Earnings Call Transcript - ARM Q4 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the ARM Fourth Quarter Fiscal Year Ending 2024 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. I would now like to hand the conference over to your speaker, Ian Thornton, Vice President of Investor Relations. Please go ahead.

Ian Thornton, Vice President of Investor Relations

Thank you very much. Good morning and good afternoon to everybody. My name is Ian Thornton, and I'm the Head of Investor Relations at ARM. I would like to welcome everyone to our earnings conference call for the fourth quarter of the fiscal year ending, 31 March 2024. I'm joined today by Rene Haas, the Chief Executive Officer of ARM; and Jason Child, ARM's Chief Financial Officer. Hopefully, you will all have downloaded and read the shareholder letter. If not, it is available on the ARM Investor Relations website at investors.arm.com. The shareholder letter provides a rich update on our strategic progress in the quarter. Before we begin, I'd like to remind everyone that during the course of this conference 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 judgments 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 from what we expect. In addition to any risks that we highlight during this call, important risk factors that may affect our future results and performance are described in our registration statements on Form F1 filed with the SEC on September 14, 2023. ARM assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. In addition, 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; and a discussion of certain projected non-GAAP financial measures that we are not able to reconcile without unreasonable efforts and supplementary financial information can be found in the shareholder letter that we released earlier today. The shareholder letter and other earnings-related materials are available on our website at investors.arm.com. And with that, I'll turn the call over to Rene, who has some prepared remarks.

Rene Haas, CEO

Thank you, Ian, and hello everyone. So I'm just going to make a few comments to kick off the call and then I'll pass it over to Jason. But in summary, this quarter, Q4, obviously being the end of our fiscal year was just outstanding. We have record revenues for this quarter and for our first fiscal year as a public company being completed, also record revenue, exceeding the high end of the guidance range. More specifically, for Q4 revenue was up 47% year-on-year, royalties up 37% year-on-year and this is really driven by the acceleration of v9 adoption, which I'll speak about a little bit more. And also licensing, up 60% year-on-year, which is really a function of increased R&D investment to capture the huge opportunity that is all things AI. Now in looking back, the expansion strategies that we talked about during our roadshow and at IPO are now all driving growth for the company. As mentioned, we had significant royalty growth in the last quarter, up year-on-year 37%, really driven by v9 adoption. And what we're seeing is the acceleration of v8 to v9, which drives not only better royalties, but we're also seeing more CPUs inside the chip, which compounds that royalty growth really across all end markets. The significant driver for that incline has been around smartphones, but broadly, we also see that in our infrastructure business as well. And v9 adoption will only continue to increase. In the last quarter, we've also seen proof points of our diversification strategy. Google, the latest hyperscaler announced their Axion processor based on ARM, a custom chip intended for the data center. They chose us largely because of our compute efficiency, but also the ability to not only have a high-performing chip, but to design an increasingly performant blade, rack, and system for a fantastic TCO. We also announced our very first autonomous solutions based on v9. This is very, very significant as we're now bringing v9 performance to the automotive sector with automotive-enhanced features such as functional safety, and we expect huge growth around this area. Furthermore, we have introduced the lowest power transformer on the planet, the Ethos-U85 for IoT-based designs. One of the strategies we put in place that we are most comfortable with in terms of its growth but very confident in terms of its trajectory is around our compute subsystems. These are essentially taking blocks of IP, putting them together into a full solution that saves customers huge time to market and also gives them a highly performant solution. So we announced our V3 Neoverse CSS this quarter, which will give increased performance and benefits to customers. The first automotive CSS is now in discussions with our key partners regarding time to market and efficiency. Our first customer in the Neoverse space doing a design, Microsoft, their Cobalt chip is now ramping. From a more exciting standpoint, we are oversubscribed on this compute subsystem strategy. We have far more demand for the product than anticipated, and we are anticipating growing that significantly over time. Every end market that we approach has a need for CSSs, and we're very excited about talking about them in the future. All of this is also being driven by AI. What we are seeing is because ARM has the largest installed base of CPUs on the planet and has over 70% of the world's population using those CPUs. It's natural that as these AI workloads are now being moved from anywhere from edge devices to the training data center, that they need support from an ARM CPU standpoint. Whether it's from cloud Edge from GPT to Llama, all AI workloads rely and run on ARM, and we only see this increasing. Our licensing activity is probably the best proxy for that. The way to think about licensing revenue as it applies to AI is as software is moving faster than hardware, and the hardware designs need to be upgraded quickly to ensure they can capture the needs of these new AI workloads. So because of that, we have seen huge growth in our licensing activity. We talked about that last quarter and it continued this quarter. Based upon this, we are very, very confident in our growth outlook for the upcoming year. This past year was over 20% revenue growth, and we expect that to be even better in this year and the upcoming years. Our growth has been accelerating. Lastly, it took ARM 20 years to reach $1 billion in revenue. It took us 10 years to reach $2 billion. This year, we passed $3 billion in only two years after our first $2 billion year, and we expect to be near $4 billion this year. The future is very bright at ARM, and I could not be more excited about the future that we have. And with that, I'll turn it over to Jason.

