Q3 2025 Arm Holdings PLC Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the third quarter of fiscal year towards 25 at some conference calls.
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Today's conference is being recorded.
Jeff: And I would like to turn the conference over to your first speaker today, Jeff <unk> head of Investor Relations. Please go ahead Sir.
Jeff: Thank you and welcome to our earnings conference call for the third quarter of fiscal 'twenty, five which ended December 31, 2024 on the call today are in Ahus Armes, Chief Executive Officer, and Jason Child, Armes, Chief Financial Officer.
Jeff: During the 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 and <unk>.
Jeff: <unk> to any risks that we highlight during the call important risk factors that may affect our future results and performance are described in our registration straight statement on form 20-F filed with the SEC arm assumes no obligation to update any forward looking statements.
Jeff: 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 we are not able to reconcile without unreasonable efforts and supplemental financial information can be found.
Jeff: In our shareholder letter.
Renee: The shareholder letter on other earnings related materials are all available on our website at investors that arm dot com and with that I'll turn the call over to Renee Renee.
Renee: Thank you, Jeff and good afternoon, everyone.
Renee: AI demand continues to drive strong momentum for the army ecosystem, which is built on the world's most pervasive compute platform.
Renee: We're pleased to report record total revenue and an all time record royalty revenue over the third quarter of fiscal 2025.
Renee: Total revenue grew 19% year on year to an all time high that exceeded the high end of guidance.
Renee: Our royalty revenue grew 23% year on year to a new record. This was driven by adoption and deployment of benign and strong demand for RMC CSS.
Renee: Licensing remains strong as our partners make long term commitments to more of our advanced technology to take AI everywhere.
Renee: AI growth requires significantly more compute across all of our end markets from smartphones with better chat features to autos with better driving and parking assist.
Renee: The Iot microprocessors with embedded into use.
Renee: This is driving continued adoption of our benign in CSS technologies.
Renee: New flagship smartphones from Oppo, and vivo take advantage of Mediatek, new domestic 9400 system on chip.
Renee: <unk> is based on our CSS for client, which includes the arm cortex X 95, CPU and important immortelle us G 95 GPU.
Renee: Increased chip complexity is driving the top hyperscale or us to customize silicon on the latest arm RMB nine in CSS.
Renee: We're gaining share in the data center with AWS Graviton, Microsoft Cobalt Google Axion.
Renee: In the video Grace arm based chips.
Renee: AWS recently announced more than 50% of new CPU capacity installed over the past two years was on graviton.
Renee: Over 90% of Aws's top 1000, EC to customers use graviton.
Renee: We have more than 20 million developers.
Renee: The world's largest developer community and we continue to increase investment in our ecosystem.
Renee: Nvidia also announced project digits, which combines the arm based CPU in the Blackwell GPU into the new <unk> Super chip that powers the smallest AI supercomputer.
Renee: The great CPU is based upon arm CSS for client and includes 20 power efficient arm cores 10 cortex, <unk> 95, and 10 cortex a 75.
Renee: With project digits developers data scientists and AI researchers will.
Renee: We will be able to more easily able to build inference models before deploying them into the cloud.
Renee: I'd also like to call out two key projects that further cement arms position at the very center of the AI ecosystem.
Renee: Along with Softbank group and open AI Stargate for AI infrastructure deployment.
Renee: And advanced Enterprise AI called Crystal intelligence to develop AI agents for knowledge work we.
Renee: We strongly believe that the advances in AI, both for training and inference are going to increase the demand for compute in the cloud.
Renee: We expect arm solutions to address the needs from the cloud to the edge to power growth in the world's most popular computing ecosystem for decades to come.
Renee: And with that I'll hand, it over to Jason.
Jason Child: Thank you Renee.
Renee: Q3 was another record quarter.
Renee: We need to deliver strong growth total revenue was $983 million, which was above the top end of our guided range.
Renee: Revenue was a record $580 million.
Renee: <unk> grew 23% year on year and was above our expectations.
Renee: This growth was driven by continued RMB nine adoption and initial shipments of chips based on a compute sub systems as well as the growth in revenues from silicon custom silicon going into the data center.
Renee: Royalty revenue from chips for smartphones, the datacenter networking equipment and automotive were all within expectations, while royalty revenue from Iot show signs of recovery after multiple quarters of weakness.
Renee: Based on the most recent royalty reports revenues from smartphones continue to grow much faster than the overall smartphone market.
Renee: This was helped by chips based on both RMB nine and CSS, such as media Techs domestic 9400, which is being deployed in flagship smartphones from both opdivo.
