Q3 2024 Arm Holdings PLC Earnings Call

Participants

Ian Thornton; IR; Arm Holdings plc

Rene Haas; CEO; Arm Holdings plc

Jason Child; CFO & EVP; Arm Holdings plc

Harlan Sur; Analyst; J.P. Morgan Securities LLC

Gary Mobley; Analyst; Wells Fargo Securities, LLC

Thomas O’Malley; Analyst; Barclays Capital, Inc.

Vivek Arya; Analyst; BofA Global Research

Mehdi Hosseini; Analyst; Susquehanna Financial Group, LLP

Vijay Rakesh; Analyst; Mizuho Securities USA, LLC

Ross Seymore; Analyst; Deutsche Bank Securities Inc

Charles Shi; Analyst; Needham & Company Inc.

Matt Ramsay; Analyst; TD Cohen

Andrew Gardiner; Analyst; Citi Investment Research

Presentation

Ian Thornton

Thank you, everybody. My name is Ian Thornton, and I'm the Head of Investor Relations at Arm. I would like to welcome you to our earnings conference call for the third quarter of the fiscal year ending March 31, 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 judgment about future results and performance as of today, the 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 statement on form F-1 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 refer to non-GAAP financial measures during the discussion. Reconciliations of certain of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of certain projected non-GAAP financial measures that we were 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

Thank you, Ian, and good afternoon and good evening, everyone. So I'd like to speak a few different comments about the quarter and then I'll turn it over to Jason for some specifics, and we'll open it up to Q&A.
We had an outstanding third quarter inside the company. We could not be more pleased. Record revenues. We exceeded the high end of the range for the guidance, and extremely pleased about results overall. For Q4, we're expecting another record quarter. And to that end, we've also raised guidance of which Jason is going to give more color on. But little bit regarding the why and how we got here.
Arm is the most fundamental foundational pervasive compute platform, really in the history of digital design. Over 280 billion units in the 30-plus-years that Arm has been a -- company had been built, and that has underpinned a software ecosystem and hardware ecosystem like no other. And given the fact that a CPU design is really driven by the hardware and the software, it creates a flywheel for continuous development. That is the more hardware that exists on Arm, the more software this written for Arm; the more software this written for Arm, the more popular the hardware.
So we're building off a fantastic base that when we look at what happened in the last quarter, not only did we see growth driven by a number of factors, but growth that we think is long-term and sustainable. For royalties specifically around some of the products that shipped in the quarter, we've seen a significant transition now continuing from our VA product to our v9 product. Our v9 product garners roughly 2x the royalty rate of the equivalent VA product. And whereas in the previous quarter, that was about 10% of our revenue for royalties, it's now moved to 15%. And that has seen growth in not only the smartphone sector, but also in infrastructure and other markets which drives growth.
We are also seeing a strong momentum and tailwinds from all things AI. From the most complex devices on the planet for training and inference, the NVIDIA GH200 to edge devices such as the Gemini Nano Pixel 6 from Google or the Samsung Galaxy S24, more and more AI is running on more edge device -- end devices, and that's all running on Arm. And what that has done is driven a very strong set of tailwinds for our licensing growth.
When we look at demand for new products from a licensing standpoint, what we are finding from the end market is that we've reached nowhere near good enough relative to the capability of the technology, and end customers for new designs are needing more and more Arm technology to keep up, particularly with the AI demands. So with that, our licensing growth has been very strong.
We've also seen proof points around one of our strategies that we call compute subsystems. These are complete finished blocks of designs that we put together for our end customers, that will save them significant time around validation of their engineering work and also around time to market relative to cycling products through the fab. One of the very first designs that was made public that uses this is the Microsoft Cobalt, which uses our Neoverse scores of 128 CPUs to be specific.
We work very closely with Microsoft around these designs using compute subsystems, and we see this trend only going to continue. So between strong growth in royalties that are driven between v8, v9, all things AI leading energy efficient compute and compute subsystems, we feel very, very strongly positioned for growth. And again, this is completely underpinned via ecosystem of devices that are in the installed base and our very, very large software community that develops on Arm.
So with that, I will turn it over to Jason, and then we'll open it up for Q&A.

