ARM Holdings PLC China Smartphone Market Update Call
Dec 17, 2014 AM EST
RY.TO - Royal Bank of Canada
ARM Holdings PLC China Smartphone Market Update Call
Dec 17, 2014 / 03:00PM GMT
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Corporate Participants
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* Philip Sparks
ARM Holdings plc - IR Manager
* James Bruce
ARM Holdings plc - Director of Mobile
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Conference Call Participants
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* Andrew Dunn
RBC Capital Markets - Analyst
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Presentation
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Operator [1]
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Thank you for standing by, and welcome to mobile market and China conference call.
(Operator Instructions)
I must advise you, this conference is being recorded today on Wednesday, 17th of December, 2014. I would now like to hand the conference over to your speaker today, Philip Sparks. Please go ahead, sir.
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Philip Sparks, ARM Holdings plc - IR Manager [2]
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Thank you, operator. Hello, everyone, this is Philip Sparks from ARM's investor relations team, and thank you all for joining this call on the subject of the mobile market in China. With me on the line are James Bruce, Director of Mobile in our segment marketing team, and we have Andrew Dunn, Semiconductor Analyst at RBC Capital Markets, who is going to be asking the questions today.
Hopefully, you have had a chance to visit our investor relations website, and watch James' online presentation. If not, you can view it later on at IR.ARM.com.
This call today is going to be listen-only. We won't be taking live Q&A at the end, but if you do have a question for James, then please email it to investor.relations@ARM.com, and we will try to address your question during the call. So with that, I will hand over to Andrew, who is going to lead this discussion. Over to you, Andrew.
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Questions and Answers
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Andrew Dunn, RBC Capital Markets - Analyst [1]
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Thank you very much, Phil, and thank you to James, also, for the chance to discuss ARM's opportunity with the market in China. This obviously is an area that's receiving more attention lately. Much of the future net growth in smartphones is coming from developing regions, such as China, and we've received a lot more incoming questions around this topic. So, perhaps with that, we can jump straight into Q&A, and we'll try to incorporate any additional questions that Phil receives in his inbox during the call.
James, perhaps just to start us off, you've given a very good presentation on the web, but perhaps could you give us what you see is the most important drivers of the mobile market for ARM in China? And we've talked about the middle class, the rising middle-class, increasing levels of disposable income. But are there other factors, and how much, for example, has homegrown SoC vendors played a role?
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James Bruce, ARM Holdings plc - Director of Mobile [2]
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I think if you look at the China market, there has actually been a number of factors that have driven the growth. Those factors are definitely the growth in the middle class, disposable income, which has very much driven the adoption of $300-plus handsets. There's also the other interesting trend, has been very much the China smartphone ecosystem, in that it's managed to deliver smartphones at new price points. So what we've seen is this trend of smartphones being delivered in the sub-$150 price point, and now we are seeing smartphones as low as $23. So this combination of our SoC partners in China combined with the supply chain in China, has really opened it up for smartphone to a completely different consumer base within China, just because of the new price points. And I think one of the interesting trends that you are seeing in China, and also in other developing markets, is that for some consumers, the smartphone is actually their first compute device.
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Andrew Dunn, RBC Capital Markets - Analyst [3]
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Excellent. We'll come back to that point, I think. But just so that we have some sort of framing here, could you perhaps give us some idea of either number of units or proportion of units that your Chinese customers or partners currently account for? Perhaps as a proportion of a whole, and how you might see that evolving over time?
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James Bruce, ARM Holdings plc - Director of Mobile [4]
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So if you look at overall Asia, including Korea, Taiwan and China, the number of units is 20%. If you look within China, it's 7%, and that's growing rapidly. And just to be clear on the units, it's not just the application processor. It could be the Bluetooth, it can be other connectivity, such as the Wi-Fi and the modem.
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Andrew Dunn, RBC Capital Markets - Analyst [5]
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Excellent. Just a point of clarity. Would those percentages be as a proportion of your smartphone shipments or your total ARM shipments?
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James Bruce, ARM Holdings plc - Director of Mobile [6]
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They would be total ARM shipments.
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Andrew Dunn, RBC Capital Markets - Analyst [7]
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Got it. Thank you. Perhaps moving on to 4G, and the rollout into 4G in China, could you perhaps give us some idea about where we are in the process? Is this just starting, sort of the beginning of this? How far along has this come in the process?