Renee: Diebold.
Renee: Licensing revenue increased 14% year on year to $403 million, which was better than we forecasted license.
Renee: License revenue varies quarter to quarter due to normal fluctuations in timing and size of multiple high value license agreements and contributions from backlog.
Renee: As always we recommend that you look at annualized contract value or <unk> to best understand the underlying licensing growth rate.
Renee: ACD in Q3 was up 9% year on year, which was a little lower than the recent run rate of low teens, but is above our long term plan.
Renee: Remaining performance obligations or <unk>.
Renee: It was down slightly sequentially as on delivered products that release revenue from backlog into the P&L.
Renee: As you know arm's revenues today come from technology developed years, or even decades ago, and our cost today, our investments for future revenue streams.
Renee: To maximize our future revenue opportunity.
Renee: To maximize our investment in R&D today.
Renee: And in the third quarter heightened R&D spending led our non-GAAP operating costs to their highest level at $522 million, which was in line with our expectations.
Renee: At the same time.
We delivered near record levels of non-GAAP operating profit at $442 million going forward, we will continue to balance increasing investments for the long term growth of the business and near term profitability.
Renee: Turning now to guidance I'll briefly touch on both fourth quarter and fiscal year ended March 31 2025.
Renee: This guidance reflects our current view of our end markets and our licensing pipeline.
For Q4, we expect revenue of between $1 170, fives and $1 $2 75 billion.
Renee: At the midpoint this represents revenue growth of 32% year on year.
Renee: We have left the revenue guidance range slightly wider than in prior quarters as we have some large license deals in place.
Renee: Although we have high confidence of deal closure.
Renee: Timing of deals can be hard to forecast and some may slip into the next fiscal year.
Renee: As previously mentioned revenue growth today enables us to increase our investments in R&D are essential for our long term success.
We are accelerating the investments in our next generation of technologies.
Renee: We now expect our Q4 non-GAAP operating expense to be approximately $590 million and for Q4, we expect non-GAAP EPS to be in the range of 48% to 56.
Renee: For fiscal year 'twenty, five we are increasing the midpoint of full year guidance to around $4 billion.
Renee: This midpoint represents about a 24% year on year growth.
Renee: Which is ahead of our long term target of 20%.
Renee: With this we expect full year royalty revenue growth rate in the high teens year on year, which is consistent with our previous guidance.
We expect our full year license revenue to grow around 30% year on year.
Renee: We expect non-GAAP operating expenses to be about $2 1 billion.
Renee: Which represents a 21% year on year increase.
Renee: We therefore expect our full year non-GAAP EPS to be between $1 56, and $1 64.
Renee: With that I will.
Renee: Turn the call back to the operator for the Q&A portion of the call.
Renee: Thank you.
Speaker Change: I'll ask a question you will need to press star one on 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 install your question. Please press star one on one again.
Speaker Change: We'll now take your first question.
Renee: One moment please.
Speaker Change: And your first question comes from the line of Lee Simpson from.
Renee: From Morgan Stanley. Please go ahead.
Lee Simpson: Hi, good afternoon. Thanks for fitting me in maybe you could just kick off by asking about.
Renee: We see the strength in licensing.
Renee: As it go into the subsequent year and I guess I'm really asking this.
Renee: Really as it relates to some of the recent news flow that we've seen.
Renee: And the broader AI landscape, but also really touches on all arms capability. So if we look two weeks back we had the announcement of star gates in the U S. Our budgets ranging over $100 billion and in the last day or so we've hired all of your new joint development between Softbank and open AI called Crystal intelligence.
Renee: And we're just trying to understand what it seems arm sits here because interestingly it looks like both an enabler and even having first mover advantage as a kind of AI adopter in Europe <unk>.
Renee: So maybe I could take a step back maybe just try and help us can you outline just more clearly what the opportunity set is for arm, including the sell in of new products to these new and large projects and what the long term benefit is to arm and in the earnings perspective. Thanks.
Renee: Yes. Thank you for the question there is a lot there so I'll try to I'll try to simplify a bit.
Renee: So stargate.
Renee: <unk> that was announced a few weeks back which is a extremely significant infrastructure project.
Renee: States.
Renee: <unk> $100 billion will be invested immediately and $500 billion overtime.
Renee: And this is a partnership.
Speaker Change: With open AI.
Renee: And Oracle and Softbank <unk>.
Technology partners being those companies in addition to ourselves and Microsoft and Nvidia.
