ARM Holdings, plc (NASDAQ:ARMH) Q4 2015 Earnings Conference Call February 10, 2016 4:30 AM ET
Stuart J. Chambers - Chairman
Simon A. Segars - Chief Executive Officer
Christopher Kennedy - Chief Financial Officer
Kai Korschelt - Bank of America Merrill Lynch.
Andrew Gardiner - Barclays Capital
Nick James - Numis Securities
Brett Simpson - Arete Research Services LLP
Jaguar Bajwa - Arete Research Services LLP
Amit Harchandani - Citigroup
Gareth Jenkins - Gareth Jenkins
Eoin Lambe - Liberum Capital
David Mulholland - UBS
Vijay Anand - Mirabaud Securities
Robert Sanders - Deutsche Bank
Stuart J. Chambers
Good morning ladies and gentlemen, it's Stuart Chambers, Chairman of ARM it's my pleasure to welcome you to our 2015 results presentation. Let me just first pick off with a couple of board changes which we made since I saw you last, which was at the half year. Chris Kennedy obviously is fully on board now also Lawton Fitt has joined the board as a non-executive director, but also as a replacement to Kathleen O'Donovan as Chairman of our Audit Committee and also we have Steven Pusey join us, who will bring a welcome global technology approach to our board. So those are the board changes.
Let me now turn to the company. Just briefly, last year we celebrated our 25th Anniversary and Simon and the team had a whole series of events around our various locations, clearly you know thanking if nothing else our employees for the tremendous progress we have made. And in that 25-years a lot many, many very successful years of progress.
Now, clearly it is our intent to look back at our 50th Anniversary at a second quarter century of similar success. Now to do that of course we have to do two things, we have to deliver today, tomorrow, next week, next month for our customers on the executions of our various technology roadmaps and we need to keep on doing that flawlessly.
But secondly, it's very important of course we have a long-term perspective on strategy and we have long-term strategic objectives. And as a part of that at the Investor Day last year, we talked about accelerated investments in order to make more progress further down the road and of course those are very important things for us to be doing.
So with further ado, now I'll hand over to Simon, who will cover both of things our performance in terms of 2015, but also importantly progress against some of our medium and longer terms objectives. Simon.
Simon A. Segars
Thanks Stuart. Good morning everyone. Thank you for joining us for a start, let me just refer you to the usual cautionary language and if you need any assistance with that please stay with us later on.
So here today to talk about our full-year results our Q4 and looking back on 2015, it was a very, very busy year for ARM and the ARM partnership in that I'm really thrilled with the progress that we have made on delivering to our long-term strategic objectives, which are around collaborating with business leaders, to develop the technology that’s going to be required for the products at the future. I think we made great progress on that in 2015.
Now, when roll that down to the numbers and we will talk about that later. Q4 was very strong for us and ended as strong year of great performance. We ended the year with nearly $1.5 billion of revenue and in Q4 our licensees shipped 4 billion chips containing on technologies. The total volume of shipments through the year was roughly 15 billion chips that’s a huge numbers and Q4 was the first time that we have broken that 4 billion in a quarter barrier.
So, very large volumes that’s resulted in strong royalty revenue growth. The volume growth in the year was about 23% and royalty revenue growth 31% and the reason for that difference is the increased ARM content in some of those chips and increased royalty rates that we are able to come on because of the value that our technology adds into those devices. So, the business performance led to strong cash generation that’s enabling us to recommend a 25% increase in our dividend, because of the profitability performance of the business.
So those results happened because of the long-term investments and long-term view that we take in growing the business and the investments that we have made for many, many years resulting in product that are licensed in the year and volumes of chips that shipped in the year. So this all comes about the work we do in our R&D.
Now, at the Capital Markets Day we talked about some of those investments that we are going to made in the future. ARM really is a long term business and we are thinking today about products that will be shipped in 5-year, 10-year, 15-year maybe 20-year time. We have product shipping today of our licensees based on technology we were designing 20-year ago. So this really is a long-term business and we have to take a long-term view on investments.
So I'll talk briefly about some of these areas now. So starting with mobile, clearly the growth of smartphones is slowing down, this is something we have been anticipating for long times, obviously this is going to happen, but as we look to the future and how the mobile computing market plays out. We see continued opportunity for more compute performance, more ARM content in the mobile computing devices of the future.
That’s going to come about again through work we do within ARM, but increasingly it comes about through collaboration with our partners. The way we work with leading companies in this space to take what we do, to emphasize what we do with all their own intellectual properties and their own work. So that collaboration which is the crucial part of ARM continues to play a role in the evolution of products in all spaces, but especially in mobile.
In networking, in the enterprise segment and networking services, we have outlined before the opportunities for ARM and the ARM partnership to grow share and we have seen good successes in that in 2015. What we are doing to accelerate that is further investment in the software ecosystem. There is a lot of software that’s going to run on this processes in the datacenter, in the network and our investment right now is about enabling that to be optimized for ARM architecture to fuel that growth.
Again, we are doing some of that work internally and we are partnering with leaders in this space to make sure that the right code is optimized in the right way from the right workloads, because our partners understand the details of that much better than we do. So partnering again very crucial for our growth in this space.
Now turning to embedded. All around us we are seeing more and more devices become connected and more and more devices become increasingly intelligent, so that they can make sense of the world around us and share data with other devices to gain real insight.
Now all of that is enabled by tiny low costs microprocessors embedded in microcontrollers, which sell for about very amount of money, but that low costs leads to very high volume. And this kind of embedded computing in all sorts of application is going to be real driver of technology over medium to long-term.
What we are seeing is a migration in the space from very simple technology 8-bit and 16-bit architectures produced by other. Two more sophisticated 32- bit microprocessors and this is where ARM and ARM partners have really taken a lead. We are continuing to enhance that lead through R&D and our products and again partnering with other to bring right technologies together to solve some of the securities issues that arise when suddenly everything is connected.
