155 to $3.205 billion, an increase of $160 million at the midpoint versus prior. Within Q4 total revenue, we expect royalty revenues to grow mid single digit sequentially and to be up over 30% year over year as we compare against the bottom of the industry-wide inventory correction that occurred in the prior year at Q4. Royalty revenue sequential growth is mainly coming from increasing penetration of RMV-9, where royalty rates are on average at least double the rates on equivalent RMV8 products.

As detailed in the guidance section of our shareholder letter to increase transparency and improve the comparability of our results beginning in Q4, the presentation of our non-GAAP measures will be modified to exclude employer taxes related to equity classified awards.

These taxes are dependent on our stock price at the time of vesting and as a result fluctuate independently of the operating performance of our business.

The impact of this change has been factored into today's non-GAAP Q4, and full year guidance for operating expenses on a fully diluted EPS.

On an EPS basis revenue strength will flow through to profit driving Q4, non-GAAP fully diluted EPS up to between 28% and 32.

Full year non-GAAP fully diluted EPS to up between $8 20, and $1 24.

In summary, we had an outstanding Q3, and expect our momentum to accelerate through Q4 and beyond.

With that I will now turn it back over to the operator to kick off the Q&A portion of the call.

Thank you as a reminder to ask a question you will need to press star one on your telephone to remove yourself from the question queue. Please press star one again. Please ask one question and then re queue with any follow up please standby, while we compile the Q&A roster.

Jason E. Child: Additionally, we are seeing an increasing amount of armed technology and ships being deployed, and as the amount of armed technology and ships increases, so does the royalty, with around 35% of the total, sorry, arms royalty revenue coming from smartphones. Additionally, we have benefited from the recovery in the Smart Home Market. But with 65% coming from markets beyond mobile, we are seeing more revenue growth from share gains and market share growth outside of mobile. Additionally, we are expecting another strong quarter for licensing, with revenue up sequentially to near record levels. As with recent quarters, we expect to sign multiple new ATA deals in Q4, and demand for our latest technology remains high as customers need access to AI-capable CPUs and related technology, such as our compute subsystems.

Yes.

Our first question comes from the line of Harlan sur of Jpmorgan. Your question. Please Harlan.

Yes. Thank you good afternoon, and congratulations on the strong results guidance and of course execution.

Several quarter as you guys mentioned right second consecutive quarter of strong licensing second consecutive quarter of book to Bill greater than one strong ACB sounds like many of your customers across all of your end markets are focusing on accelerated computing and AI and the requirements for more compute capability and that's obviously been reflected in the strong licensing.

How much of the expansion on recent licensing deals has been more about adding your AI specific IP right.

Ethos, and Teu or taking advantage of some of your helium in neon vector extensions for AI workloads or compute subsystems adoption versus just buying up the stock, but more powerful cores and then more importantly, like do you guys see the strong licensing momentum continuing into fiscal 'twenty five.

Yes, Hi, Harlan and thank you for the.

Type words.

Jason E. Child: Turning to expenses, we expect non-GAAP OPEX of approximately $490 million in Q4 and $1.7 billion for the full year. On a life-for-life basis, our full-year guidance has increased by $10 million driven by slightly higher spend in R&D. As detailed in the guidance section of our shareholder letter, to increase transparency and improve the comparability of our results, beginning in Q4, the presentation of our non-GAAP measures will be modified to exclude employer taxes related to equity classified awards. These taxes are dependent on our stock price at the time of vesting and, as a result, fluctuate independently of the operating performance of our business.

Take the first part of your question and then let Jason comment on the second half.

One of the new products that we released relative from a licensing standpoint is something we call arm total access what Jason referred to as HCA.

That gives customers access to a broad set of RF technology, including our most advanced Cpus and Gpus.

One of the things that we're seeing is exactly what you described we're seeing demands for incorporating Cpus with anything that helps with AI acceleration such as vector extensions. Additionally, the ath give customers access to the NPS, which they can also use for an off load.

What we are seeing anecdotally relative to when we engage customers is that the need for more compute the need to be able to handle what I would call. It the unknown relative to these <unk>.

Large language models that either run on an edge device or in a hybrid way is fundamentally driving a need for more compute than they had before so they are looking to upgrade to get themselves flexibility on the design and also to maximize their ability to deliver the most efficient product whether that's lots of different cores.

Operator: The impact of this change has been factored into today's non-GAAP Q4 and full year guidance for operating expenses and COVID diluted EPS. On an EPS basis, revenue strength will flow through to profit driving Q4 non-GAAP fully diluted EPS up to between 28 and 32 cents, and full-year non-GAAP fully diluted EPS up between $1.20 and $1.24. In summary, we had an outstanding Q3 and expect our momentum to accelerate through Q4 and beyond. With that, I will now turn it back over to the operator to kick off the Q&A portion of the call. As a reminder to ask a question, you will need to press star 1 1 on your telephone. To remove yourself from the question queue, please press star 1 1 again. Please ask one question, then continue with any follow-up.

Or a smaller set of devices that may or may not included MCU. So in summary, yes. Your question I think is accurate relative to the conclusion of.

AI demand is driving a need for a lot of different products and I'll, let Jason kind of comment to that to the longer term trend that we see.

Yes, Harlan I would.

Say on the looking forward. So obviously you gave guidance for Q4.

But going beyond that when you unpack licensing versus royalty.

Because of the fact that we're largely almost entirely under contract for next year on royalties, we feel good about those trends.

It's the license piece, that's a little harder to forecast.

I looked at last quarter end.

And this in Q4.

That's coming up we definitely have some upside from AI and selling additional licenses that were were just not in our plan and not anticipated.

So I think we're going to need to work through this quarter to find out how much of that upside continues to that trend flows into next year.

Operator: Please stand by while we compile the Q&A room. Our first question comes from the line of Harlan Sir of J.P. Morgan. Your question, please, Harlan. Yes, thank you.

Because we've seen this demand has been coming I think a little shorter little shorter sales cycles than we had seen.

Quickly before.

So I'd say stay tuned very hot 90 days, we'll give you a better view.

Helpful. Thank you very much.

Thank you.

