ARM Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2024

There are 14 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the ARM Second Quarter Fiscal Year 2025 Webcast and Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Jeff Carrel, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you very much. Welcome to our earnings conference call for the Q2 of fiscal 2025 ending September 30, 2024. On the call today are Renee Haas, the Chief Executive Officer of ARM and Jason Child, ARM's Chief Financial Officer. During the call, ARM will discuss forecasts, targets and other forward looking information regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially.

Speaker 1

In addition to these risks that we may highlight during the call, important risk factors that may affect our future results and performance are described in our registration statement on Form 20F with the SEC. ARM assumes no obligation to update any forward looking statements. We will refer to non GAAP financial measures during the discussion. Reconciliations of certain of these non GAAP financial measures to their most directly comparable GAAP financial measures as well as a discussion of certain projected non GAAP financial measures that we are not able to reconcile without unreasonable efforts and supplemental information can be found in our shareholder letter. The shareholder letter and other earnings related materials are now available on our website at investors.

Speaker 1

Arm.com. And with that, I'll turn the call over to Rene. Rene?

Speaker 2

Thank you, Jeff, and good afternoon, everyone. It's been now about 1 year since our IPO and very proud to tell you that in that year, we have exceeded all of our expectations on execution of our growth strategies. The demand for AI everywhere is increasing the demand for ARM's compute platform. To date now since our history over 300,000,000,000 ARM chips have been shipped. Now in the past quarter we had a great set of results exceeding the high end of the guidance.

Speaker 2

We had record royalty revenue up 23% year on year as adoption of V9 increases. We had continued strong licensing revenue showing that our customers are continuing to invest in the future of AI and AI everywhere world. The long term growth drivers for our business remains consistent. Every modern digital chip being designed needs a CPU and the vast majority of these chips are being designed with ARM because of the unequal software ecosystem. Now more specifically on royalty revenue growth really being driven now by more value per chip.

Speaker 2

In the past quarter version 9 now represents 25% of royalty revenue compared to 10% a year ago. More importantly, in the past quarter, our royalty revenue for smartphones grew 40%. This is versus 4% unit growth in the past quarter, a significant delta. We had new announcements, one of them being Apple's new iPhone 16 and iPhone 16 Pro on ARM version 9 and MediaTek announced their newest chipset, the Dimensity 9,400 using ARM's V9 CSS for client, our first CSS shipping in the mobile sector. We've now doubled the number of CSS licenses in this past year.

Speaker 2

It goes without saying that AI is everywhere. Arm is the only compute platform that can run AI from the edge to the cloud. AI is driving demand for our performance and power efficient compute platform everywhere. Some significant milestones, NVIDIA's Grace Blackwell shipments have started integrating the NVIDIA GPU Blackwell with ARM CPU in Grace. We've had new shipments now from Microsoft Azure Cobalt and Google GCP Axion, both ARM V9 based data center now in general availability, significant milestone.

Speaker 2

In the past quarter ARM and NetApp worked together on optimizing LAMA 3.2 using ARM Clarity libraries enabling faster on device AI processing. In the automotive market, we're seeing a very strong pipeline for CSS now for both ADAS and IVI applications. And in general demand for edge AI products for CPU acceleration V9 is very strong. We have the largest software ecosystem ever invented. Hardware is nothing without the software and we have over 20,000,000 software developers, the largest in the world.

Speaker 2

We're working closely with important ecosystem partners like GitHub, who just recently announced the integration of ARM tools into GitHub Copilot, a significant milestone for developers. The future is very bright, AI will be everywhere and it will run on ARM. And with that, I will hand over to Jason.

Speaker 3

Thank you, Renee. Q2 has continued our strong start for fiscal year 2025. Total revenue was $844,000,000 which was above the top end of our guided range. Royalty revenue was $514,000,000 which grew 23% year over year and matched our highest royalty revenue quarter to date. Our Q2 royalty revenue growth was driven by continued ARMv9 adoption and the start of CSS deployments.

Speaker 3

As with last quarter, royalty revenue from smartphone significantly outperformed smartphone shipments. Smartphone royalties increased approximately 40% year over year compared with mid single digit increase in the number of smartphones sold, mainly due to smartphone application processors being increasingly ARM V9 based with a higher royalty rate. In addition, we continue to gain share in automotive applications and with cloud service providers. However, this growth is partially offset by continued weakness in industrial given the ongoing inventory correction in that part of the semiconductor industry as indicated last quarter and widely reported by many of our semiconductor customers. Licensing revenue declined 15% year over year to $330,000,000 which was better than our expectations, which was for a 25% decline.