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James Bruce, ARM Holdings plc - Director of Mobile [8]
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We're really just in the first year of rollouts of LTE in China, so it's very much at the start, and I think if you look at the typical rollouts of new network technology, especially in the large geographies such as China, it's really going to be a four-year transition. So definitely at the start, and there's going to be a lot more growth in the LTE markets in China.
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Andrew Dunn, RBC Capital Markets - Analyst [9]
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Okay. And I think you've indicated in public in some areas the unit shipments that China Mobile and China Unicom are targeting, but how has ARM benefited to date from 4G, and where do you see these opportunities going forward, perhaps even outside of the mobile device world? Thanks.
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James Bruce, ARM Holdings plc - Director of Mobile [10]
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So if you look at LTE, actually you could find some number of opportunities for ARM. Typically, when you transition from one baseband technology to the next generation, it's actually put tougher requirements on the CPU that's actually used for the modem. And also what you see is that the requirements on the apps processor increased as well. So fundamentally, when you have one of these transitions from one baseband standard to another, what you see is this push upwards of the ARM technology used in the smartphone. And of course, the other exciting thing about a massive deployments, such as LTE is obviously the infrastructure opportunities for ARM SoCs as well.
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Andrew Dunn, RBC Capital Markets - Analyst [11]
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So, a large waterfront there to exploit. Could you just discuss perhaps, are there any differences in how ARM interacts with its Chinese partners, perhaps in terms of IP. They are buying the timeframes they like to operate under? How would you characterize this, if there are any differences?
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James Bruce, ARM Holdings plc - Director of Mobile [12]
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I think the major differences between China customers and other customers is combination of factors. First of all they have a very fast time-to-market, and because they have a very short time-to-market, what we see is they actually purchase a wider collection of ARM IP. So a typical China customer will be buying CPU solutions, Mali, POPs, our subprocessor optimization packages, our physical IP solutions. And it's really about time to market. They want to have IP solutions that they know work together, and they can deploy it very quickly.
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Andrew Dunn, RBC Capital Markets - Analyst [13]
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Okay. And then perhaps leading on from that, I know, I would imagine that a number of Chinese customers that would take some off-the-shelf standard designs, but clearly the Chinese capability has advanced significantly in recent years. Where do you see China in terms of design talent, compared to perhaps Taiwan or North America?
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James Bruce, ARM Holdings plc - Director of Mobile [14]
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I think if you look from the design talent, we're seeing some very good SoCs coming out of China. And if you're looking at the high end, one example I would highlight is in the slides, I talk about Huawei Honor 6, and this has a HiSilicon SoC in there, and that has a combination of big.LITTLE technology, the Cortex-A15, Cortex-A7. Also it has Mali graphics, and it also has a cat6 LTE modem all integrated in the same SoC, so that is very much near the top of the market capabilities.
And then I think if you look at the very low cost smartphones, though it's different technology, I think the China silicon partners have been very good at actually bringing smartphone technology at new price points. It's perhaps different skills from a traditional SoC partner, but this ability to deliver such a low bill of materials is a very good skill set.
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Andrew Dunn, RBC Capital Markets - Analyst [15]
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Interesting you mentioned Huawei there. Clearly very advanced chip. Much of the -- a fair amount I think it's fair to say, is the production has been to local markets, and speaking generally about the Chinese SoC vendors. But do you think the Chinese semi companies will be successful perhaps sending them to Western markets at the higher end, and how much you think about the impact that may have on royalties?
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James Bruce, ARM Holdings plc - Director of Mobile [16]
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So I think definitely you're going to see more silicon from both China and Taiwanese silicon partners coming into Western markets. And I think from ARM's perspective it's going to have no impact on the actual royalties, because this is very much about delivering, especially at the high-end, the latest and greatest ARM IP, and using the leading edge ARM IP. And you really will see fundamentally the same technology between, let's say a Taiwanese pride SoC, and an SoC coming from another partner.
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Andrew Dunn, RBC Capital Markets - Analyst [17]
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Could we perhaps turn to Mali now. Mali graphics. I've done some looking at the SoC vendors in China, and it would appear that the vast majority have adopted Mali, and some of which are exclusively Mali houses. Can you just talk about what's driven their decisions there, and how their requirements might be changing over time?
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James Bruce, ARM Holdings plc - Director of Mobile [18]
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As I mentioned earlier, one thing that China seems to have is a very tight time-to-market. And that's one of the reasons that they've purchased the Mali technology, is that it really helps on getting them into production. I think the other factor is that the Mali solutions are very scalable, all the way from Mali 400 being used in a low-cost handset, all the way up to Mali T-600 and T-700 series being used in high-end SoC, and I think what we're seeing is very much that the China customer base from us is using the entire Mali portfolio.