So, three areas in which we are investing is both hardware and in software to grow the opportunity for ARM. As we do this, and we look at the size of the market, these are big growing markets. When you take just these three and obviously we are involved in other markets as well and we'll come on to some later. In terms of the content the devices that will be sold by our licensees these three markets alone add up to $120 billion of silicon.
Now that’s a $120 billion in 2020 growing from today you can see, you can do the math there, the increase is about another $30 billion worth of silicon compared to 2015. So these are big market, they are growing market and they are all markets where the competing requirements are growing and these are perfect markets for ARM and our partners to address.
So back to mobile for a moment. The devices that you are carrying today, I'm guessing that everybody in the room has a smartphone at least one. The devices that you see your friends or your family buying are all based on technology that we developed a long time ago. Through 2015 we see increased adoption of Version 8 the architecture and coming into the year when we look back to 2015 as a whole, around half the smartphones that were shipped in that time were based on Version 8 of the architecture.
Now that is technology that we started developing a decade ago, it's been in development a long time. we have produced processor design based around v8, our licensees produce chips based around this and now they are shipping in volume and you can see through the year that the volume has grown, and in fact in 2015 compared to what I said 12-months ago the adoption of v8 in mobile was stronger than we expected.
It's not just about v8, we have seen increased attach rate of our Mali Graphics Processor, very high volumes out, putting about 15 million of Mali processor shipped by our partners in 2015. So the attach rate of Mali going up with the numbers graphics architecture and increase in the number of cores the amount to compute power packed into these mobile devices that we are carrying around.
So 2015 has really seen an increase in the compute performance of these devices, we have seen a growth of eight core devices and even 10 core devices now in smartphones, but all back from technology that we already developed.
So what is coming next? Well in Q4 our licensing into mobile sector was very strong. We saw a very strong demand for our next generation products. There were nine CPU licensed by our partners which are products we haven't actually announced yet, these got like code names like cats and dogs and birds and flowers and things like that.
Products we haven't actually launched yet, very strong demand for our next generation technology to provide the computing for next generation devices that hopefully we would all be using. And our continued investment in this sector is leading to that technology and leading to strong licensing in Q4.
Now, we have been evolving our technology for the high end, everybody thinks about the flagship devices these kind a hero products, which have all this compute power in them, but there is a lot of growth ahead in low costs devices, in entry level or mid-range smartphones. These are going to be a fast growing sectors or segment within the smartphone sector. And so we have been evolving our products through R&D investment to make sure that we are well suited to address that portion of the market as well.
Through 2015, we launched Cortex-A35, a Version 8 architecture processor optimized for the needs of a sub $50 smartphone. That is a portion of the smartphone, a market that we think is going to grow very rapidly and so we want to have the right technology for it. So we don’t just focus on the very high end, we are focused on this mid-range, these entry level devices, we are focused on wearable devices too and the introduction of Mali-470 with a GPU-optimized for these small-screen devices, smart watches, IoT devices, small things with smaller screens.
Again this all comes about through investment in R&D, we are able to target our technology at different markets, because we have the engineering manpower, the firepower to create the optimized products for these different segments of the market.
Now one of the other things that we have done is evolve the way that we are working with some of our licensees. As I mentioned, collaboration, partnership these are the cornerstones of ARM. And when you read through the release, you can see the announcement of a program called Built on ARM Cortex Technology.
Now what we have seen over the years is some of our licensees have some different needs for what they want to do. Some of them have addressed that by taking an architecture license and making a huge investment in building a processor team to build their own CPU core.
The way we have evolved this slightly is working with some of our partners who were looking at just a little bit of difference compared to our standard offering. we are going to be working with them closely on new products as they are developed to create a slight variance for what they need.
We are doing the engineering work in collaboration with them, we are making sure that the software ecosystem supports that variance and satisfying the needs of our customers who want specialization and differentiation. They want to tailor their products in slightly different ways and as the end-market gets more sophisticated, we believe this is a great way of addressing those challenges.
So Qualcomm is the first partner that we have announced today that we are working within this way, I’m sure there are going to be others in the future. And it’s just a slightly new way of working with our partners just to make sure that what we are doing is optimized for the needs of our customers.
Now moving onto networking. We have spoken before about the changing needs of networking and the opportunity that that brings to ARM and the ARM partnership. A year ago, I was very proudly saying that our share of the enterprise networking space have grown to 10% or through 2015 that went up by 50% and we now have a 15% share of this market. So very pleased with the progress in this space.
In Q4, we saw a number of Version 8 architecture chips announced by our partners. There were devices from Broadcom, from Marvell, from NXP leaders in the networking space to who are producing very sophisticated, very high performance in many cases very high core count devices to meet the computing needs of the next generation networking equipment. This is targeting a wide range of applications, there are low core-count devices, big core-count devices. The scalability of our architecture means that the ARM partnership can address the entire space represented by networking.
Now we have been investing in ecosystem too, processors are useless without the software that runs on them and in networking there are different requirements. Networks are becoming more software oriented, they are requiring more flexibility, they are requiring capability to have different applications running on the same processor, but isolated from other applications. And this is what virtualization does, it generates a container for an application to run in.
So we have added features into our processors over the years to support that and we are now working with the software ecosystem again in a partnership model to create the software that the next generation network will require. And a key component of that is what’s called OPNFV, I won’t bore you with the technical details of that. But if you think of that as a software platform to enable the functions that are going to required by the next generation of network and that is a very key component and we are optimizing that to run on the ARM architecture.
At the Capital Markets Day, we set out a goal of achieving 45% market share in the networking space by 2020. And the way in which we’ll communicate our progress towards that is through what Ian calls the Smartie Chart, which is breaking the market down in the different segments, each of these market on the chart here represents a leading company in this space and if we have high success in all of those, we end up with an 80% market share. So this is a way of segments in the market showing our progress within that.