Renee: For arm, we are extremely excited to be the CPU of choice for such a platform.
Renee: Combined with the Blackwell CPU with Grace arm will be the CPU of choice for the initial configurations and going forward there'll be huge potential for technology innovation.
Renee: Around that space, so incredibly exciting projects, which we think will be transformational for the industry.
Renee: Crystal Intelligence, which was discussed earlier this week is really about <unk> AI and agents moving.
Renee: Across every node of the hardware ecosystem. So if you think about the smallest devices such as ear buds all the way to the data center. This is really about agents increasingly being the the interface and or the driver of everything that drives AI inside that.
Renee: Device for arm, it's a significant opportunity because AI workloads will run on every one of those endpoints that I mentioned.
Renee: Additionally, given that arm as the world's most pervasive compute platform.
Renee: Those AI workloads will run on arm and through arm and through our cloud AI libraries, we will make it very easy for developers to target and optimize to the platform running these agents so both of those announcements.
Renee: Our very significant both in terms of the impact of the industry and represent significant opportunity for our company.
Renee: Sure.
Renee: Your other question on kind of the licensing upside components. So for in the quarter. It was up about $27 million versus our kind of.
Renee: Guidance are up 14%, 14% year on year.
Renee: Certainly the drivers have been the same components over the past few quarters, which is AI and the need to.
Renee: Continue to access benign technology to prepare for all of the <unk>.
Renee: <unk> that go into AI chips, and then of course also CSS.
Rene: As Rene mentioned theirs.
Rene: <unk> CSS contracts that we've sold and we continue to be working on.
Speaker Change: In terms of the guidance for this next quarter, we're actually guiding that license revenue can grow in the order of kind of in the order of around 60% year on year and so we've said since early in the year. We have a number of big deals that we had planned on for Q4, those look to be kind of <unk>.
Speaker Change: Mostly on track and as expected and those deals very much are in the same kind of bucket of very much being AI and CSS driven.
Speaker Change: <unk>.
Jason Child: Thanks, Jason.
Speaker Change: Thank you Keith.
Speaker Change: Your next question comes from the line of Jay Kentucky from Wells Fargo. Please go ahead.
Jay Kentucky: Yes, thanks for taking the question.
Jay Kentucky: You mentioned that the partner demand for CSS is stronger than initially anticipated I guess, how should we think about the contribution to royalty revenue ramping as we enter fiscal 'twenty six versus your prior expectations.
Jay Kentucky: Yes, so we.
Jay Kentucky: We're not ready to talk about 2006, yet but in terms of exit rate.
Jay Kentucky: We feel very good about the momentum that we've delivered for example, this last quarter at $500 million of royalty revenue.
Jay Kentucky: About 13% higher than our previous record of $514 million.
Jay Kentucky: Certainly no no.
Jay Kentucky: No surprise that also is in the first quarter that we actually have materials CSS revenue. This quarter led mostly by the defense a 9400.
Jay Kentucky: We talked about also cobalt CSS.
Jay Kentucky: Starting to see shipments and deployments and that's flown into royalty revenue now as we continue to see more CSS deployments over the next couple of quarters. We do expect there to be continued momentum in terms of quantifying the momentum we're going to have to wait until next quarter.
Jay Kentucky: Fair enough. Thank you.
Jay Kentucky: Thank you.
Jay Kentucky: Thank you.
Speaker Change: Your next question comes from the line of Charles <unk> from Needham <unk> Company. Please go ahead.
Speaker Change: Yes, Thanks Jeremy.
Speaker Change: Yes.
Speaker Change: Just wanted to touch upon.
Speaker Change: Just had a lot of news coverage on the on the file last month's worth of work.
Speaker Change: Lost customers.
Speaker Change: The seems to be based on the press reporting there seems to be some difference.
Speaker Change: Thanks.
Speaker Change: The contract will expire.
Speaker Change: What they think they think expiring in 2008.
Speaker Change: Expiring.
Speaker Change: I know thats all calendar year commentary.
Speaker Change: What's the current view there.
Speaker Change: Revenue you maybe were expecting it.
Speaker Change: To happen Havent quantified maybe that won't happen in the next calendar year I just wanted to swap out there.
Jason Child: This is Jason.
Speaker Change: I think the question was about the impact of the Qualcomm lawsuit and rather abstract.
Jason Child: There are no impact.
Jason Child: Had.
Jason Child: Forecasted really all the way back to the IPO and continue to forecast.
Though.
Jason Child: We were not going to prevail and that the.