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Andrew Dunn, RBC Capital Markets - Analyst [19]
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And is there any advantage in the fact that it's an ARM Mali and an ARM processor they are using?
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James Bruce, ARM Holdings plc - Director of Mobile [20]
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From their perspective, absolutely, it is very much about time-to-market. In this business, weeks even months really matter, and being able to just source as much IP from one supplier as possible does bring time-to-market advantages.
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Andrew Dunn, RBC Capital Markets - Analyst [21]
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Thank you. And then perhaps moving to a slightly higher level question on the handsets generally. We've got the rise of the Chinese supply chain, and we're seeing the results of that in $25 smartphones, which is incredible. So how do you see handset SPs trending, with that in mind?
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James Bruce, ARM Holdings plc - Director of Mobile [22]
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I think if you look from the overall market, if you look at ASPs, yes, the fundamental trend is downward. I think the important things to remember is this is not a deflationary effect. This is not the case of high-end smartphones that ASPs are eroding. This is actually a mix of fact. And what you're seeing now in the smartphone market is that the growth of entry-level smartphones, the growth of mid-tier smartphones is driving up the actual volume, and just by the sheer mix factor, because these are now present the significant path to the smartphone market, they are affecting the overall ASP.
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Andrew Dunn, RBC Capital Markets - Analyst [23]
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Handset ASPs to one side, if we turn now to SoC ASPs, clearly there are prices priced down there. And there's a mix effect rather than deflationary effect. But how should we think about SoC ASPs trending?
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James Bruce, ARM Holdings plc - Director of Mobile [24]
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So I think the important thing to emphasize about the actual SoC ASP is they don't actually track the handset ASP directly, and what you could see, for example, is that a $400 smartphone would have a $20 SoC in it. And perhaps a $40 smartphone would have a $4 SoC. So those are those being a 10X difference in the price of a handset, there is only a 5X gap in the actual chip price.
And certainly, I think if you look at the actual ASPs within a particular price band, what you see is that they are staying roughly the same, but also, what you are seeing is the use of the ARM technology in SOCs, especially in the mid-tier, and in the entry-level is actually increasing. So what you're seeing now is this trend, for example, big.LITTLE, as I mentioned on the $300 headset from Huawei.
And also you're seeing this other major trend of the rise of optical. This is where you have a configuration of four fast Cortex-A7s or Cortex-A53s, and four slower Cortex-A7s or Cortex-A53s implementing a sort of a big.LITTLE type system. And you are really starting to see this enter into this $150 smartphone.
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Andrew Dunn, RBC Capital Markets - Analyst [25]
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Just to clarify for my peace of mind, if you'd like. So you're saying flat ASPs within each segment of the smartphone markets, and that's as a result of increasing complexity of technology within each segment, and that would counteract the impact about standard SME ASP downs to 15%-ish. Would that be fair?
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James Bruce, ARM Holdings plc - Director of Mobile [26]
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I think that would generally be a fair statement. Just to be absolutely clear, you're obviously going to have some ASP fluctuation, depending upon the particular SoCs, and the type of SoCs. Generally what you're seeing is very much this trend of delivering more within an SoC at a particular price point.
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Andrew Dunn, RBC Capital Markets - Analyst [27]
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And of course, once you're delivering more technology, you would achieve a higher royalty rate than a more simple technology of a previous generation.
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James Bruce, ARM Holdings plc - Director of Mobile [28]
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Exactly. And also the other important thing to emphasize is where you do see the really low ASP parts, they're very much going into new markets, and creating new opportunities for them.
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Andrew Dunn, RBC Capital Markets - Analyst [29]
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Thank you. While we're talking about royalties, just could you perhaps give us a reminder of the process of collecting royalties? How these ordered, and perhaps, if you have had any issues around royalties in China?
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James Bruce, ARM Holdings plc - Director of Mobile [30]
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So really I'm going to let Phil answer this question. So, Phil, could you part by some insight on this?
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Philip Sparks, ARM Holdings plc - IR Manager [31]
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Yes absolutely yes. There is no difference to the way we ordered out to our partners in China than to anywhere else. So the terms of our license agreements, that partners have to agree to being audited by particularly one of the big four accountants every few years or so. And those accountants will go in and check the numbers they have reported to match the sales as they've been recording in their sales growth ledgers.