The color codes mean, a red, we have nothing going on there yet. An amber means there is a design win. Green means somebody has started shipping. And although there is no blue on there, when you see the dots turn blue, it means the majority of their product line is based on ARM. So we will do updates on this as we go and for this last quarter we have seen product shipping in the wireless access space growth, one of the leading companies has turned green there. And we have some design wins in two other areas, which are important in this market.
So I think in one quarter that’s pretty good progress and we will get further update as we get more design wins, as products start shipping and hopefully as more of these companies move more of their products towards ARM.
Now the data center is a very important market for ARM. Clearly, a lot of computing is going on in the cloud and we believe that there is a great opportunity for ARM and the ARM partners to target this space. The ARM technology is going to allow greater flexibility in the kind of processing that’s done in the cloud with the added benefit of greater energy efficiency. So this is an important market and the ARM partnership is driving a lot of innovation in this space.
Progress in 2015 was pretty good, we saw more chips designed by our licensees to target this space, we saw the shipments of ARM service and we saw a little work going on around the software ecosystem that’s required. Just recently in January AMD as another example, gave an update about their product roadmap introduced more products based around the ARM architecture targeting this space.
Again, it's little about software, processors needs software to run on them and so sometime now we have had a big investment in this phase again, work we do, work we do through the ecosystem, work we do with our partners and now all the major Linux distributions that are important for this market are optimized to run on ARM. It's not just about the operating system, you have to think about the workload, what the server is actually doing, and lots of different software that runs in a datacenter, we are picking up the key workload packages, we are optimizing them so that somebody building a datacenter has choice about the technology that they put in there.
All of this work has led to real deployment. There are now three Tier-1 companies, operationally deploying ARM based servers, so it's kind of an experiment in the back room which is real production operational deployments of ARM technology. And there are three Tier-1 in different countries and in fact different continents, one in China, there is one in North America, there one here in Europe using ARM technology to provide better flexibility around their service to their customers. So we are really pleased with that progress.
Now I want to talk about embedded, embedded is a very broad space with lots of different products, again these in most case very low cost microcontrollers, I'm very pleased with our progress there because ARM is the number one architecture for embedded. Now there has been a migration over the years from these simple 8-bit and 16-bit microcontrollers to most sophisticated 32-bit microcontrollers and the ARM architecture in that 32-bit space which is the fastest growing, does have number one market share.
So we are in the number one in 32-bit. When we look at the dollar value of that market in total, again we have number one market share. Our shipments into this space have gone up 25% year-over-year and in that time shipments of 8-bit and 16-bit based microcontrollers have gone down 5%. So again, we have been gaining share in this space. What we have seen in 2015, is more sophisticated microcontrollers. Microcontrollers based around Cortex-M4 that's a processor that adds DSP capability into the microcontroller space.
Product space on Cortex-M7, this is a superscalar processor, and if you asked people 10-years ago would you see superscalar processor in a microcontroller they would probably say, you are made, but our technology given how efficient it is, how small it is in terms of die size on silicon has enabled that to happen and that's delivering a lot of performance into the field which is typically relied on just a bare minimum you can possibly spin the transistors off.
So this architectural shift the work we are doing in our products, the work we are doing in our ecosystem is enabling far greater performance into a category of electronics which in the past has been very constrained by the performance that you had available to you.
So we are continuing to add capabilities, we are thinking about how these devices become connected. During 2016 we launched the Cordio radio. We saw our second license of that in Q4. We are bringing some of the security features that were previously only available on our application processor down into microcontrollers with the v8-N variant of the ARM architecture and we are licensing that to people. So a lot of progress in this space and it's growing rapidly.
So why do you want 32-bit processor? 8-bit and 16-bit micros shipped by the billions they have been around forever and we will probably ship for a very long time to come, but why do you need this ship to 32-bit? As I said, 8-bit technology is great it's been around for long time. Volumes are very large.
What they do though is they enable very simple devices. So if you want to put a screen on something and have a little LCD with some numbers on it and 8-bit or 16-bit micro is not a bad way of solving that problem, but it's very simple device. It’s hard to program, if you ever want to use the code for something else, if you want to find engineers who can program it, that's pretty hard.
So these devices tend to be written once, black box, and never touched again. And the functionality that you can provide is relatively simple, you see 8-bit and 16-bit micros in streetlights where maybe you have got a very simple sensor just working out when it's dark and it turns the light on. In something blood glucose monitoring device, again you might have a screen. You might stab yourself and it says, the answer is 5.7 I don't if that's good or bad, but that is the answer do something.
In cars, lots of microcontrollers in cars and helping that the functions of unconnected devices, the speedo and the rev counter and the display, all separate devices which definitely need a little bit of control. But maintaining the code base of these devices and what you can subsequently do is very-very limited. Now we saw this shift to 32-bit coming, we anticipated that you can build a 32-bit microcontroller in the future and that future is now for the price of an 8-bit and 16-bit micro.
And once you have go to 32-bit processor there is just so much you can do. You have got more performance, you can use modern programming languages, you can hire engineers who know how to code for it, you can run operating system. So you have got a lot more performance and capability available to you.
And as a result these devices are becoming much more sophisticated. You can now have the streetlight, which is connected even just switching itself on and off, but if the bulb breaks, it dials up some help and somebody comes and fixes it. It can think about the environment, it think about how it interacts with other street lights and other infrastructure in a city.
The glucose monitoring system can now play with a smartphone, the data that you capture can now become useful because it can get broadcast somewhere in the cloud, some analysis done, and your blood glucose is 5.7 on a Monday morning at 9 O' clock, have that compared with every Monday morning at 9 O' clock in the past. Data can now become more useful, because you got more processing power locally to do something.