Speaker 3

License revenue varies quarter to quarter due to the normal fluctuations in timing and the size of multiple high value license agreements and contributions from backlog. Because of this, we recommend that you look at annualized contract value or ACV to best understand the underlying license growth rate. ACV in Q2 was up 13% year over year, which is consistent with recent quarters. Remaining performance obligations or RPO was up 10% sequentially as we had a very strong bookings quarter. Some of this RPO will be recognized as revenue later this year.

Speaker 3

Turning now to guidance. I will briefly touch on both Q3 and fiscal year ended ending March 31, 2025. This guidance reflects our current view of our end markets and our licensing pipeline. For Q3, we expect revenue between $920,000,000 $970,000,000 which at the midpoint represents revenue growth of 15% year over year. Investment in our next generation of technologies are on track and we expect our non GAAP operating expense to be around $525,000,000 We expect our non GAAP EPS to be between $0.32 $0.36 Looking out to fiscal year 2025, we are reiterating our guidance for revenue, cost and profit.

Speaker 3

We expect revenue to be between $3,800,000,000 $4,100,000,000 which represents an 18% to 27% year over year increase. At the midpoint of our revenue guidance, this includes full year royalty revenue growth in high teens. We expect that our revenue growth from smartphones will continue to be driven by ARM V9 based chips becoming a greater proportion of the mix with CSS ramping over the next couple of quarters. We also expect to continue to gain share in cloud and automotive. Feedback from our customers leads us to expect sequential growth in networking in both Q3 and Q4, while IoT is not expected to recover until next year.

Speaker 3

Strong demand for our latest technologies will continue to drive license revenue for the rest of the year. We have kept the range for full year revenue guidance the same as last quarter at plus or minus $150,000,000 as we have some large licensing deals in full. Although the timing of these deals and the shape of the revenue recognition is not yet clear, we do expect all these deals to close. We do expect non GAAP operating expenses to be approximately $2,050,000,000 which represents a 19% year over year increase and is unchanged from our prior guidance. As we continue to invest in R and D to support future growth initiatives, we expect operating expenses to ramp consistently through the year.

Speaker 3

We expect our full year non GAAP EPS guidance of between $1.45 1.65 With that, I'll turn the call back to the operator for the Q and A portion of the call.

Operator

Thank you. We will now go to your first question. And your first question comes from the line of Andrew Gardiner from Citi. Please go ahead.

Speaker 4

Thanks very much. Good afternoon, good evening. Renee and Jason, I was hoping you could shed a little light on a topic that you didn't touch on in your prepared remarks. There have been myriad press reports regarding your working relationship and litigation with Qualcomm. I believe the case is still due in court next month and you have reportedly canceled Qualcomm's architectural license recently both I think as they plan to ship a greater volume of product based on the Nuvia designs and also ahead of the court case.

Speaker 4

Can you comment on the veracity of these reports? And I suppose specifically on numbers, are there any issue with your revenue recognition and operating expenses into the coming periods related to these actions? Do you have to reduce rev rec? Will OpEx rise on increased legal costs? If you're I know it's tricky to talk about legal things, but if you can shed any light on that, I'm sure it'd be helpful.

Speaker 2

Sure. Yes, happy to. I'll address what I can as it is an ongoing litigation. There isn't a great deal I can say on it. But at a base level, contractual consent was required by Qualcomm to assign the Nuvia license and that consent was not obtained.

Speaker 2

As a result of not obtaining that consent, they are in breach and what we did was sent a notification letter regarding cancellation of the architectural license. And to be clear to your question, we have not canceled the license, but we have sent a notification to them. Now getting consent for an assignment is fundamental for our license agreements. And as a result, we need to ensure fairness and protecting our ecosystem who rely on these license agreements. On the financials, I'll let Jason maybe chat on the OpEx.

Speaker 2

But regarding the revenue, our forecast and guidance has always taken into consideration that we may not prevail in this case. So we have essentially taken that forward look. So Jason, if there's any comment you want to make on the expense side?