Jason Child

Thank you, Rene. I'm going to briefly touch on guidance for the fourth quarter and full year. Starting with revenues. For fiscal Q4, we are guiding to a range of $850 million to $900 million with a midpoint of $875 million. This represents a raise of over $95 million compared to our prior implied guidance for the fourth quarter. When combined with our strong Q3 performance, the full year revenue guidance rises to $3.155 billion to $3.205 billion, an increase of $160 million at the midpoint versus prior.
Within Q4 total revenue, we expect royalty revenues to grow mid-single digits sequentially and to be up over 30% year-over-year as we compare against the bottom of the industry-wide inventory correction that occurred in prior year Q4. Royalty revenue sequential growth is mainly coming from increasing penetration of Armv9, where royalty rates are on average at least double the rates on equivalent Armv8 products.
Additionally, we are seeing an increasing amount of Arm technology in chips being deployed. And as the amount of Arm technology and chips increases, so does the royalty rate. With around 35% of Arm's total -- sorry, Arm's royalty revenue coming from smartphones, we have benefited from recovery in the smartphone market. Both 65% coming from markets beyond mobile, we are seeing more revenue growth from share gains and market share growth outside of mobile.
Additionally, we are expecting another strong quarter for licensing with revenue up sequentially to near record levels. As with recent quarters, we expect to sign multiple new ATA deals in Q4. And demand for our latest technology remains high as customers need access to AI-capable CPUs and related technology such as our compute subsystems.
Turning to expenses. We expect non-GAAP OpEx of approximately $490 million in Q4 and $1.7 billion for the full year. On a like-for-like basis, our full year guidance has increased by $10 million, driven by slightly higher spend in R&D.
As detailed in the guidance section of our shareholder letter, to increase transparency and improve the comparability of our results, beginning in Q4, the presentation of our non-GAAP measures will be modified to exclude employer taxes related to equity classified awards. These taxes are dependent on our stock price at the time of vesting, and as a result, fluctuate independently of the operating performance of our business. The impact of this change has been factored into today's non-GAAP Q4 and full year guidance for operating expenses fully diluted EPS.
On an EPS basis, revenue strength will flow through to profit, driving Q4 non-GAAP fully diluted EPS up to between $0.28 and $0.32, and full year non-GAAP fully diluted EPS to up between $1.20 and $1.24.
In summary, we had an outstanding Q3 and expect our momentum to accelerate through Q4 and beyond.
With that, I will now turn it back over to the operator to kick off the Q&A portion of the call.

Question and Answer Session

Operator

(Operator Instructions)
Harlan Sur, JPMorgan.

Harlan Sur

Yes, thank you. Good afternoon and congratulations on the strong results guidance and of course, execution. December quarter, as you guys mentioned right, second consecutive quarter of strong licensing, second consecutive quarter of book-to-bill greater than one strong ACV. Sounds like many of your customers across all of your end markets are focusing on accelerated compute and AI, and the requirements for more compute capability, and that's obviously being reflected in the strong licensing performance.
How much of the expansion on recent licensing deals has been more about adding your AI specific IP right, like your Ethos NPU or taking advantage of some of your helium and neon vector extensions for AI workloads or compute subsystems adoption versus just buying up the stack on more powerful cores? And then more importantly, like these, I see the strong licensing momentum continuing into fiscal '25.

Rene Haas

Hi, Harlan, and thank you for the kind words. I'll take the first part of your question and then let Jason comment on the second half. What are the new products that we released relative from a licensing standpoint, it is something we call Arm Total Access, which is referred to as ATA. That gives customers access to a broad set of Arm technology, including our most advanced CPUs and NPUs. And one of the things that we are seeing is exactly what you described. We're seeing demand for incorporating CPUs with anything that helps with AI acceleration such as vector extensions. Additionally, the ATAs give customers access to the NPUs, which they can also use for an offload.
What we are seeing anecdotally relative to when we engage customers is that the need for more compute, the need to be able to handle, what I would call, a bit of the unknown relative to these a large language models that either run on an edge device or in a hybrid way, is fundamentally driving a need for more compute than they had before. So they are looking to upgrade to give themselves flexibility on the design and also to maximize their ability to deliver the most efficient product, whether that's lots of different cores or a smaller set of devices that may or may not include NPU.
So in summary, yes, your question I think is accurate relative to the conclusion of AI demand is driving the need for a lot of different products. And I'll let Jason kind of comment to the longer term trend that we see.

