Q2 2025 Arm Holdings PLC Earnings Call
The End
Speaker Change: Good day and thank you for sending by. Welcome to the arm second quarter fiscal year 2025 webcast and conference call. At this time, all participants are in the list and only mode after the speaker's presentation. There will be a question and answers session. Talk to questions during the session. You will need to press star 1 and 1 on your telephone.
Speaker Change: You will then hear an automated message at 5 in your hand is raised. Through a draw your question, please press star 1 and 1 again. Please be advised that safe conferences being recorded. I would now like to have the conference of a chill first week today. Jeff Kerala, head of the best relations. Please go ahead.
Jeff Kerala: Thank you very much. Welcome to our earnings conference call for the second quarter of fiscal 25, ending September 30, 2024. On the call today, Rene Haas, the chief executive officer of Arm and Jason Child, Arm's chief financial officer.
Speaker Change: During the call, Arm will discuss forecasts, targets, and other followers 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.
Speaker Change: In addition to these risks that we may highlight during the call, important risk factors that may affect our future results in performance, our described in our registration statement on form 20F with the SEC. Armissons, no obligations to update any forward-looking statement.
Speaker Change: We will 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 as well as a discussion of certain projected non-GAAP financial measures that were not able to reconcile without unreasonable efforts and supplemental information.
Speaker Change: We will refer to non-gap financial measures during the discussion. Reconciliation of certain of these non-gap financial measures to their most directly comparable gap financial measures.
Speaker Change: As well as a discussion of certain projected non-gap financial measures that we are not able to reconcile with unreasonable efforts and supplemental information can be found in our shareholder letter.
Speaker Change: Can be found in our shareholder letter.
Speaker Change: The shareholder letter and other earnings related materials are now available on our website at investors that arm dot com and with that I'll turn the call over to Renee Renee.
Speaker Change: The shareholder letter and other earnings related materials are now available on our website at investors.arm.com and with that I'll turn the call over to Rene, Rene.
Rene Haas: Thank you, Jeff and good afternoon, everyone.
Speaker Change: Thank you, Jeff, and good afternoon, everyone.
Rene Haas: Spin now about one year since our IPO and very proud to tell you that in that year, we have exceeded all of our expectations on execution of our growth strategies.
Speaker Change: It's been now about one year since our IPO and very proud to tell you that in that year we have exceeded all of our expectations on execution of our growth strategies.
Speaker Change: The demand for AI everywhere is increasing the demand for arms compute platform.
Speaker Change: The demand for AI everywhere is increasing the demand for arms compute platforms.
Speaker Change: To date now since our history over 300 billion arm chips have been shipped.
Speaker Change: To date, now since our history, over 300 billion armed ships have been shipped.
Speaker Change: Now in the past quarter, we had a great set of results exceeding the high end of the guidance.
Speaker Change: Now, in the past quarter, we had a great set of results exceeding the high end of the guidance.
Speaker Change: We had record royalty revenue up 23% year on year as adoption of benign increases.
Speaker Change: We had record royalty revenue, up 23% year-on-year as adoption of V9 increases.
Speaker Change: We had continued stronger licensing revenue showing that our customers are continuing to invest in the future of AI and <unk> world.
Speaker Change: We had continued strong licensing revenue, showing that our customers are continuing to invest in the future of AI and AI over the world.
Speaker Change: The long term growth drivers for our business remains consistent.
Speaker Change: The long-term growth drivers for our business remains consistent.
Speaker Change: Every modern digital chip being designed need the CPU and the vast majority of these chips are being designed with arm because of the unequaled software ecosystem.
Speaker Change: Every modern digital chip being designed needs a CPU, and the vast majority of these chips are being designed with ARM because of the unequaled software ecosystem.
Speaker Change: Now more specifically on royalty revenue growth.
Speaker Change: Now, more specifically on royalty revenue growth.
Speaker Change: Really being driven now by more value per chip.
Speaker Change: Really being driven now by more value per chip.
Speaker Change: In the past quarter version nine now represents 25% of our royalty revenue compared to 10% a year ago.
Speaker Change: In the past quarter, Version 9 now represents 25% of royalty revenue compared to 10% a year ago.
Speaker Change: More importantly in the past quarter, our royalty revenue for smartphones grew 40%. This is versus 4% unit growth in the past quarter a significant delta.
Speaker Change: More importantly, in the past quarter, our royalty revenue for smartphones grew 40 percent. This is versus 4 percent unit growth in the past quarter, a significant delta.
Speaker Change: We have new announcements one of them being Apple's new iPhone, <unk> and iPhone 16 throw in our version nine.
Speaker Change: We had new announcements, one of them being Apple's new iPhone 16 and iPhone 16 Pro in ARM version 9. And MediaTek announced their newest chipset, the Dimensity 9400, using ARM's v9 CSS for Client, our first CSS shipping in the mobile sector.
Speaker Change: And Mediatek announced their newest chipset the domestic 9400 using arms benign CSS for client our first CSS shipping in the mobile sector.
Speaker Change: We have now doubled the number of CSS licenses in this past year.