Our next question.

Comes from the line of Gary Mobley.

Renny Haas: Good afternoon and congratulations on the strong results, guidance, and, of course, execution. December quarter, as you guys mentioned, right, second consecutive quarter of strong licensing, second consecutive quarter of book-to-bill greater than one, and strong ECV. It sounds like many of your customers across all of your end markets are focusing on accelerated compute and AI and the requirements for more compute capability, and that's obviously being reflected in the strong licensing performance. How much of the expansion on recent licensing deals has been more about adding AI-specific IP, right, like your Ethos NPU or taking advantage of some of your Helium and Neon vector extensions for AI workloads or compute subsystem adoption versus just buying up the stack on more powerful cores? And then, more importantly, like, do you guys see the strong licensing momentum continuing into fiscal 25? Yeah. Hi, Harlan.

Wells Fargo. Your question please Gary.

Hi, guys. Thanks, very much for taking my question and let me extend my congratulations to the entire RMT for for the strong results.

Can't help but notice the strength in business from arm, China, maybe if you can speak to.

What drove that strong results out of arm, China, and besides arm, China were there any other greater than 10% customers in the quarter.

Yes, I would say broadly speaking we.

We are seeing increased market share gains.

For our products across the board.

Particularly around automotive and infrastructure Slash data center.

Inside China those are very good growth markets.

One of the things we continue to comment on relative to the China market is that the China ecosystem tends to follow the global ecosystem.

So as we see the share gains across different aspects of the market.

We're seeing that.

<unk> and holding through relative to China.

Jason you want to take the other part of that yes, just on the numbers.

Yes.

Thanks, sure it's clear so when we announce related parties.

We're about 30% of growth.

Arm, China is the largest portion of it. However, there are others. So arm China was about 25% of total revenue just slightly up from the 20% from a quarter ago.

That's helpful.

The gains in that.

Royalty rate per unit, if I can add a follow on.

Certainly are accelerating.

Is that all driven by armed version nine and should we continue to expect that upward inflection in our royalty rate per unit.

Renny Haas: Thank you for the kind words. I'll take the first part of your question and then let Jason comment on the second half. One of the new products that we released from a licensing standpoint is something we call Arm Total Access, what Jason referred to as ATA. That gives customers access to a broad set of Arm technology, including our most advanced CPUs and NPUs. And one of the things that we are seeing is exactly what you described. We're seeing demands for incorporating CPUs with anything that helps with AI acceleration, such as vector extensions. Additionally, the ATAs give customers access to the NPUs, which they can also use for offload.

Yes, I think thats, the right way to think about it so as mentioned.

<unk> nine.

With 10% of our royalty revenue last quarter down, 15%, we see that accelerating.

The other thing we are seeing is that the mixes.

<unk> devices that might have a mix of VA and benign cores are increasingly moving to mortgage nine quarters.

And the reason for that is back to the AI comment.

<unk> needs and applications only continues to increase and what we're seeing is customers looking to put more and more technology into their devices.

Perhaps even more than they originally planned for when they licensed the technology. So it's a compounding effect of growth, we see growth from royalty happening from <unk> nine transition.

And more arm technology being using the same devices. So it's a bit of a compounding effect that helps us with growth.

Thank you.

Yeah.

Thank you.

Our next question.

It comes from the line of Thomas O'malley Barclays. Your question. Please Thomas.

Hey, guys. Thanks for taking my question and congrats on the nice results.

Wanted to add.

Question to the benign pile here you guys are talking about traction in AI smartphones infrastructure, you are saying that that percentage is.

Renny Haas: What we are seeing anecdotally relative to when we engage customers is that the need for more compute, the need to be able to handle what I would call a bit of the unknown relative to these large language models that either run on an edge device or in a hybrid way, is fundamentally driving a need for more compute than they have before. So they are looking to upgrade to give themselves flexibility in the design and also to maximize their ability to deliver the most efficient product, whether that's lots of different cores or a smaller set of devices that may or may not include an NPU. So in summary, yes, your question is accurate relative to the conclusion that AI demand is driving a need for a lot of different products.

Percentage of total revenue grows into the next fiscal year, where are you seeing the most of that traction you've called out a couple of times here early in the call, but is that coming more from the smart the smartphone side or the AI side and just maybe talk about the cadence of where you see that penetration rate growing as you get into the next fiscal year. Thank you.

Yeah. So thanks for the question.

So a couple of ways to think about it.

Definitely growth coming from the data center side.

So proof points such as videos Grace Hopper.

Microsoft Cobalt design to work that AWS has been doing graviton, what we're seeing is more and more AI demands in the data center, whether that's around training or inference and.

Does the arm solution in the datacenter in particular is extremely good in terms of performance per watt.

Renny Haas: And I'll let Jason kind of comment on the longer-term trend that we see. Yeah, Harlan, I would say on the looking forward, so obviously, I only gave guidance for Q4. But going beyond that, when you unpack licensing versus royalty, you know, because of the fact that we're largely, you know, almost entirely under contract for next year on royalties, we feel good about those trends. It's the license piece that's a little harder to forecast.

And the constraints that are on today's data centers relative to running these AI workloads puts a huge demand on power. That's a great tailwind for arm, if we move to the edge devices, such as a smartphone.

We have seen and I think the recent launches as I mentioned with Gemini nano and the Galaxy S 24.

Increased AI workloads being pushed to the phone.

And what we're seeing from a design standpoint is more and more compute technology being pushed into those phones such that they are AI capable of AI ready.

Jason E. Child: You know, if I look at last quarter and this coming Q4, that's coming up, we've definitely had some upside from AI and selling additional licenses that were, you know, were just not in our plan and not anticipated. So I think we're going to need to work through this quarter to find out how much of that upside continues and that trend flows into next year. Because we've seen this demand coming, I think, a little shorter, a little shorter sales cycle than we had seen with, you know, typically before. So I'd say stay tuned; in 90 days, we'll give you a better view. Oh, very helpful. Thank you very much.

Because this field is moving very very fast.

A year from now who knows what the type of AI applications that might be able to run on the smartphone. So what we're seeing is a shift to more and more high performance capable technology to capture a wave to ensure that they can run. These AI workloads nobody wants to be caught behind with not enough performance.