Jason Child

Yeah, Harlan, I would say on the looking forward -- so obviously, only I gave guidance for Q4. But going beyond that, when you unpack licensing versus royalty, because of the fact that we're largely almost entirely under contract for next year on royalties, we feel good about those trends. But it's the license piece that's a little harder to forecast.
If I look at last quarter and Q4 that's coming up, we've definitely had some upside from AI and selling additional licenses that weren't just not in our plan and not anticipated. So I think we're going to need to work through this quarter to find out how much of that upside continues to and that trend flows into next year, because we've seen this demand has been coming, I think, a little shorter sales cycles than we have seen with typically before. So I'd say stay tuned, in 90 days, we'll give you a better view.

Harlan Sur

No, helpful. Thank you very much.

Operator

Gary Mobley, Wells Fargo.

Gary Mobley

Hi, guys, thanks very much for taking my question. Let me extend my congratulations to the entire Arm team for the strong results. Can't help but notice the strength in business from Arm China, maybe if you can speak to what drove that strong results out of Arm China? And besides Arm China, were there any other greater than 10% customers in the quarter?

Rene Haas

Yeah, I would say, broadly speaking, we are seeing increased market share gains for our products across the board, particularly, around automotive and infrastructure slash data center. Inside China, those are very good growth markets.
One of the things we continue to comment on relative to the China market is that the China ecosystem tends to follow the global ecosystem. So as we see the share gains across different aspects of the market, we're seeing that consistent and holding true relative to China.
Jason, you want to take the other part of that?

Jason Child

Yes, just on the numbers to make sure it's clear. So when we announce related parties, I think we're about 30% of growth. Arm China is the largest portion of that. However, there are others. So Arm China was about 25% of total revenue, just slightly up from the 20% from a quarter ago.

Gary Mobley

That's helpful. The gains in the royalty rate per unit, if I can add a follow on, certainly are accelerating, is that all driven by Arm version 9? And should we continue to expect that upward inflection in the royalty rate per unit?

Rene Haas

Yeah, I think that's the right way to think about it. So as mentioned, Armv9 was 10% of our royalty revenue last quarter, now at 15%, we see that accelerating. The other thing we are seeing is that the mixes, devices that might have a mix of v8 and v9 cores are increasingly moving to more v9 cores. And the reason for that is, back to the AI comment, the compute needs of the end applications only continues to increase.
And what we're seeing is customers looking to put more and more technology into their devices, perhaps even more than they originally planned for when they license the technology. So it's a compounding effect of growth. We see growth from royalty happening from v8 to v9 transition, and more Arm technology being used in the same devices. So it's a bit of a compounding effect that helps us with growth.

Gary Mobley

Thank you.

Operator

Thomas O’Malley, Barclays.

Thomas O’Malley

Hey, guys. Thanks for taking my question, and congrats on the nice results. I just wanted to add a question to the v9 pile here. You guys are talking about traction in AI, smartphones, infrastructure. You're saying that that percentage is the percentage of total revenue grows into the next fiscal year. Where are you seeing the most of that traction? You called that AI a couple of times here early in the call, but is that coming more from the smartphone side or the AI side? And just maybe talk about the cadence of where you see that penetration rate growing as you get into the next fiscal year? Thank you.

