ARM Holdings Plc (ARMH) Simon Segars On Q1 2016 Results - Earnings Call Transcript

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ARM Holdings Plc (NASDAQ:ARMH) Q1 2016 Earnings Call April 20, 2016 4:30 AM ET

Executives

Ian Thornton - Head-Investor Relations

Simon Segars - Chief Executive Officer & Director

Christopher John Kennedy - Chief Financial Officer & Director

Analysts

Matthew D. Ramsay - Canaccord Genuity, Inc.

Gareth Jenkins - UBS Ltd. (Broker)

Andrew M. Gardiner - Barclays Capital Securities Ltd.

Kai Korschelt - Bank of America Merrill Lynch

Francois A. Meunier - Morgan Stanley & Co. International Plc

Sandeep S. Deshpande - JPMorgan Cazenove

Brett Simpson - Arete Research Services LLP

Amit B. Harchandani - Citigroup Global Markets Ltd.

Johannes Schaller - Deutsche Bank AG (Broker)

Eoin T. Lambe - Liberum Capital Ltd.

Vijay Anand - Mirabaud Securities LLP

Robert Lamb - Jefferies International Ltd.

Lee Simpson - Stifel Nicolaus Europe Ltd.

Anil Kumar Doradla - William Blair & Co. LLC

Martin P. O'Sullivan - Cenkos Securities Plc (Broker)

Jérôme Ramel - Exane, Inc.

Alexander Duval - Goldman Sachs International

David O'Connor - Exane, Inc.

Jaguar Bajwa - Arete Research Services LLP

Douglas Smith - Agency Partners LLP

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the ARM Holdings Q1 Result Analyst Conference Call. At this time, all participant lines are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I must advise the conference is being recorded today, Wednesday, the 20th of April 2016.

And I would now like to hand the conference over to your speaker today, Mr. Ian Thornton. Please go ahead, sir.

Ian Thornton - Head-Investor Relations

Thanks, Cullen. Good morning, everybody. This is Ian Thornton, Head of Investor Relations at ARM. On today's Q1 results conference call, we have Simon Segars, Chief Executive Officer; and Chris Kennedy, Chief Financial Officer. On today's call, Simon and Chris will take us through the highlights and comments from the quarter's result and then we'll open up the call to a Q&A session. As a reminder, the presentation and release can be found on the ARM Investor Relations website at www.arm.com/ir.

Before I hand over to them, I just had to read out a few words with respect to this conference call and what we're about to discuss. The contents of this conference call are being directed only to those of you who have professional experience in matters relating to investment and the information communicated on this call is being made available only to investment professionals. Any person present on this call who does not have professional experience in matters relating to investments should not act or rely on the contents of this call.

The following conference call will contain forward-looking statements, which are other than statement of historical facts. And the company's actual results for future periods may differ materially from these statements as they are based on current expectations and are subject to a number of risks and uncertainties.

And on that note, I'll hand over to Simon.

Simon Segars - Chief Executive Officer & Director

Thanks, Ian, and good morning, everyone. Thank you for joining our Q1 2016 results conference call. I will run through the business highlights and then hand over to Chris to provide some more detail on the numbers. Following Chris, there'll be some time for your questions.

Let me start with the business overview. Following last year's strong performance, we've had an encouraging start to 2016. We've seen healthy demand for our technology from semiconductor companies, and our bookings were the highest we've ever seen in a first quarter. Total Technology Licensing revenues were up 11% year-on-year, and Technology Royalty revenues were up 17% year-on-year.

During the quarter, I saw many of you at the Consumer Electronics Show in Las Vegas and at the Mobile World Congress in Barcelona. One thing that struck me at these events was the sheer ambition of our partners' road maps and how they intend to use our current and future technology. For example, we've seen increased activity around next-generation technologies such as 5G communications and network function virtualization, autonomous driving and computer vision, virtual and augmented reality, artificial intelligence and machine learning.

ARM has been investing for many years to create the technologies that will enable many of these future products. Those that follow ARM closely will know that at our Capital Markets Day in September last year, we announced a step-up in investments to accelerate share gains in networking and servers and also to create new revenues in nascent markets such as the Internet of Things. Having made the step-up in cost, we've now returned to a longer-term cost trajectory.

So, where is this investment going? Over the past year, we have increased our head count by 20%. We have more engineers working on our core road maps, working closely with our ecosystem partners and helping to create an optimized, open source software for ARM-based systems.

We're seeing the results of this. In networking, ARM software teams have been working as part of the OPNFV project to optimize their recently released Brahmaputra software. And we've been collaborating with Enea on the opening of the Pharos Lab in Sweden to enable the testing of networking applications.

And with the availability of ARM-based chips and ARM optimized software, our engineers and marketing teams are working with OEMs, operators and end users to accelerate the adoption and deployment of ARM technology into our target markets.

Our partners are also investing in the enterprise ecosystem by way of two examples. In February, Qualcomm announced their $280 million joint venture, which will develop server technology for the Chinese market. And in March, Red Hat previewed its Enterprise Linux Server software running on Qualcomm's ARM-based server chips. These are two of many examples across the ecosystem.

In the Internet of Things, we have seen ARM-based chips being used to improve productivity and efficiency in traditional industries such as agriculture and construction. Other examples, Verizon's ThingSpace platform has signed up 4,000 developers and is boosting productivity in precision agriculture from vineyards to oyster farms.

This month, a leading building contractor in the UK deployed smart sensors to reduce construction time on major projects. A whole host of telecoms company such as SK Telecom in Korea, Orange and Bouygues Telecom in France, Swisscom in Switzerland, Tata Communication in India all announced plans to deploy nationwide, low power wide area networks for IoT devices. All these exciting industry developments place exacting demands on processor performance and power consumption. We will continue to invest in our road map and in the next few years, we will deliver new technologies that will enable our partners to meet their ambitious goals for innovation.

Now, I'll discuss the revenue drivers in different parts of the business in more detail, starting with Technology Licensing. We signed 39 licenses with 27 customers in the quarter. Over half of those customers were new to ARM, and two of those new customers were OEMs that are just starting to build up their expertise in chip development. Our Cortex-A processors run rich operating systems and applications in consumer and enterprise devices. We signed eight licenses for Cortex-A processors in Q1, four of these were ARMv8-A-based processors that will be designed into chips for networking infrastructure applications and future consumer devices.

Our Cortex-R processors run real-time and deterministic control software for applications such as communication protocol specs and safety critical systems. We signed five licenses for Cortex-R processors in Q1, and our customers will use these to develop chips for 5G modems, network storage, and automotive controllers.