And in the car, we are seeing a real revolution about of a technology in a car. We went around CES few weeks ago, lots of floor space given over to automotive and people are thinking really creatively about how to use embedding computing given you have got more performance now in creative ways.
So talking of cars, this for us is really interesting market and is one where the semiconductor content we anticipate is going grow quite significantly. This in 2020 in terms of the portion of the semiconductors in a car that ARM could address close to $15 billion market - sorry $15 billion worth of silicon potentially all of which could contain on technology. So that’s a materially large market for us and is one that’s growing.
When you think about the number of cars that they are going to manufacture in 2020 and you divide that into $15 billion you get an average silicon content per car of $150. And that may not sound very much, but when you compare that to smartphones that’s about seven or eight times the amount of semiconductor content relative to a smartphone.
So the volumes must might be lower, but this and certainly the hiring end cost is going to be a place where there is a lot of computing power, there are lot of semiconductor devices in all areas, where it's sensing, whether the doors closed properly. Sensing whether you are about to hit the car next to you as you open the door and doing that for you so it never happens, where it's just unlocking the doors or with the platter of cameras that you are going to see in cars making sense of what is going on around you.
There is a growing need for intelligence in a car, you can't defile with this to the cloud, because you need real time response and the latency through the network is not going to let you do that. So you are going to need a lot of processing in a car and as we are saying here on slide, we anticipate a car really setting itself into a supercomputer on wheels.
Lots of compute power in there and lots of our licensees are looking at this space and looking at how to address that. And a great example was shown by NVIDIA at CES. They launched their product called Drive PX2, these books here the lower right of the slide. Big thing, its water-cooled it’s got a lot of compute power in there. It’s got a couple of chips that they have
developed with a lot of micro processing power.
Within each of those chips are eight Cotex-A57s and four of NVIDIAs own implementation to the ARM architecture, they call this Denver. So four Denvers, eight Cortex-A57s times two, that is a lot of computing power that’s put into a car, but it's what you are going to need if you want to ultimately have a car that can drive itself, workout what is going, workout is there pedestrian about the cross, where you are going to step out, what is going on the next lane, above to move, what is the lane doing. That’s is a computationally really hard problem.
Now I have sat in a self driving car and you can just see how much more compute power is going to be required to really do that seamlessly and safely everyday of a week, any certain circumstances that the car might across. So semiconductors in a cars is going up, again it's a big growth market and it's a great opportunity for ARM to address this with our innovative technology and our partnership.
So what this is going to result in, is we think about 100x increase in the compute power in the car over the next five years. In fact, it sounds like a lot, compare that to what happened in smartphones. If we look back over the last five years of smartphone evolution and we see a similar growth in compute power, we have shown some of the data before, but it's 80x to 100x over the last five years growth in compute power something you carry around with you and run of a battery. Again, 20-years of it as being in seasonable 20 years ago.
So the smartphone did that and we think that’s going to happen in cars too. Working with our partners, we are leading the way on that. We are working with people looking at in-vehicle entertainment into A Dash System, this is about providing the driver with more information and again anticipating what is happening. Chassis drive system, there is just semiconductor everywhere in cars.
We are collaborating with OEMs too, there is a lot of investments going in across the industry to address the challenges of next generation cars and as a company that drives on partnership this is a great place for us to be, because we don’t work these companies, people want to work with us to solve these next generation challenges.
we are evolving our products, we are evolving the way we design our products to make them feasible for safety critical systems and obviously a car is a safety critical system. So it requires innovation in technology, innovation in our partnership, innovation about the way we work and we are very focused on that since we see automotive as a big growth sector for the future.
So as I think about the way the use of embedded technology is going to grow over the coming years. You can see lots of places where today product work really well but tomorrow's challenge is different, tomorrow's challenge requires more compute power, more innovation in devices, more creative ways of bring vision, cameras, computing, connectivity into the cloud together to provide the kind of compute power that we are going to need in our next-generation devices.
Whether they are in our pocket, in our driveway or just the infrastructure of the environment. The connectivity between a car and a traffic light, just the traffic light telling the car to stop, instead of having to work out that the light’s gone red. That’s all about connectivity and all about embedded computing. We want to make sure that we have got the right products for all of those technology spaced and that’s why we are investing so much in our R&D capability to address that future need.
So we outlined that back in September and we are executing on that. The licensing has been driven today comes from product that we have already built. So that is the history, we are thinking about the future. We are only going to do that through our own work by crucially collaboration with our partners, building our ecosystem and working on the things that are going to help accelerate the gains.
You saw us talk about investment in software, investment and ecosystem that’s critical for us to address that market and we are going to keep focused on that. And then finally that translate into money, it translates into growing revenues, it translates into growing profit. As we provide more value we get paid for that and you have seen that effect in 2015 in the strong growth in our royalties.
So with that let me hand over to Chris. He is going to go through some of the numbers and then we will be back a little later for some Q&A. Thank you.
Thank you, Simon, good morning everybody. I’m going to start by taking you through the quarterly numbers. It was a strong quarter, as Simon said. Dollar revenues were up 14% and that was driven by strong royalty growth from the adoption of all of that advanced technology and smartphones that Simon talked about as well as the share gains we are making in markets beyond mobile.
That was coupled with flat licensing off the back of a very strong 2014 and the royalties were also helped by royalty catch-up from one of our partners, we had under reported in prior years. We have royalty catch-up of around $9 million. So that 14% in dollar terms was helped by the strong dollar. Sterling revenues were up 19% and operating profit were £124 million. And that year-on-year increase was driven by an increasing R&D, which was 37% up in the quarter year-on-year. So as a result of all of that that normalized profits were up 17%, normalized EPS up 14%.
the full-year picture reflects the same trend is the quarter. Dollar revenues up 15%, 22% in sterling terms. And at the same time for the year, our normalized OpEx increased by 20% and that’s due to investments we are making to maintain our pace of innovation and accelerate the market share gains in our target market.