Speaker Change: We've now doubled the number of CSS licenses in this past year.
Speaker Change: It goes without saying that AI is everywhere.
Speaker Change: It goes without saying that AI is everywhere. ARM is the only compute platform that can run AI from the edge to the cloud.
Speaker Change: RMC only compute platform that can run AI from the edge to the cloud.
Speaker Change: AI is driving demand for our performance and power efficient compute platform everywhere.
Speaker Change: AI is driving demand for our performant and power-efficient compute platform everywhere.
Speaker Change: Some significant milestones convenience Grace Blackwell shipments have started integration integrating the Nvidia GPU Blackwell with arm CPU embrace.
Speaker Change: Some significant milestones. NVIDIA's Grace Blackwell shipments have started, integrating the NVIDIA GPU Blackwell with ARM CPU in Grace.
Speaker Change: We've had new shipments now from Microsoft Azure, Cobalt and Google GCB Axion, both RMB nine based data center now in general availability significant milestone.
Speaker Change: We've had new shipments now from Microsoft Azure Cobalt and Google GCP Axion, both ARM v9 based data center, now in general availability, significant milestone.
Speaker Change: In the past quarter arm <unk> have worked together on optimizing Lama <unk> using arm <unk> libraries, enabling faster on device AI processing.
Speaker Change: In the past quarter, Arm and Meta have worked together on optimizing LLAMA 3.2 using Arm Cloudy Libraries, enabling faster on-device AI processing.
Speaker Change: In the automotive market, we're seeing a very strong pipeline for CNS now for both Aaas Navy applications.
Speaker Change: In the automotive market, we're seeing a very strong pipeline for CSS now, for both ADAS and IVI applications.
Speaker Change: And in general demand for edge AI products for CPO acceleration benign is very strong.
Speaker Change: And in general, demand for edge AI products for CPU acceleration on v9 is very strong.
Speaker Change: We have the largest software ecosystem ever invented hardware is nothing without the software and we have over 20 million software developers the largest in the world.
Speaker Change: We have the largest software ecosystem ever invented. Hardware is nothing without the software, and we have over 20 million software developers, the largest in the world.
Speaker Change: We're working closely with important ecosystem partners like Github, We just recently announced the integration of arm tools into Github co pilot a significant milestone for developers.
Speaker Change: We're working closely with important ecosystem partners like GitHub, who just recently announced the integration of ARM tools into GitHub Copilot, a significant milestone for developers.
Speaker Change: The future is very bright.
Speaker Change: The future is very bright, AI will be everywhere, and it will run on arm.
Speaker Change: It will be everywhere and it will run on them.
Speaker Change: And with that I will hand over to Jason.
Speaker Change: And with that, I will hand over to Jason.
Speaker Change: Thank you Renee.
Jason: Thank you, Rene.
Jason Child: Q2 has continued our strong start for fiscal year 'twenty five total revenue was $844 million, which was above the top end of our guided range royalty.
Jason: Q2 has continued our strong start for fiscal year 25. Total revenue was 844 million dollars, which was above the top end of our guided range.
Jason: Royalty revenue was $514 million, which grew 23% year over year and matched our highest royalty revenue quarter to date.
Jason: Royalty revenue was 514 million dollars which grew 23% year-over-year and matched our highest royalty revenue quarter to date.
Jason: Our Q2 royalty revenue growth was driven by continued RMB nine adoption and the start of CSS deployment.
Jason: Our Q2 royalty revenue growth was driven by continued RMB night adoption and the start of CSS deployment.
Jason: As with last quarter royalty revenue from smartphone significantly outperformed smartphone shipments smartphone royalties increased approximately 40% year over year compared with mid single digit increase in the number of smartphone sold mainly due to smartphone application processor has been increasingly RMB nine based.
Jason: As with last quarter, royalty revenue from smartphones significantly outperformed smartphone shipments.
Jason: Smartphone royalties increased approximately 40% year-over-year compared with mid-single-digit increase in the number of smartphones sold, mainly due to smartphone application processors being increasingly arm-benign based with a high royalty rate.
Jason: The higher royalty rate.
Jason: In addition, we continued to gain share in automotive applications and with cloud service providers.
Jason: In addition, we continue to gain share in automotive applications and with cloud service providers.
Jason: However, this growth is partially offset by continued weakness in industrial given the ongoing inventory correction in that part of the semiconductor industry as indicated last quarter and widely reported by many of our semiconductor customers.
Jason: However, this growth is partially offset by continued weakness in industrial, given the ongoing inventory correction in that part of the semiconductor industry, as indicated last quarter, and widely reported by many of our semiconductor customers.
Jason: Licensing revenue declined 15% year over year to $330 million.
Jason: Transcription by CastingWords
Jason: Licensing revenue declined 15% year over year to $330 million, which was better than our expectations, which was for a 25% decline.
Jason: Which was better than our expectations, which was for a 25% decline.
Jason: License revenue varies quarter to quarter due to the normal fluctuations in timing and the size of multiple high value license agreements and contributions from backlog.
Jason: License revenue varies quarter to quarter due to the normal fluctuations in timing and the size of multiple high-value license agreements and contributions from backlogs.