When the new application comes out so that is that has accelerated.

<unk> nine adoption, both from a standpoint of more devices using it and more devices using more of it and to your question where is it coming from.

It's coming from from everywhere its coming from certainly the data center.

Certainly from the edge devices, and we think over time, even AIP season, So it's a huge growth vector.

Super Helpful. And then if I could just ask a follow up as well.

If you look at kind of the seasonality of the closed here you obviously saw really strong results in both the December and the March quarter.

Jason E. Child: Thank you. Our next question comes from the line of Gary Mobley, of Wealth Fargo. Your question, please, Gary.

Obviously, youre not perfect with the units, but if you look at June and the smartphone ecosystem youre kind of seeing a little bit of a pause in the Android ecosystem and kind of some cautious data points.

Renny Haas: Hey guys, thanks very much for taking my question, and let me extend my congratulations to the entire Arm team for the strong result. I can't help but notice the strength in business from Arm China. Maybe if you can speak to what drove that strong result out of Arm China and, besides Arm China, were there any other greater than 10% customers in the quarter? Yeah, I would say, broadly speaking, we are seeing increased market share gains for our products across the board, particularly around automotive and infrastructure slash data center. You know, inside China, those are very good growth markets.

From the supply chain in general could you talk about what you expect in terms of seasonality to start your fiscal year any tidbits. There would be helpful. I know youre not guiding June but any way to help think about how do we how do we begin the next fiscal year. It would be helpful. Thank you.

Yes, I'm not going to comment in terms of too far forward on the seasonality component to what we're doing but what I would emphasize is that.

We're a bit of a different company to think about relative to how you think about other companies in terms of their specific exposure to a market.

We are involved in just about every single end market and every single end market is moving from VA to benign, which helps as I said double the royalty rates and just about every single one of these markets is putting more compute into their devices. So sometimes when we've had questions from folks, saying well wait a minute I am trying to figure out.

Renny Haas: One of the things we've continued to comment on relative to the Chinese market is that the Chinese ecosystem tends to follow the global ecosystem. So as we see share gains across different aspects of the market, we're seeing that consistent and holding true relative to China. Jason, do you want to take the other part of that?

How units match up to numbers, we're operating on a little bit of a different plane.

Because of our broad broad adoption and as I mentioned at the start of the call. The pervasiveness of the architecture, it's just driving a whole different set of growth vectors.

Thank you very much guys.

Thank you.

As a reminder, please limit yourself to one question. Our next question comes from the line.

Jason E. Child: Yeah, just on the numbers, you know, to make sure it's clear. So when we announced related parties, I think we're about 30% of the way to growth. Arm China is the largest portion of it. However, there are others.

Vivek Arya of Bank of America Securities.

Your line is open to that.

Thanks for taking my question I, just wanted to clarify on the <unk> is the 10% to 15%.

Later to number of customers number of chips or revenue related to those tests because I think.

In the shareholder letter it.

Jason E. Child: So Arm China was about 25% of total revenue, just slightly up from the 20% from a quarter ago. The gains in the royalty rate per unit, if I can add a follow-on, certainly are accelerating. Is that all driven by ARM version 9? And should we continue to expect that upward inflection in the loyalty rate per year? Yeah, I think that's the right way to think about it.

Quantify that.

We 915% of royalty revenue rather than.

I guess the bigger question is.

Just so that we have an apples to apples sense of how many of your <unk>.

<unk> units are actually using the <unk> right now.

<unk>.

The ones that use <unk> in the last quarter is that a better way to track benign adoption.

So I guess, yes, so let me let me let me try to answer your question and maybe Jason Ian If I, if I'm missing some facts you guys can fill in.

First off the number when we say, 10% and 15% that as a percentage of our overall royalty revenue. So that's the way to think about that.

Renny Haas: So, as mentioned, Arm V9 was 10% of our royalty revenue last quarter, and now it is 15%. We see that accelerating. The other thing we are seeing is that the mixes of devices that might have a mix of V8 and V9 cores are increasingly moving to more V9 cores. And the reason for that is, back to the AI comment, the compute needs of the end applications only continue to increase. And what we're seeing is customers looking to put more and more technology into their devices, perhaps even more than they originally planned for when they had licensed the technology. So, it's a compounding effect of growth.

When you think about the number of units that are moving from VA to benign I don't think we have anything specific that I can give you on this call, but what I can tell you is just as an example, or an anecdote is that.

<unk> is being used extensively in almost.

Exclusively now in all the premium smartphones.

And the premium smartphones such as Galaxy is 24.

Those are actually part of the segments that are seeing a little bit better growth than their compatriots. So given the fact that virtually all the premium smartphones have now moved to benign and as I mentioned before people trying to put as much benign technology and that smartphone to capture the AI wave I think thats, maybe one way to think about.

A portion of <unk>, where some of the growth comes versus units.

Renny Haas: We see growth happening from the V8 to V9 transition and more ARM technology being used in the same devices. So, it's a bit of a compounding effect that helps us with growth. Thank you.

What we tend to see with.

The smartphone market. For example is typically a waterfall over time, where what was in the premium unit finds its way into the <unk> the high end than into the mid range.

But thats the way maybe a good way to think about it in terms of where the percentages are there certainly is a lot of <unk> nine in the premium smartphone and we're seeing a lot of premium smartphones being sold.

Renny Haas: Our next question comes from the line of Thomas O'Malley of Barclays. Your question, Tom.

Yeah.

Thank you.

Our next question.

Renny Haas: Hey guys, thanks for taking my question and congrats on the nice results. I just wanted to add a question to the V9 pile here. You guys are talking about traction in AI, smartphones, and infrastructure. You're saying that that percentage as a percentage of total revenue grows into the next fiscal year. Where are you seeing the most of that traction?

Comes from the line of maybe <unk> of <unk>.

Your question please.

Yes.

For taking my question just actually.

Actually as a follow up is there any way you could elaborate on the mix of benign by end market like a smartphone versus cloud compute and I have a follow up.

I'll attempt to answer that and again maybe.

