ARM is the world's leading semiconductor intellectual property (IP) supplier. The technology we design is at the heart of many of the digital electronic products sold in the world. ARM has an innovative business model. We license our technology to a network of Partners, mainly leading semiconductor companies. Our Partners incorporate our designs alongside their own technology to create smart, energy-efficient chips.
ARM designs technology that would be difficult and expensive for our Partners' R&D teams to develop for themselves. It is more cost effective for our Partners to license the technology from ARM than to develop it internally. The design of a processor or a library of physical IP requires a large amount of R&D investment and expertise.
We estimate that a major semiconductor company would need to spend over $100 million every year to develop their own architecture. This represents more than $20 billion of annual costs for the industry. By designing once and licensing many times, ARM spreads the R&D costs over the whole industry, making digital electronics affordable and therefore available to more and more people across the world.
Technologies that are suitable for the ARM business model
ARM's licensing business started in the early 1990s with the development of our first processor. The processor is like the brain of the chip; it is where the software runs and it controls the functionality of the product. ARM designs each processor to be applicable to a broad range of end markets to maximise the number of Partners that can license each processor and to maximise the number of markets in which the Partner can deploy that technology.
In most years ARM introduces 2–3 new processor designs. Over the past ten years, ARM has developed other technologies suitable for our licensing and royalty business model, such as graphics processors and physical IP components. Both of these technologies are now licensed widely and are generating royalty revenues.
ARM endeavours to recover its costs from the licence revenues of each technology, leaving the majority of royalties to be reinvested back into the business or to be returned to shareholders. Over the medium term, we expect ARM to become more profitable as our partners design our technology into a broader range of end markets. As our customers include the world's largest semiconductor companies, their regular royalty payments have become a reliable cash flow.
ARM aims to recover its costs from the future licence revenues of each new technology. This would leave the majority of royalties as profits. Over the medium term, we expect royalties to grow much faster than licence revenues and costs, making ARM increasingly profitable.
As our customers are the world's largest semiconductor manufacturers, their regular royalty payments have become a highly reliable cash flow. Given our broad base of partners and end markets, ARM is not overly reliant on any one company or consumer product for its future profits and cash. Since 2004, ARM has returned over £636 million of cash to shareholders through a mixture of share buybacks and dividends.
ARM licenses technology designs to semiconductor companies. The licence fee is typically several million dollars, dependent upon which technology has been licensed and the type of licence. The semiconductor company will design and manufacture a chip utilising the ARM technology. The chip will then be incorporated into a digital electronic product, which is sold to the consumer.
ARM receives a royalty, typically based on a percentage of the chip price, for every chip sold by the semiconductor company containing ARM technology. It takes an average of 3-4 years from the time the semiconductor company signs the licence until they start to pay royalties. Many customers are able to re-use the same ARM technology in many different chips going into a broad range of end markets. Each new chip starts a new stream of royalties.
ARM's strategy is for our technology to continue to gain market share in long-term growth markets, to increase the value ARM receives from each device, and to develop new technologies that can generate additional royalty revenue.
ARM has three major revenue growth drivers
Increase market penetration
ARM has achieved a more than 95% penetration of mobile handsets. As other end markets require smarter processors, we expect ARM technology to increase market share in other application areas.
Increase value per smart electronic device
As consumer products become smarter they often contain multiple ARM-based chips, increasing our royalty opportunity. Smarter phones and TVs can generate 5–20 times more royalty than a basic model.
Generate additional royalties from complementary technology
ARM has introduced complementary technologies which we believe are suitable for R&D outsourcing and can command an upfront licence fee and an ongoing royalty.This will lead to:
Re-investment and shareholder return
ARM's financial discipline balances the need for continued investment to generate long-term future growth, whilst increasing today's profitability and shareholder returns.
ARM has built up an extensive community of 3rd party technology providers and designers, called the ARM Connected Community. This is designed to facilitate the networking opportunities for the member companies in an effort to increase design win opportunities and shorten the time-to-market of complete ARM Powered® solutions. There are currently about 1000 companies within the Community spanning the semiconductor supply chain. This Community not only serves to enable the uptake of ARM technology, but also as an extensive competitive advantage and barrier to entry for IP companies providing technologies in the same areas as ARM