Investment Case
How ARM makes money
ARM is the world's leading semiconductor intellectual property (IP) supplier. The technology we design was at the heart of many of the digital electronic products sold in 2011.
ARM has an innovative business model. Instead of bearing the costs associated with manufacturing, we license our technology to a network of Partners, mainly leading semiconductor manufacturers and OEMs (Original Equipment Manufacturers). These Partners incorporate our designs alongside their own technology to create smart, low energy chips suitable for modern electronic devices.
Why semiconductor companies use ARM technology
ARM designs technology that once would have been developed by the R&D teams inside each company in the semiconductor industry. ARM has demonstrated that it is cheaper to license technology than to continue in-house development. The design of an ARM processor requires a large amount of R&D investment and expertise. We estimate that every semiconductor company would need to spend between $50 million and $150 million every year to reproduce what ARM does. This represents an additional $20 billion of annual cost for the industry. By designing once and licensing many times, ARM spreads the R&D costs over the whole industry and thereby helps make digital electronics cheaper.
Technologies that are suitable for the ARM business model
ARM's technology licensing business started in the early 1990s with the development of the first ARM processor. The processor is like the brain of the chip, it is where the software runs which controls the functionality of the chip and the product that the chip is in. In most years ARM introduces new processor designs for our customers to license. In recent years ARM has also started developing other technologies that are suitable for a licensing and royalty business model, such as graphics processors and physical IP components.
How ARM creates value
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 faster than licence revenues.
In the medium term, we expect that revenues will grow faster than costs, making ARM increasingly profitable and leading to margin expansion. In the medium term, ARM expects normalised operating margins to expand.
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. ARM's business model is strongly cash generative and, since 2004, ARM has returned over £400 million of cash to shareholders through a mixture of share buybacks and dividends.
Q3 2012 Roadshow Presentation