Speaker 3

No, there isn't any change in I think some of the changes you pointed out rev rec expenses, whatnot. No, there's no changes because at this point, as Renee said, and as I think we said actually back at IPO and consistent since then is our forecast assumes that we're going to get paid existing ALA royalty rates. So until something changes, there won't be any increase or change in those rates.

Operator

Thank you.

Speaker 2

Thank you, Ben.

Operator

Thank you. We will now take the next question. And your next question comes from the line of Harlan Sur from JPMorgan. Please go ahead.

Speaker 5

Good afternoon. Thanks for taking my question. So now that we're midway through your fiscal year, the upside in your business through the first half has been coming from licensing, right? This is, in my view, the best forward indicator of your pipeline, your growth prospects. And it looks like licensing for the full year will come in better versus your view even 90 days ago.

Speaker 5

So this quarter, backlog was up 10% sequentially, book to bill 1.7%, so very strong. I assume you're driving more value uplift per renewal. Looks like you're seeing some add on licensing activity. As you mentioned, Renee, CSS engagements are strong. Bookings were originally expected to be lower this year versus last year, but just given the strong design activity by your customers, requirements for more compute capability per program, visibility on renewals for the remainder of the year, can the team grow its backlog for this fiscal year?

Speaker 2

Yes, I would say, I would say, a couple of things that we're observing in the marketplace. We've talked about the demand for ARM technology being quite strong given the ecosystem and the overall increased demand for ARM technology. I think when we look at what's going on with AI and when you think about AI, it's not just training in the data center, but it's inference in the data center, it's inference across different parts of the overall value chain, the network, the automobile, the PC, the mobile phone, the wearable, which can be kind of what people would call the edge. We're seeing an increased demand for compute resources to run these agents and run these small language models or large language models on top of compute requirements that they already have. So what that's driving is, I think an increase for us that we're seeing across the board for R and D and innovation to capture this platform opportunity.

Speaker 2

So we're seeing pretty broad licensing demand across candidly all the markets and all the sectors. And you're right, it's stronger than we had, I think, originally communicated and anticipated. It's a very good forward indicator for the strength of the business and also for the strength of the royalties going forward. In addition, as mentioned, we've doubled the number of CSS licenses now over the year. That's also been, I think, stronger than we anticipated.

Speaker 2

We did, as I mentioned in the opening remarks, announce MediaTek's first chip design using CSS. So I think it's a combination of increased compute demand, AI and also the CSS. I don't know if Jason, if there's anyone to add on to that.

Speaker 3

Yes. In terms of the I think you asked Harlan if there's a way to increase our backlog. I would say certainly based on the strength that we've seen, yes.

Speaker 6

In fact,

Speaker 3

if you look at the license revenue kind of implied guidance, I think we're up about 40% 45% higher this year than what was our plan back at IPO. So we have strength. Now, our forecast now is we I don't think there probably will be increased a significant increase to backlog. But again, hard to say that the large deals that we have come in later this year, there's some impact there, but then of course that's going to be offset by some kind of the amortization or recognition of milestones that will be delivered in the next quarter or so. So overall, I wouldn't count on that being the driver.

Speaker 3

I think the real focus is really the royalty growth and the 23% year on year growth that we saw in the quarter, which we're particularly excited about.

Speaker 5

I appreciate the insights. Thank you.

Operator

Thank you. Your next question comes from the line of Ross Seymore from Deutsche Bank. Please go ahead.

Speaker 6

Hi, guys. Thanks for asking the question. I'm going to stick on the licensing side of things. Renee and Jason, you guys talked about I think signing 6 new ATAs and then I think more than doubled the CSS side of things. Is there a TAM that is larger now?

Speaker 6

I think originally you talked about ATAs having somewhere around 50 potential licensees. It seems like that number must be growing if you're upwards of 40 already. So how do we think about the potential future growth there? And if that has to slow eventually before it hands over to being such a good precursor for the royalty side of things in the future?

Speaker 2

Well, I think the way to maybe think about it is, one of the opportunities we have at ATAs is to expand the portfolio and size, if you will. ATAs grant access to ARM technology in a broad sense, in other words, a broad portfolio of IP and also a broad set of rights in terms of how many chips to build and tape out in a year. We can scale that to different variations, I. E, smaller set of IP and or reduce number of tape outs, but still give additional value to end customers because they get a larger suite than they might on a single instance. In theory, I think the majority of our customer base can move to some version of ATA.