Jason: Because of this we recommend that you look at annualized contract value or ACD divest understand the underlying license growth rate.
Jason: Transcription by CastingWords
Jason: Because of this, we recommend that you look at Annualized Contract Value, or ACV, to best understand the underlying license growth rate.
Jason: ACD in Q2 was up 13% year over year, which is consistent with recent quarters.
Jason: ACV and Q2 is up 13% year-over-year, which is consistent with recent quarters.
Jason: Remaining performance obligations or <unk> was up 10% sequentially as we had a very strong bookings quarter.
Jason: Remaining performance obligations or RPO was up 10% sequentially as we had a very strong bookings quarter.
Jason: Some of this <unk> recognizes revenue later this year.
Jason: Some of this RPO will be recognized as
Jason: Turning now to guidance I will briefly touch on both third quarter and fiscal year ended ending March 31 2025.
Jason: Turning now to guidance. I will briefly touch on both third quarter and fiscal year ended, ending March 31st, 2025.
Jason: This guidance reflects our current view of our end markets and our licensing pipeline.
Jason: This guidance reflects our current view of our end markets and our licensing pipeline.
Jason: For Q3, we expect revenue between $920 and $970 million, which at the midpoint represents revenue growth of 15% year over year.
Jason: For Q3, we expect revenue between $920 million and $970 million, which at the midpoint represents revenue growth of 15% year-over-year.
Jason: Investment in our next generation of technologies are on track and we expect our non-GAAP operating expense to be around $525 million.
Jason: Investment in our next generation of technologies are on track and we expect our non-gap operating expense to be around 525 million dollars.
Jason: We expect our non-GAAP EPS to be between 32% and 36.
Jason: We expect our non-GAAP EPS to be between $0.32 and $0.36.
Jason: Looking out to fiscal year 'twenty five we are reiterating our guidance for revenue costs and profit.
Jason: Looking out to fiscal year 25, we are reiterating our guidance for revenue, cost, and profit.
Jason: We expect revenue to be between three eight and $4 1 billion, which represents an 18% to 27% year over year increase.
Jason: We expect revenue to be between 3.8 and 4.1 billion dollars which represents an 18 to 27 percent year-over-year increase.
Jason: Transcript by Rev.com Page of
Jason: At the midpoint of our revenue guidance. This includes full year royalty revenue growth in high teens.
Jason: At the midpoint of our revenue guidance, this includes full-year royalty revenue growth in high teens.
Jason: We expect that our revenue growth from smartphones will continue to be driven by RMB nine based chips, becoming a greater proportion of the mix with CSS ramping over the next couple of quarters.
Jason: We expect that our revenue growth from smartphones will continue to be driven by ARMv9-based chips becoming a greater proportion of the mix.
Jason: with CSS Ranting over the next couple of quarters. [inaudible]
Jason: We also expect to continue to gain share and cloud and automotive.
Jason: We also expect to continue to gain share in cloud and automotive.
Jason: Feedback from our customers.
Jason: Feedback from our customers.
Jason: Leads us to expect sequential growth in networking in both Q3 and Q4, while Iot is not expected to recover until next year.
Jason: leads us to expect sequential growth and networking in both Q3 and Q4 while IoT is not expected to recover until next year.
Jason: Strong demand for our latest technologies will continue to drive license revenue for the rest of the year.
Jason: Strong demand for our latest technologies will continue to drive licensed revenue for the rest of the year.
Jason: We've kept the range for full year revenue guidance, the same as last quarter at plus or minus $150 million as we have some large licensing deals.
Jason: We have kept the range for full-year revenue guidance, the same as last quarter, at plus or minus $150 million, as we have some large licensing deals in place.
Jason: Although the timing of these deals in the shape of the revenue recognition is not yet clear we do expect all of these deals to close.
Jason: Although the timing of these deals and the shape of the revenue recognition is not yet clear, we do expect all these deals to close.
Jason: We do expect non-GAAP operating expenses to be approximately 2.05 billion.
Jason: We do expect non-GAAP operating expenses to be approximately $2.05 billion, which represents a 19% year-over-year increase and is unchanged from our prior guidance.
Jason: Which represents a 19% year over year increase and is unchanged from our prior guidance.
Jason: As we continue to invest in R&D to support future growth initiatives, we expect operating expenses to ramp consistently through the year.
Jason: As we continue to invest in R&D to support future growth initiatives, we expect operating expenses to ramp consistently through the year.
Jason: We expect our full year non-GAAP EPS guidance of between $1 45, and $1 65.
Jason: We expect our full-year non-GAAP EPS guidance of between $1.45 and $1.65.
Jason: With that I'll turn the call back to the operator for the Q&A portion of the call.
Jason: Transcription by ESO. Translation by —
Jason: With that, I'll turn the call back to the operator for the Q&A portion of the call.
Speaker Change: Thank you can I ask a question press star one on your telephone and wait for your name to be announced in the interest of time. Please limit yourself to one question only and rejoin the queue for any follow ups to withdraw your question. Please press star one on one again.