Jason Child, CFO

Thank you, Rene. Q4 was a strong end to a tremendous year for ARM. For the quarter, we grew revenue 47% year-over-year to $928 million with licensing revenue up 60% and record royalty revenue up 37%, while also delivering a non-GAAP operating margin of 42%. In addition, we grew our remaining performance obligations, or RPO, by 45% year-over-year to nearly $2.5 billion. The royalty acceleration and record RPO provides a great setup for FY 2025. Turning to guidance, I will briefly touch on both the first quarter and fiscal year ending March 31, 2025. For Q1, we expect revenue of between $875 million and $925 million, representing a 30% to 37% year-over-year increase. Non-GAAP operating expense is expected to be $475 million, a sequential decline due to a change in remuneration as we complete our transition away from cash awards to equity awards, and a one-time Q4 expense. Resulting non-GAAP EPS is expected to be between $0.32 and $0.36. Unpacking Q1 revenue dynamics a little further, we expect royalty revenue to remain strong with year-over-year growth of approximately 20%. This growth is driven by continued ARMv9 adoption and recovery in smartphones, along with continued share gains in automotive and hyperscalers. This is partially offset by weakness in IoT driven by inventory correction in the broader industrial market, as has been widely reported by many of our semiconductor peers. For Q1 licensing and other revenues, we expect slight sequential growth driven by revenue from backlog. Looking out to fiscal 2025, we expect revenues of between $3.8 billion and $4.1 billion, representing a 17% to 27% year-over-year increase. We expect non-GAAP operating expenses of $2.05 billion, representing a 19% year-over-year increase as we continue to invest in R&D to support future growth initiatives. Our full-year non-GAAP EPS is expected to be between $1.45 and $1.65. We believe our license business is best understood by the measure of annualized contract value, or ACV. Our outlook for ACV remains strong. We expect low double-digit growth for the year, reflecting the durable demand in ARM's latest IP. Licensing revenue, however, will continue to be lumpy from period to period due to the timing of revenue recognition. Based on our current forecast, we expect the first half to represent approximately 40% of our license revenue for the year, with Q2 being the smallest and Q4 being the largest quarter of the year. We have high visibility through a combination of backlog renewals and new licenses. For royalties, we remain very confident in the demand for ARM-based chips and expect full-year growth in the mid-20% range driven by continued v9 adoption, market share gains in cloud and automotive, as well as chips based on our compute subsystems starting to ramp in the second half of the year. Looking further beyond this year, based on the pipeline for new licenses, agreements already signed, and royalty-bearing chips in development are now shipping, we expect to maintain total revenue growth of at least 20% year-over-year for each of the fiscal years ending in 2026 and 2027.