And Jason.

As I said premium smartphone is almost exclusively now benign.

Renny Haas: You've called out AI a couple of times here early in the call, but is that coming more from the smartphone side or the AI side? And just maybe talk about the cadence of where you see that penetration rate growing as you get into the next fiscal year. Thank you. Yeah, so thanks for the question. So, a couple ways to think about it.

And virtually every high end datacenter chip is benign when you look at Grace Hopper.

When you look at Graviton, when you look at Microsoft Cobalt.

These are all benign based designs.

I would add.

In terms of royalty revenue and then <unk>.

Chip that have actually been deployed in the market we are over weighted towards smartphones <unk>, primarily because it's an annual refresh cycle and so I would think of that being a bit ahead over time I think the other lines of businesses will catch up but it's predominantly are definitely and weighted more towards smartphone for the.

Renny Haas: There's definitely growth coming from the data center side. So proof points such as NVIDIA's Grace Hopper, the Microsoft Cobalt design, the work that AWS has been doing with Graviton, what we are seeing is more and more AI demands in the data center, whether that's around training or inference. And because the ARM solution in the data center, in particular, is extremely good in terms of performance per watt, and the constraints that are on today's data centers relative to running these AI workloads place a huge demand on power, that's a great tailwind for ARM.

Rene just pointed out on premium mix got.

Got it thank you and my follow up has to do with the.

The market share I think.

End of FY 'twenty, four I am sorry.

FY2023 cloud was about 10% market share for you in networking was 26%.

Is there any way you can give us.

Some color on how as you close FY 'twenty for how those market shares are changing.

Renny Haas: If we move to edge devices such as smartphones, we've seen, and I think the recent launches, as I mentioned, with Gemini Nano and the Galaxy S24, increased AI workloads being pushed to the phone. And what we're seeing from the design standpoint is more and more compute technology being pushed into those phones, such that they are AI capable and AI ready. Because this field is moving very, very fast.

Scott.

Yes.

Not today, we're not prepared to give that when we give the updates for our for next year the next quarter.

We can do that.

But I can say, we're very pleased about the direction of travel.

<unk> has only help that grow faster.

Got it thank you.

Thank you.

Our next question.

Comes from the line.

Jay Rakesh Mizuho your question. Please P J.

Yes, hi, congratulations again on a great quarter.

A quick question on the cloud compute side, if you could give us some way of how to look at where do you think we'll get growth.

Can you can equal in Q1.

I'm pretty market this month.

<unk> hundred graviton and cobalt hundreds now.

A follow up.

Sorry.

You Didnt catch it quite youre asking about projected growth for next year in cloud.

Renny Haas: A year from now, who knows what type of AI applications it might be able to run on a smartphone? So what we're seeing is a shift to more and more high-performance capable technology to capture a wave to ensure that they can run these AI workloads. Nobody wants to be caught behind with not enough performance when the new application comes out, so that has accelerated V9 adoption, both from the standpoint of more devices using it and more devices using more of it. And to your question, you know, where is it coming from? It's coming from everywhere.

Just wanted to get into clinical or how do you see the growth.

On the cloud compute site.

So you have some big marquee.

Customers now coming from that group.

As Rene just mentioned.

The last question will provide our market share update on specifically on compute which is for us almost all cloud.

In infrastructure and we will provide some some views on where you expect that to go next year.

Give us 90 days.

Got it and then on the <unk>.

While side, obviously, you mentioned good traction benign just wondering what.

Penetration rate on Reman is now.

Premium cost.

Mike.

Hum.

<unk> will be.

Yes.

Save it for.

Later.

Is your question.

Renny Haas: It's coming from certainly the data center, certainly from the edge devices, and we think, over time, even AI PCs. So it's a huge growth vector, super helpful.

What percentage of smartphones are benign yeah.

Yes, as I mentioned earlier.

The numbers are somewhat skewed relative to the premium segment versus the broader segment.

If you look at overall units.

Most of the premium if not all smartphones and move to benign.

Renny Haas: If you look at kind of the seasonality of the close year, you obviously saw really strong results in both the December and the March quarter. You know, obviously, you're not perfect with units, but if you look at June and the smartphone ecosystem, you're kind of seeing a little bit of a pause in the Android ecosystem and kind of some cautious data points from the supply chain in general. Could you talk about what you expect in terms of seasonality to start your fiscal year? Any tidbits there would be helpful.

And the rest of the rest of the segments have been have been slower to adopt but the premium segment draws a very very large.

Mixture of lots of course and lots of royalty rich cores. So it tends to it tends to weigh out the numbers relative to overall units, we expect benign and Ian keeping you kind of comfortable on this using next three or four years to kind of find its way throughout the entire smartphone category. Yes. If you go back to Hal.

On page seven.

It took about three.

Three years to get from <unk>.

About 80, 90% penetrated.

Got it thanks.

Thank you.

Yes.

Our next question.

Comes from the line of <unk>.

Ross Seymore of Deutsche Bank. Your question. Please Ross.

Renny Haas: I know you're not guiding June, but any way to help think about how we will begin the next fiscal year would be helpful. Thank you. Yeah, I'm not going to comment in terms of too far forward on the seasonality component to what we're doing. But what I would emphasize is that we're a bit of a different company to think about relative to how you think about other companies in terms of their specific exposure to a market. We are involved in just about every single end market, and every single end market is moving from V8 to V9, which has, as I said, doubled the royalty rates. And just about every single one of these markets is putting more compute into their devices.

Hi, guys. Thanks for May ask a question congrats on the strong result, and guide I wanted to go back to the arm China conversation. So a clarification on the main question. The clarification was that 25% that I think Jason you mentioned was that a total revenues of just of royalties and then the main question is could you just help us.

Breakdown, a little bit how that's so strong whether it's total revenues or just royalties that was a significant driver of growth and depending upon the answer to the clarification. It could have been more than all of the sequential growth. So I just wanted to get my arms around what was really driving the growth and how much of it came from or in China.

Yes, China was 25% of total revenues.

In Q3, and that's up from 20% in.

In Q2.

