ARM Holdings Earnings Call Insights: Q3 Underlying Cost, Licensing Dynamics

On Tuesday, ARM Holdings PLC ADR (NASDAQ:ARMH) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Q3 Underlying Cost

Francois Meunier – Morgan Stanley: Actually on the cost, Tim, I understand that the budget is going a bit higher and I think it would be good to reassure us that this will remain under control into next year and also in Q4 the GBP72 million you’re guiding to is there any like bonus payment or anything? I’m just trying to see what’s going to be the new run rate for next year. That’s going to be my first question. The second question, obviously, is the ASP which is a very strong this quarter, a very big increase and I thank you for providing the bridge on Page 13 of the presentation. But what’s going to be the blended royalty rate for this year? I mean last year it was 1.2 is going to be around 1.3, 1.4 already this year?

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Tim Score – CFO: On OpEx, Francois, as I said the underlying cost in the Q3 we’re up to GBP70 million just at the top end of the range we guided and GBP72 million for Q4. It will be broadly in line with consensus estimates for this year. So there is no change to our medium term view of the expenses that we need to incur to get the revenue growth. So no change in the shape and costs absolutely are under control, and as Warren said we are investing, we have a lot of opportunity to take ARM technology into a very broad range of new markets and we’re obviously invested in the R&D capability to execute on that opportunity. But there is no change to our medium term guidance in terms of operating leverage with that we expect to generate through this business.

Warren East – CEO: Francois with regard to your second question about ASP, well we haven’t got the number for you today on what that’s going to look like for the full year, we’ll wait until we see the full year on that, but I think if you look at the trend in Cortex-A shipments, you can see that that’s now up to 9% of the total. You will see Mali volumes increasing significantly and as you know, both of those have a positive impact on both the royalty rate and they are tending to go into chips of higher value and therefore you have a higher percentage most led by higher value and that is driving this average take per chip up and not at a level that you’re at today. We expect that trend to continue at the same time as we expect the trend in growth of microcontrollers to continue as well and we’ll wait and see what the answer is when we get to the end of the year.

Licensing Dynamics

Didier Scemama – BoA Merrill Lynch: Congratulations also on my end on the ASP licensing very, very well done, great execution there. Two quick questions if I may, first on licensing, I think there was a lot of confusion in the last three or six months on that particular business where people (are still) expected that to slow down dramatically. So can you explain maybe the underlying dynamics in licensing and in particular whether you’ve seen any changes in the underlying ASPs you charge or perhaps also the contribution from subscription licenses, and I’ve got a quick follow-up.

Tim Score – CFO: I’m not exactly sure, Didier, where that confusion would have come from. But we obviously – my sort of guidance on quarterly license revenue has been gradually increasing over the last few quarters and the backlog has continued to go up and what is driving that really is the broadening applicability of ARM technology to the full computing spectrum and that is bringing existing – encouraging existing licensees to license ARM more widely and it’s bringing a lot of new licensees to ARM for the first time. So I think the trend that we’ve seen in licensing has been fairly clear, so I am not quite sure where the confusion would have come from.

Didier Scemama – BoA Merrill Lynch: I think – what I meant is skepticism.

Tim Score – CFO: Skepticism, well it’s a different word.

Didier Scemama – BoA Merrill Lynch: Sorry, my English is poor.

Tim Score – CFO: You are very harsh on yourself.

Didier Scemama – BoA Merrill Lynch: Second a follow-up is basically on the ASPs. If I’ve done the math correctly, so you have disclosed for the first time that the Cortex-A class of processor was 35% of royalty revenues. If I’ve done the math correctly, it looks like the underlying ASPs on Cortex-A chips are $0.189 versus $0.035 on non-Cortex-A type chips. So would you assume that the non-Cortex-A type chips sort of (effect to the) ASP would go up in the longer run as you start to see more Mali contribution as well as maybe also higher royalty rates in the non-Cortex-A type of chips in the medium to long-term.

Warren East – CEO: Well, I mean, it’s possible. I mean these things really do depend on where you see the proportion of straight Cortex and microcontrollers compared with the Cortex-A. You’re right with your arithmetic on Cortex-A and that’s going to continue. Mali tends to go into the same sort of chip that you would find to Cortex-A. So we’re not really seeing Mali sitting alongside something like a Cortex-M processor. So I would expect the dynamic that’s been established where you have a higher priced chips with higher value ARM microprocessor cores, that’s going to continue as more phones get to be smarter phones, as mobile computing turns into reality as we get into service and we’re also seeing the types of technologies deployed in the networking infrastructure product as well. But at the other end of the spectrum, we do see a huge volume opportunity for microcontrollers and typically these chips will contain a single microprocessor core. It will be a lower priced chip and it will be a core that is commanding a royalty rates at the lower end of the spectrum.

Didier Scemama – BoA Merrill Lynch: Got it. The final one on the Renesas announcement, I think, this morning on their microprocessor product line based on ARM, I mean that has been historically sort of proprietary CPU cost for that sort of products from Renesas. How significant is it for the Company?

Warren East – CEO: Well, I mean obviously we have been working with the companies that currently comprise Renesas; Hitachi, NEC and Mitsubishi for many years and they’ve all had ARM in this (table). I mean, we do think this morning’s announcement is quite a milestone, because for microcontrollers per se it has been a bit of a no go area for ARM. It’s a great milestone and I would liken it to a couple of years ago when free scale came out with their first microcontroller announcements and we’ve seen that sort of become pervasive across the free scale microcontroller line. This quarter as I mentioned a few moments ago in the narrow table in the call here even more announcements from free scale. So this is start of a journey.