Jason: Thank you. To ask a question you will need to press star one and one on your telephone and wait for your name to be announced. In the interest of time please limit yourself to one question only and rejoin the queue for any follow-ups. To withdraw your question please press star one and one again.
Jason: We will now go to a SaaS question.
Jason: We will now go to your first question.
Speaker Change: One minute please.
Speaker Change: One moment, please.
Jason: Okay.
Speaker Change: And your first question comes from the line of Andrew Gardiner from Citi. Please go ahead.
Speaker Change: And your first question comes from the line of Andrew Gardner from City, please go ahead.
Andrew Gardner: Thanks, very much good afternoon, good evening.
Speaker Change: Thanks very much, good afternoon, good evening.
Andrew Gardner: Jason I was hoping you could shed a little light on a topic that you didn't touch on in your prepared remarks.
Jason: Rene, Jason, I was hoping you could shed a little light on a topic that you didn't touch on in your prepared remarks.
Jason: That's been myriad press reports regarding your working relationship in litigation with Qualcomm.
Jason: There have been myriad press reports regarding your working relationship and litigation with Qualcomm. I believe the case is still due in court next month, and you have reportedly cancelled Qualcomm's architectural licence recently, both, I think, as they plan to ship a greater volume of product based on the Nuvia designs.
Jason: The cases till June next month.
Jason: <unk> reportedly canceled qualcomm's architecture license recently.
Jason: I think if they plan to ship a greater volume of products based on the new via designs.
Speaker Change: And also ahead of the court case can you comment on the veracity of these reports on I suppose specifically on numbers.
Jason: and also a head of the court case. Can you comment on the veracity of these reports?
Speaker Change: and I suppose specifically on numbers, are there any issue with your revenue recognition and operating expenses into the coming periods related to these actions? Do you have to reduce REBREC? Will OPEX rise on increased legal costs?
Jason: The issue with your revenue recognition and operating expenses into the coming periods related to these actions.
Speaker Change: To reduce Rev. Rec will opex rise on increased legal costs.
Speaker Change: I know, it's tricky to talk about legal things, but if you can shed any light on that.
Speaker Change: I know it's tricky to talk about legal things, but if you can shed any light on that, I'm sure it'd be helpful.
Speaker Change: Would be helpful.
Speaker Change: Sure.
Speaker Change: Sure. Yeah, happy to. I'll address what I can. As it is an ongoing litigation, there isn't a great deal I can say on it. But at a base level, contractual consent was required by Qualcomm to assign the duty of license.
Speaker Change: Happy to I'll address what.
Speaker Change: What I can as it is an ongoing litigation there isn't a great deal I can say on it.
Speaker Change: But at a base level.
Speaker Change: Contractual consent was required by Qualcomm to assign the <unk> license.
Speaker Change: And that consent was not obtained.
Speaker Change: and that consent was not obtained.
Speaker Change: As a result of not obtained at consent. They are in breach and what we did was sent a notification letter regarding cancellation of the architectural license and to be clear to your question. We have not cancelled the license, but we have sent the notification to them.
Speaker Change: As a result of not obtaining that consent, they are in breach, and what we did was send a notification letter regarding cancellation of the architectural license. And to be clear to your question, we have not canceled the license, but we have sent a notification to them.
Speaker Change: Now now getting consent.
Speaker Change: For an assignment is fundamental for our license agreements.
Speaker Change: As a result, we need to ensure fairness and protect the arm ecosystem, who rely on these license agreements.
Speaker Change: On the financials I'll, let Jason maybe chat on the Opex, but regarding the revenue.
Speaker Change: Our forecast and guidance is always taken into consideration that we may not prevail in this case, so we have essentially taken that.
Speaker Change: That forward look so Jason or if there's any comment you want to make on the on the expense side no. There isn't any change and I think some of the changes you pointed out Rev. Rec expenses might not know that there is no changes because at this point as Renee said.
Speaker Change: And as I think we said actually back at IPO and consistent since then is our forecast assumes.
Speaker Change: We're going to get paid existing royalty rates.
Speaker Change: Well something changes there won't be any.
Speaker Change: Any increase or change in those rates.
Speaker Change: Thank you Beth.
Speaker Change: Thank you.
Speaker Change: We will now take the next question.
Speaker Change: And your next question comes from the line of Harlan sur from Jpmorgan. Please go ahead.
Harlan Sur: Good afternoon. Thanks for taking my question. So now that we're midway through your fiscal year.
Harlan Sur: Having a business through the first half has been coming from licensing rights.
Harlan Sur: In my view, the best forward indicator of their pipeline.
Harlan Sur: Both prospects and it looks like licensing for the full year will.
Harlan Sur: We will come in better versus your view, even 90 days ago. So this quarter backlog was up 10% sequentially book to Bill of one seven so very strong I assume you're driving more value uplift renewal it looks like <unk> seen some add on licensing activity as you mentioned Renee CSS engagements are strong bookings.
Harlan Sur: We expect it to be lower this year versus last year, but just given the strong design activity by your customers requirements for more compute capability.
Harlan Sur: Per program.
Harlan Sur: Ability on renewals for the remainder of the year, Canada team grow its backlog for this fiscal year.