And then what was driving that because again it by that math. It seems like the China side was up 30% and everything else kind of went down a little bit sequentially was that just the China handset market is coming back to life with it.

Renny Haas: So sometimes when we've had questions from folks saying, well, wait a minute, I'm trying to figure out how units match up to the numbers, we're operating on a little bit of a different plane because of our broad, broad adoption. And as I mentioned at the start of the call, the pervasiveness of the architecture is just driving a whole different set of growth vectors. Thank you very much, guys. Thank you. As a reminder, please limit yourself to one question. Our next question comes from the line. Vivek Arya of Bank of America Security. Your line is open, Vivek.

More goodness beyond that just any color you could give on what drove that China growth that was so impressive.

Yes, we don't we don't breakdown the individual customers, but as I said.

The China ecosystem tends to follow the rest of the world relative to the growth. So when we talk about growth in data centers and we've talked about growth in automotive and to your comment certainly a recovery in the smartphone market helps.

Thank you.

Our next question.

It comes from the line of.

Charles <unk> of Needham <unk> Company. Please go ahead Charles.

Renny Haas: Thanks for taking my question. I just wanted to clarify, Rene, is this on the V9, is the 10 to 15% related to the number of customers, the number of chips, or revenue related to those chips? Because I think in the shareholder letter, it's qualified as, you know, V9 of 15% of royalty revenue rather than... I guess a bigger question is, Just so that we have an apples-to-apples sense of how many of your smartphone units are actually using V9 right now versus, you know, the ones that used V9 in the last quarter. Is that a better way to track v9 adoption?

Okay. Thanks, My congratulations to our management team on the very strong results very impressive I do wanted to dig into a little bit more on the on the China and the related party size up the.

The revenue because when I look at your historical numbers.

Arm, China contribution tracks almost identical that related party transactions, but there seems to be a little bit.

GAAP seems to be expanding a little bit over the last quarter and maybe related to that.

You had very strong bookings in the last quarter and this quarter the booking actually come down a little bit about the licensing revenue accurate. It was stronger than you expected or was that the readout on bi.

Renny Haas: Yeah, so let me try to answer your question, and maybe Jason, Ian, if I'm missing some facts, you guys can fill in. First off, the number when we say 10% and 15%, that's a percentage of our overall royalty revenue. So that's the way to think about that. When you think about the number of units that are moving from V8 to V9, I don't think we have anything specific that I can give you on this call. But what I can tell you, just as an example or an anecdote, is that V9 is being used extensively and almost exclusively now in all premium smartphones.

Some of the earlier commencement of that licensing contracts that property signed a little bit earlier in the year might be in the prior quarter and is that more of a timing that kind of surprised you to the upside. Thanks.

Yes, so first on the on the related parties. So yes, typically China has been most all of it we did have an additional license deal.

That was roughly 5% I guess, the total revenue the difference between China and the rest.

That deal did come through this quarter.

So youre right thats, not something thats been continuous but that was a deal that came in this last quarter.

Renny Haas: And the premium smartphones, such as the Galaxy S24, are actually part of the segments that are seeing a little bit better growth than their compatriots. So given the fact that virtually all the premium smartphones have now moved to V9, and as I mentioned before, people are trying to put as much V9 technology in that smartphone to capture the AI wave, I think that's maybe one way to think about proportionally where some of the growth comes versus units. What we tend to see with the smartphone market, for example, is typically a waterfall over time where what was in the premium unit finds its way into the high end, then into the mid range. But that's maybe a good way to think about it in terms of where the percentages are. There certainly is a lot of V9 in the premium smartphone, and we're seeing a lot of premium smartphones being sold. Thank you. Our next question comes from the line of Mehdi Hassini of SIG. Your question, please, Mehdi.

In terms of the makeup of license revenue in general.

We typically run somewhere around 40% to 50% of our license revenue was from backlog. The deals previously signed that relate to technology milestones that are delivered within the quarter and then the remainder are new deals that are signed within the quarter clearly we have good visibility into backlog and what our delivery is going to be.

And we have a pretty good.

Insight into.

Newell's or deals that have relatively long lead times I think the one thing that we saw a little bit unique.

Both last quarter and this quarter.

With the increased kind of focus on AI.

And there is a lot of focus on.

Investing in building designs.

AI and.

So theres been some shorter cycle deals that have come up.

Kind of I.

I'd say, a little bit unique versus what we've seen in the past.

And that's the primary reason why we do need to spend a little more time this quarter to get our arms around how much of that momentum will continue to see next year.

Does that answer your question.

Yes. Thanks.

If I may add the China piece.

<unk> seems to be a little bit more cautious.

Renny Haas: Yes, thanks for taking my question. Just actually, as a follow-up, is there any way you could elaborate on the mix of V9 by end market, like a smartphone versus cloud computing? And I have a follow-up. I'll attempt to answer that, and again, maybe, you know, Ian and Jason.

Whats going to happen in this year and actually said that.

Kind of cautious we've started that late last year.

China is still going very strong I believe reconciling the differences here. This is my last question. Thank you so much.

Well I wouldn't say that we're less cautious I think our numbers have been strong but from a forecast perspective.

We've been forecasting that China likely goes down into the teens as a percentage of total revenue.

Renny Haas: As I said, the premium smartphone is almost exclusively v9 now, and virtually every high-end data center chip is v9. When you look at Grace Hopper, when you look at Graviton, when you look at Microsoft Cobalt, these are all v9-based designs. I don't think I would add on in terms of, you know, royalty revenue and then chips that have actually been deployed in the market. We are overweighted towards smartphones on v9 primarily because it's an annual refresh cycle. And so I would think of that being a bit ahead. Over time, I think the other lines of businesses will catch up, but it's predominantly or definitely weighted more towards the smartphone for the reason that Rene just pointed out on premium. Got it. Thank you.

This last quarter and the quarter before we're just seeing stronger recovery.

Then we had previously expected and.

And that's been certainly.

A nice positive surprise in terms of going forward, we feel good about the progress we expect to deliver this quarter and 90 days, we'll let you know if we think that progress is going to continue into next year.

I appreciate the color. Thanks.

Thank you.

Our next question.