Jason Child: The primary reason for lawsuit very much of it was around dependent dependent in our IP and thats important but from a financial perspective, we had assumed we will continue to be receiving royalties that.
Jason Child: But basically the same rates that <unk> been paying for.
In the past and will continue to debate.
Jason Child: Got it.
Jason Child: Maybe.
Jason Child: Another question, just a little bit clarification.
Jason Child: I don't see a <unk>.
Jason Child: Question number from the shareholder letter maybe I missed this.
Jason Child: If you have a number of if you can tell us what the number here for the past quarter.
Jason Child: As a percentage of total royalties in the quarter. It was 25% so consistent with the prior quarter.
Jason Child: Okay.
Jason Child: 25%.
Jason Child: It looks like it's been a couple quarters up one 5% do you expect that to go up again.
Jason Child: In coming quarters.
Jason Child: The asset is properly yet.
Jason Child: And also can you help us understand why I love the following couple of quarters already.
Jason Child: Okay.
Speaker Change: Let me just maybe cover some of the math piece and then I'll, let Renee you kind of talk about the overall kind of larger view of how <unk> adoption.
Speaker Change: Adoption is occurring and how it will continue to occur. So I would just say first of all the math is that as a percentage of total and so we saw 23% growth in the quarter. So it's flat as a percentage of total but if you actually look just at the benign dollars.
Speaker Change: The rate went from about 15% a year ago to about 25%. This quarter. So the absolute dollars grew by I would say triple digit rate.
Speaker Change: And so the fact that it's relatively flat.
Speaker Change: Actually is a great indication of the fact that you have we have a longer runway for future growth. We still expect that you will see <unk> grow to probably 67% to 70% of total royalties and the fact that we're able to kind of meet or exceed our royalty growth rates, while it's not been accelerating.
Speaker Change: Should provide more confidence about our ability as that rate goes higher our ability to drive further royalty growth.
Speaker Change: In the next quarter and beyond.
Speaker Change: Yes, I mean, maybe just to give you a sense of how to think about those transitions.
Speaker Change: They are largely driven by the transitions of OEM products and when they get introduced.
Speaker Change: Take for example.
Speaker Change: The media Tech 9400, which has been designed into the eyeball in vivo phones.
Speaker Change: Those are now in their ramp for production.
Speaker Change: So youll see a spike up as they ramp and then you get to a steady state.
Speaker Change: But as the next versions are released a couple of things happen.
Speaker Change: Broader broader adoption across the high end of the segment and then the high.
Speaker Change: Hi to mid range to mid range products start to move from VA to benign so.
Speaker Change: The transition rate that we're seeing is completely expected and very very consistent with how we expected.
Speaker Change: Overall ramp to be so very happy about where we are and as you said room for expansion, but it's largely driven by Oems shifting their chip mix as opposed to licensing.
Speaker Change: Companies.
Speaker Change: Thanks, Larry.
Speaker Change: Jason I appreciate the color. Thank you. Thanks.
Speaker Change: As a reminder, please limit yourself to one question only and rejoin the queue for any follow up.
Speaker Change: We will now go to the next question.
Speaker Change: And your question comes from the line of Tim Horan.
Speaker Change: Mainland from about that Atlantic. Please go ahead.
Speaker Change: Hi, Thanks, very much for taking my question maybe.
Speaker Change: Maybe just to key off the question on the royalty question can you, maybe just talk a little bit.
Speaker Change: More specifically about FY, 'twenty, six and kind of what momentum and what kind of mix evolution, we should expect on benign to contribute to the full year. Thank you.
Speaker Change: Yes. This is Jason where we will provide guidance on 'twenty six next quarter. We typically just like last year, we do it and when we announce Q4 results. So we'll go into more detail than I would say, what we've said in the past is that we would expect.
Speaker Change: Royalties to grow probably somewhere in the.
Speaker Change: Mid 20% growth rate, that's what we've said in the past we will not provide an update to that today.
Speaker Change: The way that we're going to get there is through the combination of benign adoption as well as CSS.
Speaker Change: So.
Speaker Change: What you saw in this most recent quarter is V. Eight actually had some really strong growth that's great.
Speaker Change: But overall you should expect to see benign over time continue to grow but also remember that <unk> is just one input into growth CSS adoption is a I would say, even a larger input to growth because the royalty rate on CSS is roughly double that of benign and of course, a benign is roughly double the <unk>.
Speaker Change: Royalty rate.
Speaker Change: So so overall you have to look at all the components, but but the momentum that we just showed in this last quarter and we would expect over the next quarter.