Speaker 2

And the reason for that is customers love the concept because it addresses a number of things. They know they're going to use the ARM technology. Number 2, having their engineers have access to the broad set of IP allows them to do a lot of experimentation and evaluation in a very easy way. And thirdly, they can now essentially fix their costs on an R and D go forward cycle since they know they're going to be purchasing the IP anyway. So what that ends up meaning for ARM is, it's pretty much broader upside because less churn on deals because they candidly are more repeatable.

Speaker 2

And also by having a broader set of IP available, what we find is engineers end up using more. So to your question, I think the vast majority of our customer base can ultimately go to some version of ATA. And given the broad set of IP that's used in ATA,

Speaker 5

I think that's going to

Speaker 2

drive higher royalties in the future.

Speaker 3

Yes, maybe just a couple of things to add. I think in the past we'd said that we thought probably about 80% of our think of our license revenue and licensees as probably ATA working well for them. I think we said in this last quarter, we're now kind of in the over 50% range. The one thing I think we said in the past, but just to make sure it's clear is with ATA, the annual costs or price increase is roughly 7% per year. And then those contracts on average are somewhere around 3 ish years.

Speaker 3

So even once everyone's in ATA, you're still going to have renewals and you're still going to have annual increases. And then of course, as we deploy and release new technologies and expand the product offering, then of course you can also upsize as well. So I don't I think we're quite a ways from reaching the TAM and there's multiple kind of points of growth to expand that TAM.

Speaker 7

Thank you.

Operator

Thank you. Your next question comes from the line of Vivek Arya from Bank of America Securities. Please go ahead.

Speaker 8

Thanks for taking my question. A few questions on the royalty business. I think you have changed this year's contribution to I think high teens growth from low 20s and then mid-20s. And I imagine that's all the cycle, but if there's any other color, I would appreciate that. But the other kind of related question is V9 contribution to royalties.

Speaker 8

It kind of stalled at 25%. I thought the plan was to continue to expand that every quarter by 5 points. And since smartphone is the kind of the biggest contributor of that and your smartphone business is growing very nicely, like over 2 times the pace, I would have thought the conversion would go on. So I was just hoping you could give more color on why did V9 conversion kind of stall in this quarter? And then overall royalty growth, what is the need to take it down?

Speaker 2

Yes. So let me take the first part of that question, Vivek. I'll address both the V9 transition and then I want to make an important point regarding how to think about pricing inside the V9 envelope and then let Jason talk about the specifics. But first off, the adoption of V9 is going very, very well. We're seeing very, very strong uptick of it in mobile.

Speaker 2

All of our Neoverse products are V9 and we're now starting to see the transition of it in automotive and IoT. And I mentioned in the opening comments that we've now seen the first shipments from Apple that are V9. So we're very, very happy with the rate of adoption. And I think if you looked at the royalty or the adoption rates on a quarter to quarter basis, it may not look linear, but it will definitely be increasing quarter over quarter over quarter when we start looking at it on a multi quarter basis. That being said, I think there's a very important distinction that I wanted to make regarding how to think about royalties during the time that the V9 architecture is ramping.

Speaker 2

In contrast to version 7 and version 8, which by the way of reference, those architectures tend to have a life of approximately 10 years in terms of their peak run rate. During version 7 and version 8, once the royalty rates were fixed for that version, there was very little delta throughout the period, meaning that as those versions reached maturity in terms of saturation, the royalty growth would asymptote. That's not going to be the case with V9 and there's 2 primary reasons for that. Reason 1 is that generation on generation, we introduce multi year improvements in the technology and multi year improvements in terms of the product. Meaning that when we deliver a product, let's say for a phone that goes into production in 2025 and then we deliver the V9 version for a phone that goes into production in 2026, because the product is better, 15% better, let's say on performance and power, we're able to drive better value based pricing for that solution.

Speaker 2

So during V9, even though the royalty rates are increasing from version 8 to version 9, we're going to see continued increases throughout the life of version 9 even as version 9 adoption increases. Secondly, in Version 9, we've also introduced CSS, which we've mentioned several times carries a higher royalty rate, in some cases double if not more of what a standard Version 9 core would be. So as a result, as we see growth in version 9 adoption, you're going to see the royalty growth track higher than it has traditionally. And again, it's for those two factors. Number 1, the value based pricing that sees an increase because of the better economics delivered.