As a reminder R&D investment accounts a half of our OpEx and that grew 28% in the year. And that means the other costs, the other 50% increased by significantly less around 13%. So they are growing at a lot less in sterling terms than our revenues are. And you can see from the chart, if you look at the engineering, the headcount we have added in the year, we have added twice as many engineers. Engineers are growing twice as fast as our non-engineering headcount. So that OpEx, you need to think about it as running costs for the business, investment for the future roughly half an hour.
Again, as a result of the strong revenue and performance and normalized EPS grew by 25% to 30.2 pence. We have continued to benefit from the patent box regime that the UK tax authorities have introduced and that’s resulted in the normalized effective tax rate of 16.3% all of that reflecting the high R&D investment we make. So we have had a strong 2015. We have outperformed the overall semis market and that is not a new thing, this is something that ARM have been doing over many years and this chart just indicates that.
So on the left hand side, the light blue line is the total number of chips shipped every year, it excludes memory and analog. Then the green line is the number of those chips that have a processor in them. And the dark blue line is the number of chips that have in ARM processor in them. Then you have got the same data on the right hand side of the chart expressed as a proportion of the total number of chips shipped.
So you can see as Simon said that the amount of processing power is increasing every year. So the number of chips or the processor it’s going from 25% of the overall market to 68% in 2015. The number of chips with an ARM based processor and that time is going from 5% to 21%. So what does that mean in terms of the compound growth?
Well, the overall market is growing at 5%. So the overall market with the processor in has grown at double that rate. And then when you look at the number of chips with an ARM based processor in that’s double that again. So we have been drilling at four times the overall semis market rate for a long time and we don’t see any reason for that trend not to continue.
So what is this trend mean for the addressable markets in 2020? These charts are something you would be familiar with from road show slides and from the website. They show the addressable market for ARM based chips and we periodically update these target market both for the growth rate in the markets that we are in already, but also for the increasing range of markets that ARM technology has become suitable for.
As a result in most recent review, we have upped our target market by around 10% in both volume and value terms and that's principally because we started to receive royalty checks from processors in batter controllers, flash memory controllers and smart sensors. So those weren't markets that we had previously put in addressable market and targets, we are getting royalties on them. We think it's appropriate to include them now. And we can get into the detail of these markets forecast and you can talk to Phil or to Rene or to myself and we can go through on the road show.
Now although we have increased the addressable market for 2020, there is clearly uncertainty over the short-term trajectory of smartphone handset volumes. However, following 2015 strong performance through the adoption of the advanced technology v8, Mali, Octa-core and the fact that we see further opportunities for our partners to adopt more of those technologies, we are very well placed to outperform the overall market.
And then looking further ahead, third-party estimates for these smartphone markets for 2020 have come down by around 5%. If you take those estimates which equates to around 6% compound growth from 2016 to 2020 factor in that of increased adoption of ARM advanced technology, then we are still confident that we can grow the royalties from the chips in smartphones by 15% compound from 2016 to 2020.
At the same, we are continuing to gain share in markets outside of the mobile market and so when you look the royalty rate in all of our addressable markets, we still believe we can grow at 15 percentage points more than the overall growth in the semis market in that time period. And finally, we continue to expect licensing revenue to grow over the medium term by around 5% to 10% per annum as well.
So as we set out in our Capital Market Day in September, we are increasing on our investments in R&D in 2016 to accelerate the opportunity to gain share in our target markets, and we have also been investing in organically as well, we have made 10 acquisitions in the last 10 quarters. And that gives us the opportunity to further extend our growth.
Turning to the balance sheet, we are committed to having a net cash balance over the medium term and this reflects our commitments to maintain the investments that’s necessary for our roadmap and our partners roadmaps. And it also ensures we retained the flexibility to act quickly and decisively in what is a very fast moving market where we see opportunities to further extend growth. And given the expected rate of cash generation and pipeline of opportunities that we can see today, I wouldn't expect this to result to external financing market for any acquisitions in the near future.
The business remains really strongly cash generative. We generated £361 million in cash in 2015. As Simon said, we are proposing an increase in the ordinary dividend of 25% which is in line both with our EPS growth this year and historic trend of dividend growth over the last five years.
And the Board remains committed to growing that ordinary dividend in line with the growth of business and maintaining the policy of maintaining share count flat to maintain that buyback program. And I think the combination of the investment we are making in 2016 and the ability to increase that dividend really demonstrates the ARMs ability to balance both the investment for the future and increasing cash returns for shareholders today.
Let me conclude on the outlook, in revenue terms we are well placed to outperform the overall semis market driven by that further Version 8 penetration in mobile and market share gain as well. Based on our current view of the semis market, we estimate the full-year revenues will be in line with market expectations although this does assume the macroeconomic environment doesn't further impact the end-market for our partners' product. And finally, we expect normalized OpEx with Q1 2016 between £127 million to £129 million as we continue the investment program that we outlined in September.
So on that note, I'll hand back to Simon to chair the Q&A.
Simon A. Segars
Thanks Chris. So just before we start, I would point out your expertise in asking compound question and if we could start with a questions and we will get around the room hopefully for another spin.
Q - Kai Korschelt
Thanks its Kai from Merrill Lynch. I had a question on the near-term and I appreciate if highlighted that you continue to expect to outgrow the smartphone industry to obviously take share in the markets, but particularly about this year it seems like Octa-core penetration is only 10% so there is still quite a lot of tailwinds I think. So I’m just wondering nobody knows what the semiconductor industry is going to grow at this year, let say it's flat. What relative outperformance of your total royalties would you expect at this point in time? Thank you.