Our Cortex-M processors are designed for low-cost, low-power chips such as microcontrollers and sensors. We signed 22 licenses for Cortex-M processors in Q1, and these will bring advanced functionality to a huge variety of devices including electric motor controllers, memory cards, motion detectors and microphones. Our Mali processors bring advanced graphics and video capabilities to consumer devices. In Q1, a major semiconductor company signed two licenses for our latest Mali products.

Our physical IP libraries help our partners build chips on the latest manufacturing process technology. During the quarter, we signed two major physical IP agreements with leading foundries. One of those was announced with UMC last week. Both of these extend our relationships by developing new physical IP products that chip companies can use when building products from 55 nanometers down to 14 nanometers. These contracts were backlog-building and there was a lower portion of revenue from terms this quarter in our physical IP business. Therefore, this quarter, we're reporting lower physical IP licensing revenues than the usual run rate. We expect that revenues will improve from Q2.

Now, let's switch to the royalty side of the business. ARM's royalty revenues are reported one quarter in arrears, so our royalty for Q1 was generated from chips sold by licensees in Q4. Processor royalty revenue was up 15% year-on-year outperforming the semiconductor market, which declined 3% in the relevant period.

Processor unit volumes are up 10% with strong growth being in ARM-based microcontrollers and smartcards, which grew 20% on last year, and networking infrastructure chips, which grew 10% year-on-year. Volumes of ARMv8-A chips more than doubled year-on-year to reach 280 million units. We estimate ARMv8-A chips accounted for approximately 65% of the smartphone market in Q1.

We saw growth in a number of chips containing multiple ARMv8-A processors such as the optical chips installed into mobile phones. These amounted to 100 million units in Q1, roughly 25% of the smartphone market. Ultimately, we expect to see ARMv8-A in all smartphones and many other devices, too.

In the last few months, we've launched two processors that help expand the breadth of ARMv8-A adoption. The Cortex-A35 is the smallest and lowest power processor that support the full ARMv8-A architecture including 64-bit instructions. The Cortex-A32 processor reduces the size and power further by supporting only the 32-bit instruction set within ARMv8-A. These new technologies from ARM will help drive higher royalties per device from billions of low-cost smart and connected devices.

I'll now hand over to Chris, who'll provide further details on the numbers.

Christopher John Kennedy - Chief Financial Officer & Director

Good morning. Hopefully, many of you will have had the chance to have a quick look at our earnings release, and the quarterly roadshow slides that are available on our website as usual. Q1 dollar revenues of $398 million were up 14% year-on-year with 11% growth in Technology Licensing and 17% growth in Technology Royalty.

As you know, quarterly license revenues are lumpy. Processor Licensing had a particularly strong quarter, up 24% year-on-year to $135 million whereas physical IP license revenue was down 46% year-on-year to $13 million. This resulted in overall licensing growth of 11%. And we have a good pipeline of opportunities to underpin both processor and physical licensing growth for the balance of the year. Approximately 40% of our processor license revenue came from backlog in the quarter, and this is at the lower end of our typical 40% to 60%. Bookings were strong for Q1 and group backlog was down around 5% sequentially.

Processor Royalty revenue was $192 million, up 15% year-on-year, reflecting continued market share gains and the increased amounts of ARM content being deployed in mobile computing and enterprise devices. Processor chip shipments grew 10% year-on-year and revenue grew faster than unit shipment as ARMv8, Mali and octa core all gained share. For smartphone chips reported in Q1, ARMv8 had around a 65% share, Mali around 60% and octa around 25%. Physical IP royalty grew 38% year-on-year due to the increase in shipments of wafers using ARM's physical IP at advanced nodes. These wafers are typically more expensive than older nodes and therefore yield a greater royalty for wafer.

Normalized OpEx in Q1 was £132.9 million, up 33% year-on-year, and adjusting for foreign exchange broadly in line with our guidance. There were two main drivers of the increase. Firstly, our accelerated investments have resulted in a 20% increase in head count, the vast majority going into engineering and new business development.

And secondly, sterling has weakened significantly against all major currencies, particularly the U.S. dollar. As a reminder, around 40% of our OpEx is in sterling, 40% is in dollars, and around 20% in other currencies whereas income is over 90% dollar-denominated. A weaker sterling increases costs in sterling terms but overall gives a net benefit to ARM. Excluding the impact of currency movements, OpEx is just 1% higher than in the previous quarter and at the upper end of the Q1 guidance given last quarter.

Assuming exchange rates at current levels of around $1.42 to the pound, OpEx in Q2 is expected to be in the range of £130 million to £133 million. This reflects the return to quarter-on-quarter OpEx increases in line with historical levels. The group's effective normalized tax rate was 15% in Q1 and we expect the full year tax rate to also be around 15%. And as a result, EPS grew 15% year-on-year to £0.082.

Now on to the outlook, the licensing pipeline for the rest of the year is robust with leading semiconductor companies and equipment manufacturers looking to license ARM's most advanced technologies for the next-generation products. Macroeconomic uncertainty remains and could influence consumer and enterprise spending on semiconductors in 2016. And based on current conditions in the semiconductor industry, we expect group dollar revenues for the full year to be in line with market expectations.

Simon Segars - Chief Executive Officer & Director

Great. Thanks, Chris. And now, we'll hand over to Q&A. As usual, if you could ask just one question at a time please, we'll be able to get everybody's question in, and we can come around again if you have follow-up questions. So, operator, do you want to open the call for questions now, please?

Question-and-Answer Session

Operator

Your first question today comes from the line of Matt Ramsay from Canaccord Genuity. Your line is open.

Matthew D. Ramsay - Canaccord Genuity, Inc.

Yes. Thank you very much. Good morning, gentlemen. Simon, I guess a two-part question from me, and congratulations on the strong execution in a pretty choppy macro.

Simon Segars - Chief Executive Officer & Director

Thank you.

Matthew D. Ramsay - Canaccord Genuity, Inc.

But I guess, with only a 25% or so penetration of octa core in the smartphone market so far, I guess where do you think that penetration can get through the year and how big of a driver of earnings could it be for royalty growth? And I guess on the flip side, tons of moving parts last night with Intel, but one of the things that stood out to me in their results was the 60% growth in their networking business year-over-year.

The numbers that you guys have put out is 10% growth. And it strikes me that as ARMv8 compares get a little bit tougher as we move through the year that networking revenue might need to be a bit robust for you guys to keep royalty growth rates high. So, I wonder, maybe you could just walk us through the differences in the growth rates you've seen in your networking business versus Intel. I know it's very different product and sort of what the growth rate of that business could be over the medium term. Thanks.

