ARM Holdings
Cambridge, England, United Kingdom
Industry: Semiconductor
Region: UK 🇬🇧
Founded: 1990
Expected Valuation: $80 billion
IPO Date: 2023 (Expected)
ARM Holdings
Key Company Facts
| Founded | 1990 |
| Headquarters | Cambridge, UK |
| Sector | Technology |
| Industry | Semiconductors |
| Founders | Jamie Urquhart, Mike Muller, Tudor Brown, Lee Smith, John Biggs, Harry Oldham, Dave Howard, Pete Harrod, Harry Meekings, Al Thomas, Andy Merritt, David Seal |
| Number of employees | 5,700 (2023) |
| IPO Date | 2023 (Expected) |
| Number of investors | N/A |
| Total funding | N/A |
| Valuation estimate | $80 billion USD |
Company Overview & History
Arm Holdings is a multinational semiconductor and software design company founded in 1990, headquartered in Cambridge, England. Its core business revolves around designing and licensing fast, low-cost, power-efficient RISC processors, peripherals, and ‘system-on-chip’ solutions for a wide range of applications.
Arm is best known for its role in designing the architecture for processors used in most mobile devices, including smartphones and tablets.
The company originated as a joint venture between Acorn Computers, Apple Computer (now Apple Inc.), and VLSI Technology, aiming to develop the Acorn RISC Machine processors.
Over time, Arm extended its scope beyond the computer hardware sector, becoming a linchpin in the booming mobile and embedded systems market. By the late 2000s, Arm’s designs were found in the majority of smartphones, prompting a dramatic surge in company growth.
In 2016, SoftBank, a Japanese multinational conglomerate, acquired Arm Holdings for about $32 billion. Later, in 2020, SoftBank announced its intention to sell Arm to NVIDIA, a leading American multinational technology company, for $40 billion.
Financial Performance
As of 2023, Arm Holdings reported a total revenue of $746 million in the most recent fiscal quarter, marking a 28% year-on-year increase. The majority of this revenue came from royalties on products shipping in the market ($446M), while $300M was from licensing activity.
The licensing business showed significant growth, increasing by 65% year-on-year. However, it is important to note that Arm’s Debt to Equity ratio stood at 0.04%, significantly higher than that of the sector average and the debt to equity for all United States stocks.
The ratio of Total Debt to Earnings Per Share for ARM Holdings Plc was approximately 11,300,000.
Revenue
| Year | Revenue (USD) |
|---|---|
| 2015 | $1.56 billion |
| 2016 | $1.69 billion |
| 2017 | $1.83 billion |
| 2018 | $1.84 billion |
| 2019 | $1.9 billion |
| 2020 | $2 billion |
| 2021 | $2.7 billion |
Business Model
Arm Holdings operates on a licensing business model. The company licenses its processor designs to semiconductor companies, which then incorporate the technology into their computer chips.
Licensees pay an upfront fee to gain access to Arm’s technology, and a royalty on every chip that uses one of their technology designs.
The royalty is typically based on the selling price of the chip. Each Arm design can be used in a wide range of applications and can be reused in a variety of chip families to address multiple markets.
Each new chip family generates a new stream of royalties, and an Arm design may be used in many different chips and may ship for more than 25 years.
The company has been investing heavily in new processor technology to maintain its market position in areas where it’s already strong, such as smartphones, consumer electronics, and embedded computing. Arm aims to increase royalty revenue per chip by providing more technology or more valuable technology, establish market leadership in emerging technology areas, and introduce new business models.
The company also directly licenses its technology to Original Equipment Manufacturers (OEMs) and cloud companies.
Arm’s technology royalty revenue grew by 16.7% year-on-year in fiscal 2020, primarily due to the ramp of 5G smartphones sales and the rapid global rollout of 5G networks.
However, technology non-royalty revenue (technology licensing revenue and software and services revenue) declined by 1.7% year-on-year due to uncertainty regarding the impact of the COVID-19 pandemic, offset later in the year by newly introduced products and new customers.
Licenses signed today are not expected to yield royalty revenue for another 2-3 years, but if the chips are commercially successful, they can bring additional royalty revenue streams that may last for years, and even decades.
Since 2020, Arm has benefited from higher chip sales in markets like 5G smartphones and wireless connectivity equipment due to the high demand and priority given to these areas by chip manufacturers.
Estimated Valuation
| Year | Valuation (USD) |
|---|---|
| 2020 | $40 billion |
| 2021 | $80 billion |
Risk Factors
ARM Holdings, as a leading technology firm, faces a range of risk factors that could potentially affect its business.
One major risk factor is the slowing growth in the semiconductor industry, which could lead to fewer customers for ARM due to consolidation in the industry.
This is particularly relevant as about half of ARM’s revenue comes from direct license sales to semiconductor companies.
Furthermore, the convergence of smartphones and laptops has the potential to impact ARM’s market share in smartphone application processors, as x86-based chips become more suitable for use in smartphones. This could also hinder any market share gains that might be made by ARM licensees in mobile computing.
Lastly, competing in the microcontroller market presents a unique challenge for ARM. While ARM has been successful in penetrating this market, it could be difficult for the company to displace many established in-house processor designs. Moreover, as microcontroller chips are low-cost, the royalty revenue per device is also lower than in other markets.
Market Opportunity
ARM Holdings presents a significant market opportunity, particularly in the server market. According to Mercury Research, Arm-based processors accounted for 13% of all PCs sold during the fourth quarter of 2022, and they are making significant gains in the server market with public cloud providers leading the way.
Arm-based offerings in the public cloud increased by an incredible 290% in 2022. The company reported total revenue of $746M in the most recent fiscal quarter, up 28% year-on-year, demonstrating impressive momentum.
Notably, the energy efficiency of ARM processors, which has led to the architecture’s dominance in both the embedded and smartphone markets, is also a key driver for ARM in the cloud.
Furthermore, Amazon’s success with its ARM-based Graviton processors has demonstrated the architecture’s potential in the cloud, with rumors of other major cloud providers like Microsoft Azure and Google Cloud considering similar offerings.