Speaker Change: Yes, I would say a.
Speaker Change: A couple of things that we're observing in the marketplace.
Speaker Change: <unk> talked about the demand for our technology being quite strong given the ecosystem and the overall increased demand for <unk> technology.
Speaker Change: I think when we look at what's going on with with AI and when you think about AI. It's not just training in the data center, but its influence in the data center, it's in France across different parts of the overall value chain the networks the automobile the PC.
Speaker Change: The mobile phone, the wearable, which can be kind of what people would call. The edge. We're seeing an increased demand for compute resources to run these agents and run. These small language models are large language models on top of compute requirements that they already have.
Speaker Change: So what that is.
Speaker Change: An increase for us that we're seeing across the board for R&D and innovation to capture this platform opportunity. So we're seeing pretty broad licensing demand across candidly all the markets and all the sectors and youre right its.
Speaker Change: It's stronger than we had I think originally communicated and anticipated.
Speaker Change: It's a very good forward indicator for the strength of the business and also for the strength of the royalty is going forward and.
Speaker Change: In addition.
Speaker Change: As mentioned, we've doubled the number of CSS licenses now over the year. That's also been I think stronger than we anticipated.
Speaker Change: We did as I mentioned in the opening remarks announced.
Speaker Change: <unk> first.
Speaker Change: Chip design using CSS, so I think it's a combination.
Speaker Change: Increased compute demand.
Speaker Change: AI and also the CSS.
Speaker Change: And if theres any one add on to that.
Speaker Change: Yes in terms of the I think you asked Harlan.
Speaker Change: Harlan if theres a way to increase our backlog I would say certainly based on the strength that we've seen yes.
Speaker Change: If you look at the license revenue kind of implied guidance I think we're up about 40%, 45% higher this year than what was our plan back at IPO.
Speaker Change: So we have constraints now our forecast now is we I don't think there probably will be increased significant increase to backlog.
Speaker Change: But again hard to say that the large deals that we have coming later this year. There is there is some impact there but that of course, that's going to be offset by some of the kind of the amortization of recognition.
Speaker Change: Milestones they'll be delivered in the next quarter or so so so overall I wouldn't count on that being the driver I mean, I think the real focus is is really the royalty growth in the 23% year on year growth that we saw in the quarter.
Speaker Change: We're particularly excited about.
Speaker Change: I appreciate the insights thank you.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Ross Seymore from Deutsche Bank. Please go ahead.
Ross Seymore: Hi, guys. Thanks for asking the question going to stick on the licensing side of things.
Ross Seymore: Just since you guys talked about I think signing six new <unk> and then I think more than doubled the CSS side of things.
Ross Seymore: Is there a tam that is larger now I think originally you talked about Etfs, having somewhere around 50 potential licensees. It seems like that number must be growing if you're up upwards of 40 already so how do we think about the potential future growth there and if that has to slow eventually before his hands over to being such a good precursor for the royalty side.
Ross Seymore: If things in the future.
Speaker Change: Well I think the way to maybe think about it is.
Ross Seymore: One of the one of the opportunities we have with <unk>.
Ross Seymore: Is to expand.
Ross Seymore: The portfolio in size, if you will.
Ross Seymore: <unk> grant access to arm technology in a broad sense.
Ross Seymore: In other words, a broad portfolio of IP and also a broad set of rights in terms of how many chips to build and tape out in the year.
Ross Seymore: We can scale that to different variations I E smaller set of IP and or reduce number of tape outs, but still give.
Ross Seymore: Additional value to end customers because they get a larger suite then they might on a single instance.
Ross Seymore: In theory.
Ross Seymore: I think the majority of our customer base can move to some version of HCA and the reason for that is customers love the concept.
Ross Seymore: Because it addresses a number of things they know theyre going to use the arm technology number two having their engineers have access to the broad set of IP allows them to do a lot of experimentation and evaluation in a very easy way.
Ross Seymore: Thirdly, if they can now essentially fix their costs are in R&D go forward cycles since they know theyre going to be purchasing the IP anyway. So what that ends up meaning for arm is it's pretty much broader upside because less less churn on deals because they candidly are more repeatable and also by having a broader set.
Ross Seymore: Of IP available what we find is engineers end up using more.
Ross Seymore: So to your question and I think the vast majority of our customer base can ultimately go to some version of HCA and given the broad set of IP. That's used in HCA, I think thats going to drive higher royalties in the future.
Speaker Change: Maybe just a couple of things to add I think in the past, we'd said that we thought it probably about 80% of our.
Speaker Change: Or do you think of our.
Speaker Change: Since revenue and licensees as probably.
Speaker Change: <unk> been working well for them I think we said in this last quarter, where we're now kind of in the over 50% range.
Speaker Change: The one thing I think I think we've said in the past, but just to make sure it's clear as with HCA.
Speaker Change: Annual cost or price increase is roughly 7% per year and then those contracts on average are somewhere around three ish years, so even once everyone's in HCA.
Ross Seymore: Youre still going to have renewals youre still going to have annual increases and then of course as we deploy and released new technologies and expand the product offering then of course, you can also upsize as well. So so I don't I think we're quite a ways from reaching the.
