Earnings Call Transcript - ARM Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Arm Second Quarter Fiscal Year 2025 Webcast and Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jeff Kvaal, Head of Investor Relations. Please go ahead.

Jeff Kvaal, Head of Investor Relations

Thank you very much. Welcome to our earnings conference call for the second quarter of fiscal '25 ending September 30, 2024. On the call today are Rene 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 of 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. 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 20-F 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.arm.com. And with that I'll turn the call over to Rene.

Rene Haas, CEO

Thank you, Jeff, and good afternoon, everyone. It's been now about 1 year since our IPO. And I'm 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 billion Arm chips have been shipped. Now in the past quarter, we had a good set of results and exceeded the high end of the guidance. 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 in an ever-evolving world. The long-term growth drivers for our business remain 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 unequaled software ecosystem. Now more specifically on royalty revenue growth, it is really being driven now by more value per chip. In the 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 9400 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. 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 Armv9 based data center now in general availability. Significant milestone. In the past quarter, Arm and Meta worked together on optimizing Llama 3.2 using Arm's 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 of v9 is very strong. We have the largest software ecosystem ever invented. Hardware is nothing without the software, and we have over 20 million software developers, the largest in the world. We're working closely with important ecosystem partners like GitHub, who just recently announced the integration of Arm Tools in the 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.

Jason Child, CFO

Thank you, Rene. Q2 has continued our strong start for fiscal year '25. Total revenue was $844 million, which was above the top end of our guided range. Royalty revenue was $514 million, 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. As with last quarter, royalty revenue from smartphones 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 Armv9 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 million, which was better than our expectations, which was for a 25% decline. 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. Turning now to guidance. I will briefly touch on both third quarter and fiscal year 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 million and $970 million, 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 million. We expect our non-GAAP EPS to be between $0.32 and $0.36. Looking out to fiscal year '25, we are reiterating our guidance for revenue, cost, and profit. We expect revenue to be between $3.8 billion and $4.1 billion, 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 the high teens. We expect that our revenue growth from smartphones will continue to be driven by Armv9 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. 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 million as we have some large licensing deals in the funnel. 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 $2.05 billion, which represents a 19% year-over-year increase and is unchanged from our prior guidance. As we continue to invest in R&D to support future growth initiatives, we expect operating expenses to ramp consistently through the year. We expect our full year non-GAAP EPS guidance of between $1.45 and $1.65. With that, I'll turn the call back to the operator for the Q&A portion of the call.

Operator, Operator

And your first question comes from the line of Andrew Gardiner from Citi.

Andrew Gardiner, Analyst

Rene, Jason, I was hoping you could clarify a topic that wasn't covered in your prepared remarks. There have been numerous press reports concerning your working relationship and litigation with Qualcomm. I understand that the case is scheduled for court next month, and it appears you have recently canceled Qualcomm's architecture license, likely in light of their plans to increase product shipments based on the Nuvia designs and before the court case. Can you comment on the accuracy of these reports? Specifically regarding financial matters, will these actions affect your revenue recognition and operating expenses in the coming periods? Will you need to reduce revenue recognition or will operating expenses increase due to higher legal costs? I know legal matters can be delicate to discuss, but any insights you can provide would be appreciated.

Rene Haas, CEO

Sure. Yes, happy to. So 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 sign a Nuvia license, and that consent was not obtained. As a result of not obtaining that consent, they are in breach. And what we did was send 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 protect the Arm ecosystem which relies on these license agreements. On the financials, I'll let Jason maybe chat on the OpEx. 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, I don't know if there's any comment you want to make on the expense side?

Jason Child, CFO

No, there isn't any change in, I think, some of the changes you pointed out, rev-rec expenses like that. No, there's no changes because at this point, as Rene 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, Operator

And your next question comes from the line of Harlan Sur from JPMorgan.

Harlan Sur, Analyst

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. So this quarter, backlog was up percent sequentially; book-to-bill, 1:7, so very strong. I assume you're driving more value uplift per renewal. It looks like you've seen some add-on licensing activity. As you mentioned, Rene, CSS engagements are strong. Bookings were originally expected to be lower this year compared to 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?

Rene Haas, CEO

Yes. 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, and 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&D and innovation to capture this platform opportunity. 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. 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, Jason, if there's anything you want to add on to that?

Jason Child, CFO

Yes. Regarding your question about increasing our backlog, I believe there is potential based on the strength we’ve observed. Specifically, if you examine our implied guidance for license revenue, it's approximately 45% higher this year compared to what we had planned at our IPO. We’ve definitely seen strength. However, I don’t anticipate a significant increase to our backlog based on our current forecast. The large deals expected later this year might have some impact, but this will be balanced by the amortization or recognition of milestones that will occur in the next quarter. Therefore, I wouldn’t rely on that as a major driver. The key focus should be on the royalty growth and the 23% year-on-year growth we experienced this quarter, which we find particularly encouraging.

Operator, Operator

Your next question comes from the line of Ross Seymore from Deutsche Bank.