Rene Haas

Yeah. So thanks for the question. So a couple of ways to think about it. There's definitely growth coming from the data center side. So proof points such as NVIDIA's Grace Hopper, the Microsoft Cobalt design, the work that AWS has been doing with Graviton, what we are seeing is more and more AI demands in the data center, whether that's around training or inference. And because the Arm solution in the data center in particular is extremely good in terms of performance per watt, and the constraints that are on today's data center is relative to running these AI workloads puts a huge demand on power, that's a great tailwind for Arm.
If we move to the edge devices such as a smartphone, we've seen -- and I think the recent launches, as I mentioned with Gemini Nano and the Galaxy S24, increased AI workloads being pushed to the phone. And what we're seeing from the design standpoint is more and more compute technology being pushed into those phones such as they are AI capable and AI-ready, because this field is moving very, very fast. A year from now, who knows what the type of AI applications that might be able to run on a smartphone.
So what we're seeing is a shift to more and more high-performance capable technology to capture a wave to ensure that they can run these AI workloads. Nobody wants to be caught behind with not enough performance when the new application comes out. So that has accelerated the v9 adoption, both from a standpoint of more devices using it and more devices using more of it. And to your question, where is it coming from? It's coming from everywhere. It's coming from, certainly, the data center, certainly from the edge devices. And we think over time, even AIPCs, so it's a huge growth vector.

Thomas O’Malley

Super helpful. And then if I could just ask a follow-up as well. If you look at kind of the seasonality to close here, you obviously saw really strong results in both the December and the March quarter. Obviously, you're not perfect with units, but if you look at June and the smartphone ecosystem, you're kind of seeing a little bit of a pause in the Android ecosystem and kind of some cautious data points from the supply chain in general. Could you talk about what you expect in terms of seasonality to start your fiscal year? Any tidbits there would be helpful. I know you're not guiding June, but any way to help think about how we begin the next fiscal year would be helpful. Thank you.

Rene Haas

Yeah. I'm not going to comment in terms of too far forward on the seasonality component to what we're doing. But what I would emphasize is that we're a bit of a different company to think about relative to how you think about other companies in terms of their specific exposure to a market. We are involved in just about every single end market, and every single end market is moving from v8 to v9, which as I said, doubled the royalty rates. And just about every single one of these markets is putting more compute into their devices.
So sometimes when we've had questions and folks saying, well, wait a minute, I'm trying to figure out how units match up to the numbers. We're operating on a little bit of a different plane because of our broad, broad adoption. And as I mentioned at the start of the call, the pervasiveness of the architecture, it's just driving a whole different set of growth vectors.

Thomas O’Malley

Thank you very much, guys.

Harlan Sur

(Operator Instructions)
Vivek Arya, Bank of America Securities.

Vivek Arya

Thanks for taking my question. I just wanted to clarify, Rene, is this -- on the v9, is the 10% to 15% related to number of customers, number of chips or revenue related to those, because I think in the shareholder letter, it's qualified as v9 of 15% of royalty revenue rather than -- I guess the bigger question is just so that we have an apples to apples sense of how many of your smartphone units are actually using v9 right now versus the ones that used v9 n the last quarter? Is that a better way to track v9 adoption? (multiple speakers)

Rene Haas

Yeah, so let me try to answer your question and maybe, Jason, Ian, if I if I am missing some facts, you guys can fill in. First off, the number when we say 10% and 15%, that's percentage of our overall royalty revenue. So that's the way to think about. When when you think about the number of units that are moving from v8 to v9, I don't think we have anything specific that I can give you on this call. But what I can tell you is just as an example or an anecdote is that v9 is being used extensively in almost exclusively now in all the premium smartphones. And the premium smartphones such as the Galaxy S24, those are actually part of the segments that are seeing a little bit better growth than their compatriots.
So given the fact that virtually all the premium smartphones have now moved to v9, and as I mentioned before, people are trying to put as much v9 technology in that smartphone to capture the AI wave. I guess maybe one way to think about proportionately where some of the growth comes versus units. What we tend to see with the smartphone market, for example, is typically a waterfall over time where what was in the premium unit finds its way into the high-end then into the midrange. But that's the way I -- maybe a good way to think about it in temrs of where the percentages are. There certainly is a lot of v9 in the premium smartphone, and we're seeing a lot of premium smartphones being sold.

Vivek Arya

Thank you.

Operator

Mehdi Hosseini, Susquehanna

Mehdi Hosseini

Yes, thanks for taking my question. Just actually as a follow-up, is there any way you could elaborate on the mix of v9 by end market, like a smartphone versus cloud compute? And I have a follow-up.

Rene Haas

I'll attempt to answer that. And again, maybe Ian and Jason -- as a premium smartphone is almost exclusively now v9 and virtually, every high-end data center chip is v9. When you look at Grace Hopper, when you look at Graviton, when you look at Microsoft Cobalt, these are all v9 based designs.