Simon A. Segars
Our guidance is always to outperform the industry by about 15 percentage points and there are some fluctuation in that but that seems to have been the case for many years now and we expect that to remain the case into future. As we say, we are in a interesting period right now, we are calling what the industry is going to do this year is very hard, the overall kind of sentiment out there around smartphone growth is lower than people maybe would have expected a year ago. But as you say, there is a reasonable tailwind that’s more technology going into those devices for ARM based on what we have today and then the long-term trend for more and more compute powering devices. So as a working model that 15 percentage points outperformance is what we have in mind plus or minus through a given period, we don’t tend to get through head off about the quarter, the next quarter the next six months, it is really is about the long-term trend. Andrew.
Thank you, Andrew Gardiner from Barclays. Another questions for you Chris. Just on the dividend and the return policy relative to the investment in the business that you are talking about, 25% growth in the dividend is nothing to be sneaked out. But your cash power does continue to grow, you talked about it, your predecessors talked about it that ARM doesn’t need to continue to having a never increasing pile of cash in the books given the business model. That said, you have increased investments, you are talking about the pipeline of potential M&A, you did four last year to a £60 million £70 million pounds worth. Are you suggesting there an increased appetite for organic growth here, what kind of size should we be looking at as to why you are keeping your powder so on it? Thank you.
So as we said of the Capital Markets Day, we have been through our five year planning process, we took a good hard look of the capital structure of the company, we compared that to our semis peers as well and we took all that thinking to the Board earlier this calendar year. I'll conclude and the first thing to say is, we are not out of line with our semiconductor peers in terms of the amount of cash that’s on the balance sheet and the second thing I would reiterate is on uses of cash, our express to fund growth that organically or inorganically. Second to maintain that strong balance sheet and then increasing cash returns for shareholders as well.
So I think the words in the statement some is not really is we've done a good review in terms of the pipeline of potential opportunities and they are potential, we are not signaling anything in a concrete around acquisitions. We are comfortable with the level of cash we have at the moment. Your point is you know well maybe we don’t want to sit on a never increasing cash pile. Cash growth this year was relatively modest due to the acquisitions we've made and the share buyback and the dividend was declared and we will keep it under review and looking on the statement as we said we will take another look next year
Thanks its Nick James from Numis. I guess I was going to ask on the as you call built on Cortex product that seems to be over the first [indiscernible] you have announced that's previously been architecture license. So the first question was is that for a product for mobile or non-mobile and the second is the red new potential of this new type structure selling to them different or higher or less than what you previously gained from that personal type customers?
So I mean in terms of the specifics about what they are going to do with the technology that’s for them to talk about when the time is right. They are doing a Analyst Day I believe tomorrow. And in terms of the revenue opportunity for us these different licensing models at a high level had pretty much an equal royalty opportunity for us, so there is been a radical shift here.
Thanks it's Achal from Credit Suisse. Simon one question on adoption of 64-bit and big.LITTLE. I think you gave some numbers for Q3 and now you have given numbers for Q4, I think it is 215 million 64-bit shipments in the last quarter and now it's 214 million and at the same time we have seen the big.LITTLE number go up from 70 to 75. So clearly we are seeing much faster adoption still on the v8 side but big.LITTLE kind of still much slower. Like what are the things that are stopping your customers on getting on that big.LITTLE train much faster like something we saw with v8 earlier last year like what are the things that they are possibly thinking about We*in.
Simon A. Segars
I think a mistake you are making in the way you are looking in those numbers is to assume that every chip that on processors goes into looks like a small thing chip. So small things are somewhat unusual and that the workload that they are running at any moment in time varies. You can have applications that require lots and lots and lots of performance, everything you want to throw at it you can. And there are other applications which are very lightweight. So big.LITTLE is a great way of dealing with vastly different compute requirements in the same applications.
Now some of those v8 chips are going into networking. Networking is about data going through at a constant rate, it’s not doing one thing, one minute another thing the next in the way that networks are designed today. And so big.LITTLE doesn’t apply in that kind of market. Similarly in servers, these aren’t applications, which are switching around and meet sophistication of big.LITTLE, because they are running on a battery.
So it’s wrong to just go v8 was growing at this, big.LITTLE was growing at this and that’s good or bad. v8 is a technology that can span lots and lots of markets. You see we are putting it into microcontrollers and microcontrollers tend to have a single CPU, maybe a superscalar one with M7, but a single CPU. You are not going to see, I doubt, never say never, but that isn’t the kind of sweet spot of big.LITTLE.
So it’s about application and which technology you need for which application, what we are trying to do without technology roadmap is to provide the ingredients, ingredients work really well together. So based on what you are doing, you can choose the right amount of compute power, the right amount of everything else that you need and build a chip that's optimal for that application. So you can’t just say the two should grow at the same rate, it’s much more complex than that.
Thank you. It’s Brett Simpson, Arete. Simon, just a quick question on industry R&D spend, if you look at some of your big licensees they are making substantial cuts and R&D. So Qualcomm, I think are cutting $1 billion off their OpEx and they have just shut down their custom ARM CPU team for smartphones. Broadcom is doing similar things. And you can look down the list of Freescale NXP. We haven’t really seen R&D cuts on this scale since the early 2000s. So I’m trying to reconcile that with your outlook for licensing and why you think that we are going to see a growth year this year. Can you maybe just run through what’s the factors that that get you there?
Simon A. Segars
Yes, as you say, there are, there are some consolidation going on and there is R&D trimming, one plus one is turning into less than two as some of the big companies are being put together. And there is a maturing of the semiconductor industry going on. I think that the trends that come from that play very well for our business, because people are going to look at outsourcing more. They are going to really focus and what is the value that the company bring. And the dialog we are having with our big customers is about what else can we do, so that they can spend their R&D on the most effective areas. So people are looking to stop doing the thing that really going differentiate their end product. And as our business to whom the semiconductor industry outsources that’s a good trend for us.
