There was a lot of concern back in 2016 when Softbank bought ARM holdings for a record 32B$. Was the Japanese bank going to treat ARM as a milking cow or was it a big bet on the future as stated by the CEO of Softbank, Masayoshi Son. With the closure of 2017, it is possible to get an overview of a full year in which ARM has been fully controlled by SoftBank. The investment strategy and statements from Softbank still indicate an agressive investment philosophy but what is the verdict of the financial data.
The available data confirms that Softbank is not treating ARM as a cashcow. Rather than trying to optimise EBITDA, ARM is allowed to increase operational costs significantly even though the revenue growth is single digits. R&D has increased by a staggering 60% while the SG&A costs has been boosted 44%. The headcount has increased by 22% while ARM’s semiconductor customers are cutting headcount by 5-10% a year.
The revenue of ARM has three main categories. The chart below excludes software to show the increaseing importance of royalties from chips sold, over licenses bought up front when customers engage with ARM and design with their architecture. Although licensing revenue is going down ARM is confident the new licenses has higher royalty potential that the earlier licenses.
Being acquired by SoftBank looks like a very good move for ARM. The agressive increases in operational costs shows that this is truly a future bet for SoftBank.
Other highlights and snacks from the lastest ARM presentation:
The ARM business model is very solid and perceived fair by the company’s clients. This is quite difficult as Qualcomm can testify. Their business model is constantly challenged by their customers and authorities. What is also interesting about it is that it give a view into the semiconductor market that is not available from the semiconductor companies.
As semiconductor devices increasingly become more integrated, more devices are containing processors. Arm now estimate that 70% of all integrated devices contain processors and that ARM has penetrated a third of that market.
Although the revenue from licensing has been decreasing the licensees has higher royalty potential:
Like the semiconductor companies we follow, ARM is also seeing a slowdown in the number of mobile units sold. The other markets have grown quite healthy and above the average non-memory market growth.
While ARM dominates the slow-growing market segment for mobile processors they have close to zero market share in the fast-growing server and data center market. This market, dominated by Intel and challenged by Nvidia, will be the next big target area for ARM.
The automotive market is changing from a power/discrete/microcontroller centric market to also include high-performance computing. ARM has a low market share but well positioned to get a significant share of the new opportunities. The chart below is a great overview of how ARM views the opportunity.
That ARM is interested in the IoT market is no suprise. However the company has a very interesting view on how the IoT market is going to be monetised. Semiconductor companies might enable this market but they will not derive the most value.
ARM have some interesting figures on the 4G to 5G deployments and the benefits that will be derived.
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