Jason Child

And only I'd add, on a -- in terms of royalty revenue and then chips that have actually been deployed in the market, we are overweighted towards smartphones on v9, primarily because it's an annual refresh cycle. And so I would think of that being a bit ahead. Over time, I think the other lines of businesses will catch up, but it's predominantly or definitely weighted more towards smartphone for the reasons that Rene just pointed out on premium mix.

Mehdi Hosseini

Got it. Thank you. And my follow-up has to do with the market share. I think and of FY24 -- I'm sorry, end of FY23 cloud was about 10% market share for you and networking was 26%. Is there any way you can give us some color as you close FY24, how those market shares are changing?

Rene Haas

Yeah, not today, we're not prepared to give that. When we give the update for next year or the next quarter, we can do that. But I can say we're very pleased about the direction of travel, and AI has only helped that grow faster.

Mehdi Hosseini

Got it. Thank you.

Operator

Vijay Rakesh, Mizuho.

Vijay Rakesh

Yeah, hi, congratulations again on a great quarter. Just a quick question on the cloud compute side, if you could give us some way of how to look at what do you think with the growth in 2024, given you have some pretty marquee customers such as GH200, and Graviton, and Cobalt 100 now?
And I've got a follow-up.

Rene Haas

Sorry, I didn't catch -- you're asking about projected growth for next year in cloud?

Vijay Rakesh

Yeah, just for the current year '24, how do you see the growth with those on the cloud compute side? You have some big marquee customers there now. How do you see that growth?

Jason Child

As René just mentioned for the last question, we'll provide our market share update on specific on compute, which is for us almost all cloud in the infrastructure. And we'll provide some views on where we expect that to go next year. So give us 90 days.

Vijay Rakesh

Got it. And then on the mobile side, obviously you mentioned good traction with v9. Just wondering what the penetration rate on v9 is now, when you look at the premium phones, I guess all of it? But what the trajectory on that is through the year, I guess? I mean, you save it for later.

Rene Haas

Is your question, what percentage of smartphones have v9?

Vijay Rakesh

Yeah.

Rene Haas

Yeah. As I mentioned earlier, the numbers are somewhat skewed relative to the premium segment versus the broader segment. If you look at overall units, most of the premium, if not all, smartphones have moved to v9, and the rest of the segments have been slower to adopt. But the premium segment draws a very, very large mixture of lots of cores and lots of royalty rich cores. So it tends to weigh out the numbers relative to overall units. We expect v9 and -- Ian, keep me accountable on this -- use the next three, four years to kind of find its way throughout the entire smartphone category.

Jason Child

Yeah, if you go back to how v8 took over v7, it took about that three years to get flowing from (technical difficulty) to about 80%, 89% penetrated.

Vijay Rakesh

Got it. Thanks.

Operator

Ross Seymore, Deutsche Bank.

Ross Seymore

Hi, guys. Thanks for answering my question, and congrats on the strong results and guide. I wanted to go back to the Arm China conversation. So a clarification on the main question. The clarification was that 25% that I think, Jason, you mentioned, was that of total revenues or just the royalties? And then the main question is, could you just help us break down a little bit how that is so strong? Whether it's total revenues or just of royalties, that was a significant driver of growth. And depending upon the answer to the clarification, it could have been more than all of the sequential growth. So I just wanted to get my arms around what was really driving the growth and how much of it came from Arm China?

Jason Child

Yes, China was 25% of total revenues in Q3, and that's up from 20% in Q2.

Ross Seymore

And then what was driving that? Because, again by that math it seems like the China side was up, I don't know, 30%, and everything else kind of went down a little bit sequentially. Was that just the China handset market coming back to life? Was it more goodness beyond that? Just any color you could give on what drove that China growth that was so impressive?

Rene Haas

Yeah, we don't break down the individual customers. But as I said, the China ecosystem tends to follow the rest of the world relative to the growth. So when we talk about growth in data centers and we talk about growth in automotive, and to your comment, certainly recovering the smartphone market helps.

Ross Seymore

Thank you.

Operator

Charles Shi, Needham & Company.