Simon Segars - Chief Executive Officer & Director

Okay. So, thank you for ignoring my request to only ask one question, but we'll cover them both. First of all, so on the question about octa core, as we've said in first quarter, penetration was around 25%. That's grown fairly steadily over the last year. A year ago, Q1 2015, it was less than 5% penetrated. That grew through the year. Full year 2015 was about 10%. Full year 2016, obviously, it's hard to say. It's going to depend on the mix and what handsets get sold, et cetera. But it wouldn't surprise us for full year to be about 30%. And we do see room for growth of octa core for some time to come. If you were thinking where might v8-A penetration go in the full year, as I said a moment ago, about 65% for Q1 2016. It could be 70% to 80%, exit rate around 80%, maybe as much as 85% for the full year.

So, your second question was about networking. Networking volume for us grew about 10% year-on-year. A lot of that is still chips-based but ARMv7. As you know, we've spoken about a lot of licensing activity in the networking space over the last couple of years, and we're expecting ARMv8-A-based chips to come through. So, we think networking will be a driver of royalty.

In comparison to Intel that you mentioned, both businesses are completely different. So, I'm not going to spend too long trying to draw a comparison between the two of them. We feel good about what's going on for us in networking. The long-term driver – or medium-term driver, rather, is about 5G and overall the increased sophistication of the equipment is going to be required to deliver the kind of bandwidth and amounts of connectivity that 5G necessitates. And I think we're in a very good position for the ARM partnership service there.

Matthew D. Ramsay - Canaccord Genuity, Inc.

Well, thanks very much, Simon. I appreciated the perspectives.

Simon Segars - Chief Executive Officer & Director

Thanks.

Operator

Your next question is from the line of Gareth Jenkins from UBS. Your line is open.

Gareth Jenkins - UBS Ltd. (Broker)

Hi. So, I'll just keep it to one. You've done a great job in gaining market share in the last two years in graphics. I just wondered whether you can talk about some of the technological aspects of how you moat that business off a little bit and make it sticky through GPU/CPU coherency or any other assets that you see over the next two years that you can maybe makes that more defendable against potential competition? Thank you.

Simon Segars - Chief Executive Officer & Director

Yes. So, really a lot of that is about engagement with the ecosystem. So, we have a strong effort around the developer community, making it easy for people to write their applications that utilize the benefits of the Mali architecture so we do a lot of work on tools, we do a lot of work generally on enabling that ecosystem, and that is one of the ways in which we do increase stickiness around our product. As you know, fundamentally, GPUs implement a third party standard. OpenGL ES is controlled by the Khronos Group that we're a member of and very active in driving the standards forward.

And then ultimately, it's going to come down to execution on building the best performance and the most power-efficient cores with the right mix of features for different markets. You mentioned GPU computing. There are going to be markets where that's important, and we're expanding our road map to have some GPUs with those features in for those markets and some GPUs with those features out where there's more price sensitivity and power sensitivity. So, it's about the mix of all those things, having the right product but crucially engaging in the right way with the ecosystem.

Gareth Jenkins - UBS Ltd. (Broker)

Can I do a follow-up on that, Simon?

Simon Segars - Chief Executive Officer & Director

Just this once, Gareth.

Gareth Jenkins - UBS Ltd. (Broker)

Thanks. So, do you feel that your GPU can scale to performance levels that are high enough to compete with, I guess, high-end graphics companies that we see stand-alone, the likes of NVIDIA, et cetera on the compete side?

Simon Segars - Chief Executive Officer & Director

I guess the way we look at it is not so much can we compete with company X. It's more about market opportunity and is there a large volume market opportunity that we think the ARM partnership wants to serve with IP license from us. So, we're looking at different markets and making sure that if we think that's a viable market that our business model serves, then making sure we got the right products for it.

So, there are always going to be some applications where the volumes are so low that they're not served best through an IP model, and there's no point in us making some enormous product that's only used by one or two people and the volumes are low. That just doesn't fit our business model. So, we're looking at where the volume's going to be. We're looking at how the markets evolve and driving our road maps accordingly.

Gareth Jenkins - UBS Ltd. (Broker)

That's great. Thank you.

Simon Segars - Chief Executive Officer & Director

Thanks.

Operator

...question is from the line of Andrew Gardiner from Barclays. Your line is open.

Andrew M. Gardiner - Barclays Capital Securities Ltd.

Good morning, guys. Thanks for taking the question. Just one on the mobile side. At the time of 4Q results, you'd highlighted that I think nine companies had licensed the next-generation Cortex-A processor. I was wondering if there was sort of, A, any more activity there in terms of lead licensing, and is this something that we're likely to hear more of perhaps later this year or is it a little further out there into 2017 perhaps.

Simon Segars - Chief Executive Officer & Director

Well, we haven't called out particularly which products were licensed and the licensing of advanced technology in this quarter. But as ever, there are new products that we're developing. We will announce those in the fullness of time. In the last two quarters, we've launched at least three CPUs and seen very strong demand for that and very strong interest in the high end of our road map. So, we'll reveal more details of that as it comes and be explicit about the licensing as it goes.

Andrew M. Gardiner - Barclays Capital Securities Ltd.

Okay. Thank you.

Simon Segars - Chief Executive Officer & Director

Thanks.

Operator

...line of Kai Korschelt from Merrill Lynch. Your line is open.

Kai Korschelt - Bank of America Merrill Lynch

Yeah. Good morning. Thanks, gents, for taking my question. I had one on the revenue guidance at the Capital Markets Day in September last year. I think you guided to about $40 million in incremental revenues this year. Do you have any visibility at this stage about the phasing and then also around kind of which end markets and also which maybe segments we should expect those incremental revenues to come from? And just to confirm, that will be incremental revenues based on your OpEx investments that you have been carrying out in the last six months. Thank you.

Simon Segars - Chief Executive Officer & Director

So, in the Capital Markets Day, we talked about £50 million of incremental cost ramping up over the year and then generate $600 million worth – sorry, £40 million of cost ramping up over the year and then $200 million of revenue in 2020. We didn't actually give an explicit revenue guidance for the first year. So, when we've given our guidance now which says total revenue, we're comfortable that it's going to be in line with market expectations. That includes the incremental revenue that's coming from those investments.

And if you go back to the Capital Markets Day, revenue this year is around – the continuing revenue from some of the acquisitions we made last year such as Sansa, together with some early licensing wins in the other markets. Actually, the big ramp-up in the additional $200 million will come in future years as those licenses turn into shipments by our partners to OEMs and generating royalties.

Kai Korschelt - Bank of America Merrill Lynch

Okay. So, it would be mostly on the licensing side. And actually, I'm just looking at the slide where you have said $40 million which is at slide 94. Just wanted to clarify that that is mostly licensing and M&A, I guess.