Ian Thornton, Vice President of Investor Relations

Thank you, Jason. We will now move to the Q&A portion of the call. We request that you limit yourself to just one question each so that everyone gets a chance to ask their most pressing question. If time allows we will go around again. I hand back to you, operator.

Operator, Operator

Certainly. First question will come from Ross Seymore of Deutsche Bank. Your line is open.

Ross Seymore, Analyst

Hi guys. Thanks for letting me ask a question. Congrats on the strong results and guide. Rene, I had a question on your infrastructure business and specifically the cloud side. You rattled off a number of the design wins that are starting to ramp from several hyperscaler customers. What I was really wondering is, during the IPO process you talked about 10% market share in that market rising to roughly, I think you said 27% or so. Are those products that are occurring now and being launched? Are they contemplating their original ramp or are you seeing an acceleration above and beyond the growth rate that you laid out for all of us during the IPO process?

Rene Haas, CEO

I would say I'm still confident in those numbers, Ross. I would say one of the dynamics that has changed a bit since we chatted, and I think it's a positive for us, is the increased investment in the data center around all things AI and that bodes well for ARM for a couple of reasons. First off, when you think about power efficiency and what's required for the data center, the implementation of an ARM-based design gets very, very interesting relative to not only building a custom chip that will be more power-efficient but by designing a blade and interconnecting the storage and an overall rack that will be much more power-efficient. Secondly, and I think we chatted about this during the IPO process with Grace Hopper, but I think now with NVIDIA's most recent announcement, Grace Blackwell, you are going to see an acceleration of ARM in the data center in these AI applications. One of the benefits that you get in terms of designing a chip such as Grace Blackwell is by integrating the ARM CPU with the NVIDIA GPU, you're able to get an interconnect between the CPU and the GPU that allows for much higher access to memory, which is one of the limiting factors for training and inference applications. In a conventional system where you might connect to an x86 externally, you have to do that over a PCI bus, which is much slower. So by using a custom bus in the NVIDIA example like NVLink, you get much higher memory bandwidth. So I think what that means is that ARM adoption in the data center will increase probably faster than the numbers that we had indicated, but we're not seeing anything official right now.

Ross Seymore, Analyst

Thank you.

Operator, Operator

And one moment for our next question. And our next question will come from Vivek Arya of Bank of America Securities. Your line is open, Vivek.

Vivek Arya, Analyst

Thanks so much for the question. It's on the v9 conversion. If I look at Slide 15 of the chart presentation you have, it shows that it took about seven years or so for v8 to become about half of the base. Rene, how do you expect this v9 conversion? It seems to have gotten off to a faster start, 20% or so conversion in a year. What's your assumption of what that conversion looks like in your fiscal 2025? I think Jason said mid-20% growth or so in royalty; what does that imply for the level of conversion exiting the year?

Rene Haas, CEO

Yes, I'll let Jason touch on that conversion rate. But what I can say from a high level is that the difference between v8 and v9 is, back into the conversion from v7 to v8, we really didn't have an infrastructure business at all to speak about. We do today, and that is all v9. That is going to be a growth driver that we saw in terms of conversion for v9 from v8 that we just didn't see from v7 to v8. In the smartphone business, we are seeing a fairly rapid acceleration in the premium handset segment that is moving to v9. I think it's been pretty well-documented that it's the premium handset business that has enjoyed probably better growth than some of the other segments, which has accelerated as well. So those are two drivers for v9 that will look, I think, a bit different than v8, and why it should happen more quickly. I'll let Jason comment on what we think the potential exit rate might be and particularly how it applies to our year-on-year revenue growth projection.