Speaker 2

And secondly, more of a transition to CSS. With that, Jason, if you have any comments, I think maybe we answer the extent of that question. Okay. Thank you.

Operator

Thank you. Your next question comes from the line of Srini Pajjuri from Raymond James. Please go ahead.

Speaker 9

Thank you. My question is on the networking and data center business. Rene, I think that accounted for about 10% of your mix in the last 12 months. Obviously, a lot of momentum on the data center front and then you have CSS products potentially ramping at some point in the next 12 months. So I'm just trying to understand how important of a driver that could be for the next 12 months, both from a, I guess, royalty standpoint and also from a licensing standpoint?

Speaker 9

Thank you.

Speaker 2

Yes. So let me talk about the macro and let Jason address the numbers piece. I think the adoption of Neoverse in the network and in data center is going to mean very, very strong trajectory for ARM, not just in the 12 months, but over the next number of years. Two components to that, we have for general purpose compute, we now obviously have had Graviton in production for many years. And with Microsoft Azure on Cobalt and Google GCP with Axion general purpose compute, they are now in general availability, which means now instances can be purchased by end users.

Speaker 2

And based upon the type of deployment we've seen with Graviton, we're very excited about the opportunity there both with Azure and GCP on these chips. So for general purpose compute, we're expecting to see very, very good results driven primarily by the fact that the power and efficiency is anywhere between 50% to 60% better than compared to X86. In addition, we are seeing, as I mentioned in the opening, demand for NVIDIA's advanced training and inference chip, Grace Blackwell, which uses the ARM CPU Grace as part of that overall solution. One of the benefits of that solution being introduced in the data center is that many of the base OS and workloads that are required for a general purpose cluster are also used on this AI cluster, meaning that there is a lot of leverage between using ARM the data center for general purpose compute and using it for an AI training or inference center. There's a lot of software reuse.

Speaker 2

So as a result, we believe that from an overall TCO standpoint, that will accelerate adoption of ARM the data center, which we're very excited about. So I'll let Jason talk about the numbers in the mix.

Speaker 3

Yes. In terms of the data, infrastructure and data center market, we do expect networking to continue to be slow. But the data center side is specifically the cloud compute market for all the reasons that Renee just mentioned. It has been strong. We do expect it to accelerate throughout the back half of the year as the deployments of the both cobalt and axion continue to ramp as well as some of the other custom silicon chips from other makers that are also continuing to ramp.

Speaker 3

So we do expect that to accelerate.

Operator

Thank you. Your next question comes from the line of Lee Simpson from Morgan Stanley. Please go ahead.

Speaker 10

Great. Thanks for fitting me in here. I just wanted to go back to licensing again and really just trying to understand what contributed in particular to that better than expected licensing here? And maybe how does this relate to the RPO number? It looks as though it's down a couple of percentage points year on year.

Speaker 10

So how do we think about the growth going to the rest of this year? Do we still think we can track to a $1,700,000,000 number? And how we perhaps pull forward some of the licensing deals into this quarter? Thanks.

Speaker 3

Thanks, Lee. So first, I would say, no, we don't foresee any sort of pull forwards. In terms of the upside, I think it was about $35,000,000 higher than the guide, which I think we've guided to a 25% decrease. We actually had a 15% decrease. And again, a decrease is mostly because of a tough comp with a couple of really large deals that were lapped a year ago.

Speaker 3

In terms of the reduction year on year in RPO, well, we happen to have the all time record a year ago and we actually have the 2nd highest quarter was this quarter because actually stepped up sequentially 10%. So it's actually a pretty nice increase. And as you know, earlier this year, we had a fairly large amount of RPO that, effectively amortized into revenue, from a large deal signed last year. So overall, I think the RPO trend has been very, very healthy. But yes, I wouldn't expect that I think the range that you indicated for end of the year is still probably a reasonable range.

Speaker 3

And so I think other than what we've included in the guidance on the deals that we expect to close in Q4, at this point, we don't have line of sight to any significant deals beyond those. Obviously, if something changes, we'll let you guys know.