Ross Seymore: Tam.
Ross Seymore: And there is multiple kind of points of growth to expand that Tam.
Ross Seymore: Thank you.
Tam: Thank you.
Speaker Change: Your next question comes from the line of Vivek Arya from Bank of America Securities. Please go ahead.
Vivek Arya: Thanks for taking my question.
Vivek Arya: Few questions on the royalty business I think you.
Speaker Change: We have changed this year's contribution to I think high teens growth from low Twenty's and then mid twenties.
Ross Seymore: I imagine that followed the cycle, but if there's any other color I would appreciate that but the other kind of related question is the nine contribution to royalties.
Ross Seymore: It kind of started at 25% I thought the plan was to continue to expand that every quarter by five points and since smartphone is the kind of the biggest contributor of that on your smartphone business is growing very nicely.
Ross Seymore: Over two times the base I would've talked the conversion would go on so I was just hoping you could give more color on why did the nine conversion kind of stalled.
Vivek Arya: Quarter, and then Oh.
Vivek Arya: Overall royalty growth.
Vivek Arya: What does it need to take it down.
Speaker Change: Yes, So let me take the first part of that question Vivek I'll address both the Divina and transition and then I want to make.
Vivek Arya: An important point regarding how to think about pricing inside the benign envelope and then let Jason talk about the specifics.
Vivek Arya: But first off.
Vivek Arya: The adoption of <unk> nine is going very very well, we're seeing very very strong uptick of it in mobile.
Vivek Arya: All of our <unk> products are benign and we're now starting to see the transition of it in an automotive and Iot and I mentioned in the opening comments that.
Vivek Arya: We've now seen the first shipments from Apple that are benign. So we're very very happy with the rate of adoption and I think if you looked at the royalty or the adoption rates on a quarter to quarter basis. It may not look.
Vivek Arya: Linear but.
Vivek Arya: It will definitely be increasing quarter over quarter over quarter, when we start looking at it on a multi quarter basis.
Vivek Arya: That being said I think there is a very important distinction that I want to make regarding how to think about royalties during the time that the benign architectures ramping in.
Vivek Arya: In contrast to version seven version eight.
Vivek Arya: Which by the way by way of reference those architectures tend to have a life of approximately 10 years in terms of their peak run rate during version seven in version eight once the royalty rates were fixed for that version there was very little delta throughout the period, meaning that as those versions reached maturity.
Vivek Arya: In terms of saturation.
Vivek Arya: The royalty growth would asymptote.
Vivek Arya: <unk> can be the case with benign and there's two primary reasons for that reason one is that generation.
Vivek Arya: Generation on generation, we introduced multi year improvements in the technology and multi year improvements in terms of the product, meaning that when we deliver a product, let's say for a phone that goes into production in 2025, and then we delivered a benign version for a film that goes in the production of 2026, because the product is better.
Vivek Arya: 15% better lets say on performance and power, we're able to drive better value based pricing for that solution.
Vivek Arya: During benign even though the royalty rates are increasing from version eight to version nine we're going to see continued increases throughout the life of Virgin nine even as version nine adoption increases.
Vivek Arya: <unk> in version nine we've also introduced CSS, which we've mentioned several times carries a higher royalty rate.
Vivek Arya: In some cases double if not more of what a standard version nine core would be so as a result, as we see growth in version nine adoption.
Vivek Arya: Going to see the royalty growth tracked higher than it has traditionally and again its for those two factors number one the value based pricing that sees an increase because of the better economics delivered and secondly, more of a transition to CSS.
Speaker Change: With that I'll, let Jason if you have any any comments I think maybe and to the extent of that question.
Vivek Arya: Okay.
Jason Child: Okay. Thank you.
Vivek Arya: Thank you.
Speaker Change: As a reminder, in the interest of time, please limit yourself to one question only and rejoin the queue for any follow up questions.
Speaker Change: Your next question.
Speaker Change: Comes from the line of Sweeny jewelry from Raymond James. Please go ahead.
Sweeny: Thank you my question is on the networking and data center business Rene I think that accounted for about 10% of your mix.
Speaker Change: The last 12 months, obviously, a lot of momentum on the data Center front and then.
Speaker Change: You have CSS products potentially ramping at some point in the next 12 months I'm just.
Vivek Arya: Trying to understand how important that's a driver that could be for the next 12 months both for me.
Vivek Arya: Yes.
Vivek Arya: Loyalty standpoint, and also from a licensing standpoint, thank you.
Vivek Arya: Yes, So let me, let me talk about the macro and let in.
Vivek Arya: And let Jason address the numbers piece.
Vivek Arya: I think the adoption of <unk> in the network and data center is going to mean very very strong.
Vivek Arya: Trajectory for arm not just in the 12 months, but over the next number of years.
Vivek Arya: Two components to that.
Vivek Arya: For general purpose compute.
Vivek Arya: We now obviously have had graviton and production for many years.
Speaker Change: From a large deal signed signed last year. So so overall I think the <unk> trend has been very very healthy.