Charles Shi

Hey, thanks. My congratulations to Arm management team on the very strong results, very impressive. I do want to dig into a little bit more on the on the China and the related party side of the revenue. Because when I look at your historical numbers, your Arm China contribution tracks almost identical the related party transactions.
There seems to be a little bit of the gap, seems to be, I think, expanding a little bit over the last quarter. And maybe related to that, you have a very strong bookings in the last quarter. And this quarter, the booking actually come down a little bit, but the licensing revenue actually was stronger than you expected. Was that the result of some of that earlier commencement of that licensing contracts that is probably signed a little bit earlier in the year maybe in the prior quarter? And is that the more of a timing that kind of surprised you to the upside? Thanks.

Jason Child

Yeah, so first on the on the related parties. So yeah, typically, China has been most all of it. We did have an additional license deal that was roughly 5% of the total revenue, I guess, is difference between Arm China and the rest. That deal did come through this quarter. And so you're right, that's not something that's been continuous, but was a deal that came in this last quarter. In terms of the makeup of license revenue in general, we typically run somewhere around 40% to 50% of our license revenue is from backlog. The deals previously sign that relate to technology milestones that are delivered within the quarter. And then the remainder are new deals that are signed within the quarter.
Clearly, we have good visibility into backlog and what our delivery is going to be. And we have a pretty good insight into renewals or deals that have relatively long lead times. I think the one thing that we saw a little bit unique, both last quarter and this quarter, is with the increased kind of focus in AI. And there just is a lot of focus on investing and building designs in AI. And so there's been some shorter-cycle deals that have come up, kind of say, a little bit unique versus what we've seen in the past. And that's the primary reason why we do need to spend a little more time this quarter to get our arms around how much of that momentum will we continue to see next year.

Rene Haas

Does that answer your question?

Charles Shi

Yes, thanks. If I may add that the China piece, your IP peers seems to be a little more cautious about what's going to happen, I mean, in this year and actually, kind of cautious we have started that late last year, but your China revenue still going very strong. How do your reconcile the differences here? I mean this was my last question. Thank you so much.

Jason Child

I wouldn't say that we are less cautious. I think our numbers have been strong. But from a forecast perspective, we've been forecasting that China likely goes down into the teens as a percentage of total revenue. This last quarter and the quarter before, we have just seen stronger recovery than we had previously expected. And that's been certainly a nice positive surprise. In terms of going forward, we feel good about the progress we expect to deliver this quarter. In 90 days, we'll let you know if we think that progress is going to continue into this year.

Charles Shi

Appreciate the color, thanks.

Jason Child

Thank you.

Operator

Matt Ramsay, TD Cohen.

Matt Ramsay

Thank you very much, guys, good afternoon. I wanted to go back to the Armv9 conversation on a couple of points. I noticed that this is the first time in -- maybe I'm just dumb and didn't see it -- but I think this is the first time you had explicitly put in the shareholder letter and in writing that you were at least double royalty rates from v8 to v9. And I wanted to ask about that in a broader sense that is that sort of across the board, across end markets, and also, across customers that are traditionally processor licensees and also ones that are traditionally architectural licensees and do the systems themselves? I guess that's the first part of the question, is that blanket statement across the board?
And the reason I ask it is if you go back to lots of conversations around the IPO time frame, there were some aggressive ramps of royalty rates across your mobile business. And I think we were all trying to figure out whether the v8 penetration to v9 would drive those kind of expansion and results or if you would need some significant contributions from sort of system license and the like to get those results? So any context there about the applicability and breadth of that comment on doubling royalty rates on v9 would be really helpful. Thanks, guys.

Rene Haas

Yeah, thanks, Matt. So I'll attempt to answer it and let Jason, if Jason wants to chime in.
Yes, you're right. This is the first time we've done it, although we only have done two of these letters, so we don't have a huge installed base to refer to. We wanted to provide some specific clarity, because we had been receiving some level of questions around the you just asked about relative to how to think about v8 versus v9. The double the v9 rate for the equivalent -- double v8 for the equivalent v8 is sort of a rough guidepost, but in some cases, it's quite a bit more.
The Neoverse royalty rates have their own unique tables. The automotive royalty rates have their own unique tables. And some of the most high performance CPUs that we ship into the client section have a very, very significant lifted rates over version eight. So double is a good rule of thumb for like-for-like, but some cases, it's even better than that. So that's -- but we did want to sort of provide some clarity, because we thought when folks look at the numbers in the absence of that context, there would just be a question of just help me work out how you got here.
So Jason, something you wanted to add on to that?