Simon Segars - Chief Executive Officer & Director

I think the $40 million that you're referring to there is the £40 million investment that we were talking about incrementally making through this year. And as Chris said that products for the networking and server space and it is new product for IoT, we talked about our software platform around mbed. That development is going very well. We're seeing a very strong interest and pick-up across the industry.

Christopher John Kennedy - Chief Financial Officer & Director

But, I mean, I think if you're question's around how we're doing on those investments, as you'd expect, we do a fairly frequent look back at how the spend is going and how the revenues are going. And it's exactly where we were planning it to be from the latest look that what was done.

Kai Korschelt - Bank of America Merrill Lynch

Okay. Thank you.

Simon Segars - Chief Executive Officer & Director

Thanks.

Operator

Question is from the line of Francois Meunier from Morgan Stanley. Your line is open.

Francois A. Meunier - Morgan Stanley & Co. International Plc

Hello. Yes. Congratulations on the great quarter. Despite the weakness in smartphones, really well done. I was wondering what's your view on competition at the moment because there's a big competitor in Santa Clara, which is registering head count by 12,000. Well, your head count is actually increasing by 20%. It's pretty clear that you're making an R&D push this year for a reason in servers, networking and Internet of Things. What's the view – maybe it's a bit early, let us know, about 2017. Is it worth making an incremental push in 2017 to nail the competition or basically is an extra investment in 2016 enough?

Simon Segars - Chief Executive Officer & Director

Well, we are planning on expanding generally over the next few years the extra investments that we outlined last September on the only source of growth in terms of R&D in the business. You've seen us grow quite significantly over the last few years, and we do expect over the coming years to keep expanding. What we saw explicitly last year was, based on the success that we were having in those markets, the opportunity to push ahead.

I mean we view competition quite broadly in different markets. There are different people who we compete with in a microcontroller space that's very fragmented as an example. And so, some of the work we're doing is to help defragment that and create some standardization around the ARM architecture. In networking, competition there is different. There is incumbency that we need to address. We're going to make sure we got the right product, that we're working with the right ecosystem, and that's where those investments are going as well.

So, when I think generally about how we've expanded over the last few years, it's been about deploying resources in a way that helps us sustain our very strong position that we saw in the mobile market whilst broadening the success we've had in other markets as well. It's incorrect to assume – some people do. I know, Francois, you know ARM very, very well, but a lot of people still assume that we are completely dominated by what goes on in mobile. But as you've seen from the numbers here, it's 45% of the units. We are having quite significant success outside of mobile investments that we spelled out to really capitalize on that yet further.

Francois A. Meunier - Morgan Stanley & Co. International Plc

Okay. So, if I translate that into the number for next year, we should see operating leverage come back to the numbers next year?

Simon Segars - Chief Executive Officer & Director

Well, I mean the operating leverage is going to be a function of where revenues go obviously. And part of that is royalty that we don't control at all, you can say very much, but at all. But in terms of continued investment in head count, we're expecting, after the step-up that we've gone through, for growth rates to return to more of the kind of typical growth that you've seen on a quarter-to-quarter or year-to-year basis from us.

Francois A. Meunier - Morgan Stanley & Co. International Plc

All right. Thank you very much.

Simon Segars - Chief Executive Officer & Director

Thanks a lot.

Operator

Question is from the line of Sandeep Deshpande from JPMorgan. Your line is open.

Sandeep S. Deshpande - JPMorgan Cazenove

Yeah. Hi. Thank you. Simon, maybe two questions, firstly, on the mobile market itself. Do you think you've now seen the worst decline in the ruble market and now from here on? So, because as we can see, you can see the numbers reported by your customers that the biggest decline is over and they will be stable trends from there into the next quarter in the mobile market. Or do you still expect, based on what you have seen in this report that this may go down again in the following quarter?

And a follow-up on the server/networking part, what are you – or where – yes, you are trying to break into the – and you have got some wins with the data center guys. What about in the networking market itself or virtualized servers for the networking market? Thank you.

Simon Segars - Chief Executive Officer & Director

Okay. So to your first question, in terms of mobile growth, we're looking at the industry report coming out at the moment. Haven't actually seen our numbers, our unit growth in Q1. But the forecast for the year is still in that 6% to 7% growth rate range that we were talking about 90 days ago. So, 2016 looks like it's going to pan out at the moment based on the forecast from what everybody expected. From one quarter to the next, to be honest, I really do not spend a lot of time worrying about that. Totally outside of my control. It will be what it will be.

We think in the long term, smartphones are going to continue to grow. We're going to see increased functionality within those smartphones that's going to drive the demand for more computing performance, for more sophisticated processors from ARM's partners. We're seeing core counts go up. We're seeing increased adoption of octa. We're seeing some deca-core products launched. And just in the last few weeks, MediaTek launched their X20 and X25 products which have 10 cores in them. So, yeah, that is a trend we're expecting to continue from one quarter to the next. You're going to get fluctuations within that. Really don't spend a lot of time trying to analyze it.

Your second question was about supporting virtualization in network servers I think. Was that right?

Sandeep S. Deshpande - JPMorgan Cazenove

Yes, I mean – yeah, what I'm talking about is in a networking market looking to virtualize altogether and whether ARM is going to position best for servers in a virtualized networking market.

Simon Segars - Chief Executive Officer & Director

Yeah. So, we built features into ARMv8 to support more virtualization. We talked a moment ago about the work we're doing in the OPNFV world to make sure that the software stack that utilizes those – well, that is optimized to utilize those features and create efficient implementations of that. We're doing a lot of work both directly in ARM, across our partners within Linaro on making sure that all the open source software to support efficient running of virtualized networks on ARM is all there and all well supported.

So, that work is a good example of where some of our increased investments is going. We're happy with progress on that and see no reason why ARM technology can't be used to implement that class of networking product, which is going to be really important to deliver the performance that 5G requires.

Sandeep S. Deshpande - JPMorgan Cazenove

Thank you.

Operator

The next question is from the line of Brett Simpson. Your line is open.

Brett Simpson - Arete Research Services LLP

Yeah. Thanks very much. Simon, just looking at consensus for PD royalties in the June quarter, I think it's about $185 million, which is coming off of $1 million, $2 million base. This quarter it's about 3% down Q-on-Q in dollar terms, which suggests a pretty healthy seasonal period. But when I look at the March quarter for the industry, we've had an earthquake in Taiwan that took out capacity at TSMC. And I think we all know that iPhone builds have seen big cutbacks in the March quarter sequentially. So, when you say you're happy with consensus estimates, can you perhaps talk about why you see it being so strong despite some of these headwinds that's clearly impacted the sector? Thank you.