Speaker 2

Thanks. Thanks so much.

Speaker 3

Thanks, Lee.

Operator

Thank you. Your next question comes from the line of Janke Venter from Arete Research. Please go ahead.

Speaker 11

Thanks guys for giving me a question. I just want to get back to CSS. The announcement of MediaTek in smartphones, how do you see the adoption of CSS in smartphones and trending through this year into next year? Could we see 50% of the market in the next few years?

Speaker 2

Yes. Thank you for the question. I think so, because when we think about what the value proposition of CSS, it's really about reducing time to market and increasing overall confidence in the design and performance. One of the hallmarks of the mobile phone market, as I'm sure you know, is the fact that the product cycle is rather relentless. They're on an annual cadence.

Speaker 2

It's not very forgiving in terms of when units need to be available, whether that's aligning with MWC or Singles Day in China. So with a very relentless product cycle combined with these new smartphone chips are becoming more and more complex, these application processors. And then they're also being built in the most advanced geometries at the fabs, which have longer manufacturing cycle times. Anything you can do to improve the time it takes to design a chip is welcomed. So when we introduced CSS, we had a bit of skepticism whether it would be applicable for the mobile phone market, but what we've actually seen is very, very good adoption.

Speaker 2

So in summary, yes. Can we get to 50% of the market? I believe so, because there's real value being delivered on a product that can move months off the development time in what typically is a very, very severe and relentless product cycle.

Speaker 11

Thank you.

Speaker 10

Thank you.

Operator

Thank you. Your next question comes from the line of Krish Sankar from TD Cowen. Please go ahead.

Speaker 12

Yes. Hi. Thanks for taking my question. I had a quick question on China. It seems like the smartphone mix is shifting towards the entry tier there in the Android market.

Speaker 12

Are you seeing any meaningful impact to your China royalties? And also what is the penetration of V9 in China today? Thank you.

Speaker 2

Yes. Thank you for the question. We've definitely seen strength in the overall handset numbers in China due to the reasons that you had just mentioned. I think the local brands there, Xiaomi, Oppo, Vivo are all seeing very, very good growth. Our team just participated in an Oppo product launch last month.

Speaker 2

So number 1, growth has been strong there. I think there is an allegiance towards the local brands. And in the premium flagship market, as we get into the next year or so, that's all version 9 and that's also going to find its way into the mid range. So China Android, yes, strong and also the vast majority of the products now are going to be moving to Version 9. The high end already is all there.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from the line of John DiFucci from Guggenheim Securities. Please go ahead.

Speaker 13

Thank you for taking my question. Renee, thanks for that explanation you gave on the V9 mix and the related variables that are going to affect royalties going forward. That was really helpful to think about some of that. But shouldn't we expect to continue to see that V99 mix grow? And if not, what would cause it not to grow?

Speaker 13

Is it just a, I don't know, a temporary macro issue or is this AI, you guys are obviously benefiting. There are NVIDIA, there's some others out there, the cloud vendors, but we really haven't seen it like in a lot of other places. And I'm just curious is could there be at least people just stepping back and just catch up in our minds like to see how this is going or I don't know. I'm just trying to figure out how to model this going forward, like what sort of implied in guidance?

Speaker 2

Thank you for the question. No, it's actually going to be quite predictable. As we said, it was 10% a year ago, 25%. Now I can guarantee you, it will not be 25% a year from now. It will be considerably higher than that.

Speaker 2

So if you step back and say, okay, what is really driving that? I think you're going to see more version 9 in PCs as more Windows and ARM products are introduced in the market as more vendors introduce chips. That's a given, number 1. Number 2, what you will see in the mobile phone space is a very classic waterfall of what existed in the flagship will find its way in the mid range and what was in the mid range will find its way in the low end. That's a very natural evolution of products.

Speaker 2

It happens every single time. It's going to happen this time. So a year from now, I would expect now that the majority of the mobile phones will be version 9. Everything we do in the data center, everything we do in the data center is version 9. So what will really be the slowest of the products to come to market will be the automotive sector and that's really driven by just the time lag it takes for those products to be introduced particularly around IBI and ADAS.

Speaker 2

But we know the pipeline. We've got CSS activity in particular there. So, and when we have this call a year from now, and then we'll take the numbers, but I'll guarantee you we'll be way ahead of 0.5% for the reasons I gave.