Jason Child, CFO

Yes. I would say the 500 basis points of growth or as a percentage of total going from 10% to 15% last quarter and then this most recent quarter from 15% to 20%. I think that's a pretty steady clip. It could be plus or minus, but that somewhere around 5-ish percent growth, 500 basis points of share growth per quarter is probably a reasonable assumption. So that puts you probably out somewhere in the two to three-year timeframe that we probably get to the high end, which is probably somewhere maybe around 60% to 70%, because there is still going to be some v8 and v9 out there even as we see growth in v9 adoption. Keep in mind, I think when we talked about this back at IPO and even last quarter, you do also see an increased royalty that's almost double from v9 when you go to subsystems. So we start to see our subsystems come online at the end of this year, late in the back half of this year, and then that will start to take hold next year. That also probably has somewhere in the kind of three to four-year timeframe of becoming a large share of our royalties. So that's the reason why we have high confidence in a royalty forecast that should be pretty strong and in that kind of 20% range for years to come.

Vivek Arya, Analyst

Thank you.

Operator, Operator

And one moment for our next question. And our next question will be coming from Matt Ramsay of TD Cowen. Your line is open.

Matt Ramsay, Analyst

Thank you very much, everybody. Good afternoon. Rene, I wanted to follow up a little bit on the infrastructure business question that Ross sort of started us off with. And one of the questions I've been getting from folks is, I can see very, very clearly how things like Grace Hopper and Grace Blackwell will be accelerants of pulling ARM into the data center and you've announced with Amazon, Google, and Microsoft other design wins that will do the same thing. On the flip side, in the accelerated data center, if you just look at a percentage of CapEx that goes to CPUs versus accelerators, that accelerator portion is going to be a vast majority, it seems like and that trend is accelerating pretty rapidly. So maybe you could speak a little bit to ARM's role, not just in the head node of accelerated servers, but across the accelerator portion of that sort of exciting growth in CapEx? Thanks.

Rene Haas, CEO

Yes. Thanks, Matt, for the question. I think if you go back to the original design win we had with the hyperscalers, and that was with AWS and Graviton, one of the benefits they talked about specifically in terms of using ARM was performance per dollar. The performance per dollar metric becomes increasingly important as we talk about these large CapEx spends having to manage both the CPU and GPU balance. I think that is candidly also going to be a tailwind for growth with us because not only do you get a better TCO from a chip standpoint in terms of performance per dollar, but again, just launching into the AWS example for a moment, they build a chip called Nitro, which is based on ARM for storage offload. When you combine a Nitro SoC with a Graviton SoC into an EC2 compute rack and then you potentially now configure that for acceleration, that's going to give you a pretty compelling cost advantage versus the competition. So I think candidly, the trade-off is very favorable for us, which is why the question in terms of what's going on with AI and how we think about market share, I think that's going to be a tailwind for ARM because not only with the standard devices can you configure something that's fairly interesting, but you can start to imagine if anyone wants to do a custom implementation to greatly enhance some of those interconnect features I've talked about, it gets very, very interesting, and only ARM allows that flexibility. There's no way to do that with any alternative. Not only is there no way to do that with the alternative architecture that is the incumbent today, but more importantly, ARM has done all the work with the partners relative to running the boot code, the system interface, everything to boot the operating system. So we are extremely well-positioned to do well on that platform. So I think the short summary is, what everything you described is actually going to be quite good for us, which is why I think the growth numbers for our market share in the data center were probably better than we had originally articulated.

Matt Ramsay, Analyst

Thank you very much.

Operator, Operator

And one moment for our next question. Thank you. Our next question will come from Mehdi Hosseini of Susquehanna International Group. Your line is open.

Mehdi Hosseini, Analyst

Yes, sir. Thanks for taking my question. Just want to go back to your fiscal year 2025 color and specifically on the licensing. Should I assume that the licensing mix rebounded in the second half of fiscal year? Is that going to be driven by more of the smartphone customers renewing for ARMv9 or is that going to be more broad-based?

Jason Child, CFO

I would expect it to be more broad-based. As I mentioned, Q4 is going to be the biggest license quarter of the year. But definitely with the focus on AI and the focus on AI capability in really all the different end markets that we serve, you should expect it to be quite broad-based.