And very rarely, actually, do they uncover a major error, and if there is an error, then it's always been down to an oversight, rather than deliberate underreporting. And the reason being, is if we found at that anyone was deliberately underreporting, their shipments, and it's highly unlikely that we would give them access to next-generation technology. So our partners are very keen to make sure that their reporting to us is as accurate as their internal systems will allow.
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Andrew Dunn, RBC Capital Markets - Analyst [32]
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Okay. So no difference in China from anywhere else?
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Philip Sparks, ARM Holdings plc - IR Manager [33]
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Absolutely not.
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Andrew Dunn, RBC Capital Markets - Analyst [34]
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Just turning to competition, now because China is clearly a very attractive market. And this hasn't gone unnoticed by your competitors, and they're clearly keen to capture this opportunity, too. So how does ARM and ARM's ecosystem defend its leadership position in China?
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James Bruce, ARM Holdings plc - Director of Mobile [35]
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So I think if you actually look at this market, especially where you've seen people announce that they are going to go after the low-cost smartphone market, I think the critical things to emphasize about the strength of the ARM ecosystem is first of all, the actual strength of the app ecosystem in China, built around ARM. What you see is over 90% of the applications that are being written using the android native development kit are being designed for ARM. So it's that software ecosystem.
The second part is when you're looking at these low-cost handsets, These sub-$100 handsets, it's very much about ensuring that you maintain the margin, and the great advantage is at this price point, you really see Cortex-A7, Cortex-A53 being used, and if you look at other solutions, they are actually significantly larger than the Cortex-A7 or the Cortex-A53. And what this means is that anyone who's coming in with one of these larger CPU designs would be at a significant margin, or would be significantly challenged on the margins, just because those CPUs are so large, relative to the Cortex-A7 and the Cortex-A53.
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Andrew Dunn, RBC Capital Markets - Analyst [36]
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And you sort of touch on the ecosystem there, and you mention it in the slide deck, and you sort of highlight how fragmented the ecosystem is in China. Could you perhaps give us some clues as to how that's a benefit or a hindrance to ARM, and perhaps what's ARM doing to help develop the ecosystem in China?
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James Bruce, ARM Holdings plc - Director of Mobile [37]
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So I think rather than the term fragmented, I would actually use the term diverse, and that's just by the sheer size of the market. And certainly, from ARM's perspective, this diverse market matches very well to the ARM business model. We have a very diverse range of SoC, also diverse range of handsets.
And I think it's actually very tough for someone else to come in to such diverse markets, because they have got to reach out to all these various companies that the optimization is done, and that's a lot of work. Certainly from ARM's perspective, we do work with a range of companies on doing software optimizations, to make sure that they take full advantage of the ARM CPU or the ARM GPUs.
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Andrew Dunn, RBC Capital Markets - Analyst [38]
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Okay. Thank you. Lastly, and we've had a few questions as the call has been ongoing on 64 bits. 64-bit obviously arrives in mobile with Apple, and I think it's fair to say the remainder of the industry was slightly caught off guard and is playing catch up. Given the product announcements from silicon vendors, 2015 looks like the year that 64-bit arrives in force in the Android ecosystem. How do you expect this to play out in China?
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James Bruce, ARM Holdings plc - Director of Mobile [39]
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I think if you look at the China market, all our silicon partners will be moving to the AK 64-bit very quickly. And I think fundamentally, if you look at $75 plus handsets in 2015, it's very much about a very rapid transition from 32-bit v7A to 64-bit the v8A in the China market. So you really have these two momentum effects in the China market. This combination of a rapid rollout of LTE, combined with a rapid rollout of ARM v8A with the 64-bit support.
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Andrew Dunn, RBC Capital Markets - Analyst [40]
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If it's a fair question, does ARM have any expectation around the penetration rates that you might see in 64-bit in mobile, perhaps by the end of next year?
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James Bruce, ARM Holdings plc - Director of Mobile [41]
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So I think if you look at the overall market, worldwide market, I think by the end of the year through the total year, the number of 64-bit shipments will be -- our v8A shipments will probably be around about 50% of the total smartphone shipments by the end of 2015.
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Andrew Dunn, RBC Capital Markets - Analyst [42]
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So just for clarity, is that an exit run rate? Or is that an average for the year?
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James Bruce, ARM Holdings plc - Director of Mobile [43]
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That's the average for the year.
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Andrew Dunn, RBC Capital Markets - Analyst [44]
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Okay. That's quite a rapid uptake. What might that be dependent on? Are there particular manufacturing nodes that your Chinese partners are targeting the v8A, or is the v8A dependent rollout? Is that dependent on a particular node coming on stream, for example?
