Arm’s IPO Filing: Revenue, China Reliance, Ampere Stake And Other Things To Know
With Arm reportedly planning to list on the Nasdaq for a valuation of $60 billion to $70 billion, the chip designer’s IPO filing revealed a wealth of previously undisclosed information about the chip designer, including annual revenue trends, its reliance on China for revenue, a mass layoff from last year and its equity stake in server CPU design startup Ampere Computing.
Arm filed for its initial public offering on Monday, signaling a new era for the British chip designer that is looking to expand on footholds in cloud infrastructure and PCs after dominating the smartphone market for years.
The company is set to return to the public market after operating for several years under the ownership of Japanese investment giant SoftBank Group, which acquired Arm for $32 billion in 2016.
But even with Arm planning to list on the Nasdaq in September, SoftBank will still own around 90 percent of the company following the IPO, according to multiple reports. The Japanese firm is reportedly seeking a valuation in the range of $60 billion to $70 billion for Arm.
While Arm’s IPO filing did not confirm these details, it did reveal a wealth of previously undisclosed information about the chip designer, including annual revenue trends, the extent of its reliance on China for revenue, a mass layoff from last year and its equity stake in server CPU design startup Ampere Computing.
For instance, the company revealed in its IPO filing that revenue slightly contracted in its most recent fiscal year despite increasing adoption of its chip architecture into products sold by Apple, Amazon, Microsoft and other tech giants.
The IPO filing also made clear the company’s reliance on business in China, which is the target of mounting trade restrictions by the United States and other Western countries, for a significant portion of revenue through an entity it has no control over.
But despite the company’s challenges, Arm is painting itself as the center of the compute universe and said it has significant opportunities to expand in several growing markets, including cloud and data center infrastructure, consumer electronics, industrial IoT and automotive.
“Arm is defining the future of computing. Semiconductor technology has become one of the world’s most critical resources, as it enables all electronic devices today. At the heart of these devices is the CPU, and Arm is the industry leader of CPUs,” the company said near the opening of the filing.
The company said it will also be “central” in the tech industry’s transition to computing enabled by artificial intelligence and machine learning, with Arm-based CPUs already running such workloads in “billions of devices, including smartphones, cameras, digital TVs, cars and cloud data centers.”
What follows are important things to know about Arm from its IPO filing, including annual revenue trends, its evolving business model, its concerns about customers developing custom Arm chips, details around a mass layoff from last year, its reliance on China and its stake in chip design startup Ampere.
Arm’s Annual Revenue And Evolving Business Model
Arm brought in nearly $2.68 billion in revenue and generated net income of $524 million for its fiscal year that ended on March 31. These figures were down from the $2.7 billion in revenue and net income of $676 million for the company’s previous fiscal year that ended 12 months earlier.
The chip designer makes money in two ways. The first way is through fees that are paid by companies such as Apple and Amazon to license Arm’s technology, whether it’s the instruction set architecture itself, CPU designs or other technologies focused on areas such as graphics and security.
The other way Arm makes money is through royalties, which the chip designer typically earns every time a company that licenses its technology, such as Apple or Amazon, ships an Arm-based chip. These chips include Apple’s M2 for Mac computers and Amazon Web Services’ Graviton3 for cloud instances.
For the most recent fiscal year, Arm said 63 percent of its annual revenue came from royalties, which the company views as a “long-term recurring revenue opportunity” due to the nature of many Arm-based chips remaining in the market for a long time. Case in point: Arm said 46 percent of its royalty revenue in the most recent fiscal year came from products that were released between 1990 and 2012.
More than 50 percent of those royalties in the last fiscal year came from chips for smartphones and consumer electronics, which includes laptops, tablets, wearables, digital TVs and mixed reality headsets.
Arm said it expects to increase royalty revenue over time by switching more customers to two new kinds of license agreements that will grant access to a broader set of CPU designs and technologies. Currently, most Arm-based chips are developed under a technology licensing agreement, which grants a single CPU design or other technology design to a company in exchange for a fixed license fee.
The chip designer believes more companies will seek out these broader licenses in the future because they will need to incorporate a greater share of Arm’s technologies into their products due to the increasing cost and complexity of chip design. In turn, Arm expects to command higher royalties from products that use a higher proportion of the chip designer’s technologies.
Arm Worries If More Companies Like Apple Make Custom Chips, It Could Hurt Sales
Arm believes if more companies follow Apple’s lead in developing custom chips using its instruction set architecture, it could hurt the company’s business.
While Arm did not address Apple by name in the IPO filing, the company addressed the issue of customers that elect to license the company’s instruction set architecture to design custom processors instead of licensing the company’s pre-developed processor designs and technologies.
“Customers may choose to develop their own processors if they believe they can do so more effectively than us or if supply and capacity constraints within the semiconductor industry further incentivize vertical integration in an effort to secure additional control over their supply chains,” Arm said.
Apple is among Arm’s customers that have been developing custom Arm chips for more than a decade by licensing the chip designer’s instruction set architecture. These chips include the M1, M2 and variant system-on-chips that debuted in 2020 for Apple’s portfolio of Mac computers. The electronics giant has been designing custom Arm processors for iPhones and iPads since 2012.