Ross Seymore, Analyst

Going to stick on the licensing side of things. Rene and Jason, you guys talked about, I think, signing six new ATAs and then I think, more than doubled the CSS side of things. Is there a TAM that is larger now? 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?

Rene Haas, CEO

Well, I think the way to maybe think about it is one of the opportunities we have with ATA 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., a smaller set of IP and/or reduce the 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. 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 two, 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&D 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. 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, I think that's going to drive higher royalties in the future.

Jason Child, CFO

Yes. I would like to add a few points. Previously, we estimated that about 80% of our license revenue and fees would come from ATA performing well. In the last quarter, we noted that we are now at over 50%. It's important to clarify that with ATA, the annual cost or price increase is approximately 7% each year, and these contracts generally last around three years. Therefore, even after all clients transition to ATA, there will still be renewals and annual increases. Additionally, as we introduce new technologies and expand our product offerings, there will be opportunities for growth as well. I believe we still have some distance to cover before we reach our total addressable market, and there are several avenues for expanding that market.

Operator, Operator

Your next question comes from the line of Vivek Arya from Bank of America Securities.

Vivek Arya, Analyst

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 kind of stalled at 25%. I thought the plan was to continue to expand that every quarter by 5 points. And since smartphone is kind of the biggest contributor of that and your smartphone business is growing very nicely, like over 2x 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 the overall royalty growth, what is the need to take it down?

Rene Haas, CEO

Yes. Let me address the first part of your question about the v9 transition and then highlight something important regarding pricing within the v9 framework before turning it over to Jason for specifics. The adoption of v9 is progressing incredibly well, particularly in mobile. All of our NeoVerse products are v9, and we are beginning to see the transition in Automotive and IoT. I also mentioned earlier that we've seen the first shipments from Apple utilizing v9. We are very pleased with the adoption rate. While the quarter-to-quarter adoption rates may not appear linear, they will definitely show an increase when viewed over multiple quarters. I want to clarify an important distinction regarding how we should consider royalties as the v9 architecture ramps up. Unlike versions 7 and 8, which typically have a peak run rate lifespan of about 10 years, those versions experienced fixed royalty rates, leading to limited growth as they matured. This will not be the case with v9 for two main reasons. First, we are introducing multi-year advancements in technology and products. For example, a phone produced in 2025 might feature a v9 version that is significantly better, let's say 15% in terms of performance and power, allowing us to implement better value-based pricing. Thus, with v9, even as royalty rates rise from version 8 to version 9, we will see continued increases throughout the life of version 9 alongside its growing adoption. Second, with v9 we have introduced CSS, which often has a higher royalty rate—sometimes double that of a standard v9 core. Consequently, as version 9 adoption grows, royalty growth will outpace historical levels due to these two factors: first, the value-based pricing driven by enhanced economics, and second, the shift towards CSS. Jason, if you have any comments, feel free to add. I believe we've covered that question thoroughly.

Operator, Operator

Your next question comes from the line of Srini Pajjuri from Raymond James.

Srinivas Pajjuri, Analyst

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, I guess, a royalty standpoint and also from a licensing standpoint?

Rene Haas, CEO

Yes. Let me discuss the macro landscape, and I'll have Jason cover the numbers. The adoption of NeoVerse in the network and data center is expected to lead to a strong growth trajectory for Arm, not just in the next 12 months but over the coming years. There are two key components to this. For general-purpose computing, we have had Graviton in production for several years. With Microsoft Azure on Cobalt and Google GCP with Axion now generally available, instances can be purchased by end users. Given the deployment of Graviton, we are very optimistic about the potential there with both Azure and GCP using these chips. We anticipate excellent results for general-purpose computing, mainly because their power and efficiency are significantly better, by 50% to 60%, compared to x86. Additionally, there is strong demand for NVIDIA's advanced training and inference chip, Grace Blackwell, which incorporates the Arm CPU Grace as part of its overall solution. A key advantage of this introduction in the data center is that many of the base operating systems and workloads required for a general-purpose cluster are also utilized in this AI cluster, promoting substantial leverage between using Arm for general-purpose compute and for an AI training or inference center. There is considerable software reuse. Consequently, we believe that from a total cost of ownership perspective, this will speed up the adoption of Arm in the data center, which we are very enthusiastic about. Now I'll let Jason discuss the numbers and the mix.

Jason Child, CFO

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, and specifically the cloud compute market for all the reasons that Rene just mentioned, it has been strong. We do expect it to accelerate throughout the back half of the year as the deployments of 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. So we do expect that to accelerate.

Operator, Operator

Your next question comes from the line of Lee Simpson from Morgan Stanley.

Lee Simpson, Analyst

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. So how do we think about the growth going through the rest of this year? Do we still think we can track to a $1.7 billion number? And have we perhaps pulled forward some of the licensing deals into this quarter?