Come from the line of Matt Ramsay of TD Cowen. Please go ahead, Matt.

Thank you very much guys good afternoon.

I wanted to go back to the the RMB benign conversation on a couple of points I noticed that this is the first time in maybe Im just Dom and didn't see it but I think this is the first time you had explicitly point.

In the shareholder letter and in writing.

You were at least double royalty rates from from the <unk> nine and I guess I wanted to ask about that in a broader sense is that sort of across the board.

<unk> end markets and also across customers that are traditionally processor licensees and also ones that are traditionally architectural licensees and do the systems themselves.

Renny Haas: And my follow-up has to do with market share. I think, end of FY24, sorry, end of FY23, cloud was about 10% market share for you, and networking was 26%. Is there any way you can give us some color as to how, as you close FY24, how those market shares are changing? Yeah, not today. We're not prepared to give that.

So I guess, that's the first part of the question is that up a blanket statement across the board and the reason I ask it if you go back to lots of conversations around the IPO timeframe. There were some aggressive ramp of royalty rates across your mobile business and I think we were all trying to figure out whether the VA penetration to benign would drive.

Those kind of expansion in results.

Or if you would need some significant contributions from sort of system license and alike to get those resolved.

And so any context, there about <unk>.

Clickability and breadth of this.

Renny Haas: When we give the updates for next year, the next quarter, we can do that. But I can say we're very pleased about the direction of travel, and AI has only helped that grow faster. Thank you. Our next question comes from the line of Vijay Rakesh, a Mizzou host. Your question, please, Vijay.

That comment on doubling royalty rates on benign would be really helpful. Thanks, guys.

Yeah. Thanks, Matt So I'll attempt to answer it and let let Jason and Jason wants to chime in yes.

Yes, you are right. This is the first time, we've done it.

Although we only have done two of these letters. So we don't have a huge installed base to referred to.

We wanted to provide some specific clarity because we had been receiving some level of questions around the thing you just asked about relative to how to think about V eight versus benign.

Renny Haas: Yeah, congratulations again on a great quarter. Just a quick question on the cloud compute side, if you could give us some way of looking at what you think of the growth in 2024 given that you have some pretty big market customers with GS200 and Graviton and Cobalt 100, and a follow-up. Sorry, you didn't catch it quite.

The double Divina and right for the equivalent double benign for the Columbia is sort of a rough guidepost, but in some cases, it's quite a bit more.

The the <unk> royalty rates have their own unique tables, the automotive royalty rates have their own unique tables and some of the most high performance Cpus.

That we ship into the clients' section have very very significant lifted rates over version eight so double is a good rule of thumb for like for like but some cases, it's even better than that.

Renny Haas: You're asking about projected growth for next year in the cloud? Yeah, yeah, just for calendar 24. How do you see the growth with those on the cloud compute side, with some big market customers there now? How do you see that growth? Yeah, as Rene just mentioned for the last question, we'll provide our market share update specifically on compute, which is for us almost all cloud in infrastructure, and we'll provide some views, and we'll expect that to go up next year. So give us 90 days.

So thats, but we did want to sort of provide just some clarity because we thought when folks look at the numbers and the absence of that context. They would just be a question of just help me work out how you got here. So Jason you want to add on to that no I think to Rene is earlier point.

Sure.

I understand we're a little bit hard to model, because we don't really track to other companies.

Because of <unk>.

Well, it's getting paid royalties on roughly $8 billion chips a quarter.

And just the slightest bit of mix either to more premium handsets or two more benign versus the eight.

That turns out to be a pretty sensitive variable.

Renny Haas: Got it. And then on the mobile side, obviously, you mentioned good traction with V9. Just wondering what the penetration rate on V9 is now when you look at the premium phones. I guess all of it, but what the, you know, what the prediction on that is for the year. I will save it for later. Is your question, what percentage of smartphones are benign?

And when you look at the growth from last quarter to this quarter and what we're expecting from this quarter. The next quarter unit growth is very very small, it's really almost all coming from rate growth increases and as we said back at IPO.

Almost 100% of our contracts.

For next year. So so really we're just seeing the manifestation of the work that was done in the last two years.

We wanted to provide this benign ratio as one way to help you guys be able to kind of see the progress and be able to model. It. So I hope it's helpful.

Renny Haas: Yeah. Yeah, as I mentioned earlier, the numbers are somewhat skewed relative to the premium segment versus the broader segment. If you look at overall units, most of the premium, if not all, smartphones have moved to V9, and the rest of the segments have been slower to adopt it. But the premium segment draws a very, very large mixture of lots of cores and lots of royalty-rich cores. So it tends to weigh out the numbers relative to overall units.

No I can say one thing one thing that we had high confidence in when we started looking at the transition was VH benign we knew we had.

Increased rates and we knew that the royalty picture would be better than what we were customer in the past I think one of the benefits we're getting.

We use AI is sort of a.

Driver for all this is that.

The amount of the non cores or the mix of benign cores has been stronger than anticipated.

Because people are putting more cpus down.

They were not planning on putting as many or they may be putting a higher mix of benign NDA. So that's all driven I think good forward momentum for us.

Renny Haas: We expect V9, and Ian, keep me kind of comfortable on this, usually the next three, four years to kind of find its way throughout the entire smartphone category. Yes, if you go back to how V8 sort of took over from V7, it took about three years to get from where we are here to about 80, 90 percent penetration. Got it, thanks.

No. That's super helpful. Guys, just a quick clarification any any comment on the base rates, maybe different than obviously different customers have different contracts, but all of that commentary at least directionally applicable to your.

Architectural licensees as well yes.

Yes.

Yes. It is.

Thank you.

Renny Haas: Thank you. Our next question comes from the line of Ross Seymour of Deutsche Bank. Your question, please, Ross. Hi guys, thanks for asking the question. Congratulations on the strong result and guide. I wanted to go back to the Arm China conversation.

Excuse me thank you.

Next question.

Comes from the line of Andrew Gardiner of Citi. Your question. Please Andrew.

Thanks, very much for taking the question I had one on the licensing side.

You guys have spoken about how strong it was in the quarter and the.