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James Bruce, ARM Holdings plc - Director of Mobile [45]
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Absolutely not. And I think the great thing about ARM v8A 64-bit offerings is the fact that for example, things like the Cortex-A53 can be implemented in 28 nanometer, which is default node choice being used today. And this means that it's very easy for customer, who's perhaps using Cortex-A7 today to move very quickly to Cortex-A53, and use that in their smartphone SoCs.
So I think really the only thing that you are seeing is just that people just have the standard getting into production process. Doing final qual of SoCs, during final qual of the handsets or software, and I think as we go into Q1, Q2 and next year, you're going to see numerous announcements around ARM v8A smartphones and SoCs being launched.
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Andrew Dunn, RBC Capital Markets - Analyst [46]
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And without going, I know ARM is sensitive about talking about royalty rates, but just generally speaking, common sense would dictate that you would expect to be able to achieve a higher royalty rate for a version 8 chip than a version 7. But are there other considerations other than just the fact that it's the next-generation technology, in terms of what you might get for the royalty rate?
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James Bruce, ARM Holdings plc - Director of Mobile [47]
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So absolutely you're right, as we move along the technology, the royalty rates do increase. And certainly, with our China customers, when they're looking at new SoCs using new CPUs, they're also looking at using latest generation Mali technology such as the T-7 series or the T-8 series, so that does provide potential opportunities as well.
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Andrew Dunn, RBC Capital Markets - Analyst [48]
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And multicore and big.LITTLE?
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James Bruce, ARM Holdings plc - Director of Mobile [49]
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Yes. That's a very good point. So very much, as I mentioned earlier, we're seeing the $300 plus price point, very strong trend towards big.LITTLE technology.
Using a combination of Cortex-A57s and Cortex-A53s and for example, what you're saying is people looking at different core counts, so perhaps six cores rather than eight cores. And the big.LITTLE configurations. And then very much at that $100 to $150 price point, people looking at optical configurations using Cortex-A53.
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Andrew Dunn, RBC Capital Markets - Analyst [50]
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Perhaps this may be a question for Phil, but I think ARM has spoken in the past about an upward trajectory in its royalty rate it may achieve on average within the smartphone market, to around 4%, I think was in a five-year time frame. I suppose all of these factors will feed into that, but are you still happy with that?
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Philip Sparks, ARM Holdings plc - IR Manager [51]
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As you know, there's a wide range of chips out there, with various amounts of ARM technology in them. Certainly if you're using advanced ARM V8 big.LITTLEs, Mali graphics, Cortex off the modems, and Cortex-M3s for Wi-Fi, Bluetooth, GPS and so on, you're going to be paying a higher royalty rates than someone who has perhaps just taken one of our processor cores. So perhaps the safest way to answer that is to say there is a range of royalty percentages, and the average will come out wherever it comes out.
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Andrew Dunn, RBC Capital Markets - Analyst [52]
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Fair enough. Perhaps just one final question came in on the call. Are you seeing any differences in China in terms of features, product features, the Chinese customer is demanding? Anything in particular there within China?
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James Bruce, ARM Holdings plc - Director of Mobile [53]
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I think there is two interesting aspects. Certainly from the software ecosystem, the apps that are actually running on the smartphones, those are very different from the typical apps that you'd see, for example, in your android smartphone today in the Western world.
I think the second aspect is because this is a very rapid market, with a very short time to market, we're seeing that OEMs are actually willing to take a lot more risks on the design of the handset. Try different things, looking at how they can have an edge against the competition. And I think that trend is very much going to continue. And I think at some point, you could actually see some of those, should we say mechanical design aspects, or new features actually then come out into the developed world.
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Andrew Dunn, RBC Capital Markets - Analyst [54]
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Great. Thank you. I think I am more or less out of questions. I don't know if Phil, if he has any remarks to make.
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Philip Sparks, ARM Holdings plc - IR Manager [55]
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No. It's fantastic. Thanks very much, James. Thanks very much, Andrew, and thank you everyone for dialing in today and listening to the call.
As I mentioned earlier, James has prepared a presentation on this topic, which you can view at IR.ARM.com. And just in terms of forthcoming events on the IR calendar, we are hosting an investor breakfast at CES on January 7, and the event after that will be our full-year results, which the date is February 11. So please see our website for more details.
And on that, I look forward to speaking to you in the next year, and in the meantime, enjoy the holidays. Thank you very much.
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