Speaker 13

That's really helpful.

Speaker 3

John, just to add on modeling complexity of V9 penetration. So if you look specifically at the most recent quarter where it was flat quarter on quarter, the primary reason why was because the mid market had higher growth in the quarter in smartphones. The mid market doesn't have V9 yet, it has a waterfall yet to V9. And so as a result, it looked like V9 installed. It really has more to do with the kind of where the growth in the market turned out to be in this most recent quarter.

Speaker 3

So over time, that stuff all shakes out, as Renee said, but you will have some maybe trends like we saw in this most in this last quarter to this quarter that is something unique, but I don't think are going to sustain.

Speaker 2

We tend to have on these products anywhere between a 3 to 5 year visibility on when they show up. And that's because the licenses have been done years ago and we have very good line of sight with the chip vendors in terms of when they're going to introduce the products and we have very good line of sight with the OEMs when they plan to take it. So, yes, don't read too much in terms of this quarter to quarter thing. We have extremely good visibility in terms of where they're going to land and the trend is only going forward.

Speaker 13

Thank you very much guys. That's very clear.

Operator

Thank you. We will now take our final question for today. And your final question comes from the line of Toshiya Hari from Goldman Sachs. Please go ahead.

Speaker 7

Hi, guys. Thank you so much for squeezing me in. Renee, I was hoping to get your thoughts, your forward outlook on the PC and smartphone markets. AI PC so far have been relatively underwhelming relative expectations at the beginning of the year, maybe at Computex. AI really hasn't catalyzed the replacement cycle in smartphones either.

Speaker 7

I know you guys are not so dependent on units because you've got things like V9 and then CSS growing your royalty rate. But given your visibility that you just spoke to in terms of what your customers are working on, when do you expect volumes across PCs and smartphones to grow? Is it a 25 dynamic? Is it more of a 26 dynamic? And I think at one of the conferences you spoke to a 50% market share goal in PCs over the long run.

Speaker 7

Is that still the aspirational goal for you guys? Thank you.

Speaker 2

Yes, sure. Answering your last question first, absolutely. And I stand by that prediction. When we think about the Windows ecosystem, it's really all about filling out a broad lineup of SKUs. If you go into a retailer today, you'll see that there's thin and light machines, low end machines, mid price machines, gaming laptops, etcetera, etcetera.

Speaker 2

I think what you're what we're going to need to see and we will see it because we have great line of sight in terms of people working on multiple chips in multiple areas is a filling out of that SKUs. So I think when you start to see, thin and light devices and an entry price point based on ARM with a different chipset, you'll see growth. When you see a gaming laptop that has ARM inside, which by the way will be compelling, if and when that comes out, I think you'll see growth. So we're pretty confident in terms of next couple of years in terms of growth in the PC market. Now whether that's related to AI demand, I think what's important is that these PCs are equipped with the horsepower required to run the AI applications.

Speaker 2

I think it's early days in terms of the definition of an AI PC relative to the value prop. But I wouldn't get so hung up on that. What we typically see with these type of cycles is that you've got more technology in here than you need to take advantage of the applications and then it flips the other way around. So this is being largely future approved. But broadly speaking, yes, we're pretty bullish about the demand and I definitely stick to my prediction on growth of Windows on ARM.

Speaker 7

Great. Thank you so much.

Operator

Thank you. I will now hand the call back to Rene Haas, CEO for closing remarks.

Speaker 2

Thank you and thank you everyone for the questions and the interest in what we're doing. Again, to summarize, now our 5th conference call since we've been a public company and we've been consistently beating the expectations of what we have told you that we were going to do the prior quarter. I think more broadly though what you're seeing with ARM and our strategies as I said in the opening, really coming to life. We've talked many, many times about the resiliency of our business, the growth of V9, the increased royalty rates. And when you see a royalty growth in a market where units, for example, in smartphones are up 4% or up 40%, that's a great proof point that the strategy we've put in place are working.

Speaker 2

The future is incredibly bright for all the questions that came up regarding automotive, the data center, AI, smartphones, PCs. We're very fortunate to be able to talk about exciting opportunities in all those verticals, all of them that are using ARM and all of them are going to grow in the future. So thank you very much and appreciate all the questions and comments.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
ARM Q2 2025
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