In its IPO filing, Arm said customers that choose to license its instruction set architecture to develop custom chips rather than its processor designs result in fewer fees paid to the chip designer. This, in turn, could hurt the company’s business, especially if large customers pursue the custom chip route, it added.
“If our customers, and particularly one or more key customers from whom we generate a significant portion of our total revenues, elect to develop their own processors based on our ISA, the market for our developed processor portfolio would decline, which could have a material adverse effect on our business, results of operations, financial condition and prospects,” Arm said in the filing.
Apple isn’t alone in pursuing the development of custom Arm chips.
Another major customer, Qualcomm, has for years relied on Arm’s pre-developed processor designs and technologies for its chips that go in smartphones and other mobile devices.
But in 2021, the company—which accounted for 11 percent of Arm’s revenue in the most recent fiscal year, according to Arm’s IPO filing—said it planned to transition to custom chip designs for multiple products in the future with its acquisition of CPU design startup Nuvia.
Arm and Qualcomm are now engaged in a legal dispute over the latter’s custom chip plans after the British chip designer sued the customer last year. Arm is alleging that Qualcomm breached its licensing terms when it decided to continue developing custom CPU cores that came from the Nuvia acquisition after both parties failed to reach an agreement on a new license.
Another customer, CPU design startup Ampere Computing, has moved to designing custom Arm chips for its server CPUs with its new Ampere One lineup after relying on Arm’s pre-developed processor designs for its previous lineup of chips. Arm is an investor in Ampere.
Despite Arm’s concerns about getting less revenue from customers developing custom chips, the company said a “very small number of companies” want to do so, and it expects that number to “diminish over time as the effort required on their part to provide the customization often does not provide a reasonable return on investment.”
For companies that develop custom chips, Arm said these customers often license its processor designs to complement their own designs or use in products where in-house designs don’t suffice.
Arm’s Employee Count, Layoff In 2022
As of March, Arm had 5,963 employees across North America, Europe and Asia, 80 percent of whom are focused on research and design, according to the IPO filing.
The company’s headquarters are in Cambridge, United Kingdom, and it has global operations and research and development centers elsewhere in the U.K., Europe, North America, India and Asia-Pacific countries.
In the filing, Arm disclosed that it had laid off 436 general and administrative positions last year “as part of a restructuring that was completed in June 2022 to address duplicative work functions and deprioritize certain initiatives within the Company.” The terminated positions were located across nine countries, though most of them happened in the U.K. and United States.
The restructuring resulted in Arm paying $26 million to cover one-time benefit costs for laid-off staff.
Arm’s Reliance On China And The Risks It Faces
Arm disclosed that China is the company’s largest source of revenue, with the country accounting for roughly 24 percent of annual revenue in the fiscal year that ended March 31.
This marked an increase from the previous fiscal year when China represented 18 percent of the chip designer’s total revenue in that 12-month period.
All of Arm’s revenue from China comes through Arm China, an independent entity that gives the company access to customers in the country.
In the IPO filing, Arm made it clear that it views the arrangement as well as geopolitical tensions between Western countries like the United States and China as significant risks.
“The fact that Arm China operates independently of us exposes us to significant risks,” Arm wrote.
Those risks include Arm China not committing the “necessary resources to market and sell our products to [Chinese] end-users of our semiconductor IP products,” the company said. The entity could also run afoul of laws and regulatory requirements that could impact its ability to sell Arm’s products.
The company is concerned how its reliance on China makes it “particularly susceptible to economic and political risks affecting” the country, which it said could be “exacerbated by tensions” between the China and Western powers like the U.S. and United Kingdom.
The U.S. and U.K. in recent years have ramped up trade restrictions against China meant to curtail the country’s ability to make advanced chips over fears they could be used for military purposes.
These restrictions make it difficult for Arm to obtain the export licenses needed to sell its highest performance processor design to Chinese customers, according to the company. While the company has been able to sell designs that do not exceed the performance threshold for export controls, it said “future restriction on sales of our products into [China] could have a material adverse impact.”
Arm’s Previously Undisclosed Stake In Ampere Computing
While Amazon has driven most of Arm’s growth in the server CPU market, another company that has been pushing adoption of Arm server chips is a startup called Ampere Computing.
Founded by former Intel executive Renee James, Ampere designs Arm-based server CPUs that have now been adopted in cloud instances by Google Cloud, Microsoft Azure, Oracle Cloud and several other cloud service providers across the world. The processors have also been adopted by several server vendors.
In Arm’s IPO filing, the chip designer revealed that it has a 6.8 percent stake in Ampere, which confidentially filed for its own IPO in April of last year. Ampere announced Arm as an investor in 2019 but did not disclose any financial details of the investment.
While it’s now known how much Arm invested in the startup, the chip designer said the carrying value for its investment in the startup was $389.8 million for the fiscal year ended this past March. That is down from the investment’s $416.2 million carrying value in the previous year.
The company added in its IPO filing that it gave a $29 million convertible promissory note to Ampere in December 2021. As of March, the outstanding balance of the note was $30.9 million.
Ampere’s other investors include Oracle and private equity firm The Carlyle Group.