Speaker Change: But yes, I wouldn't expect that I think the range that you indicated for ended the year is still probably a reasonable range.
Speaker Change: And so I think other than what we've included in the guidance on the deals that we expect to close in Q4 at this point, we don't have line of sight and the significant deals beyond those.
Speaker Change: Obviously, if something changes, we'll let you guys know.
Speaker Change: Alright, thanks, so much.
Speaker Change: Thanks Lee.
Speaker Change: Thank you.
Speaker Change: Your next question.
Speaker Change: Comes from the line of Jan <unk> from Arete Research. Please go ahead.
Speaker Change: Okay.
Speaker Change: Thanks, guys for giving me a Christian.
Speaker Change: I just wanted to get back to you.
Speaker Change: Yes.
Speaker Change: No.
Speaker Change: The announcement of <unk> smartphones.
Speaker Change: So how do you see the adoption of smartphones.
Speaker Change: Triggering through this year into next year, but could we see 50% of the market in the next few years.
Speaker Change: Yes. Thank you for the question I think so because when we think about what the value proposition of CSS, it's really about reducing time to market.
Speaker Change: And increasing overall confidence in the design and performance.
Speaker Change: One of the hallmarks of the mobile phone market as I am sure. You know is the fact that the product cycle is rather relentless.
Speaker Change: They are on an annual cadence.
Speaker Change: It's not very forgiving in terms of when units need to be available, whether that's aligning with <unk> WC or Singles' day in China, So with a very relentless.
Speaker Change: <unk> cycle.
Speaker Change: Combined with these new smartphone chips are becoming more and more complex application processors and then they're also being built in the most advanced.
Speaker Change: Geometries at the Fabs, which have longer manufacturing cycle times.
Speaker Change: Anything you can do to improve the time it takes to design a chip is welcomed so when we when we introduced CSS.
Speaker Change: Had a bit of.
Speaker Change: Skepticism, whether it would be applicable for the mobile phone market, but what we've actually seen as very very good adoption. So.
Speaker Change: In summary, yes can we get to 50% of the market I believe so because there is real value being delivered on a product that can move months off the development time, and what typically is a very very severe and relentless product cycle.
Speaker Change: Thank you.
Speaker Change: Thanks Keith.
Speaker Change: Keith.
Speaker Change: Your next question comes from the line of Chris <unk> from TD Cowen. Please go ahead.
Chris: Yeah. Thanks for taking my question I had a quick question on China. It seems like the smartphone mix is shifting towards the end to deal with in the Android market are you seeing any meaningful impact to your China volume piece and also what is the penetration of <unk> nine in China today. Thank you.
Speaker Change: Yes. Thank you for the question.
Speaker Change: We've definitely seen strength in the overall handset numbers in China due to the reasons that you had just mentioned I think the local brands there.
Speaker Change: Xiaomi Oppo vivo are all seeing very very good growth.
Speaker Change: Our team just participated in an <unk> product launch last month so.
Speaker Change: Number one.
Speaker Change: <unk> has been strong there I think there is a allegiance towards the local brands and in the premium flagship market as we get into the next year or so.
Speaker Change: Thats all version nine and Thats also going to find its way into the mid range. So China Android, yes, strong and also the vast majority of the products narrowing removing diversion nine the high end already is all there.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Your next question.
Speaker Change: Comes from the line of John <unk> from Guggenheim Securities. Please go ahead.
John <unk>: Thank you for taking my question Rene Thanks for that explanation you gave on the <unk> mix and the related variables that are in effect royalties going forward that was really helpful.
John <unk>: Think about some of that.
John <unk>: But shouldnt, we expect to continue to see that the nine mix grow and if not.
John <unk>: What would cause it not to grow or is it just.
John <unk>: I don't know a temporary macro issue or is this.
John <unk>: AI you guys are obviously benefiting there are.
John <unk>: In video, there's some others out there that the cloud vendors, but we really haven't seen it like in a lot of other places and I'm. Just curious is could there be at least.
John <unk>: People, just stepping back and just.
John <unk>: Catch up in our minds like to see how this is going or I don't know, Mike I'm, just trying to figure out how to model this going forward.
John <unk>: Sort of implied in guidance. Thank you for the question.
John <unk>: It's actually going to be quite predictable as we said it was 10% a year ago 25.
John <unk>: Now I can I can guarantee you it will not be 25% a year from now.
John <unk>: Will be considerably higher than that so <unk> say, okay, well what is really driving that.
John <unk>: I think youre going to see more version nine and Pcs is more windows on arm products are introduced in the market as more vendors introduced chips.
John <unk>: Given number one.
John <unk>: Number two what you will see in the mobile phone space is a very classic waterfall of what existed in the flagship will find its way in the mid range than what was in the mid range will find its way in below and that's a very natural evolution to products. It happens every single time. It is going to happen. This time, so a year from now.
John <unk>: I would expect now that the majority of the mobile phones will be version nine everything we do in the data center everything we do in the data Center is version nine.
John <unk>: So what will really be the slowest of the products to come to market will be the automotive sector and thats really driven by just the time lag. It takes for those products to be introduced particularly around <unk> and <unk>, but we know the pipeline we've got CSS activity in particular there so.