Speaker Change: We think sets us up for a very good 26 in.
Speaker Change: And maybe just to expand further on that and make sure Jason doesn't kill me, but the royalty rate on our CSS of 26 is not necessarily the same as the royalty rate for CSS in 'twenty five.
Speaker Change: Those CSS rates.
Speaker Change: <unk> year on year, when the new solution is offered to the market. So.
Speaker Change: Those are those are variable over time and they increase overtime.
Speaker Change: That's great Super helpful. And then maybe just one quick follow up the license fee revenue clearly.
Speaker Change: It's super hard to predict the exact week or day or month, but is there anything structurally changing in terms of the complexity of your client agreements that means that these are just structurally going to take longer and longer to get over the line or is that something we should expect to see in coming years. Thanks very much.
Jason Child: This is Jason I would say no, but you need to kind of look at the contracts primarily in two buckets. There is brand new contracts with someone we haven't done work with before that probably it takes a while there is a lot longer approval process versus a renewal.
Jason Child: Maybe an existing HCA and thats, probably a shorter cycle, but nonetheless, the larger the deal is the longer the timeframe typically when these get into hundreds of millions of dollars. They probably involve boards of directors and all of these these different.
Jason Child: Approvals that can just take many many months, but in general to your to your question is anything changing now where next year versus where it's been in this last year and now it's all the same factors.
Jason Child: Great Super helpful. Thank you.
Jason Child: Thank you.
Jason Child: Thank you.
Speaker Change: Your next question comes from the line of Vijay Rakesh from Mizuho. Please go ahead.
Vijay Rakesh: Yes, hi, thanks add in and Jason just a quick question on the it looks like on AWS, we are having very good success almost.
Speaker Change: 90% of the top 1000 customers using gravity.
Vijay Rakesh: They have done that.
Speaker Change: IP can you talk to how the cobalt gone under this program thing how that's ramping.
Vijay Rakesh: Follow up.
Speaker Change: I'll defer to Microsoft making statements about the shipments of cobalt.
Speaker Change: To be clear, we've taken the AWS comments directly from from AWS, but in general what we're seeing inside of Microsoft with cobalt and more broadly with all of our partners has not only increased momentum for deployment of those products into the cloud, but because of the trans.
Speaker Change: <unk> away from an X 86, plus <unk> 102, a grace Blackwell GBP 200 that is also an accelerant for arm and database and the data center.
Speaker Change: Does he is AI Dennis centers.
Speaker Change: The primary CPU being grace running everything relative from a post control standpoint.
Speaker Change: A good tailwind or kicker if you will so we're very happy with the momentum in general.
Speaker Change: For again to Microsoft from specific.
Speaker Change: Commentary on cobalt, but the momentum has been has been terrific.
Got it thanks, and then on the related party side, it looks like very nice traction sequentially.
Speaker Change: Up 48% just wondering long term are you seeing anything that does that.
Speaker Change: As you look out longer term, how does that progress. Thanks.
Speaker Change: I would expect it to be pretty consistent related party. The largest component is our in China, and so I would expect that.
That will be kind of pretty consistent.
Speaker Change: Overtime arm, China, probably we expect it to probably be a smaller percentage of revenue. This quarter was in the 25% range I've.
Speaker Change: I've said in the past, we expect to probably default to mid teens overtime.
Speaker Change: But but over the next few quarters.
Speaker Change: Not going to change a whole lot.
Speaker Change: Alright, thank you.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Andrew Gardiner from Citi. Please go ahead.
Speaker Change: Okay.
Andrew Gardiner: Good afternoon, and thank you for taking the question.
Andrew Gardiner: I had one on M&A.
Andrew Gardiner: There continues to be continue continues to be speculation in the press about M&A, whether it's or perhaps related to to softbank above you and.
Andrew Gardiner: And in particular sort of the potential for you to move beyond a pure traditional IP model and get further into the silicon space.
Andrew Gardiner: Without sort of saying anything specific on M&A I know you wont be able to really do that but just in terms of the discussions you're having internally and perhaps with your customers and what they are needing why what is what is happening that is causing you to perhaps mean further in that direction.
Andrew Gardiner: As you look out beyond the current years. Thank you.
Andrew Gardiner: Yes. Thank you for the question and as you surmised there isn't very much we can say about speculation or rumors.
Andrew Gardiner: We spend a lot of time most.
Andrew Gardiner: Most of my time personally thinking about growth I'm thinking about about the future.