So that’s one of the things that gives us confidence about the licensing in the near-term and in the mid-term. And to me, there is no doubt that the different types of processing element, the way in which processors will be used in the future is just an expansion opportunity and we want to make sure we got the right products. So that we can be the guy that these big companies outsource to, with the right product, at the right time to address this growing markets.
And just a follow-up on that. So the industry is reducing R&D, you guys are raising R&D quite significantly. Can you just talk about two to three things as to why you think that’s the right move for ARM, what’s underpinning that increase in headcount?
Simon A. Segars
Well as always expanding in the presentation. It is about the opportunity that will mature over the next five to 10-years and because of the long-term view we need to take on that. We can’t throw a CPU design team together to build a processor in six weeks, it’s just not like that. v8 has literally being design for 10-years and now we are seeing the volume come through. So we have to take that long-term look.
And you could kind of relate it back to the balance sheet question as well. With the volatility that is around at the moment, with the uncertainty, now is the time to invest, we’ve seen this in cycles in the past where the companies that come out of these periods in a strong position and we’ve done this before are the ones invest through them and we have the capability to do that. And looking at this opportunity ahead, I believe it’s the right thing for us to do.
Jaguar Bajwa also with Arete Research. Given the strong year you have had in smartphones, the increase in core accounts, the move to v8, I was just wondering if you could give a guide of how much of your royalty revenues is actually coming from smartphones this year?
Simon A. Segars
You mean in 2015 or?
2015 I know it’s potentially the year-on-year move that you’ve seen?
Simon A. Segars
To be honest, I don't keep that number in my head. We looked at the split of the volume of our base chips and there is the table in there, it’s about 45% of the volume is mobile. I think again we can maybe follow-up with the team here, it’s about 60% plus of the dollars come out of mobile. But we can follow-up to see if it’s more accuracy on that.
Good morning. Amit Harchandani, Citigroup. My question pertains to the investment that you are making in the business right now and it pertains to share based payments. It was up around more than 75 million for this year more than 70 million last year. You spent about 90 million to offset share based diluted this year, if I remember correctly. So is there a case to be made that these figures really no need to be considered as normalized in terms of viewing the investments in your business so just want to know your thoughts on the thing? Thank you.
So clearly we put out IFRS figures alongside the normalized on the front page so they are all is completely transparent. One of reasons that we exclude the share based finance from the normalized is that it is quite volatile because it depends on the share price at the time as well. So we believe the normalized view is a better way to be able to compare numbers overtime and over multiple time periods and that's why we present in the way we do, but IFRS numbers for those we would like to use those as well.
Thanks Jenkins, UBS. I just want to come back on the 15% outperformance versus the industry which remain unchanged this year through 2020 and despite having a very strong year last year for royalties and v8 going better than eco and the smartphone market expectation is coming down. What has changed to offset those that performance you put in last year and smartphone market expectation? Is it line of sight on some of these new areas of growth for you? Is it networking servers, you feel more comfortable on and was it is just underline prudence originally and that maybe the compound growth rate should have been higher before?
Simon A. Segars
Both a combination of most of those factors. As we showed here, our share in networking went up from 10% to 15% that's a trajectory of growth that we are anticipating to continue. The increased content in the devices as we talked about the tailwinds of more Octo-core more Mali more v8 are going to help that revenue growth and help what we believe will transpire into roughly that level of outperformance and actually the level of outperformance in Q4 was 17%, the industry actually been backwards 3% where we grew 14%. So there is variance in there, obviously most of this is out of our control, but we look at the pipeline of products coming out the way in which anticipate they are going to be used in product sold and we feel okay with that as a kind of guideline for par if you like for our outperformance.
And as if you think about the addressable market side that Simon put up, you have to three very large markets one of which is mobile which the estimates have come down by 5% for that market in 2020. So you only of your the third of addressable market is coming down a small amount, we then recognized also the increased use the ARM technology in smart sensors and battery controller and the flash controllers. So within the mix that addressable market is still very big, everyone is focused on the mobile market and the immediate slowdown. So two things, one over the longer term that slowdown doesn't impact the overall CAGR to 2020 as much as you might imagine; and secondly we've got the other markets to address.
Hi there its Eoin from Liberum. A question on the economics of the built on ARM Cortex announcement you put out this morning. And historically, the beauty of ARM was you design it once and you sell it many times and the model is very scalable and very high margin. With this new model where you are taking more R&D and customizing for your customers, does that impact the margin potential of ARM if you are taking the cost and you have to have an R&D team for Qualcomm and all your big customer, would that be a lower margin model longer term rather than one standard product for everybody?
Simon A. Segars
Yes. So at one level, it sounds like a services business; what would you like me to build sir? Here is my team and off we go and we do completely bespoke, it's not like that I mean we are talking about fundamentally our standard product which might be a little bit different based on how our licensee wants to integrate it with their own technology on the same chip. So the scale of changes that we are talking about are pretty small, but they are going to result in a more optimized in solution.
And the learning from that potentially can't get rolled back into our future products, so it's not completely - we are going have a big CPU design team for every customers of the planet. It is about making some incremental changes, which we hope will return in big efficiency gains when the SOC is put together by our customers. But it does require some additional engineering to do that but I think we result in a better product and hence hopefully grater adoption by people who are ultimately going to buy the product at end of the day.
Hi it's David from UBS. I just wanted to come back to the automotive market which you are talking quite more about these days. When you have gone into other markets in the past networking, microcontrollers with embed, you have often created software platforms and put a lot of investment on that side as well to establish yourselves in these markets. Is there something we should think of that you are doing along these lines to establish yourself in automotive especially in things like safety and a lot of the new areas that are coming through?
Simon A. Segars
I think overtime that maybe something that we look at particularly when consider the challenges around securing all of these devices within a car, I mean the car is becoming sort of mini network which in itself need securing and then networked device into the broader wide area network. So there are some security challenges around that and we are thinking about the software content there. Maybe we will do some of that maybe we will work with the ecosystem. It’s a problem that needs solving.