Mehdi Hosseini, Analyst

And on the smartphone, is the royalty going to kick in with the smartphone shipments in calendar year 2025?

Jason Child, CFO

Well, our first subsystems will start to launch in the last quarter of the year, so you should see it in our Q4, but I guess it would be in calendar Q1 of 2025.

Rene Haas, CEO

Yes. From the time we license the technology to the time we see a royalty, it's probably two or three years best case, which is why the confidence level that we have in terms of royalty growth is quite high because those contracts are done, we know the rates, we know the market share, etc. For the new designs, to Matt's question earlier and Ross's, if you're trying to develop an SoC that's going to fit in the server, and it needs to run Linux and it needs to run on Kubernetes, etc., there’s really only one choice, ARM. If you're trying to build an SoC to run Windows, there's only one choice; it's ARM. If you're trying to build an SoC to run Android or Gemini, there's only one choice; it's ARM. So the confidence we have in terms of licensing happening is extremely high. The tricky part is always in terms of the visibility, whether that license is signed on December 15 or January 15, which moves across a quarter boundary. But in terms of the confidence that's going to happen, it's extremely high because the choices are rather limited if you want to participate in that market. And when you add in factors on Windows such as Copilot and things such as Gemini for Android, that's why we're seeing an accelerating effort of the licensees to be able to get access to next-generation technology to take advantage of these new AI features.

Mehdi Hosseini, Analyst

Thank you.

Operator, Operator

Thank you. Please hold on for our next question. Our next question comes from Charles Shi of Needham & Company. Charles, you may proceed.

Charles Shi, Analyst

Thank you very much. Good afternoon. I have a question, maybe a little bit backward-looking. This was a question I got quite frequently over the last quarter about your royalty revenue growth seen in the December quarter. And obviously, you see another sequential increase in March. So in the December quarter, since you already disclosed how much of the royalty revenue comes from related parties, which is a proxy of ARM China, we did notice that ARM China actually was the driver for the royalty revenue growth in December, at least on a sequential basis. Outside of China, it's probably only like 4%-ish of the sequential growth. So I wonder if you guys can use this opportunity to clarify, what was driving that over 50% sequential China royalty revenue growth in December quarter? And can you kind of give us a breakdown for the March quarter, which one, either China or the non-China, is driving the most of the sequential growth? Thank you.

Jason Child, CFO

Sure, this is Jason. I'll take that question. So first, I would say there has been a little bit of recovery in China in the handset market. It was up, what is it, 1.5%, 2% or so year-on-year going back to the December quarter. So a little bit was just the general market. But the bigger impact was, I would say, the mix shift of the Chinese consumer buying from, I would say, OEMs or partners. Our revenues are based out of more than the customers but based on one of the partner who effectively sold the product was. So basically, there was a transfer from Chinese customers buying from Chinese producers versus someone from outside of China. And so that shows up as there from a royalty perspective, a shift from the rest of the world to related parties. And by the way, related parties is mostly China; there are other parties in there as well. Now in terms of the March quarter end, you'll see similar trends. The rest of the world did accelerate. I mean, we saw a pretty significant royalty acceleration from, what was it, 11%, 12% back in Q3, and it was 37% in Q4. So there is broad-based increase across the world. But you are going to see more acceleration also in China for really the same factors that we saw back in Q3 as well.

Charles Shi, Analyst

Got it. May I ask a quick clarification, Jason? When you talk about the acceleration of the percentages, do you mean year-on-year or quarter-on-quarter? Thank you.

Jason Child, CFO

Quarter-on-quarter.

Charles Shi, Analyst

Okay. Thank you.

Operator, Operator

One moment for our next question. Our next question will come from Toshiya Hari of Goldman Sachs. Your line is open.