Andrew Gardiner: One thing I can say that we are seeing that I'm sure all of all of us in the market and in our space are trying to reflect upon is at the at the rate of which AI is evolving.
Andrew Gardiner: And the rate at which the.
Andrew Gardiner: The software models change it puts tremendous pressure on our ecosystem to develop products faster better sooner and more efficient and as art as arm is the heart of all of that we look very hard in terms of how to solve customer problems, but unfortunately, I can't give you much more detail than that and certainly can't.
Andrew Gardiner: Speculate on any rumors on M&A.
Andrew Gardiner: Thank you.
Speaker Change: Your next question comes from the line of Harlan sur from Jpmorgan. Please go ahead.
Harlan Sur: Yes. Good afternoon. Thanks for taking my question, maybe as a follow on to that question Rene I mean, the team has always led with our system level strategy, which then caused demand for compute IP solutions right. Our model is a good example of that.
Speaker Change: Move to CSS is another good example of that knowledge seems like the team is scaling this strategy to attack the complex vessel market that is rapidly moving towards this more sort of heterogeneous sort of chipset based strategy. You guys are building an ecosystem around your CSA or just shiplett system architecture like what's the.
Speaker Change: What's the progress so far are you seeing an acceleration of activity around CSA and more importantly, like how is the RM team going to monetize this strategy.
Speaker Change: Yes, thanks for a lot of good points there, we've absolutely seen an acceleration of demand for CSS as Jason mentioned.
Speaker Change: Customers clearly see the benefit of it.
Speaker Change: Now involved with CSS and just about all the major markets that we engage there's just significant demand for that product.
Speaker Change: Also kicked off something we call the arm total design partners and this allows and partners design houses.
Speaker Change: We take our CSS and potentially developed triplets and.
Speaker Change: Very very strong demand for that program as well.
Speaker Change: To your point in terms of what's really driving all of this I go back to the previous answer I gave it is really the fact that these designs are incredibly complex to build getting even more so there is a very very strong link between the hardware and the software.
Speaker Change: And as arm is the heart of everything that takes place in any one of these chips relative to the software ecosystem. There's just huge demand on asking us to do more sooner and how products get to market faster because we're in a phenomenal time in our industry, where the compute demand.
Speaker Change: <unk> are outpacing the silicon to serve it we get lots of questions about the smartphone market and in the AI capabilities to harness what's going on inside there you have to remember that these smartphones where does that the chips for the smartphone for design two or three years ago.
Speaker Change: Memory subsystem to power everything was predefined so to be able to fit these small language models or anything that goes inside the phone is quite a challenge given the fact that you still have to run a display you still have to run an operating system you still have to run apps. So what what helps address that.
Speaker Change: Getting products to market faster and that is really what we're very focused on.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Vivek Arya from Bank of America. Please go ahead.
Vivek Arya: Thanks for taking my question I wanted to go back to the <unk> nine adoption question and I appreciate that in absolute numbers right of course that represents more dollars.
Vivek Arya: As a percentage of your royalty, but at the start of the fiscal year I think you said that.
Vivek Arya: Adoption with go by.
Vivek Arya: <unk> contribution will grow by five points or.
So 500 basis points every quarter, but it has started at 25%. So I was hoping you could explain.
Vivek Arya: What's happening versus the assumption you have at the start of the year and since we did not see it as much in the last fiscal year does this create an.
Vivek Arya: An acceleration or a upside driver for next year or is that not the right way to look at it. Thank you.
Jason Child: Yes. This is Jason ill take that one so I would say I mean, ultimately what you're trying to get to is does this set us up for better growth next year.
Jason Child: I would say it could I just don't know if its going to be next year and year after or what exactly is the timeframe.
Jason Child: If you go back to as you said our assumptions, we had seen three straight quarters of when it went from 10% of total to 15, and then went to <unk> and I went to 25 and now a few quarters, where it's leveled out of 25.
Jason Child: On the.
Jason Child: The reason we provide the metric is to help people understand the adoption of <unk>.
Jason Child: Benign.
Jason Child: The fact that it's slowed as a percentage of total again as I said is actually a good thing.
Jason Child: Because it just gives us as you said already that it gives us.
Jason Child: Better.
Jason Child: Do you into the growth because we still believe it's going to reach the 60% to 70% as a percentage of total why do we believe that we've already sold the contracts and we already have insight into the products that are going to come to market on benign. So as a result, we have high confidence. It's just a question of what's the timing there.
Jason Child: The fact that it has not grown over the past few quarters is.