And maybe just a follow-up as well, looking at Q1, can you maybe just talk about where we are with v8 and Mali and octa as a percentage of smartphone units in the Q1 period? Thank you.

Simon Segars - Chief Executive Officer & Director

Okay. So, when we talk about in our outlook statement there about being – expecting group dollar revenues to be in line with market expectations, we are talking about the full year there. And again, one quarter to the next, that's split. As you know, we don't guide for the breakdown between licensing and royalty revenues. So, we're talking about the full year.

As you say, there are things that have gone on. There was the earthquake that affected TSMC's capacity. I believe they've largely recovered that situation right now. There's, of course, a tragic earthquake the other day in Japan. Our understanding is that both Sony and Renesas are impacted to some degree around that. And there are things that may well affect that. And that's why in our outlook statement we talked about being comfortable with that guidance modulo the macroeconomic environment and that's the sort of thing that plays into it.

But in terms of overall demand for our products, we have a very strong pipeline of licensing opportunities. And the big companies that we work with are investing for the future and investing to win. There's always going to be something that happens that is outside anyone's control. And that's why the macro factor does play into it.

Second part of your question was about breakdown of v8, Mali and octa. In Q1, smartphone shipments, was that how you...

Brett Simpson - Arete Research Services LLP

That's right. That's right. Yeah.

Simon Segars - Chief Executive Officer & Director

Yeah. So, our estimate of that is v8-A in about 65% of handsets, Mali in about 50% and octa in about 25%

Brett Simpson - Arete Research Services LLP

That's great. Thanks very much.

Operator

...the line of Amit Harchandani, Citigroup. Your line is open.

Amit B. Harchandani - Citigroup Global Markets Ltd.

Good morning, gentlemen. Amit Harchandani from Citigroup. And a question, if I may, on your mobile royalties. We've seen over the years the move towards making silicon in-house by some of the larger players such as Apple and Samsung. And in the past, for example, we have looked at mobile royalties as a percentage of ASPs and there's been talk about ASPs declining or gradually coming down.

But my question is as you move towards increased sourcing of content in-house as opposed to merchant silicon, how does that impact the way you drive your royalties from these customers? And is there any incentive to move away from percentage to maybe flat pricing that, in turn, would encourage greater uptake of ARM-based content? So, if you could you just talk about the impact of moving away from merchant silicon to in-house silicon, that would be helpful. Thank you.

Simon Segars - Chief Executive Officer & Director

Okay. So, as you say, there are companies that do this. There are a lot of companies that don't do this because the merchant market is still supplying a lot of silicon into handsets. The concept of kind of OEMs building their own silicon is something that we've dealt within our business for many years. This isn't actually new to us. It's been a situation that's been around for a long time. And we have ways of modeling the cost of kit so that the royalties that we get from somebody who's building silicon via an in-house supplier is paying for the first approximation, the same royalty as somebody with – if the silicon came from a merchant supplier. So, that is a very well-trodden path for us. We're used to dealing with it and we have models for that.

Amit B. Harchandani - Citigroup Global Markets Ltd.

So if I would just get a clarification around that, nothing really changes as we move towards a greater adoption of v8, octa core and Mali. It still remains the same, tried and tested approach that you've followed in the past?

Simon Segars - Chief Executive Officer & Director

Yeah. I mean we're not seeing any big shift away from our conventional models. I mean it's something that does evolve all the time. As you know, we've changed the rates around the newer technology reflecting the value that it brings. And our business models do evolve as the industry evolves but there's no big sort of step function that's going on or that we anticipate could go on.

Amit B. Harchandani - Citigroup Global Markets Ltd.

Thank you.

Operator

Question is from the line of Johannes Schaller from Deutsche Bank. Your line is open.

Johannes Schaller - Deutsche Bank AG (Broker)

Hey, gentlemen. Thanks for taking my question. It looks like the adoption of v8 in mobile is maybe trending a little bit behind what you initially planned. It sounds like more of the low end space on v7 at least for a while. Also for octa core, maybe there's a little bit of incremental, less incremental adoption this year than we've seen last year. Just wondering if you could share with us some of your thoughts around the reason for that. Is it costs from the client side? Is there the technical reasons for that? If you could give us a bit of an update around that, that would be helpful. Thank you.

Simon Segars - Chief Executive Officer & Director

No. I mean there's no technical reasons for that. I mean I think that we're not a million miles away from where we thought we were going to be. And the number of smartphones in a quarter that has got a v8 versus v7 is down to kind of mix shift fundamentally. And what we've seen for quite a long time, probably over a year now or probably about 18 months is a shift to v8-based chips from the supply chain.

Now, at the very low end where there is a supply of v7-based chips that are very low cost, you're going to see those get worked through the channel. But I don't think there's any change in our view that in the long term, we expect all smartphones to move to v8. When we set that out, we said that was going to be a multi-year journey. The initial uptake, very rapid. Uptake or mix shift slowed down maybe a little bit.

But we think through this year, we'll end the year with about 80% to 85% of smartphones being v8-based, and it's going to asymptote over the next couple of years to 100%. And again, one quarter to the next, things will speed up, things will slow down. Not something that I can control, not something I worry about too much. The numbers are what the numbers are. It's very much in the output of what happens but the trend's unchanged.

Johannes Schaller - Deutsche Bank AG (Broker)

That's clear. I mean, okay. On v8, you seem to be quite confident. If you just look at octa core, just as a quick follow-up, I mean you're targeting 30% maybe by the end of this year, 60% longer term. Is there any kind of view you have, if that's a relatively gradual, steady progression towards the 60% over time or should we expect something that is a bit kind of out of line for next year to the positive or to the negative side?

Simon Segars - Chief Executive Officer & Director

I think there will be a fairly steady progression there; again, not expecting any big steps. As chips move to more advanced process geometries and it's economic to put more cores into each chip at same or small incremental price, then I think we're going to see functionality of smartphone chips go up at the entry level all the way up. So, the high core counts are going to trickle down, we think, get to 50%, 60% over the next few years is entirely feasible.

Johannes Schaller - Deutsche Bank AG (Broker)

Okay. That's very helpful. Thanks.

Operator

Your next question is from the line of Eoin Lambe from Liberum. Your line is open.

Eoin T. Lambe - Liberum Capital Ltd.

Hi there. It's Eoin and thanks for letting me ask a question. Accounts receivables increased, I think, 54% year-on-year or £18 million, and accounts receivables is now growing at more than 2X revenue. Has there been a change in the revenue mix or accounting policy to lead to this faster growth in accounts receivable?