Jason E. Child: So a clarification of the main question, clarification was that 25% that I think Jason you mentioned was that of total revenues or just royalties? And then the main question is, could you just help us break down a little bit how that's so strong, you know, whether it's total revenues or just royalties, that was a significant driver of growth. And, you know, depending upon the answer to the clarification question, it could have been more than all of the sequential growth. So I just wanted to get my arms around what was really driving the growth and how much of it came from Arn Child.

Being surprised.

The quicker sales cycle time on some of these licenses.

A point that you haven't brought up on the coal yet but that was in the shareholder letter.

So three five.

Licensees in the quarter the upgrades from the flexible access program.

And you said that was the first time that had happened did that take you by surprise or with these customers that we're getting.

Getting to be particularly large for an <unk> and so it was natural for them to upgrade.

Yes, it wasn't a surprise and is this something that might actually continue to surprise positively.

Renny Haas: Yeah, China was 25% of total revenue in Q3, and that's up from 20%. And then what was driving that? Because again, by that math, it seems like the Chinese side was up, you know, I don't know, 30%, and everything else kind of went down a little bit sequentially. Was that just the Chinese handset market coming back to life? More goodness beyond that, just any color you could get on what drove that Chinese growth that was so impressive.

A portion of that that cohort.

Sort of natural to be upgrading from AA to HCA and therefore contribute more in terms of license dollars.

Yes. Thank you for the question.

We didn't bring it up in our comments, we've got a lot of good stuff to talk about this quarter was trying to keep this concise with the <unk>.

<unk>.

<unk> transitioned to <unk>. Thank you for calling that out that's a great trend for us.

When we designed the program a number of years ago that was absolutely. The intent is that customers that launched into NFA would ultimately go on to total access license with.

Largely drives that quite frankly is this.

This is <unk>.

They start to get commercial traction in their business.

Some of the <unk> customers are early stage companies. They may have an early exit or get acquired but as they get larger and mature.

Renny Haas: Yeah, we don't we don't break down the individual customers. But as I said, The Chinese ecosystem tends to follow the rest of the world relative to growth. So when we talk about growth in data centers and we talk about growth in the automotive industry, and to your comment, you know, certainly recovering the smartphone market helped. Thank you. Our next question comes from the line of Charles Shee of Needham. Please go ahead, Charles.

We expect them to embrace arm technology in a broader way so I wouldn't call. It a surprise I would actually call. It an expected outcome that we have and what we're really happy to see it it's great.

Thanks very much.

Okay.

Thank you I would now like to turn the conference back to Renee Haas for closing remarks, Sir.

Thank you and thank you everyone for the kind words on the quarter.

<unk>.

Jason E. Child: Hey, thanks. My congratulations to our management team on the very strong results; very impressive. I do want to dig into a little bit more on the China and related party side of the revenue because when I look at your historical numbers, your arm China contribution tracks almost identically the related party transactions. There seems to be a little bit of a gap, and it seems to be expanding a little bit over the last quarter. And maybe related to that, you had very strong bookings in the last quarter, and this quarter the bookings actually came down a little bit, but the licensing revenue actually was stronger than you expected. Was that the result of some of the earlier commencement of the licensing contracts that you probably signed a little bit earlier in the year, maybe in the prior quarter? And is that more of a timing that kind of surprised you to the upside? Thanks. Yeah, so first on the related parties.

Good set of questions that we had.

We're thrilled about Q3.

And we're very very excited about Q4, I think what youre seeing coming to life or all the strategies that we've been working hard on over the last number of years.

Investment in the benign technology the.

The diversification of our business in the data center into automotive and also of course Iot.

And then now the.

What I think is probably most profound.

Opportunity in our lifetimes, which is around AI and I think regarding AI, particularly when you think about artificial general intelligence.

That's going to drive the need for more compute in a way that we've never seen before.

So as good as the last couple of quarters, where we're at.

Just at the beginning.

I could not be more excited about the growth that we have going forward and thank you for all your time and questions.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Okay.

Jason E. Child: So yeah, typically, China has been most of it. We did have an additional license deal, you know, that was roughly 5% of total revenue, the difference between, you know, Arm China and the rest. That deal did come through this quarter. And so you're right, that's not something that's been continuous but was a deal that came in this last quarter. In terms of the makeup of license revenue, in general, we typically run somewhere around 40 to 50% of our license revenue from backlog, the deals previously signed, but they relate to technology milestones that are delivered within the quarter. And then the remainder is new deals that are signed within the quarter. Clearly, we have good visibility into our backlog and what our delivery is going to be. And we have pretty good insight into, you know, renewals or deals that have relatively long lead times. I think the one thing that we saw a little bit unique, both last quarter and this quarter, was the increased kind of focus on AI.

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Yes.

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[music].

Jason E. Child: And, you know, there just is a lot of focus on investing and building designs in AI. And I said, so there's been some shorter cycle deals that have come up, kind of, I would say, a little bit unique versus what we've seen in the past. And that's the primary reason why we do need to spend a little more time this quarter to get our arms around how much of that momentum we will continue to see next year. Does that answer your question? Yes, thanks. If I may add that on the China piece, your IP peers seem to be a little more cautious about what's going to happen this year and actually the kind of cautious you started that late last year, but your Chinese revenue is still going very strong. How do we reconcile the differences here?

Yes.

[music].

Jason E. Child: I mean, this is my last question. Thank you so much. Well, I wouldn't say that we're less cautious. I think our numbers have been strong, but from a forecast perspective, we've been forecasting that China likely goes down into the teens as a percentage of total revenue. This last quarter and the quarter before, we've just seen a stronger recovery than we had previously expected, and that's certainly been a nice positive surprise. In terms of going forward, we feel good about the progress we expect to deliver this quarter, and in 90 days, we'll let you know if we think that progress is going to continue into next. I appreciate the call. Thank you. Our next question comes from the line of Matt Ramsey of TD Cohen. Please go ahead. Thank you very much, guys. I wanted to go back, but the arm was benign.

Yes.

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Okay.

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Yes.