John <unk>: And when we had this call a year from now.
John <unk>: And then with the numbers, but I'll guarantee you we'll be way ahead.
John <unk>: 5% for the reasons I guess.
John <unk>: Okay, that's really helpful. John.
John <unk>: Modeling complexity of DNI and penetration. So if you look specifically at the most recent quarter, where it was flat quarter on quarter. The primary reason why was because the mid market had higher growth in the quarter and smartphones. The mid market doesn't have benign yet hasnt waterfall yet to benign.
John <unk>: And so as a result.
John <unk>: It looked like Eni installed it really hasnt been a deal with the kind of where the growth in the market.
John <unk>: It turned out to be in this most recent quarter. So so over time that stuff all shakes out as Renee said, but but you will have some maybe trends like we saw in this most in this last quarter to this quarter.
John <unk>: You need, but I don't think our.
John <unk>: Going to sustain we tend to have answer products anywhere between a three to five year visibility on when they show up.
John <unk>: And thats because the licenses had been done years ago, and we have very good line of sight with the chip vendors in terms of when theyre going to introduce the products and we have very good line of sight with the Oems when they plan to take it.
John <unk>: So don't read too much in terms of this quarter to quarter thing.
John <unk>: We have extremely good visibility in terms of where theyre going to land and the trend is only going forward.
Speaker Change: Thank you very much guys thats very clear.
Speaker Change: Thank you we will now take our final question for today and Youll final question comes from the line of <unk> Hari from Goldman Sachs. Please go ahead.
Speaker Change: Yeah.
<unk> Hari: Hi, guys. Thank you so much for squeezing me in.
Speaker Change: I was hoping to get your thoughts your forward outlook on the PC and smartphone markets.
Speaker Change: IPC, so far have been relatively underwhelmed relative to expectations at the beginning of the year or maybe a comp your tax.
Speaker Change: No it really hasnt catalyze the replacement cycle.
Speaker Change: Smartphones, either I know you guys are.
Speaker Change: Not so dependent on units because you've got.
Speaker Change: So things like benign and CFS growing our royalty rate, but given your visibility that you just spoke to in terms of what your customers are working on.
Speaker Change: When do you expect volumes across Pcs and smartphones to grow or is it a 25 dynamic is it more of a 'twenty six dynamic and I think one of the conferences you spoke to a 50% market share goal and npcs over the long run is that still the aspirational goal for you guys. Thank you.
Speaker Change: Yes sure.
Speaker Change: Answering your last question first absolutely and I standby standby that prediction.
Speaker Change: When we think about the windows ecosystem.
Speaker Change: It's really all about filling out a broad lineup of skus.
Speaker Change: If you go into a retailer today youll see that there is.
Speaker Change: And in light machines, low end machines mid price machines gaming laptops et cetera, et cetera, I think what you are what we're going to need to see and we will see it because we have great line of sight in terms of people working on multiple chips in multiple areas is a filling out of that skews.
Speaker Change: So I think when you start to see thin and light.
Speaker Change: Devices in an entry price point based on arm with a different chipset it'll you'll.
Speaker Change: Youll see growth when you see a gaming laptop it has arm inside which by the way will be compelling.
Speaker Change: When that comes out I think youll see growth so were pretty confident in terms of the next couple of years in terms of growth.
Speaker Change: In the PC market now whether thats related to AI demand end quote I think what's important is that these pieces are equipped with the horsepower required to run the AI applications. I think it's early days in terms of the definition of an AIP see relative to the value prop, but I wouldn't get so hung up on that.
Speaker Change: What we typically see these type of cycles is that you.
Speaker Change: <unk> got more technology in there then you would need to take advantage of the applications and then it flips the other way around so this is being largely future proofed, but broadly speaking, yes, we're pretty we're pretty <unk>.
Speaker Change: Bullish about the demand and I definitely stick to my prediction on growth of Windows on arm.
Speaker Change: Great. Thank you so much.
Speaker Change: Thank you.
Speaker Change: I'll now hand, the call back to Ray May have CEO for closing remarks.
Ray May: Thank you and thank you everyone for the questions and the interest in what we're doing again to summarize now our fifth conference call. Since we've been a public company and we've been consistently beating the expectations of what we have told you that we were going to do that prior quarter I think more broadly, though what youre seeing with <unk>.
Ray May: Arm and our strategies as I said in the opening.
Speaker Change: Really coming to life.
Speaker Change: We've talked many many times about the resiliency of our business the growth of benign to increase royalty rates and when you see our royalty growth in a market where units for example in smartphones are up 4% were up 40.
Speaker Change: That's a great proof point that the strategy, we put in place are working.
Speaker Change: Future is incredibly bright for all the questions that came up regarding automotive data center AI smartphones Pcs.
Speaker Change: We're very fortunate to be able to talk about exciting opportunities in all of those verticals all of them that are using arm and all of them theyre going to grow in the future. So thank you very much and I appreciate all the questions and comments.
Speaker Change: Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change:
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Sure.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: So.
Speaker Change:
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].