Simon Segars - Chief Executive Officer & Director

No change in policy. The increase is sort of a good news story and reflective really of the great bookings quarter that we had on the licensing side. So, it's just a function that if you close a number of deals in the last month of the quarter, then you're going to have a big accounts receivable balance at the end of it.

Eoin T. Lambe - Liberum Capital Ltd.

Okay. So, we shouldn't expect any difference in the cash conversion or working capital outflow...?

Simon Segars - Chief Executive Officer & Director

No.

Eoin T. Lambe - Liberum Capital Ltd.

...this year pre-billed receivables.

Simon Segars - Chief Executive Officer & Director

No is the short answer. I think when you look at our cash conversion, it sort of sits somewhere between 90% and 110% depending on license growth. So, when we've got high license growth period and you see that over the sort of years from 2012, 2014, that's when cash conversion was a bit more than 100% and trended down as both licenses – as we delivered on them and the payments then became due. And so, it'll bounce around 100%. I don't see any reason why it won't, on average, over a multi-year time be 100%.

Eoin T. Lambe - Liberum Capital Ltd.

Okay. Thank you.

Operator

Question is from the line of Vijay Anand. Your line is open.

Vijay Anand - Mirabaud Securities LLP

Thank you. I have a question on the server market specifically your thoughts on competition from the Power Architecture. We've seen some statements from Google very recently that they've made much more progress in putting their software on the Power Architecture than on ARM. So, just wanted to get your thoughts on how you see Power as a competitor and whether you see them as a threat in terms of achieving your 25% market share target by 2020.

Simon Segars - Chief Executive Officer & Director

I think the server market could well be much more fragmented in the future than it has been, but obviously, IBM are a very long-term player in this market. Power Architecture has been around a long time. It's been in service since about 1995. So, it has something of a track record in this space. It was designed for that market in the first place. IBM created Power.org to help push that into the future.

But I look at the ARM partnership and the number of silicon vendors and the coming together of the ecosystem that we have in the data center space and there will be competition in the future. But I think what's been going on around those architectures doesn't change our view of where we could get to.

Vijay Anand - Mirabaud Securities LLP

Okay. Thank you.

Operator

Your next question is from the line of Robert Lamb. Your line is open.

Robert Lamb - Jefferies International Ltd.

...from Jefferies. My question is just following up on Eoin's question about the trade receivables and just the mix there in terms of the amounts recoverable on contract. It went up obviously at the tail end of last year and it come down this quarter, but it's still a bit high, I guess, compared to what we've seen over the last few years.

And I just wanted to understand what the business dynamic that's been going on that's caused this to increase. And is it fair that the reason it's come down is because it's now converted into trade receivables? And if so, it just seems that the cash collection on it seems a little bit longer than the normal? So, I just wanted to understand is it linked to the new investment cycle. Just any color here would be great.

Simon Segars - Chief Executive Officer & Director

As we've said, the AROC came down this quarter. And I know there were questions about it going up last quarter. And what I said then was it's really down to the timing of the quarter-end and how that stacks with milestones and the license agreement. So, we were expecting it to come down. It has come down. That's what I've said would happen when we last reported.

At the same time, we're signing new contracts that will serve to increase AROC. So, again, I'd go back to the comments I made about accounts receivable. It's really to do with the timing of payment milestones, and there's no change in the business model. There's no change in policy. It is the normal ebb and flow of the licensing process.

Robert Lamb - Jefferies International Ltd.

Okay. Great. Thanks for the clarification.

Operator

Question is from the line of Lee Simpson from Stifel. Your line is open.

Lee Simpson - Stifel Nicolaus Europe Ltd.

Great. Thanks. Good morning. Thanks for letting me on. Just a quick one again on OpEx, if I could, just trying to clarify what you mean by historic OpEx growth levels. Really just trying to understand what the underlying head count implications might be of growth there for wage inflation and how does that sync with medium-term needs for servers investment and investment in the mbed incubator business.

Simon Segars - Chief Executive Officer & Director

Yeah. I mean when you look back over time, it's been around a sort of 5% to 7% increase in head count and then you've got the wage inflation on top that sort of translates into high-single digit. So, that's what we're talking about for the investment. And as we've said, we announced a big step-up in September. We wanted to flag it. That's worked its way through now and we'll return to that more normal level of head count and wage inflation. And as you know, the majority of our cost is people, so it's a head count-driven number.

Lee Simpson - Stifel Nicolaus Europe Ltd.

Okay. And that 5% to 7% head count increase, is it skewed to server space in particular? Is it skewed to the mbed incubators? Any color you could give on those?

Simon Segars - Chief Executive Officer & Director

It's quite broadly across the business. What we've explained on the call just now was how we're investing in core road maps, so it's driving our processors, our GPU, our physical IP to create the next product to enable servers, networking and mobile devices to be implemented. It's on the ecosystem around networking and servers particularly, and it's been to our IoT team. They're looking at the mbed platform. So, it's quite broad. I wouldn't say it's more in one area than the other but on those new fronts, that's where that incremental investment is mainly going.

Lee Simpson - Stifel Nicolaus Europe Ltd.

Got you. Thanks so much.

Operator

And your next question is from the line of Anil Doradla from William Blair. Your line is open.

Anil Kumar Doradla - William Blair & Co. LLC

Hey, guys. Thanks for taking my question. Simon, one quick question on the software ecosystem for the data center market, for the server market. Obviously, you're seeing a lot of investments and some of your chipset vendors are investing quite a bit. When we step back and looking at the big picture, how ready do you think the ARM server chips are ready to take on perhaps the whole ecosystem? Can you share which areas that still need a little bit more work on the software ecosystem? Thanks a lot.

Simon Segars - Chief Executive Officer & Director

Well, it's hard to pinpoint a big area that we need to go work on. What we've been doing is working through with people as they are looking at particular workloads, looking at particular deployments and seeing where the gap is and where we can optimize to get an even better implementation.

So, there's been some broad kind of foundational work around the basic Linux infrastructure, the infrastructure that you need if you're a manager of a data center to install a server and manage it. And then it's down to particular workloads. What we're showing in the roadshow slides are different workloads that we're looking at from storage to Web serving going up to data analytics, et cetera.

So, we're kind of knocking these off, and then they're very much driven by our partners and where they see opportunity, where end customers want to use ARM-based servers, we're getting quite focused on optimizing particular loads. So, it's not any one big thing. It's, in fact, lots of little things. And when you come down to it, this is often the case.

Anil Kumar Doradla - William Blair & Co. LLC

Okay. Thanks a lot.

Operator

Next question is from the line of Martin O'Sullivan from Cenkos. Your line is open.