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Renny Haas: I noticed, for the first time, and maybe I'm just dominant, in the shareholder letter and in writing. Royal, TheFNDC.com I wanted to ask about that in a broader way. Is that sort of across the board? across end markets and also across customers that are traditionally processor-licensed and myself. I guess that's the first part of it, that upshot statement across the board. And the reason I asked goes back to lots of conversations around the IPO time, aggressive ramps of loyalty rates across... or mobile... We're all trying to figure out whether the VA can drive those kind of rates or if you would need some significant contribution. System License, and the like, any context there.

Sure.

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Yes.

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Okay.

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Renny Haas: Yeah, thanks, Matt. So I'll attempt to answer it and let Jason and Jason want to chime in. Yes, you're right. This is the first time we've done it, although we only have done two of these letters.

Okay.

[music].

Renny Haas: So we don't have a huge installed base to refer to. We wanted to provide some specific clarity because we had been receiving some level of questions around the thing you just asked about relative to how to think about V8 versus V9. The double V9 for the equivalent V8 is sort of a rough guidepost, but in some cases, it's quite a bit more.

Yes.

[music].

Renny Haas: The Neoverse royalty rates have their own unique tables. The automotive royalty rates have their own unique tables. And some of the most high-performance CPUs that we ship into the client section have very, very significant lifted rates over version V8. So double is a good rule of thumb for like-for-like, but in some cases, it's even better than that.

Yes.

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Sure.

[music].

Renny Haas: But we did want to sort of provide just some clarity because we thought when folks looked at the numbers in the absence of that context, they would just be a question of just helping me work out how you got here. So Jason, do you want to add to that? No, I think, you know, to Rene's earlier point, we are.

Okay.

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Jason E. Child: I understand we're a little bit hard to model because we don't really track to other companies. And because, you know, we're getting paid royalties on roughly 8 billion chips a quarter and just the slightest bit of mix, either to more premium handsets or to more B9 versus B8, that turns out to be a pretty sensitive variable. And when you look at the growth from last quarter to this quarter and what we're expecting from this quarter to the next quarter, unit growth is very, very small.

Okay.

Yes.

[music].

Okay.

[music].

Jason E. Child: It's really almost all coming from rate growth increases. And as we said back at IPO, we're, you know, almost 100% on a contract for next year. So really, we're just seeing the manifestation of the work that was done in the last two years. We wanted to provide this B8 to B9 ratio as one way to help you guys be able to kind of see the progress and be able to model it. So I hope it's helpful.

Yes.

Okay.

Sure.

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Yes.

Okay.

[music].

Okay.

Renny Haas: Yeah, I can say that one thing that we had high confidence in when we started looking at the transition was V8, V9. We knew we had increased rates, and we knew that the world we pictured would be better than what we were accustomed to in the past. I think one of the benefits we're getting, and I might use AI as sort of a driver for all this, is that the amount of V9 cores or the mix of V9 cores has been stronger than anticipated because people are putting more CPUs down, whether we're not planning on putting as many, or they may be putting a higher mix of V9 and V8. So that's all driven, I think, good forward momentum Yes. Yes, it is. Thank you. Excuse me.

Okay.

Sure.

Okay.

[music].

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Jason E. Child: Thank you. Our next question comes from the line of Andrew Gardner of Citi. Your question, please, Andrew. Thanks very much for taking the question. I had one on the licensing side.

Okay.

Yes.

Okay.

Jason E. Child: You guys have spoken about how strong it was in the quarter and being surprised at the quicker sale cycle time on some of these licenses. A point that you haven't brought up on the call yet, but that was in the shareholder letter, was that you also saw upgrades from the Arm Flexible Access Program in the quarter. And you said that it was the first time that that had happened.

Yes.

Okay.

Yes.

[music].

Yes.

Thanks.

Okay.

Jason E. Child: Did that take you by surprise, or were these customers that were getting to be particularly large for an AFA, and so it was natural for them to upgrade. Yeah, it wasn't a surprise, and is this something that might actually..., continue to surprise positively, right? Is there a portion of that cohort that is natural to be upgrading from AFA to ATA and, therefore, contributing more in terms of license dollars? Yeah, thank you for the question. We didn't bring it up in our comments.

[music].

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[music].

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Yes.

Renny Haas: We've got a lot of good stuff to talk about this quarter, but I was trying to keep it as concise as possible. But the AFA transition to ATA, thank you for calling that out. That's a great trend for us. When we designed the program a number of years ago, that was absolutely the intent that customers that launched into an AFA would ultimately go on to a total access license. What largely drives that, quite frankly, is that the AFA starts to get commercial traction in their business. Some of the AFA customers are early stage companies. They may have an early exit or get acquired.

Thank you.

Yes.

Okay.

Thank you.

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[music].

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Renny Haas: But as they get larger and mature, we expect them to embrace arm technology in a broader way. So I wouldn't call it a surprise. I would actually call it an expected outcome that we have.

Thank you.

Okay.

Yes.

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Thanks.

Sure.

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Yes.

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[music].

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[music].

Renny Haas: And we're really happy to see it. Great. Thanks very much.

Yes.

Okay.

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Renny Haas: Thank you. I would now like to turn the conference back to Rene Haas for his closing remarks, sir. Thank you, and thank you, everyone, for the kind words on this order and the good set of questions that we had. We're thrilled about Q3, and we're very, very excited about Q4. I think what you're seeing coming to life are all the strategies that we've been working hard on over the last number of years, investment in V9 technology, the diversification of our business into data center, into automotive, and, of course, IoT. And then now, what I think is probably the most profound opportunity in our lifetimes, which is around AI. And I think regarding AI, particularly when you think about artificial general intelligence, that's going to drive the need for more compute in a way that we've never seen before. So, as good as the last couple quarters were, we're just at the beginning.

Sure.

Yes.

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Renny Haas: I could not be more excited about the growth that we have going forward, and thank you for all your time and questions. This concludes today's conference call. Thank you for participating. You may now, Phone Ringing John DiFucci, Matthew Ramsay, Ross Seymour, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? John DiFucci, Matthew Ramsay, Ross Seymour, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, John DiFucci, Jason Child, Arm Holdings, ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?

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Q3 2024 Arm Holdings PLC Earnings Call

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