Jason Child: A little bit surprising to us and the reason why is because you've actually seen stronger VA growth than we previously expected.
Speaker Change: Thats, great. If all generations are going to be able to have strong growth that's good.
Speaker Change: But what's coming online again already under contract and we know it's coming just a question of when when do those shipments occur and what's the mix. So so so ultimately those are the drivers.
Speaker Change: Again. The reason we provided this number was more as a indicator to try to help understand the leading indicators of royalty growth.
Speaker Change: And so the fact that we've been able to meet or exceed our royalty numbers, while having a slightly slower growth of benign mix again is a good thing, but I think you should focus on the overall royalty growth.
Speaker Change: We gave those metrics back when royalties were growing much slower than they are now and so that's why I think I would focus more on overall royalty growth and I would be nine adoption.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you Joe.
Speaker Change: Next question comes from the line of John <unk> from Guggenheim Securities. Please go ahead.
Speaker Change: Thank you.
Speaker Change: My question is for Renee as kind of a high level question I think there's been a lot of investor discussion around training optimization and a lot of discussion around in regards to deep seek assuming assuming this is all valid how does that change your view on arms opportunity as it pertains.
Speaker Change: If at all and I guess for any more broadly just like to hear your thoughts on this topic even beyond our.
Speaker Change: Yes.
Speaker Change: Well a few things.
Speaker Change: Broadly speaking if you think about the achievements of deep seek both of these three sort of their generic model. If you will and are one their reasoning model.
Speaker Change: There was obviously a lot of work that was done on top of existing work a K a.
Speaker Change: <unk>.
Speaker Change: Our frontier model that was created by someone else and then.
Speaker Change: Deep seek doing some very creative work to build a model on top of that that was very very efficient in terms of inference.
Speaker Change: I think it's great to be honest with you and I think it's great for a couple of reasons, it's great for the industry.
Speaker Change: Because it drives.
Speaker Change: Efficiency.
Speaker Change: It lowers the cost and by doing that is expanding the demand for overall compute so just from a general standpoint, that's a good thing.
Speaker Change: When you think about the application to arm given the fact that AI workloads will need to run everywhere and lower cost in France are more efficient inference.
Speaker Change: It easier to run these applications in areas, where power is constrained.
Speaker Change: The amount of compute you can put down as constrained it's terrific for arm.
Speaker Change: As wonderful the product is Grace Blackwell is you would never be able to cell phones, you would never be able to put it into earbuds you can't even put it into a car.
Speaker Change: But isn't all those places and as a result, I think when you drive down the overall cost of inference. It's great. I also think that we're also nowhere close to good enough.
Speaker Change: Because if you look at the expenditure is being announced by.
Speaker Change: The large players in this market I think Google just announce a $60 billion spend in their call.
Speaker Change: <unk> has talked about $80 billion med has talked about.
Speaker Change: $40 billion to $50 billion no one is pulling back and the reason for that is we're nowhere near.
Speaker Change: The capabilities that could be transformational in terms of what AI can do so I'm actually I think it's a great thing and a good thing and I think it will actually increase our road.
Speaker Change: Compute demand and for arm, even better because it allows us to play in areas of efficiency is key and that's that's our sweet spot.
Speaker Change: Makes sense and thanks for your thoughts for ne.
Speaker Change: Yes.
Speaker Change: Keith.
Speaker Change: Your next question comes from the line of Chris <unk> from TD Cowen. Please go ahead.
Speaker Change: Yes, hi, Thanks for taking my question, Jason I, just wanted to follow up on the ACD you mentioned the growth details I know you guys know putting those items later on.
Speaker Change: Just kind of curious how to think about the ECB around golf on a longer term basis are there any big data center and mobile programs that are coming that could ramp it back to that Deane, some double digit growth and how much of the ACD starting from the arm China business today. Thank you.
Speaker Change: Sure so.
Speaker Change: Let's see so in terms of.
Speaker Change: The I guess the forecast and what do we what are we.
Speaker Change: I think its land if you go back to way back when we went public we basically provided ACB with the idea that it probably should be growing in the mid to high single digits.
Speaker Change: And the reason for that is if you treat all of our deals as ratable knowing that the vast majority of our of our.
Speaker Change: License revenue in ACD is actually coming from HCA deals and the nearly all of our deals typically have a 7% annual escalator. So it should be.
Speaker Change: And then all the non HCA deals won't have that.
Speaker Change: It's probably plus or minus in the 7% range. So that's kind of what our what our forecast looks then.