Toshiya Hari, Analyst

Hi, thank you for taking my question. I have a short-term inquiry regarding the June quarter outlook for your royalty business. From your comments, it seems you are anticipating a sequential decline of about 7% in revenue for royalties. With the transition from v8 to v9, I would imagine your blended royalty rate continues to show good growth. This suggests that unit sales must be down by perhaps double digits compared to the previous quarter. Historically, your business has experienced typical seasonality that results in sequential increases over the past few years. Therefore, my question is, what is causing this sequential decline? I understand you're starting from a high base, but I'm interested in what factors you are considering, such as the smartphone market or other major influences. Thank you.

Jason Child, CFO

Sure. So the driver of the 7% sequential decline is really us looking at the combination of what are we seeing all of our partners forecast either through good faith estimates or what they've actually just disclosed publicly. And when I look across all the big players, when I look across all of those different markets, I'm basically seeing pretty significant declines or weakness, specifically in, I would say, networking, industrial and IoT. I think on the mobile side, things will be pretty consistent. Our overall growth will still be very, very positive in the kind of 20-ish percent range. But because we're coming off of the kind of the bottom out from over a year ago, the year-on-year will look a little less significant than it did last quarter. But we'll see if our partners end up seeing different impacts, which, of course, flow through our royalties; there perhaps may be upside. But that's what we're seeing right now, and we'll obviously let you know what we see at the end of the quarter.

Toshiya Hari, Analyst

And Jason, just to clarify, is it fair to say that automotive and IoT are relative underperformers into June and client and infrastructure should be relatively resilient? Is that a fair statement?

Jason Child, CFO

Yes, I think it's generally right.

Toshiya Hari, Analyst

Okay. Thank you.

Jason Child, CFO

Thank you.

Operator, Operator

One moment for our next question. And our next question will come from Ananda Baruah of Loop Capital. Your line is open.

Ananda Baruah, Analyst

Yes, good afternoon, guys. Thank you for taking the question. Rene, maybe I'd love to get your thoughts on PC potential over the next few years, and prevalence in clients, given all the work with various folks in the ecosystem that you've been doing, there seems to be a lot of really interesting reciprocity going on. So just any thoughts on the potential would be great. Thanks.

Rene Haas, CEO

Yes, thanks for the question. We've been obviously working on the Windows ecosystem for a long time. The Apple ecosystem has completely converted over. So when we think about our growth, we're talking about Windows. I think over the next number of years, we are very positive about the growth potential. I think one of the things that's needed for the PC industry to grow, particularly the Windows on ARM segment, is going to be a diversification of the supplier base to provide multiple units, multiple SKUs, multiple price points, and multiple experiences for end consumers. Everything I'm hearing says that there are going to be multiple suppliers to serve that market over the next 12 to 36 months. With that, we think now will be the time, over the next two to three years, where the ARM ecosystem will take a significant level of market share, primarily because of the level of experience that we've seen in the other ecosystem, the fantastic performance, the great battery life, the fact that you can build a high-performance machine without a fan. I think all those things will add up for significant growth. So I think once the vendor base diversifies, we're going to see that growth start to kick in over the next 12 to 36 months.

Ananda Baruah, Analyst

Yes, that's really great comment sense. Thanks a lot. Really appreciate it.

Rene Haas, CEO

You're welcome.

Operator, Operator

And one moment for our next question. Our next question will come from Gary Mobley of Wells Fargo Securities. Gary, your line is open.

Gary Mobley, Analyst

Thank you for taking my question. When the fiscal year 2025 concludes, you will have increased your licensing revenue at a 20% rate over the past two years, which is significantly higher than what you forecasted during the IPO roadshow, and it seems you are now predicting a long-term growth of 10%. Should we consider that as the new long-term target for licensing revenue growth? Additionally, you mentioned that you have converted half of your top 30 customers into ATA licensees. How challenging will it be to convert the remaining half?