Martin P. O'Sullivan - Cenkos Securities Plc (Broker)

Yeah. Thanks very much. Actually, my questions have been asked. But I was just wondering if you could give us a sense for how the recent acquisition and integration of Sansa is going and whether there have been any notable milestones achieved with regards to Sansa, particularly with regards to IoT security.

Simon Segars - Chief Executive Officer & Director

So, integration and working with that team going very, very well. We've expanded that a little bit. We put more heads into Israel. We have merged that team in with the rest of the guys who are working on the IoT area and within part of our business that's focused on systems IT. Some of the hardware security features that came from Sansa have been merged into that. So, very happy with how that's going and the integration of that team.

Sorry. There was a second part of your question, I think?

Martin P. O'Sullivan - Cenkos Securities Plc (Broker)

There wasn't actually.

Simon Segars - Chief Executive Officer & Director

Okay.

Martin P. O'Sullivan - Cenkos Securities Plc (Broker)

It's just really with regard to IoT security and how that's progressing.

Simon Segars - Chief Executive Officer & Director

Okay.

Martin P. O'Sullivan - Cenkos Securities Plc (Broker)

Okay. Thanks very much. Thanks.

Operator

Question is from the line of Jérôme Ramel. Your line is open.

Jérôme Ramel - Exane, Inc.

Yeah. Good morning. I got a quick question, Simon, concerning your new agreement with TSMC on 7-nanometer node, specifically the part on the high-performance compute system-on-chips. Should we read that you are maybe more aggressive targeting server networking with 7-nanometer node or should we expect a kind of acceleration of design wins due to the 7 nanometer or maybe just the 60-nanometer node will be enough to see the ramp-up in servers?

Simon Segars - Chief Executive Officer & Director

So, I don't think that our – well, our expectations of growth aren't dependent on any particular process node. We have, for many years, engaged with TSMC and others on advanced process technologies and looking at how those process technologies are developed and the co-optimization of our processor with their process. So, the work that we have going on on 7 nanometer, 10 nanometer and below is a continuation of that work. It's making sure that we kind of trail blaze with our foundry partners the implementation of ARM-based SoCs on their high-end processes so that when our mutual customers then get to it, they know they can rely on the results and know that we have worked together to make it easier and make the result more deterministic. And so the work we have going on on 7-nanometer is really an extension of that. It's going to help with the high performance compute market, with servers, with high-end networking. But it really is just a – I say just – it's a continuation of our sort of modus operandi of how we work with those partners who are developing advanced manufacturing processes.

Jérôme Ramel - Exane, Inc.

Okay. Thank you very much.

Operator

...line of Alex Duval. Your line is open.

Alexander Duval - Goldman Sachs International

Yes. Hi, everyone. Alex Duval from Goldman. I wondered, can you talk a little bit more about ARM's ability to benefit strategically from the buildup of the semis industry in China. We know there are significant plans to invest in the industry there, perhaps catalyzed a bit by the issues ZTE has experienced in terms of sourcing components. And then related to the China question, I wondered if you could give some more color on the consortium that was announced of Alibaba, Phytium, Baidu, et cetera, working with ARM on cloud computing with some institutions in China. Many thanks.

Simon Segars - Chief Executive Officer & Director

Sure. Yes. So, as you know, the Chinese government has an initiative around developing local semiconductor companies and ensuring that more devices are sourced locally than are imported. I've seen data that says that China imports more semiconductors by value than they do oil. So, that has been a priority for some time.

We've seen the growth of local companies, companies like Spreadtrum, for example, Rockchip, Allwinner. We've seen the growth of – within Huawei, they've seen HiSilicon are developing some of the most advanced chips in the world right now. So, that's a development that we've been close to for a long time – and we've been operating in China for 15 years or so by now – and have a team on the ground working very closely with those 20 semiconductor companies providing support and helping enable the innovation that they want to achieve locally.

Obviously, by using ARM technology, it prevents somebody from needing to reinvent the wheel because so many chips have microprocessors in them. There's so much software in the world that runs on ARM. It enables anyone, anywhere to build chips that can then sell into the global market. So, our business model is very supportive of the objectives of the Chinese semiconductor industry. We've seen them invest a lot in manufacturing at the same time.

So then, yeah, how are those chips going to be used? Again, there is an initiative in China to ensure that their server infrastructure for the banking industries, for the local cloud companies, et cetera, is served locally. And that led to ARM's participation in what's called the Green Server Alliance (sic) [Green Computing Consortium], which got announced last week. But again, it's something that's been some time in the making, sponsored by MIIT in China. One of their Vice Minister, Vice Minister Huai, gave the opening speech at that event last Friday, and there are a number of companies involved.

ARM is a platinum member of that. You mentioned some of the companies there, Alibaba, Baidu, Dell, the new joint venture companies with Qualcomm is involved in that, H3C/HPE, Huawei, Lenovo, Phytium. Lots of companies, big names are involved in that. It's an important initiative to develop local server infrastructure that is both energy efficient and open by way of platform participation.

Alexander Duval - Goldman Sachs International

Super helpful. Many thanks.

Simon Segars - Chief Executive Officer & Director

Thanks.

Operator

...from the line of Douglas Smith. Your line is open.

Douglas Smith - Agency Partners LLP

Yes. Simon, there was a line in the press release about increasing R&D to develop next -generation processor technology. Where do you think ARM processor technology will be in five years' time? What is the road map going forward for the next generation?

Simon Segars - Chief Executive Officer & Director

Well, our road map has always been driven really by maximizing the benefits of process technology and enabling next-generation applications to be implemented as efficiently as possible, and we take a systems view on that. So, it isn't just about raw instruction throughput or number of threads within the processor.

We're looking at system design. We're looking at the applications that are going to be run in terms of workload and what's the best way to partition that across the CPU or GPU-specific accelerators, how you optimize data flow around the chip on an off-chip to minimize power consumption. And so, as an overall theme driving our road map, those are things that we worry about.

In terms of specifically where our road map's going, if you look back over time, when we introduced Cortex as a technology, we created specific architecture variants to enable the application processors, the real-time processors, the microcontroller processors to have the right feature sets yet have architectural consistency across them.

And more recently, we've seen at the high end of that and as we've achieved success in the enterprise space, we've – at the high end v8-A, there are some processors with more enterprise level features in them than the ones that we developed for the mobile market, features. So, we've seen a kind of a split at the road map off the top there.

And I expect those to really be the trends over the next five years. As we're more successful in enterprise, I think that's an area where we'll push on performance. We'll look at the different workloads that are being run on ARM and that will probably drive some evolution there. And meanwhile the rest of the road map, again, just focused on that system efficiency and delivering the better performance at the lowest possible power.

