Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- ARM Holdings PLC (ARM, Financial) reported its fourth straight quarter of record results, with a 39% year-on-year revenue increase.
- Record license revenue up 70% year on year, driven by strong demand for AI applications.
- Royalty revenue increased by 17% year on year, with smartphone royalty revenue up 50% year on year.
- Significant growth in the adoption of ARM's V9 architecture, contributing to higher royalty rates.
- Strong performance in the cloud and automotive sectors, with cloud compute market growth exceeding 75% year on year.
Negative Points
- Continued weakness in IoT and networking equipment markets due to ongoing inventory corrections.
- Q2 revenue is expected to be the low point of the year due to the timing of revenue recognition from licensing.
- Full-year royalty revenue growth guidance slightly reduced to the low 20% range from the mid-20% range previously expected.
- Non-GAAP operating expenses are expected to increase by 19% year over year, driven by continued investments in R&D.
- Challenges in the broader semiconductor industry could impact future licensing and royalty revenues.
Q & A Highlights
Q: Rene, I was hoping you could help us draw a line between the licensing upside of today to the royalty upside of tomorrow. When do you think we will see that reflected in royalty upside in some commensurate manner? What is the right way you're going to help look at the conversion factor between licensing and royalties over time? Thank you.
A: Thank you for the question. We are super pleased about the growth in the licensing business. The way to think about that growth is really around continued investment in R&D. From the time that we license a piece of IP to a customer and from the time that they put that into a chip and that chip goes into an end system and then ultimately into the customer's hands, can be anywhere between three and four years, and in some cases, even longer. The mobile industry, the smartphones is probably the fastest at around three years-ish. But when you start looking at other markets like the data center and or automotive, that can be longer than that. So the way to think about all this increased licensing activity, I think is a very, very good predictor of further royalty growth. Increasingly, we are licensing more and more V9, obviously, but also more and more of these compute subsystems. And both V9 over V8 and then compute subsystems over V9 carry significantly higher royalty rates. So all of this is a very good projection for the future.
Q: Rene, it is noticeable here that you've had a raft of good product releases recently. We've had the new Cortex-X925 CPU. We've had Immortalis cores. So there's quite a lot of activity going on here, a lot for you to be licensing. But I think somewhat unnoticed is there's quite a few CPU extensions that you've been putting out to market as well. Do we see more momentum in the CPU extensions? Do we see more of these coming out? Which markets would they address? And how does this drive some of that royalty growth that you've been talking about over the medium term?
A: The way you think about the CPU product line and the GPU product line for that matter, in addition to some of the fabric that goes with it. We're introducing these products annually for the smartphone market and PC market, in particularly, those are annual beats and for the data center market more like every couple of years. And similar to that on the automotive side. And all of that is driving a pretty significant growth and demand cycle for Arm technology. One of the things that we see to your question of extensions, if I understand it correctly, is really around taking advantage of more and more of the v9 features. There's a lot inside version nine with security. There's a lot in terms of version nine in terms of confidential compute. We're seeing increased demand for that across all areas, particularly in the data center. And when we think about the data center growth, one of the benefits we're also getting that's driving increased licensing activity is the fact that these AI data centers are largely custom, meaning that the blades, the racks, the interconnect, everything associated with building an AI data center is different each time which leads its way to customization, which is good for Arm because these custom chips require Arm. And At the same time, the AI data centers, the power required by them is unprecedented relative to conventional data centers, and that's also good for Arm. And so the areas that I just mentioned around security and confidence will compute particularly AI data centers become hard requirements.
Q: The licensing business has continued to be really strong for Arm and I think certainly, stronger recently than you guys had even forecast through the IPO process and whatnot. Maybe some of the upselling to make AI capable devices in certain markets has been part of that. And obviously, you talked about some of the platform licenses and whatnot and data center. But there's no doubt some correction going on in certain parts of the semiconductor industry, we've seen that across a number of your licensees and in broader based market. So I just wonder if you could maybe give some commentary about what you're seeing in the licensing pipeline juxtaposed against some weakness in some parts of the semis industry? And then I guess the second part, I know you guys don't plan to report royalties or comment on them based on segments and lines of business on a quarterly basis. But you did call out 50% year-over-year growth in smartphone royalties against the total royalty pie growing 17%. So maybe you could talk about the puts and takes in some of the other non-smartphone sectors of the royalty numbers that you just printed?
A: It's a great question relative to how to think about industry correction, inventory sell through as a function of investment in R&D. In cycles in the past, sometimes you might see that investment in future design being impacted by just what you described. I would say, in the current moment of time, that is not the case. What we are not observing is any slowdown in licensing as it applies to anything going on in the end market. And I think what really drives that is when you think about these AI workloads and what's required to go drive them, keep in mind that if a designer is designing an SOC and they're now having to run a workload or a small language model at the edge of a device, that is in addition to all of the things that the SOC in the system has to do anyway. So what that is driving is a demand for more compute, more compute capability, more CPU cores, more subsystems, all of the above relative to new SOC starts. So we're not observing anything slowing down. And in fact, as you can see by the numbers, in your commentary relative to what we talked about 12 months ago during the IPO, it's probably picked up. And I think one of the reasons that we're seeing the end-benefit of that from a revenue standpoint is these are all running off existing platforms that are Arm-based. And one of the things that we continuously say about what drives our demand is this virtuous cycle of the largest number of platforms from a software development standpoint are Arm-based. So the more software that's available to run on Arm, the more companies that are trying to build chips that go into these end-products end up making them Arm-based. So we face very little competition, quite frankly, when their people are considering what is the CPDUs on the new design. And as a result, the availability of additional hardware just makes it easy for the software developers to choose which hardware to continue to develop on because it ends up holding on Arm. So long-winded way of saying that on this cycle, not observing any slowdown in terms of R&D investment, even though there might be some slowdown in terms of end market consumption as you state.
A: On royalties, we're going to provide in the accompanying slides, we're going to update that, that will be sent out right when the call ends. But we'll provide an update as we promised the annual kind of update on what is the mix of our royalties and then what is the kind of update in TAM and kind of market shares. Just at a high level, provide maybe a little bit of update at kind of some of the the
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