Rene Haas, CEO

Thank you for the question. I view the licensing revenue as a significant advantage that remains very robust. Looking ahead, we don't foresee any obstacles that would hinder the licensing activity from gaining further momentum. This is due to the increasing demand for AI, the need for a comprehensive application ecosystem, and broad OS support—factors that make ARM the logical choice for partners. Consequently, we are confident in our ability to maintain and sustain this momentum. I estimate that about 80% of our customer base will likely transition to an ATA at some point, which will enhance the predictability of license renewals, especially regarding the timing of renewals. Jason, I'll let you take over for the second part of the question.

Jason Child, CFO

On ATA, we increased our ATA partners from 27 to 31, adding four more, which means that a little over half of the top 20 are now included. Looking ahead to next year, our expectations for year-on-year growth in royalties have shifted. Initially, we anticipated about 30% growth due to an expected full industry correction. However, it appears that industrial IoT and networking are not quite there yet. While there is a small reduction in royalties, we are able to increase licensing even more than that decrease, primarily due to the demand for additional licensing capabilities related to AI. I wouldn't describe this as a new normal, as large license deals usually convert significantly into royalties. Mature companies tend to convert these into design wins and royalties effectively. Since these deals are based on v9, they come with higher royalty rates than older agreements. We maintain the expectation discussed at the IPO that royalties will account for 75-plus percent of our total revenue. We are beginning to see progress as we delve deeper into the v9 penetration lifecycle and as the Compute Subsystems come online again at even higher royalty rates by the end of this year, setting us up for a greater mix of royalties as we approach next year.

Gary Mobley, Analyst

Thank you both.

Jason Child, CFO

Thank you.

Operator, Operator

And one moment for our next question. Our next question will come from Lee Simpson of Morgan Stanley. Lee, your line is open.

Lee Simpson, Analyst

Great. Thanks for fitting me on here. I just want to take us back to the v9 profiles that you stood out for automotive, the automotive enhanced profiles, and that includes licensing from Texas, NXP, NVIDIA, et cetera. Just trying to understand how much of that licensing would have been recognized in Q4's number? How much would have gone into RPO? And maybe just related to that, I don't know if I heard correctly but you mentioned multiple customers are working on the CSS release for this in 2025? Thanks.

Rene Haas, CEO

Yes, I'll let Jason go into detail relative to the contribution of the automotive v9 AI technology from a licensing standpoint. On the CSS engagement, we have multiple partners who are engaged in that. The way to think about the automotive industry is that it is an extremely complex market that needs some degree of customization but also wants some level of standardization. Each of the automotive OEMS would love to have a solution that supports a full software stack, that would have several different contributions relative to differentiation but also something that could be standardized. To that level, we've had incredible engagement with lots of different OEMs across this level. We're very, very confident that the kind of demand we've seen for CSSs in our other businesses will be there in automotive. It just makes all kinds of sense when you think about the complexity of these devices, the costs involved, but yet the need for supply chain resilience. I'll let Jason address the question relative to the licensing revenue and how that all ties together.

Jason Child, CFO

Yes. The licensing revenue for automotive is somewhat distinct. Normally, we recognize about 50% of the bookings as revenue at the time they are made. However, since version 9 has not yet been delivered for automotive, that revenue recognition is currently delayed and has been placed in backlog. It will be recognized as soon as it is launched, and we will inform everyone when that occurs.

Lee Simpson, Analyst

Great. Thanks for clarifying.

Jason Child, CFO

Thank you.

Operator, Operator

One moment for our next question. Our next question will come from Timm Schulze-Melander of Redburn Atlantic. Your line is open.

Timm Schulze-Melander, Analyst

Yes, hi. Thanks for taking my question. So I just wanted to dig back into the royalty outlook for next quarter, and just trying to maybe disaggregate a little bit the volume and the pricing impact. I think you talked about the mix increasing by about 5 percentage points a quarter, which, over the course of 2025 should give us a pretty decent tailwind. But I think you guided the royalties are going to grow somewhere in the sort of 25% range. Can you maybe just give us a little bit of color about how that breaks down between volume, price, and mix? Thank you.