Douglas Smith - Agency Partners LLP

Great. Can I ask a follow-up on a previous question someone asked? On the TSMC 7-nanometer, high-performance computer on the press release, I mean, obviously, data center is one of the few areas where you're not really there yet. And I think there's still some skepticism out there. Is the kind of thinking that it'll take until 7-nanometers until the ARM architecture can really compete against the supplier who's dominant in that space?

Simon Segars - Chief Executive Officer & Director

Well, as I said earlier, we don't think that we need to wait for 7-nanometer processors to come along before we get anywhere in the server space. In our roadshow slide, if you have a look at slide 25...

Douglas Smith - Agency Partners LLP

25, right.

Simon Segars - Chief Executive Officer & Director

...that shows there's a growing number of markets which can be served as – really as more performance and different chips come along and that shows us growing from 2015 where we already addressed the storage and Web-serving market to over time – through the combination of many, many functions and processes – technology is one of them – more and more of the market being addressable by ARM technology. So, this is one of the factors in it, but it's not the case that nothing happens until 7-nanometer comes along.

Douglas Smith - Agency Partners LLP

Sure. Actually, that was the slide that led me to my question because you have HPC (Engineering) at 2018, which is I think exactly 7 nanometer at TSMC.

Simon Segars - Chief Executive Officer & Director

But that also has initial underway in the middle of this year as well.

Douglas Smith - Agency Partners LLP

Right. Okay.

Simon Segars - Chief Executive Officer & Director

Again, that's a kind of evolutionary thing.

Douglas Smith - Agency Partners LLP

Okay. Right. Thanks a lot.

Operator

And your next question today is from the line of David O'Connor from Exane. Your line is open.

David O'Connor - Exane, Inc.

Great. Thanks for squeezing me in, guys. Simon, question for you. When I look at the 2016 royalty drivers, I think they're well understood. And you've indicated that you're exiting the year at high levels of the v8. And then also, you talked about, in the medium term, 5G will be a strong driver particularly in new segments, such as networking and servers when those architectures are rolled out, but that seems to be more like 2018 timeframe. So, my question's around what you see as the royalty drivers for 2017. Thanks.

Simon Segars - Chief Executive Officer & Director

So yeah, I mean 5G deployment really starts around 2018 and will go for a number of years. So, it's going to be something that is a driver in that timeframe. In the meantime, there are many networking applications which are clearly being served by ARM chips today. We're seeing 10% year-on-year growth. We've seen royalties perform strongly, driven by embedded, driven by mobile, driven by enterprise and home, and we're expecting those trends to continue. So, we're going to gain share in many different market.

5G is a new technology, but it's not like there's no evolution between 5G and now. Really, what we're seeing with the development of advanced networking equipment, it is more evolutionary. There's not just a big bang that comes along every so often from 3G to 4G to 5G, yet in between you're seeing the rollout of more and more of ARM's technologies. So, that's going to be a driver over the next few years.

David O'Connor - Exane, Inc.

Great. Thank you.

Operator

Next question is from the line of Jaguar Bajwa. Your line is open.

Jaguar Bajwa - Arete Research Services LLP

Hi. Thanks for taking our question. On the licensing side, probably been more near term, but given the receivables grow a lot in the quarter, it would imply that a lot of deals were done late in the quarter. So I mean, also when I look at the last time your mix of turns versus backlog in licensing was at 60% over the last four years was in Q4 2014, and the following quarter was quite weak for licensing.

And we can also see the next six-month composition of backlog is at a relatively low level. It's down year-on-year. So, this would imply, given your statements around robust licensing that your turns visibility is very good. So, can you just talk about that, given your historical trend that we saw in Q4 where the following quarter was quite weak? Just the confidence you have around that robust pipeline.

And then just secondly on the Mali penetration, I'm just wondering how you see that exiting the year? Currently at 50%, do you see that – more runway to grow that? And also the royalty rates that you see trending from Mali, do you see it kind of staying in this rate or is there room to grow that? Thanks.

Simon Segars - Chief Executive Officer & Director

So just on the backlog, the backlog is actually flat year-on-year. So, we're not down – we're down Q-on-Q. I don't think you can read too much into the mechanics of turns versus backlogs in terms of what that means prospectively because prospective license income is all about the pipeline of deals that we have in our CRM system, and we have pretty good visibility of what that's going to be over the next 12 months. And that's what's behind the guidance that we've given around full year revenues so...

Jaguar Bajwa - Arete Research Services LLP

Okay. I was just talking about the six-month backlog. I think that's down year-on-year but okay.

Simon Segars - Chief Executive Officer & Director

And then the second question was about Mali. I mean our expectation is that Mali gets about 60% penetration in smartphones over the full year. So, exit rate, I would expect to see about that level, maybe a little bit higher. Royalty rates, I mean, in Mali, there's a journey there very similar to processors. As we add new capability, add new functionality, we expect to hedge out royalties over time. But I wouldn't brace yourself for any big step change in that in the near term.

Jaguar Bajwa - Arete Research Services LLP

Okay. Great. Thanks. That's very helpful. Thanks.

Operator

Question is from the line of Francois Meunier from Morgan Stanley. Your line is open.

Francois A. Meunier - Morgan Stanley & Co. International Plc

Yeah, I just wanted to ask about the Chinese server opportunity, but someone has asked the question so thank you very much.

Simon Segars - Chief Executive Officer & Director

Okay. So, perhaps we can just make this the last question as we are running out of time.

Operator

Your last question is from the line of Amit Harchandani. Your line is open.

Amit B. Harchandani - Citigroup Global Markets Ltd.

Thank you. Just a quick follow-up around your current thoughts with regards to M&A, if you could please share how you are thinking about M&A, any changes in thought processes there, or more or less consistent what you have said in the past and whether it's still more centered around – investing around the software building up ecosystems. Any thoughts would be helpful. Thank you.

Simon Segars - Chief Executive Officer & Director

Yeah. I mean there's no real change in our philosophy right now. We're looking at what IP fits our model, what are the IP building blocks that people are going to need for their chip devices to address the future generation of needs, what makes sense for us to do, what makes sense for the ecosystem to do from both a hardware and software's perspective. So, no real change on that. You've seen us do a number of acquisitions over the last little while. I'm very happy with how that's going and the philosophy that we're taking to it.

Amit B. Harchandani - Citigroup Global Markets Ltd.

Thank you.

Simon Segars - Chief Executive Officer & Director

Okay. Well, so we're going to have to call it a day there. Thank you very much to everyone for dialing in today and thank you for your questions. We will see you for Q2 results in July. Thank you and good morning.

Operator

That does conclude the conference for today. Thank you all for participating and you may now disconnect. Speaker, please stand by.

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