Rene Haas, CEO

Thanks, Lee. To start, we do not anticipate any pull forwards. Regarding the upside, it was approximately $35 million above our guidance, which indicated a 25% decrease; however, we actually saw a 15% decrease. This decline is primarily due to tough comparisons with a few significant deals from last year. Concerning the year-on-year reduction in RPO, we reached an all-time record a year ago, and this quarter we achieved the second highest RPO, with a sequential increase of 10%, which is a positive sign. Earlier this year, we did see a substantial amount of RPO that converted into revenue from a major deal signed last year. Overall, the RPO trend remains very healthy. The range you mentioned for the end of the year seems reasonable, and aside from what we have included in our Q4 guidance for expected deals, we currently do not see any significant deals on the horizon. If there are any changes, we will keep you informed.

Operator, Operator

Your next question comes from the line of Yanko Venta from Arete Research.

Unknown Analyst, Analyst

I just want to get back to the announcement of MediaTek and smartphones. How do you see the adoption of CSS in smartphones trending through this year into next year? Could we see 50% of the market in the next few years?

Rene Haas, CEO

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. It's not very forgiving in terms of when units need to be available, whether it's aligning with MWC or Single's Day in China. So with a very relentless product cycle, combined with these new smartphone chips 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 regarding whether it would be applicable for the mobile phone market, but what we've actually seen is very, very good adoption. 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.

Operator, Operator

Your next question comes from the line of Krish Sankar from TD Cowen.

Sreekrishnan Sankarnarayanan, Analyst

I had a quick question on China. It seems like the smartphone mix is shifting towards the entity there in the Android market. Are you seeing any meaningful impact on your China royalties? And also, what is the penetration of v9 in China today?

Rene Haas, CEO

Yes. Thank you for the question. We have seen strong growth in overall handset numbers in China for the reasons you mentioned. Local brands like Xiaomi, Oppo, and Vivo are experiencing significant growth. Our team recently attended an Oppo product launch last month, indicating that growth is strong. There seems to be a preference for local brands. Additionally, as we move into next year, we anticipate that version 9 will significantly impact the premium flagship market and also reach the midrange segment. Overall, the Android market in China is strong, and most products are transitioning to version 9, with the high-end already fully adopted.

Operator, Operator

Your next question comes from the line of John DiFucci from Guggenheim Securities.

John DiFucci, Analyst

Thank you for your explanation on the v9 mix and its related variables that will impact royalties moving forward. It was very helpful to consider these aspects. Shouldn't we expect to see continued growth in the v9 mix? If we don’t, what might prevent that growth? Could it be a temporary macroeconomic issue? I know some companies are benefiting, like NVIDIA and other cloud vendors, but we haven’t observed that to the same extent in many other areas. I'm curious if there's a possibility that people are just taking a step back to reassess the situation. I'm trying to understand how to project this going forward and what is implied in the guidance.

Rene Haas, CEO

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. So if you step in and say, okay, well, 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 one. Number two, what you will see in the mobile phone space is a very classic waterfall of what existed in the flagship will find its way into the midrange and what was in the midrange, will find its way in the low end. That's a very natural evolution of products. 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 IVI and ADAS. But we know the pipeline. We've got CSS activity in particular there. So when we have this call a year from now, hopefully, and then we'll look at the numbers. But I'll guarantee you, we'll be way ahead of 25% for the reasons I gave.

Jason Child, CFO

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 hasn't waterfall yet to be v9. And so as a result, it looks like v9 installed and 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. So over time, that stuff all shakes out, as Rene said. But you will have some maybe trends like we saw in this most recent quarter to this quarter, but I don't think our going to sustain.

Rene Haas, CEO

We tend to have Arm's 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 increase the products, and we have very good line of sight with the OEMs when they plan to take it. So don't read too much into the 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.

Operator, Operator

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

Toshiya Hari, Analyst

Rene, I was hoping to get your thoughts, your forward outlook on the PC and smartphone markets. AI PCs so far have been relatively underwhelming relative to expectations at the beginning of the year or maybe at Computex. AI really hasn't catalyzed a replacement cycle in smartphones either. I know you guys are not so dependent on units because you've got things like v9 and 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. Is that still the aspirational goal for you guys?

Rene Haas, CEO

Yes, absolutely, and I stand by that prediction. When we consider the Windows ecosystem, it’s primarily about expanding a diverse range of products. If you visit a retailer today, you'll find various options including thin-and-light laptops, budget machines, mid-range devices, gaming laptops, and more. We expect to see this variety grow, backed by our visibility into teams developing multiple chips across different segments. As we begin to see entry-level thin and light devices based on Arm with distinct chipsets, there will be growth. Similarly, the introduction of gaming laptops featuring Arm technology, which could be quite appealing, will also lead to growth. We're optimistic about the next few years in the PC market. While AI demand may play a role, what's crucial is ensuring that these PCs have the necessary capacity to handle AI applications. We're still early in defining what an AI PC will look like in terms of its value proposition, but we typically find that technology outpaces application needs before balancing out. This landscape is largely future-proofed. Overall, we're confident about the demand and I maintain my outlook on the growth of Windows on Arm. Thank you. And thank you, everyone, for the questions and the interest in what we're doing. Again, to summarize, now our fifth 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%, and we're up 40%, that's a great proof point that the strategy we've put in place are working. 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 I appreciate all the questions and comments.

Operator, Operator

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