Jason Child, CFO

Last quarter, when I reviewed the performance of our partners, their average growth was approximately 2 percent. In contrast, we achieved a growth rate of 37%. This significant difference is primarily due to a higher mix of premium chips and increased royalties, especially related to v9. Looking ahead to the next quarter, we anticipate that our overall peer group will experience growth around 5 percent. We project that our royalties will be in the range of 20 percent. While we have a good understanding of the v9 portion, predicting the mix across different premium market segments remains challenging. Moving forward, we do expect to see continued unit growth, assuming that the mix across other areas remains relatively stable. We are likely to maintain our royalty growth, largely driven by the impacts of v9 and mix that are expected to significantly outpace overall market unit growth.

Timm Schulze-Melander, Analyst

Got it. Very helpful. Thank you.

Jason Child, CFO

Thank you.

Operator, Operator

And one moment for our next question. And our next question will come from Harlan Sur of JPMorgan. Harlan, your line is open.

Harlan Sur, Analyst

Good afternoon. Thanks for taking my question. Your backlog was up 45% year-over-year, strong Q4 ACV, so a very strong end to the year. Obviously, a combination of some large renewals, but more importantly, customers. It seems like across all of your end markets, right, adopting the higher value-added compute and Compute Subsystems IP as they sort of look towards their future chip design programs. As you look at your renewal pipeline, discussions with customers and their program timing, does it look like you are going to drive strong licensing growth again this year, but does the pipeline suggest that the team can grow total backlog this fiscal year?

Jason Child, CFO

Harlan, this is Jason. I’ll address your question. Looking at last year, we can estimate bookings by adding revenue to the change in backlog, which totaled around $2.2 billion. For this year, we're expecting to see less than that. Last year, we began with a figure significantly below $2.2 billion, but we experienced strong bookings due in large part to additional deals related to AI. Our expectations for this year's licenses suggest that we might achieve about 60% of last year's bookings, which is necessary for us to meet our plan. There is certainly potential for growth; last year, we had some overage that was in that same range. We started with a plan intending for about 60% or 70% of what we ultimately accomplished. We have a clear view of our current plan and provided a broad range to account for when these deals will finalize and whether they close in Q3 or Q4. If we examine the midpoint of our guidance for this year, I estimate we have over 80% of that midpoint either in backlog or under contract in royalties. Our focus now is on forecasting the incremental bookings we expect to secure this year, much of which is already in the pipeline, along with what additional opportunities might arise. I’m not detailing any forecasts beyond what’s in the pipeline today, but if this year mirrors last year, that’s where we could see some upside.

Harlan Sur, Analyst

Well, thank you, Jason.

Jason Child, CFO

Thanks, Harlan.

Operator, Operator

Thank you. I would now like to turn the call back over to Rene Haas, CEO, for closing remarks.

Rene Haas, CEO

Thank you, everyone, and thank you for all the questions, a very good set of dialogue and hopefully, we always give insight into why we are so confident about the future of our company. This is our third quarter as a public company, so it's the third time we've done one of these calls. And it's the third time that we've reported record revenue to you. It's the third time that we are forecasting growth on the quarter going forward. So we've had three quarters of record revenue as a public company. We're also forecasting that next quarter. Again, what you're seeing is validation of the strategies that we put in place some years ago, all coming to fruition, the expansion of our business into multiple markets such as infrastructure, automotive, client PCs, and of course, smartphones. In addition to that, the AI tailwind has driven unprecedented growth for our licensing business. ARM is a platform company unlike any other. It's a business unlike any other, and the growth and outlook for the company could not have been brighter. To come off a year where we're talking about 20% growth and then talking about the year following and the year following where we will do better than that – it's a great business to be in. Thank you for all your time, and I'll leave it now to Ian or who else to close the call.

Ian Thornton, Vice President of Investor Relations

That's all from us, and thank you very much indeed. We'll talk to some of you later and some in 90 days' time.

Operator, Operator

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