Speaker Change: And then over the last I guess now six quarters, we've seen because of AI, we've seen acceleration in.
Speaker Change: And licenses mostly around adopting.
Speaker Change: Benign as well as now CSS as well so thats provided upside that took us from that.
Speaker Change: Seven ish percent plus or minus all the way up to over the 14 or 15% at a high.
Speaker Change: Will we get back to the mid teens range.
Speaker Change: No that's not that's not what we never really forecasted.
Speaker Change: It certainly could happen when I provide guidance next quarter I'll try to give you a little more insight on that.
Speaker Change: But in terms of kind of the longer term growth model.
Speaker Change: You should expect the vast majority of the growth really to come from royalties and so certainly with benign I don't much higher royalty rate and as Renee said earlier, both benign and CSS. Those are not one time increases in royalty rate there are step change, but each year theres still with new versions typically going to be increases annually as well. So so overall.
Speaker Change: You should expect the majority of the growth coming more from royalties in the future than from from license.
Speaker Change: Okay.
Speaker Change: I'll now turn Pcbs arm, China. Thank you.
Speaker Change: Oh yeah.
Speaker Change: The arm sorry, the on China portion.
Speaker Change: We're in kind of the the Twentyish percent range, so pretty close to kind of the overall mix. This last quarter was about 25%. So it's kind of somewhere in that range.
Speaker Change: Thank you very much thank you.
Speaker Change: Thank you.
Speaker Change: Thank you we will now take our final question for today until final question comes from the line of Mark <unk> from Evercore. Please go ahead.
Speaker Change: Great. Thank you that smartphone <unk> from Evercore, thanks for taking the question.
Speaker Change: I think our CSS question.
Speaker Change: For for Jason and Renee.
Speaker Change: Jason the CSS license activity is that mostly data center or is it balanced between data center in handsets and then.
Speaker Change: And then Renee when you I just want to make sure I understood. Your comments that you made earlier.
Speaker Change: AI comes into smartphones does that necessarily mean that.
Speaker Change: Those.
Those processors are going to be kind of chip lit architected and so then longer term, there's likely a very high attach rate of CSS to the to the smartphones and then.
Speaker Change: Is this similar question on the on the Iot side does the ear Bud become.
Speaker Change: We assess device also or is that like a monolithic die without just more processing power on the arm chip. Thank you.
Speaker Change: Yes, so maybe I'll take the first part of that and an adjacent sort of changed your address the numbers.
Speaker Change: I think every.
Speaker Change: Endpoint that you just described earbuds, maybe maybe not just because there is so so tiny.
Speaker Change: But certainly this chip would approach is going to be pervasive across.
Speaker Change: Just about every end Soc, if you will.
Speaker Change: In other words it inside the package, you'll have a number of small die everywhere. It exists on the high end today, almost as a standard but I think I think you'll see that everywhere, which is a gigantic opportunity for us because not only can we provide.
Speaker Change: The compute CSS from a CPU standpoint, but it allows us to have the right mix of whether it's an MCU or combined with a GPU.
Speaker Change: And the rights CPU combination to maximize performance you've sort of hit on a on a very very key point in terms of demand driver, which is why we're seeing really strong CSS type of demand across all of those end markets.
Jason Child: Well ill, let Jason handle the last piece on the CSS mix, we said in the past that auto we've announced that it's coming not here yet so in terms of the roughly dozen that we've sold.
Speaker Change: Whom that's.
Speaker Change: Basically about 50 50 between infrastructure and our client business.
Speaker Change: Okay very helpful. Thanks, so much guys.
Mark: Thank you Mark.
Mark: Thank you I will now hand, the call back for closing remarks.
Mark: Thank you and thank you everyone for all your questions as always very much appreciate the interest in <unk>.
Mark: What arms doing in very very good questions.
Mark: As summarized the beginning.
Mark: The quarter was just phenomenal.
Mark: Quarter, we've never been close to $1 billion before in revenue and we just about got there.
Royalties a record at $5 80, and we're now guiding to well north of $1 billion in the next quarter.
Mark: Which is something obviously the company has never done before so being able to share with you record revenues for the quarter just ended and a projection to beat that by a healthy margin in the next quarter is just something we're so proud of at arm. So we are very excited about the future.
Mark: Whether it's about the near term execution of our strategies with benign in CSS to all the opportunities that star Gate and Crystal intelligence bring us.
Mark: Fantastic time to be with arm. So thank you all for your questions and interest and we'll speak to you next quarter.
Mark: Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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