Jason Child

No, I think to Rene's earlier point, we're -- I understand we're a little bit hard to model, because we don't really track to other companies. And because of -- we're getting paid royalties on roughly 8 billion chips a quarter, and just a slightest bit of mix either to more premium handsets or to more v9 versus v8, that turns out to be a pretty sensitive variable.
And when you look at the growth from last quarter to this quarter, what we're expecting from this quarter to next quarter, unit growth is very, very small. It's really almost all coming from rate growth increases. And as we said back at IPO, we are almost 100% on contract for next year. So really, we're just seeing the manifestation of the work that was done in the last two years. We wanted to provide this the v8 to v9 ratio as one way to help you guys be able to kind of see the progress and be able to model it. So I hope it's helpful.

Rene Haas

(multiple speakers) I can say that one thing that we have high confidence in when we start looking at the transition was v8, v9, we knew we had increased rates, and we knew that the royalty picture would be better than what we were clustered in the past. I think one of the benefits we're getting and would use AI sort of a driver for all this is that the amount of the v9 cores or the mix of v9 quarters has been stronger than anticipated, because people are putting more CPUs down where they were not planning on putting as many or they may be putting a higher mix of v9 and v8. So that's all driven, I think good forward momentum for us.

Matt Ramsay

Super helpful, guys. Just a quick clarification. Any comment on -- the base rates may be different and obviously, different customers have different contracts, but all of that commentary at least directionally applicable to you architectural licensees as well? Thanks.

Rene Haas

Yes. Yes, it is.

Operator

Andrew Gardiner, Citi.

Andrew Gardiner

Thanks very much for taking the question, I had one on the licensing side. You guys have spoken about how strong it was in the quarter and being surprised at the quicker sales cycle time on some of these licenses. A point that you haven't brought up on the call yet, but that was in the shareholder letter, that you must have missed. So three of the five ATA licensees in the quarter, the upgrades from the Arm flexible access program -- and you said that was the first time that had happened. Did that take you by surprise? Or were these customers that were getting to be particularly large for an AFA and so it was natural for them to upgrade?
If it wasn't a surprise, is there something that might actually continue to surprise positively? Is there a portion of that cohort that sort of natural to be upgrading from AFA to ATA, and therefore, contribute more in terms of license dollars?

Rene Haas

Yeah, thank you for the question. We didn't bring it up in our comments. We've had a lot of good stuf to talk about quarter, I was trying to keep it as concise. But the AFA transition to ATA -- thank you for calling that out, that's a great trend for us. And when we designed the program a number of years ago, that was absolutely the intent. It is that customers that launched into an AFA would ultimately go on to a total excess license.
What largely drives that, quite frankly, is the time that the AFA start to get commercial traction in new business, some of the AFA customers are early-stage companies. They may have an early exit or get acquired. But as they get larger and mature, we expect them to embrace Arm technology in a broader way. So I wouldn't call it a surprise, I would actually call it an expected outcome that we have and we're really happy to see it. It is great.

Andrew Gardiner

Thanks very much.

Operator

Thank you. I would now like to turn the conference back to Rene Haas for closing remarks. Sir?

Rene Haas

Thank you, and thank you, everyone, for the kind words on the quarter and good set of questions that we had. We are thrilled about Q3, and we're very, very excited about Q4. I think what you're seeing coming to life are all the strategies that we've been working hard on over the last number of years; investment in the v9 technology; the diversification of our business into data center, into automotive, and of course, IoT; and then now the -- what I think is probably most profound opportunity in our lifetimes, which is around AI.
And I think regarding AI, particularly, you think about artificial general intelligence, that's going to drive the need for more compute in a way that we've never seen before. So as good as the last couple of quarters where, we're just at the beginning. I could not be more excited about the growth that we had going forward. And thank you for all your time and questions.