ARM Holdings Management Discusses Q2 2012 Results - Earnings Call Transcript

ARM Holdings (ARMH)

Q2 2012 Earnings Call

July 25, 2012 4:30 am ET


D. Warren A. East - Chief Executive Officer, Director and Member of Disclosure Committee

Tim Score - Chief Financial Officer, Director, Member of Compliance Committee, Member of Disclosure Committee and Member of Risk Review Committee


Didier Scemama - BofA Merrill Lynch, Research Division

Kai Korschelt - Deutsche Bank AG, Research Division

Andrew Dunn - RBC Capital Markets, LLC, Research Division

Simon F. Schafer - Goldman Sachs Group Inc., Research Division

Janardan Menon - Liberum Capital Limited, Research Division

Julian Robert James Yates - Investec Securities (UK), Research Division


D. Warren A. East

Good morning, everybody. Olympic week, so it's fairly select bunch, so thank you all very much for coming along, braving the London transport conditions. They were fine at 6:00 this morning, by the way. So as usual, I will step-through business update, and Tim will follow-up with some detail on the numbers. It's been a really good quarter. Not one that, I would say, and here's the standout one thing that we talked about, but actually if you look right across our business, whether you cut it up by applications sector, whether you cut it out by product sector, then it's been an excellent quarter with a -- with some good news.

But if we were to highlight some things at all, then on our highlights slides, it has been a continuation of big semiconductor companies, continuing to invest in our technology, not just sort of Tier 2 types semiconductors, we've had some very serious semiconductor companies, who you'd call market leaders who have incumbent architectures that they've been with for many years, adapting ARM in their next generation of their products, which is very good. We've signed another v8 architecture license, and that is -- that particular one will be announced in due course, as and when they want to announce it. But what we can say, is that it's in networking applications. And if there is a little bit of a theme, particularly behind my excitement in these results, then it is the fact that we're starting to see quite a lot more ARM activity in the networking space, and more on that as we go.

If you look at it from a volume shipments and a royalty point of view, again, we'll come onto some detail on that. But across our target markets, we are continuing to perform the industry at large, and I'll come back to the numbers on that. Just earlier this week, we had an announcement with TSMC about pushing forward on semiconductor process technology and involvement there in terms of optimizing our physical IP, optimizing their semiconductor process, and working with our leading edge 64 -- new 64-bit product, so a bit more on that later as well. But net-net, a very good quarter which helped us generate increases, significant increases in levels of profitability. We're maintaining our dividend going forward. So that's the sort of summary picture.

Now if we sort of cut up and start looking at the business. And we look at the business to start with, from the outside in. So look at it by market sector to start with. Obviously, mobile and computing remains very, very important for ARM, and it's nice to see a flagship mobile product like the Galaxy SIII, which was launched during the quarter, containing so much on technology. In the ARM's processor, we've got ARM microprocessors, we've got ARM graphics, we've got ARM physical IP. And I've played with one of these products for the first time, only yesterday, actually, and it really does perform and it's an outstanding performer. So I can see why everybody is very excited about the Galaxy SIII, and for us of course having all that ARM technology is good. And by the way, it's also ARM in the touch screen, so that's encouraging to see, our processors getting into those more sophisticated touchscreens.

One thing we are seeing is the value coming through in mobile, generally, the increasing number of smartphones, and within the smartphones themselves, an increasing number of Cortex-A products. And you can see a little histogram halfway down the slide, the top bar there is the ARM11. So ARM11 is still accounting for 40%, roughly, of the apps processors. And the Cortex-A is accounting for, roughly, 60% of the apps processors. But within that Cortex-A, you can see dual-core Cortex-A increasing significantly if you compare the situation a year ago. And that's good news from a value point of view for ARM as royalty, because typically these chips are more expensive. So single-core moving to dual-core and quad-core is a good trend for us. And note also, the underlying growth in sheer volume of apps processors in smartphones. Don't forget, with all these gloom and doom around, smartphones continues to be an area of significant growth for the business, and we're looking forward to 30% thereabout growth in smartphones year-on-year so -- for the year as a whole.

A computer is really like a smartphone in a different form factor. And obviously, the big news if 2012, in the computing front for ARM will be arrival of the Windows operating system on ARM, and this quarter saw the Computex show, we had an excellent Computex show. The ARM partners who are engaged in the Windows launch we're showing of their products. They went down very well and we're looking forward to that launch, which is going to happen in the third -- fourth quarter rather, of this year. So that's yet to come but we've seen the products and they're looking good.

Just while we're on PCs, of course, it was a quarter in which AMD made an interesting announcement about adopting ARM technology for use in their computer chips. And this is an example of how ARM is actually sitting alongside an x86. So it isn't always a question of either/or, this is ARM adding significant value to AMD's x86 product line as security becomes more of an issue in these products.

Moving on to -- down the chain now, these smartphones, computers and everything, they have -- they communicate and that communication means that they're getting data from somewhere or they're sending data somewhere. They're sending over some data handling infrastructure. And the explosion in smartphones and more mobile computing and prevalence of the Internet is generating much more data. Some study suggests there's much as 20x as much data over the sort of 10-year period from 2010 to 2020. And clearly, if that data is handled with the existing architecture, it's going to consume 20x as much power, which is not a very sustainable situation. If you look at all the electricity generated in the world, then IT equipment account for about 10% of it, and if that is going to increase by a factor of 20, then we'll going to have to build a lot more power stations. So that isn't going to happen. People are going to look for more power efficient ways of designing this stuff, and here is the opportunity for ARM in networking. And so you see as I mentioned a moment ago, a new v8 architecture licensee engaged in ARM in networking.

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