But traditionally, a lot income the software that’s running cars has been a closed box and we’ve been in this market for long time. When I did design work, I visited a large customer in Germany who was thinking about two ARM processors and did they ever disagree with each other and turn the light on? They were running their software and I bet you there is cars today with that system still in it. So a lot of that software is homegrown and doesn’t change very often. But in the future, it’s going to become more open, it’s going to need more traditional - what has become the conventional developing code. But you have got those security and safety issues to deal with, so this isn’t going to change overnight.
Thanks. It’s Vijay Anand from Mirabaud. I had a question on the networking market. So share went up to 15% from 10% last year. My understanding is historically most of your networking share is in the enterprise market with relatively limited penetration on Telco side. So I wonder if you can explain or help us understand the dynamic in 2015 whether you made any more progress on the Telco side and how you expect that evolve looking ahead. Thanks.
Simon A. Segars
Yes, what we showed there with the Smartie chart was about the penetration into some of those sub-segments of networking. Did we make progress in 2015? Absolutely. The Telco side, the mobile operators are looking at how they deploy more flexible network, how they deal with greater bandwidth, shorter latency, deal with the challenges of connecting billions of devices versus hundreds of millions of devices and doing particular network. And that has implications through the whole network from the edge, where the device connects, all the way back up into the cloud.
So we’re anticipating a world where there is - today there are kind of half boundary the in cloud device, the network, the cloud, the future that becomes a much more needed environment. And we are talking to everybody working through that chain, adopting our conventional partnership model of approaching the market and about those challenges and thinking how that relates to our products, who we work with, what code we optimize that’s how that’s coming together.
But we do believe that that will result in penetration into sectors of the networking space that haven’t traditionally used ARM in the past. But I think it’s going to become a necessity for those companies to think more about processor architecture, because so much more what I do is going to be around the software and the hardware coming together instead of a collection of closed boxes that get wired together and then optimized through some control level.
Yes. Hi, it’s Rob Sanders from Deutsche Bank. And just a question for Chris. Could you talk us through the increase in amounts recoverable under contract in 2015, it seem to be quite a big move.
So you are talking about the total amounts receivable or the…
Around the contract, I mean in the past its been because of revenue booked, but that it’s met milestones but hasn’t been delivered. Is that the reason why it’s gone up quite a lot?
Yes. So that is revenue book to where we haven’t yet hit an invoicing milestone. So that is a consequence of - so to start with, there is nothing unusual about that movement, it is to do with the timing of the payment versus the timing of the delivery of the IP. And so typically say under a subscription contract, people can be taking IP or recognizing the revenue, but actually we haven’t invoiced them to next months in a subscription. So I wouldn’t read anything into that for me it’s within the normal tolerances of what we see. Any other questions?
Hi [Doug smith] (Ph) Agency Partners. One part of the business you didn’t talk about very much in your presentation, physical IP obviously had has a different customer base. What trends are you seeing there? Maybe an update? And also I notice that the royalties there never seem to get bigger than the licensees. Is that something that permanently the case or is it somehow a different structure of how that business works?
Simon A. Segars
I think when royalties get bigger than licensing is a timing thing. I remember thinking about 15-years ago they would come up in ARM’s processor business where royalties are so much light to the licensing, but the longer that remains the same, the better really. So in the physical IP business everything go into it today, but the way that works are going to a lot of R&D on advanced process technology to create the libraries then that chip designers download from our website and build chips and tape out and buy wafers.
So again there is a long kind of disconnect between the R&D that you do that drives revenue recognition on the licensing line and the royalties that come. What we have seen in that is that is a slightly different customers set, it’s all part of the same supply chain. But in the foundry space there has been a lot of consolidation there, there only very small number of people innovating on the leading edge, we are working with them all and next generation physical IP for the next generation process technologies.
But meanwhile the volume and the royalties coming from the shipments of wafers with 28, 20 FinSET technology on and the adoption of those process nodes is very strong. So we're seeing good performance in the royalty side of the physical IP business, but two things are unrelated, it's about developing a product, the volume comes in the future, our engineers in that part of the business are very, very busy working on this next generation processors and that is quite cyclical. Moore's law cycles come round every 18 to 24 to maybe few more months and so processors is getting introduced on that kind of clock tick and that leads to some kind of cyclicality on the licensing side.
Actually one quick question, I mean looking very far head, is there ever going to be ARM v9 architecture?
Simon A. Segars
Well, if you look back in history, you will see the v3, v4, v5, v6, v7, v8, one might see that that's coming on the road, but periodically we do change on naming conventions. We have R&D work going on, obviously looking at in everything I was talking about today. The next generation computing devices will have different performance requirements. Look at the way the architecture has evolved over the years which delivered more performance, we've delivered greater efficiency to take advantage of what can be manufactured in a cost effective way. So these two things are kind of related and a lot of work going on the things about where that goes architecturally. How we roll that up into architectural products and then into CPUs et cetera [CBD] (Ph) that's the fun bit for the future, but a lot of work going on that right now. Any other questions?
[indiscernible] I just wanted to know whether you could talk about your market share in 32-bit micro controllers, I think last year you said 65% not the total market, but just 32-bit, is that still fair assuming it's probably gone up a bit, but can you talk about your market share there and presumably it blends to that higher rate overtime? And then second question unrelated, do you have any customers that are over 10% of sales for the full-year last year?
Simon A. Segars
I'll do with that one because if we do, we have to declare it and we didn’t. In terms of share in 32-bit micros product, I don’t have the number in my head, but maybe - yes, I'm it's higher given the volumes there. But the number on top of my head, I don't have it, might look out momentarily and if not, we can follow-up with you on that.
Simon A. Segars
Okay, well, if there are no other questions, thank you for joining us today and we will see you either on the road or on our Q1 results in April. Thanks very much.
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